<PAGE>
<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 15, 1997
REGISTRATION NOS.
________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM N-1A
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933 [x]
PRE-EFFECTIVE AMENDMENT NO. 1 [x]
POST-EFFECTIVE AMENDMENT NO. [ ]
AND/OR
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940 [x]
AMENDMENT NO. 1 [x]
------------------------
SALOMON BROTHERS VARIABLE SERIES FUNDS INC
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
------------------------
7 WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (800) 725-6666
MICHAEL HYLAND
SALOMON BROTHERS ASSET MANAGEMENT INC
7 WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
(NAME AND ADDRESS OF AGENT FOR SERVICE)
------------------------
COPIES TO:
GARY SCHPERO, ESQ.
SIMPSON THACHER & BARTLETT
425 LEXINGTON AVENUE
NEW YORK, NY 10017
------------------------
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after
this Registration Statement becomes effective.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SECTION 8(a), MAY DETERMINE.
PURSUANT TO RULE 24f-2 UNDER THE INVESTMENT COMPANY ACT OF 1940, AS
AMENDED, REGISTRANT HEREBY ELECTS TO REGISTER AN INDEFINITE NUMBER OF SHARES OF
REGISTRANT AND ANY SERIES THEREOF.
________________________________________________________________________________
<PAGE>
<PAGE>
SALOMON BROTHERS VARIABLE SERIES FUNDS INC
REGISTRATION STATEMENT ON FORM N-1A
CROSS REFERENCE SHEET PURSUANT TO
RULE 495(b) UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
N-1A ITEM NO. LOCATION PROSPECTUS CAPTION
- -------------- ----------------------------------------------------- ------------------------------------------
<S> <C> <C>
PART A
Item 1. Cover Page........................................... Cover Page
Item 2. Synopsis............................................. Expense Information
Item 3. Condensed Financial Information...................... Not Applicable
Item 4. General Description of Registrant.................... Investment Objectives and Policies;
Additional Investment Activities and
Risk Factors; Investment Limitations
Item 5. Management of the Fund............................... Management; Purchase and Redemption of
Shares
Item 5A. Management's Discussion of Performance............... Not Applicable
Item 6. Capital Stock and Other Securities................... Dividends, Distributions and Taxes;
Capital Stock
Item 7. Purchase of Securities Being Offered................. Determination of Net Asset Value; Purchase
and Redemption of Shares; Management;
Dividends, Distributions and Taxes
Item 8. Redemption or Repurchase............................. Determination of Net Asset Value;
Dividends, Distributions and Taxes;
Purchase and Redemption of Shares;
Management
Item 9. Pending Legal Proceedings............................ Not Applicable
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF ADDITIONAL
LOCATION INFORMATION CAPTION
----------------------------------------------------- ------------------------------------------
<S> <C> <C>
PART B
Item 10. Cover Page........................................... Cover Page
Item 11. Table of Contents.................................... Table of Contents
Item 12. General Information and History...................... Not applicable.
Item 13. Investment Objectives and Policies................... Additional Information on Portfolio
Instruments and Investment Policies;
Investment Limitations
Item 14. Management of the Fund............................... Management
Item 15. Control Persons and Principal Holders of
Securities........................................... Management
Item 16. Investment Advisory and Other Services............... Management; Custodian and Transfer Agent;
Independent Accountants
Item 17. Brokerage Allocation and Other Practices............. Portfolio Transactions
Item 18. Capital Stock and Other Securities................... Capital Stock
Item 19. Purchase, Redemption and Pricing of Securities Being
Offered.............................................. Management; Net Asset Value; Additional
Purchase Information; Additional
Redemption Information
Item 20. Tax Status........................................... Additional Information Concerning Taxes
Item 21. Underwriters......................................... Distributor
Item 22. Calculation of Performance Data...................... Performance Data
Item 23. Financial Statements................................. Not Applicable
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C of this Registration Statement.
<PAGE>
<PAGE>
SUBJECT TO COMPLETION, DATED DECEMBER 15, 1997
- ------------------------------------------------------------------------------
Salomon Brothers
Variable Series Funds Inc
7 WORLD TRADE CENTER NEW YORK, NEW YORK 10048
SALOMON BROTHERS VARIABLE SERIES FUNDS, INC. ('VARIABLE SERIES FUNDS'), AN
OPEN-END MANAGEMENT COMPANY, CONSISTS OF SALOMON BROTHERS VARIABLE U.S.
GOVERNMENT INCOME FUND (THE 'U.S. GOVERNMENT INCOME FUND'), SALOMON BROTHERS
VARIABLE HIGH YIELD BOND FUND (THE 'HIGH YIELD BOND FUND'), SALOMON BROTHERS
VARIABLE STRATEGIC BOND FUND (THE 'STRATEGIC BOND FUND'), SALOMON BROTHERS
VARIABLE TOTAL RETURN FUND (THE 'TOTAL RETURN FUND'), SALOMON BROTHERS VARIABLE
ASIA GROWTH FUND (THE 'ASIA GROWTH FUND'), SALOMON BROTHERS VARIABLE INVESTORS
FUND (THE 'INVESTORS FUND') AND SALOMON BROTHERS VARIABLE CAPITAL FUND (THE
'CAPITAL FUND') (EACH A 'FUND' AND COLLECTIVELY, THE 'FUNDS'). VARIABLE SERIES
FUNDS IS OFFERED EXCLUSIVELY AS A FUNDING VEHICLE FOR VARIABLE ANNUITY ('VA')
CONTRACTS AND VARIABLE LIFE INSURANCE ('VLI') POLICIES OFFERED THROUGH SEPARATE
ACCOUNTS OF VARIOUS LIFE INSURANCE COMPANIES ('PARTICIPATING INSURANCE
COMPANIES') AND FOR QUALIFIED PENSION AND RETIREMENT PLANS. EACH INVESTOR SHOULD
REFER TO THE PROSPECTUS FOR HIS OR HER CONTRACT OR POLICY OR HIS OR HER PLAN
DOCUMENTS FOR INFORMATION AS TO WHICH PORTFOLIOS OF VARIABLE SERIES FUNDS ARE
AVAILABLE FOR INVESTMENT THROUGH THE CONTRACT, POLICY OR PLAN. EACH OF THE FUNDS
HAS A SPECIFIC INVESTMENT OBJECTIVE.
------------------------------------------------------------------
THERE CAN BE NO ASSURANCE THAT ANY FUND WILL ACHIEVE ITS INVESTMENT OBJECTIVE(S)
AND EACH OF THE FUNDS MAY EMPLOY CERTAIN INVESTMENT PRACTICES WHICH INVOLVE
SPECIAL RISK CONSIDERATIONS. CERTAIN FUNDS MAY INVEST IN CERTAIN SECURITIES,
COMMONLY REFERRED TO AS JUNK BONDS, WHICH PRESENT A HIGH DEGREE OF RISK. SUCH
LOWER-QUALITY SECURITIES INVOLVE COMPARATIVELY GREATER RISKS, INCLUDING PRICE
VOLATILITY AND THE RISK OF DEFAULT IN THE TIMELY PAYMENT OF INTEREST AND
PRINCIPAL, THAN HIGHER-QUALITY SECURITIES. THE HIGH YIELD BOND FUND AND THE
STRATEGIC BOND FUND ARE NOT LIMITED IN THE PERCENTAGE OF THEIR ASSETS WHICH MAY
BE INVESTED IN SUCH SECURITIES. EACH OF THE TOTAL RETURN FUND, THE ASIA GROWTH
FUND, THE INVESTORS FUND AND THE CAPITAL FUND MAY INVEST UP TO 20%, 10%, 5% AND
10%, RESPECTIVELY, OF ITS TOTAL ASSETS IN NON-CONVERTIBLE SECURITIES OF THIS
TYPE AND MAY INVEST WITHOUT LIMIT IN CONVERTIBLE SECURITIES OF THIS TYPE. SEE
'ADDITIONAL INVESTMENT ACTIVITIES AND RISK FACTORS.'
This Prospectus sets forth concisely the information a prospective investor
should know before investing in any of the Funds and should be read and retained
for future reference. A Statement of Additional Information dated January 2,
1998, containing additional information about each Fund (the 'Statement of
Additional Information') has been filed with the Securities and Exchange
Commission (the 'SEC') and is incorporated herein by reference. It is available
without charge and can be obtained by writing to the Funds at the address, or by
calling the toll-free telephone number, listed above.
THE SEC MAINTAINS A WEB SITE AT http://www.sec.gov THAT CONTAINS THE STATEMENT
OF ADDITIONAL INFORMATION, MATERIAL INCORPORATED BY REFERENCE AND OTHER
INFORMATION REGARDING THE VARIABLE SERIES FUNDS.
------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
SALOMON BROTHERS ASSET MANAGEMENT INC -- INVESTMENT MANAGER
SALOMON BROTHERS INC -- DISTRIBUTOR
JANUARY 2, 1998
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED
PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS
SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR
SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER,
SOLICITATION, OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION
UNDER THE SECURITIES LAWS OF ANY STATE.
PAGE 1
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<PAGE>
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Table of Contents
Summary 3
Expense Information 6
Investment Objectives and Policies 8
Additional Investment Activities and Risk
Factors 27
Investment Limitations 44
Management 47
Determination of Net Asset Value 51
Participating Insurance Companies and Plans 52
Purchase of Shares 52
Redemption of Shares 53
Performance Information 54
Dividends and Distributions 55
Taxation 56
Account Services 57
Capital Stock 57
Appendix A A-1
PAGE 2
<PAGE>
<PAGE>
- -----------------------------------------------------------------
Summary
THE FUNDS
Each of the Funds, is an investment portfolio of the Variable Series Funds, an
open-end investment company incorporated in Maryland on October 1, 1997. Shares
of the Fund are sold only to: (i) separate accounts of Participating Insurance
Companies to fund the benefits for VA contracts and VLI policies; and (ii)
Qualified Pension and Retirement Plans ('Plans). Accordingly, all references to
'shareholders' in this Prospectus refer to such Participating Insurance
Companies and Plans and not to individual contract or policy holders or plan
participants. See 'Participating Insurance Companies and Plans.'
Each of the Funds, except Asia Growth Fund and Capital Fund, is classified as a
diversified Fund under the Investment Company Act of 1940, as amended (the
'1940 Act').
THE FUNDS' OBJECTIVES AND POLICIES
U.S. GOVERNMENT INCOME FUND. The objective of the U.S. Government Income Fund
is to seek a high level of current income. The Fund seeks to achieve its
objective by investing in securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities. From time to time, a significant
portion of the Fund's assets may be invested in mortgage-backed securities.
HIGH YIELD BOND FUND. The objective of the High Yield Bond Fund is to maximize
current income. As a secondary objective, the Fund seeks capital appreciation.
The Fund seeks to achieve its objectives by investing primarily in a
diversified portfolio of high yield fixed-income securities rated in medium or
lower rating categories or determined by Salomon Brothers Asset Management Inc
('SBAM') to be of comparable quality.
STRATEGIC BOND FUND. The primary objective of the Strategic Bond Fund is to
seek a high level of current income. As a secondary objective, the Fund will
seek capital appreciation. The Fund seeks to achieve its objectives by
investing in a globally diverse portfolio of fixed-income investments and by
giving SBAM broad discretion to deploy the Fund's assets among certain segments
of the fixed-income market that the investment manager believes will best
contribute to achievement of the Fund's investment objectives. In pursuing its
investment objectives, the Strategic Bond Fund reserves the right to invest
predominantly in securities rated in medium or lower rating categories or as
determined by the investment manager to be of comparable quality. Although the
investment manager has the ability to invest up to 100% of the Strategic Bond
Fund's assets in lower-rated securities, the investment manager does not
anticipate investing in excess of 75% of the assets in such securities.
TOTAL RETURN FUND. The Total Return Fund seeks to obtain above-average income
(compared to a portfolio entirely invested in equity securities). As a
secondary objective, the Fund seeks to take advantage of opportunities for
growth of capital and income. The Fund seeks to achieve its objectives
primarily through investments in a broad variety of securities, including
equity securities, fixed-income securities and short-term obligations.
ASIA GROWTH FUND. The Asia Growth Fund's objective is long-term capital
appreciation. The Fund seeks to achieve its objective by investing at least 65%
of its total assets in equity and equity-related securities of Asian Companies
(as defined
PAGE 3
<PAGE>
<PAGE>
SALOMON BROTHERS VARIABLE SERIES
under 'Investment Objectives and Policies').
INVESTORS FUND. The Investors Fund's primary objective is long-term growth of
capital. Current income is a secondary objective. The Fund seeks to achieve its
objectives primarily through investments in common stocks of well-known
companies.
CAPITAL FUND. The objective of the Capital Fund is to seek capital appreciation
through investments primarily in common stock, or securities convertible into
common stocks, which are believed to have above-average price appreciation
potential and which may also involve above-average risk. Current income is an
incidental consideration.
There can be no assurance that any Fund will achieve its investment
objective(s). See 'Investment Objectives and Policies.'
INVESTMENT MANAGER
SBAM is the Funds' investment manager. SBAM also serves as investment manager
to other investment companies and numerous individuals and institutions. See
'Management.'
With respect to the Strategic Bond Fund, SBAM has entered into a subadvisory
consulting agreement with its affiliate, Salomon Brothers Asset Management
Limited ('SBAM Limited') pursuant to which SBAM Limited provides certain
advisory services to SBAM relating to currency transactions and investments in
non-dollar denominated debt securities for the benefit of the Fund. Subject to
the supervision of SBAM, Salomon Brothers Asia Pacific Limited ('SBAM AP')
serves as sub-adviser to the Asia Growth Fund. SBAM Limited and SBAM AP are
compensated by SBAM at no additional cost to the Funds. For a discussion of
these arrangements, see 'Management.'
RISK FACTORS
Prospective investors should consider certain risks associated with an
investment in each Fund. Certain Funds may use various investment practices
that involve special considerations, including investing in high yield and/or
illiquid securities, foreign securities (including emerging markets
securities), warrants, municipal obligations, zero coupon securities, loan
participations and assignments, entering into repurchase and reverse repurchase
agreements, entering into securities transactions on a firm commitment or when
issued basis, lending portfolio securities and high portfolio turnover rates.
Certain Funds may engage in derivatives which involve special risks. See
'Investment Objectives and Policies' and 'Additional Investment Activities and
Risk Factors.'
PURCHASE OF SHARES
Shares of each Fund may be purchased at their next determined net asset value by
Participating Insurance Companies and Plans. Individuals may not place orders
directly with the Funds. See 'Purchase of Shares.'
REDEMPTION OF SHARES
Each Fund redeems shares at the applicable next determined net asset value. The
value of shares at the time of redemption may be more or less than the
shareholder's cost. See 'Redemption of Shares.'
DIVIDENDS AND DISTRIBUTIONS
Substantially all of the net investment income of each Fund will be declared as
an annual dividend, and shareholders will receive such dividends annually. Each
Fund will pay net realized long-term capital gains annually. See 'Dividends and
Distributions.' Dividends and
PAGE 4
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SALOMON BROTHERS VARIABLE SERIES
distributions are reinvested in additional shares of the same Fund unless a
shareholder requests otherwise. See 'Dividends and Distributions' and
'Taxation.'
The information in this Summary is qualified in its entirety by the more
detailed information appearing elsewhere in this Prospectus and in the
Statement of Additional Information.
PAGE 5
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
Expense Information
ANNUAL FUND OPERATING EXPENSES
Information in the table below is given as a percentage of average daily net
assets.
<TABLE>
<CAPTION>
FUND
<S> <C>
- ----------------------------------------------------------------------------------------------------------
U.S. Government Income
Management Fees........................................................................... 0.60
Other Expenses (after reimbursement)*,**.................................................. 0.65
----
Total Fund Operating expenses (after reimbursement)*...................................... 1.25%
High Yield Bond
Management Fees........................................................................... 0.75
Other Expenses (after reimbursement)*,**.................................................. 0.50
----
Total Fund Operating expenses (after reimbursement)*...................................... 1.25%
Strategic Bond
Management Fees........................................................................... 0.75
Other Expenses (after reimbursement)*,**.................................................. 0.50
----
Total Fund Operating expenses (after reimbursement)*...................................... 1.25%
Total Return
Management Fees........................................................................... 0.80
Other Expenses (after reimbursement)*,**.................................................. 0.45
----
Total Fund Operating expenses (after reimbursement)*...................................... 1.25%
Asia Growth
Management Fees........................................................................... 0.80
Other Expenses (after reimbursement)*,**.................................................. 0.95
----
Total Fund Operating expenses (after reimbursement)*...................................... 1.75%
Investors
Management Fees........................................................................... 0.75
Other Expenses (after reimbursement)*,**.................................................. 0.50
----
Total Fund Operating expenses (after reimbursement)*...................................... 1.25%
Capital
Management Fees........................................................................... 1.00
Other Expenses) (after reimbursement)*,**................................................. 0.25
----
Total Fund Operating expenses (after reimbursement)*...................................... 1.25%
</TABLE>
- ------------
* Reflects the voluntary agreement by SBAM to impose an expense cap for the
fiscal year ending December 31, 1998 on the total operating expenses of each
Fund (exclusive of taxes, interest and extraordinary expenses such as
litigation and indemnification expenses) at the amounts shown in the table
through the reimbursement of expenses. Absent such agreement, the ratio of
other expenses and total operating expenses to the average daily net assets
would be 1.91% and 2.51% for the U.S. Government Income Fund; 1.91% and
2.66% for the High Yield Bond Fund; 1.91% and 2.66% for the Strategic Bond
Fund; 1.91% and 2.71% for the Total Return Fund; 2.10% and 2.90% for the
Asia Growth Fund; 1.91% and 2.66% for the Investors Fund; and 1.91% and
2.91% for the Capital Fund respectively.
** As of the date of this Prospectus, the Fund had not commenced investment
operations. The amounts set forth for 'Other Expenses' are therefore based
on estimates for the current fiscal year and will include fees for
shareholder services, administrative fees, custodial fees, legal and
accounting fees, printing costs and registration fees.
PAGE 6
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SALOMON BROTHERS VARIABLE SERIES
Example:
The following table demonstrates the projected dollar amount of total cumulative
expenses that would be incurred over various periods with respect to a
hypothetical investment in each Fund. The example assumes payment by each Fund
of operating expenses at the levels set forth in the table above and are also
based upon the following assumptions:
An investor would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time period:
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Government Income.......................................................... $ 13 $40
High Yield Bond................................................................. $ 13 $40
Strategic Bond.................................................................. $ 13 $40
Total Return.................................................................... $ 13 $40
Asia Growth..................................................................... $ 18 $55
Investors....................................................................... $ 13 $40
Capital......................................................................... $ 13 $40
</TABLE>
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES FOR ANY OF THE FUNDS MAY BE HIGHER OR LOWER THAN THE
AMOUNTS SHOWN IN THE FEE TABLES. Moreover, while the example assumes a 5% annual
return, each Fund's performance will vary and may result in a return greater or
less than 5%.
The information in the foregoing summary is qualified in its entirety by the
more detailed information appearing elsewhere in this Prospectus and in the
Statement of Additional Information.
PAGE 7
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
Investment Objectives
and Policies
The investment objective(s) of each Fund are deemed to be fundamental policies
and may not be changed without the affirmative vote of the holders of a
majority of its outstanding shares, as defined in the 1940 Act. There can be no
assurance that any Fund will achieve its investment objective(s).
U.S. GOVERNMENT INCOME FUND
The investment objective of the U.S. Government Income Fund is to obtain a high
level of current income. The Fund seeks to attain its objective by investing
under normal circumstances 100% of its assets in debt obligations and mortgage-
backed securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities. The securities in which the U.S. Government Income Fund may
invest are:
(1) U.S. Treasury obligations;
(2) obligations issued or guaranteed by agencies or instrumentalities of the
U.S. government which are backed by their own credit and may not be backed by
the full faith and credit of the U.S. government;
(3) mortgage-backed securities guaranteed by the Government National Mortgage
Association ('GNMA'), popularly known as 'Ginnie Maes,' that are supported by
the full faith and credit of the U.S. government. Such securities entitle the
holder to receive all interest and principal payments due whether or not
payments are actually made on the underlying mortgages;
(4) mortgage-backed securities guaranteed by agencies or instrumentalities of
the U.S. government which are supported by their own credit but not the full
faith and credit of the U.S. government, such as the Federal Home Loan Mortgage
Corporation ('FHLMC') and the Federal National Mortgage Association ('FNMA'),
commonly known as 'Fannie Maes;' and
(5) collateralized mortgage obligations issued by private issuers for which the
underlying mortgage-backed securities serving as collateral are backed: (i) by
the credit alone of the U.S. government agency or instrumentality which issues
or guarantees the mortgage-backed securities; or (ii) by the full faith and
credit of the U.S. government.
Any guarantee of the securities in which the U.S. Government Income Fund invests
runs only to principal and interest payments on the securities and not to the
market value of such securities or the principal and interest payments on the
underlying mortgages. In addition, the guarantee only runs to the portfolio
securities held by the U.S. Government Income Fund and not to the purchase of
shares of the Fund.
The U.S. Government Income Fund currently expects that it will maintain an
average portfolio effective duration of two to five years. Duration is an
approximate measure of the sensitivity of the value of a fixed income security
to changes in interest rates. In general, the percentage change in a fixed
income security's value in response to changes in interest rates is a function
of that security's duration multiplied by the percentage point change in
interest rates. The Fund may, however, invest in securities of any maturity or
effective duration and accordingly, the composition and weighted average
maturity of the Fund's portfolio will vary from time to time, based upon SBAM's
determination of how best to achieve the Fund's investment objective. With
respect
PAGE 8
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<PAGE>
SALOMON BROTHERS VARIABLE SERIES
to mortgage-backed securities in which the Fund invests, average maturity and
duration are determined by using mathematical models that incorporate
prepayment assumptions and other factors that involve estimates of future
economic parameters. These estimates may vary from actual results, particularly
during periods of extreme market volatility. In addition, the average maturity
and duration of mortgage-backed derivative securities may not accurately
reflect the price volatility of such securities under certain market conditions.
From time to time, a significant portion of the Fund's assets may be invested in
mortgage-backed securities. The mortgage-backed securities in which the U.S.
Government Income Fund invests represent participating interests in pools of
fixed rate and adjustable rate residential mortgage loans issued or guaranteed
by agencies or instrumentalities of the U.S. government. Mortgage-backed
securities are issued by lenders such as mortgage bankers, commercial banks,
and savings and loan associations. Mortgage-backed securities generally provide
monthly payments which are, in effect, a 'pass-through' of the monthly interest
and principal payments (including any prepayments) made by the individual
borrowers on the pooled mortgage loans. Principal prepayments result from the
sale of the underlying property or the refinancing or foreclosure of underlying
mortgages.
The yield of the mortgage securities is based on the prepayment rates
experienced over the life of the security. Prepayments tend to increase during
periods of falling interest rates, while during periods of rising interest rates
prepayments will most likely decline. Reinvestment by the U.S. Government
Income Fund of scheduled principal payments and unscheduled prepayments may
occur at higher or lower rates than the original investment, thus affecting the
yield of the Fund. Monthly interest payments received by the Fund have a
compounding effect which will increase the yield to shareholders as compared to
debt obligations that pay interest semiannually. For further discussion of
mortgage-backed securities and collateralized mortgage obligations and their
associated risks, see 'Additional Investment Activities and Risk Factors --
Mortgage-Backed Securities' and 'Additional Information on Portfolio
Instruments and Investment Policies -- Mortgage-Backed Securities' in the
Statement of Additional Information.
While the U.S. Government Income Fund seeks a high level of current income, it
cannot invest in instruments such as lower grade corporate obligations which
offer higher yields but are subject to greater credit risks. Shares of the Fund
are neither insured nor guaranteed by the U.S. government, its agencies or
instrumentalities. Neither the issuance by nor the guarantee of a U.S.
government agency for a security constitutes assurance that the security will
not significantly fluctuate in value or that the U.S. Government Income Fund
will receive the originally anticipated yield on the security.
The U.S. Government Income Fund may enter into repurchase agreements and
reverse repurchase agreements, may purchase securities on a firm commitment
basis, including when-issued securities and may lend portfolio securities. The
Fund does not currently intend to make loans of portfolio securities with a
value in excess of 33% of the value of its total assets. The Fund may also
enter into mortgage 'dollar rolls.' For a description of these investment
practices and the risks associated therewith, see 'Additional Investment
Activities and Risk Factors.'
The U.S. Government Income Fund may purchase securities for which there is a
limited trading market or which are subject to restrictions on resale to the
public. The Fund will not invest more than 15% of the value of its total assets
in illiquid securities, such as 'restricted
PAGE 9
<PAGE>
<PAGE>
SALOMON BROTHERS VARIABLE SERIES
securities' which are illiquid, and securities that are not readily marketable.
For further discussion of illiquid securities and their associated risks, see
'Additional Investment Activities and Risk Factors -- Restricted Securities
and Securities with Limited Trading Markets.'
The U.S. Government Income Fund is not currently authorized to use any of the
various investment strategies referred to under 'Additional Investment
Activities and Risk Factors -- Derivatives.' However, such strategies may be
used in the future by the Fund. The Fund's ability to pursue certain of these
strategies may be limited by applicable regulations of the SEC, the CFTC and
the federal income tax requirements applicable to regulated investment
companies. See 'Additional Investment Activities and Risk
Factors -- Derivatives' and the Statement of Additional Information for a
description of these strategies and of certain risks associated therewith.
The foregoing investment policies, other than the U.S. Government Income Fund's
investment objective, are not fundamental policies and may be changed by vote of
the Fund's Board of Directors without the approval of shareholders.
HIGH YIELD BOND FUND
The High Yield Bond Fund's investment objective is to maximize current income.
As a secondary objective, the High Yield Bond Fund will seek capital
appreciation. The Fund seeks to achieve its objective by investing primarily in
a diversified portfolio of high yield fixed-income securities rated in medium
or lower rating categories or determined by SBAM to be of comparable quality.
The High Yield Bond Fund intends to invest, under normal market conditions, at
least 65% of its assets in securities rated 'Baa' or lower by Moody's Investors
Service ('Moody's') or 'BBB' or lower by Standard & Poor's Ratings Group
('S&P'), or in securities determined by SBAM to be of comparable quality. The
Fund may invest up to 35% of its total assets in foreign fixed-income
securities as more fully described below. Medium and low-rated and comparable
unrated securities offer yields that fluctuate over time, but generally are
superior to the yields offered by higher rated securities. However, such
securities also involve significantly greater risks, including price volatility
and risk of default in the payment of interest and principal, than higher rated
securities. Certain of the debt securities purchased by the Fund may be rated
as low as 'C' by Moody's or 'D' by S&P or may be comparable to securities so
rated. The lower-rated bonds in which the Fund may invest are commonly referred
to as 'junk bonds.'
An investment in the High Yield Bond Fund should not be considered as a
complete investment program. For further discussion of high yield securities
and the special risks associated therewith, see 'Additional Investment
Activities and Risk Factors -- High Yield Securities.'
In light of the risks associated with high yield debt securities, SBAM will take
various factors into consideration in evaluating the creditworthiness of an
issuer. For corporate debt securities, these will typically include the
issuer's financial resources, its sensitivity to economic conditions and
trends, the operating history of the issuer, and the experience and track
record of the issuer's management. For sovereign debt instruments, these will
typically include the economic and political conditions within the issuer's
country, the issuer's overall and external debt levels and debt service ratios,
the issuer's access to capital markets and other sources of funding, and the
issuer's debt service payment history. SBAM will also review the ratings, if
any, assigned to the security by any recognized rating agencies, although the
investment manager's judgment as to the quality of a debt security may differ
from that
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suggested by the rating published by a rating service. The High Yield Bond
Fund's ability to achieve its investment objectives may be more dependent on
SBAM's credit analysis than would be the case if it invested in higher quality
debt securities. A description of the ratings used by Moody's and S&P is set
forth in Appendix A to this Prospectus.
The investment manager will have discretion to select the range of maturities
of the fixed-income securities in which the High Yield Bond Fund may invest. The
investment manager anticipates that under current market conditions, the Fund
will have an average portfolio maturity of 10 to 15 years. However, the average
portfolio maturity may vary substantially from time to time depending on
economic and market conditions.
The High Yield Bond Fund may invest up to 35% of its total assets in foreign
fixed-income securities all or a portion of which may be non-U.S. dollar
denominated and which include: (a) debt obligations issued or guaranteed by
foreign national, provincial, state, municipal or other governments with taxing
authority or by their agencies or instrumentalities, including Brady Bonds; (b)
debt obligations of supranational entities; (c) debt obligations of the U.S.
government issued in non-dollar securities; (d) debt obligations and other
fixed-income securities of foreign corporate issuers (both dollar and
non-dollar denominated); and (e) U.S. corporate issuers (both Eurodollar and
non-dollar denominated). There is no minimum rating criteria for the Fund's
investments in such securities. A description of Brady Bonds is set forth in
the discussion of investment objectives and policies of the Strategic Bond
Fund. The risks associated with these investments are described under the
captions 'Additional Investment Activities and Risk Factors -- Foreign
Securities' and ' -- High Yield Debt Securities.' Moreover, substantial
investments in foreign securities may have adverse tax implications as described
under 'Taxation.'
The High Yield Bond Fund may also invest in zero coupon securities and
pay-in-kind bonds, which involve special risk considerations. See 'Additional
Investment Activities and Risk Factors -- Zero Coupon Securities, Pay-in-Kind
Bonds and Deferred Payment Securities.'
The High Yield Bond Fund may invest in fixed and floating rate loans ('Loans')
arranged through private negotiations between a corporate borrower or a foreign
sovereign entity and one or more financial institutions ('Lenders'). The Fund
may invest in such Loans in the form of participations in Loans
('Participations') and assignments of all or a portion of Loans from third
parties ('Assignments'). See 'Additional Investment Activities and Risk
Factors -- Loan Participations and Assignments.'
The High Yield Bond Fund may invest up to 20% of its assets in common stock,
convertible securities, warrants, preferred stock or other equity securities
when consistent with the Fund's objectives. The Fund will generally hold such
equity investments as a result of purchases of unit offerings of fixed-income
securities which include such securities or in connection with an actual or
proposed conversion or exchange of fixed-income securities, but may also
purchase equity securities not associated with fixed-income securities when, in
the opinion of the investment manager, such purchase is appropriate.
There may be times when, in SBAM's judgment, conditions in the securities
markets would make pursuing the Fund's basic investment strategy inconsistent
with the best interests of the Fund's shareholders. At such times, the Fund may
employ alternative strategies, including investment of a substantial portion of
its assets in securities rated higher than 'Baa' by Moody's or 'BBB' by S&P, or
of comparable quality. In addition, in order
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to maintain liquidity, the Fund may invest up to 35% of its assets in
high-quality short-term money market instruments. Such instruments may include
obligations of the U.S. government or its agencies or instrumentalities;
commercial paper of issuers rated, at the time of purchase, A-2 or better by
S&P or P-2 or better by Moody's or which, in SBAM's determination, are of
comparable quality; certificates of deposit, banker's acceptances or time
deposits of U.S. banks with total assets of at least $1 billion (including
obligations of foreign branches of such banks) and of the 75 largest foreign
commercial banks in terms of total assets (including domestic branches of such
banks), and repurchase agreements with respect to such obligations.
If at some future date, in SBAM's opinion, adverse conditions prevail in the
securities markets which makes the High Yield Bond Fund's investment strategy
inconsistent with the best interests of the Fund's shareholders, the Fund may
invest its assets without limit in high-quality short-term money market
instruments.
The High Yield Bond Fund may enter into repurchase agreements and reverse
repurchase agreements, may purchase securities on a firm commitment basis,
including when-issued securities and may lend portfolio securities. For a
description of these investment practices and the risks associated therewith,
see 'Additional Investment Activities and Risk Factors.'
The High Yield Bond Fund may purchase securities for which there is a limited
trading market or which are subject to restrictions on resale to the public. The
Fund will not invest more than 15% of the value of its total assets in illiquid
securities, such as 'restricted securities' which are illiquid, and securities
that are not readily marketable. As more fully described in the Statement of
Additional Information, the Fund may purchase certain restricted securities
('Rule 144A securities') for which there is a secondary market of qualified
institutional buyers as contemplated by Rule 144A under the Securities Act of
1933, as amended (the '1933 Act'). The Fund's holdings of Rule 144A securities
which are liquid securities will not be subject to the 15% limitation on
investments in illiquid securities. For further discussion of illiquid
securities and their associated risks, see 'Additional Investment Activities
and Risk Factors -- Restricted Securities and Securities with Limited Trading
Markets.'
The High Yield Bond Fund is currently authorized to use all of the various
investment strategies referred to under 'Additional Investment Activities and
Risk Factors -- Derivatives.' It is not presently anticipated that any of
these strategies will be used to a significant degree by the Fund. The Fund's
ability to pursue certain of these strategies may be limited by applicable
regulations of the SEC, the Commodity Futures Trading Commission ('CFTC') and
the federal income tax requirements applicable to regulated investment
companies. See 'Additional Investment Activities and Risk
Factors -- Derivatives' and the Statement of Additional Information for a
description of these strategies and of certain risks associated therewith.
The foregoing investment policies, other than the High Yield Bond Fund's
investment objectives, are not fundamental policies and may be changed by vote
of the Fund's Board of Directors without the approval of shareholders.
STRATEGIC BOND FUND
The primary investment objective of the Strategic Bond Fund is to seek a high
level of current income. As a secondary objective, the Fund seeks capital
appreciation. The Strategic Bond Fund seeks to achieve its objectives by
investing in a globally diverse portfolio of fixed-income investments and by
giving SBAM broad discretion to deploy the Strategic Bond Fund's assets among
certain segments of the fixed-income
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SALOMON BROTHERS VARIABLE SERIES
market that SBAM believes will best contribute to the achievement of the Fund's
objectives. At any point in time, SBAM will deploy the Fund's assets based on
its analysis of current economic and market conditions and the relative risks
and opportunities present in the following market segments: U.S. government
obligations, investment grade domestic corporate debt, high yield domestic
corporate debt securities, mortgage-backed securities and investment grade and
high yield foreign corporate and sovereign debt securities. SBAM has entered
into a subadvisory consulting agreement with its London based affiliate, SBAM
Limited, pursuant to which SBAM Limited will provide certain advisory services
to SBAM relating to currency transactions and investments in non-dollar-
denominated debt securities for the benefit of the Fund.
SBAM will determine the amount of assets to be allocated to each type of
security in which it invests based on its assessment of the maximum level of
income and capital appreciation that can be achieved from a portfolio which is
invested in these securities. In making this determination, SBAM will rely in
part on quantitative analytical techniques that measure relative risks and
opportunities of each type of security based on current and historical
economic, market, political and technical data for each type of security, as
well as on its own assessment of economic and market conditions both on a
global and local (country) basis. In performing quantitative analysis, SBAM
will employ prepayment analysis and option adjusted spread technology to
evaluate mortgage securities, mean variance optimization models to evaluate
foreign debt securities, and total rate of return analysis to measure relative
risks and opportunities in other fixed-income markets. Economic factors
considered will include current and projected levels of growth and inflation,
balance of payment status and monetary policy. The allocation of assets to
foreign debt securities will further be influenced by current and expected
currency relationships and political and sovereign factors. SBAM will
continuously review this allocation of assets and make such adjustments as it
deems appropriate. The Fund does not plan to establish a minimum or a maximum
percentage of the assets which it will invest in any particular type of
fixed-income security.
In addition, SBAM will have discretion to select the range of maturities of the
various fixed-income securities in which the Strategic Bond Fund invests. SBAM
anticipates that under current market conditions, the Fund's portfolio
securities will have a weighted average life of 6 to 10 years. However, the
weighted average life of the portfolio securities may vary substantially from
time to time depending on economic and market conditions.
The investment grade corporate debt securities and the investment grade foreign
debt securities to be purchased by the Fund are domestic and foreign debt
securities rated within the four highest bond ratings of either Moody's or S&P,
or, if unrated, deemed by SBAM to be of equivalent quality. While debt
securities carrying the fourth highest quality rating ('Baa' by Moody's or
'BBB' by S&P) are considered investment grade and are viewed to have adequate
capacity for payment of principal and interest, investments in such securities
involve a higher degree of risk than that associated with investments in debt
securities in the higher rating categories and such debt securities lack
outstanding investment characteristics and in fact have speculative
characteristics as well. For example, changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade debt securities.
The types and characteristics of the U.S. government obligations and mortgage
backed securities to be purchased by the Strategic Bond Fund are set forth
above in
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the discussion of the investment objective and policies for the U.S. Government
Income Fund. In addition, the Fund may purchase privately issued mortgage
securities which are not guaranteed by the U.S. government or its agencies or
instrumentalities and may purchase stripped mortgage securities, including
interest-only and principal-only securities. The Strategic Bond Fund does not
currently intend to invest more than 10% of its total assets in interest-only
and principal-only securities. Additional information with respect to
securities to be purchased by the Fund is set forth below in the section
entitled 'Additional Investment Activities and Risk Factors' and in the section
entitled 'Additional Information on Portfolio Instruments and Investment
Policies' in the Statement of Additional Information.
The Strategic Bond Fund may invest in debt obligations issued or guaranteed by a
foreign sovereign government or one of its agencies or political subdivisions
and debt obligations issued or guaranteed by supranational organizations.
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 World Bank, the European Coal and Steel
Community, the Asian Development Bank and the Inter-American Development Bank.
Such supranational issued instruments may be denominated in multi-national
currency units. The Strategic Bond Fund will not invest more than 10% of its
total assets in issuers located in any one country (other than issuers located
in the United States).
In pursuing the Strategic Bond Fund's investment objectives, the Fund reserves
the right to invest predominantly in medium or lower-rated securities, commonly
known as 'junk bonds.' Investments of this type involve significantly greater
risks, including price volatility and risk of default in the payment of
interest and principal, than higher-quality securities. Although the investment
manager does not anticipate investing in excess of 75% of the Strategic Bond
Fund's assets in domestic and developing country debt securities that are rated
below investment grade, the Strategic Bond Fund may invest a greater percentage
in such securities when, in SBAM's determination, the yield available from such
securities outweighs their additional risks. SBAM anticipates that under
current market conditions, a significant portion of the Fund's assets will be
invested in such securities. By investing a portion of the Strategic Bond Fund's
assets in securities rated below investment grade as well as through
investments in mortgage securities and foreign debt securities, the investment
manager expects to provide investors with a higher yield than a high-quality
domestic corporate bond fund. Certain of the debt securities in which the
Strategic Bond Fund may invest may be rated as low as 'C' by Moody's or 'D' by
S&P or may be considered comparable to securities having such ratings. See
'Additional Investment Activities and Risk Factors -- High Yield Securities.'
In light of the risks associated with high yield corporate and sovereign debt
securities, SBAM will take various factors into consideration in evaluating the
creditworthiness of an issuer. For corporate debt securities, these will
typically include the issuer's financial resources, its sensitivity to economic
conditions and trends, the operating history of the issuer, and the experience
and track record of the issuer's management. For sovereign debt instruments,
these will typically include the economic and political conditions within the
issuer's country, the issuer's overall and external debt levels and debt
service ratios, the issuer's access to capital markets and other sources of
funding, and the issuer's debt service payment history.
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SBAM will also review the ratings, if any, assigned to the security by any
recognized rating agencies, although the investment manager's judgment as to
the quality of a debt security may differ from that suggested by the rating
published by a rating service. The Strategic Bond Fund's ability to achieve its
investment objectives may be more dependent on SBAM's credit analysis than
would be the case if it invested in higher quality debt securities. A
description of the ratings used by Moody's and S&P is set forth in Appendix A
to this Prospectus.
The high yield sovereign debt securities in which the Strategic Bond Fund may
invest are U.S. dollar-denominated and non-dollar-denominated debt securities,
including Brady Bonds, that are issued or guaranteed by governments or
governmental entities of developing and emerging market countries. SBAM expects
that these countries will consist primarily of those which have issued or have
announced plans to issue Brady Bonds, but the Fund is not limited to investing
in the debt of such countries. Brady Bonds are debt securities issued under the
framework of the Brady Plan, an initiative announced by former U.S. Treasury
Secretary Nicholas F. Brady in 1989 as a mechanism for debtor nations to
restructure their outstanding external indebtedness. For a description of Brady
Bonds, see 'Additional Investment Activities and Risk Factors -- High Yield
Securities' in this Prospectus and 'Additional Information on Portfolio
Instruments and Investment Policies -- Brady Bonds' in the Statement of
Additional Information. SBAM anticipates that the Fund's investments in
sovereign debt will be concentrated in Latin American countries, including
Central and South American and Caribbean countries. SBAM also expects to take
advantage of additional opportunities for investment in the debt of North
African countries, such as Nigeria and Morocco, Eastern European countries,
such as Poland and Hungary, and Southeast Asian countries, such as the
Philippines. Sovereign governments may include national, provincial, state,
municipal or other foreign governments with taxing authority. Governmental
entities may include the agencies and instrumentalities of such governments, as
well as state-owned enterprises. For a more detailed discussion of high yield
sovereign debt securities, see 'Additional Investment Activities and Risk
Factors -- High Yield Securities.'
The Strategic Bond Fund will be subject to special risks as a result of its
ability to invest up to 100% of its assets in foreign securities (including
emerging market securities). Such securities may be non-U.S. dollar denominated
and there is no limit on the percentage of the Fund's assets that can be
invested in non-dollar denominated securities. SBAM anticipates that under
current market conditions, a significant portion of the Fund's assets will be
invested in foreign securities. These risks are described under the captions
'Additional Investment Activities and Risk Factors -- Foreign Securities.'
Moreover, substantial investments in foreign securities may have adverse tax
implications as described under 'Taxation.' The ability to spread its
investments among the fixed-income markets in a number of different countries
may, however, reduce the overall level of market risk to the extent it may
reduce the Strategic Bond Fund's exposure to a single market.
The Strategic Bond Fund may invest in zero coupon securities, pay-in-kind bonds,
Loan Participations and Assignments. See 'Additional Investment Activities and
Risk Factors-Zero Coupon Securities, Pay-in-Kind Bonds and Deferred Payment
Securities' and ' -- Loan Participations and Assignments.'
The Strategic Bond Fund may invest up to 20% of its assets in common stock,
convertible securities, warrants, preferred stock or other equity securities
when consistent with the Fund's objectives. The
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Fund will generally hold such equity investments as a result of purchases of
unit offerings of fixed-income securities which include such securities or in
connection with an actual or proposed conversion or exchange of fixed-income
securities, but may also purchase equity securities not associated with
fixed-income securities when, in SBAM's opinion such purchase is appropriate.
The Strategic Bond Fund currently intends to invest substantially all of its
assets in fixed-income securities. In order to maintain liquidity, the
Strategic Bond Fund may invest up to 25% of its assets in high-quality
short-term money market instruments. Such instruments may include obligations
of the U.S. government or its agencies or instrumentalities; commercial paper
of issuers rated, at the time of purchase, A-2 or better by S&P or P-2 or
better by Moody's or which, in SBAM's determination, are of comparable quality;
certificates of deposit, banker's acceptances or time deposits of U.S. banks
with total assets of at least $1 billion (including obligations of foreign
branches of such banks) and of the 75 largest foreign commercial banks in terms
of total assets (including domestic branches of such banks), and repurchase
agreements with respect to such obligations.
The Strategic Bond Fund may enter into repurchase agreements and reverse
repurchase agreements, may purchase securities on a firm commitment basis,
including when-issued securities and may lend portfolio securities. The Fund
may also enter into mortgage 'dollar rolls.' For a description of these
investment practices and the risks associated therewith, see 'Additional
Investment Activities and Risk Factors.'
The Strategic Bond Fund may purchase securities for which there is a limited
trading market or which are subject to restrictions on resale to the public.
The Fund will not invest more than 15% of the value of its total assets in
illiquid securities, such as 'restricted securities' which are illiquid, and
securities that are not readily marketable. As more fully described in the
Statement of Additional Information, the Fund may purchase Rule 144A securities
for which there is a secondary market of qualified institutional buyers as
contemplated by Rule 144A under the 1933 Act. The Fund's holdings of Rule 144A
securities which are liquid securities will not be subject to the 15%
limitation on investments in illiquid securities. For further discussion of
illiquid securities and their associated risks, see 'Additional Investment
Activities and Risk Factors -- Restricted Securities and Securities with
Limited Trading Markets.'
The Strategic Bond Fund is currently authorized to use all of the various
investment strategies referred to under 'Additional Investment Activities and
Risk Factors -- Derivatives.' With the exception of currency transactions,
however, it is not presently anticipated that any of these strategies will be
used to a significant degree by the Fund. The Fund's ability to pursue certain
of these strategies may be limited by applicable regulations of the SEC, the
CFTC and the federal income tax requirements applicable to regulated investment
companies. See 'Additional Investment Activities and Risk
Factors -- Derivatives' and the Statement of Additional Information for a
description of these strategies and of certain risks associated therewith.
The foregoing investment policies, other than the Strategic Bond Fund's
investment objectives, are not fundamental policies and may be changed by vote
of the Fund's Board of Directors without the approval of shareholders.
TOTAL RETURN FUND
The primary investment objective of the Total Return Fund is to obtain above
average income (compared to a portfolio entirely invested in equity
securities). The Fund's secondary objective is to take advantage of
opportunities for growth of capital and income. The policy of the
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Total Return Fund is to invest in a broad variety of securities, including
equity securities, fixed-income securities and short-term obligations. The Fund
may vary the percentage of assets invested in any one type of security in
accordance with the investment manager's view of existing and anticipated
economic and market conditions, fiscal and monetary policy and underlying
security values. Under normal market conditions, it is anticipated that at
least 40% of the Fund's total assets will be invested in equity securities.
Equity securities include common and preferred stock (including convertible
preferred stock), bonds, notes and debentures convertible into common or
preferred stock, stock purchase warrants and rights, equity interests in trusts,
partnerships, joint ventures or similar enterprises and American, Global or
other types of Depositary Receipts. Most of the equity securities purchased by
the Fund are expected to be traded on a stock exchange or in an over-the-counter
market.
SBAM will have discretion to invest in the full range of maturities of
fixed-income securities. Generally, most of the Fund's long-term debt
investments will consist of 'investment grade' securities; that is, securities
rated Baa or better by Moody's or BBB or better by S&P or determined by SBAM to
be of comparable quality to securities so rated. See Appendix A to this
Prospectus for a description of these ratings. Certain risks associated with
investment in debt securities carrying the fourth highest quality rating ('Baa'
by Moody's or 'BBB' by S&P) are described above in the investment objectives and
policies for the Strategic Bond Fund.
Up to 20% of the Fund's net assets may be invested in nonconvertible fixed
income securities that are rated Ba or lower by Moody's or BB or lower by S&P
or Fitch or determined by SBAM to be of comparable quality. These securities are
commonly known as 'junk bonds.' There is no limit on the amount of the Total
Return Fund's assets that can be invested in convertible securities rated below
investment grade. For additional information on these lower rated, high yield
debt securities, which involve a high degree of risk, see the discussion above
under the investment objectives and policies for the High Yield Bond Fund and
'Additional Investment Activities and Risk Factors -- High Yield Securities.'
In addition to corporate debt securities, the Total Return Fund may invest in
U.S. Government securities and mortgage-backed securities, the types and
characteristics of which are set forth above in the discussion of the investment
objective and policies for the U.S. Government Income Fund. The Fund may also
purchase privately issued mortgage securities which are not guaranteed by the
U.S. government or its agencies or instrumentalities. For a description of
these securities and the risks associated therewith see 'Additional Investment
Activities and Risk Factors.' The Total Return Fund may invest in corporate
asset-backed securities, the characteristics and risks of which are described
above under the investment objective and policies of the Strategic Bond Fund.
Other fixed income securities in which the Total Return Fund may invest include
zero coupon bonds, deferred interest bonds and bonds on which the interest is
payable in kind ('PIK bonds'). For additional information on zero coupon bonds
and PIK bonds, see 'Additional Investment Activities and Risk Factors -- Zero
Coupon Securities, PIK Bonds and Deferred Payment Securities.' Deferred
interest bonds are debt obligations which are issued or purchased at a
significant discount from face value and provide for a period of delay before
the regular payment of interest begins. The characteristics and related risks
of these bonds are similar to those of zero coupon bonds.
The Total Return Fund may invest up to 20% (and generally expects to invest
between 10% and 20%) of its total assets
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in foreign securities (including American Depositary Receipts). For a
discussion of the risks associated with investment in foreign securities, see
'Additional Investment Activities and Risk Factors -- Foreign Securities.'
The Total Return Fund may invest a portion of its assets in Loan Participations
and Assignments. For a discussion of Loan Participations and Assignments and
their associated risks, see 'Additional Investment Activities and Risk
Factors -- Loan Participation and Assignments.'
The Total Return Fund may enter into repurchase agreements and reverse
repurchase agreements, may purchase securities on a firm commitment basis,
including when-issued securities, and may lend portfolio securities. For a
description of these investment practices, see 'Additional Investment
Activities and Risk Factors.' The Fund will not invest more than 10% of its
assets in repurchase agreements maturing in more than seven days.
The Total Return Fund may purchase securities for which there is a limited
trading market or which are subject to restrictions on resale to the public. The
Fund will not invest more than 15% of the value of its total assets in illiquid
securities, such as 'restricted securities' which are illiquid, and securities
that are not readily marketable. As more fully described in the Statement of
Additional Information, the Fund may purchase Rule 144A securities for which
there is a secondary market of qualified institutional buyers as contemplated
by Rule 144A under the 1933 Act. The Fund's holdings of Rule 144A securities
which are liquid securities will not be subject to the 15% limitation on
investments in illiquid securities. For further discussion of illiquid
securities and their associated risks, see 'Additional Investment Activities
and Risk Factors -- Restricted Securities and Securities with Limited Trading
Market.'
The Total Return Fund is currently authorized to use all of the various
investment strategies referred to under 'Additional Investment Activities and
Risk Factors -- Derivatives.' With the exception of currency transactions,
however, it is not presently anticipated that any of these strategies will be
used to a significant degree by the Fund. The Fund's ability to pursue certain
of these strategies may be limited by applicable regulations of the SEC, the
CFTC and the federal income tax requirements applicable to regulated investment
companies. See 'Additional Investment Activities and Risk
Factors -- Derivatives' and the Statement of Additional Information for a
description of these strategies and of certain risks associated therewith.
The foregoing investment policies, other than the Total Return Fund's investment
objectives, are not fundamental policies and may be changed by vote of the Board
of Directors without the approval of shareholders.
ASIA GROWTH FUND
The Asia Growth Fund's objective is to achieve long-term capital appreciation.
The Fund seeks to achieve its objective by investing at least 65% of its total
assets in equity and equity-related securities of Asian Companies. Asian
Companies include companies that: (i) are organized under the laws of
Bangladesh, China, Hong Kong, India, Indonesia, Korea, Malaysia, Pakistan, the
Philippines, Singapore, Sri Lanka, Taiwan, Thailand or any other country in the
Asian region (other than Japan, Australia and New Zealand) that currently or in
the future permits foreign investment (collectively, 'Asian Countries'); or
(ii) regardless of where organized and as determined by SBAM AP, (a) derive at
least 50% of their revenues from goods produced or sold, investments made, or
services performed in or with one or more of the Asian Countries, (b) maintain
at least 50% of
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their assets in one or more of the Asian Countries, or (c) have securities
which are traded principally on a stock exchange in an Asian Country. The Fund
is non-diversified within the meaning of the 1940 Act. See 'Additional
Investment Activities and Risk Factors -- Non-Diversification.'
Equity securities in which the Asia Growth Fund may invest include common and
preferred stocks (including convertible preferred stock), bonds, notes and
debentures convertible into common and preferred stock, stock purchase warrants
and rights, equity-linked debt securities, equity interests in trusts,
partnerships, joint ventures or similar enterprises, and American, Global or
other types of Depositary Receipts. Equity-linked debt securities are debt
instruments whose prices are indexed to the prices of equity securities or
securities indices. In other words, the value at maturity or coupon rate of
these equity-linked debt instruments is determined by reference to a specific
instrument or statistic. The performance of equity-linked debt instruments
depends to a great extent on the performance of the security or index to which
they are indexed, and may also be influenced by interest rate changes in the
United States and abroad. At the same time, these instruments are subject to the
credit risks associated with the issuer of the security, and their values may
decline substantially if the issuer's creditworthiness deteriorates. Indexed
instruments may be more volatile than the underlying instruments.
There are no prescribed limits on geographic asset distributions among Asian
Countries and from time to time, SBAM AP expects to invest a significant portion
of the Asia Growth Fund's assets in Hong Kong, Malaysia, Singapore and Thailand.
Investments in each of these countries may from time to time exceed 25% of the
Fund's total assets. In addition, more than 25% of the Fund's total assets may
be denominated or quoted in the currencies of any one or more of such
countries. In this connection, SBAM AP anticipates that up to 40% of the Fund's
total assets may be invested in Hong Kong. Under an agreement signed in 1984,
Britain passed Hong Kong's sovereignty to China effective July 1, 1997. The
political, social and financial ramifications of China's assumption of
sovereignty over Hong Kong, and the impact on the financial markets in Hong
Kong, Asia or elsewhere, are uncertain.
Although SBAM AP expects that most of the equity securities purchased by the
Fund will be traded on a stock exchange or in an over-the-counter market, most
of the Asian securities markets have substantially less volume than U.S. or
other established markets and some of the stock exchanges in the Asian
Countries are in the early stages of their development. Concentration of the
Fund's assets in one or a few of the Asian countries and Asian currencies will
subject the Fund, to a greater extent than if the Fund's assets were less
geographically concentrated, to the risks of adverse changes in the securities
and foreign exchange markets of such countries and social, political or
economic events which may occur in those countries. For a more detailed
discussion of the special risks which the Fund is subject to by virtue of its
investment in foreign securities, see 'Additional Investment Activities and
Risk Factors -- Foreign Securities.' An investment in the Asia Growth Fund
should not be considered as a complete investment program.
In pursuing the Asia Growth Fund's investment objective, SBAM AP will combine a
traditional fundamental approach towards evaluating industry sectors and
individual securities of Asian Companies with a risk management driven approach
seeking to keep the Fund's volatility of return in line with or lower than that
currently experienced in the Asian markets.
SBAM AP expects to focus on certain industry groups across Asian Countries in
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an attempt to identify and capture the relative value of such groups on a
pan-regional basis. SBAM AP will research individual companies in an effort to
identify the investment opportunities within these industry groups which will
provide long-term capital appreciation. In addition, SBAM AP intends to meet the
management of individual companies on a periodic basis. As part of the Asia
Growth Fund's risk management objective, SBAM AP will also concentrate on
macroeconomic issues and other variables influencing the direction of monetary
policies followed by Asian Central Banks.
The investment process to be implemented by SBAM AP will consist of the three
following principal (and potentially overlapping) types of approaches.
PAN REGIONAL INDUSTRY GROUP DECISIONS. SBAM AP will seek to identify the
pan-regional industrial sectors which are likely to exhibit attractive returns
over the long-term. In selecting such industrial sectors, SBAM AP will focus on
industry cycles and competitiveness as well as the industrial characteristics
of the Asian economies. In addition, SBAM AP will review government
regulations, industrial policies, access to technology and industrial research
reports provided by industrial companies or associations and securities dealers
in Asian Countries. SBAM AP will focus on those industries which represent
meaningful weightings in the total market capitalization of the Asian Countries
including, but not limited to, telecommunications, consumer durables and
nondurables, food and beverage, electronics, hotels, power engineering and
generation, basic industries, public utilities, property and financial sectors.
SBAM AP believes that an investment process that places emphasis on industry
groups is appropriate given the current state of economic and financial
integration being achieved by the Asian Countries and the relatively
significant concentration of market capitalization in Asian Countries toward
certain industrial sectors.
FUNDAMENTAL ANALYSIS. In order to identify the most attractive investment
opportunities within industry groups, SBAM AP will employ extensive research to
select investments in Asian Countries that offer long-term growth potential for
investors. While the Asia Growth Fund generally seeks to invest in securities of
larger companies within the particular Asian market, it may also invest in the
securities of medium and smaller companies that, in the opinion of SBAM AP,
have potential for growth. In particular, SBAM AP will employ the following
three-step process to evaluate particular investment opportunities for the Fund.
SCREENING PROCESS. SBAM AP will implement a systematic screening process in an
effort to identify individual securities it believes likely to exhibit
attractive returns over the long term. SBAM AP will screen companies according
to factors such as the perceived quality of their management and business,
overall sustainable competitiveness, historical earnings, dividend records over
at least a full business cycle, liquidity, trading volumes and historical and
expected volatility.
FINANCIAL ANALYSIS PROCESS. The financial analysis of selected companies will
focus on evaluating the fundamental value of the enterprise. SBAM AP will use a
value-driven process which will emphasize quantitative analysis based on return
on equity ('ROE') and its components, such as operating margins, financial
leverage, asset turnover and interest and tax burdens. In addition, the
company's cash flow generating capabilities and return on assets will be
considered. SBAM AP believes that ROE and cash flow dynamics are appropriate
variables when analyzing companies which operate in high growth markets, such
as Asia, as the ability of such companies to capture this growth by
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using the right allocation of resources and asset financing is of utmost
importance.
VALUATION PROCESS AND VOLATILITY ANALYSIS. The valuation process will focus on
Price Earnings Ratio ('PER') calculations and comparisons with historical
relative PER bands and local market conditions. SBAM AP will use measures such
as PER/growth, and will evaluate whether the security enjoys accelerating
earnings growth momentum due to management changes or the introduction of new
products and/or services. In addition, where appropriate, SBAM AP will conduct
specific dividend discount model and discount cash flow analyses for specific
securities with predictable cash flows or dividend streams. Through the use of
this analysis, SBAM AP will attempt to identify companies with strong potential
for appreciation relative to their downside exposure. Lastly, SBAM AP will
conduct a volatility analysis on selected securities in an effort to forecast
the expected risk of such securities and compare the results of such risk
analysis with these securities' expected returns. Investments may be made in
companies that do not have extensive operating experience provided that SBAM AP
believes such companies nevertheless have significant growth potential.
RISK MANAGEMENT AND MACROECONOMIC/TOP-DOWN ANALYSIS. SBAM AP will also consider
macroeconomic variables, such as liquidity and capital flows, foreign equity and
industrial investments and the direction of monetary policies in the Asian
Countries in an effort to capture individual market movements as well as attain
an optimal asset allocation mix and to identify the appropriate risk management
parameters for the Asia Growth Fund. The macroeconomic data SBAM AP will
monitor and analyze includes, but is not limited to, gross domestic product
growth, balance of payments and current account balances, budget deficits or
surpluses, inflation and interest rates. SBAM AP intends to meet with central
bankers, regional economists and strategists on a regular basis to assess the
present and future direction of monetary policies and their likely impact on
the markets of the Asian Countries.
As part of the Fund's risk management approach and in an attempt to better
assess and control the Fund's overall risk level on an ongoing basis, SBAM AP
will employ a quantitative analysis at each stage of the investment process
which will consist of analyzing and forecasting volatilities of the Asian
markets and securities. SBAM AP will use a number of volatility-control
strategies, including derivative instruments (as discussed below), in an effort
to attain an optimal asset allocation mix, for hedging purposes in an attempt
to control the Fund's overall risk level and to obtain exposure to markets in
the Asian Countries which have restrictions on foreign investment.
The Asia Growth Fund from time to time may invest up to 10% of its total assets
in non-convertible debt securities, which may include securities rated below
investment grade by S&P and Moody's with no minimum rating required or
comparable unrated securities, commonly known as 'junk bonds.' There is no
limit on the amount of the Fund's assets that can be invested in convertible
securities rated below investment grade. For additional information on these
high yield debt securities, which may involve a high degree of risk, see
'Additional Investment Activities and Risk Factors -- High Yield Securities.'
In order to maintain liquidity, the Asia Growth Fund may hold and/or invest up
to 35% of its total assets in debt securities denominated in U.S. dollars or in
another freely convertible currency including: (1) short-term (less than 12
months to maturity) and medium-term (not greater than five years to maturity)
obligations issued or guaranteed by (a) the U.S. government or the government
of an Asian Country, their agencies or
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instrumentalities or (b) international organizations designated or supported by
multiple foreign governmental entities to promote economic reconstruction or
development ('supranational entities'); (2) finance company obligations,
corporate commercial paper and other short-term commercial obligations, in each
case rated, or issued by companies with similar securities outstanding that are
rated, 'Prime-1' or 'A' or better by Moody's or 'A-1' or 'A' or better by S&P
or, if unrated, of comparable quality as determined by SBAM AP; (3) obligations
(including certificates of deposit, time deposits, demand deposits and bankers'
acceptances) of banks; and (4) repurchase agreements (as described below under
'Additional Investment Activities and Risk Factors -- Repurchase Agreements')
with respect to securities in which the Fund may invest. If at some future
date, in the opinion of SBAM AP, adverse conditions prevail in the securities
markets which makes the Asia Growth Fund's investment strategy inconsistent
with the best interests of the Fund's shareholders, the Fund may invest its
assets without limit in such instruments.
The Asia Growth Fund may enter into repurchase agreements and reverse
repurchase agreements, may purchase securities on a firm commitment basis,
including when-issued securities and may lend portfolio securities. The Fund may
also invest in investment funds. For a description of these investment practices
and the risks associated therewith, see 'Additional Investment Activities and
Risk Factors.'
The Asia Growth Fund may purchase securities for which there is a limited
trading market or which are subject to restrictions on resale to the public. The
Fund will not invest more than 15% of the value of its total assets in illiquid
securities, such as 'restricted securities' which are illiquid, and securities
that are not readily marketable. For further discussion of illiquid securities
and their associated risks, see 'Additional Investment Activities and Risk
Factors -- Restricted Securities and Securities With Limited Trading Markets.'
As more fully described in the Statement of Additional Information, the Fund
may purchase Rule 144A securities. The Fund's holdings of Rule 144A securities
which are liquid securities will not be subject to the 15% limitation on
investments in illiquid securities.
The Asia Growth Fund is currently authorized and intends to use the various
investment strategies referred to under 'Additional Investment Activities and
Risk Factors -- Derivatives.' The Fund's ability to pursue certain of these
strategies may be limited by applicable regulations of the SEC, the CFTC and
the federal income tax requirements applicable to regulated investment
companies. See 'Additional Investment Activities and Risk Factors --
Derivatives' and the Statement of Additional Information for a description of
these strategies and of certain risks associated therewith.
The foregoing investment policies and activities, other than the Asia Growth
Fund's investment objective, are not fundamental policies and may be changed by
vote of the Fund's Board of Directors without the approval of shareholders.
INVESTORS FUND
The primary investment objective of the Investors Fund is to seek long-term
growth of capital. Current income is a secondary objective. The Fund seeks to
achieve its objectives primarily through investments in common stocks of well-
known companies.
The Investor Fund's policy is to retain flexibility in the management of its
portfolio, without restrictions as to the proportion of assets which may be
invested in any class of securities. It is anticipated that the Fund's
portfolio will generally consist of common and preferred stocks.
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The Fund may purchase securities of companies located in foreign countries
which SBAM deems consistent with the investment objectives and policies of the
Fund, but not if upon such purchase more than 20% of the Fund's net assets would
be so invested. For a discussion of the risks associated with investment in
foreign securities, see 'Additional Investment Activities and Risk
Factors -- Foreign Securities.'
Under normal conditions, the selection of common stock or securities convertible
into common stock, such as convertible preferred stock or convertible
debentures, with growth possibilities will be favored. Income-producing
securities are a secondary consideration in portfolio selection. To meet
operating expenses and to meet anticipated redemption requests, the Investors
Fund generally holds a portion of its assets in short-term fixed-income
securities (governmental obligations or investment grade debt securities) or
cash or cash equivalents. As described below, short-term investments may
include repurchase agreements with banks or broker/dealers. When management
deems it appropriate, consistent with the Investors Fund's secondary objective
of current income, or during temporary defensive periods due to economic or
market conditions, the Fund may invest without limitation in fixed-income
securities or hold assets in cash or cash equivalents. The types and
characteristics of investment grade corporate debt securities and investment
grade foreign debt securities which may be purchased by the Fund are set forth
above in the discussion of investment objectives and policies for the Strategic
Bond Fund. Investments in such investment grade fixed-income securities may
also be made for the purpose of capital appreciation, as in the case of
purchases of bonds traded at a substantial discount, or when interest rates are
expected to decline.
The Investors Fund from time to time may invest up to 5% of its net assets in
non-convertible debt securities rated below investment grade by S&P and Moody's
with no minimum rating required or comparable unrated securities. There is no
limit on the amount of Investors Fund's assets that can be invested in
convertible securities rated below investment grade. For additional information
on these high yield debt securities, which involve a high degree of risk, see
the description above of investment objectives and polices for the High Yield
Bond Fund and 'Additional Investment Activities and Risk Factors -- High Yield
Securities.'
The Investors Fund maintains a carefully selected portfolio of securities
diversified among industries and companies. The Fund may invest up to 25% of
its net assets in any one industry. The Fund generally purchases marketable
securities, primarily those traded on the New York Stock Exchange ('NYSE') or
other national securities exchanges, but also issues traded in the
over-the-counter market. The Fund will not invest more than 15% of the value of
its total assets in illiquid securities, such as 'restricted securities' which
are illiquid, and securities that are not readily marketable. As more fully
described in the Statement of Additional Information, the Fund may purchase
certain Rule 144A securities for which there is a secondary market of qualified
institutional buyers as contemplated by Rule 144A under the 1933 Act. The
Fund's holdings of Rule 144A securities which are liquid securities will not be
subject to the 15% limitation on investments in illiquid securities. For
further discussion of illiquid securities and their associated risks, see
'Additional Investment Activities and Risk Factors -- Restricted Securities
and Securities with Limited Trading Markets.'
From time to time, the Investors Fund may lend portfolio securities to brokers
or dealers or other financial institutions. Such loans will not exceed 33 1/3%
of the Fund's total assets, taken at value. For a discussion of the risks
associated with
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lending portfolio securities, see 'Additional Investment Activities and Risk
Factors -- Loans of Portfolio Securities.'
For a description of repurchase agreements and their associated risks, see
'Additional Investment Activities and Risk Factors -- Repurchase Agreements.'
As a hedge against either a decline in the value of securities included in the
Investors Fund's portfolio or against an increase in the price of securities
which it plans to purchase or in order to preserve or maintain a return or
spread on a particular investment or portion of its portfolio or to achieve a
particular return on cash balances, or in order to increase income or gain, the
Investors Fund may use all of the various investment strategies referred to
under 'Additional Investment Activities and Risk Factors -- Derivatives.' The
Fund's ability to pursue certain of these strategies may be limited by
applicable regulations of the SEC, the CFTC and the federal income tax
requirements applicable to regulated investment companies. See 'Additional
Investment Activities and Risk Factors -- Derivatives' and the Statement of
Additional Information for a description of these strategies and of certain
risks associated therewith.
The foregoing investment policies and activities, other than the Investors
Fund's investment objectives are not fundamental policies and may be changed by
vote of the Board of Directors without the approval of shareholders.
CAPITAL FUND
The investment objective of the Capital Fund is to seek capital appreciation
through investments in securities which are believed to have above-average price
appreciation potential. Such investments may also involve above-average risk.
There can be no assurance that the Fund's objective will be achieved. Although
the Fund may receive current income from dividends, interest and other sources,
income is an incidental consideration to seeking capital appreciation. The Fund
is non-diversified within the meaning of the 1940 Act. See 'Additional
Investment Activities and Risk Factors -- Non-Diversification.'
In seeking capital appreciation, the Capital Fund may purchase securities of
seasoned issuers, relatively smaller and newer companies as well as in new
issues and may be subject to wide fluctuations in market value. Portfolio
securities may have limited marketability or may be widely and publicly traded.
The Fund will not concentrate its investments in any particular industry.
The Capital Fund anticipates that its investments generally will be in
securities of companies which it considers to reflect the following
characteristics:
(1) share prices which appear to undervalue the company's assets or which
appear not to take into account adequately factors such as prospective reversal
of an unfavorable industry trend, lack of investor recognition or disappointing
earnings believed to be temporary;
(2) special situations such as existing or possible changes in management or
management policies, corporate structure or control, capitalization, regulatory
environment, or other circumstances which could be expected to favor earnings or
market price of such company's shares; or
(3) growth potential due to technological advances, new methods in marketing or
production, new or unique products or services, changes in demand for products
or services or other significant new developments.
The Capital Fund intends to invest primarily in common stocks, or securities
convertible into or exchangeable for common stocks, such as convertible
preferred stocks or convertible debentures. To meet operating expenses and to
meet anticipated redemption requests, the Fund
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SALOMON BROTHERS VARIABLE SERIES
generally holds a portion of its assets in short-term fixed income securities
(government obligations or investment grade debt securities) or cash or cash
equivalents. As described below, short-term investments may include repurchase
agreements with banks or brokers-dealers. When management deems it appropriate,
for temporary defensive purposes, the Fund may invest without limitation in
investment grade fixed-income securities or hold assets in cash or cash
equivalents. Investment grade debt securities are debt securities rated BBB or
better by S&P or Baa or better by Moody's, or if rated by other rating agencies
or if unrated, securities deemed by SBAM to be of comparable quality. See
'Appendix A: Description of Ratings.' Investments in such investment grade
fixed-income securities may also be made for the purpose of capital
appreciation, as in the case of purchases of bonds traded at a substantial
discount or when SBAM believes interest rates may decline.
The Capital Fund from time to time may invest up to 10% of its net assets in
non-convertible debt securities rated below investment grade by S&P and Moody's
with no minimum rating required or comparable unrated securities. There is no
limit on the amount of the Fund's assets that can be invested in convertible
securities rated below investment grade. For additional information on these
high yield debt securities, which may involve a high degree of risk, see the
description above of the investment objectives and policies for the High Yield
Bond Fund and 'Additional Investment Activities and Risk Factors -- High Yield
Securities.' The Fund may invest up to 20% of the value of the Fund's assets in
securities of foreign issuers. See 'Additional Investment Activities and Risk
Factors -- Foreign Securities.'
The Capital Fund may purchase securities for which there is a limited trading
market or which are subject to restrictions on resale to the public. The Fund
will not invest more than 15% of the value of its total assets in illiquid
securities, such as 'restricted securities' which are illiquid, and securities
that are not readily marketable. For further discussion of illiquid securities
and their associated risks, see 'Additional Investment Activities and Risk
Factors -- Restricted Securities and Securities With Limited Trading Markets.'
As more fully described in the Statement of Additional Information, the Fund
may purchase Rule 144A securities. The Fund's holding of Rule 144A securities
which are liquid securities will not be subject to the 15% limitation on
investments in illiquid securities.
As indicated below under 'Investment Limitations,' the Fund may from time to
time lend portfolio securities to brokers or dealers or other financial
institutions. Such loans will not exceed 33 1/3% of the Fund's total assets
taken at value. For a discussion of the risks associated with lending portfolio
securities, see 'Additional Investment Activities and Risk Factors -- Loans of
Portfolio Securities.'
The Fund enters into repurchase agreements with respect to securities in which
it may otherwise invest. For a description of repurchase agreements and their
associated risks, see 'Additional Investment Activities and Risk Factors --
Repurchase Agreements.' In addition, in order to meet redemptions or to take
advantage of promising investment opportunities without disturbing an
established portfolio, the Fund may borrow up to an aggregate of 15% of the
value of its total assets taken at the time of borrowing. In addition, the Fund
may borrow for temporary or emergency purposes an aggregate amount which may
not exceed 5% of the value of its total assets at the time of borrowing. The
Fund shall borrow only from banks. Borrowings may be unsecured, or may be
secured by not more than 15% of the value of the Fund's total assets. As a
matter of operating policy, however, the Fund will not secure borrowings by
more than 10%
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of the value of the Fund's total assets. For a discussion of the risks
associated with borrowings, see 'Additional Investment Activities and Risk
Factors -- Borrowing.'
As a hedge against either a decline in the value of the securities included in
the Capital Fund's portfolio, or against an increase in the price of the
securities which it plans to purchase, or in order to preserve or maintain a
return or spread on a particular investment or portion of its portfolio or to
achieve a particular return on cash balances, or in order to increase income or
gain, the Capital Fund may use all of the investment strategies referred to
under 'Additional Investment Activities and Risk Factors -- Derivatives.' The
Fund's ability to pursue certain of these strategies may be limited by
applicable regulations of the SEC, the CFTC and the federal income tax
requirements applicable to regulated investment companies. See 'Additional
Investment Activities and Risk Factors -- Derivatives' for a description of
these strategies and of certain risks associated therewith.
The foregoing investment policies (other than the policy of the Capital Fund
with respect to the borrowing of money and the lending of portfolio securities)
are not fundamental policies and may be changed by vote of the Board of
Directors without the approval of shareholders.
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Additional Investment Activities
and Risk Factors
BANK OBLIGATIONS. Banks are subject to extensive governmental regulations which
may limit both the amounts and types of loans and other financial commitments
which may be made and interest rates and fees which may be charged. The
profitability of this industry is largely dependent upon the availability and
cost of capital funds for the purpose of financing lending operations under
prevailing money market conditions. Also, general economic conditions play an
important part in the operations of this industry and exposure to credit losses
arising from possible financial difficulties of borrowers might affect a bank's
ability to meet its obligations.
Investors should also be aware that securities issued or guaranteed by foreign
banks, foreign branches of U.S. banks, and foreign government and private
issuers may involve investment risks in addition to those relating to domestic
obligations. See ' -- Foreign Securities' below. None of the Funds will
purchase bank obligations which SBAM believes, at the time of purchase, will be
subject to exchange controls or foreign withholding taxes; however, there can
be no assurance that such laws may not become applicable to certain of the
Funds' investments. In the event unforeseen exchange controls or foreign
withholding taxes are imposed with respect to a Fund's investments, the effect
may be to reduce the income received by the Fund on such investments.
FLOATING AND VARIABLE RATE INSTRUMENTS. The Strategic Bond Fund may invest in
floating and variable rate obligations. Floating or variable rate obligations
bear interest at rates that are not fixed, but vary with changes in specified
market rates or indices, such as the prime rate, and at specified intervals.
Certain of the floating or variable rate obligations that may be purchased by a
Fund may carry a demand feature that would permit the holder to tender them
back to the issuer at par value prior to maturity. Such obligations include
variable rate master demand notes, which are unsecured instruments issued
pursuant to an agreement between the issuer and the holder that permit the
indebtedness thereunder to vary and provide for periodic adjustments in the
interest rate. A Fund will limit its purchases of floating and variable rate
obligations to those of the same quality as it otherwise is allowed to
purchase. SBAM will monitor on an ongoing basis the ability of an issuer of a
demand instrument to pay principal and interest on demand. For a further
discussion of floating and variable rate obligations, see 'Additional
Information on Portfolio Instruments and Investment Policies -- Floating and
Variable Rate Instruments' in the Statement of Additional Information.
REPURCHASE AGREEMENTS. Each Fund may enter into repurchase agreements for cash
management purposes. A repurchase agreement is a transaction in which the
seller of a security commits itself at the time of the sale to repurchase that
security from the buyer at a mutually agreed upon time and price.
Each Fund will enter into repurchase agreements only with dealers, domestic
banks or recognized financial institutions which, in the opinion of SBAM based
on guidelines established by the Board of Directors, are deemed creditworthy.
SBAM will monitor the value of the securities underlying the repurchase
agreement at the time the transaction is entered into and at all times during
the term of the repurchase agreement to ensure that the value of the securities
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always equals or exceeds the repurchase price. Each Fund requires that
additional securities be deposited if the value of the securities purchased
decreases below their resale price and does not bear the risk of a decline in
the value of the underlying security unless the seller defaults under the
repurchase obligation. In the event of default by the seller under the
repurchase agreement, a Fund could experience losses and experience delays in
connection with the disposition of the underlying security. To the extent that,
in the meantime, the value of the securities that a Fund has purchased has
decreased, the Fund could experience a loss. Repurchase agreements with
maturities of more than seven days will be treated as illiquid securities by a
Fund.
REVERSE REPURCHASE AGREEMENTS. The High Yield Bond Fund, Strategic Bond Fund,
Total Return Fund and Asia Growth Fund may enter into 'reverse' repurchase
agreements to avoid selling securities during unfavorable market conditions to
meet redemptions. Pursuant to a reverse repurchase agreement, a Fund will sell
portfolio securities and agree to repurchase them from the buyer at a
particular date and price. Whenever a Fund enters into a reverse repurchase
agreement, it will establish a segregated account of liquid assets in an amount
at least equal to the repurchase price marked to market daily (including accrued
interest), and will subsequently monitor the account to ensure that such
equivalent value is maintained, in accordance with procedures established by the
Board of Directors. A Fund pays interest on amounts obtained pursuant to reverse
repurchase agreements. Reverse repurchase agreements are considered to be
borrowings by a Fund.
LOANS OF PORTFOLIO SECURITIES. Each Fund may lend portfolio securities to
generate income. In the event of the bankruptcy of the other party to a
securities loan, a Fund could experience delays in recovering the securities it
lent. To the extent that, in the meantime, the value of the securities a Fund
lent has increased, the Fund could experience a loss. The value of securities
loaned will be marked to market daily. Any securities that a Fund may receive
as collateral will not become a part of its portfolio at the time of the loan.
In the event of a default by the borrower, the Fund will, if permitted by law,
dispose of such collateral except that the Fund may retain any such part
thereof that is a security in which the Fund is permitted to invest. The Fund
may invest the cash collateral and earn additional income or receive an agreed-
upon fee from a borrower that has delivered cash equivalent collateral. Cash
collateral received by a Fund may be invested in securities in which the Fund is
permitted to invest. Portfolio securities purchased with cash collateral are
subject to possible depreciation. Voting rights may pass with the lending of
portfolio securities. Loans of securities by a Fund will be subject to
termination at the Fund's or the borrower's option. A Fund may pay
administrative and custodial fees in connection with a securities loan and may
pay a negotiated portion of the interest or fee earned with respect to the
collateral to the borrower or a placing broker.
FIRM COMMITMENTS AND WHEN-ISSUED SECURITIES. Each Fund may purchase securities
on a firm commitment basis, including when-issued securities. Securities
purchased on a firm commitment basis are purchased for delivery beyond the
normal settlement date at a stated price and yield. No income accrues to the
purchaser of a security on a firm commitment basis prior to delivery. Such
securities are recorded as an asset and are subject to changes in value based
upon changes in the general level of interest rates. Purchasing a security on a
firm commitment basis can involve a risk that the market price at the time of
delivery may be lower than the agreed upon purchase price, in which case there
could be an unrealized loss at the time of delivery. A Fund will only make
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commitments to purchase securities on a firm commitment basis with the intention
of actually acquiring the securities, but may sell them before the settlement
date if it is deemed advisable. A Fund will establish a segregated account in
which it will maintain liquid assets in an amount at least equal in value to
the Fund's commitments to purchase securities on a firm commitment basis. If
the value of these assets declines, the Fund will place additional liquid
assets in the account on a daily basis so that the value of the assets in the
account is equal to the amount of such commitments.
ZERO COUPON SECURITIES, PIK BONDS AND DEFERRED PAYMENT SECURITIES. The High
Yield Bond Fund, Strategic Bond Fund and Total Return Fund may invest in zero
coupon securities, PIK bonds and deferred payment securities.
Zero coupon securities are debt securities that pay no cash income but are sold
at substantial discounts from their value at maturity. When a zero coupon
security is held to maturity, its entire return, which consists of the
amortization of discount, comes from the difference between its purchase price
and its maturity value. This difference is known at the time of purchase, so
that investors holding zero coupon securities until maturity know at the time
of their investment what the expected return on their investment will be.
Certain zero coupon securities also are sold at substantial discounts from their
maturity value and provide for the commencement of regular interest payments at
a deferred date. Zero coupon securities may have conversion features. A Fund
also may purchase PIK bonds. PIK bonds pay all or a portion of their interest
in the form of debt or equity securities. Deferred payment securities are
securities that remain zero coupon securities until a predetermined date, at
which time the stated coupon rate becomes effective and interest becomes
payable at regular intervals.
Zero coupon securities, PIK bonds and deferred payment securities tend to be
subject to greater price fluctuations in response to changes in interest rates
than are ordinary interest-paying debt securities with similar maturities. The
value of zero coupon securities appreciates more during periods of declining
interest rates and depreciates more during periods of rising interest rates
than ordinary interest-paying debt securities with similar maturities. Zero
coupon securities, PIK bonds and deferred payment securities may be issued by a
wide variety of corporate and governmental issuers. Although these instruments
are generally not traded on a national securities exchange, they are widely
traded by brokers and dealers and, to such extent, will not be considered
illiquid for the purposes of a Fund's limitation on investments in illiquid
securities.
Current federal income tax law requires the holder of a zero coupon security,
certain PIK bonds, deferred payment securities and certain other securities
acquired at a discount (such as Brady Bonds) to accrue income with respect to
these securities prior to the receipt of cash payments. Accordingly, to avoid
liability for federal income and excise taxes, a Fund may be required to
distribute income accrued with respect to these securities and may have to
dispose of portfolio securities under disadvantageous circumstances in order to
generate cash to satisfy these distribution requirements.
LOAN PARTICIPATIONS AND ASSIGNMENTS. The High Yield Bond Fund, Strategic Bond
Fund, and Total Return Fund may invest in Loan Participations and Assignments.
The Funds consider these investments to be investments in debt securities for
purposes of this Prospectus. Loan Participations typically will result in a
Fund having a contractual relationship only with the Lender, not with the
borrower. A Fund will have the right to receive payments of principal, interest
and
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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. In
connection with purchasing Loan 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 the Fund may not benefit directly 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. In the event of the insolvency of the Lender selling a
Participation, a Fund may be treated as a general creditor of the Lender and
may not benefit from any set-off between the Lender and the borrower. A Fund
will acquire Loan Participations only if the Lender interpositioned between the
Fund and the borrower is determined by SBAM to be creditworthy. When a Fund
purchases Assignments from Lenders, the Fund will acquire direct rights against
the borrower on the Loan, except that under certain circumstances such rights
may be more limited than those held by the assigning Lender.
A Fund may have difficulty disposing of Assignments and Loan Participations.
Because the market for such instruments is not highly liquid, the Funds
anticipate that such instruments could be sold only to a limited number of
institutional investors. The lack of a highly liquid secondary market may have
an adverse impact on the value of such instruments and will have an adverse
impact on a Fund's ability to dispose of particular Assignments or Loan
Participations in response to a specific economic event, such as deterioration
in the creditworthiness of the borrower.
The Board of Directors has adopted policies and procedures for the purpose of
determining whether Assignments and Loan Participations are liquid or illiquid.
Pursuant to those policies and procedures, the Board of Directors has delegated
to SBAM the determination as to whether a particular Loan Participation or
Assignment is liquid or illiquid, requiring that consideration be given to,
among other things, the frequency of quotes, the number of dealers willing to
sell and the number of potential purchasers, the nature of the Loan
Participation or Assignment and the time needed to dispose of it and the
contractual provisions of the relevant documentation. To the extent that liquid
Assignments and Loan Participation that a Fund holds become illiquid, due to the
lack of sufficient buyers or market or other conditions, the percentage of a
Fund's assets invested in illiquid assets would increase. SBAM, under the
supervision of the Board of Directors, monitors Fund investments in Assignments
and Loan Participations and will consider appropriate measures to enable a Fund
to maintain sufficient liquidity for operating purposes and to meet redemption
requests.
In valuing a Loan Participation or Assignment held by a Fund for which a
secondary trading market exists, the Fund will rely upon prices or quotations
provided by banks, dealers or pricing services. To the extent a secondary
trading market does not exist, a Fund's Loan Participations and Assignments
will be valued in accordance with procedures adopted by the Board of Directors,
taking into consideration, among other factors: (i) the creditworthiness of the
borrower under the Loan and the Lender; (ii) the current interest rate; period
until next rate reset and maturity of the Loan; (iii) recent prices in the
market for similar Loans; and (iv) recent prices in the market for instruments
of similar quality, rate, period until next interest rate reset and maturity.
See 'Net Asset Value.'
RESTRICTED SECURITIES AND SECURITIES WITH LIMITED TRADING MARKETS. Each Fund
may purchase securities for which
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there is a limited trading market or which are subject to restrictions on
resale to the public. If a Fund were to assume substantial positions in
securities with limited trading markets, the activities of the Fund could have
an adverse effect upon the liquidity and marketability of such securities and
the Fund might not be able to dispose of its holdings in those securities at
then current market prices. Circumstances could also exist (to satisfy
redemptions, for example) when portfolio securities might have to be sold by a
Fund at times which otherwise might be considered to be disadvantageous so that
the Fund might receive lower proceeds from such sales than it had expected to
realize. Investments in securities which are 'restricted' may involve added
expenses to a Fund should the Fund be required to bear registration costs with
respect to such securities and could involve delays in disposing of such
securities which might have an adverse effect upon the price and timing of
sales of such securities and the liquidity of the Fund with respect to
redemptions. Restricted securities and securities for which there is a limited
trading market may be significantly more difficult to value due to the
unavailability of reliable market quotations for such securities, and
investment in such securities may have an adverse impact on net asset value. As
more fully described in the Statement of Additional Information, certain Funds
may purchase Rule 144A securities for which there may be a secondary market of
qualified institutional buyers as contemplated by recently adopted Rule 144A
under the 1933 Act. A Fund's holdings of Rule 144A securities which are liquid
securities will not be subject to the Fund's applicable limitation on
investments in illiquid securities. Rule 144A is a recent development and there
is no assurance that a liquid market in Rule 144A securities will develop or be
maintained. To the extent that the number of qualified institutional buyers is
reduced, a previously liquid Rule 144A security may be determined to be
illiquid, thus increasing the percentage of illiquid assets in a Fund's
portfolio. SBAM, under the supervision of the Board of Directors, is
responsible for monitoring the liquidity of Rule 144A securities and the
selection of such securities. The Board of Directors periodically reviews
purchases and sales of such securities.
WARRANTS. Each of the Funds, except for the U.S. Government Income Fund, may
invest in warrants, which are securities permitting, but not obligating, their
holder to subscribe for other securities. Warrants do not carry the right to
dividends or voting rights with respect to their underlying securities, and
they do not represent any rights in assets of the issuer. An investment in
warrants may be considered speculative. In addition, the value of a warrant
does not necessarily change with the value of the underlying securities and a
warrant ceases to have value if it is not exercised prior to its expiration
date.
FOREIGN SECURITIES. Investors should recognize that investing in the securities
of foreign issuers involves special considerations which are not typically
associated with investing in the securities of U.S. issuers. Investments in
securities of foreign issuers may involve risks arising from differences
between U.S. and foreign securities markets, including less volume, much
greater price volatility in and illiquidity of certain foreign securities
markets, different trading and settlement practices and less governmental
supervision and regulation, from changes in currency exchange rates, from high
and volatile rates of inflation, from economic, social and political conditions
and, as with domestic multinational corporations, from fluctuating interest
rates.
Investment in certain emerging market securities is restricted or controlled to
varying degrees which may at times limit or preclude investment in certain
emerging market securities and increase
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the costs and expenses of a Fund. Certain emerging market countries require
governmental approval prior to investments by foreign persons, limit the amount
of investment by foreign persons in a particular issuer, limit the investment
by foreign persons only to a specific class of securities of an issuer that may
have less advantageous rights than other classes, restrict investment
opportunities in issuers in industries deemed important to national interests
and/or impose additional taxes on foreign investors.
Certain emerging market countries may require governmental approval for the
repatriation of investment income, capital or the proceeds of sales of
securities by foreign investors which could adversely affect a Fund. In
addition, if a deterioration occurs in the country's balance of payments, it
could impose temporary restrictions on foreign capital remittances. Investing
in local markets in emerging market countries may require a Fund to adopt
special procedures, seek local government approvals or take other actions, each
of which may involve additional costs to the Fund.
Other investment risks include the possible imposition of foreign withholding
taxes on certain amounts of a Fund's income, the possible seizure or
nationalization of foreign assets and the possible establishment of exchange
controls, expropriation, confiscatory taxation, other foreign governmental laws
or restrictions which might affect adversely payments due on securities held by
a Fund, the lack of extensive operating experience of eligible foreign
subcustodians and legal limitations on the ability of a Fund to recover assets
held in custody by a foreign subcustodian in the event of the subcustodian's
bankruptcy. Moreover, brokerage commissions and other transactions costs on
foreign securities exchanges are generally higher than in the United States.
In addition, there may be less publicly-available information about a foreign
issuer than about a U.S. issuer, and foreign issuers may not be subject to the
same accounting, auditing and financial record-keeping standards and
requirements as U.S. issuers. In particular, the assets and profits appearing
on the financial statements of an emerging market country issuer may not
reflect its financial position or results of operations in the way they would
be reflected and the financial statements been prepared in accordance with U.S.
generally accepted accounting principles. In addition, for an issuer that keeps
accounting records in local currency, inflation accounting rules may require,
for both tax and accounting purposes, that certain assets and liabilities be
restated on the issuer's balance sheet in order to express items in terms of
currency of constant purchasing power. Inflation accounting may indirectly
generate losses or profits. Consequently, financial data may be materially
affected by restatements for inflation and may not accurately reflect the real
condition of those issuers and securities markets. See ' -- High Yield
Securities.'
Finally, in the event of a default in any such foreign obligations, it may be
more difficult for a Fund to obtain or enforce a judgment against the issuers
of such obligations. For a further discussion of certain risks involved in
investing in foreign securities, particularly of emerging market issuers, see
'Additional Information on Portfolio Instruments and Investment
Policies -- Foreign Securities' in the Statement of Additional Information.
FIXED-INCOME SECURITIES. Changes in market yields will affect a Fund's net asset
value as prices of fixed-income securities generally increase when interest
rates decline and decrease when interest rates rise. Prices of longer term
securities generally increase or decrease more sharply than those of shorter
term securities in response to interest rate changes, particularly if such
securities
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were purchased at a discount. Because the, U.S. Government Income Fund, the
High Yield Bond Fund and the Strategic Bond Fund will invest primarily in fixed-
income securities and the Total Return Fund may from time to time invest in a
substantial amount of fixed-income securities, the net asset value of these
Fund's shares can be expected to change as general levels of interest rates
fluctuate. It should be noted that the market values of securities rated below
investment grade and comparable unrated securities tend to react less to
fluctuations in interest rate levels than do those of higher-rated securities.
Except to the extent that values are affected independently by other factors
such as developments relating to a specific issuer, when interest rates
decline, the value of a fixed-income portfolio can generally be expected to
rise. Conversely, when interest rates rise, the value of a fixed-income
portfolio can generally be expected to decline.
In addition, many fixed-income securities contain call or buy-back features that
permit their issuers to call or repurchase the securities from their holders.
Such securities may present risks based on payment expectations. Although a Fund
would typically receive a premium if an issuer were to redeem a security, if an
issuer exercises such a 'call option' and redeems the security during a time of
declining interest rates, a Fund may realize a capital loss on its investment if
the security was purchased at a premium and a Fund may have to replace the
called security with a lower yielding security, resulting in a decreased rate
of return to the Fund.
MORTGAGE-BACKED SECURITIES. The yield characteristics of the mortgage-backed
securities in which the U.S. Government Income Fund, the Strategic Bond Fund
and the Total Return Fund may invest differ from those of traditional debt
securities. Among the major differences are that interest and principal
payments are made more frequently on mortgage-backed securities, usually
monthly, and that principal may be prepaid at any time because the underlying
mortgage loans generally may be prepaid at any time. As a result, if these
securities are purchased at a premium, faster than expected prepayments will
reduce yield to maturity, while slower than expected prepayments will increase
yield to maturity. Conversely, if these securities are purchased at a discount,
faster than expected prepayments will increase yield to maturity, while slower
than expected prepayments will reduce yield to maturity. Accelerated
prepayments on securities purchased at a premium also impose a risk of loss of
principal because the premium may not have been fully amortized at the time the
principal is prepaid in full. Because of the reinvestment of prepayments of
principal at current rates, mortgage-backed securities may be less effective
than Treasury bonds of similar maturity at maintaining yields during periods of
declining interest rates. When interest rates rise, the value and liquidity of
mortgage-backed securities may decline sharply and generally will decline more
than would be the case with other fixed-income securities; however, when
interest rates decline, the value of mortgage-backed securities may not
increase as much as other fixed-income securities due to the prepayment
feature. Certain market conditions may result in greater than expected
volatility in the prices of mortgage-backed securities. For example, in periods
of supply and demand imbalances in the market for such securities and/or in
periods of sharp interest rate movements, the prices of mortgage-backed
securities may fluctuate to a greater extent than would be expected from
interest rate movements alone. For a description of multiple class mortgage
pass-through securities, see ' -- Collateralized Mortgage Obligations and
Multiclass Pass-Through Securities' below.
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ADJUSTABLE RATE MORTGAGE SECURITIES. Unlike fixed rate mortgage securities,
adjustable rate mortgage securities are collateralized by or represent
interests in mortgage loans with variable rates of interest. These variable
rates of interest reset periodically to align themselves with market rates. A
Fund will not benefit from increases in interest rates to the extent that
interest rates rise to the point where they cause the current coupon of the
underlying adjustable rate mortgages to exceed any maximum allowable annual or
lifetime reset limits (or 'cap rates') for a particular mortgage. In this
event, the value of the mortgage securities in a Fund would likely decrease.
Also, a Fund's net asset value could vary to the extent that current yields on
adjustable rate mortgage securities are different than market yields during
interim periods between coupon reset dates or if the timing of changes to the
index upon which the rate for the underlying mortgages is based lags behind
changes in market rates. During periods of declining interest rates, income to
a Fund derived from adjustable rate mortgages which remain in a mortgage pool
will decrease in contrast to the income on fixed rate mortgages, which will
remain constant. Adjustable rate mortgages also have less potential for
appreciation in value as interest rates decline than do fixed rate investments.
PRIVATELY-ISSUED MORTGAGE SECURITIES. The Strategic Bond Fund and the Total
Return Fund may also purchase mortgage-backed securities issued by private
issuers which may entail greater risk than mortgage-backed securities that are
guaranteed by the U.S. government, its agencies or instrumentalities. Privately-
issued mortgage securities are issued by private originators of, or investors
in, mortgage loans, including mortgage bankers, commercial banks, investment
banks, savings and loan associations and special purpose subsidiaries of the
foregoing. Since privately-issued mortgage certificates are not guaranteed by
an entity having the credit status of GNMA or FHLMC, such securities generally
are structured with one or more types of credit enhancement. Such credit support
falls 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 pass-through of
payments due on the underlying pool occurs in a timely fashion. Protection
against losses resulting from ultimate default enhances the likelihood of
ultimate payment of the obligations on at least a portion of the assets in the
pool. Such protection may be provided through guarantees, insurance policies or
letters of credit obtained by the issuer or sponsor from third parties, through
various means of structuring the transaction or through a combination of such
approaches.
The ratings of mortgage securities for which third-party credit enhancement
provides liquidity protection or protection against losses from default are
generally dependent upon the continued creditworthiness of the provider of the
credit enhancement. The ratings of such securities could be subject to
reduction in the event of deterioration in the creditworthiness of the credit
enhancement provider even in cases where the delinquency and loss experience on
the underlying pool of assets is better than expected. There can be no
assurance that the private issuers or credit enhancers of mortgage-backed
securities can meet their obligations under the relevant policies or other
forms of credit enhancement.
Examples of credit support arising out of the structure of the transaction
include 'senior-subordinated securities' (multiple class securities with one or
more classes subordinate to other classes as to the payment of principal
thereof and interest thereon, with the result that defaults on the underlying
assets are borne first by the
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holders of the subordinated class), creation of 'reserve funds' (where cash or
investments sometimes funded from a portion of the payments on the underlying
assets are held in reserve against future losses) and 'over-collateralization'
(where the scheduled payments on, or the principal amount of, the underlying
assets exceed those required to make payment of the securities and pay any
servicing or other fees). The degree of credit support provided for each issue
is generally based on historical information with respect to the level of
credit risk associated with the underlying assets. Delinquency or loss in
excess of that which is anticipated could adversely affect the return on an
investment in such security.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH SECURITIES. The
U.S. Government Income Fund and the Strategic Bond Fund may invest in
collateralized mortgage obligations ('CMOs'). CMOs are debt obligations
collateralized by mortgage loans or mortgage pass-through securities.
Typically, CMOs are collateralized by GNMA, Fannie Mae or Freddie Mac
Certificates, but also may be collateralized by whole loans or private
pass-throughs (such collateral collectively hereinafter referred to as
'Mortgage Assets'). Multiclass pass-through securities are interests in a trust
composed of Mortgage Assets. Unless the context indicates otherwise, all
references herein to CMOs include multiclass pass-through securities. Payments
of principal and of interest on the Mortgage Assets, and any reinvestment
income thereon, provide the funds to pay debt service on the CMOs or make
scheduled distributions on the multiclass pass-through securities. CMOs may be
issued by agencies or instrumentalities of the U.S. government, or by private
originators of, or investors in, mortgage loans, including savings and loan
associations, mortgage banks, commercial banks, investment banks and special
purpose subsidiaries of the foregoing. CMOs acquired by the U.S. Government
Income Fund will be limited to those issued or guaranteed by agencies or
instrumentalities of the U.S. government and, if available in the future, the
U.S. government.
In a CMO, a series of bonds or certificates is issued in multiple classes. Each
class of CMOs, often referred to as a 'tranche,' is issued at a specified fixed
or floating coupon rate and has a stated maturity or final distribution date.
Principal prepayments on the Mortgage Assets may cause the CMOs to be retired
substantially earlier than their stated maturities or final distribution dates.
Interest is paid or accrues on all classes of the CMOs on a monthly, quarterly
or semi-annual basis. The principal of and interest on the Mortgage Assets may
be allocated among the several classes of a series of a CMO in innumerable
ways. In one structure, payments of principal, including any principal
prepayments, on the Mortgage Assets are applied to the classes of a CMO in the
order of their respective stated maturities or final distribution dates, so
that no payment of principal will be made on any class of CMOs until all other
classes having an earlier stated maturity or final distribution date have been
paid in full. The U.S. Government Income and Strategic Bond Funds have no
present intention to invest in CMO residuals. As market conditions change, and
particularly during periods of rapid or unanticipated changes in market
interest rates, the attractiveness of the CMO classes and the ability of the
structure to provide the anticipated investment characteristics may be
significantly reduced. Such changes can result in volatility in the market
value, and in some instances reduced liquidity, of the CMO class.
The U.S. Government Income Fund and the Strategic Bond Fund may also invest in,
among others, parallel pay CMOs and Planned Amortization Class CMOs ('PAC
Bonds'). Parallel pay CMOs are structured to provide payments of principal on
each
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payment date to more than one class. These simultaneous payments are taken into
account in calculating the stated maturity date or final distribution date of
each class, which, as with other CMO structures, must be retired by its stated
maturity date or a final distribution date but may be retired earlier. PAC
Bonds are a type of CMO tranche or series designed to provide relatively
predictable payments of principal provided that, among other things, the actual
prepayment experience on the underlying mortgage loans falls within a
predefined range. If the actual prepayment experience on the underlying
mortgage loans is at a rate faster or slower than the predefined range or if
deviations from other assumptions occur, principal payments on the PAC Bond may
be earlier or later than predicted. The magnitude of the predefined range
varies from one PAC Bond to another; a narrower range increases the risk that
prepayments on the PAC Bond will be greater or smaller than predicted. Because
of these features, PAC Bonds generally are less subject to the risks of
prepayment than are other types of mortgage-backed securities.
STRIPPED MORTGAGE SECURITIES. The Strategic Bond Fund may purchase stripped
mortgage securities which are derivative multiclass mortgage securities.
Stripped mortgage securities may be issued by agencies or instrumentalities of
the U.S. government, or by private originators of, or investors in, mortgage
loans, including savings and loan associations, mortgage banks, commercial
banks, investment banks and special purpose subsidiaries of the foregoing.
Stripped mortgage securities have greater volatility than other types of
mortgage securities. Although stripped mortgage securities are purchased and
sold by institutional investors through several investment banking firms acting
as brokers or dealers, the market for such securities has not yet been fully
developed. Accordingly, stripped mortgage securities are generally illiquid.
Stripped mortgage securities are structured with two or more classes of
securities that receive different proportions of the interest and principal
distributions on a pool of mortgage assets. A common type of stripped mortgage
security will have at least one class receiving only a small portion of the
interest and a larger portion of the principal from the mortgage assets, while
the other class will receive primarily interest and only a small portion of the
principal. In the most extreme case, one class will receive all of the interest
('IO' or interest-only), while the other class will receive all of the
principal ('PO' or principal-only class). The yield to maturity on IOs, POs and
other mortgage-backed securities that are purchased at a substantial premium or
discount generally are extremely sensitive not only to changes in prevailing
interest rates but also to the rate of principal payments (including
prepayments) on the related underlying mortgage assets, and a rapid rate of
principal payments may have a material adverse effect on such securities' yield
to maturity. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, a Fund may fail to fully recoup its
initial investment in these securities even if the securities have received the
highest rating by a nationally recognized statistical rating organizations.
In addition to the stripped mortgage securities described above, the Strategic
Bond Fund may invest in similar securities such as Super POs and Levered IOs
which are more volatile than POs, IOs and IOettes. Risks associated with
instruments such as Super POs are similar in nature to those risks related to
investments in POs. Risks connected with Levered IOs and IOettes are similar in
nature to those associated with IOs. The Strategic Bond Fund may also invest in
other similar instruments developed in the future that are deemed consistent
with its investment objective, policies and restrictions. POs may generate
taxable income from the current accrual of original issue discount, without a
corresponding distribution of
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cash to the Fund. See 'Taxation' in this Prospectus and 'Additional Information
Concerning Taxes' in the Statement of Additional Information.
MORTGAGE ROLLS. The U.S. Government Income Fund and the Strategic Bond Fund may
enter into mortgage 'dollar rolls' in which a Fund sells mortgage-backed
securities for delivery in the current month and simultaneously contracts to
repurchase substantially similar (same type, coupon and maturity) securities on
a specified future date. During the roll period, a Fund foregoes principal and
interest paid on the mortgage-backed securities. A Fund is compensated by the
difference between the current sales price and the lower forward 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 only enter into
covered rolls. A 'covered roll' is a specific type of dollar roll for which
there is an offsetting cash position which matures on or before the forward
settlement date of the dollar roll transaction. At the time a Fund enters into
a mortgage 'dollar roll,' it will establish a segregated account with its
custodian bank in which it will maintain liquid assets equal in value to its
obligations in respect of dollar rolls, and accordingly, such dollar rolls will
not be considered borrowings. Mortgage dollar rolls involve the risk that the
market value of the securities the Fund is obligated to repurchase under the
agreement may decline below the repurchase price. In the event the buyer of
securities under a mortgage dollar roll files for bankruptcy or becomes
insolvent, the Fund's use of proceeds of the dollar roll may be restricted
pending a determination by the other party, or its trustee or receiver, whether
to enforce the Fund's obligation to repurchase the securities.
HIGH YIELD SECURITIES. The High Yield Bond Fund and the Strategic Bond Fund may
invest without limitation in domestic and foreign 'high yield' securities,
commonly known as 'junk bonds.' The Investors Fund, the Capital Fund and the
Total Return Fund may invest without limitation in convertible securities of
this type and up to 5%, 10% and 20%, respectively, of their net assets in non-
convertible securities of this type. The Asia Growth Fund may invest without
limitation in convertible non-U.S. high yield securities and up to 10% of its
total assets in non-convertible non-U.S. high yield securities.
Under rating agency guidelines, medium-and lower-rated securities and comparable
unrated securities will likely have some quality and protective characteristics
that are outweighed by large uncertainties or major risk exposures to adverse
conditions. Medium and lower rated securities are considered to have extremely
poor prospects of ever attaining any real investment standing, to have a current
identifiable vulnerability to default or are in default, to be unlikely to have
the capacity to pay interest and repay principal when due in the event of
adverse business, financial or economic conditions, and/or to be in default or
not current in the payment of interest or principal. Such securities are
considered speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations.
Accordingly, it is possible that these types of factors could, in certain
instances, reduce the value of securities held by a Fund with a commensurate
effect on the value of the Fund's shares.
Changes by recognized rating services in their ratings of any fixed-income
security and in the ability of an issuer to make payments of interest and
principal may also affect the value of these investments. A description of the
ratings used by Moody's and S&P is set forth in Appendix A to this Prospectus.
The ratings of Moody's and S&P generally represent the opinions of those
organizations as to the quality of the securities that they rate. Such ratings,
however, are relative and subjective, are not absolute standards of quality,
are subject to change and do not
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evaluate the market risk or liquidity of the securities. Ratings of a non-U.S.
debt instrument, to the extent that those ratings are undertaken, are related
to evaluations of the country in which the issuer of the instrument is located.
Ratings generally take into account the currency in which a non-U.S. debt
instrument is denominated. Instruments issued by a foreign government in other
than the local currency, for example, typically have a lower rating than local
currency instruments due to the existence of an additional risk that the
government will be unable to obtain the required foreign currency to service
its foreign currency-denominated debt. In general, the ratings of debt
securities or obligations issued by a non-U.S. public or private entity will not
be higher than the rating of the currency or the foreign currency debt of the
central government of the country in which the issuer is located, regardless of
the intrinsic creditworthiness of the issuer.
The secondary markets for high yield securities are not as liquid as the
secondary markets for higher rated securities. The secondary markets for high
yield securities are concentrated in relatively few market makers and
participants in the market are mostly institutional investors, including
insurance companies, banks, other financial institutions and mutual funds. In
addition, the trading volume for high yield securities is generally lower than
that for higher-rated securities and the secondary markets could contract under
adverse market or economic conditions independent of any specific adverse
changes in the condition of a particular issuer. These factors may have an
adverse effect on the ability of a Fund holding such securities to dispose of
particular portfolio investments, may adversely affect the Fund's net asset
value per share and may limit the ability of such a Fund to obtain accurate
market quotations for purposes of valuing securities and calculating net asset
value. If a Fund is not able to obtain precise or accurate market quotations
for a particular security, it will become more difficult to value such Fund's
portfolio securities, and a greater degree of judgment may be necessary in
making such valuations. Less liquid secondary markets may also affect the
ability of a Fund to sell securities at their fair value. If the secondary
markets for high yield securities contract due to adverse economic conditions
or for other reasons, certain liquid securities in a Fund's portfolio may
become illiquid and the proportion of the Fund's assets invested in illiquid
securities may significantly increase.
Prices for high yield securities may be affected by legislative and regulatory
developments. These laws could adversely affect a Fund's net asset value and
investment practices, the secondary market for high yield securities, the
financial condition of issuers of these securities and the value of outstanding
high yield securities. For example, federal legislation requiring the
divestiture by federally insured savings and loan associations of their
investments in high yield bonds and limiting the deductibility of interest by
certain corporate issuers of high yield bonds adversely affected the market in
recent years.
HIGH YIELD CORPORATE SECURITIES. While the market values of securities rated
below investment grade and comparable unrated securities tend to react less to
fluctuations in interest rate levels than do those of higher-rated 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-rated securities. In addition, such securities present a higher degree
of credit risk. Issuers of these 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 than with investment
grade securities because such securities generally are unsecured and frequently
are
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subordinated to the prior payment of senior indebtedness. A Fund also 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.
The development of a market for high yield non-U.S. corporate securities has
been a relatively recent phenomenon. On the other hand, the market for high
yield U.S. corporate debt securities is more established than that for high
yield non-U.S. corporate debt securities, but has undergone significant changes
in the past and may undergo significant changes in the future.
High yield non-U.S. and U.S. corporate securities in which the applicable Funds
may invest include bonds, debentures, notes, commercial paper and preferred
stock and will generally be unsecured. Most of the debt securities will bear
interest at fixed rates. However, a Fund may also invest in corporate debt
securities with variable rates of interest or which involve equity features,
such as contingent interest or participations based on revenues, sales or
profits (i.e., interest or other payments, often in addition to a fixed rate of
return, that are based on the borrower's attainment of specified levels of
revenues, sales or profits and thus enable the holder of the security to share
in the potential success of the venture).
HIGH YIELD FOREIGN SOVEREIGN DEBT SECURITIES. Investing in fixed and floating
rate high yield foreign sovereign debt securities will expose Funds investing in
such securities to the direct or indirect consequences of political, social or
economic changes in the countries that issue the securities. See ' -- Foreign
Securities' above. The ability and willingness of sovereign obligors in
developing and emerging market countries or the governmental authorities that
control repayment of their external debt to pay principal and interest on such
debt when due may depend on general economic and political conditions within
the relevant country. Countries such as those in which a Fund may invest have
historically experienced, and may continue to experience, high rates of
inflation, high interest rates, exchange rate trade difficulties and extreme
poverty and unemployment. Many of these countries are also characterized by
political uncertainty or instability. Additional factors which may influence
the ability or willingness to service debt include, but are not limited to, a
country's cash flow situation, the availability of sufficient foreign exchange
on the date a payment is due, the relative size of its debt service burden to
the economy as a whole, and its government's policy towards the International
Monetary Fund, the World Bank and other international agencies.
The ability of a foreign sovereign obligor to make timely payments on its
external debt obligations will also be strongly influenced by the obligor's
balance of payments, including export performance, its access to international
credits and investments, fluctuations in interest rates and the extent of its
foreign reserves. A country whose exports are concentrated in a few commodities
or whose economy depends on certain strategic imports could be vulnerable to
fluctuations in international prices of these commodities or imports. To the
extent that a country receives payment for its exports in currencies other than
U.S. dollars, its ability to make debt payments denominated in U.S. dollars
could be adversely affected. If a foreign sovereign obligor cannot generate
sufficient earnings from foreign trade to service its external debt, it may
need to depend on continuing loans and aid from foreign governments, commercial
banks and multilateral organizations, and inflows of foreign investment. The
commitment on the part of these foreign governments, multilateral organizations
and others to make such disbursements may be conditioned on the government's
implementation of economic reforms and/ or economic performance and the timely
service of its obligations. Failure to implement such reforms, achieve such
levels of economic performance or repay principal or interest
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when due may result in the cancellation of such third parties' commitments to
lend funds, which may further impair the obligor's ability or willingness to
timely service its debts. The cost of servicing external debt will also
generally be adversely affected by rising international interest rates, because
many external debt obligations bear interest at rates which are adjusted based
upon international interest rates. The ability to service external debt will
also depend on the level of the relevant government's international currency
reserves and its access to foreign exchange. Currency devaluations may affect
the ability of a sovereign obligor to obtain sufficient foreign exchange to
service its external debt.
As a result of the foregoing, a governmental obligor may default on its
obligations. If such an event occurs, a Fund may have limited legal recourse
against the issuer and/or guarantor. Remedies must, in some cases, be pursued
in the courts of the defaulting party itself, and the ability of the holder of
foreign sovereign debt securities to obtain recourse may be subject to the
political climate in the relevant country. In addition, no assurance can be
given that the holders of commercial bank debt will not contest payments to the
holders of other foreign sovereign debt obligations in the event of default
under their commercial bank loan agreements.
Certain debt obligations, customarily referred to as 'Brady Bonds,' are created
through the exchange of existing commercial bank loans to foreign entities for
new obligations in connection with debt restructuring under a plan introduced
by former U.S. Secretary of the Treasury, Nicholas F. Brady (the 'Brady Plan').
Brady Bonds have been issued only recently, and, accordingly, do not have a
long payment history. They may be collateralized or uncollateralized and issued
in various currencies (although most are dollar-denominated) and they are
actively traded in the over-the-counter secondary market. Dollar-denominated,
collateralized Brady Bonds, which may be fixed rate par bonds or floating rate
discount bonds, are generally collateralized in full as to principal due at
maturity by U.S. Treasury zero coupon obligations which have the same maturity
as the Brady Bonds. Certain interest payments on these Brady Bonds may be
collateralized by cash or securities in an amount that, in the case of fixed
rate bonds, is typically equal to between 12 and 18 months of rolling interest
payments or, in the case of floating rate bonds, initially is typically equal
to between 12 and 18 months rolling interest payments based on the applicable
interest rate at that time and is adjusted at regular intervals thereafter with
the balance of interest accruals in each case being uncollateralized. The
applicable Funds may purchase Brady Bonds with no or limited collateralization,
and will be relying for payment of interest and (except in the case of
principal collateralized Brady Bonds) principal primarily on the willingness
and ability of the foreign government to make payment in accordance with the
terms of the Brady Bonds. In the event of a default with respect to
collateralized Brady Bonds as a result of which the payment obligations of the
issuer are accelerated, the U.S. Treasury zero coupon obligations held as
collateral for the payment of principal will not be distributed to investors,
nor will such obligations be sold and the proceeds distributed. The collateral
will be held by the collateral agent to the scheduled maturity of the defaulted
Brady Bonds, which will continue to be outstanding, at which time the face
amount of the collateral will equal the principal payments which would have
then been due on the Brady Bonds in the normal course. Based upon current
market conditions, a Fund would not intend to purchase Brady Bonds which, at
the time of investment, are in default as to payments. However, in light of the
residual risk of the Brady Bonds and, among other factors, the history of
default with respect to commercial bank loans by public and private entities of
countries issuing Brady Bonds, investments in Brady Bonds are to be viewed as
speculative. A substantial portion of the
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Brady Bonds and other sovereign debt securities in which the High Yield Bond
and Strategic Bond Funds invest are likely to be acquired at a discount, which
involves certain considerations discussed below under 'Taxation.'
Sovereign obligors in developing and emerging market countries are among the
world's largest debtors to commercial banks, other governments, international
financial organizations and other financial institutions. These obligors have
in the past experienced substantial difficulties in servicing their external
debt obligations, which led to defaults on certain obligations and the
restructuring of certain indebtedness. Restructuring arrangements have
included, among other things, reducing and rescheduling interest and principal
payments by negotiating new or amended credit agreements or converting
outstanding principal and unpaid interest to Brady Bonds, and obtaining new
credit to finance interest payments. Holders of certain foreign sovereign debt
securities may be requested to participate in the restructuring of such
obligations and to extend further loans to their issuers. There can be no
assurance that the Brady Bonds and other foreign sovereign debt securities in
which certain of the Funds may invest will not be subject to similar
restructuring arrangements or to requests for new credit which may adversely
affect a Fund's holdings. Furthermore, certain participants in the secondary
market for such debt may be directly involved in negotiating the terms of these
arrangements and may therefore have access to information not available to
other market participants.
INVESTMENT FUNDS. A Fund may invest in unaffiliated investment funds which
invest principally in securities in which that Fund is authorized to invest.
Under the 1940 Act, the Fund may invest a maximum of 10% of its total assets in
the securities of other investment companies. In addition, under the 1940 Act,
not more than 5% of the Fund's total assets may be invested in the securities
of any one investment company and a Fund may not purchase more than 3% of the
outstanding voting stock of such investment company. To the extent a Fund
invests in other investment funds, the Fund's shareholders will incur certain
duplicative fees and expenses, including investment advisory fees. A Fund's
investment in certain investment funds will result in special U.S. Federal
income tax consequences described below under 'Taxation.'
BORROWING. Each of the Funds may borrow in certain limited circumstances. See
'Investment Limitations.' Borrowing creates an opportunity for increased
return, but, at the same time, creates special risks. For example, borrowing may
exaggerate changes in the net asset value of a Fund's shares and in the return
on the Fund's portfolio. Although the principal of any borrowing will be fixed,
a Fund's assets may change in value during the time the borrowing is
outstanding. A Fund may be required to liquidate portfolio securities at a time
when it would be disadvantageous to do so in order to make payments with
respect to any borrowing, which could affect the investment manager's strategy
and the ability of the Fund to comply with certain provisions of the Internal
Revenue Code of 1986, as amended (the 'Code') in order to provide 'pass-though'
tax treatment to shareholders. Furthermore, if a Fund were to engage in
borrowing, an increase in interest rates could reduce the value of the Fund's
shares by increasing the Fund's interest expense.
NON-DIVERSIFICATION. The Asia Growth Fund and the Capital Fund are classified
as 'non-diversified' funds under the 1940 Act, which means that each Fund is not
limited by the 1940 Act in the proportion of its assets that may be invested in
the obligations of a single issuer. Each Fund, however, intends to comply with
the diversification requirements imposed by the Code in order to continue to
qualify as a regulated investment company. To the extent the Funds invest a
greater proportion of their assets in the securities of a smaller number of
issuers, each Fund
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may be more susceptible to any single economic, political or regulatory
occurrence than a more widely diversified fund and may be subject to greater
risk of loss with respect to its portfolio securities.
DERIVATIVES. Each of the Funds, except the U.S. Government Income Fund, may use
various investment strategies described below to hedge market risks (such as
broad or specific market movements, interest rates and currency exchange
rates), to manage the effective maturity or duration of debt instruments held
by a Fund, or to seek to increase a Fund's income or gain. Although these
strategies are regularly used by some investment companies and other
institutional investors, it is not presently anticipated that any of these
strategies will be used to a significant degree by any Fund unless otherwise
specifically indicated in the description of the particular Fund contained in
this Prospectus. Over time, however, techniques and instruments may change as
new instruments and strategies are developed or regulatory changes occur.
Subject to the constraints described above, a Fund may (if and to the extent so
authorized) purchase and sell interest rate, currency or stock or bond index
futures contracts and enter into currency forward contracts and currency swaps;
purchase and sell (or write) exchange listed and over-the-counter put and call
options on securities, currencies, futures contracts, indices and other
financial instruments, and a Fund may enter into interest rate transactions,
equity swaps and related transactions, invest in indexed debt securities and
other similar transactions which may be developed to the extent the investment
manager determines that they are consistent with the applicable Fund's
investment objective and policies and applicable regulatory requirements
(collectively, these transactions are referred to in this Prospectus as
'Derivatives'). A Fund's interest rate transactions may take the form of swaps,
caps, floors and collars, and a Fund's currency transactions may take the form
of currency forward contracts, currency futures contracts, currency swaps and
options on currencies.
Derivatives may be used to attempt to protect against possible changes in the
market value of securities held or to be purchased for a Fund's portfolio
resulting from securities markets or currency exchange rate fluctuations, to
protect a Fund's unrealized gains in the value of its securities, to facilitate
the sale of those securities for investment purposes, to manage the effective
maturity or duration of a Fund's portfolio or to establish a position in the
derivatives markets as a temporary substitute for purchasing or selling
particular securities or to seek to enhance a Fund's income or gain. A Fund may
use any or all types of Derivatives which it is authorized to use at any time;
no particular strategy will dictate the use of one type of transaction rather
than another, as use of any authorized Derivative will be a function of numerous
variables, including market conditions. The ability of a Fund to utilize
Derivatives successfully will depend on numerous factors including the
investment manager's ability to predict pertinent market movements, which
cannot be assured. These skills are different from those needed to select a
Fund's portfolio securities. None of the Funds is a 'commodity pool' (i.e., a
pooled investment vehicle which trades in commodity futures contracts and
options thereon and the operator of which is registered with the CFTC), and
Derivatives involving futures contracts and options on futures contracts will be
purchased, sold or entered into only for bona fide hedging purposes, provided
that a Fund may enter into such transactions for purposes other than bona fide
hedging if, immediately thereafter, the sum of the amount of its initial margin
and premiums on open contracts and options would not exceed 5% of the
liquidation value of the Fund's portfolio, after taking into account unrealized
profits and losses on existing contracts provided, further, that, in the
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SALOMON BROTHERS VARIABLE SERIES
case of an option that is in-the-money, the in-the-money amount may be excluded
in calculating the 5% limitation. The use of certain Derivatives in certain
circumstances will require that a Fund segregate liquid assets to the extent a
Fund's obligations are not otherwise 'covered' through ownership of the
underlying security, financial instrument or currency.
Derivatives involve special risks, including possible default by the other
party to the transaction, illiquidity and, to the extent the investment
manager's view as to certain market movements is incorrect, the risk that the
use of Derivatives could result in significantly greater losses than if it had
not been used. Losses resulting from the use of Derivatives will reduce a
Fund's net asset value, and possibly income. Use of put and call options could
result in losses to a Fund, force the purchase or sale of portfolio securities
at inopportune times or for prices higher or lower than current market values,
or cause a Fund to hold a security it might otherwise sell. The use of currency
transactions could result in a Fund's incurring losses as a result of the
imposition of exchange controls, suspension of settlements, or the inability to
deliver or receive a specified currency in addition to exchange rate
fluctuations. The use of options and futures transactions entails certain
special risks. In particular, the variable degree of correlation between price
movements of futures contracts and price movements in the related portfolio
position of a Fund could create the possibility that losses on the Derivative
will be greater than gains in the value of the Fund's position. In addition,
futures and options markets could be illiquid in some circumstances and certain
over-the-counter options could have no markets. A Fund might not be able to
close out certain positions without incurring substantial losses. To the extent
a Fund utilizes futures and options transactions for hedging, such transactions
should tend to minimize the risk of loss due to a decline in the value of the
hedged position and, at the same time, limit any potential gain to the Fund
that might result from an increase in value of the position. Finally, the daily
variation margin requirements for futures contracts create a greater ongoing
potential financial risk than would purchases of options, in which case the
exposure is limited to the cost of the initial premium and transaction costs
and the losses may be significantly greater than if Derivatives had not been
used. Additional information regarding the risks and special considerations
associated with Derivatives appears in the Statement of Additional Information.
The degree of a Fund's use of Derivatives may be limited by certain provisions
of the Code. See 'Taxation.'
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Investment Limitations
The following investment restrictions and those described in the Statement of
Additional Information are fundamental policies applicable to the individual
Funds which may be changed only when permitted by law and approved by the
holders of a majority of each Fund's outstanding voting securities, as defined
in the 1940 Act. Except for the investment restrictions set forth below and in
the Statement of Additional Information and each Fund's investment
objective(s), the other policies and percentage limitations referred to in this
Prospectus and in the Statement of Additional Information are not fundamental
policies of the Funds and may be changed by the applicable Fund's Board of
Directors without shareholder approval.
If a percentage restriction on investment or use of assets set forth in this
Prospectus or in the Statement of Additional Information is adhered to at the
time a transaction is effected, later changes in percentages resulting from
changing values will not be considered a violation.
U.S. GOVERNMENT INCOME FUND, HIGH YIELD BOND FUND, STRATEGIC BOND FUND, TOTAL
RETURN FUND AND INVESTORS FUND.
The U.S. Government Income Fund, the High Yield Bond Fund, the Strategic Bond
Fund, the Total Return Fund and the Investors Fund may not:
(1) purchase securities of any issuer if the purchase would cause more than 5%
of the value of each Fund's total assets to be invested in the securities of
any one issuer (excluding securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities and bank obligations) or cause
more than 10% of the voting securities of the issuer to be held by a Fund,
except that up to 25% of the value of each Fund's total assets may be invested
without regard to this restriction and provided that each Fund may invest all
or substantially all of its assets in another registered investment company
having substantially the same investment objective(s) and policies and
substantially the same investment restrictions as those with respect to such
Fund;
(2) borrow money (including entering into reverse repurchase agreements),
except for temporary or emergency purposes and then not in excess of 10% of the
value of the total assets of the applicable Fund at the time the borrowing is
made, except that for the purpose of this restriction, short-term credits
necessary for settlement of securities transactions are not considered
borrowings (a Fund will not purchase additional securities at any time its
borrowings exceed 5% of total assets, provided, however, that a Fund may
increase its interest in another registered investment company having
substantially the same investment objective(s) and policies and substantially
the same investment restrictions as those with respect to such Fund while such
borrowings are outstanding); or
(3) invest more than 25% of the total assets of each Fund in the securities of
issuers having their principal activities in any particular industry, except for
obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities or by any state, territory or any possession of the United
States or any of their authorities, agencies, instrumentalities or political
subdivisions, or with respect to repurchase agreements collateralized by any
of such obligations (for purposes of this restriction, supranational issuers
will be considered to comprise an industry as will each foreign government
that issues securities purchased by a Fund), provided, however, that each Fund
may invest all or substantially all of its assets in another
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SALOMON BROTHERS VARIABLE SERIES
registered investment company having substantially the same investment
objective(s) and policies and substantially the same investment restrictions
as those with respect to such Fund.
For purposes of investment limitations (1) and (3) above, both the borrower
under a Loan and the Lender selling a Participation will be considered an
'issuer.' See 'Additional Investment Activities and Risk Factors -- Loan
Participations and Assignments.'
ASIA GROWTH FUND. The Asia Growth Fund may not:
(1) borrow money (including entering into reverse repurchase agreements),
except for temporary or emergency purposes and then not in excess of 5% of the
value of the total assets of the applicable Fund at the time the borrowing is
made, except that for the purpose of this restriction, short-term credits
necessary for settlement of securities transactions are not considered
borrowings (the Fund will not purchase additional securities at any time its
borrowings exceed 5% of total assets, provided, however, that the Fund may
increase its interest in another registered investment company having
substantially the same investment objective(s) and policies and substantially
the same investment restrictions as those with respect to the Fund while such
borrowings are outstanding); or
(2) invest more than 25% of the total assets of each Fund in the securities of
issuers having their principal activities in any particular industry, except for
obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities or by any state, territory or any possession of the United
States or any of their authorities, agencies, instrumentalities or political
subdivisions, or with respect to repurchase agreements collateralized by any of
such obligations (for purposes of this restriction, supranational issuers will
be considered to comprise an industry as will each foreign government that
issues securities purchased by a Fund, provided, however, that the Fund may
invest all or substantially all of its assets in another registered investment
company having substantially the same investment objective(s) and policies and
substantially the same investment restrictions as the Fund).
CAPITAL FUND. The Capital Fund may not:
(1) borrow money, except as described under 'Investment Objective and Policies
and except that for the purpose of this restriction, short-term credits
necessary for settlement of securities transactions are not considered
borrowings.
(2) invest more than 25% of the total assets of the Fund in the securities of
issuers having their principal activities in any particular industry, except for
obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities or by any state, territory or any possession of the United
States or any of their authorities, agencies, instrumentalities or political
subdivisions, or with respect to repurchase agreements collateralized by any of
such obligations (for purposes of this restriction, supranational issuers will
be considered to comprise an industry as will each foreign government that
issues securities purchased by the Fund), provided, however, that each Fund
may invest all or substantially all of its assets in another registered
investment company having substantially the same investment objective(s) and
policies and substantially the same investment restrictions as the Fund.
Each Fund may, in the future, seek to achieve its investment objective(s) by
investing all of its assets in a no-load, open-end management investment
company for which SBAM serves as investment manager and which has substantially
the same investment objective(s) and policies and substantially
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SALOMON BROTHERS VARIABLE SERIES
the same investment restrictions as those applicable to such Fund. In such
event, the Fund's applicable investment advisory agreement would be terminated
since the investment management would be performed by or on behalf of such
other registered investment company.
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Management
The business and affairs of each Fund are managed under the direction of the
Board of Directors. The Board of Directors approves all significant agreements
between a Fund and the persons or companies that furnish services to the Fund,
including agreements with its distributor, investment manager, administrator,
custodian and transfer agent. The day-to-day operations of the Funds are
delegated to SBAM, the Fund's investment manager and administrator.
The Statement of Additional Information contains general background information
regarding each director and executive officer of each Fund.
INVESTMENT MANAGER
Each Fund retains SBAM, a wholly owned subsidiary of Salomon Brothers Holding
Company Inc, which is in turn wholly owned by Salomon Smith Barney Holdings,
Inc., which is in turn wholly owned by Travelers Group Inc. ('Travelers'), as
its investment manager under an investment management contract. SBAM was
incorporated in 1987 and together with SBAM affiliates in London, Frankfurt,
Tokyo and Hong Kong, provides a broad range of fixed-income and equity
investment advisory services to various individuals and institutional clients
located throughout the world, and serves as investment adviser to various
investment companies. As of October 31, 1997, SBAM and such affiliates managed
approximately $26.6 billion of assets of which approximately $1.5 billion is
invested in high yield securities and approximately $598.7 million is invested
in mortgage backed securities. In providing advisory services, SBAM has access
to hundreds of affiliated economists and mortgage, bond, sovereign and equity
analysts. Michael S. Hyland serves as President of SBAM. SBAM's business offices
are located at 7 World Trade Center, New York, New York 10048.
In connection with SBAM's service as investment manager to the Strategic Bond
Fund, SBAM Limited, whose business address is Victoria Plaza, 111 Buckingham
Palace Road, London SW1W OSB, England, provides certain advisory services to
SBAM relating to currency transactions and investments in non-dollar-denominated
debt securities for the benefit of the Strategic Bond Fund. SBAM Limited is
compensated by SBAM at no additional expense to the Fund. Like SBAM, SBAM
Limited is a wholly-owned subsidiary of Salomon Brothers Holding Company Inc.
SBAM Limited is a member of the Investment Management Regulatory Organization
Limited in the United Kingdom and is registered as an investment adviser in the
United States pursuant to the Investment Advisers Act of 1940, as amended.
Pursuant to a subadvisory agreement, SBAM has retained SBAM AP, whose business
address is Three Exchange Square, Hong Kong, to act as sub-adviser to the Asia
Growth Fund, subject to the supervision of SBAM. SBAM AP is compensated by SBAM
at no additional cost to the Fund. Like SBAM, SBAM AP is a wholly-owned
subsidiary of Salomon Brothers Holding Company Inc. SBAM AP, which was organized
in 1995, is a member of the Hong Kong Securities and Futures Commission and is
registered as an investment adviser in the United States pursuant to the
Investment Advisers Act of 1940, as amended.
Steven Guterman is primarily responsible for the day-to-day management of the
U.S. Government Income Fund and the investment grade and asset allocation
portions of the Strategic Bond Fund. Mr. Guterman is assisted by Roger Lavan in
the management of the two foregoing Funds.
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Mr. Guterman who joined SBAM in 1990 is a Managing Director of Salomon Brothers
and SBAM and is currently a Senior Portfolio Manager, responsible for SBAM's
investment company and institutional portfolios which invest primarily in
investment grade securities. Mr. Guterman also serves as portfolio manager for
the Salomon Brothers U.S. Government Income Fund, a portfolio of Salomon
Brothers Series Funds Inc ('Series Funds'), as well an offshore mortgage funds.
In addition, Mr. Guterman serves as portfolio manager for a number of SBAM's
institutional clients. Mr. Guterman joined Salomon Brothers in 1983. He
initially worked in the mortgage research group where he became a Research
Director and later traded derivative mortgage-backed securities for Salomon
Brothers. Mr. Lavan joined SBAM in 1990 and is a Portfolio Manager and
Quantitative Fixed Income Analyst. He is responsible for working with senior
portfolio managers to monitor and analyze market relationships and identify and
implement relative value transactions in SBAM's investment company and
institutional portfolios which invest in mortgage-backed securities and U.S.
Government securities. Prior to joining SBAM, Mr. Lavan spent four years
analyzing portfolios for Salomon Brothers' Fixed Income Sales Group and Product
Support Divisions. David J. Scott is primarily responsible for a portion of the
Strategic Bond Fund relating to currency transactions and investments in
non-dollar denominated debt securities. Prior to joining SBAM Limited in April,
1994, Mr. Scott worked for four years at JP Morgan Investment Management where
he was responsible for global and non-dollar portfolios. Before joining JP
Morgan Investment Management, Mr. Scott worked for three years at Mercury Asset
Management where he was responsible for captive insurance portfolios and
products.
Peter J. Wilby is primarily responsible for the day-to-day management of the
High Yield Bond Fund and the high yield and sovereign bond portions of the
Strategic Bond Fund. Mr. Wilby, who joined SBAM in 1989, is a Managing Director
of Salomon Brothers and SBAM and a Senior Portfolio Manager of SBAM, responsible
for SBAM's investment company and institutional portfolios which invest in high
yield non-U.S. and U.S. corporate debt securities and high yield foreign
sovereign debt securities. Mr. Wilby is the portfolio manager for Salomon
Brothers High Yield Bond Fund, a portfolio of the Series Funds, Salomon Brothers
Institutional High Yield Bond Fund and Salomon Brothers Institutional Emerging
Markets Debt Fund, each a portfolio of Salomon Brothers Institutional Series
Funds Inc ('Institutional Series Funds'), Global Partners Income Fund Inc., The
Emerging Markets Income Fund Inc, The Emerging Markets Income Fund II Inc, The
Emerging Markets Floating Rate Fund Inc, Salomon Brothers Worldwide Income Fund
Inc, Salomon Brothers High Income Fund Inc, and the foreign sovereign debt
component of Salomon Brothers 2008 Worldwide Dollar Government Term Trust Inc.
Giampaolo G. Guarnieri is primarily responsible for the day-to-day management of
the Asia Growth Fund. Mr. Guarnieri has served as a Director of SBAM AP since
July 1996 and has been employed as a Senior Portfolio Manager since joining SBAM
AP in April 1995. Prior to joining SBAM AP, Mr. Guarnieri spent five years as a
Senior Portfolio Investment Manager at Credit Agricole Asset Management (South
East Asia) Limited in Hong Kong, a wholly-owned subsidiary of the Credit
Agricole Group as a senior portfolio manager since 1992 and as head of direct
investment activities prior to that. Mr. Guarnieri is the portfolio manager for
Salomon Brothers Asia Growth Fund, a portfolio of the Series Funds, and Salomon
Brothers Institutional Asia Growth Fund, a portfolio of Institutional Series
Funds.
Allan R. White III is a Managing Director of Salomon Brothers and SBAM and is
primarily responsible for day-to-day
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SALOMON BROTHERS VARIABLE SERIES
management of the Investors Fund. Since 1989 he has been a Vice President of
SBAM. Prior to 1989 he was a Vice President at The First Boston Corporation. Mr.
White is also Executive Vice President and portfolio manager for the Salomon
Brothers Investors Fund Inc, as well as The Salomon Brothers Fund Inc. Mr. White
is assisted in the management of the Investors Fund by Pamela P. Milunovich. Ms.
Milunovich has been a Director of SBAM since January 1997, and a portfolio
manager since joining SBAM in June 1992. Prior to June 1992, Ms. Milunovich was
an associate at James Capel Wardley Inc.
Richard E. Dahlberg is primarily responsible for the day-to-day management of
the Total Return Fund. Mr. Dahlberg is also the portfolio manager for the
Salomon Brothers Total Return Fund, a portfolio of the Series Funds. Prior to
joining SBAM in July 1995, Mr. Dahlberg was employed by Massachusetts Financial
Services Company since 1968. Mr. Dahlberg had been primarily responsible for the
day-to-day management of the MFS Total Return Fund for ten years prior to
joining SBAM.
Ross S. Margolies is primarily responsible for the day-to-day management of the
Capital Fund. Mr. Margolies is a managing director with SBAM who manages other
investments in equities, options, convertible bonds and high yield bonds. He is
also the portfolio manager for Salomon Brothers Capital Fund Inc. Prior to
joining SBAM in 1992, Mr. Margolies was a Senior Vice President and analyst in
the High Yield Research Department at Lehman Brothers.
Subject to policy established by the Board of Directors, which has overall
responsibility for the business and affairs of each Fund, SBAM manages the
investment and reinvestment of each Fund's assets pursuant to the applicable
management contract. SBAM also furnishes office space, personnel and certain
facilities required for the performance by SBAM of certain additional services
provided by it to each Fund under the applicable management contract, including
SEC compliance, supervision of Fund operations and certain administrative and
clerical services, and pays the compensation of the Funds' officers, employees
and directors affiliated with SBAM. Except for the expenses paid by SBAM that
are described herein, each Fund bears all costs of its operations.
As compensation for its services, the U.S. Government Income Fund pays SBAM a
monthly fee at an annual rate of .60% of the Fund's average daily net assets;
the High Yield Bond Fund pays SBAM a monthly fee at an annual rate of .75% of
the Fund's average daily net assets; the Strategic Bond Fund pays SBAM a monthly
fee at an annual rate of .75% of the Fund's average daily net assets; the Total
Return Fund pays SBAM a monthly fee at an annual rate of .80% of the Fund's
average daily net assets; the Asia Growth Fund pays SBAM a monthly fee at an
annual rate of .80% of the Fund's average daily net assets; the Investors Fund
pays SBAM a monthly fee at an annual rate of .75% of the Fund's average daily
net assets; and the Capital Fund pays SBAM a monthly fee at an annual rate of
1.00% of average daily net assets. With respect to all Funds except the Asia
Growth Fund, for the 1998 fiscal year, SBAM has voluntarily agreed to impose an
expense cap on total Fund operating expenses (exclusive of taxes, interest and
extraordinary expenses such as litigation and indemnification expenses) at
1.25%. With respect to the Asia Growth Fund, for the 1998 fiscal year, SBAM has
voluntarily agreed to impose an expense cap on total Fund operating expenses
(exclusive of taxes, interest and extraordinary expenses such as litigation and
indemnification expenses) at 1.75%.
With respect to the Strategic Bond Fund and in connection with the subadvisory
consulting agreement between SBAM and SBAM Limited, SBAM pays SBAM Limited, as
full compensation for all services provided under the subadvisory consulting
agreement, a portion of its investment management fee. The amount payable to
SBAM Limited is equal to the
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SALOMON BROTHERS VARIABLE SERIES
fee payable under SBAM's management agreement multiplied by the portion of the
assets of the Strategic Bond Fund that SBAM Limited has been delegated to manage
divided by the current value of the net assets of the Strategic Bond Fund.
With respect to the Asia Growth Fund, SBAM pays SBAM AP as full compensation for
its services provided under the subadvisory agreement, a portion of its
investment management fee.
SBAM may waive all or part of its fee from time to time in order to increase
each Fund's net investment income available for distribution to shareholders.
The Funds will not be required to reimburse SBAM for any advisory fees waived.
In addition, Participating Insurance Companies that purchase the Funds' shares
may perform certain administrative services relating to the Funds and SBAM may
pay those companies for such services.
The services of SBAM, SBAM Limited and SBAM AP are not deemed to be exclusive,
and nothing in the relevant agreements will prevent either of them or their
affiliates from providing similar services to other investment companies and
other clients (whether or not their investment objectives and policies are
similar to those of any of the Funds) or from engaging in other activities.
Consistent with the Rules of Fair Practice of the National Association of
Securities Dealers (the 'NASD'), and subject to seeking the most favorable price
and execution available, the investment manager may consider sales of shares of
the Funds as a factor in the selection of brokers to execute portfolio
transactions for the Funds. The Funds may use Salomon Brothers Inc, other
broker-dealer subsidiaries of Travelers and their affiliates to execute
portfolio transactions when the investment manager believes that the broker's
charge for the transaction does not exceed the usual and customary levels
charged by other brokers in connection with comparable transactions involving
similar securities. See the Statement of Additional Information for a more
complete description of the Funds' policies with respect to portfolio
transactions.
DISTRIBUTOR
Salomon Brothers Inc, located at 7 World Trade Center, New York, New York 10048,
serves as each Fund's distributor. Salomon Brothers Inc, a wholly-owned
subsidiary of Salomon Brothers Holding Company Inc, is also one of the largest
securities dealers in the world and a registered broker-dealer. Salomon Brothers
Inc, along with other broker-dealer subsidiaries of Travelers, makes markets in
securities and provides a broad range of underwriting, research, and financial
advisory services to governments, international corporations, and institutional
investors. Salomon Brothers Inc and other affiliated broker-dealers from time to
time may receive fees from the Funds in connection with the execution of
portfolio transactions on behalf of the Funds. See 'Purchase of
Shares -- Distribution Fees.'
ADMINISTRATOR
Each Fund employs SBAM (in such capacity, the 'Admininstrator') under
administration agreements to provide certain administrative services to the
Funds. The Administrator is not involved in the Funds' investment decisions.
The services provided by the Administrator under the applicable administration
agreement include certain accounting, clerical and bookkeeping services, Blue
Sky reports, corporate secretarial services and assistance in the preparation
and filing of tax returns and reports to shareholders and the SEC. For its
services as administrator, each Fund pays the Administrator a fee, calculated
daily and payable monthly, at an annual rate of .05% of the applicable Fund's
aggregate average daily net assets. The Administrator has delegated its
responsibilities under the administrative agreement to one of its affiliates.
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SALOMON BROTHERS VARIABLE SERIES
EXPENSES
Each Fund's expenses include taxes, interest, fees and salaries of the directors
and officers who are not directors, officers or employees of the Fund's service
contractors, SEC fees, state securities qualification fees, costs of preparing
and printing prospectuses for regulatory purposes and for distribution to
existing shareholders, advisory and administration fees, charges of the
custodian, transfer agent and dividend disbursing agent, certain insurance
premiums, outside auditing and legal expenses, costs of shareholder reports and
shareholder meetings and any extraordinary expenses. Each Fund also pays for
brokerage fees and commissions (if any) in connection with the purchase and sale
of portfolio securities.
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Determination
of Net Asset Value
For the purpose of pricing purchase and redemption orders, the net asset value
per share of each Fund is calculated separately and is determined once daily as
of the close of regularly scheduled trading on the NYSE. With respect to each
Fund, such calculation is determined on each day that the NYSE is open for
trading, i.e., Monday through Friday, except for New Year's Day, Martin Luther
King, Jr. Day, President's Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day, and the preceding Friday or
subsequent Monday when one of those holidays falls on a Saturday or Sunday,
respectively. Net asset value per share of each Fund is calculated by dividing
the value of the Fund's securities and other assets, less the liabilities, by
the number of shares outstanding. In calculating net asset value, all portfolio
securities will be valued at market value when there is a reliable market
quotation available for the securities and otherwise pursuant to procedures
adopted by each Fund's Board of Directors. Securities that are primarily traded
on foreign exchanges generally are valued at the preceding closing values of
such securities on their respective exchanges, except that when an occurrence
subsequent to the time a value was so established is likely to have changed such
value, then the fair value of those securities will be determined by
consideration of other factors by or under the direction of the Board of
Directors. Securities may be valued by independent pricing services which use
prices provided by market-makers or estimates of market values obtained from
yield data relating to instruments or securities with similar characteristics.
In valuing a Fund's assets, any assets or liabilities initially expressed in
terms of a foreign currency are converted to U.S. dollar equivalents at the then
current exchange rate. Corporate actions by issuers of foreign securities held
by the Fund, such as payment of dividends or distributions, are reflected in the
net asset value on the ex-dividend date therefor, except that such actions will
be so reflected on the date the Fund is actually advised of the corporate action
if subsequent to the ex-dividend date. Further information regarding the Funds'
valuation policies is contained in the Statement of Additional Information.
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Participating Insurance Companies
and Plans
Variable Series Funds is a funding vehicle for VA contracts and VLI policies to
be offered by separate accounts of Participating Insurance Companies and for
Plans. The VA contracts and the VLI policies are described in the separate
prospectuses issued by the Participating Insurance Companies for which the Fund
assumes no responsibility, and the Plans are described in the relevant Plan
documents for which the Fund assumes no responsibility. Variable Series Funds
currently does not foresee any disadvantages to the holders of VA contracts and
VLI policies or Plan Participants arising from the fact that the interests of
the holders of such policies and such Plan Participants may differ in the future
due to differences in tax treatment of variable products and Plans or other tax
considerations.
Nevertheless, the Variable Series Funds' Board of Directors intends to monitor
events in order to identify any material conflicts which may arise and to
determine what action, if any, should be taken in response thereto. Resolution
of an irreconcilable conflict might result in the withdrawal of a substantial
amount of a Fund's assets which could adversely affect the Fund's net asset
value per share.
Individual VA contract holders and VLI policy holders and Plan Participants are
not the 'shareholders' of the Funds. Rather, the separate accounts of
Participating Insurance Companies and the Plans are the shareholders. However,
the Participating Insurance Companies have informed the Fund that they will pass
through voting rights to their VA contract and VLI policy holders. Plans will
vote shares as required by applicable law and governing plan documents.
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Purchase of Shares
Shares of the Funds are sold at net asset value to the separate accounts of
Participating Insurance Companies and to Plans. Individuals may not place orders
directly with the Funds. See the prospectus of the separate account of the
Participating Insurance Company or the relevant Plan documents for more
information on the purchase of Fund shares and with respect to the availability
for investment in each Fund. There are no sales commissions or redemption
charges; however, other charges may apply to the variable annuity contracts or
life insurance policies or Plans. The Funds do not issue share certificates.
Purchase orders will be effected at the net asset value of a Fund determined on
the business day received if the orders are received by such Fund through First
Data Investor Services Group, Inc. ('Investor Services Group') ('the Transfer
Agent') in proper form and in accordance with the
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SALOMON BROTHERS VARIABLE SERIES
applicable requirements prior to the close of regular trading on the New York
Stock Exchange on any day that such Fund calculates its net asset value and the
Federal Funds (monies of member banks within the Federal Reserve System which
are held on deposit at a Federal Reserve Bank) in the net amount of such orders
are received by such Fund on such business day in accordance with applicable
requirements. Otherwise, the orders will be priced as of the time the net asset
value is next determined. It is each Plan and Participating Insurance Company's
responsibility to properly transmit purchase orders and Federal Funds in
accordance with applicable requirements. VA contract or VLI policy holders and
Plan Participants should refer to the prospectus for their contracts or policies
or Plan documents in this regard.
Each Fund reserves the right to reject any purchase order in whole or in part.
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Redemption of Shares
Fund shares may be redeemed at any time by the separate accounts of the
Participating Insurance Companies and the Plans. Individuals may not place
redemption orders directly with the Funds. Redemption requests will be effected
at the net asset value of each Fund next determined after receipt of redemption
instructions by such Fund in proper form and in accordance with applicable
requirements. It is the responsibility of the Participating Insurance Company to
properly transmit redemption requests in accordance with applicable
requirements. VA contract holders and VLI policy holders and Plan Participants
should consult their Participating Insurance Company or Plan in this regard. The
value of the shares redeemed may be more or less than their original cost,
depending on each Fund's then-current net asset value. No charges are imposed by
the Funds when shares are redeemed.
Payment of redemption proceeds may be made in securities, subject to regulation
by some state securities commissions. Payment of the redemption price will be
made within seven days after receipt of the redemption instructions in good
order (or such shorter time period as may be required), but each Fund may
suspend the right of redemption during any period when: (i) trading on the NYSE
is restricted or the NYSE is closed, other than customary weekend and holiday
closings; (ii) the SEC has by order permitted such suspension; or (iii) an
emergency exists, as defined by rules of the SEC, making disposal of portfolio
securities or determination of the value of the net assets of each Fund not
reasonably practicable.
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Performance Information
From time to time, a Fund may advertise its 'yield,' 'tax-equivalent yield,'
'effective yield' and/or standardized and nonstandardized 'average annual total
return' over various periods of time. Total return and yield quotations are
computed separately for each class of shares of a Fund. Total return figures
show the average annual percentage change in value of an investment in a Fund
from the beginning date of the measuring period to the end of the measuring
period. These figures reflect changes in the price of the shares and assume that
any income dividends and/or capital gains distributions made by a Fund during
the period were reinvested in shares of the same Fund.
Standardized total return is calculated in accordance with the SEC's formula.
Nonstandardized total return differs from the standardized total return only in
that it may relate to a nonstandard period or is presented in the aggregate
rather than as an annual average.
Total return figures will be given for the most current one-, five- and ten-year
periods, or the life of a Fund to the extent it has not been in existence for
any such periods, and may be given for other periods as well, such as on a
year-by-year basis. When considering average total return figures for periods
longer than one year, it is important to note that the total return for any one
year in the period might have been greater or less than the average for the
entire period. 'Aggregate total return' figures may be used for various periods,
representing the cumulative change in value of an investment in Fund shares for
the specific period (again reflecting changes in share prices and assuming
reinvestment of dividends and distributions). Aggregate total return may be
shown by means of schedules, charts or graphs and may indicate subtotals of the
various components of total return (i.e., change in the value of initial
investment, income dividends and capital gains distributions).
Furthermore, in reports or other communications to shareholders or in
advertising materials, performance of Fund shares may be compared with that of
other mutual funds or classes of shares of other mutual funds, as listed in the
rankings prepared by Lipper Analytical Services, Inc. or similar independent
services that monitor the performance of mutual funds, financial indices such as
the S&P 500 Index or other industry or financial publications, including, but
not limited to, Bank Rate Monitor, Barron's, Business Week, CDA Investment
Technologies, Inc., Changing Times, Forbes, Fortune, ICB Donaghue's Money Fund
Report, Institutional Investor, Investors Daily, Money, Morningstar Mutual Fund
Values, The New York Times, USA Today and The Wall Street Journal. Performance
figures are based on historical earnings and are not intended to indicate future
performance. See 'Performance Data' in the Statement of Additional Information.
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Dividends and Distributions
Each Fund will declare dividends from net investment income annually and will
pay such dividends annually. Net investment income is a Fund's investment
company taxable income, as that term is defined in the Code, determined without
regard to the deduction for dividends paid and excluding any net realized
capital gains. For the purpose of calculating dividends, net investment income
shall consist of interest earned, which includes, where applicable, any discount
accreted or premium amortized to the date of maturity, minus estimated expenses.
Shares of a Fund are entitled to dividends declared beginning on the day after
the purchase order is received in good order.
Dividends are determined in the same manner and are paid in the same amount for
each Fund share.
Net realized short-term capital gains of each Fund, if any, will be distributed
whenever the Directors determine that such distributions would be in the best
interest of shareholders, but in any event at least once a year. Each Fund
distributes annually any net realized long-term capital gains from the sale of
securities (after deducting any net realized losses that may be carried forward
from prior years).
If, for any full fiscal year, a Fund's total distributions exceed net investment
income and net realized capital gains, the excess distributions generally will
be treated as a tax-free return of capital (up to the amount of the
shareholder's tax basis in his or her shares). The amount treated as a tax-free
return of capital will reduce a shareholder's adjusted basis in his or her
shares. Pursuant to the requirements of the 1940 Act and other applicable laws,
a notice will accompany any distribution paid from sources other than net
investment income. In the event a Fund distributes amounts in excess of its net
investment income and net realized capital gains, such distributions may have
the effect of decreasing the Fund's total assets, which may increase the Fund's
expense ratio.
Dividend and/or capital gains distributions will be reinvested automatically in
additional shares of the same class of a Fund at the applicable net asset value
per share and such shares will be automatically credited to a shareholder's
account, unless a shareholder elects to receive either dividends or capital
gains distributions in cash.
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Taxation
FEDERAL INCOME TAX MATTERS. Each Fund intends to qualify and elect to be treated
as a regulated investment company under Subchapter M of the Code. If it so
qualifies, a Fund will not be subject to U.S. federal income taxes on its net
investment income (i.e., its investment company taxable income, as that term is
defined in the Code, determined without regard to the deduction for dividends
paid) and net capital gain (i.e., the excess of a Fund's net realized long-term
capital gain over its net realized short-term capital loss), if any, that it
distributes to its shareholders in each taxable year, provided that it
distributes to its shareholders at least 90% of its net investment income for
such taxable year. If in any year a Fund fails to qualify as a regulated
investment company, such Fund would incur regular corporate federal income tax
on its taxable income for that year and be subject to certain additional
distribution requirements upon requalification.
Each Fund will be subject to federal corporate income tax (currently at a
maximum rate of 35%) on any undistributed income and to alternative minimum tax
(currently at a maximum rate of 28%) on alternative minimum taxable income.
Each Fund is subject to a nondeductible 4% excise tax calculated as a percentage
of certain undistributed amounts of ordinary income and capital gain net income.
To the extent possible, each Fund intends to make sufficient distributions to
avoid the application of both the corporate income and excise taxes.
HONG KONG TAX MATTERS. The Asia Growth Fund would be subject to Hong Kong
profits tax, which is currently charged at the rate of 16.5% for corporations
and 15% for individuals, if, by virtue of the fact that SBAM AP is located in
Hong Kong, (a) the Fund or its agents were deemed to carry on a trade,
profession or business in Hong Kong and (b) profits from that trade, profession
or business were to arise in or be derived from Hong Kong. Hong Kong profits tax
will not be payable in respect of profits from the sale of shares and other
securities transacted outside Hong Kong, interest arising or derived from
outside Hong Kong and profits in the nature of capital gains. The sale of
securities will not be treated as the sale of capital assets if the profit or
loss from such sale is regarded as attributable to a trade or business carried
on in Hong Kong. The Asia Growth Fund does not currently believe that it will be
subject to Hong Kong profits tax.
Dividends which the Fund pays to its shareholders are not taxable in Hong Kong
(whether through withholding or otherwise) under current legislation and
practice. No Hong Kong stamp duty will be payable in respect of transactions in
shares of the Asia Growth Fund provided that the register of shareholders is
maintained outside of Hong Kong.
DIVIDENDS. Notice as to the tax status of dividends and distributions will be
mailed to shareholders annually. Dividends paid from net investment income
generally are taxable as ordinary income whether received in cash or reinvested
in additional shares. Distributions from net capital gain which are designated
as 'capital gain dividends' generally are taxable as long-term capital gain
whether received in cash or reinvested in additional shares. Since the Funds'
shareholders are the separate accounts of Participating Insurance Companies and
the Plans, no discussion is included herein as to the Federal income tax
consequences to VA contract holders, VLI policy holders and Plan Participants.
For information concerning the Federal income tax consequences to such holders,
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SALOMON BROTHERS VARIABLE SERIES
see the prospectus for such contract or policy or the applicable Plan documents.
DIVERSIFICATION. Section 817(h) of the Code requires that the investments of a
segregated asset account of an insurance company be 'adequately diversified' as
provided therein or in accordance with U.S. Treasury Regulations in order for
the account to serve as the basis for VA contracts and VLI policies. Section
817(h) and the U.S. Treasury Regulations issued thereunder provide the manner in
which a segregated asset account will treat investments in a regulated
investment company for purposes of the diversification requirements. If a Fund
satisfies certain conditions, a segregated asset account owning shares of the
such Fund will be treated as owning the account's proportionate share of each of
the assets of the Series. Each Fund intends to satisfy these conditions so that
the shares of the Fund owned by a segregated asset account of a Participating
Insurance Company will be treated as adequately diversified.
Participating Insurance Companies and Plans should consult their tax advisers
regarding specific questions as to Federal, state or local taxes.
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Account Services
Shareholders of each Fund are kept informed through semi-annual reports showing
current investments and other financial data for such Fund. Annual reports for
all Funds include audited financial statements.
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Capital Stock
The Variable Series Funds was incorporated in Maryland on October 1, 1997. The
authorized capital stock of the Series Funds consists of 10,000,000,000 shares
having a par value of $.001 per share. Pursuant to the Series Funds' Articles of
Incorporation and Articles Supplementary, the Directors have authorized the
issuance of seven series of shares, each representing shares in one of seven
separate Funds; namely, the U.S. Government Income Fund, High Yield Bond Fund,
Strategic Bond Fund, Total Return Fund, the Asia Growth Fund, the Investors Fund
and the Capital Fund. The assets of each Fund are segregated and separately
managed. The Variable Series Funds' Board of Directors may, in the
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SALOMON BROTHERS VARIABLE SERIES
future, authorize the issuance of additional classes of capital stock
representing shares of additional investment portfolios. As of the date of this
Prospectus, SBAM owns all the shares of each Fund and consequently is deemed to
be a 'control person,' as defined in the 1940 Act, of each Fund.
Although each Fund is offering only its own shares, it is possible that a Fund
could become liable for a misstatement in this Prospectus about another Fund.
The Directors of the Variable Series Funds have considered this factor in
approving the use of a combined Prospectus.
All shares of each Fund have equal voting rights and will be voted in the
aggregate, and not by series, except where voting by series is required by law
or where the matter involved affects only one series. Pursuant to current
interpretations of the 1940 Act, the Fund anticipates that each Participating
Insurance Company will solicit voting instructions from VA contract and VLI
policy owners with respect to any matters that are presented to a vote of
shareholders, and will vote shares in proportion to the voting instructions
received. Plans will vote shares as required by applicable law and governing
Plan documents. All shares of each Fund will, when issued, be fully paid and
nonassessable. Under the corporate law of Maryland, the state of incorporation
of the Variable Series Funds and the By-Laws of each of the Variable Series
Funds, the Variable Series Fund is not required and does not currently intend to
hold annual meetings of shareholders for the election of directors except as
required under the 1940 Act. A more complete statement of the voting rights of
shareholders is contained in the Statement of Additional Information.
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Appendix A:
Description of Ratings
A DESCRIPTION OF THE RATING POLICIES OF MOODY'S, S&P AND FITCH WITH RESPECT TO
BONDS AND COMMERCIAL PAPER APPEARS BELOW.
MOODY'S CORPORATE BOND RATINGS
Aaa -- Bonds which are rated 'Aaa' are judged to be of the best quality and
carry the smallest degree of investment risk. 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 which 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 which make the long-term risks appear somewhat larger than in Aaa
securities.
A -- Bonds which are rated 'A' possess many favorable investment qualities 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
which suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds which 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 a desirable
investment. Assurance of interest and principal payments or of maintenance and
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
to a high degree. Such issues are often in default or have other marked
shortcomings.
C -- Bonds which are rated 'C' are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Moody's applies numerical modifiers '1', '2' and '3' to certain of its rating
classifications. The modifier '1' indicates that the security ranks in the
higher end of
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SALOMON BROTHERS VARIABLE SERIES
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.
S&P's CORPORATE BOND RATINGS
AAA -- This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to repay principal and pay interest.
AA -- Bonds rated 'AA' also qualify as high quality debt obligations. Capacity
to pay principal and interest is very strong, and differs from 'AAA' issues
only in small degree.
A -- Bonds rated 'A' have a strong capacity to repay principal and pay
interest, although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher-rated
categories.
BBB -- Bonds rated 'BBB' are regarded as having an adequate capacity to repay
principal and pay interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to repay principal and pay interest for
bonds in this category than for higher-rated categories.
BB-B-CCC-CC-C -- Bonds rated 'BB', 'B', 'CCC', 'CC' and 'C' are regarded, on
balance, as predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal in accordance with the terms of the
obligations. BB indicates the lowest degree of speculation and C the highest
degree of speculation. While such bonds will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions.
CI -- Bonds rated 'CI' are income bonds on which no interest is being paid.
D -- Bonds rated 'D' are in default. The 'D' category is used when interest
payments or principal payments are not made on the date due even if the
applicable grace period has not expired unless S&P believes that such payments
will be made during such grace period. The 'D' rating is also used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
The ratings set forth above may be modified by the addition of a plus or minus
to show relative standing within the major rating categories.
MOODY'S COMMERCIAL PAPER RATINGS
PRIME-1 -- Issuers (or related supporting institutions) rated 'Prime-1' have a
superior ability for repayment of senior short-term debt obligations. 'Prime-1'
repayment ability will often be evidenced by many of 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 charges and high internal cash generation, and
well-established access to a range of financial markets and assured sources of
alternate liquidity.
PRIME-2 -- Issuers (or related supporting institutions) rated 'Prime-2' have a
strong ability for repayment of senior short-term debt 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
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SALOMON BROTHERS VARIABLE SERIES
characteristics, while still appropriate, may be more affected by external
conditions. Ample alternative liquidity is maintained.
PRIME-3 -- Issuers (or related supporting institutions) rated 'Prime-3' have an
acceptable ability for repayment of senior short-term obligations. The effect
of industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and the requirement for relatively high financial
leverage. Adequate alternate liquidity is maintained.
NOT PRIME -- Issuers rated 'Not Prime' do not fall within any of the Prime
rating categories.
S&P's COMMERCIAL PAPER RATINGS
A -- S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.
Ratings are graded into several categories, ranging from 'A-1' for the highest
quality obligations to 'D' for the lowest. The four categories are as follows:
A-1 -- This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus (+) sign designation.
A-2 -- Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated 'A-1'.
A-3 -- Issues carrying this designation have adequate capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
B -- Issues rated 'B' are regarded as having only speculative capacity for
timely payment.
C -- This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D -- Debt rated 'D' is in payment default. The 'D' rating category is used when
interest payments or principal payments are not made on the date due, even if
the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period.
Like higher-rated bonds, bonds rated in the Baa or BBB categories are
considered to have adequate capacity to pay principal and interest. However,
such bonds may have speculative characteristics, and changes in economic
conditions or other circumstances are more likely to lead to a weakened
capacity to make principal and interest payments than is the case with higher
grade bonds.
After purchase by a Fund, a security may cease to be rated or its rating may be
reduced below the minimum required for purchase by such Fund. Neither event will
require a sale of such security by a Fund. However, a Fund's investment manager
will consider such event in its determination of whether such Fund should
continue to hold the security. To the extent the ratings given by Moody's, or
S&P may change as a result of changes in such organizations or their rating
systems, a Fund will attempt to use comparable ratings as standards for
investments in accordance with the investment policies contained in this
Prospectus and in the Statement of Additional Information.
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DISTRIBUTOR
Salomon Brothers Inc
7 World Trade Center
New York, New York 10048
INVESTMENT MANAGER
Salomon Brothers Asset
Management Inc
7 World Trade Center
New York, New York 10048
CUSTODIANS
PNC Bank
Airport Business Center
International Court 2
200 Stevens Drive
Lester, Pennsylvania 19113
The Chase Manhattan Bank
4 Chase Metrotech Center
Brooklyn, NY 11245
TRANSFER AGENT AND
DIVIDEND DISBURSING AGENT
First Data Investors Services Group, Inc.
P.O. Box 5127
Westborough, Massachusetts 01581-5127
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
LEGAL COUNSEL
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION
OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS,
IN CONNECTION WITH THE OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY A FUND, THE DISTRIBUTOR OR THE INVESTMENT MANAGER.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY STATE IN WHICH SUCH
OFFERING MAY NOT LAWFULLY BE MADE.
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SALOMON BROTHERS ASSET MANAGEMENT
-----------------------------------------------
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SUBJECT TO COMPLETION, DATED DECEMBER 15, 1997
SALOMON BROTHERS VARIABLE SERIES FUNDS, INC
7 WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
(800) SALOMON
(800) 725-6666
STATEMENT OF ADDITIONAL INFORMATION
Salomon Brothers Variable Series Funds Inc consists of Salomon Brothers
Variable U.S. Government Income Fund (the 'U.S. Government Income Fund'),
Salomon Brothers Variable High Yield Bond Fund (the 'High Yield Bond Fund'),
Salomon Brothers Variable Strategic Bond Fund (the 'Strategic Bond Fund'),
Salomon Brothers Variable Total Return Fund (the 'Total Return Fund'), Salomon
Brothers Variable Asia Growth Fund (the 'Asia Growth Fund'), Salomon Brothers
Variable Investors Fund (the 'Investors Fund') and Salomon Brothers Variable
Capital Fund (the 'Capital Fund') (each, a 'Fund' and collectively, the
'Funds'). Each of the Funds is an investment portfolio of the Salomon Brothers
Variable Series Funds Inc (the 'Variable Series Funds'), an open-end investment
company incorporated in Maryland on October 1, 1997. The Asia Growth Fund and
Capital Fund are non-diversified portfolios and the other Funds which are part
of the Variable Series Funds are diversified portfolios.
This Statement of Additional Information (the 'SAI') is not a prospectus
and is only authorized for distribution only when preceded or accompanied by the
Variable Series Funds' current Prospectus, dated January 2, 1998. This SAI
supplements and should be read in conjunction with the Prospectus, a copy of
which may be obtained without charge by writing the Funds at the address, or by
calling the toll-free telephone number, listed above.
January 2, 1998
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS STATEMENT OF ADDITIONAL INFORMATION DOES NOT CONSTITUTE A
PROSPECTUS.
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TABLE OF CONTENTS
<TABLE>
<S> <C>
Additional Information on Portfolio Instruments and Investment Policies......................... 3
Investment Limitations.......................................................................... 26
Management...................................................................................... 27
Investment Manager.............................................................................. 29
Portfolio Transactions.......................................................................... 32
Net Asset Value................................................................................. 32
Additional Purchase Information................................................................. 33
Additional Redemption Information............................................................... 33
Additional Information Concerning Taxes......................................................... 34
Performance Data................................................................................ 36
Capital Stock................................................................................... 37
Custodian and Transfer Agent.................................................................... 38
Independent Accountants......................................................................... 38
Counsel......................................................................................... 38
Financial Statements............................................................................ 39
</TABLE>
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ADDITIONAL INFORMATION ON PORTFOLIO INSTRUMENTS
AND INVESTMENT POLICIES
The Prospectus indicates the extent to which each Fund may purchase the
instruments or engage in the investment activities described below. The
discussion below supplements the information set forth in the Prospectus under
'Investment Objectives and Policies,' and 'Additional Investment Activities and
Risk Factors.' References herein to the investment manager means Salomon
Brothers Asset Management Inc ('SBAM'), except with respect to the Asia Growth
Fund, in which case it means Salomon Brothers Asset Management Asia Pacific
Limited ('SBAM AP').
FOREIGN SECURITIES
As discussed in the Prospectus, investing in the securities of foreign
issuers generally, and particularly in emerging market issuers, involves special
considerations which are not typically associated with investing in securities
of U.S. issuers. The following discussion supplements the discussion contained
in the Prospectus under 'Additional Investment Activities and Risk
Factors -- Foreign Securities' and ' -- High Yield Securities.' See also
' -- Brady Bonds' below.
Certain of the risks associated with international investments and
investing in smaller capital markets are heightened for investments in emerging
market countries. For example, some of the currencies of emerging market
countries have experienced devaluations relative to the U.S. dollar, and major
adjustments have been made periodically in certain of such currencies. Certain
of such countries face serious exchange constraints. In addition, governments of
many emerging market countries have exercised and continue to exercise
substantial influence over many aspects of the private sector. In certain cases,
the government owns or controls many companies. Accordingly, government actions
in the future could have a significant effect on economic conditions in
developing countries which could affect private sector companies and
consequently, the value of certain securities held in a Fund's portfolio.
Certain markets are in only the earliest stages of development. There is
also a high concentration of market capitalization and trading volume in a small
number of issuers representing a limited number of industries, as well as a high
concentration of investors and financial intermediaries. Many of such markets
also may be affected by developments with respect to more established markets in
the region. Brokers in emerging market countries typically are fewer in number
and less capitalized than brokers in the United States. These factors, combined
with the U.S. regulatory requirements for open-end investment companies and the
restrictions on foreign investment, result in potentially fewer investment
opportunities for a Fund and may have an adverse impact on the investment
performance of a Fund.
There generally is less governmental supervision and regulation of
exchanges, brokers and issuers in foreign countries than there is in the United
States. For example, there may be no comparable provisions under certain foreign
laws to insider trading and similar investor protection securities laws that
apply with respect to securities transactions consummated in the United States.
Further, brokerage commissions and other transaction costs on foreign securities
exchanges generally are higher than in the United States.
With respect to investments in certain emerging market countries, different
legal standards may have an adverse impact on a Fund. For example, while the
potential liability of a shareholder in a U.S. corporation with respect to acts
of the corporation is generally limited to the amount of the shareholder's
investment, the notion of limited liability is less clear in certain emerging
market countries. Similarly, the rights of investors in emerging market
companies may be more limited than those of shareholders of U.S. corporations.
In some countries, banks or other financial institutions may constitute a
substantial number of the leading companies or companies with the most actively
traded securities. The Investment Company Act of 1940, as amended (the '1940
Act'), limits a Fund's ability to invest in any equity security of an issuer
which, in its most recent fiscal year, derived more than 15% of its revenues
from 'securities related activities,' as defined by the rules
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thereunder. These provisions may also restrict a Fund's investments in certain
foreign banks and other financial institutions.
The manner in which foreign investors may invest in companies in certain
emerging market countries, as well as limitations on such investments, also may
have an adverse impact on the operations of a Fund. For example, the Fund may be
required in some countries to invest initially through a local broker or other
entity and then have the shares purchased re-registered in the name of the Fund.
Re-registration may in some instances not occur on a timely basis, resulting in
a delay during which the Fund may be denied certain of its rights as an
investor.
Foreign markets have different clearance and settlement procedures, and in
certain markets there have been times when settlements have failed to keep pace
with the volume of securities transactions, making it difficult to conduct such
transactions. Further, satisfactory custodial services for investment securities
may not be available in some countries having smaller, emerging capital markets,
which may result in a Fund incurring additional costs and delays in transporting
and custodying such securities outside such countries. Delays in settlement or
other problems could result in periods when assets of a Fund are uninvested and
no return is earned thereon. The inability of a Fund to make intended security
purchases due to settlement problems or the risk of intermediary counterparty
failures could cause a Fund to forego attractive investment opportunities. The
inability to dispose of a portfolio security due to settlement problems could
result either in losses to a Fund due to subsequent declines in the value of
such portfolio security or, if the Fund has entered into a contract to sell the
security, could result in possible liability to the purchaser.
Rules adopted under the 1940 Act permit a Fund to maintain its foreign
securities and cash in the custody of certain eligible non-U.S. banks and
securities depositories. Certain banks in foreign countries may not be 'eligible
sub-custodians,' as defined in the 1940 Act, for a Fund, in which event the Fund
may be precluded from purchasing securities in certain foreign countries in
which it otherwise would invest or which may result in the Fund's incurring
additional costs and delays in providing transportation and custody services for
such securities outside of such countries. A Fund may encounter difficulties in
effecting on a timely basis portfolio transactions with respect to any
securities of issuers held outside their countries. Other banks that are
eligible foreign sub-custodians may be recently organized or otherwise lack
extensive operating experience. In addition, in certain countries there may be
legal restrictions or limitations on the ability of a Fund to recover assets
held in custody by foreign sub-custodians in the event of the bankruptcy of the
sub-custodian.
U.S. GOVERNMENT OBLIGATIONS
In addition to the U.S. Treasury obligations described in the Prospectus, a
Fund may invest in separately traded interest components of securities issued or
guaranteed by the U.S. Treasury. The interest components of selected securities
are traded independently under the Separate Trading of Registered Interest and
Principal of Securities program ('STRIPS'). Under the STRIPS program, the
interest components are individually numbered and separately issued by the U.S.
Treasury at the request of depository financial institutions, which then trade
the component parts independently.
Securities issued or guaranteed by U.S. government agencies and
instrumentalities include obligations that are supported by: (a) the full faith
and credit of the U.S. Treasury (e.g., direct pass-through certificates of the
Government National Mortgage Association ('Ginnie Maes')); (b) the limited
authority of the issuer or guarantor to borrow from the U.S. Treasury (e.g.,
obligations of Federal Home Loan Banks); or (c) only the credit of the issuer or
guarantor (e.g., obligations of the Federal Home Loan Mortgage Corporation
('Freddie Macs')). In the case of obligations not backed by the full faith and
credit of the U.S. Treasury, the agency issuing or guaranteeing the obligation
is principally responsible for ultimate repayment.
Agencies and instrumentalities that issue or guarantee debt securities and
that have been established or sponsored by the U.S. government include, in
addition to those identified above, the Bank for Cooperatives, the Export-Import
Bank, the Federal Farm Credit
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System, the Federal Intermediate Credit Banks, the Federal Land Banks, the
Federal National Mortgage Association and the Student Loan Marketing
Association.
BANK OBLIGATIONS
Banks are subject to extensive governmental regulations which may limit
both the amounts and types of loans and other financial commitments which may be
made and interest rates and fees which may be charged. The profitability of this
industry is largely dependent upon the availability and cost of capital funds
for the purpose of financing lending operations under prevailing money market
conditions. Also, general economic conditions play an important part in the
operations of this industry and exposure to credit losses arising from possible
financial difficulties of borrowers might affect a bank's ability to meet its
obligations.
Investors should also be aware that securities issued or guaranteed by
foreign banks, foreign branches of U.S. banks, and foreign government and
private issuers may involve investment risks in addition to those relating to
domestic obligations. See ' -- Foreign Securities' above. None of the Funds will
purchase bank obligations which SBAM or the applicable sub-adviser believes, at
the time of purchase, will be subject to exchange controls or foreign
withholding taxes; however, there can be no assurance that such laws may not
become applicable to certain of the Funds' investments. In the event unforeseen
exchange controls or foreign withholding taxes are imposed with respect to a
Fund's investments, the effect may be to reduce the income received by the Fund
on such investments.
Bank obligations that may be purchased by a Fund include certificates of
deposit, banker's acceptances and fixed time deposits. A certificate of deposit
is a short-term negotiable certificate issued by a commercial bank against funds
deposited in the bank and is either interest-bearing or purchased on a discount
basis. A bankers' acceptance is a short-term draft drawn on a commercial bank by
a borrower, usually in connection with an international commercial transaction.
The borrower is liable for payment as is the bank, which unconditionally
guarantees to pay the draft at its face amount on the maturity date. Fixed time
deposits are obligations of branches of U.S. banks or foreign banks which are
payable at a stated maturity date and bear a fixed rate of interest. Although
fixed time deposits do not have a market, there are no contractual restrictions
on the right to transfer a beneficial interest in the deposit to a third party.
Bank obligations may be general obligations of the parent bank or may be
limited to the issuing branch by the terms of the specific obligations or by
government regulation.
FLOATING AND VARIABLE RATE INSTRUMENTS
Certain Funds may invest in floating and variable rate obligations.
Floating or variable rate obligations bear interest at rates that are not fixed,
but vary with changes in specified market rates or indices, such as the prime
rate, and at specified intervals. Certain of the floating or variable rate
obligations that may be purchased by a Fund may carry a demand feature that
would permit the holder to tender them back to the issuer at par value prior to
maturity. Such obligations include variable rate master demand notes, which are
unsecured instruments issued pursuant to an agreement between the issuer and the
holder that permit the indebtedness thereunder to vary and provide for periodic
adjustments in the interest rate. A Fund will limit its purchases of floating
and variable rate obligations to those of the same quality as it otherwise is
allowed to purchase. SBAM or the applicable sub-adviser will monitor on an
ongoing basis the ability of an issuer of a demand instrument to pay principal
and interest on demand.
Certain of the floating or variable rate obligations that may be purchased
by a Fund may carry a demand feature that would permit the holder to tender them
back to the issuer of the instrument or to a third party at par value prior to
maturity. Some of the demand instruments purchased by a Fund are not traded in a
secondary market and derive their liquidity solely from the ability of the
holder to demand repayment from the issuer or third party providing credit
support. If a demand instrument is not traded in a secondary market, each Fund
will nonetheless treat the instrument as 'readily marketable' for the purposes
of
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its investment restriction limiting investments in illiquid securities unless
the demand feature has a notice period of more than seven days in which case the
instrument will be characterized as 'not readily marketable' and therefore
illiquid.
A Fund's right to obtain payment at par on a demand instrument could be
affected by events occurring between the date such Fund elects to demand payment
and the date payment is due that may affect the ability of the issuer of the
instrument or third party providing credit support to make payment when due,
except when such demand instruments permit same day settlement. To facilitate
settlement, these same day demand instruments may be held in book entry form at
a bank other than a Fund's custodian subject to a sub-custodian agreement
approved by such Fund between that bank and the Fund's custodian.
FIXED-INCOME SECURITIES
Many fixed-income securities contain call or buy-back features that permit
their issuers to call or repurchase the securities from their holders. Such
securities may present risks based on payment expectations. Although a Fund
would typically receive a premium if an issuer were to redeem a security, if an
issuer exercises such a 'call option' and redeems the security during a time of
declining interest rates, a Fund may realize a capital loss on its investment if
the security was purchased at a premium and a Fund may have to replace the
called security with a lower yielding security, resulting in a decreased rate of
return to the Fund.
ASSET-BACKED SECURITIES
Asset-backed securities are generally issued as pass through certificates,
which represent undivided fractional ownership interests in the underlying pool
of assets, or as debt instruments, which are generally issued as the debt of a
special purpose entity organized solely for the purpose of owning such assets
and issuing such debt. The pool of assets generally represents the obligations
of a number of different parties. Asset-backed securities frequently carry
credit protection in the form of extra collateral, subordinated certificates,
cash reserve accounts, letters of credit or other enhancements. For example,
payments of principal and interest may be guaranteed up to certain amounts and
for a certain time period by a letter of credit or other enhancement issued by a
financial institution unaffiliated with the entities issuing the securities.
Assets which, to date, have been used to back asset-backed securities include
motor vehicle installment sales contracts or installment loans secured by motor
vehicles, and receivables from revolving credit (credit card) agreements.
Asset-backed securities present certain risks which are, generally, related
to limited interests, if any, in 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. Other types of
asset-backed securities will be subject to the risks associated with the
underlying assets. If a letter of credit or other form of credit enhancement is
exhausted or otherwise unavailable, holders of asset-backed securities may also
experience delays in payments or losses if the full amounts due on underlying
assets are not realized. Because asset-backed securities are relatively new, the
market experience in these securities is limited and the market's ability to
sustain liquidity through all phases of the market cycle has not been tested.
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LOANS OF PORTFOLIO SECURITIES
Each of the Funds may lend portfolio securities to brokers or dealers or
other financial institutions. The procedure for the lending of securities will
include the following features and conditions. The borrower of the securities
will deposit cash with the Fund in an amount equal to a minimum of 100% of the
market value of the securities lent. The Fund will invest the collateral in
short-term debt securities or cash equivalents and earn the interest thereon. A
negotiated portion of the income so earned may be paid to the borrower or the
broker who arranged the loan. If the deposit drops below the required minimum at
any time, the borrower may be called upon to post additional cash. If the
additional cash is not paid, the loan will be immediately due and the Fund may
use the collateral or its own cash to replace the securities by purchase in the
open market charging any loss to the borrower. These will be 'demand' loans and
may be terminated by the Fund at any time. A Fund will receive any dividends and
interest paid on the securities lent and the loans will be structured to assure
that the Fund will be able to exercise its voting rights on the securities. Such
loans will be authorized only to the extent that the receipt of income from such
activity would not cause any adverse tax consequences to a Fund's shareholders
and only in accordance with applicable rules and regulations. With the exception
of the Capital Fund and the Investors Fund, none of the Funds presently intends
to lend any of its portfolio securities in 1998.
RULE 144A SECURITIES
As indicated in the Prospectus, certain Funds may purchase certain
restricted securities ('Rule 144A securities') for which there is a secondary
market of qualified institutional buyers, as defined in Rule 144A promulgated
under the Securities Act of 1933, as amended (the '1933 Act'). Rule 144A
provides an exemption from the registration requirements of the 1933 Act for the
resale of certain restricted securities to qualified institutional buyers.
One effect of Rule 144A is that certain restricted securities may now be
liquid, though there is no assurance that a liquid market for Rule 144A
securities will develop or be maintained. In promulgating Rule 144A, the
Securities and Exchange Commission (the 'Commission') stated that the ultimate
responsibility for liquidity determinations is that of an investment company's
board of directors. However, the Commission stated that the board may delegate
the day-to-day function of determining liquidity to the fund's investment
adviser, provided that the board retains sufficient oversight. The Board of
Directors of each Fund has adopted policies and procedures for the purpose of
determining whether securities that are eligible for resale under Rule 144A are
liquid or illiquid. Pursuant to those policies and procedures, each Board of
Directors has delegated to the investment manager the determination as to
whether a particular security is liquid or illiquid, requiring that
consideration be given to, among other things, the frequency of trades and
quotes for the security, the number of dealers willing to sell the security and
the number of potential purchasers, dealer undertakings to make a market in the
security, the nature of the security and the time needed to dispose of the
security. The Board of Directors periodically reviews Fund purchases and sales
of Rule 144A securities.
To the extent that liquid Rule 144A securities that a Fund holds become
illiquid, due to the lack of sufficient qualified institutional buyers or market
or other conditions, the percentage of a Fund's assets invested in illiquid
assets would increase. The investment manager, under the supervision of the
Boards of Directors, will monitor Fund investments in Rule 144A securities and
will consider appropriate measures to enable a Fund to maintain sufficient
liquidity for operating purposes and to meet redemption requests.
MORTGAGE-BACKED SECURITIES
The following describes certain characteristics of mortgage-backed
securities. Mortgage-backed securities acquired by the U.S. Government Income
Fund will be limited to those issued or guaranteed by the U.S. government, its
agencies and instrumentalities. The Strategic Bond Fund and the Total Return
Fund may, in addition, purchase privately issued mortgage securities which are
not guaranteed by the U.S. government, its agencies or instrumentalities. It
should be noted that new types of mortgage-backed securities are
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developed and marketed from time to time and that, consistent with its
investment limitations, a Fund may invest in those new types of mortgage-backed
securities that the investment manager believes may assist it in achieving its
investment objective(s).
Background. Mortgage-backed securities were introduced in the 1970s when
the first pool of mortgage loans was converted into a mortgage pass-through
security. Since the 1970s, the mortgage-backed securities market has vastly
expanded and a variety of structures have been developed to meet investor needs.
Yield Characteristics. Interest and principal payments on mortgage-backed
securities are typically made monthly, and principal may be prepaid at any time
because the underlying mortgage loans or other assets generally may be prepaid
at any time. As a result, if a Fund purchases such a security at a premium, a
prepayment rate that is faster than expected will reduce yield to maturity,
while a prepayment rate that is slower than expected will have the opposite
effect of increasing yield to maturity. Conversely, if a Fund purchases these
securities at a discount, faster than expected prepayments will increase, while
slower than expected prepayments will reduce, yield to maturity.
Prepayments on a pool of mortgage loans are influenced by a variety of
economic, geographic, social and other factors, including changes in mortgagors'
housing needs, job transfers, unemployment, mortgagors' net equity in the
mortgaged properties and servicing decisions. Generally, however, prepayments on
fixed rate mortgage loans will increase during a period of falling interest
rates. Accordingly, amounts available for reinvestment by a Fund are likely to
be greater during a period of relatively low interest rates and, as a result,
likely to be reinvested at lower interest rates than during a period of
relatively high interest rates. This prepayment effect has been particularly
pronounced during recent years as borrowers have refinanced higher interest rate
mortgages into lower interest rate mortgages available in the marketplace.
Mortgage-backed securities may decrease in value as a result of increases in
interest rates and may benefit less than other fixed income securities from
declining interest rates because of the risk of prepayment.
Guaranteed Mortgage Pass-Through Securities. The U.S. Government Income,
Strategic Bond and Total Return Funds may invest in mortgage pass-through
securities representing participation interests in pools of residential mortgage
loans originated by U.S. governmental or private lenders and guaranteed, to the
extent provided in such securities, by the U.S. government or one of its
agencies or instrumentalities. Any guarantee of such securities runs only to
principal and interest payments on the securities and not to the market value of
such securities or the principal and interest payments on the underlying
mortgages. In addition, the guarantee only runs to the portfolio securities held
by a Fund and not to the purchase of shares of the Fund. Such securities, which
are ownership interests in the underlying mortgage loans, differ from
conventional debt securities, which provide for periodic payment of interest in
fixed amounts (usually semi-annually) and principal payments at maturity or on
specified call dates. Mortgage pass-through securities provide for monthly
payments that are a 'pass-through' of the monthly interest and principal
payments (including any prepayments) made by the individual borrowers on the
pooled mortgage loans, net of any fees paid to the guarantor of such securities
and the servicer of the underlying mortgage loans. Guaranteed mortgage
pass-through securities are often sold on a to-be-acquired or 'TBA' basis. Such
securities are typically sold one to three months in advance of issuance, prior
to the identification of the underlying pools of mortgage securities but with
the interest payment provisions fixed in advance. The underlying pools of
mortgage securities are identified shortly before settlement and must meet
certain parameters.
The guaranteed mortgage pass-through securities in which a Fund may invest
may include those issued or guaranteed by Ginnie Mae, the Federal National
Mortgage Association ('Fannie Mae') and Freddie Mac.
Ginnie Mae Certificates. Ginnie Mae is a wholly-owned corporate
instrumentality of the United States within the Department of Housing and Urban
Development. The full faith and credit of the U.S. government is pledged to the
payment of amounts that may be required to be paid under any guarantee, but not
as to the market value of such securities. The Ginnie Mae Certificates will
represent a pro rata interest in one or more pools of the following types of
mortgage loans: (i) fixed rate level payment mortgage loans; (ii) fixed rate
graduated
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payment mortgage loans; (iii) fixed rate growing equity mortgage loans; (iv)
fixed rate mortgage loans secured by manufactured (mobile) homes; (v) mortgage
loans on multifamily residential properties under construction; (vi) mortgage
loans on completed multifamily projects; (vii) fixed rate mortgage loans as to
which escrowed funds are used to reduce the borrower's monthly payments during
the early years of the mortgage loans ('buydown' mortgage loans); (viii)
mortgage loans that provide for adjustments in payments based on periodic
changes in interest rates or in other payment terms of the mortgage loans; and
(ix) mortgage-backed serial notes. All of these mortgage loans will be Federal
Housing Administration Loans ('FHA Loans') or Veterans' Administration Loans
('VA Loans') and, except as otherwise specified above, will be fully amortizing
loans secured by first liens on one- to four-family housing units.
Fannie Mae Certificates. Fannie Mae is a federally chartered and privately
owned corporation organized and existing under the Federal National Mortgage
Association Charter Act. Each Fannie Mae Certificate will entitle the registered
holder thereof to receive amounts representing such holder's pro rata interest
in scheduled principal payments and interest payments (at such Fannie Mae
Certificate's pass-through rate, which is net of any servicing and guarantee
fees on the underlying mortgage loans), and any principal prepayments on the
mortgage loans in the pool represented by such Fannie Mae Certificate and such
holder's proportionate interest in the full principal amount of any foreclosed
or otherwise finally liquidated mortgage loan. The full and timely payment of
principal of and interest on each Fannie Mae Certificate, but not the market
value thereof, will be guaranteed by Fannie Mae, which guarantee is not backed
by the full faith and credit of the U.S. government. Each Fannie Mae Certificate
will represent a pro rata interest in one or more pools of FHA Loans, VA Loans
or conventional mortgage loans (i.e., mortgage loans that are not insured or
guaranteed by any governmental agency) of the following types: (i) fixed rate
level payment mortgage loans; (ii) fixed rate growing equity mortgage loans;
(iii) fixed rate graduated payment mortgage loans; (iv) variable rate California
mortgage loans; (v) other adjustable rate mortgage loans; and (vi) fixed rate
mortgage loans secured by multifamily projects.
Freddie Mac Certificates. Freddie Mac is a corporate instrumentality of the
United States created pursuant to the Emergency Home Finance Act of 1970, as
amended (the 'FHLMC Act'). Freddie Mac guarantees to each registered holder of a
Freddie Mac Certificate ultimate collection of all principal of the related
mortgage loans, without any offset or deduction, but does not, generally,
guarantee the timely payment of scheduled principal or the market value of the
securities. Freddie Mac may remit the amount due on account of its guarantee of
collection of principal at any time after default on an underlying mortgage
loan, but not later than 30 days following: (i) foreclosure sale; (ii) payment
of a claim by any mortgage insurer; or (iii) the expiration of any right of
redemption, whichever occurs later, but in any event no later than one year
after demand has been made upon the mortgagor for accelerated payment of
principal. The obligations of Freddie Mac under its guarantee are obligations
solely of Freddie Mac and are not backed by the full faith and credit of the
U.S. government.
Freddie Mac Certificates represent a pro rata interest in a group of
mortgage loans (a 'Freddie Mac Certificate group') purchased by Freddie Mac. The
mortgage loans underlying the Freddie Mac Certificates will consist of fixed
rate or adjustable rate mortgage loans with original terms to maturity of
between ten and thirty years, substantially all of which are secured by first
liens on one- to four-family residential properties or multifamily projects.
Each mortgage loan must meet the applicable standards set forth in the FHLMC
Act. A Freddie Mac Certificate group may include whole loans, participation
interests in whole loans and undivided interests in whole loans and
participations comprising another Freddie Mac Certificate group.
BRADY BONDS
Brady Bonds are debt securities, generally denominated in U.S. dollars,
issued under the framework of the Brady Plan. The Brady Plan is an initiative
announced by former U.S. Treasury Secretary Nicholas F. Brady in 1989 as a
mechanism for debtor nations to
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restructure their outstanding external commercial bank indebtedness. In
restructuring its external debt under the Brady Plan framework, a debtor nation
negotiates with its existing bank lenders as well as multilateral institutions
such as the International Bank for Reconstruction and Development (the 'World
Bank') and the International Monetary Fund (the 'IMF'). The Brady Plan
framework, as it has developed, contemplates the exchange of external commercial
bank debt for newly issued bonds known as 'Brady Bonds.' Brady Bonds may also be
issued in respect of new money being advanced by existing lenders in connection
with the debt restructuring. The World Bank and/or the IMF support the
restructuring by providing funds pursuant to loan agreements or other
arrangements which enable the debtor nation to collateralize the new Brady Bonds
or to repurchase outstanding bank debt at a discount. Under these arrangements
with the World Bank and/or the IMF, debtor nations have been required to agree
to the implementation of certain domestic monetary and fiscal reforms. Such
reforms have included the liberalization of trade and foreign investment, the
privatization of state-owned enterprises and the setting of targets for public
spending and borrowing. These policies and programs seek to promote the debtor
country's economic growth and development. Investors should also recognize that
the Brady Plan only sets forth general guiding principles for economic reform
and debt reduction, emphasizing that solutions must be negotiated on a
case-by-case basis between debtor nations and their creditors. The investment
manager believes that economic reforms undertaken by countries in connection
with the issuance of Brady Bonds may make the debt of countries which have
issued or have announced plans to issue Brady Bonds an attractive opportunity
for investment. However, there can be no assurance that SBAM's expectations with
respect to Brady Bonds will be realized.
Investors should recognize that Brady Bonds have been issued only recently,
and accordingly, do not have a long payment history. Brady Bonds which have been
issued to date are rated in the categories 'BB' or 'B' by Standard & Poor's
Corporation ('S&P') or 'Ba' or 'B' by Moody's Investors Service, Inc.
('Moody's') or, in cases in which a rating by S&P or Moody's has not been
assigned, are generally considered by the investment manager to be of comparable
quality.
Agreements implemented under the Brady Plan to date are designed to achieve
debt and debt-service reduction through specific options negotiated by a debtor
nation with its creditors. As a result, the financial packages offered by each
country differ. The types of options have included the exchange of outstanding
commercial bank debt for bonds issued at 100% of face value of such debt which
carry a below-market stated rate of interest (generally known as par bonds),
bonds issued at a discount from the face value of such debt (generally known as
discount bonds), bonds bearing an interest rate which increases over time and
bonds issued in exchange for the advancement of new money by existing lenders.
Discount bonds issued to date under the framework of the Brady Plan have
generally borne interest computed semiannually at a rate equal to 13/16 of 1%
above the then current six month London Inter-Bank Offered Rate ('LIBOR') rate.
Regardless of the stated face amount and stated interest rate of the various
types of Brady Bonds, the applicable Funds will purchase Brady Bonds in
secondary markets, as described below, in which the price and yield to the
investor reflect market conditions at the time of purchase. Brady Bonds issued
to date have traded at a deep discount from their face value. Certain sovereign
bonds are entitled to 'value recovery payments' in certain circumstances, which
in effect constitute supplemental interest payments but generally are not
collateralized. Certain Brady Bonds have been collateralized as to principal due
at maturity (typically 30 years from the date of issuance) by U.S. Treasury zero
coupon bonds with a maturity equal to the final maturity of such Brady Bonds,
although the collateral is not available to investors until the final maturity
of the Brady Bonds. Collateral purchases are financed by the IMF, the World Bank
and the debtor nations' reserves. In addition, interest payments on certain
types of Brady Bonds may be collateralized by cash or high-grade securities in
amounts that typically represent between 12 and 18 months of interest accruals
on these instruments with the balance of the interest accruals being
uncollateralized. The applicable Funds may purchase Brady Bonds with no or
limited collateralization, and will be relying for payment of interest and
(except in the case of principal collateralized Brady Bonds) principal primarily
on the willingness and ability of the foreign government to make payment in
accordance with the terms of the Brady Bonds.
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Brady Bonds issued to date are purchased and sold in secondary markets through
U.S. securities dealers and other financial institutions and are generally
maintained through European transnational securities depositories. A substantial
portion of the Brady Bonds and other sovereign debt securities in which these
Funds may invest are likely to be acquired at a discount, which involves certain
considerations discussed below under 'Additional Information Concerning Taxes.'
INVERSE FLOATING RATE OBLIGATIONS
Certain Funds may invest in inverse floating rate obligations, or 'inverse
floaters.' Inverse floaters have coupon rates that vary inversely at a multiple
of a designated floating rate (which typically is determined by reference to an
index rate, but may also be determined through a dutch auction or a remarketing
agent) (the 'reference rate'). Inverse floaters may constitute a class of
Collateralized Mortgage Obligations ('CMOs ') with a coupon rate that moves
inversely to a designated index, such as LIBOR or COFI (Cost of Funds Index).
Any rise in the reference rate of an inverse floater (as a consequence of an
increase in interest rates causes a drop in the coupon rate while any drop in
the reference rate of an inverse floater causes an increase in the coupon rate.
In addition, like most other fixed income securities, the value of inverse
floaters will generally decrease as interest rates increase.
Inverse floaters exhibit substantially greater price volatility than fixed
rate obligations having similar credit quality, redemption provisions and
maturity, and inverse floater CMOs exhibit greater price volatility than the
majority of mortgage pass-through securities or CMOs. In addition, some inverse
floater CMOs exhibit extreme sensitivity to changes in prepayments. As a result,
the yield to maturity of an inverse floater CMO is sensitive not only to changes
in interest rates but also to changes in prepayment rates on the related
underlying mortgage assets.
INVESTMENT FUNDS
Each Fund may invest in unaffiliated investment funds which invest
principally in securities in which that Fund is authorized to invest, in
accordance with the limits of the 1940 Act. Each Fund may invest a maximum of
10% of its total assets in the securities of other investment companies. In
addition, under the 1940 Act, not more than 5% of the Fund's total assets may be
invested in the securities of any one investment company. To the extent a Fund
invests in other investment funds, the Fund's shareholders will incur certain
duplicative fees and expenses, including investment advisory fees. A Fund's
investment in certain investment funds will result in special U.S. Federal
income tax consequences described below under 'Taxation.'
HIGH YIELD SECURITIES
Changes by recognized rating services in their ratings of any fixed-income
security and in the ability of an issuer to make payments of interest and
principal may also affect the value of high yield securities. A description of
the ratings used by Moody's and S&P is set forth in Appendix A to each
Prospectus. The ratings of Moody's and S&P generally represent the opinions of
those organizations as to the quality of the securities that they rate. Such
ratings, however, are relative and subjective, are not absolute standards of
quality, are subject to change and do not evaluate the market risk or liquidity
of the securities. Ratings of a non-U.S. debt instrument, to the extent that
those ratings are undertaken, are related to evaluations of the country in which
the issuer of the instrument is located. Ratings generally take into account the
currency in which a non-U.S. debt instrument is denominated. Instruments issued
by a foreign government in other than the local currency, for example, typically
have a lower rating than local currency instruments due to the existence of an
additional risk that the government will be unable to obtain the required
foreign currency to service its foreign currency-denominated debt. In general,
the ratings of debt securities or obligations issued by a non-U.S. public or
private entity will not be higher than the rating of the currency or the foreign
currency debt of the central government of the country in which the issuer is
located, regardless of the intrinsic creditworthiness of the issuer.
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The secondary markets for high yield securities are concentrated in
relatively few market makers and participants in the market are mostly
institutional investors, including insurance companies, banks, other financial
institutions and mutual funds. In addition, the trading volume for high yield
securities is generally lower than that for higher-rated securities and the
secondary markets could contract under adverse market or economic conditions
independent of any specific adverse changes in the condition of a particular
issuer. These factors may have an adverse effect on the ability of a Fund
holding such securities to dispose of particular portfolio investments, may
adversely affect the Fund's net asset value per share and may limit the ability
of such a Fund to obtain accurate market quotations for purposes of valuing
securities and calculating net asset value. Less liquid secondary markets may
also affect the ability of a Fund to sell securities at their fair value. If the
secondary markets for high yield securities contract due to adverse economic
conditions or for other reasons, certain liquid securities in a Fund's portfolio
may become illiquid and the proportion of the Fund's assets invested in illiquid
securities may significantly increase.
Prices for high yield securities may be affected by legislative and
regulatory developments. These laws could adversely affect a Fund's net asset
value and investment practices, the secondary market for high yield securities,
the financial condition of issuers of these securities and the value of
outstanding high yield securities. For example, federal legislation requiring
the divestiture by federally insured savings and loan associations of their
investments in high yield bonds and limiting the deductibility of interest by
certain corporate issuers of high yield bonds adversely affected the market in
recent years.
Issuers of these 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 than with investment grade
securities because such securities generally are unsecured and frequently are
subordinated to the prior payment of senior indebtedness. A Fund also 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.
The development of a market for high yield non-U.S. corporate securities
has been a relatively recent phenomenon. On the other hand, the market for high
yield U.S. corporate debt securities is more established than that for high
yield non-U.S. corporate debt securities, but has undergone significant changes
in the past and may undergo significant changes in the future.
High yield non-U.S. and U.S. corporate securities in which the applicable
Funds may invest include bonds, debentures, notes, commercial paper and
preferred stock and will generally be unsecured. Most of the debt securities
will bear interest at fixed rates. However, a Fund may also invest in corporate
debt securities with variable rates of interest or which involve equity
features, such as contingent interest or participations based on revenues, sales
or profits (i.e., interest or other payments, often in addition to a fixed rate
of return, that are based on the borrower's attainment of specified levels of
revenues, sales or profits and thus enable the holder of the security to share
in the potential success of the venture).
Investing in fixed and floating rate high yield foreign sovereign debt
securities will expose Funds investing in such securities to the direct or
indirect consequences of political, social or economic changes in the countries
that issue the securities. See ' -- Foreign Securities' above. The ability and
willingness of sovereign obligors in developing and emerging market countries or
the governmental authorities that control repayment of their external debt to
pay principal and interest on such debt when due may depend on general economic
and political conditions within the relevant country. Countries such as those in
which a Fund may invest have historically experienced, and may continue to
experience, high rates of inflation, high interest rates, exchange rate trade
difficulties and extreme poverty and unemployment. Many of these countries are
also characterized by political uncertainty or instability. Additional factors
which may influence the ability or willingness to service debt include, but are
not limited to, a country's cash flow situation, the availability of sufficient
foreign exchange on the date a payment is due, the relative size of its debt
service burden to
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the economy as a whole, and its government's policy towards the International
Monetary Fund, the World Bank and other international agencies.
The ability of a foreign sovereign obligor to make timely payments on its
external debt obligations will also be strongly influenced by the obligor's
balance of payments, including export performance, its access to international
credits and investments, fluctuations in interest rates and the extent of its
foreign reserves. A country whose exports are concentrated in a few commodities
or whose economy depends on certain strategic imports could be vulnerable to
fluctuations in international prices of these commodities or imports. To the
extent that a country receives payment for its exports in currencies other than
U.S. dollars, its ability to make debt payments denominated in U.S. dollars
could be adversely affected. If a foreign sovereign obligor cannot generate
sufficient earnings from foreign trade to service its external debt, it may need
to depend on continuing loans and aid from foreign governments, commercial banks
and multilateral organizations, and inflows of foreign investment. The
commitment on the part of these foreign governments, multilateral organizations
and others to make such disbursements may be conditioned on the government's
implementation of economic reforms and/or economic performance and the timely
service of its 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,
which may further impair the obligor's ability or willingness to timely service
its debts. The cost of servicing external debt will also generally be adversely
affected by rising international interest rates, because many external debt
obligations bear interest at rates which are adjusted based upon international
interest rates. The ability to service external debt will also depend on the
level of the relevant government's international currency reserves and its
access to foreign exchange. Currency devaluations may affect the ability of a
sovereign obligor to obtain sufficient foreign exchange to service its external
debt.
As a result of the foregoing, a governmental obligor may default on its
obligations. If such an event occurs, a Fund may have limited legal recourse
against the issuer and/or guarantor. Remedies must, in some cases, be pursued in
the courts of the defaulting party itself, and the ability of the holder of
foreign sovereign debt securities to obtain recourse may be subject to the
political climate in the relevant country. In addition, no assurance can be
given that the holders of commercial bank debt will not contest payments to the
holders of other foreign sovereign debt obligations in the event of default
under their commercial bank loan agreements.
Brady Bonds have been issued only recently, and, accordingly, do not have a
long payment history. They may be collateralized or uncollateralized and issued
in various currencies (although most are dollar-denominated) and they are
actively traded in the over-the-counter secondary market. Dollar-denominated,
collateralized Brady Bonds, which may be fixed rate par bonds or floating rate
discount bonds, are generally collateralized in full as to principal due at
maturity by U.S. Treasury zero coupon obligations which have the same maturity
as the Brady Bonds. Certain interest payments on these Brady Bonds may be
collateralized by cash or securities in an amount that, in the case of fixed
rate bonds, is typically equal to between 12 and 18 months of rolling interest
payments or, in the case of floating rate bonds, initially is typically equal to
between 12 and 18 months rolling interest payments based on the applicable
interest rate at that time and is adjusted at regular intervals thereafter with
the balance of interest accruals in each case being uncollateralized. The
applicable Funds may purchase Brady Bonds with no or limited collateralization,
and will be relying for payment of interest and (except in the case of principal
collateralized Brady Bonds) principal primarily on the willingness and ability
of the foreign government to make payment in accordance with the terms of the
Brady Bonds. In the event of a default with respect to collateralized Brady
Bonds as a result of which the payment obligations of the issuer are
accelerated, the U.S. Treasury zero coupon obligations held as collateral for
the payment of principal will not be distributed to investors, nor will such
obligations be sold and the proceeds distributed. The collateral will be held by
the collateral agent to the scheduled maturity of the defaulted Brady Bonds,
which will continue to be outstanding, at which time the face amount of the
collateral will equal the principal payments which would have then been due on
the Brady Bonds in the normal course. Based upon current market
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conditions, a Fund would not intend to purchase Brady Bonds which, at the time
of investment, are in default as to payments. However, in light of the residual
risk of the Brady Bonds and, among other factors, the history of default with
respect to commercial bank loans by public and private entities of countries
issuing Brady Bonds, investments in Brady Bonds are to be viewed as speculative.
A substantial portion of the Brady Bonds and other sovereign debt securities in
which the High Yield Bond and Strategic Bond Funds invest are likely to be
acquired at a discount, which involves certain considerations discussed below
under 'Additional Information Concerning Taxes.'
Sovereign obligors in developing and emerging market countries are among
the world's largest debtors to commercial banks, other governments,
international financial organizations and other financial institutions. These
obligors have in the past experienced substantial difficulties in servicing
their external debt obligations, which led to defaults on certain obligations
and the restructuring of certain indebtedness. Restructuring arrangements have
included, among other things, reducing and rescheduling interest and principal
payments by negotiating new or amended credit agreements or converting
outstanding principal and unpaid interest to Brady Bonds, and obtaining new
credit to finance interest payments. Holders of certain foreign sovereign debt
securities may be requested to participate in the restructuring of such
obligations and to extend further loans to their issuers. There can be no
assurance that the Brady Bonds and other foreign sovereign debt securities in
which certain of the Funds may invest will not be subject to similar
restructuring arrangements or to requests for new credit which may adversely
affect a Fund's holdings. Furthermore, certain participants in the secondary
market for such debt may be directly involved in negotiating the terms of these
arrangements and may therefore have access to information not available to other
market participants.
DERIVATIVES
A detailed discussion of Derivatives (as defined below) that may be used by
the investment manager on behalf of certain Funds follows below. The description
in the Prospectus of the Variable Series Fund indicates which, if any, of these
types of transactions may be used by that Fund. A Fund will not be obligated,
however, to use any Derivatives and makes no representation as to the
availability of these techniques at this time or at any time in the future.
'Derivatives,' as used in the Prospectus and this Statement of Additional
Information, refers to interest rate, currency or stock or bond index futures
contracts, currency forward contracts and currency swaps, the purchase and sale
(or writing) of exchange listed and over-the-counter ('OTC') put and call
options on debt and equity securities, currencies, interest rate, currency or
stock index futures and fixed-income and stock indices and other financial
instruments, entering into various interest rate transactions such as swaps,
caps, floors, collars, entering into equity swaps, caps, floors, the purchase
and sale of indexed debt securities or trading in other similar types of
instruments.
Derivatives may be used to attempt to protect against possible changes in
the market value of securities held or to be purchased for a Fund's portfolio
resulting from securities markets or currency exchange rate fluctuations, to
protect a Fund's unrealized gains in the value of its securities, to facilitate
the sale of those securities for investment purposes, to manage the effective
maturity or duration of a Fund's portfolio or to establish a position in the
derivatives markets as a temporary substitute for purchasing or selling
particular securities or to seek to enhance a Fund's income or gain. A Fund may
use any or all types of Derivatives which it is authorized to use at any time;
no particular strategy will dictate the use of one type of transaction rather
than another, as use of any authorized Derivative will be a function of numerous
variables, including market conditions. The ability of a Fund to utilize
Derivatives successfully will depend on numerous factors including the
investment manager's ability to predict pertinent market movements, which cannot
be assured. These skills are different from those needed to select a Fund's
portfolio securities.
A Fund's ability to pursue certain of these strategies may be limited by
the Commodity Exchange Act, as amended, applicable regulations of the CFTC
thereunder and the federal income tax requirements applicable to regulated
investment companies which are not operated as commodity pools.
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Currency Transactions. A Fund may engage in currency transactions with
Counterparties to hedge the value of portfolio securities denominated in
particular currencies against fluctuations in relative value or to generate
income or gain. Currency transactions include currency forward contracts,
exchange-listed currency futures contracts and options thereon, exchange-listed
and OTC options on currencies, and currency swaps. A forward currency contract
involves a privately negotiated obligation to purchase or sell (with delivery
generally required) a specific currency at a future date, which may be any fixed
number of days from the date of the contract agreed upon by the parties, at a
price set at the time of the contract. A currency swap is an agreement to
exchange cash flows based on the notional difference among two or more
currencies and operates similarly to an interest rate swap, which is described
below under 'Swaps, Caps, Floors and Collars.' A Fund may enter into currency
transactions only with Counterparties that the investment manager deems to be
creditworthy.
A Fund may enter into forward currency exchange contracts when the
investment manager believes that the currency of a particular country may suffer
a substantial decline against the U.S. dollar. In those circumstances, a Fund
may enter into a forward contract to sell, for a fixed amount of U.S. dollars,
the amount of that currency approximating the value of some or all of the Fund's
portfolio securities denominated in such currency. Forward contracts may limit
potential gain from a positive change in the relationship between the U.S.
dollar and foreign currencies.
Transaction hedging is entering into a currency transaction with respect to
specific assets or liabilities of the Fund, which will generally arise in
connection with the purchase or sale of the Fund's portfolio securities or the
receipt of income from them. Position hedging is entering into a currency
transaction with respect to portfolio securities positions denominated or
generally quoted in that currency. A Fund will not enter into a transaction to
hedge currency exposure to an extent greater, after netting all transactions
intended wholly or partially to offset other transactions, than the aggregate
market value (at the time of entering into the transaction) of the securities
held by the Fund that are denominated or generally quoted in or currently
convertible into the currency, other than with respect to proxy hedging as
described below.
A Fund may cross-hedge currencies by entering into transactions to purchase
or sell one or more currencies that are expected to increase or decline in value
relative to other currencies to which the Fund has or in which the Fund expects
to have exposure. To reduce the effect of currency fluctuations on the value of
existing or anticipated holdings of its securities, a Fund may also engage in
proxy hedging. Proxy hedging is often used when the currency to which the Fund's
holdings is exposed is difficult to hedge generally or difficult to hedge
against the dollar. Proxy hedging entails entering into a forward contract to
sell a currency, the changes in the value of which are generally considered to
be linked to a currency or currencies in which some or all of the Fund's
securities are or are expected to be denominated, and to buy dollars. The amount
of the contract would not exceed the market value of the Fund's securities
denominated in linked currencies.
Currency transactions are subject to risks different from other portfolio
transactions, as discussed below under 'Risk Factors.' If a Fund enters into a
currency hedging transaction, the Fund will comply with the asset segregation
requirements described below under 'Use of Segregated and Other Special
Accounts.'
Futures Contracts. A Fund may trade futures contracts: (1) on domestic and
foreign exchanges on currencies, interest rates and bond indices; and (2) on
domestic and, to the extent permitted by the Commodity Futures Trading
Commission ('CFTC'), foreign exchanges on stock indices. Futures contracts are
generally bought and sold on the commodities exchanges on which they are listed
with payment of initial and variation margin as described below. The sale of a
futures contract creates a firm obligation by the Fund, as seller, to deliver to
the buyer the specific type of financial instrument called for in the contract
at a specific future time for a specified price (or, with respect to certain
instruments, the net cash amount). None of the Funds is a commodity pool, and
each Fund, where permitted, will use futures contracts and options thereon
solely: (i) for bona fide hedging purposes; and (ii) for other purposes in
amounts permitted by the rules and regulations promulgated by the CFTC. A Fund's
use of financial futures contracts and options thereon
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will in all cases be consistent with applicable regulatory requirements and in
particular the rules and regulations of the CFTC. Maintaining a futures contract
or selling an option on a futures contract will typically require the Fund to
deposit with a financial intermediary, as security for its obligations, an
amount of cash or other specified assets ('initial margin') that initially is
from 1% to 10% of the face amount of the contract (but may be higher in some
circumstances). Additional cash or assets ('variation margin') may be required
to be deposited thereafter daily as the mark-to-market value of the futures
contract fluctuates. A Fund will not enter into a futures contract or option
thereon other than for bona fide hedging purposes if, immediately thereafter,
the sum of the amount of its initial margin and premiums required to maintain
permissible non-bona fide hedging positions in futures contracts and options
thereon would exceed 5% of the liquidation value of the Fund's portfolio, after
taking into account unrealized profits and losses on existing contracts;
however, in the case of an option that is in-the-money at the time of the
purchase, the in-the-money amount may be excluded in calculating the 5%
limitation. The value of all futures contracts sold by the Fund (adjusted for
the historical volatility relationship between the Fund and the contracts) will
not exceed the total market value of the Fund's securities. In addition, the
value of a Fund's long futures and options positions (futures contracts on stock
or bond indices, interest rates or foreign currencies and call options on such
futures contracts) will not exceed the sum of: (a) liquid assets segregated for
this purpose; (b) cash proceeds on existing investments due within thirty days;
and (c) accrued profits on the particular futures or options positions. The
segregation requirements with respect to futures contracts and options thereon
are described below under 'Use of Segregated and Other Special Accounts.'
Interest Rate Futures Contracts. A Fund may enter into interest rate
futures contracts in order to protect it from fluctuations in interest rates
without necessarily buying or selling fixed income securities. An interest rate
futures contract is an agreement to take or make delivery of either: (i) an
amount of cash equal to the difference between the value of a particular index
of debt securities at the beginning and at the end of the contract period; or
(ii) a specified amount of a particular debt security at a future date at a
price set at time of the contract. For example, if a Fund owns bonds, and
interest rates are expected to increase, the Fund might sell futures contracts
on debt securities having characteristics similar to those held in the
portfolio. Such a sale would have much the same effect as selling an equivalent
value of the bonds owned by the Fund. If interest rates did increase, the value
of the debt securities in the portfolio would decline, but the value of the
futures contracts to the Fund would increase at approximately the same rate,
thereby keeping the net asset value of each class of the Fund from declining as
much as it otherwise would have. A Fund could accomplish similar results by
selling bonds with longer maturities and investing in bonds with shorter
maturities when interest rates are expected to increase. However, since the
futures market may be more liquid than the cash market, the use of futures
contracts as a risk management technique allows a Fund to maintain a defensive
position without having to sell its portfolio securities.
Similarly, when the investment manager expects that interest rates may
decline, a Fund may purchase interest rate futures contracts in an attempt to
hedge against having to make subsequently anticipated purchases of bonds at the
higher prices subsequently expected to prevail. Since the fluctuations in the
value of appropriately selected futures contracts should be similar to that of
the bonds that will be purchased, a Fund could take advantage of the anticipated
rise in the cost of the bonds without actually buying them until the market had
stabilized. At that time, a Fund could make the intended purchase of the bonds
in the cash market and the futures contracts could be liquidated.
At the time of delivery of securities pursuant to an interest rate futures
contract, adjustments are made to recognize differences in value arising from
the delivery of securities with a different interest rate from that specified in
the contract. In some (but not many) cases, securities called for by a futures
contract may have a shorter term than the term of the futures contract and,
consequently, may not in fact have been issued when the futures contract was
entered.
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Options. As indicated in the Prospectus, in order to hedge against adverse
market shifts or to increase income or gain, certain Funds may purchase put and
call options or write 'covered' put and call options on futures contracts on
stock indices, interest rates and currencies. In addition, in order to hedge
against adverse market shifts or to increase its income, a Fund may purchase put
and call options and write 'covered' put and call options on stocks, stock
indices and currencies. A Fund may utilize options on currencies in order to
hedge against currency exchange rate risks. A call option is 'covered' if, so
long as the Fund is obligated as the writer of the option, it will own: (i) the
underlying investment subject to the option; (ii) securities convertible or
exchangeable without the payment of any consideration into the securities
subject to the option; or (iii) a call option on the relevant security or
currency with an exercise price no higher than the exercise price on the call
option written. A put option is 'covered' if, to support its obligation to
purchase the underlying investment if a put option that a Fund writes is
exercised, the Fund will either (a) deposit with its custodian in a segregated
account cash, cash equivalents, U.S. government securities or other high grade
liquid debt obligations having a value at least equal to the exercise price of
the underlying investment or (b) continue to own an equivalent number of puts of
the same 'series' (that is, puts on the same underlying investment having the
same exercise prices and expiration dates as those written by the Fund), or an
equivalent number of puts of the same 'class' (that is, puts on the same
underlying investment) with exercise prices greater than those that it has
written (or, if the exercise prices of the puts it holds are less than the
exercise prices of those it has written, it will deposit the difference with its
custodian in a segregated account). Parties to options transactions must make
certain payments and/or set aside certain amounts of assets in connection with
each transaction, as described in the Prospectus.
In all cases except for certain options on interest rate futures contracts,
by writing a call, a Fund will limit its opportunity to profit from an increase
in the market value of the underlying investment above the exercise price of the
option for as long as the Fund's obligation as writer of the option continues.
By writing a put, a Fund will limit its opportunity to profit from a decrease in
the market value of the underlying investment below the exercise price of the
option for as long as the Fund's obligation as writer of the option continues.
Upon the exercise of a put option written by a Fund, the Fund may suffer an
economic loss equal to the difference between the price at which the Fund is
required to purchase the underlying investment and its market value at the time
of the option exercise, less the premium received for writing the option. Upon
the exercise of a call option written by a Fund, the Fund may suffer an economic
loss equal to an amount not less than the excess of the investment's market
value at the time of the option exercise over the Fund's acquisition cost of the
investment, less the sum of the premium received for writing the option and the
positive difference, if any, between the call price paid to the Fund and the
Fund's acquisition cost of the investment.
In all cases except for certain options on interest rate futures contracts,
in purchasing a put option, a Fund will seek to benefit from a decline in the
market price of the underlying investment, while in purchasing a call option, a
Fund will seek to benefit from an increase in the market price of the underlying
investment. If an option purchased is not sold or exercised when it has
remaining value, or if the market price of the underlying investment remains
equal to or greater than the exercise price, in the case of a put, or remains
equal to or below the exercise price, in the case of a call, during the life of
the option, the Fund will lose its investment in the option. For the purchase of
an option to be profitable, the market price of the underlying investment must
decline sufficiently below the exercise price, in the case of a put, and must
increase sufficiently above the exercise price, in the case of a call, to cover
the premium and transaction costs.
In the case of certain options on interest rate futures contracts, a Fund
may purchase a put option in anticipation of a rise in interest rates, and
purchase a call option in anticipation of a fall in interest rates. By writing a
covered call option on interest rate futures contracts, a Fund will limit its
opportunity to profit from a fall in interest rates. By writing a covered put
option on interest rate futures contracts, a Fund will limit its opportunity to
profit from a rise in interest rates.
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A Fund may choose to exercise the options it holds, permit them to expire
or terminate them prior to their expiration by entering into closing
transactions. A Fund may enter into a closing purchase transaction in which the
Fund purchases an option having the same terms as the option it had written or a
closing sale transaction in which the Fund sells an option having the same terms
as the option it had purchased. A covered option writer unable to effect a
closing purchase transaction will not be able to sell the underlying security
until the option expires or the underlying security is delivered upon exercise,
with the result that the writer will be subject to the risk of market decline in
the underlying security during such period. Should a Fund choose to exercise an
option, the Fund will purchase in the open market the securities, commodities or
commodity futures contracts underlying the exercised option.
Exchange-listed options on securities and currencies, with certain
exceptions, generally settle by physical delivery of the underlying security or
currency, although in the future, cash settlement may become available.
Frequently, rather than taking or making delivery of the underlying instrument
through the process of exercising the option, listed options are closed by
entering into offsetting purchase or sale transactions that do not result in
ownership of the new option. Index options are cash settled for the net amount,
if any, by which the option is 'in-the-money' (that is, the amount by which the
value of the underlying instrument exceeds, in the case of a call option, or is
less than, in the case of a put option, the exercise price of the option) at the
time the option is exercised.
Put options and call options typically have similar structural
characteristics and operational mechanics regardless of the underlying
instrument on which they are purchased or sold. Thus, the following general
discussion relates to each of the particular types of options discussed in
greater detail below. In addition, many Derivatives involving options require
segregation of Fund assets in special accounts, as described below under 'Use of
Segregated and Other Special Accounts.'
A put option gives the purchaser of the option, upon payment of a premium,
the right to sell, and the writer of the obligation to buy, the underlying
security, index, currency or other instrument at the exercise price. A Fund's
purchase of a put option on a security, for example, might be designed to
protect its holdings in the underlying instrument (or, in some cases, a similar
instrument) against a substantial decline in the market value of such instrument
by giving the Fund the right to sell the instrument at the option exercise
price. A call option, upon payment of a premium, gives the purchaser of the
option the right to buy, and the seller the obligation to sell, the underlying
instrument at the exercise price. A Fund's purchase of a call option on a
security, financial futures contract, index, currency or other instrument might
be intended to protect the Fund against an increase in the price of the
underlying instrument that it intends to purchase in the future by fixing the
price at which it may purchase the instrument. An 'American' style put or call
option may be exercised at any time during the option period, whereas a
'European' style put or call option may be exercised only upon expiration or
during a fixed period prior to expiration. Exchange-listed options are issued by
a regulated intermediary such as the Options Clearing Corporation ('OCC'), which
guarantees the performance of the obligations of the parties to the options. The
discussion below uses the OCC as an example, but is also applicable to other
similar financial intermediaries.
OCC-issued and exchange-listed options, with certain exceptions, generally
settle by physical delivery of the underlying security or currency, although in
the future, cash settlement may become available. Index options are cash settled
for the net amount, if any, by which the option is 'in-the-money' (that is, the
amount by which the value of the underlying instrument exceeds, in the case of a
call option, or is less than, in the case of a put option, the exercise price of
the option) at the time the option is exercised. Frequently, rather than taking
or making delivery of the underlying instrument through the process of
exercising the option, listed options are closed by entering into offsetting
purchase or sale transactions that do not result in ownership of the new option.
A Fund's ability to close out its position as a purchaser or seller of an
OCC-issued or exchange-listed put or call option is dependent, in part, upon the
liquidity of the particular option market. Among the possible reasons for the
absence of a liquid option market on an
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exchange are: (1) insufficient trading interest in certain options, (2)
restrictions on transactions imposed by an exchange, (3) trading halts,
suspensions or other restrictions imposed with respect to particular classes or
series of options or underlying securities, including reaching daily price
limits, (4) interruption of the normal operations of the OCC or an exchange, (5)
inadequacy of the facilities of an exchange or the OCC to handle current trading
volume or (6) a decision by one or more exchanges to discontinue the trading of
options (or a particular class or series of options), in which event the
relevant market for that option on that exchange would cease to exist, although
any such outstanding options on that exchange would continue to be exercisable
in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that would not be reflected in the corresponding option
markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties (collectively referred to as 'Counterparties' and
individually referred to as a 'Counterparty') through a direct bilateral
agreement with the Counterparty. In contrast to exchange-listed options, which
generally have standardized terms and performance mechanics, all of the terms of
an OTC option, including such terms as method of settlement, term, exercise
price, premium, guaranties and security, are determined by negotiation of the
parties. It is anticipated that any Portfolio authorized to use OTC options will
generally only enter into OTC options that have cash settlement provisions,
although it will not be required to do so.
Unless the parties provide for it, no central clearing or guaranty function
is involved in an OTC option. As a result, if a Counterparty fails to make or
take delivery of the security, currency or other instrument underlying an OTC
option it has entered into with the Fund or fails to make a cash settlement
payment due in accordance with the terms of that option, the Fund will lose any
premium it paid for the option as well as any anticipated benefit of the
transaction. Thus, the investment manager must assess the creditworthiness of
each such Counterparty or any guarantor or credit enhancement of the
Counterparty's credit to determine the likelihood that the terms of the OTC
option will be met. A Fund will enter into OTC option transactions only with
U.S. Government securities dealers recognized by the Federal Reserve Bank of New
York as 'primary dealers,' or broker-dealers, domestic or foreign banks, or
other financial institutions that the investment manager deems to be
creditworthy. In the absence of a change in the current position of the staff of
the SEC, OTC options purchased by a Fund and the amount of a Fund's obligation
pursuant to an OTC option sold by the Fund (the cost of the sell-back plus the
in-the-money amount, if any) or the value of the assets held to cover such
options will be deemed illiquid.
If a Fund sells a call option, the premium that it receives may serve as a
partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments held by the Fund or will
increase the Fund's income. Similarly, the sale of put options can also provide
gains for a Fund.
A Fund may purchase and sell call options on securities that are traded on
U.S. and foreign securities exchanges and in the OTC markets, and on securities
indices, currencies and futures contracts. All calls sold by a Fund must be
'covered' (that is, the Fund must own the securities or futures contract subject
to the call), or must otherwise meet the asset segregation requirements
described below for so long as the call is outstanding. Even though the Fund
will receive the option premium to help protect it against loss, a call sold by
a Fund will expose the Fund during the term of the option to possible loss of
opportunity to realize appreciation in the market price of the underlying
security or instrument and may require the Fund to hold a security or instrument
that it might otherwise have sold.
A Fund reserves the right to purchase or sell options on instruments and
indices which may be developed in the future to the extent consistent with
applicable law, the Fund's investment objective and the restrictions set forth
herein.
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A Fund may purchase and sell put options on securities (whether or not it
holds the securities in its portfolio) and on securities indices, currencies and
futures contracts. In selling put options, a Fund faces the risk that it may be
required to buy the underlying security at a disadvantageous price above the
market price.
(a) Options on Stocks and Stock Indices. A Fund may purchase put and call
options and write covered put and call options on stocks and stock indices
listed on domestic and foreign securities exchanges in order to hedge against
movements in the equity markets or to increase income or gain to the Fund. In
addition, the Fund may purchase options on stocks that are traded
over-the-counter. Options on stock indices are similar to options on specific
securities. However, because options on stock indices do not involve the
delivery of an underlying security, the option represents the holder's right to
obtain from the writer cash in an amount equal to a fixed multiple of the amount
by which the exercise price exceeds (in the case of a put) or is less than (in
the case of a call) the closing value of the underlying stock index on the
exercise date. Currently, options traded include the Standard & Poor's 100 Index
of Composite Stocks, Standard & Poor's 500 Index of Composite Stocks (the 'S&P
500 Index'), the NYSE Composite Index, the American Stock Exchange ('AMEX')
Market Value Index, the National Over-the-Counter Index and other standard
broadly based stock market indices. Options are also traded in certain industry
or market segment indices such as the Oil Index, the Computer Technology Index
and the Transportation Index. Stock index options are subject to position and
exercise limits and other regulations imposed by the exchange on which they are
traded.
If the investment manager expects general stock market prices to rise, a
Fund might purchase a call option on a stock index or a futures contract on that
index as a hedge against an increase in prices of particular equity securities
it wants ultimately to buy. If the stock index does rise, the price of the
particular equity securities intended to be purchased may also increase, but
that increase would be offset in part by the increase in the value of the Fund's
index option or futures contract resulting from the increase in the index. If,
on the other hand, the investment manager expects general stock market prices to
decline, it might purchase a put option or sell a futures contract on the index.
If that index does decline, the value of some or all of the equity securities in
a Fund's portfolio may also be expected to decline, but that decrease would be
offset in part by the increase in the value of the Fund's position in such put
option or futures contract.
(b) Options on Currencies. A Fund may invest in options on currencies
traded on domestic and foreign securities exchanges in order to hedge against
currency exchange rate risks or to increase income or gain, as described above
in 'Forward Currency Exchange Contracts.'
(c) Options on Futures Contracts. A Fund may purchase put and call options
and write covered put and call options on futures contracts on stock indices,
interest rates and currencies traded on domestic and, to the extent permitted by
the CFTC, foreign exchanges, in order to hedge all or a portion of its
investments or to increase income or gain and may enter into closing
transactions in order to terminate existing positions. There is no guarantee
that such closing transactions can be effected. An option on a stock index
futures contract, interest rate futures contract or currency futures contract,
as contrasted with the direct investment in such a contract, gives the purchaser
the right, in return for the premium paid, to assume a position in the
underlying contract at a specified exercise price at any time on or before the
expiration date of the option. Upon exercise of an 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. The potential loss related to the purchase of an option on a
futures contract is limited to the premium paid for the option (plus transaction
costs). While the price of the option is fixed at the point of sale, the value
of the option does change daily and the change would be reflected in the net
asset value of the Fund.
The purchase of an option on a financial futures contract involves payment
of a premium for the option without any further obligation on the part of the
Fund. If the Fund exercises an option on a futures contract it will be obligated
to post initial margin (and potentially variation margin) for the resulting
futures position just as it would for any futures
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position. Futures contracts and options thereon are generally settled by
entering into an offsetting transaction, but no assurance can be given that a
position can be offset prior to settlement or that delivery will occur.
Interest Rate and Equity Swaps and Related Transactions. Certain Funds may
enter into interest rate and equity swaps and may purchase or sell (i.e., write)
interest rate and equity caps, floors and collars. A Fund expects to enter into
these transactions in order to hedge against either a decline in the value of
the securities included in the Fund's portfolio, or against an increase in the
price of the securities which it plans to purchase, or in order to preserve or
maintain a return or spread on a particular investment or portion of its
portfolio or to achieve a particular return on cash balances, or in order to
increase income or gain. Interest rate and equity swaps involve the exchange by
a Fund with another party of their respective commitments to make or receive
payments based on a notional principal amount. The purchase of an interest rate
or equity cap entitles the purchaser, to the extent that a specified index
exceeds a predetermined level, to receive payments on a contractually-based
principal amount from the party selling the interest rate or equity cap. The
purchase of an interest rate or equity floor entitles the purchaser, to the
extent that a specified index falls below a predetermined rate, to receive
payments on a contractually-based principal amount from the party selling the
interest rate or equity floor. A collar is a combination of a cap and a floor
which preserve a certain return within a predetermined range of values.
A Fund may enter into interest rate and equity swaps, caps, floors and
collars 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 and equity swaps on a net basis (i.e., the two payment streams are
netted out), with the Fund receiving or paying, as the case may be, only the net
amount of the two payments. The net amount of the excess, if any, of a Fund's
obligations over its entitlements with respect to each interest rate or equity
swap will be accrued on a daily basis, and an amount of liquid assets having an
aggregate net asset value at least equal to the accrued excess will be
maintained in a segregated account by the Fund's custodian. If a Fund enters
into an interest rate or equity swap on other than a net basis, the Fund will
maintain a segregated account in the full amount accrued on a daily basis of the
Fund's obligations with respect to the swap. A Fund will only enter into
interest rate and equity swap, cap, floor or collar transactions with
counterparties the investment manager deems to be creditworthy. The investment
manager will monitor the creditworthiness of counterparties to its interest rate
and equity swap, cap, floor and collar transactions on an ongoing basis. If
there is a default by the other party to such a transaction, a Fund will have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and agents utilizing
standardized swap documentation. The investment manager has determined that, as
a result, the swap market is liquid. Caps, floors and collars are more recent
innovations for which standardized documentation has not yet been developed and,
accordingly, they are less liquid than swaps. To the extent a Fund sells caps,
floors and collars it will maintain in a segregated account cash and/or, cash
equivalents or other liquid high grade debt securities having an aggregate net
asset value at least equal to the full amount, accrued on a daily basis, of the
Fund's obligations with respect to the caps, floors or collars. The use of
interest rate and equity swaps is a highly specialized activity which involves
investment techniques and risks different from those associated with ordinary
portfolio securities transactions. If the investment manager is incorrect in its
forecasts of market values, interest rates and other applicable factors, the
investment performance of a Fund would diminish compared with what it would have
been if these investment techniques were not utilized. Moreover, even if the
investment manager is correct in its forecasts, there is a risk that the swap
position may correlate imperfectly with the price of the asset or liability
being hedged.
The liquidity of swap agreements will be determined by the investment
manager based on various factors, including (1) the frequency of trades and
quotations, (2) the number of dealers and prospective purchasers in the
marketplace, (3) dealer undertakings to make a market, (4) the nature of the
security (including any demand or tender features), and (5) the nature of the
marketplace for trades (including the ability to assign or offset the Fund's
rights and obligations relating to the investment). Such determination will
govern whether a swap
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will be deemed within the percentage restriction on investments in securities
that are not readily marketable.
A Fund will maintain liquid assets in a segregated custodial account to
cover its current obligations under swap agreements. If a Fund enters into a
swap agreement on a net basis, it will segregate assets with a daily value at
least equal to the excess, if any, of the Fund's accrued obligations under the
swap agreement over the accrued amount the Fund is entitled to receive under the
agreement. If a Fund enters into a swap agreement on other than a net basis, it
will segregate assets with a value equal to the full amount of the Fund's
accrued obligations under the agreement. See 'Use of Segregated and Other
Special Accounts' below.
There is no limit on the amount of interest rate and equity swap
transactions that may be entered into by a Fund. These transactions do not
involve the delivery of securities or other underlying assets or principal.
Accordingly, the risk of loss with respect to interest rate and equity swaps is
limited to the net amount of payments that a Fund is contractually obligated to
make, if any. The effective use of swaps and related transactions by a Fund may
depend, among other things, on the Fund's ability to terminate the transactions
at times when the investment manager deems it desirable to do so. Because swaps
and related transactions are bilateral contractual arrangements between a Fund
and counterparties to the transactions, the Fund's ability to terminate such an
arrangement may be considerably more limited than in the case of an exchange
traded instrument. To the extent a Fund does not, or cannot, terminate such a
transaction in a timely manner, the Fund may suffer a loss in excess of any
amounts that it may have received, or expected to receive, as a result of
entering into the transaction. If the other party to a swap defaults, a Fund's
risk of loss is the net amount of payments that the Fund contractually is
entitled to receive, if any. A Fund may purchase and sell caps, floors and
collars without limitation, subject to the segregated account requirement
described above.
Indexed Securities. A Fund may purchase securities whose prices are indexed
to the prices of other securities, securities indices, currencies, or other
financial indicators. Indexed securities typically, but not always, are debt
securities or deposits whose value at maturity or coupon rate is determined by
reference to a specific instrument or statistic. Currency-indexed securities
typically are short-term to intermediate-term debt securities whose maturity
values or interest rates are determined by reference to the values of one or
more specified foreign currencies, and may offer higher yields than U.S.
dollar-denominated securities of equivalent issuers. Currency-indexed securities
may be positively or negatively indexed; that is, their maturity value may
increase when the specified currency value increases, resulting in a security
that performs similarly to a foreign currency-denominated instrument, or their
maturity value may decline when foreign currencies increase, resulting in a
security whose price characteristics are similar to a put on the underlying
currency. Currency-indexed securities may also have prices that depend on the
values of a number of different foreign currencies relative to each other.
Combined Transactions. A Fund may enter into multiple transactions,
including multiple options transactions, multiple futures transactions, multiple
currency transactions (including forward currency contracts), multiple interest
rate transactions and any combination of futures, options, currency and interest
rate transactions, instead of a single Derivative, as part of a single or
combined strategy when, in the judgment of the investment manager, it is in the
best interests of the Fund to do so. A combined transaction will usually contain
elements of risk that are present in each of its component transactions.
Although combined transactions will normally be entered into by a Fund based on
the investment manager's judgment that the combined strategies will reduce risk
or otherwise more effectively achieve the desired portfolio management goal, it
is possible that the combination will instead increase the risks or hinder
achievement of the Fund management objective.
Risk Factors. Derivatives have special risks associated with them,
including possible default by the Counterparty to the transaction, illiquidity
and, to the extent the investment manager's view as to certain market movements
is incorrect, the risk that the use of the Derivatives could result in losses
greater than if they had not been used. Use of put and call options could result
in losses to a Fund, force the sale or purchase of portfolio securities at
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inopportune times or for prices higher than (in the case of put options) or
lower than (in the case of call options) current market values, or cause a Fund
to hold a security it might otherwise sell.
The use of futures and options transactions entails certain special risks.
In particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related securities position of a
Fund could create the possibility that losses on the hedging instrument are
greater than gains in the value of the Fund's position. In addition, futures and
options markets could be illiquid in some circumstances and certain
over-the-counter options could have no markets. As a result, in certain markets,
a Fund might not be able to close out a transaction without incurring
substantial losses. Although a Fund's use of futures and options transactions
for hedging should tend to minimize the risk of loss due to a decline in the
value of the hedged position, at the same time it will tend to limit any
potential gain to the Fund that might result from an increase in value of the
position. There is also the risk of loss by a Fund of margin deposits in the
event of bankruptcy of a broker with whom the Fund has an open position in a
futures contract or option thereon. Finally, the daily variation margin
requirements for futures contracts create a greater ongoing potential financial
risk than would purchases of options, in which case the exposure is limited to
the cost of the initial premium. However, because option premiums paid by a Fund
are small in relation to the market value of the investments underlying the
options, buying options can result in large amounts of leverage. The leverage
offered by trading in options could cause a Fund's net asset value to be subject
to more frequent and wider fluctuation than would be the case if the Fund did
not invest in options.
As is the case with futures and options strategies, the effective use of
swaps and related transactions by a Fund may depend, among other things, on a
Fund's ability to terminate the transactions at times when SBAM deems it
desirable to do so. To the extent a Fund does not, or cannot, terminate such a
transaction in a timely manner, a Fund may suffer a loss in excess of any
amounts that it may have received, or expected to receive, as a result of
entering into the transaction.
Currency hedging involves some of the same risks and considerations as
other transactions with similar instruments. Currency transactions can result in
losses to a Fund if the currency being hedged fluctuates in value to a degree or
in a direction that is not anticipated. Further, the risk exists that the
perceived linkage between various currencies may not be present or may not be
present during the particular time that the Fund is engaging in proxy hedging.
Currency transactions are also subject to risks different from those of other
portfolio transactions. Because currency control is of great importance to the
issuing governments and influences economic planning and policy, purchases and
sales of currency and related instruments can be adversely affected by
government exchange controls, limitations or restrictions on repatriation of
currency, and manipulations or exchange restrictions imposed by governments.
These forms of governmental actions can result in losses to a Fund if it is
unable to deliver or receive currency or monies in settlement of obligations and
could also cause hedges it has entered into to be rendered useless, resulting in
full currency exposure as well as incurring transaction costs. Buyers and
sellers of currency futures contracts are subject to the same risks that apply
to the use of futures contracts generally. Further, settlement of a currency
futures contract for the purchase of most currencies must occur at a bank based
in the issuing nation. Trading options on currency futures contracts is
relatively new, and the ability to establish and close out positions on these
options is subject to the maintenance of a liquid market that may not always be
available. Currency exchange rates may fluctuate based on factors extrinsic to
that country's economy.
Because the amount of interest and/or principal payments which the issuer
of indexed debt securities is obligated to make is linked to the prices of other
securities, securities indices, currencies, or other financial indicators, such
payments may be significantly greater or less than payment obligations in
respect of other types of debt securities. As a result, an investment in indexed
debt securities may be considered speculative. Moreover, the performance of
indexed securities depends to a great extent on the performance of and may be
more volatile than the security, currency, or other instrument to which they are
indexed,
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and may also be influenced by interest rate changes in the United States and
abroad. At the same time, indexed securities are subject to the credit risks
associated with the issuer of the security, and their values may decline
substantially if the issuer's creditworthiness deteriorates.
Losses resulting from the use of Derivatives will reduce a Fund's net asset
value, and possibly income, and the losses can be greater than if Derivatives
had not been used.
Risks of Derivatives Outside the United States. When conducted outside the
United States, Derivatives may not be regulated as rigorously as in the United
States, may not involve a clearing mechanism and related guarantees, and will be
subject to the risk of governmental actions affecting trading in, or the prices
of, foreign securities, currencies and other instruments. In addition, the price
of any foreign futures or foreign options contract and, therefore, the potential
profit and loss thereon, may be affected by any variance in the foreign exchange
rate between the time an order is placed and the time it is liquidated, offset
or exercised. The value of positions taken as part of non-U.S. Derivatives also
could be adversely affected by: (1) other complex foreign political, legal and
economic factors, (2) lesser availability of data on which to make trading
decisions than in the United States, (3) delays in the Fund's ability to act
upon economic events occurring in foreign markets during nonbusiness hours in
the United States, (4) the imposition of different exercise and settlement terms
and procedures and margin requirements than in the United States and (5) lower
trading volume and liquidity.
Use of Segregated and Other Special Accounts. Use of many Derivatives by a
Fund will require, among other things, that the Fund segregate liquid assets
with its custodian, or a designated sub-custodian, to the extent the Fund's
obligations are not otherwise 'covered' through ownership of the underlying
security, financial instrument or currency. In general, either the full amount
of any obligation by a Fund to pay or deliver securities or assets must be
covered at all times by the securities, instruments or currency required to be
delivered, or, subject to any regulatory restrictions, an amount of liquid
assets at least equal to the current amount of the obligation must be segregated
with the custodian or sub-custodian. The segregated assets cannot be sold or
transferred unless equivalent assets are substituted in their place or it is no
longer necessary to segregate them. A call option on securities written by a
Fund, for example, will require the Fund to hold the securities subject to the
call (or securities convertible into the needed securities without additional
consideration) or to segregate liquid high grade debt obligations sufficient to
purchase and deliver the securities if the call is exercised. A call option sold
by a Fund on an index will require the Fund to own portfolio securities that
correlate with the index or to segregate liquid high grade debt obligations
equal to the excess of the index value over the exercise price on a current
basis. A put option on securities written by a Fund will require the Fund to
segregate liquid high grade debt obligations equal to the exercise price. Except
when a Fund enters into a forward contract in connection with the purchase or
sale of a security denominated in a foreign currency or for other
non-speculative purposes, which requires no segregation, a currency contract
that obligates the Fund to buy or sell a foreign currency will generally require
the Fund to hold an amount of that currency or liquid securities denominated in
that currency equal to the Fund's obligations or to segregate liquid high grade
debt obligations equal to the amount of the Fund's obligations.
OTC options entered into by a Fund, including those on securities,
currency, financial instruments or indices, and OCC-issued and exchange-listed
index options will generally provide for cash settlement, although the Fund will
not be required to do so. As a result, when a Fund sells these instruments it
will segregate an amount of assets equal to its obligations under the options.
OCC-issued and exchange-listed options sold by a Fund other than those described
above generally settle with physical delivery, and the Fund will segregate an
amount of assets equal to the full value of the option. OTC options settling
with physical delivery or with an election of either physical delivery or cash
settlement will be treated the same as other options settling with physical
delivery.
In the case of a futures contract or an option on a futures contract, a
Fund must deposit initial margin and, in some instances, daily variation margin
in addition to segregating assets sufficient to meet its obligations to purchase
or provide securities or currencies, or to pay the
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<PAGE>
amount owed at the expiration of an index-based futures contract. These assets
may consist of cash, cash equivalents, liquid debt or equity securities or other
acceptable assets. A Fund will accrue the net amount of the excess, if any, of
its obligations relating to swaps over its entitlements with respect to each
swap on a daily basis and will segregate with its custodian, or designated
sub-custodian, an amount of cash, cash equivalents or other liquid high grade
debt obligations having an aggregate value equal to at least the accrued excess.
Caps, floors and collars require segregation of assets with a value equal to the
Fund's net obligation, if any.
Derivatives may be covered by means other than those described above when
consistent with applicable regulatory policies. A Fund may also enter into
offsetting transactions so that its combined position, coupled with any
segregated assets, equals its net outstanding obligation in related Derivatives.
A Fund could purchase a put option, for example, if the strike price of that
option is the same or higher than the strike price of a put option sold by the
Fund. Moreover, instead of segregating assets if it holds a futures contract or
forward contract, a Fund could purchase a put option on the same futures
contract or forward contract with a strike price as high or higher than the
price of the contract held. Other Derivatives may also be offset in
combinations. If the offsetting transaction terminates at the time of or after
the primary transaction, no segregation is required, but if it terminates prior
to that time, assets equal to any remaining obligation would need to be
segregated.
PORTFOLIO TURNOVER
Purchases and sales of portfolio securities may be made as considered
advisable by the investment manager in the best interests of the shareholders.
Each Fund intends to limit portfolio trading to the extent practicable and
consistent with its investment objectives. Each Fund's portfolio turnover rate
may vary from year to year, as well as within a year. Short-term gains realized
from portfolio transactions are taxable to shareholders as ordinary income. In
addition, higher portfolio turnover rates can result in corresponding increases
in portfolio transaction costs for a Fund. See 'Portfolio Transactions.'
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<PAGE>
INVESTMENT LIMITATIONS
Unless otherwise indicated, the investment restrictions described below as
well as those described under 'Investment Limitations' in the Variable Series
Funds' Prospectus are fundamental investment policies which may be changed only
when permitted by law, if applicable, and approved by the holders of a majority
of the applicable Fund's outstanding voting securities, which, as defined by the
1940 Act means the lesser of: (i) 67% of the shares represented at a meeting at
which more than 50% of the outstanding shares are represented; or (ii) more than
50% of the outstanding shares. Except for: (i) the investment restrictions set
forth below; (ii) the investment restrictions set forth in 'Investment
Limitations' in the Prospectus; and (iii) each Fund's investment objective(s) as
described in the Prospectus, the other policies and percentage limitations
referred to in this Statement of Additional Information and in the Prospectus
are not fundamental policies of the Funds and may be changed by vote of the
Board of Directors without shareholder approval.
If a percentage restriction on investment or utilization of assets set
forth in this Statement of Additional Information or the Prospectus is adhered
to at the time a transaction is effected, a later change in percentage resulting
from changing values will not be considered a violation.
Each Fund may not:
(1) underwrite securities of other issuers, except to the extent that
the purchase of investments directly from the issuer thereof or from an
underwriter for an issuer and the later disposition of such securities in
accordance with a Fund's investment program may be deemed to be an
underwriting;
(2) purchase or sell real estate, although a Fund may purchase and
sell securities of companies which deal in real estate, may purchase and
sell securities which are secured by interests in real estate and may
invest in mortgages and mortgage-backed securities;
(3) purchase or sell commodities or commodity contracts except that a
Fund may engage in derivative transactions to the extent permitted by its
investment policies as stated in the Prospectus and this Statement of
Additional Information;
(4) make loans, except that (a) a Fund may purchase and hold debt
securities in accordance with its investment objective(s) and policies, (b)
a Fund may enter into repurchase agreements with respect to portfolio
securities, (c) a Fund may lend portfolio securities with a value not in
excess of one-third of the value of its total assets, provided that
collateral arrangements with respect to options, forward currency and
futures transactions will not be deemed to involve loans of securities, and
(d) delays in the settlement of securities transactions will not be
considered loans; or
(5) purchase the securities of other investment companies except as
permitted under the 1940 Act or in connection with a merger, consolidation,
acquisition or reorganization.
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<PAGE>
MANAGEMENT
DIRECTORS AND OFFICERS
The directors and executive officers of the Company are listed below. The
address of each, unless otherwise indicated, is Seven World Trade Center, New
York, New York 10048. Certain of the directors and officers are also directors
and officers of one or more other investment companies for which SBAM, the
Fund's investment manager, acts as investment adviser. 'Interested directors' of
the Fund (as defined in the 1940 Act) are indicated by an asterisk.
VARIABLE SERIES FUND
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION(S) HELD PRINCIPAL OCCUPATION(S) PAST 5 YEARS
- ------------------------------------ ------------------- -----------------------------------------
<S> <C> <C>
Charles F. Barber .................. Director and Consultant. Formerly, Chairman of the
66 Glenwood Drive Chairman, Audit Board of ASARCO Incorporated.
Greenwich, CT 06830 Committee
Age: 80
Carol L. Colman .................... Director and Audit President of Colman Consulting Co., Inc.
Consulting Co., Inc. Committee Member
278 Hawley Road
North Salem, NY 10560
Age: 51
Daniel P. Cronin ................... Director and Audit Vice President and General Counsel of
Pfizer, Inc Committee Member Pfizer International Inc. Senior
235 East 42nd Street Assisting General Counsel of Pfizer,
New York, NY 10017 Inc.
Age: 51
Heath McClendon .................... Managing Director, Smith Barney Inc.
Age: 63 from 1993 to present. Chairman, Smith
Barney Mutual Funds Management Inc.
from 1993 to present.
Michael S. Hyland* ................. President President and Managing Director of SBAM
Age: 51 and Managing Director and Member of the
Management Board of Salomon Brothers
Inc ('SBI').
Giampaolo G. Guarnieri ............. Executive Vice Member of Board of Directors and Head of
Salomon Brothers Asset Management President SBAM AP from January 1997 to present.
Asia Pacific Limited Director of SBAM AP since July 1996.
Three Exchange Square, Vice President and Senior Portfolio
Hong Kong Manager of SBAM AP from April 1995 to
Age: 33 June 1996. From April 1995 to January
1996, Vice President and Senior Vice
President of Salomon Brothers Hong Kong
Limited. From January 1992 to March
1995, Senior Portfolio Investment
Manager of Credit Agricole Asset
Management (South East Asia) Limited.
Steven Guterman .................... Executive Vice Managing Director of SBAM and SBI since
Age: 43 President January 1996. Prior to January 1996,
Director of SBAM and SBI.
Peter J. Wilby ..................... Executive Vice Managing Director of SBAM and SBI since
Age: 38 President January 1996. Prior to January 1996,
Director of SBAM and SBI.
</TABLE>
27
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION(S) HELD PRINCIPAL OCCUPATION(S) PAST 5 YEARS
- ------------------------------------ ------------------- -----------------------------------------
<S> <C> <C>
Richard E. Dahlberg ................ Executive Vice Managing Director of SBAM and SBI since
Age: 57 President January 1996. From July 1995 to January
1996, Director of SBAM and SBI. Prior
to July 1995, Senior Vice President and
Senior Portfolio Manager of
Massachusetts Financial Services
Company.
Beth A. Semmel ..................... Executive Vice Director of SBAM and SBI since January
Age: 36 President 1996. From May 1993 to December 1995,
Vice President of SBAM and SBI. From
January 1989 to May 1993, Vice
President of Morgan Stanley Asset
Management.
Allan R. White, III ................ Executive Vice Managing Director of SBAM and SBI since
Age: 37 President January 1996. Prior to January 1996,
Director of SBAM and SBI.
Ross S. Margolies .................. Executive Vice Managing Director of SBAM since November
Age: 38 President 1997. Prior to November 1997, Director
of SBAM and SBI.
Pamela P. Milunovich ............... Vice President Director of SBAM and SBI since January
Age: 34 1997. Vice President of SBAM and SBI
from June 1992 to December 1996. Prior
to June 1992, an associate with James
Capel.
Eliza Lau .......................... Vice President Vice President and Portfolio Manager of
Salomon Brothers Asset SBAM AP since March 1996. From July
Management Asia 1994 to March 1996, Vice President and
Pacific Limited Portfolio Manager of Salomon Brothers
Three Exchange Square Hong Kong Limited; from October 1991 to
Hong Kong July 1994, research analyst with SBI.
Age: 34
Noel B. Daugherty .................. Secretary Employee of SBAM since November 1996.
Age: 32 From August 1993 to October 1996, an
employee of Chancellor LGT Asset
Management. From October 1989 to August
1993, an employee of The Dreyfus
Corporation.
Jennifer G. Muzzey ................. Assistant Secretary Employee of SBAM since June 1994. Prior
Age: 37 to June 1994, Vice President of
SunAmerica Asset Management
Corporation.
Alan M. Mandel ..................... Treasurer Vice President of SBAM and SBI since
Age: 40 January 1995. Prior to January 1995,
Chief Financial Officer and Vice
President of Hyperion Capital
Management Inc.
Reji Paul .......................... Assistant Treasurer Investment Accounting Manager of SBAM
Age: 34 since February 1995. Prior to February
1995, Assistant Vice President of
Mitchell Hutchins Asset Management,
Inc.
Amy Yeung .......................... Assistant Treasurer Investment Accounting Manager of SBAM.
Age: 33
</TABLE>
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It is estimated that each Director of Variable Series Funds, except those
deemed 'interested persons' under the 1940 Act will receive $5,000 for the 1998
fiscal year as compensation for serving as director. Variable Series Funds does
not provide any pension or retirement benefits to directors. No remuneration
will be paid during the 1998 fiscal year by the Variable Series Funds to
Directors who are employees of SBAM or its affiliates, and may therefore be
considered interested persons under the 1940 Act.
As of the date hereof directors and officers of the Variable Series Funds,
individually and as a group, beneficially owned less than 1% of the outstanding
shares of the Funds.
INVESTMENT MANAGER
Each Fund retains SBAM to act as its investment manager. SBAM, a
wholly-owned subsidiary of Salomon Brothers Holding Company Inc, which is in
turn wholly-owned by Salomon Smith Barney Holdings Inc, which is in turn
wholly-owned by Travelers Group Inc. ('Travelers'), serves as the investment
manager to numerous individuals and institutions and other investment companies.
The management contract between SBAM and each respective Fund provides that
SBAM shall manage the operations of the Fund, subject to policy established by
the Board of Directors. Pursuant to the applicable management contract, SBAM
manages each Fund's investment portfolio, directs purchases and sales of
portfolio securities and reports thereon to the Fund's officers and directors
regularly. SBAM also provides the office space, facilities, equipment and
personnel necessary to perform the following services for each Fund: Commission
compliance, including record keeping, reporting requirements and registration
statements and proxies; supervision of Fund operations, including coordination
of functions of administrator, transfer agent, custodian, accountants, counsel
and other parties performing services or operational functions for each Fund;
certain administrative and clerical services, including certain accounting
services, facilitation of redemption requests, exchange privileges, and account
adjustments, development of new shareholder services and maintenance of certain
books and records; and certain services to each Fund's shareholders, including
assuring that investments and redemptions are completed efficiently, responding
to shareholder inquiries and maintaining a flow of information to shareholders.
In connection with SBAM's service as investment manager to the Strategic
Bond Fund, Salomon Brothers Asset Management Limited ('SBAM Limited'), whose
business address is Victoria Plaza, 111 Buckingham Palace Road, London SW1W OSB,
England, provides certain advisory services to SBAM relating to currency
transactions and investments in non-dollar-denominated debt securities for the
benefit of the Strategic Bond Fund pursuant to a subadvisory consulting
agreement. At no additional expense to the Strategic Bond Fund, SBAM pays SBAM
Limited, as full compensation for all services provided under the subadvisory
consulting agreement, a fee in an amount equal to the fee payable to SBAM under
its management contract with respect to the Strategic Bond Fund multiplied by
the current value of the net assets of the portion of the assets of the
Strategic Bond Fund as SBAM shall allocate and divided by the current value of
the net assets of the Strategic Bond Fund. Like SBAM, SBAM Limited is a
wholly-owned subsidiary of Salomon Brothers Holding Company Inc. SBAM Limited is
a member of the Investment Management Regulatory Organization Limited in the
United Kingdom and is registered as an investment adviser in the United States
pursuant to the Advisers Act.
Pursuant to a sub-advisory agreement, SBAM has retained SBAM AP as
sub-adviser to the Asia Growth Fund (the 'Asia Subadvisory Agreement'). Subject
to the supervision of SBAM, SBAM AP will have responsibility for the day-to-day
management of the Fund's portfolio. For its services under the Asia Subadvisory
Agreement, SBAM AP is compensated at no additional cost to the Asia Growth Fund
at a rate agreed to between SBAM and SBAM AP from time to time. Like SBAM, SBAM
AP is a wholly-owned subsidiary of Salomon Brothers Holding Company Inc. SBAM AP
is a member of the Hong Kong Securities and Futures Commission and is registered
as an investment adviser in the United States pursuant to the Advisers Act.
Pursuant to a sub-administration agreement, SBAM has retained SBAM Limited to
provide certain administrative services to SBAM relating to the
29
<PAGE>
<PAGE>
Asia Growth Fund (the 'Subadministration Agreement'). For its services under
the Subadministration Agreement, SBAM Limited is compensated by SBAM at no
additional cost to the Asia Growth Fund at an annual rate of .10% of the Asia
Growth Fund's daily net assets.
Investment decisions for a particular Fund are made independently from
those of other funds or accounts managed by SBAM, SBAM AP or SBAM Limited. Such
other funds or accounts may also invest in the same securities as a Fund. If
those funds or accounts are prepared to invest in, or desire to dispose of, the
same security at the same time as a Fund, however, transactions in such
securities will be made, insofar as feasible, for the respective funds and
accounts in a manner deemed equitable to all. In some cases, this procedure may
adversely affect the size of the position obtained for or disposed of by a Fund
or the price paid or received by a Fund. In addition, because of different
investment objectives, a particular security may be purchased for one or more
funds or accounts when one or more funds or accounts are selling the same
security.
As compensation for its services, SBAM receives, on behalf of each Fund, as
described below, a monthly management fee, at an annual rate based upon the
average daily net assets of the Fund as follows: .60% for the U.S. Government
Income Fund; .75% for the High Yield Bond Fund, the Investors Fund and the
Strategic Bond Fund; .80% for the Total Return Fund and the Asia Growth Fund;
and 1.00% for the Capital Fund.
With respect to all Funds except the Asia Growth Fund, for the 1998 fiscal
year, SBAM has voluntarily agreed to impose an expense cap on total fund
operating expenses (exclusive of taxes, interest and extraordinary expenses such
as litigation and indemnification expenses) at 1.25%.
With respect to the Asia Growth Fund, for the 1998 fiscal year, SBAM has
voluntarily agreed to impose an expense cap on total Fund operating expenses
(exclusive of taxes, interest and extraordinary expenses such as litigation and
indemnification expenses) at 1.75%.
The management contract for each of the Funds provides that it will
continue for an initial two year period and thereafter for successive annual
periods; provided that, with respect to each such contract, such continuance is
specifically approved at least annually: (a) by the vote of a majority of the
directors not parties to the management contract or 'interested persons' of such
parties, as defined in the 1940 Act, cast in person at a meeting called for the
specific purpose of voting on such management contract and (b) either by the
Board of Directors or a majority of the outstanding voting securities. The
management contract may be terminated on 60 days' written notice by either party
and will terminate automatically if assigned.
Under the terms of the management contract between each Fund and SBAM,
neither SBAM nor its affiliates shall be liable for losses or damages incurred
by the Fund (including, with respect to the Asia Growth Fund, the imposition of
certain Hong Kong tax liabilities on the Fund), unless such losses or damages
are attributable to the willful misfeasance, bad faith or gross negligence on
either the part of SBAM or its affiliate or from reckless disregard by it of its
obligations and duties under the Management Contract ('disabling conduct'). In
addition, the Asia Growth Fund will indemnify SBAM and its affiliates and hold
each of them harmless against any losses or damages, including the imposition of
certain Hong Kong tax liabilities on the Fund, not resulting from disabling
conduct.
Rule 17j-1 under the 1940 Act requires all registered investment companies
and their investment advisers and principal underwriters to adopt written codes
of ethics and institute procedures designed to prevent 'access persons' (as
defined in Rule 17j-1) from engaging in any fraudulent, deceptive or
manipulative trading practices. The Board of Directors for the Variable Series
Fund has adopted a code of ethics (the 'Fund Code') that incorporates personal
trading policies and procedures applicable to access persons of each Fund, which
includes officers, directors and other specified persons who may make,
participate in or otherwise obtain information concerning the purchase or sale
of securities by the Fund. In addition, the Fund Code attaches and incorporates
personal trading policies and procedures applicable to access persons of the
investment manager and if applicable, any sub-adviser to
30
<PAGE>
<PAGE>
each Fund, which policies serve as such adviser's code of ethics (the
'Adviser Code'). The Fund and Adviser Codes have been designed to address
potential conflict of interests that can arise in connection with the personal
trading activities of investment company and investment advisory personnel.
Pursuant to the Fund and Adviser Codes, access persons are generally
permitted to engage in personal securities transactions, provided that a
transaction does not involve securities that are being purchased or sold, are
being considered for purchase or sale, or are being recommended for purchase or
sale by or for a Fund. In addition, the Adviser Code contains specified
prohibitions and blackout periods for certain categories of securities and
transactions, including a prohibition on short-term trading and purchasing
securities during an initial public offering. The Adviser Code, with certain
exceptions, also requires that access persons obtain preclearance to engage in
personal securities transactions. Finally, the Fund and Adviser Codes require
access persons to report all personal securities transactions periodically.
ADMINISTRATOR
SBAM (in such capacity, the 'Administrator') provides certain
administrative services to each Fund. The services provided by the Administrator
under the applicable administration agreement include certain accounting,
clerical and bookkeeping services, Blue Sky compliance, corporate secretarial
services and assistance in the preparation and filing of tax returns and reports
to shareholders and the SEC. Each Fund pays the Administrator a fee, calculated
daily and payable monthly, at an annual rate of .05% of the applicable Fund's
average daily net assets. The Administrator has delegated its responsibilities
under the administration agreements to one of its affiliates.
DISTRIBUTOR
Salomon Brothers Inc, located at 7 World Trade Center, New York, New York
10048, serves as each Fund's distributor pursuant to a distribution contract.
Salomon Brothers Inc is a wholly owned subsidiary of Salomon Brothers Holding
Company Inc.
EXPENSES
Each Fund's expenses include taxes, interest, fees and salaries of such
Fund directors and officers who are not directors, officers or employees of the
Fund's service contractors, Commission fees, state securities qualification
fees, costs of preparing and printing prospectuses for regulatory purposes and
for distribution to existing shareholders, advisory and administration fees,
charges of the custodian and of the transfer and dividend disbursing agent,
certain insurance premiums, outside auditing and legal expenses, costs of
shareholder reports and shareholder meetings and any extraordinary expenses.
Each Fund also pays for brokerage fees and commissions (if any) in connection
with the purchase and sale of portfolio securities.
31
<PAGE>
<PAGE>
PORTFOLIO TRANSACTIONS
Subject to policy established by the Board of Directors, the investment
manager is primarily responsible for each Fund's portfolio decisions and the
placing of the Fund's portfolio transactions.
Fixed-income, certain short-term securities and certain equities normally
will be purchased or sold from or to issuers directly or to dealers serving as
market makers for the securities at a net price, which may include dealer
spreads and underwriting commissions. Equity securities may also be purchased or
sold through brokers who will be paid a commission.
The general policy of each Fund in selecting brokers and dealers is to
obtain the best results taking into account factors such as the general
execution and operational facilities of the broker or dealer, the type and size
of the transaction involved, the creditworthiness of the broker or dealer, the
stability of the broker or dealer, execution and settlement capabilities, time
required to negotiate and execute the trade, research services and the
investment manager's arrangements related thereto (as described below), overall
performance, the dealer's risk in positioning the securities involved, and the
broker's commissions and dealer's spread or mark-up. While the investment
manager generally seeks the best price in placing its orders, a Fund may not
necessarily be paying the lowest price available.
Notwithstanding the above, in compliance with Section 28(e) of the
Securities Exchange Act of 1934, the investment manager may select brokers who
charge a commission in excess of that charged by other brokers, if the
investment manager determines in good faith that the commission to be charged is
reasonable in relation to the brokerage and research services provided to the
investment manager by such brokers. Research services generally consist of
research or statistical reports or oral advice from brokers and dealers
regarding particular companies, industries or general economic conditions. The
investment manager may also have arrangements with brokers pursuant to which
such brokers provide research services to the investment manager in exchange for
a certain volume of brokerage transactions to be executed by such broker. While
the payment of higher commissions increases a Fund's costs, the investment
manager does not believe that the receipt of such brokerage and research
services significantly reduces its expenses as a Fund's investment manager.
Arrangements for the receipt of research services from brokers may create
conflicts of interest.
Research services furnished to the investment manager by brokers who effect
securities transactions for a Fund may be used by the investment manager in
servicing other investment companies and accounts which it manages. Similarly,
research services furnished to the investment manager by brokers who effect
securities transactions for other investment companies and accounts which the
investment manager manages may be used by the investment manager in servicing a
Fund. Not all of these research services are used by the investment manager in
managing any particular account, including the Funds.
Under the 1940 Act, 'affiliated persons' of a Fund are prohibited from
dealing with it as a principal in the purchase and sale of securities unless an
exemptive order allowing such transactions is obtained from the SEC. However,
each Fund may purchase securities from underwriting syndicates of which the
investment manager or any of its affiliates as defined in the 1940 Act, is a
member under certain conditions, in accordance with Rule 10f-3 promulgated under
the 1940 Act.
Each Fund contemplates that, consistent with the policy of obtaining the
best net results, brokerage transactions may be conducted through 'affiliated
broker/dealers,' as defined in the 1940 Act. The Board of Directors has adopted
procedures in accordance with Rule 17e-1 promulgated under the 1940 Act to
ensure that all brokerage commissions paid to such affiliates are reasonable and
fair in the context of the market in which such affiliates operate. Any such
compensation will be paid in accordance with applicable SEC regulations.
NET ASSET VALUE
In calculating net asset value, portfolio securities listed or traded on
national securities exchanges, or reported by the NASDAQ National Market
reporting system, are valued at the last sale price, or, if there have been no
sales on that day, at the mean of the current bid
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<PAGE>
and ask price which represents the current value of the security.
Over-the-counter securities are valued at the mean of the current bid and ask
price.
Securities that are primarily traded on foreign exchanges generally are
valued at the closing price of such securities on their respective exchanges,
except that if the investment manager is of the opinion that such price would
result in an inappropriate value for a security, including as a result of an
occurrence subsequent to the time a value was so established then the fair value
of those securities will be determined by consideration of other factors by or
under the direction of the Board of Directors or its delegates. In valuing
assets, prices denominated in foreign currencies are converted to U.S. dollar
equivalents at the current exchange rate. Securities may be valued by
independent pricing services which use prices provided by market-makers or
estimates of market values obtained from yield data relating to instruments or
securities with similar characteristics. Short-term obligations with maturities
of 60 days or less are valued at amortized cost, which constitutes fair value as
determined by the Board of Directors. Amortized cost involves valuing an
instrument at its original cost to a Fund and thereafter assuming a constant
amortization to maturity of any discount or premium, regardless of the impact of
fluctuating interest rates on the market value of the instrument. All other
securities and other assets of a Fund will be valued at fair value as determined
in good faith pursuant to procedures adopted by the Board of Directors of each
Fund.
ADDITIONAL PURCHASE INFORMATION
DETERMINATION OF PUBLIC OFFERING PRICE
Each Fund offers its shares to the separate accounts of Participating
Insurance Companies on a continuous basis. The offering price per share of each
Fund is equal to the net asset value per share at the time of purchase.
Individuals may not place orders directly with the Funds. See the prospectus of
the separate account of the Participating Insurance Company or the relevant Plan
documents for more information on the purchase of Fund shares and with respect
to the availability for investment in each Fund.
ADDITIONAL REDEMPTION INFORMATION
Fund shares may be redeemed at any time by the separate accounts of the
Participating Insurance Companies and the Plans. Individuals may not place
redemption orders directly with the Funds. It is the responsibility of the
Participating Insurance Company to properly transmit redemption requests in
accordance with applicable requirements. VA contract holders and VLI policy
holders and Plan Participants should consult their Participating Insurance
Company in this regard. Redemption requests will be effected at the net asset
value of each Fund next determined after receipt of redemption instructions by
such Fund in proper form and in accordance with applicable requirements. The
value of the shares redeemed may be more or less than their original cost,
depending on each Fund's then-current net asset value. No charges are imposed by
the Funds when shares are redeemed.
If the Board of Directors shall determine that it is in the best interests
of the remaining shareholders of a Fund, such Fund may pay the redemption price
in whole, or in part, by a distribution in kind from the portfolio of the Fund,
in lieu of cash, taking such securities at their value employed for determining
such redemption price, and selecting the securities in such manner as the Board
of Directors may deem fair and equitable.
Under the 1940 Act, a Fund may suspend the right of redemption or postpone
the date of payment upon redemption for any period during which the NYSE is
closed, other than customary weekend and holiday closings, or during which
trading on said Exchange is restricted, or during which (as determined by the
SEC by rule or regulation) an emergency exists as a result of which disposal or
valuation of portfolio securities is not reasonably practicable, or for such
other periods as the SEC may permit. (A Fund may also suspend or postpone the
recordation of the transfer of its shares upon the occurrence of any of the
foregoing conditions.)
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ADDITIONAL INFORMATION CONCERNING TAXES
TAXATION OF A FUND
The following discussion is a brief summary of certain additional tax
considerations affecting a Fund and its shareholders. No attempt is made to
present a detailed explanation of all federal, state, local and foreign tax
concerns, and the discussions set forth here and in the Prospectus do not
constitute tax advice. Investors are urged to consult their own tax advisers
with specific questions relating to federal, state, local or foreign taxes.
Each Fund intends to elect to be treated as a regulated investment company
(a 'RIC') under Subchapter M of the Internal Revenue Code of 1986, as amended
(the 'Code'). Qualification as a RIC requires, among other things, that a Fund:
(a) derive at least 90% of its gross income in each taxable year from dividends,
interest, payments with respect to securities loans and gains from the sale or
other disposition of stock or securities, foreign currencies or other income
(including gains from options, futures or forward contracts) derived with
respect to its business of investing in such stock, securities or currencies;
and (b) diversify its holdings so that, at the end of each quarter of each
taxable year: (i) at least 50% of the market value of a Fund's assets is
represented by cash, cash items, U.S. government securities, securities of other
RICs and other securities with such other securities limited, in respect of any
one issuer, to an amount not greater than 5% of the value of a Fund's assets and
10% of the outstanding voting securities of such issuer; and (ii) not more than
25% of the value of its assets is invested in the securities of any one issuer
(other than U.S. government securities or the securities of other RICs).
As a RIC, a Fund will not be subject to federal income tax on its 'net
investment income' (i.e., its investment company taxable income, as that term is
defined in the Code, determined without regard to the deduction for dividends
paid) and 'net capital gain' (the excess of the Fund's net long-term capital
gains over net short-term capital losses), if any, that it distributes in each
taxable year to its shareholders, provided that it distributes 90% of its net
investment income for such taxable year. However, a Fund would be subject to
corporate income tax (currently at a maximum rate of 35%) on any undistributed
net investment income and net capital gain. Each Fund expects to designate
amounts retained as undistributed net capital gain in a notice to its
shareholders who (i) will be required to include in income for United States
federal income tax purposes, as long-term capital gains, their proportionate
shares of the undistributed amount, (ii) will be entitled to credit their
proportionate shares of the 35% tax paid by a Fund on the undistributed amount
against their federal income tax liabilities and to claim refunds to the extent
such credits exceed their liabilities and (iii) will be entitled to increase
their tax basis, for federal income tax purposes, in their shares by an amount
equal to 65% of the amount of undistributed net capital gain included in the
shareholder's income.
A Fund will be subject to a non-deductible 4% excise tax to the extent that
a Fund does not distribute by the end of each calendar year: (a) at least 98% of
its ordinary income for such calendar year; (b) at least 98% of the excess of
its capital gain net income for the one-year period ending, as a general rule,
on October 31 of each year; and (c) 100% of the undistributed ordinary income
and capital gain net income from the preceding calendar year (if any) pursuant
to the calculations in (a) and (b). For this purpose, any income or gain
retained by a Fund that is subject to corporate tax will be considered to have
been distributed by year-end.
A Fund's investment in options, swaps and related transactions, futures
contracts and forward contracts, options on futures contracts and stock indices
and certain other securities, including transactions involving actual or deemed
short sales or foreign exchange gains or losses are subject to many complex and
special tax rules. For example, over-the-counter options on debt securities and
equity options, including options on stock and on narrow-based stock indexes,
will be subject to tax under Section 1234 of the Code, generally producing a
long-term or short-term capital gain or loss upon exercise, lapse or closing out
of the option or sale of the underlying stock or security. By contrast, a Fund's
treatment of certain other options, futures and forward contracts entered into
by a Fund is generally governed by Section 1256 of the Code. These 'Section
1256' positions generally include
34
<PAGE>
<PAGE>
listed options on debt securities, options on broad-based stock indexes, options
on securities indexes, options on futures contracts, regulated futures contracts
and certain foreign currency contracts and options thereon.
Absent a tax election to the contrary, each such Section 1256 position held
by a Fund will be marked-to-market (i.e., treated as if it were sold for fair
market value) on the last business day of a Fund's fiscal year, and all gain or
loss associated with fiscal year transactions and mark-to-market positions at
fiscal year end (except certain currency gain or loss covered by Section 988 of
the Code) will generally be treated as 60% long-term capital gain or loss and
40% short-term capital gain or loss. The effect of Section 1256 mark-to market
rules may be to accelerate income or to convert what otherwise would have been
long-term capital gains into short-term capital gains or short-term capital
losses into long-term capital losses within a Fund. The acceleration of income
on Section 1256 positions may require a Fund to accrue taxable income without
the corresponding receipt of cash. In order to generate cash to satisfy the
distribution requirements of the Code, a Fund may be required to dispose of
portfolio securities that they otherwise would have continued to hold or to use
cash flows from other sources such as the sale of Fund shares. In these ways,
any or all of these rules may affect the amount, character and timing of income
earned and in turn distributed to shareholders by a Fund.
When a Fund holds options or contracts which substantially diminish their
risk of loss with respect to other positions (as might occur in some hedging
transactions), this combination of positions could be treated as a 'straddle'
for tax purposes, resulting in possible deferral of losses, adjustments in the
holding periods of Fund securities and conversion of short-term capital losses
into long-term capital losses. Certain tax elections exist for mixed straddles
i.e., straddles comprised of at least one Section 1256 position and at least one
non-Section 1256 position which may reduce or eliminate the operation of these
straddle rules.
A Fund will monitor its transactions in such options and contracts and may
make certain other tax elections in order to mitigate the effect of the above
rules and to prevent disqualification of the Fund as a RIC under Subchapter M of
the Code.
A Fund may make investments that produce income that is not matched by a
corresponding cash distribution to the Fund, such as investments in pay-in-kind
bonds or in obligations such as certain Brady Bonds or zero-coupon securities
having original issue discount (i.e., an amount equal to the excess of the
stated redemption price of the security at maturity over its issue price), or
market discount (i.e., an amount equal to the excess of the stated redemption
price of the security over the basis of such bond immediately after it was
acquired) if the Fund elects to accrue market discount on a current basis. In
addition, income may continue to accrue for federal income tax purposes with
respect to a non-performing investment. Any such income would be treated as
income earned by a Fund and therefore would be subject to the distribution
requirements of the Code. Because such income may not be matched by a
corresponding cash distribution to a Fund, such Fund may be required to borrow
money or dispose of other securities to be able to make distributions to its
investors. The extent to which a Fund may liquidate securities at a gain may be
limited by the 'short-short test' discussed above. In addition, if an election
is not made to currently accrue market discount with respect to a market
discount bond, all or a portion of any deduction for any interest expense
incurred to purchase or hold such bond may be deferred until such bond is sold
or otherwise disposed.
Under recently enacted legislation, the Fund must generally recognize gain
(but not loss) upon entering into a 'constructive sale' of an appreciated
financial position. A constructive sale of an appreciated financial position is:
(1) a short sale of, (2) an offsetting notional principal contract with respect
to, or (3) a forward or futures contract to deliver, the same or substantially
identical property. In the case of such a transaction, the Fund will be treated
as having entered into the constructive sale when it acquires the related long
position. To the extent provided in regulations, a constructive sale will occur
if the Fund enters into one or more transactions that have substantially the
same effect as the above-described transactions. When a constructive sale
occurs, the Fund will recognize gain as if the position were sold at its fair
market value on the date of the constructive sale and
35
<PAGE>
<PAGE>
immediately repurchased. The basis of the property is adjusted and a new holding
period begins on the date of the constructive sale. Constructive sale treatment
does not apply to a transaction that is closed within 30 days after the end of
the taxable year during which the transaction is entered into. However, if the
transaction is closed during the last 90 days of this period, then the exception
will only apply if the Fund holds the appreciated financial position (without
reducing the risk of loss with respect thereto) throughout the 60-day period
following the closing of the transaction.
If the Fund purchases shares in a 'passive foreign investment company' (a
'PFIC'), the Fund may be subject to U.S. federal income tax on a portion of any
'excess distribution' or gain from the disposition of such shares even if such
income is distributed as a taxable dividend by the Fund to its shareholders.
Additional charges in the nature of interest may be imposed on the Fund in
respect of deferred taxes arising from such distributions or gains. If the Fund
were to invest in a PFIC and elected to treat the PFIC as a 'qualified electing
fund' under the Code (a 'QEF'), in lieu of the foregoing requirements, the Fund
would be required to include in income each year a portion of the ordinary
earnings and net capital gain of the qualified electing fund, even if not
distributed to the Fund. Alternatively, under recently enacted legislation, the
Fund can elect to mark-to-market at the end of each taxable year its shares in a
PFIC; in this case, the Fund would recognize as ordinary income any increase in
the value of such shares, and as ordinary loss any decrease in such value to the
extent it did not exceed prior increases included in income. Under either
election, the Fund might be required to recognize in a year income in excess of
its distributions from PFICs and its proceeds from dispositions of PFIC stock
during that year, and such income would nevertheless be subject to the 90%
distribution requirement and would be taken into account for purposes of the 4%
excise tax.
Since the Funds' shareholders are the separate accounts of Participating
Insurance Companies and the Plans, no discussion is included herein as to the
Federal income tax consequences to VA contract holders, VLI policy holders and
Plan Participants. For information concerning the Federal income tax
consequences to such holders, see the prospectus for such contract or policy or
the applicable Plan documents. VA contract holders, VLI policy holders and Plan
Participants should consult their tax advisers about the application of the
provisions of the tax law described in this statement of additional information
in light of their particular tax situations.
PERFORMANCE DATA
As indicated in the Prospectus, from time to time, a Fund may quote its
'yield,' 'tax-equivalent yield,' 'effective yield,' 'average annual total
return' and/or 'aggregate total return' in advertisements or in reports and
other communications to shareholders and compare its performance figures to
those of other funds or accounts with similar objectives and to relevant
indices.
AVERAGE ANNUAL TOTAL RETURN
A Fund's 'average annual total return' figures, as described and shown in
each Prospectus, are computed according to a formula prescribed by the
Commission. The formula can be expressed as follows:
P(1+T)'pp'n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = Ending Redeemable Value of a hypothetical $1,000 payment made at the
beginning of a 1-5 or 10-year period at the end of such period (or
fractional portion thereof), assuming reinvestment of all dividends
and distributions.
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<PAGE>
AGGREGATE TOTAL RETURN
The 'aggregate total return' figures for each Fund, as described in the
Prospectus, represent the cumulative change in the value of an investment in
Fund shares of such Fund for the specified period and are computed by the
following formula:
AGGREGATE TOTAL RETURN = ERV-P
-----
P
Where: P = a hypothetical initial payment of $10,000.
ERV = Ending Redeemable Value of a hypothetical $10,000 investment made
at the beginning of a 1-, 5-, or 10-year period at the end of such
period (or fractional portion thereof), assuming reinvestment of
all dividends and distributions.
THIRTY DAY YIELD
Certain Funds may advertise the yields for such Funds based on a 30-day (or
one month) period according to the following formula:
a-b
Yield = 2 [(--- + 1)'pp'6 - 1]
cd
Any quotation of performance stated in terms of yield (whether or not based
on a 30-day period) will be given no greater prominence than the information
prescribed under Commission rules. In addition, all advertisements containing
performance data of any kind will include a legend disclosing that such
performance data represents past performance and that the investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
Advertisements and communications may compare a Fund's performance with
that of other mutual funds, as reported by Lipper Analytical Services, Inc. or
similar independent services or financial publications. From time to time,
advertisements and other Fund materials and communications may cite statistics
to reflect a Fund's performance over time utilizing, comparisons to indices.
A Fund's performance will vary from time to time depending upon market
conditions, the composition of its portfolio and operating expenses.
Consequently, any given performance quotation should not be considered
representative of the performance of Fund shares for any specified period in the
future. Because performance will vary, it may not provide a basis for comparing
an investment in Fund shares with certain bank deposits or other investments
that pay a fixed return for a stated period of time. Investors comparing a
Fund's performance with that of other mutual funds should give consideration to
the nature, quality and maturity of the respective investment companies'
portfolio securities and market conditions. An investor's principal is not
guaranteed by any Fund.
CAPITAL STOCK
Pursuant to current interpretations of the 1940 Act, the Fund anticipates
that each Participating Insurance Company will solicit voting instructions from
VA contract and VLI policy owners with respect to any matters that are presented
to a vote of shareholders, and will vote shares in proportion to the voting
instructions received. Plans will vote shares as required by applicable law and
governing Plan documents.
As used in this Statement of Additional Information and the Prospectus, the
term 'majority', when referring to the approvals to be obtained from
shareholders in connection with matters affecting a particular Fund or any other
single portfolio (e.g., approval of investment management contracts) and
requiring a vote under the 1940 Act means the vote of the lesser of: (i) 67% of
the shares of that particular portfolio, represented at a meeting if the holders
of more than 50% of the outstanding shares of such portfolio are present in
person or by proxy; or (ii) more than 50% of the outstanding shares of such
portfolio. Shareholders are entitled to one vote for each full share held and
fractional votes for fractional shares held.
37
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<PAGE>
Shares of each Fund are entitled to such dividends and distributions out of
the assets belonging to that Fund as are declared in the discretion of the Board
of Directors. In determining the net asset value of a Fund, assets belonging to
a Fund are charged with the direct liabilities in respect of that Fund and with
a share of the general liabilities of the investment company which are normally
allocated in proportion to the relative net asset values of the respective Funds
at the time of allocation.
In the event of the liquidation or dissolution of the investment company,
shares of each Fund are entitled to receive the assets attributable to it that
are available for distribution, and a proportionate distribution, based upon the
relative net assets of the Fund, of any general assets not attributable to a
portfolio that are available for distribution. Shareholders are not entitled to
any preemptive rights. All shares, when issued, will be fully paid, non-
assessable, fully transferable and redeemable at the option of the holder.
Subject to the provisions of the Variable Series Funds' charter,
determinations by the Board of Directors as to the direct and allocable
liabilities and the allocable portion of any general assets of the investment
company, with respect to a particular Fund are conclusive.
CUSTODIAN AND TRANSFER AGENT
PNC Bank, located at Airport Business Center, International Court 2, 200
Stevens Drive, Lester, Pennsylvania 19113, serves as each Fund's custodian
except the Asia Growth Fund. The Chase Manhattan Bank, located at 4 Chase
MetroTech Center, Brooklyn, New York 11245, serves as the Asia Growth Fund's
custodian. PNC Bank and The Chase Manhattan Bank (each, a 'Custodian' and
collectively, the 'Custodians'), among other things: maintain a custody account
or accounts in the name of each Fund; receive and deliver all assets for each
Fund upon purchase and upon sale or maturity; collect and receive all income and
other payments and distributions on account of the assets of each Fund; and make
disbursements on behalf of each Fund. The Custodians neither determine the
Funds' investment policies, nor decide which securities each Fund will buy or
sell. For their services, each Custodian receives a monthly fee based upon the
daily average market value of securities held in custody and also receives
securities transaction charges, including out-of-pocket expenses. A Fund may
also periodically enter into arrangements with other qualified custodians with
respect to certain types of securities or other transactions such as repurchase
agreements or derivatives transactions.
First Data Investors Services Group, Inc. (the 'Transfer Agent'), located
at P.O. Box 5127, Westborough, Massachusetts 01581-5127, serves as each Fund's
transfer agent. The Transfer Agent registers and processes transfers of the
Fund's stock, processes purchase and redemption orders, acts as dividend
disbursing agent for the Fund and maintains records and handles correspondence
with respect to shareholder accounts, pursuant to a transfer agency agreement.
For these services, the Transfer Agent receives a monthly fee computed
separately for each Fund and is reimbursed for out-of-pocket expenses.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP ('Price Waterhouse') provides audit services, tax
return preparation and assistance and consultation in connection with review of
Commission filings. Price Waterhouse's address is 1177 Avenue of the Americas,
New York, New York 10036.
COUNSEL
Simpson Thacher & Bartlett (a partnership which includes professional
corporations) serves as counsel to each Fund, and is located at 425 Lexington
Avenue, New York, New York 10017-3954.
Piper & Marbury L.L.P. of Baltimore, Maryland has issued an opinion
regarding the valid issuance of shares being offered for sale pursuant to the
Funds' Prospectus.
38
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<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholder and Board of Directors of
Salomon Brothers Variable Series Funds, Inc.
In our opinion, the accompanying statements of assets and liabilities present
fairly, in all material respects, the financial position of Salomon Brothers
Variable Strategic Bond Fund, Salomon Brothers Variable Total Return Fund,
Salomon Brothers Variable Investors Fund and Salomon Brothers Variable Capital
Fund (four of the portfolios constituting Salomon Brothers Variable Series
Funds, Inc., hereafter referred to as the "Funds") at December 12, 1997, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Funds' management; our responsibility
is to express an opinion on these financial statements based on our audit. We
conducted our audit of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
December 12, 1997
39
<PAGE>
<PAGE>
SALOMON BROTHERS VARIABLE SERIES FUNDS, INC.
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 12, 1997
<TABLE>
<CAPTION>
Strategic Total
Bond Return Investors Capital
Fund Fund Fund Fund
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets:
Cash $10 $99,970 $10 $10
Deferred organization expenses
(Note 3) 31,250 31,250 31,250 31,250
---------------------------------------------------------------------------------------
Total assets 31,260 131,220 31,260 31,260
---------------------------------------------------------------------------------------
Liabilities:
Organization expenses payable 31,250 31,250 31,250 31,250
---------------------------------------------------------------------------------------
Net assets $10 $99,970 $10 $10
=======================================================================================
Net Assets consist of:
Paid-in capital $10 $99,970 $10 $10
---------------------------------------------------------------------------------------
Net assets $10 $99,970 $10 $10
=======================================================================================
Shares outstanding 1 9,997 1 1
=======================================================================================
Net asset value, offering and
redemption price per share $ 10.00 $ 10.00 $ 10.00 $ 10.00
=======================================================================================
</TABLE>
See accompanying notes to financial statements.
40
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<PAGE>
SALOMON BROTHERS VARIABLE SERIES FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION
Salomon Brothers Variable Series Funds, Inc. ( the "Series"), an open-end
management investment company, consists of Salomon Brothers Variable U.S.
Government Income Fund (the "U.S. Government Income Fund"), Salomon Brothers
Variable High Yield Bond Fund ( the "High Yield Bond Fund'), Salomon Brothers
Variable Strategic Bond Fund (the "Strategic Bond Fund"), Salomon Brothers
Variable Total Return Fund (the "Total Return Fund"), Salomon Brothers Variable
Asia Growth Fund (the "Asia Growth Fund"), Salomon Brothers Variable Investors
Fund (the "Investors Fund") and Salomon Brothers Variable Capital Fund (the
"Capital Fund") (each a "Fund" and collectively, the "Funds"). The Series was
incorporated in Maryland on October 1, 1997. Each of the Funds, except Asia
Growth Fund and Capital Fund, is classified as a diversified fund under the
Investment Company Act of 1940, as amended (the "1940 Act"). The Funds are
offered exclusively as funding vehicles for Variable Annuity ("VA") contracts
and Variable Life Insurance ("VLI") Policies offered through separate accounts
of various Life Insurance Companies ("Participating Insurance Companies") and
for Qualified Pension and Retirement Plans.
As of December 12, 1997, the Series had no other activity except for matters
relating to its organization and the purchase by SBAM, the Funds' investment
adviser, of 10 shares in each of the Strategic Bond Fund, the Investors Fund and
the Capital Fund and 9,997 shares of the Total Return Fund.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts and disclosures. Actual results could differ from
those estimates.
NOTE 2. MANAGEMENT AND ADVISORY FEES AND OTHER TRANSACTIONS
Each Fund has entered into an investment management contract with Salomon
Brothers Asset Management Inc. ("SBAM"), a wholly-owned subsidiary of Salomon
Smith Barney Holdings, Inc. ("Salomon Smith Barney"), which is in turn
wholly-owned by Travelers Group ("Travelers"). Pursuant to the respective
contracts, SBAM manages the investment and reinvestment of each Fund's assets.
SBAM also furnishes office space, personnel and certain facilities required for
the performance by SBAM of certain additional services provided by it to each
Fund under the applicable management contract.
As compensation for its services, each Fund will pay SBAM a monthly fee at an
annual rate based on its average daily net assets as follows:
<TABLE>
<CAPTION>
Annual Rate
<S> <C>
U.S. Government Income Fund .60%
High Yield Bond Fund .75%
Strategic Bond Fund .75%
Total Return Fund .80%
Asia Growth Fund .80%
Investors Fund .75%
Capital Fund 1.00%
</TABLE>
41
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<PAGE>
2
SALOMON BROTHERS VARIABLE SERIES FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE 2. MANAGEMENT AND ADVISORY FEES AND OTHER TRANSACTIONS (continued)
In connection with SBAM's service as investment manager to the Strategic Bond
Fund, SBAM Limited, whose business address is in London, England, provides
certain advisory services to SBAM in currency transactions and investments in
non-dollar debt securities for that Fund's benefit at no additional cost.
SBAM has retained SBAM AP, whose business address is in Hong Kong, to act as
sub-advisor to the Asia Growth Fund at no additional cost to the Fund.
Like SBAM, both SBAM Limited and SBAM AP are each indirect, wholly-owned
subsidiaries of Salomon Smith Barney.
SBAM has voluntarily agreed to impose an expense cap on the total operating
expenses (exclusive of taxes, interest and extraordinary expenses such as
litigation and indemnification expenses) for each Fund, except the Asia Growth
Fund, at 1.25% for the year ending December 31, 1998. With respect to the Asia
Growth Fund, SBAM has agreed to impose an expense cap on total operating
expenses (exclusive of taxes, interest and extraordinary expenses such as
litigation and indemnification expenses) at 1.75% for the year ending December
31, 1998.
Salomon Brothers Inc, a wholly-owned subsidiary of Salomon Smith Barney, serves
as the Funds Distributor. Salomon Brothers Inc from time to time may receive
commissions from the Funds in connection with the execution of portfolio
transactions on behalf of the Funds.
Each Fund will enter into an Administration agreement with SBAM. Under these
agreements, SBAM will provide certain accounting, clerical, and bookkeeping
services, Blue Sky reports, corporate secretarial and assistance in the
preparation and filing of tax returns and reports to shareholders and various
regulatory agencies. As compensation for its services, each Fund will pay SBAM a
monthly fee at an annual rate of .05% of the applicable Fund's average daily net
assets.
NOTE 3. ORGANIZATION EXPENSES
Organization expenses estimated at $125,000 have been allocated appropriately to
and capitalized by the respective Funds. These expenses will be deferred and
amortized ratably over a five-year period from commencement of operations. In
the event that any of the shares representing initial capital of the Funds are
redeemed during the amortization period by any holder thereof, then such Fund's
remaining unamortized organization costs will be reduced in the same ratio as
the number of such shares being redeemed bears to the number of initial shares
outstanding immediately prior to redemption.
42
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<PAGE>
SALOMON BROTHERS VARIABLE SERIES FUNDS INC
PART C.
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Not applicable.
(b) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ --------------------------------------------------------------------------------------------------------
<C> <S>
1 (a) -- Articles of Incorporation of Registrant.*
2 (a) -- Registrant's By-Laws.*
3 -- None.
4 (a) -- None.
5 (a) -- Form of Management Contract between Registrant and Salomon Brothers Asset Management Inc relating to
the Salomon Brothers Variable U.S. Government Income Fund.
5 (b) -- Form of Management Contract between Registrant and Salomon Brothers Asset Management Inc relating to
the Salomon Brothers Variable High Yield Bond Fund.
5 (c) -- Form of Management Contract between Registrant and Salomon Brothers Asset Management Inc relating to
the Salomon Brothers Variable Strategic Bond Fund.
5 (d) -- Form of Management Contract between Registrant and Salomon Brothers Asset Management Inc relating to
the Salomon Brothers Variable Total Return Fund.
5 (e) -- Form of Management Contract between Registrant and Salomon Brothers Asset Management Inc relating to
the Salomon Brothers Variable Asia Growth Fund.
5 (f) -- Form of Management Contract between Registrant and Salomon Brothers Asset Management Inc relating to
the Salomon Brothers Variable Investors Fund.
5 (g) -- Form of Management Contract between Registrant and Salomon Brothers Asset Management Inc relating to
the Salomon Brothers Variable Capital Fund.
5 (h) -- Form of Subadvisory Consulting Agreement between Salomon Brothers Asset Management Inc and Salomon
Brothers Asset Management Limited relating to the Salomon Brothers Variable Strategic Bond Fund.
5 (i) -- Form of Subadvisory Agreement between Salomon Brothers Asset Management and Salomon Brothers Asset
Management Asia Pacific relating to the Salomon Brothers Variable Asia Growth Fund.
6 (a) -- Form of Distribution Agreement between Registrant and Salomon Brothers Inc.
7 -- None.
8 (a) -- Form of Custodian Agreement between Registrant and PNC Bank.
8 (b) -- Form of Custodian Agreement between Registrant and The Chase Manhattan Bank.
9 (a) -- Form of Transfer Agency Agreement between Registrant and First Data Investors Services Group, Inc.
9 (b) -- Form of Administration Agreement between Registrant and Salomon Brothers Asset Management Inc
9 (c) -- Form of Participation Agreement.
10 -- Opinion and Consent of Counsel of Piper & Marbury L.L.P. as to the Legality of Securities Being
Registered.
11 -- Consents of Independent Accountants.
12 -- None.
13 (a) -- Share Purchase Agreement.
14 -- None.
15 -- None.
16 -- None.
17 -- None.
18 -- None.
</TABLE>
- ------------
* Previously filed.
C-1
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<PAGE>
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Entities within the Salomon group own the outstanding shares of the U.S.
Government Income Fund, High Yield Bond Fund, Strategic Bond Fund, Asia Growth
Fund, Investors Fund, Capital Fund and Total Return Fund and, therefore may be
deemed to be control persons of such Funds. As a result, such Funds may be
deemed to be under common control.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
As of December 12, 1997, each Fund had one record holder of securities.
ITEM 27. INDEMNIFICATION.
Reference is made to Article VIII of Registrant's Articles of
Incorporation, Article IV of Registrant's By-Laws and Section 4 of the
Distribution Agreements between the Registrant and Salomon Smith Barney.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the 'Securities Act'), may be permitted to directors,
officers and controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant understands that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
The list required by this Item 28 of officers and directors of SBAM,
Salomon Brothers Asset Management AP ('SBAM AP') and Salomon Brothers Asset
Management Limited ('SBAM Limited'), together with information as to any other
business, profession, vocation or employment of a substantial nature engaged in
by such officers and directors during the past two years, is incorporated by
reference to Schedules A and D of their respective FORM ADV filed by SBAM, SBAM
AP and SBAM Limited, respectively, pursuant to the Advisers Act (SEC File Nos.
801-32046, 801-51393 and 801-43335, respectively).
ITEM 29. PRINCIPAL UNDERWRITER
(a) Salomon Brothers Inc currently acts as distributor for, in addition to
the Registrant, Salomon Brothers Capital Fund Inc, Salomon Brothers Investors
Fund, Salomon Brothers Series Funds, Salomon Brothers Institutional Series Funds
Inc and Salomon Brothers Opportunity Fund Inc.
(b) The information required by this Item 29 with respect to each director,
officer or partner of Salomon Brothers Inc is incorporated by reference to
Schedule A of Form BD filed by Salomon Brothers Inc pursuant to the Securities
Exchange Act of 1934 (SEC File No. 8-26920).
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
(1) Salomon Brothers Asset Management Inc
7 World Trade Center
New York, New York 10048
(2) First Data Investors Services Group, Inc.
P.O. Box 5127
Westborough, Massachusetts 01581-5127
C-2
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ITEM 31. MANAGEMENT SERVICES.
Not applicable.
ITEM 32. UNDERTAKINGS.
(a) Not applicable.
(b) The Registrant undertakes to file a post-effective amendment containing
financial statements as of a reasonably current date, which need not be
certified, within four to six months from the date of commencement of investment
operations for each of the Funds.
(c) Registrant undertakes to furnish to each person to whom a prospectus is
delivered a copy of Registrant's latest annual report to shareholders upon
request and without charge.
(d) Registrant hereby undertakes to call a meeting of shareholders for the
purpose of voting upon the question of removal of one or more of Registrant's
directors when requested in writing to do so by the holders of at least 10% of
Registrant's outstanding shares of common stock and, in connection with such
meeting, to assist in communications with other shareholders in this regard, as
provided under Section 16(c) of the Investment Company Act of 1940, as amended.
C-3
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, and
the Investment Company Act of 1940, as amended, the Registrant has duly caused
this Amendment to this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, and State of
New York, on the 12th day of December, 1997.
SALOMON BROTHERS VARIABLE
SERIES FUNDS INC
(Registrant)
By /s/ MICHAEL S. HYLAND
...................................
MICHAEL S. HYLAND
PRESIDENT
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------------- ---------------------------------------------- ------------------
<S> <C> <C>
/s/ MICHAEL S. HYLAND Director and President (principal executive December 12, 1997
........................................ officer)
(MICHAEL S. HYLAND)
/s/ THOMAS W. BROCK Director December 12, 1997
........................................
(THOMAS W. BROCK)
/s/ ALAN MANDEL Treasurer (principal financial and accounting December 12, 1997
........................................ officer)
(ALAN MANDEL)
</TABLE>
STATEMENT OF DIFFERENCES
------------------------
The service mark symbol shall be expressed as......................... 'sm'
Characters normally expressed as superscript shall be preceded by..... 'pp'
<PAGE>
<PAGE>
MANAGEMENT CONTRACT
SALOMON BROTHERS VARIABLE SERIES FUNDS INC
7 World Trade Center
New York, New York 10048
January 2, 1998
Salomon Brothers Asset Management Inc
7 World Trade Center
New York, New York 10048
Dear Sirs:
This will confirm the agreement between the undersigned (the
"Company") and you (the "Investment Manager") as follows:
1. The Company is an open-end investment company which currently
has seven investment portfolios -- Salomon Brothers Variable U.S. Government
Income Fund, Salomon Brothers Variable High Yield Bond Fund, Salomon Brothers
Variable Strategic Bond Fund, Salomon Brothers Variable Total Return Fund,
Salomon Brothers Variable Asia Growth Fund, Salomon Brothers Variable Investors
Fund and Salomon Brothers Variable Capital Fund. The Company proposes to engage
in the business of investing and reinvesting the assets of the Salomon Brothers
Variable U.S. Government Income Fund (the "Fund") in the manner and in
accordance with the investment objective and limitations specified in the
Company's Articles of Incorporation, (the "Articles") and the currently
effective prospectus, including the documents incorporated by reference therein
(the "Prospectus"), relating to the Company and the Fund, included in the
Company's Registration Statement, as amended from time to time (the
"Registration Statement"), filed by the Company under the Investment Company Act
of 1940, as amended (the "1940 Act"), and the Securities Act of 1933, as
amended. Copies of the documents referred to in the preceding sentence have been
furnished to the Investment Manager. Any amendments to these documents shall be
furnished to the Investment Manager.
2. The Company employs the Investment Manager to (a) make
investment strategy decisions for the Fund, (b) manage the investing and
reinvesting of the Fund's assets as specified in paragraph 1, (c) place purchase
and sale orders on behalf of the Fund and (d) provide continuous supervision of
the Fund's investment portfolios. At the Investment Manager's own expense and
subject to its supervision, the Investment Manager may delegate the performance
of all or a part of its services under this agreement to others.
3. (a) The Investment Manager shall, at its expense, (i) provide
the Fund with office space, office facilities and personnel reasonably necessary
for performance of the services to be provided by the Investment Manager
pursuant to this Agreement, (ii) provide the Fund with persons satisfactory to
the Company's Board of Directors to serve as officers
<PAGE>
<PAGE>
2
and employees of the Fund and (iii) provide the office space, facilities,
equipment and personnel necessary to perform the following services for the
Fund: (A) review purchases and sales of portfolio instruments and review the
Fund's portfolios to assess compliance with the Fund's stated investment
objectives and limitations and compliance with the 1940 Act and other applicable
laws and regulations, (B) record keeping, reporting, and maintaining
registration statements and proxy statements to the extent such records, reports
and documents are not maintained or furnished by the Fund's transfer agent,
custodian, administrative and accounting services agent, or other agents
employed by the Fund, (C) supervision of Fund operations, including coordination
of functions of transfer agent, custodian, administrative and accounting
services agent, accountants, counsel and other parties performing services or
operational functions for the Fund; and (D) certain administrative and clerical
services not otherwise provided by the Fund's transfer agent, custodian,
administrative and accounting services agent, or other agents employed by the
Fund.
(b) Except as provided in subparagraph (a), the Company shall be
responsible for all of the Fund's expenses and liabilities, including
organizational expenses; taxes; interest; fees (including fees paid to its
directors who are not affiliated with the Investment Manager or any of its
affiliates); fees payable to the Securities and Exchange Commission; state
securities qualification fees; costs of preparing and printing prospectuses for
regulatory purposes and for distribution to existing shareholders; advisory and
administration fees; charges of the custodian, transfer agent, administrative
and accounting services agent and any other agent employed by the Fund;
insurance premiums; auditing and legal expenses; costs of shareholders' reports
and shareholders' meetings; charges and expenses of any entity used for pricing
the Fund's portfolio securities and calculating the net asset value of the
Fund's shares; any extraordinary expenses; brokerage fees and commissions, if
any, in connection with the purchase or sale of portfolio securities; and
payments to the Fund's distributor for activities intended to result in the sale
of Fund shares.
4. As manager of the Fund's assets, the Investment Manager shall
make investments for the Fund's accounts in accordance with the investment
objectives and limitations set forth in the Articles, the Prospectus, the 1940
Act, the provisions of the Internal Revenue Code of 1986, as amended, relating
to regulated investment companies, applicable banking laws and regulations, and
policy decisions adopted by the Company's Board of Directors from time to time.
The Investment Manager shall advise the Company's officers and Board of
Directors, at such times as the Company's Board of Directors may specify, of
investments made for the Fund's account and shall, when requested by the
Company's officers or Board of Directors, supply the reasons for making such
investments.
5. The Investment Manager is authorized on behalf of the Company,
from time to time when deemed to be in the best interests of the Company and to
the extent permitted by applicable law, to purchase and/or sell securities in
which the Investment Manager or any of its affiliates underwrites, deals in
and/or makes a market and/or may perform or seek to perform investment banking
services for issuers of such securities. The Investment Manager is further
authorized, to the extent permitted by applicable law, to select brokers for the
execution of trades for the Company, which broker may be an affiliate of the
Investment Manager, provided that the affiliated broker's charge for the
transaction is
<PAGE>
<PAGE>
3
reasonable and fair compared to the usual and customary levels charged by other
brokers in connection with comparable transactions involving similar securities.
6. In consideration of the Investment Manager's undertaking to
render the services described in this agreement, the Company agrees that the
Investment Manager shall not be liable under this agreement for any error of
judgment or mistake of law or for any loss suffered by the Company in connection
with the performance of this agreement, provided that nothing in this agreement
shall be deemed to protect or purport to protect the Investment Manager against
any liability to the Company or its stockholders to which the Investment Manager
would otherwise be subject by reason of willful misfeasance, bad faith or gross
negligence in the performance of its duties under this agreement or by reason of
its reckless disregard of its obligations and duties hereunder ("disabling
conduct"). The Fund will indemnify the Investment Manager against, and hold it
harmless from, any and all losses, claims, damages, liabilities or expenses,
including reasonable counsel fees and expenses and any amounts paid in
satisfaction of judgments, in compromise or as fines or penalties, not resulting
from disabling conduct by the Investment Manager. Indemnification shall be made
only following: (i) a final decision on the merits by a court or other body
before whom the proceeding was brought that the Investment Manager was not
liable by reason of disabling conduct, or (ii) in the absence of such a
decision, a reasonable determination, based upon a review of the facts, that the
Investment Manager was not liable by reason of disabling conduct by (a) the vote
of a majority of a quorum of directors of the Company who are neither
"interested persons" of the Company nor parties to the proceeding
("disinterested non-party directors"), or (b) an independent legal counsel in a
written opinion. The Investment Manager shall be entitled to advances from the
Fund for payment of the reasonable expenses incurred by it in connection with
the matter as to which it is seeking indemnification in the manner and to the
fullest extent permissible under law. The Investment Manager shall provide to
the Fund a written affirmation of its good faith belief that the standard of
conduct necessary for indemnification by the Fund has been met and a written
undertaking to repay any such advance if it should ultimately be determined that
the standard of conduct has not been met. In addition, at least one of the
following additional conditions shall be met: (a) the Investment Manager shall
provide security in form and amount acceptable to the Fund for its undertaking;
(b) the Fund is insured against losses arising by reason of the advance; or (c)
a majority of a quorum of disinterested non-party directors, or independent
legal counsel, in a written opinion, shall have determined, based on a review of
facts readily available to the Fund at the time the advance is proposed to be
made, that there is reason to believe that the Investment Manager will
ultimately be found to be entitled to indemnification. For purposes of this
paragraph 6 only, the term "Investment Manager" shall be deemed to include
affiliates of the Investment Manager to whom the Investment Manager has
delegated the exercise of all or any of its powers, discretion and duties under
this agreement.
7. In consideration of the services to be rendered by the
Investment Manager under this agreement, each Fund shall pay the Investment
Manager a monthly fee on the first business day of each month at an annual rate
0.60% of the average daily value (as determined on the days and at the time set
forth in the Prospectus for determining net asset value per share) of the Fund's
net assets during the preceding month. If the fee payable to the Investment
Manager pursuant to this paragraph 7 begins to accrue before the end of any
<PAGE>
<PAGE>
4
month or if this agreement terminates before the end of any month, the fee for
the period from such date to the end of such month or from the beginning of such
month to the date of termination, as the case may be, shall be prorated
according to the proportion which such period bears to the full month in which
such effectiveness or termination occurs. For purposes of calculating each such
monthly fee, the value of the Fund's net assets shall be computed in the manner
specified in the Prospectus and the Articles for the computation of the value of
the Fund's net assets in connection with the determination of the net asset
value of shares of the Fund's capital stock.
8. This agreement shall continue in effect until two years from
the date hereof and thereafter for successive annual periods, provided that such
continuance is specifically approved at least annually (a) by the vote of a
majority of the Fund's outstanding voting securities (as defined in the 1940
Act) or by the Company's Board of Directors and (b) by the vote, cast in person
at a meeting called for the purpose, of a majority of the Company's directors
who are not parties to this agreement or "interested persons" (as defined in the
1940 Act) of any such party. This agreement may be terminated at any time,
without the payment of any penalty, by a vote of a majority of the Fund's
outstanding voting securities (as defined in the 1940 Act) or by a vote of a
majority of the Company's entire Board of Directors on 60 days' written notice
to the Investment Manager or by the Investment Manager on 60 days' written
notice to the Company. This agreement shall terminate automatically in the event
of its assignment (as defined in the 1940 Act). The respective agreements,
covenants, indemnities and other statements set forth in Section 6 hereof shall
remain in full force and effect regardless of any termination or cancellation of
this agreement. All property of the Fund shall be returned to the Fund as soon
as reasonably practicable after the termination of this agreement.
9. Upon expiration or earlier termination of this agreement, the
Company shall, if reference to "Salomon Brothers" is made in the corporate name
of the Company or in the name of the Fund and if the Investment Manager requests
in writing, as promptly as practicable change its corporate name and the name of
the Fund so as to eliminate all reference to "Salomon Brothers", and thereafter
the Company and the Fund shall cease transacting business in any corporate name
using the words "Salomon Brothers" or any other reference to the Investment
Manager or "Salomon Brothers". The foregoing rights of the Investment Manager
and obligations of the Company shall not deprive the Investment Manager, or any
affiliate thereof which has "Salomon Brothers" in its name, of, but shall be in
addition to, any other rights or remedies to which the Investment Manager and
any such affiliate may be entitled in law or equity by reason of any breach of
this agreement by the Company, and the failure or omission of the Investment
Manager to request a change of the Company's or the Fund's name or a cessation
of the use of the name of "Salomon Brothers" as described in this paragraph 10
shall not under any circumstances be deemed a waiver of the right to require
such change or cessation at any time thereafter for the same or any subsequent
breach.
10. Except to the extent necessary to perform the Investment
Manager's obligations under this agreement, nothing herein shall be deemed to
limit or restrict the right of the Investment Manager, or any affiliate of the
Investment Manager, or any employee of
<PAGE>
<PAGE>
5
the Investment Manager, to engage in any other business or to devote time and
attention to the management or other aspects of any other business, whether of a
similar or dissimilar nature, or to render services of any kind to any other
corporation, firm, individual or association.
11. This agreement shall be governed by the laws of the State of
New York.
<PAGE>
<PAGE>
6
If the foregoing correctly sets forth the agreement between the
Company and the Investment Manager, please so indicate by signing and returning
to the Company the enclosed copy hereof.
Very truly yours,
SALOMON BROTHERS SERIES VARIABLE
FUNDS INC
By:
------------------------------
Name: Michael S. Hyland
Title: President
ACCEPTED:
SALOMON BROTHERS ASSET
MANAGEMENT INC
By:
---------------------------------
Name: Michael S. Hyland
Title: President
<PAGE>
<PAGE>
MANAGEMENT CONTRACT
SALOMON BROTHERS VARIABLE SERIES FUNDS INC
7 World Trade Center
New York, New York 10048
January 2, 1998
Salomon Brothers Asset Management Inc
7 World Trade Center
New York, New York 10048
Dear Sirs:
This will confirm the agreement between the undersigned (the
"Company") and you (the "Investment Manager") as follows:
1. The Company is an open-end investment company which currently
has seven investment portfolios -- Salomon Brothers Variable U.S. Government
Income Fund, Salomon Brothers Variable High Yield Bond Fund, Salomon Brothers
Variable Strategic Bond Fund, Salomon Brothers Variable Total Return Fund,
Salomon Brothers Variable Asia Growth Fund, Salomon Brothers Variable Investors
Fund and Salomon Brothers Variable Capital Fund. The Company proposes to engage
in the business of investing and reinvesting the assets of the Salomon Brothers
Variable High Yield Bond Fund (the "Fund") in the manner and in accordance with
the investment objective and limitations specified in the Company's Articles of
Incorporation, (the "Articles") and the currently effective prospectus,
including the documents incorporated by reference therein (the "Prospectus"),
relating to the Company and the Fund, included in the Company's Registration
Statement, as amended from time to time (the "Registration Statement"), filed by
the Company under the Investment Company Act of 1940, as amended (the "1940
Act"), and the Securities Act of 1933, as amended. Copies of the documents
referred to in the preceding sentence have been furnished to the Investment
Manager. Any amendments to these documents shall be furnished to the Investment
Manager.
2. The Company employs the Investment Manager to (a) make
investment strategy decisions for the Fund, (b) manage the investing and
reinvesting of the Fund's assets as specified in paragraph 1, (c) place purchase
and sale orders on behalf of the Fund and (d) provide continuous supervision of
the Fund's investment portfolios. At the Investment Manager's own expense and
subject to its supervision, the Investment Manager may delegate the performance
of all or a part of its services under this agreement to others.
3. (a) The Investment Manager shall, at its expense, (i) provide
the Fund with office space, office facilities and personnel reasonably necessary
for performance of the services to be provided by the Investment Manager
pursuant to this Agreement, (ii) provide the Fund with persons satisfactory to
the Company's Board of Directors to serve as officers
<PAGE>
<PAGE>
2
and employees of the Fund and (iii) provide the office space, facilities,
equipment and personnel necessary to perform the following services for the
Fund: (A) review purchases and sales of portfolio instruments and review the
Fund's portfolios to assess compliance with the Fund's stated investment
objectives and limitations and compliance with the 1940 Act and other applicable
laws and regulations, (B) record keeping, reporting, and maintaining
registration statements and proxy statements to the extent such records, reports
and documents are not maintained or furnished by the Fund's transfer agent,
custodian, administrative and accounting services agent, or other agents
employed by the Fund, (C) supervision of Fund operations, including coordination
of functions of transfer agent, custodian, administrative and accounting
services agent, accountants, counsel and other parties performing services or
operational functions for the Fund; and (D) certain administrative and clerical
services not otherwise provided by the Fund's transfer agent, custodian,
administrative and accounting services agent, or other agents employed by the
Fund.
(b) Except as provided in subparagraph (a), the Company shall be
responsible for all of the Fund's expenses and liabilities, including
organizational expenses; taxes; interest; fees (including fees paid to its
directors who are not affiliated with the Investment Manager or any of its
affiliates); fees payable to the Securities and Exchange Commission; state
securities qualification fees; costs of preparing and printing prospectuses for
regulatory purposes and for distribution to existing shareholders; advisory and
administration fees; charges of the custodian, transfer agent, administrative
and accounting services agent and any other agent employed by the Fund;
insurance premiums; auditing and legal expenses; costs of shareholders' reports
and shareholders' meetings; charges and expenses of any entity used for pricing
the Fund's portfolio securities and calculating the net asset value of the
Fund's shares; any extraordinary expenses; brokerage fees and commissions, if
any, in connection with the purchase or sale of portfolio securities; and
payments to the Fund's distributor for activities intended to result in the sale
of Fund shares.
4. As manager of the Fund's assets, the Investment Manager shall
make investments for the Fund's accounts in accordance with the investment
objectives and limitations set forth in the Articles, the Prospectus, the 1940
Act, the provisions of the Internal Revenue Code of 1986, as amended, relating
to regulated investment companies, applicable banking laws and regulations, and
policy decisions adopted by the Company's Board of Directors from time to time.
The Investment Manager shall advise the Company's officers and Board of
Directors, at such times as the Company's Board of Directors may specify, of
investments made for the Fund's account and shall, when requested by the
Company's officers or Board of Directors, supply the reasons for making such
investments.
5. The Investment Manager is authorized on behalf of the Company,
from time to time when deemed to be in the best interests of the Company and to
the extent permitted by applicable law, to purchase and/or sell securities in
which the Investment Manager or any of its affiliates underwrites, deals in
and/or makes a market and/or may perform or seek to perform investment banking
services for issuers of such securities. The Investment Manager is further
authorized, to the extent permitted by applicable law, to select brokers for the
execution of trades for the Company, which broker may be an affiliate of the
Investment Manager, provided that the affiliated broker's charge for the
transaction is
<PAGE>
<PAGE>
3
reasonable and fair compared to the usual and customary levels charged by other
brokers in connection with comparable transactions involving similar securities.
6. In consideration of the Investment Manager's undertaking to
render the services described in this agreement, the Company agrees that the
Investment Manager shall not be liable under this agreement for any error of
judgment or mistake of law or for any loss suffered by the Company in connection
with the performance of this agreement, provided that nothing in this agreement
shall be deemed to protect or purport to protect the Investment Manager against
any liability to the Company or its stockholders to which the Investment Manager
would otherwise be subject by reason of willful misfeasance, bad faith or gross
negligence in the performance of its duties under this agreement or by reason of
its reckless disregard of its obligations and duties hereunder ("disabling
conduct"). The Fund will indemnify the Investment Manager against, and hold it
harmless from, any and all losses, claims, damages, liabilities or expenses,
including reasonable counsel fees and expenses and any amounts paid in
satisfaction of judgments, in compromise or as fines or penalties, not resulting
from disabling conduct by the Investment Manager. Indemnification shall be made
only following: (i) a final decision on the merits by a court or other body
before whom the proceeding was brought that the Investment Manager was not
liable by reason of disabling conduct, or (ii) in the absence of such a
decision, a reasonable determination, based upon a review of the facts, that the
Investment Manager was not liable by reason of disabling conduct by (a) the vote
of a majority of a quorum of directors of the Company who are neither
"interested persons" of the Company nor parties to the proceeding
("disinterested non-party directors"), or (b) an independent legal counsel in a
written opinion. The Investment Manager shall be entitled to advances from the
Fund for payment of the reasonable expenses incurred by it in connection with
the matter as to which it is seeking indemnification in the manner and to the
fullest extent permissible under law. The Investment Manager shall provide to
the Fund a written affirmation of its good faith belief that the standard of
conduct necessary for indemnification by the Fund has been met and a written
undertaking to repay any such advance if it should ultimately be determined that
the standard of conduct has not been met. In addition, at least one of the
following additional conditions shall be met: (a) the Investment Manager shall
provide security in form and amount acceptable to the Fund for its undertaking;
(b) the Fund is insured against losses arising by reason of the advance; or (c)
a majority of a quorum of disinterested non-party directors, or independent
legal counsel, in a written opinion, shall have determined, based on a review of
facts readily available to the Fund at the time the advance is proposed to be
made, that there is reason to believe that the Investment Manager will
ultimately be found to be entitled to indemnification. For purposes of this
paragraph 6 only, the term "Investment Manager" shall be deemed to include
affiliates of the Investment Manager to whom the Investment Manager has
delegated the exercise of all or any of its powers, discretion and duties under
this agreement.
7. In consideration of the services to be rendered by the
Investment Manager under this agreement, each Fund shall pay the Investment
Manager a monthly fee on the first business day of each month at an annual rate
0.75% of the average daily value (as determined on the days and at the time set
forth in the Prospectus for determining net asset value per share) of the Fund's
net assets during the preceding month. If the fee payable to the Investment
Manager pursuant to this paragraph 7 begins to accrue before the end of any
<PAGE>
<PAGE>
4
month or if this agreement terminates before the end of any month, the fee for
the period from such date to the end of such month or from the beginning of such
month to the date of termination, as the case may be, shall be prorated
according to the proportion which such period bears to the full month in which
such effectiveness or termination occurs. For purposes of calculating each such
monthly fee, the value of the Fund's net assets shall be computed in the manner
specified in the Prospectus and the Articles for the computation of the value of
the Fund's net assets in connection with the determination of the net asset
value of shares of the Fund's capital stock.
8. This agreement shall continue in effect until two years from
the date hereof and thereafter for successive annual periods, provided that such
continuance is specifically approved at least annually (a) by the vote of a
majority of the Fund's outstanding voting securities (as defined in the 1940
Act) or by the Company's Board of Directors and (b) by the vote, cast in person
at a meeting called for the purpose, of a majority of the Company's directors
who are not parties to this agreement or "interested persons" (as defined in the
1940 Act) of any such party. This agreement may be terminated at any time,
without the payment of any penalty, by a vote of a majority of the Fund's
outstanding voting securities (as defined in the 1940 Act) or by a vote of a
majority of the Company's entire Board of Directors on 60 days' written notice
to the Investment Manager or by the Investment Manager on 60 days' written
notice to the Company. This agreement shall terminate automatically in the event
of its assignment (as defined in the 1940 Act). The respective agreements,
covenants, indemnities and other statements set forth in Section 6 hereof shall
remain in full force and effect regardless of any termination or cancellation of
this agreement. All property of the Fund shall be returned to the Fund as soon
as reasonably practicable after the termination of this agreement.
9. Upon expiration or earlier termination of this agreement, the
Company shall, if reference to "Salomon Brothers" is made in the corporate name
of the Company or in the name of the Fund and if the Investment Manager requests
in writing, as promptly as practicable change its corporate name and the name of
the Fund so as to eliminate all reference to "Salomon Brothers", and thereafter
the Company and the Fund shall cease transacting business in any corporate name
using the words "Salomon Brothers" or any other reference to the Investment
Manager or "Salomon Brothers". The foregoing rights of the Investment Manager
and obligations of the Company shall not deprive the Investment Manager, or any
affiliate thereof which has "Salomon Brothers" in its name, of, but shall be in
addition to, any other rights or remedies to which the Investment Manager and
any such affiliate may be entitled in law or equity by reason of any breach of
this agreement by the Company, and the failure or omission of the Investment
Manager to request a change of the Company's or the Fund's name or a cessation
of the use of the name of "Salomon Brothers" as described in this paragraph 10
shall not under any circumstances be deemed a waiver of the right to require
such change or cessation at any time thereafter for the same or any subsequent
breach.
10. Except to the extent necessary to perform the Investment
Manager's obligations under this agreement, nothing herein shall be deemed to
limit or restrict the right of the Investment Manager, or any affiliate of the
Investment Manager, or any employee of
<PAGE>
<PAGE>
5
the Investment Manager, to engage in any other business or to devote time and
attention to the management or other aspects of any other business, whether of a
similar or dissimilar nature, or to render services of any kind to any other
corporation, firm, individual or association.
11. This agreement shall be governed by the laws of the State of
New York.
<PAGE>
<PAGE>
6
If the foregoing correctly sets forth the agreement between the
Company and the Investment Manager, please so indicate by signing and returning
to the Company the enclosed copy hereof.
Very truly yours,
SALOMON BROTHERS SERIES VARIABLE
FUNDS INC
By:
-------------------------------
Name: Michael S. Hyland
Title: President
ACCEPTED:
SALOMON BROTHERS ASSET
MANAGEMENT INC
By:
----------------------------
Name: Michael S. Hyland
Title: President
<PAGE>
<PAGE>
MANAGEMENT CONTRACT
SALOMON BROTHERS VARIABLE SERIES FUNDS INC
7 World Trade Center
New York, New York 10048
January 2, 1998
Salomon Brothers Asset Management Inc
7 World Trade Center
New York, New York 10048
Dear Sirs:
This will confirm the agreement between the undersigned (the
"Company") and you (the "Investment Manager") as follows:
1. The Company is an open-end investment company which currently
has seven investment portfolios -- Salomon Brothers Variable U.S. Government
Income Fund, Salomon Brothers Variable High Yield Bond Fund, Salomon Brothers
Variable Strategic Bond Fund, Salomon Brothers Variable Total Return Fund,
Salomon Brothers Variable Asia Growth Fund, Salomon Brothers Variable Investors
Fund and Salomon Brothers Variable Capital Fund. The Company proposes to engage
in the business of investing and reinvesting the assets of the Salomon Brothers
Variable Strategic Bond Fund (the "Fund") in the manner and in accordance with
the investment objective and limitations specified in the Company's Articles of
Incorporation, (the "Articles") and the currently effective prospectus,
including the documents incorporated by reference therein (the "Prospectus"),
relating to the Company and the Fund, included in the Company's Registration
Statement, as amended from time to time (the "Registration Statement"), filed by
the Company under the Investment Company Act of 1940, as amended (the "1940
Act"), and the Securities Act of 1933, as amended. Copies of the documents
referred to in the preceding sentence have been furnished to the Investment
Manager. Any amendments to these documents shall be furnished to the Investment
Manager.
2. The Company employs the Investment Manager to (a) make
investment strategy decisions for the Fund, (b) manage the investing and
reinvesting of the Fund's assets as specified in paragraph 1, (c) place purchase
and sale orders on behalf of the Fund and (d) provide continuous supervision of
the Fund's investment portfolios. At the Investment Manager's own expense and
subject to its supervision, the Investment Manager may delegate the performance
of all or a part of its services under this agreement to others.
3. (a) The Investment Manager shall, at its expense, (i) provide
the Fund with office space, office facilities and personnel reasonably necessary
for performance of the services to be provided by the Investment Manager
pursuant to this Agreement, (ii) provide the Fund with persons satisfactory to
the Company's Board of Directors to serve as officers
<PAGE>
<PAGE>
2
and employees of the Fund and (iii) provide the office space, facilities,
equipment and personnel necessary to perform the following services for the
Fund: (A) review purchases and sales of portfolio instruments and review the
Fund's portfolios to assess compliance with the Fund's stated investment
objectives and limitations and compliance with the 1940 Act and other applicable
laws and regulations, (B) record keeping, reporting, and maintaining
registration statements and proxy statements to the extent such records, reports
and documents are not maintained or furnished by the Fund's transfer agent,
custodian, administrative and accounting services agent, or other agents
employed by the Fund, (C) supervision of Fund operations, including coordination
of functions of transfer agent, custodian, administrative and accounting
services agent, accountants, counsel and other parties performing services or
operational functions for the Fund; and (D) certain administrative and clerical
services not otherwise provided by the Fund's transfer agent, custodian,
administrative and accounting services agent, or other agents employed by the
Fund.
(b) Except as provided in subparagraph (a), the Company shall be
responsible for all of the Fund's expenses and liabilities, including
organizational expenses; taxes; interest; fees (including fees paid to its
directors who are not affiliated with the Investment Manager or any of its
affiliates); fees payable to the Securities and Exchange Commission; state
securities qualification fees; costs of preparing and printing prospectuses for
regulatory purposes and for distribution to existing shareholders; advisory and
administration fees; charges of the custodian, transfer agent, administrative
and accounting services agent and any other agent employed by the Fund;
insurance premiums; auditing and legal expenses; costs of shareholders' reports
and shareholders' meetings; charges and expenses of any entity used for pricing
the Fund's portfolio securities and calculating the net asset value of the
Fund's shares; any extraordinary expenses; brokerage fees and commissions, if
any, in connection with the purchase or sale of portfolio securities; and
payments to the Fund's distributor for activities intended to result in the sale
of Fund shares.
4. As manager of the Fund's assets, the Investment Manager shall
make investments for the Fund's accounts in accordance with the investment
objectives and limitations set forth in the Articles, the Prospectus, the 1940
Act, the provisions of the Internal Revenue Code of 1986, as amended, relating
to regulated investment companies, applicable banking laws and regulations, and
policy decisions adopted by the Company's Board of Directors from time to time.
The Investment Manager shall advise the Company's officers and Board of
Directors, at such times as the Company's Board of Directors may specify, of
investments made for the Fund's account and shall, when requested by the
Company's officers or Board of Directors, supply the reasons for making such
investments.
5. The Investment Manager is authorized on behalf of the Company,
from time to time when deemed to be in the best interests of the Company and to
the extent permitted by applicable law, to purchase and/or sell securities in
which the Investment Manager or any of its affiliates underwrites, deals in
and/or makes a market and/or may perform or seek to perform investment banking
services for issuers of such securities. The Investment Manager is further
authorized, to the extent permitted by applicable law, to select brokers for the
execution of trades for the Company, which broker may be an affiliate of the
Investment Manager, provided that the affiliated broker's charge for the
transaction is
<PAGE>
<PAGE>
3
reasonable and fair compared to the usual and customary levels charged by other
brokers in connection with comparable transactions involving similar securities.
6. In consideration of the Investment Manager's undertaking to
render the services described in this agreement, the Company agrees that the
Investment Manager shall not be liable under this agreement for any error of
judgment or mistake of law or for any loss suffered by the Company in connection
with the performance of this agreement, provided that nothing in this agreement
shall be deemed to protect or purport to protect the Investment Manager against
any liability to the Company or its stockholders to which the Investment Manager
would otherwise be subject by reason of willful misfeasance, bad faith or gross
negligence in the performance of its duties under this agreement or by reason of
its reckless disregard of its obligations and duties hereunder ("disabling
conduct"). The Fund will indemnify the Investment Manager against, and hold it
harmless from, any and all losses, claims, damages, liabilities or expenses,
including reasonable counsel fees and expenses and any amounts paid in
satisfaction of judgments, in compromise or as fines or penalties, not resulting
from disabling conduct by the Investment Manager. Indemnification shall be made
only following: (i) a final decision on the merits by a court or other body
before whom the proceeding was brought that the Investment Manager was not
liable by reason of disabling conduct, or (ii) in the absence of such a
decision, a reasonable determination, based upon a review of the facts, that the
Investment Manager was not liable by reason of disabling conduct by (a) the vote
of a majority of a quorum of directors of the Company who are neither
"interested persons" of the Company nor parties to the proceeding
("disinterested non-party directors"), or (b) an independent legal counsel in a
written opinion. The Investment Manager shall be entitled to advances from the
Fund for payment of the reasonable expenses incurred by it in connection with
the matter as to which it is seeking indemnification in the manner and to the
fullest extent permissible under law. The Investment Manager shall provide to
the Fund a written affirmation of its good faith belief that the standard of
conduct necessary for indemnification by the Fund has been met and a written
undertaking to repay any such advance if it should ultimately be determined that
the standard of conduct has not been met. In addition, at least one of the
following additional conditions shall be met: (a) the Investment Manager shall
provide security in form and amount acceptable to the Fund for its undertaking;
(b) the Fund is insured against losses arising by reason of the advance; or (c)
a majority of a quorum of disinterested non-party directors, or independent
legal counsel, in a written opinion, shall have determined, based on a review of
facts readily available to the Fund at the time the advance is proposed to be
made, that there is reason to believe that the Investment Manager will
ultimately be found to be entitled to indemnification. For purposes of this
paragraph 6 only, the term "Investment Manager" shall be deemed to include
affiliates of the Investment Manager to whom the Investment Manager has
delegated the exercise of all or any of its powers, discretion and duties under
this agreement.
7. In consideration of the services to be rendered by the
Investment Manager under this agreement, each Fund shall pay the Investment
Manager a monthly fee on the first business day of each month at an annual rate
0.75% of the average daily value (as determined on the days and at the time set
forth in the Prospectus for determining net asset value per share) of the Fund's
net assets during the preceding month. If the fee payable to the Investment
Manager pursuant to this paragraph 7 begins to accrue before the end of any
<PAGE>
<PAGE>
4
month or if this agreement terminates before the end of any month, the fee for
the period from such date to the end of such month or from the beginning of such
month to the date of termination, as the case may be, shall be prorated
according to the proportion which such period bears to the full month in which
such effectiveness or termination occurs. For purposes of calculating each such
monthly fee, the value of the Fund's net assets shall be computed in the manner
specified in the Prospectus and the Articles for the computation of the value of
the Fund's net assets in connection with the determination of the net asset
value of shares of the Fund's capital stock.
8. This agreement shall continue in effect until two years from
the date hereof and thereafter for successive annual periods, provided that such
continuance is specifically approved at least annually (a) by the vote of a
majority of the Fund's outstanding voting securities (as defined in the 1940
Act) or by the Company's Board of Directors and (b) by the vote, cast in person
at a meeting called for the purpose, of a majority of the Company's directors
who are not parties to this agreement or "interested persons" (as defined in the
1940 Act) of any such party. This agreement may be terminated at any time,
without the payment of any penalty, by a vote of a majority of the Fund's
outstanding voting securities (as defined in the 1940 Act) or by a vote of a
majority of the Company's entire Board of Directors on 60 days' written notice
to the Investment Manager or by the Investment Manager on 60 days' written
notice to the Company. This agreement shall terminate automatically in the event
of its assignment (as defined in the 1940 Act). The respective agreements,
covenants, indemnities and other statements set forth in Section 6 hereof shall
remain in full force and effect regardless of any termination or cancellation of
this agreement. All property of the Fund shall be returned to the Fund as soon
as reasonably practicable after the termination of this agreement.
9. Upon expiration or earlier termination of this agreement, the
Company shall, if reference to "Salomon Brothers" is made in the corporate name
of the Company or in the name of the Fund and if the Investment Manager requests
in writing, as promptly as practicable change its corporate name and the name of
the Fund so as to eliminate all reference to "Salomon Brothers", and thereafter
the Company and the Fund shall cease transacting business in any corporate name
using the words "Salomon Brothers" or any other reference to the Investment
Manager or "Salomon Brothers". The foregoing rights of the Investment Manager
and obligations of the Company shall not deprive the Investment Manager, or any
affiliate thereof which has "Salomon Brothers" in its name, of, but shall be in
addition to, any other rights or remedies to which the Investment Manager and
any such affiliate may be entitled in law or equity by reason of any breach of
this agreement by the Company, and the failure or omission of the Investment
Manager to request a change of the Company's or the Fund's name or a cessation
of the use of the name of "Salomon Brothers" as described in this paragraph 10
shall not under any circumstances be deemed a waiver of the right to require
such change or cessation at any time thereafter for the same or any subsequent
breach.
10. Except to the extent necessary to perform the Investment
Manager's obligations under this agreement, nothing herein shall be deemed to
limit or restrict the right of the Investment Manager, or any affiliate of the
Investment Manager, or any employee of
<PAGE>
<PAGE>
5
the Investment Manager, to engage in any other business or to devote time and
attention to the management or other aspects of any other business, whether of a
similar or dissimilar nature, or to render services of any kind to any other
corporation, firm, individual or association.
11. This agreement shall be governed by the laws of the State of New York.
<PAGE>
<PAGE>
6
If the foregoing correctly sets forth the agreement between the
Company and the Investment Manager, please so indicate by signing and returning
to the Company the enclosed copy hereof.
Very truly yours,
SALOMON BROTHERS SERIES VARIABLE
FUNDS INC
By:
-------------------------------
Name: Michael S. Hyland
Title: President
ACCEPTED:
SALOMON BROTHERS ASSET
MANAGEMENT INC
By:
----------------------------
Name: Michael S. Hyland
Title: President
<PAGE>
<PAGE>
MANAGEMENT CONTRACT
SALOMON BROTHERS VARIABLE SERIES FUNDS INC
7 World Trade Center
New York, New York 10048
January 2, 1998
Salomon Brothers Asset Management Inc
7 World Trade Center
New York, New York 10048
Dear Sirs:
This will confirm the agreement between the undersigned (the
"Company") and you (the "Investment Manager") as follows:
1. The Company is an open-end investment company which currently
has seven investment portfolios -- Salomon Brothers Variable U.S. Government
Income Fund, Salomon Brothers Variable High Yield Bond Fund, Salomon Brothers
Variable Strategic Bond Fund, Salomon Brothers Variable Total Return Fund,
Salomon Brothers Variable Asia Growth Fund, Salomon Brothers Variable Investors
Fund and Salomon Brothers Variable Capital Fund. The Company proposes to engage
in the business of investing and reinvesting the assets of the Salomon Brothers
Variable Total Return Fund (the "Fund") in the manner and in accordance with the
investment objective and limitations specified in the Company's Articles of
Incorporation, (the "Articles") and the currently effective prospectus,
including the documents incorporated by reference therein (the "Prospectus"),
relating to the Company and the Fund, included in the Company's Registration
Statement, as amended from time to time (the "Registration Statement"), filed by
the Company under the Investment Company Act of 1940, as amended (the "1940
Act"), and the Securities Act of 1933, as amended. Copies of the documents
referred to in the preceding sentence have been furnished to the Investment
Manager. Any amendments to these documents shall be furnished to the Investment
Manager.
2. The Company employs the Investment Manager to (a) make
investment strategy decisions for the Fund, (b) manage the investing and
reinvesting of the Fund's assets as specified in paragraph 1, (c) place purchase
and sale orders on behalf of the Fund and (d) provide continuous supervision of
the Fund's investment portfolios. At the Investment Manager's own expense and
subject to its supervision, the Investment Manager may delegate the performance
of all or a part of its services under this agreement to others.
3. (a) The Investment Manager shall, at its expense, (i) provide
the Fund with office space, office facilities and personnel reasonably necessary
for performance of the services to be provided by the Investment Manager
pursuant to this Agreement, (ii) provide the Fund with persons satisfactory to
the Company's Board of Directors to serve as officers and employees of the Fund
and (iii) provide the office space, facilities, equipment and
<PAGE>
<PAGE>
2
personnel necessary to perform the following services for the Fund: (A) review
purchases and sales of portfolio instruments and review the Fund's portfolios to
assess compliance with the Fund's stated investment objectives and limitations
and compliance with the 1940 Act and other applicable laws and regulations, (B)
record keeping, reporting, and maintaining registration statements and proxy
statements to the extent such records, reports and documents are not maintained
or furnished by the Fund's transfer agent, custodian, administrative and
accounting services agent, or other agents employed by the Fund, (C) supervision
of Fund operations, including coordination of functions of transfer agent,
custodian, administrative and accounting services agent, accountants, counsel
and other parties performing services or operational functions for the Fund; and
(D) certain administrative and clerical services not otherwise provided by the
Fund's transfer agent, custodian, administrative and accounting services agent,
or other agents employed by the Fund.
(b) Except as provided in subparagraph (a), the Company shall be
responsible for all of the Fund's expenses and liabilities, including
organizational expenses; taxes; interest; fees (including fees paid to its
directors who are not affiliated with the Investment Manager or any of its
affiliates); fees payable to the Securities and Exchange Commission; state
securities qualification fees; costs of preparing and printing prospectuses for
regulatory purposes and for distribution to existing shareholders; advisory and
administration fees; charges of the custodian, transfer agent, administrative
and accounting services agent and any other agent employed by the Fund;
insurance premiums; auditing and legal expenses; costs of shareholders' reports
and shareholders' meetings; charges and expenses of any entity used for pricing
the Fund's portfolio securities and calculating the net asset value of the
Fund's shares; any extraordinary expenses; brokerage fees and commissions, if
any, in connection with the purchase or sale of portfolio securities; and
payments to the Fund's distributor for activities intended to result in the sale
of Fund shares.
4. As manager of the Fund's assets, the Investment Manager shall
make investments for the Fund's accounts in accordance with the investment
objectives and limitations set forth in the Articles, the Prospectus, the 1940
Act, the provisions of the Internal Revenue Code of 1986, as amended, relating
to regulated investment companies, applicable banking laws and regulations, and
policy decisions adopted by the Company's Board of Directors from time to time.
The Investment Manager shall advise the Company's officers and Board of
Directors, at such times as the Company's Board of Directors may specify, of
investments made for the Fund's account and shall, when requested by the
Company's officers or Board of Directors, supply the reasons for making such
investments.
5. The Investment Manager is authorized on behalf of the Company,
from time to time when deemed to be in the best interests of the Company and to
the extent permitted by applicable law, to purchase and/or sell securities in
which the Investment Manager or any of its affiliates underwrites, deals in
and/or makes a market and/or may perform or seek to perform investment banking
services for issuers of such securities. The Investment Manager is further
authorized, to the extent permitted by applicable law, to select brokers for the
execution of trades for the Company, which broker may be an affiliate of the
Investment Manager, provided that the affiliated broker's charge for the
transaction is reasonable and fair compared to the usual and customary levels
charged by other brokers in connection with comparable transactions involving
similar securities.
<PAGE>
<PAGE>
3
6. In consideration of the Investment Manager's undertaking to
render the services described in this agreement, the Company agrees that the
Investment Manager shall not be liable under this agreement for any error of
judgment or mistake of law or for any loss suffered by the Company in connection
with the performance of this agreement, provided that nothing in this agreement
shall be deemed to protect or purport to protect the Investment Manager against
any liability to the Company or its stockholders to which the Investment Manager
would otherwise be subject by reason of willful misfeasance, bad faith or gross
negligence in the performance of its duties under this agreement or by reason of
its reckless disregard of its obligations and duties hereunder ("disabling
conduct"). The Fund will indemnify the Investment Manager against, and hold it
harmless from, any and all losses, claims, damages, liabilities or expenses,
including reasonable counsel fees and expenses and any amounts paid in
satisfaction of judgments, in compromise or as fines or penalties, not resulting
from disabling conduct by the Investment Manager. Indemnification shall be made
only following: (i) a final decision on the merits by a court or other body
before whom the proceeding was brought that the Investment Manager was not
liable by reason of disabling conduct, or (ii) in the absence of such a
decision, a reasonable determination, based upon a review of the facts, that the
Investment Manager was not liable by reason of disabling conduct by (a) the vote
of a majority of a quorum of directors of the Company who are neither
"interested persons" of the Company nor parties to the proceeding
("disinterested non-party directors"), or (b) an independent legal counsel in a
written opinion. The Investment Manager shall be entitled to advances from the
Fund for payment of the reasonable expenses incurred by it in connection with
the matter as to which it is seeking indemnification in the manner and to the
fullest extent permissible under law. The Investment Manager shall provide to
the Fund a written affirmation of its good faith belief that the standard of
conduct necessary for indemnification by the Fund has been met and a written
undertaking to repay any such advance if it should ultimately be determined that
the standard of conduct has not been met. In addition, at least one of the
following additional conditions shall be met: (a) the Investment Manager shall
provide security in form and amount acceptable to the Fund for its undertaking;
(b) the Fund is insured against losses arising by reason of the advance; or (c)
a majority of a quorum of disinterested non-party directors, or independent
legal counsel, in a written opinion, shall have determined, based on a review of
facts readily available to the Fund at the time the advance is proposed to be
made, that there is reason to believe that the Investment Manager will
ultimately be found to be entitled to indemnification. For purposes of this
paragraph 6 only, the term "Investment Manager" shall be deemed to include
affiliates of the Investment Manager to whom the Investment Manager has
delegated the exercise of all or any of its powers, discretion and duties under
this agreement.
7. In consideration of the services to be rendered by the
Investment Manager under this agreement, each Fund shall pay the Investment
Manager a monthly fee on the first business day of each month at an annual rate
0.80% of the average daily value (as determined on the days and at the time set
forth in the Prospectus for determining net asset value per share) of the Fund's
net assets during the preceding month. If the fee payable to the Investment
Manager pursuant to this paragraph 7 begins to accrue before the end of any
month or if this agreement terminates before the end of any month, the fee for
the period from such date to the end of such month or from the beginning of such
month to the date of termination, as the case may be, shall be prorated
according to the proportion which such
<PAGE>
<PAGE>
4
period bears to the full month in which such effectiveness or termination
occurs. For purposes of calculating each such monthly fee, the value of the
Fund's net assets shall be computed in the manner specified in the Prospectus
and the Articles for the computation of the value of the Fund's net assets in
connection with the determination of the net asset value of shares of the Fund's
capital stock.
8. This agreement shall continue in effect until two years from
the date hereof and thereafter for successive annual periods, provided that such
continuance is specifically approved at least annually (a) by the vote of a
majority of the Fund's outstanding voting securities (as defined in the 1940
Act) or by the Company's Board of Directors and (b) by the vote, cast in person
at a meeting called for the purpose, of a majority of the Company's directors
who are not parties to this agreement or "interested persons" (as defined in the
1940 Act) of any such party. This agreement may be terminated at any time,
without the payment of any penalty, by a vote of a majority of the Fund's
outstanding voting securities (as defined in the 1940 Act) or by a vote of a
majority of the Company's entire Board of Directors on 60 days' written notice
to the Investment Manager or by the Investment Manager on 60 days' written
notice to the Company. This agreement shall terminate automatically in the event
of its assignment (as defined in the 1940 Act). The respective agreements,
covenants, indemnities and other statements set forth in Section 6 hereof shall
remain in full force and effect regardless of any termination or cancellation of
this agreement. All property of the Fund shall be returned to the Fund as soon
as reasonably practicable after the termination of this agreement.
9. Upon expiration or earlier termination of this agreement, the
Company shall, if reference to "Salomon Brothers" is made in the corporate name
of the Company or in the name of the Fund and if the Investment Manager requests
in writing, as promptly as practicable change its corporate name and the name of
the Fund so as to eliminate all reference to "Salomon Brothers", and thereafter
the Company and the Fund shall cease transacting business in any corporate name
using the words "Salomon Brothers" or any other reference to the Investment
Manager or "Salomon Brothers". The foregoing rights of the Investment Manager
and obligations of the Company shall not deprive the Investment Manager, or any
affiliate thereof which has "Salomon Brothers" in its name, of, but shall be in
addition to, any other rights or remedies to which the Investment Manager and
any such affiliate may be entitled in law or equity by reason of any breach of
this agreement by the Company, and the failure or omission of the Investment
Manager to request a change of the Company's or the Fund's name or a cessation
of the use of the name of "Salomon Brothers" as described in this paragraph 10
shall not under any circumstances be deemed a waiver of the right to require
such change or cessation at any time thereafter for the same or any subsequent
breach.
10. Except to the extent necessary to perform the Investment
Manager's obligations under this agreement, nothing herein shall be deemed to
limit or restrict the right of the Investment Manager, or any affiliate of the
Investment Manager, or any employee of the Investment Manager, to engage in any
other business or to devote time and attention to the management or other
aspects of any other business, whether of a similar or dissimilar
<PAGE>
<PAGE>
5
nature, or to render services of any kind to any other corporation, firm,
individual or association.
11. This agreement shall be governed by the laws of the State of
New York.
<PAGE>
<PAGE>
6
If the foregoing correctly sets forth the agreement between the
Company and the Investment Manager, please so indicate by signing and returning
to the Company the enclosed copy hereof.
Very truly yours,
SALOMON BROTHERS SERIES VARIABLE
FUNDS INC
By:
--------------------------------
Name: Michael S. Hyland
Title: President
ACCEPTED:
SALOMON BROTHERS ASSET
MANAGEMENT INC
By:
--------------------------------
Name: Michael S. Hyland
Title: President
<PAGE>
<PAGE>
MANAGEMENT CONTRACT
SALOMON BROTHERS VARIABLE SERIES FUNDS INC
7 World Trade Center
New York, New York 10048
January 2, 1998
Salomon Brothers Asset Management Inc
7 World Trade Center
New York, New York 10048
Dear Sirs:
This will confirm the agreement between the undersigned (the
"Company") and you (the "Investment Manager") as follows:
1. The Company is an open-end investment company which currently
has seven investment portfolios -- Salomon Brothers Variable U.S. Government
Income Fund, Salomon Brothers Variable High Yield Bond Fund, Salomon Brothers
Variable Strategic Bond Fund, Salomon Brothers Variable Total Return Fund,
Salomon Brothers Variable Asia Growth Fund, Salomon Brothers Variable Investors
Fund and Salomon Brothers Variable Capital Fund. The Company proposes to engage
in the business of investing and reinvesting the assets of the Salomon Brothers
Variable Asia Growth Fund (the "Fund") in the manner and in accordance with the
investment objective and limitations specified in the Company's Articles of
Incorporation, (the "Articles") and the currently effective prospectus,
including the documents incorporated by reference therein (the "Prospectus"),
relating to the Company and the Fund, included in the Company's Registration
Statement, as amended from time to time (the "Registration Statement"), filed by
the Company under the Investment Company Act of 1940, as amended (the "1940
Act"), and the Securities Act of 1933, as amended. Copies of the documents
referred to in the preceding sentence have been furnished to the Investment
Manager. Any amendments to these documents shall be furnished to the Investment
Manager.
2. The Company employs the Investment Manager to (a) make
investment strategy decisions for the Fund, (b) manage the investing and
reinvesting of the Fund's assets as specified in paragraph 1, (c) place purchase
and sale orders on behalf of the Fund and (d) provide continuous supervision of
the Fund's investment portfolios. At the Investment Manager's own expense and
subject to its supervision, the Investment Manager may delegate the performance
of all or a part of its services under this agreement to others.
3. (a) The Investment Manager shall, at its expense, (i) provide
the Fund with office space, office facilities and personnel reasonably necessary
for performance of the services to be provided by the Investment Manager
pursuant to this Agreement, (ii) provide the Fund with persons satisfactory to
the Company's Board of Directors to serve as officers
<PAGE>
<PAGE>
2
and employees of the Fund and (iii) provide the office space, facilities,
equipment and personnel necessary to perform the following services for the
Fund: (A) review purchases and sales of portfolio instruments and review the
Fund's portfolios to assess compliance with the Fund's stated investment
objectives and limitations and compliance with the 1940 Act and other applicable
laws and regulations, (B) record keeping, reporting, and maintaining
registration statements and proxy statements to the extent such records, reports
and documents are not maintained or furnished by the Fund's transfer agent,
custodian, administrative and accounting services agent, or other agents
employed by the Fund, (C) supervision of Fund operations, including coordination
of functions of transfer agent, custodian, administrative and accounting
services agent, accountants, counsel and other parties performing services or
operational functions for the Fund; and (D) certain administrative and clerical
services not otherwise provided by the Fund's transfer agent, custodian,
administrative and accounting services agent, or other agents employed by the
Fund.
(b) Except as provided in subparagraph (a), the Company shall be
responsible for all of the Fund's expenses and liabilities, including
organizational expenses; taxes; interest; fees (including fees paid to its
directors who are not affiliated with the Investment Manager or any of its
affiliates); fees payable to the Securities and Exchange Commission; state
securities qualification fees; costs of preparing and printing prospectuses for
regulatory purposes and for distribution to existing shareholders; advisory and
administration fees; charges of the custodian, transfer agent, administrative
and accounting services agent and any other agent employed by the Fund;
insurance premiums; auditing and legal expenses; costs of shareholders' reports
and shareholders' meetings; charges and expenses of any entity used for pricing
the Fund's portfolio securities and calculating the net asset value of the
Fund's shares; any extraordinary expenses; brokerage fees and commissions, if
any, in connection with the purchase or sale of portfolio securities; and
payments to the Fund's distributor for activities intended to result in the sale
of Fund shares.
4. As manager of the Fund's assets, the Investment Manager shall
make investments for the Fund's accounts in accordance with the investment
objectives and limitations set forth in the Articles, the Prospectus, the 1940
Act, the provisions of the Internal Revenue Code of 1986, as amended, relating
to regulated investment companies, applicable banking laws and regulations, and
policy decisions adopted by the Company's Board of Directors from time to time.
The Investment Manager shall advise the Company's officers and Board of
Directors, at such times as the Company's Board of Directors may specify, of
investments made for the Fund's account and shall, when requested by the
Company's officers or Board of Directors, supply the reasons for making such
investments.
5. The Investment Manager is authorized on behalf of the Company,
from time to time when deemed to be in the best interests of the Company and to
the extent permitted by applicable law, to purchase and/or sell securities in
which the Investment Manager or any of its affiliates underwrites, deals in
and/or makes a market and/or may perform or seek to perform investment banking
services for issuers of such securities. The Investment Manager is further
authorized, to the extent permitted by applicable law, to select brokers for the
execution of trades for the Company, which broker may be an affiliate of the
Investment Manager, provided that the affiliated broker's charge for the
transaction is
<PAGE>
<PAGE>
3
reasonable and fair compared to the usual and customary levels charged by other
brokers in connection with comparable transactions involving similar securities.
6. In consideration of the Investment Manager's undertaking to
render the services described in this agreement, the Company agrees that the
Investment Manager shall not be liable under this agreement for any error of
judgment or mistake of law or for any loss suffered by the Company (including
any Hong Kong taxes or related expenses imposed on the Fund in relation to
matters contemplated by this agreement) in connection with the performance of
this agreement, provided that nothing in this agreement shall be deemed to
protect or purport to protect the Investment Manager against any liability to
the Company or its stockholders to which the Investment Manager would otherwise
be subject by reason of willful misfeasance, bad faith or gross negligence in
the performance of its duties under this agreement or by reason of its reckless
disregard of its obligations and duties hereunder ("disabling conduct"). The
Fund will indemnify the Investment Manager against, and hold it harmless from,
any and all losses, claims, damages, liabilities or expenses, (including any
Hong Kong taxes or related expenses imposed on the Asia Growth Fund in relation
to matters contemplated by this agreement) including reasonable counsel fees and
expenses and any amounts paid in satisfaction of judgments, in compromise or as
fines or penalties, not resulting from disabling conduct by the Investment
Manager. Indemnification shall be made only following: (i) a final decision on
the merits by a court or other body before whom the proceeding was brought that
the Investment Manager was not liable by reason of disabling conduct, or (ii) in
the absence of such a decision, a reasonable determination, based upon a review
of the facts, that the Investment Manager was not liable by reason of disabling
conduct by (a) the vote of a majority of a quorum of directors of the Company
who are neither "interested persons" of the Company nor parties to the
proceeding ("disinterested non-party directors"), or (b) an independent legal
counsel in a written opinion. The Investment Manager shall be entitled to
advances from the Fund for payment of the reasonable expenses incurred by it in
connection with the matter as to which it is seeking indemnification in the
manner and to the fullest extent permissible under law. The Investment Manager
shall provide to the Fund a written affirmation of its good faith belief that
the standard of conduct necessary for indemnification by the Fund has been met
and a written undertaking to repay any such advance if it should ultimately be
determined that the standard of conduct has not been met. In addition, at least
one of the following additional conditions shall be met: (a) the Investment
Manager shall provide security in form and amount acceptable to the Fund for its
undertaking; (b) the Fund is insured against losses arising by reason of the
advance; or (c) a majority of a quorum of disinterested non-party directors, or
independent legal counsel, in a written opinion, shall have determined, based on
a review of facts readily available to the Fund at the time the advance is
proposed to be made, that there is reason to believe that the Investment Manager
will ultimately be found to be entitled to indemnification. For purposes of this
paragraph 6 only, the term "Investment Manager" shall be deemed to include
affiliates of the Investment Manager to whom the Investment Manager has
delegated the exercise of all or any of its powers, discretion and duties under
this agreement.
7. In consideration of the services to be rendered by the
Investment Manager under this agreement, each Fund shall pay the Investment
Manager a monthly fee on the first business day of each month at an annual rate
0.80% of the average daily value (as
<PAGE>
<PAGE>
4
determined on the days and at the time set forth in the Prospectus for
determining net asset value per share) of the Fund's net assets during the
preceding month. If the fee payable to the Investment Manager pursuant to this
paragraph 7 begins to accrue before the end of any month or if this agreement
terminates before the end of any month, the fee for the period from such date to
the end of such month or from the beginning of such month to the date of
termination, as the case may be, shall be prorated according to the proportion
which such period bears to the full month in which such effectiveness or
termination occurs. For purposes of calculating each such monthly fee, the value
of the Fund's net assets shall be computed in the manner specified in the
Prospectus and the Articles for the computation of the value of the Fund's net
assets in connection with the determination of the net asset value of shares of
the Fund's capital stock.
8. This agreement shall continue in effect until two years from
the date hereof and thereafter for successive annual periods, provided that such
continuance is specifically approved at least annually (a) by the vote of a
majority of the Fund's outstanding voting securities (as defined in the 1940
Act) or by the Company's Board of Directors and (b) by the vote, cast in person
at a meeting called for the purpose, of a majority of the Company's directors
who are not parties to this agreement or "interested persons" (as defined in the
1940 Act) of any such party. This agreement may be terminated at any time,
without the payment of any penalty, by a vote of a majority of the Fund's
outstanding voting securities (as defined in the 1940 Act) or by a vote of a
majority of the Company's entire Board of Directors on 60 days' written notice
to the Investment Manager or by the Investment Manager on 60 days' written
notice to the Company. This agreement shall terminate automatically in the event
of its assignment (as defined in the 1940 Act). The respective agreements,
covenants, indemnities and other statements set forth in Section 6 hereof shall
remain in full force and effect regardless of any termination or cancellation of
this agreement. All property of the Fund shall be returned to the Fund as soon
as reasonably practicable after the termination of this agreement.
9. Upon expiration or earlier termination of this agreement, the
Company shall, if reference to "Salomon Brothers" is made in the corporate name
of the Company or in the name of the Fund and if the Investment Manager requests
in writing, as promptly as practicable change its corporate name and the name of
the Fund so as to eliminate all reference to "Salomon Brothers", and thereafter
the Company and the Fund shall cease transacting business in any corporate name
using the words "Salomon Brothers" or any other reference to the Investment
Manager or "Salomon Brothers". The foregoing rights of the Investment Manager
and obligations of the Company shall not deprive the Investment Manager, or any
affiliate thereof which has "Salomon Brothers" in its name, of, but shall be in
addition to, any other rights or remedies to which the Investment Manager and
any such affiliate may be entitled in law or equity by reason of any breach of
this agreement by the Company, and the failure or omission of the Investment
Manager to request a change of the Company's or the Fund's name or a cessation
of the use of the name of "Salomon Brothers" as described in this paragraph 10
shall not under any circumstances be deemed a waiver of the right to require
such change or cessation at any time thereafter for the same or any subsequent
breach.
<PAGE>
<PAGE>
5
10. Except to the extent necessary to perform the Investment
Manager's obligations under this agreement, nothing herein shall be deemed to
limit or restrict the right of the Investment Manager, or any affiliate of the
Investment Manager, or any employee of the Investment Manager, to engage in any
other business or to devote time and attention to the management or other
aspects of any other business, whether of a similar or dissimilar nature, or to
render services of any kind to any other corporation, firm, individual or
association.
11. This agreement shall be governed by the laws of the State of
New York.
<PAGE>
<PAGE>
6
If the foregoing correctly sets forth the agreement between the
Company and the Investment Manager, please so indicate by signing and returning
to the Company the enclosed copy hereof.
Very truly yours,
SALOMON BROTHERS SERIES VARIABLE
FUNDS INC
By:
-------------------------------
Name: Michael S. Hyland
Title: President
ACCEPTED:
SALOMON BROTHERS ASSET
MANAGEMENT INC
By:
-------------------------------
Name: Michael S. Hyland
Title: President
<PAGE>
<PAGE>
MANAGEMENT CONTRACT
SALOMON BROTHERS VARIABLE SERIES FUNDS INC
7 World Trade Center
New York, New York 10048
January 2, 1998
Salomon Brothers Asset Management Inc
7 World Trade Center
New York, New York 10048
Dear Sirs:
This will confirm the agreement between the undersigned (the
"Company") and you (the "Investment Manager") as follows:
1. The Company is an open-end investment company which currently
has seven investment portfolios -- Salomon Brothers Variable U.S. Government
Income Fund, Salomon Brothers Variable High Yield Bond Fund, Salomon Brothers
Variable Strategic Bond Fund, Salomon Brothers Variable Total Return Fund,
Salomon Brothers Variable Asia Growth Fund, Salomon Brothers Variable Investors
Fund and Salomon Brothers Variable Capital Fund. The Company proposes to engage
in the business of investing and reinvesting the assets of the Salomon Brothers
Variable Investors Fund (the "Fund") in the manner and in accordance with the
investment objective and limitations specified in the Company's Articles of
Incorporation, (the "Articles") and the currently effective prospectus,
including the documents incorporated by reference therein (the "Prospectus"),
relating to the Company and the Fund, included in the Company's Registration
Statement, as amended from time to time (the "Registration Statement"), filed by
the Company under the Investment Company Act of 1940, as amended (the "1940
Act"), and the Securities Act of 1933, as amended. Copies of the documents
referred to in the preceding sentence have been furnished to the Investment
Manager. Any amendments to these documents shall be furnished to the Investment
Manager.
2. The Company employs the Investment Manager to (a) make
investment strategy decisions for the Fund, (b) manage the investing and
reinvesting of the Fund's assets as specified in paragraph 1, (c) place purchase
and sale orders on behalf of the Fund and (d) provide continuous supervision of
the Fund's investment portfolios. At the Investment Manager's own expense and
subject to its supervision, the Investment Manager may delegate the performance
of all or a part of its services under this agreement to others.
3. (a) The Investment Manager shall, at its expense, (i) provide
the Fund with office space, office facilities and personnel reasonably necessary
for performance of the services to be provided by the Investment Manager
pursuant to this Agreement, (ii) provide the Fund with persons satisfactory to
the Company's Board of Directors to serve as officers and employees of the Fund
and (iii) provide the office space, facilities, equipment and
<PAGE>
<PAGE>
2
personnel necessary to perform the following services for the Fund: (A) review
purchases and sales of portfolio instruments and review the Fund's portfolios to
assess compliance with the Fund's stated investment objectives and limitations
and compliance with the 1940 Act and other applicable laws and regulations, (B)
record keeping, reporting, registration statements and proxy statements to the
extent such records, reports and documents are not maintained or furnished by
the Fund's transfer agent, custodian, administrative and accounting services
agent, or other agents employed by the Fund, (C) supervision of Fund operations,
including coordination of functions of transfer agent, custodian, administrative
and accounting services agent, accountants, counsel and other parties performing
services or operational functions for the Fund; and (D) certain administrative
and clerical services not otherwise provided by the Fund's transfer agent,
custodian, administrative and accounting services agent, or other agents
employed by the Fund.
(b) Except as provided in subparagraph (a), the Company shall be
responsible for all of the Fund's expenses and liabilities, including
organizational expenses; taxes; interest; fees (including fees paid to its
directors who are not affiliated with the Investment Manager or any of its
affiliates); fees payable to the Securities and Exchange Commission; state
securities qualification fees; costs of preparing and printing prospectuses for
regulatory purposes and for distribution to existing shareholders; advisory and
administration fees; charges of the custodian, transfer agent, administrative
and accounting services agent and any other agent employed by the Fund;
insurance premiums; auditing and legal expenses; costs of shareholders' reports
and shareholders' meetings; charges and expenses of any entity used for pricing
the Fund's portfolio securities and calculating the net asset value of the
Fund's shares; any extraordinary expenses; brokerage fees and commissions, if
any, in connection with the purchase or sale of portfolio securities; and
payments to the Fund's distributor for activities intended to result in the sale
of Fund shares.
4. As manager of the Fund's assets, the Investment Manager shall
make investments for the Fund's accounts in accordance with the investment
objectives and limitations set forth in the Articles, the Prospectus, the 1940
Act, the provisions of the Internal Revenue Code of 1986, as amended, relating
to regulated investment companies, applicable banking laws and regulations, and
policy decisions adopted by the Company's Board of Directors from time to time.
The Investment Manager shall advise the Company's officers and Board of
Directors, at such times as the Company's Board of Directors may specify, of
investments made for the Fund's account and shall, when requested by the
Company's officers or Board of Directors, supply the reasons for making such
investments.
5. The Investment Manager is authorized on behalf of the Company,
from time to time when deemed to be in the best interests of the Company and to
the extent permitted by applicable law, to purchase and/or sell securities in
which the Investment Manager or any of its affiliates underwrites, deals in
and/or makes a market and/or may perform or seek to perform investment banking
services for issuers of such securities. The Investment Manager is further
authorized, to the extent permitted by applicable law, to select brokers for the
execution of trades for the Company, which broker may be an affiliate of the
Investment Manager, provided that the affiliated broker's charge for the
transaction is fair and
<PAGE>
<PAGE>
3
reasonable compared to the usual and customary levels charged by other brokers
in connection with comparable transactions involving similar securities.
6. In consideration of the Investment Manager's undertaking to
render the services described in this agreement, the Company agrees that the
Investment Manager shall not be liable under this agreement for any error of
judgment or mistake of law or for any loss suffered by the Company in connection
with the performance of this agreement, provided that nothing in this agreement
shall be deemed to protect or purport to protect the Investment Manager against
any liability to the Company or its stockholders to which the Investment Manager
would otherwise be subject by reason of willful misfeasance, bad faith or gross
negligence in the performance of its duties under this agreement or by reason of
its reckless disregard of its obligations and duties hereunder ("disabling
conduct"). The Fund will indemnify the Investment Manager against, and hold it
harmless from, any and all losses, claims, damages, liabilities or expenses,
including reasonable counsel fees and expenses and any amounts paid in
satisfaction of judgments, in compromise or as fines or penalties, not resulting
from disabling conduct by the Investment Manager. Indemnification shall be made
only following: (i) a final decision on the merits by a court or other body
before whom the proceeding was brought that the Investment Manager was not
liable by reason of disabling conduct, or (ii) in the absence of such a
decision, a reasonable determination, based upon a review of the facts, that the
Investment Manager was not liable by reason of disabling conduct by (a) the vote
of a majority of a quorum of directors of the Company who are neither
"interested persons" of the Company nor parties to the proceeding
("disinterested non-party directors"), or (b) an independent legal counsel in a
written opinion. The Investment Manager shall be entitled to advances from the
Fund for payment of the reasonable expenses incurred by it in connection with
the matter as to which it is seeking indemnification in the manner and to the
fullest extent permissible under law. The Investment Manager shall provide to
the Fund a written affirmation of its good faith belief that the standard of
conduct necessary for indemnification by the Fund has been met and a written
undertaking to repay any such advance if it should ultimately be determined that
the standard of conduct has not been met. In addition, at least one of the
following additional conditions shall be met: (a) the Investment Manager shall
provide security in form and amount acceptable to the Fund for its undertaking;
(b) the Fund is insured against losses arising by reason of the advance; or (c)
a majority of a quorum of disinterested non-party directors, or independent
legal counsel, in a written opinion, shall have determined, based on a review of
facts readily available to the Fund at the time the advance is proposed to be
made, that there is reason to believe that the Investment Manager will
ultimately be found to be entitled to indemnification. For purposes of this
paragraph 6 only, the term "Investment Manager" shall be deemed to include
affiliates of the Investment Manager to whom the Investment Manager has
delegated the exercise of all or any of its powers, discretion and duties under
this agreement.
7. In consideration of the services to be rendered by the
Investment Manager under this agreement, each Fund shall pay the Investment
Manager a monthly fee on the first business day of each month at an annual rate
0.75% of the average daily value (as determined on the days and at the time set
forth in the Prospectus for determining net asset value per share) of the Fund's
net assets during the preceding month. If the fee payable to the Investment
Manager pursuant to this paragraph 7 begins to accrue before the end of any
<PAGE>
<PAGE>
4
month or if this agreement terminates before the end of any month, the fee for
the period from such date to the end of such month or from the beginning of such
month to the date of termination, as the case may be, shall be prorated
according to the proportion which such period bears to the full month in which
such effectiveness or termination occurs. For purposes of calculating each such
monthly fee, the value of the Fund's net assets shall be computed in the manner
specified in the Prospectus and the Articles for the computation of the value of
the Fund's net assets in connection with the determination of the net asset
value of shares of the Fund's capital stock.
8. This agreement shall continue in effect until two years from
the date hereof and thereafter for successive annual periods, provided that such
continuance is specifically approved at least annually (a) by the vote of a
majority of the Fund's outstanding voting securities (as defined in the 1940
Act) or by the Company's Board of Directors and (b) by the vote, cast in person
at a meeting called for the purpose, of a majority of the Company's directors
who are not parties to this agreement or "interested persons" (as defined in the
1940 Act) of any such party. This agreement may be terminated at any time,
without the payment of any penalty, by a vote of a majority of the Fund's
outstanding voting securities (as defined in the 1940 Act) or by a vote of a
majority of the Company's entire Board of Directors on 60 days' written notice
to the Investment Manager or by the Investment Manager on 60 days' written
notice to the Company. This agreement shall terminate automatically in the event
of its assignment (as defined in the 1940 Act). The respective agreements,
covenants, indemnities and other statements set forth in Section 6 hereof shall
remain in full force and effect regardless of any termination or cancellation of
this agreement. All property of the Fund shall be returned to the Fund as soon
as reasonably practicable after the termination of this agreement.
9. Upon expiration or earlier termination of this agreement, the
Company shall, if reference to "Salomon Brothers" is made in the corporate name
of the Company or in the name of the Fund and if the Investment Manager requests
in writing, as promptly as practicable change its corporate name and the name of
the Fund so as to eliminate all reference to "Salomon Brothers", and thereafter
the Company and the Fund shall cease transacting business in any corporate name
using the words "Salomon Brothers" or any other reference to the Investment
Manager or "Salomon Brothers". The foregoing rights of the Investment Manager
and obligations of the Company shall not deprive the Investment Manager, or any
affiliate thereof which has "Salomon Brothers" in its name, of, but shall be in
addition to, any other rights or remedies to which the Investment Manager and
any such affiliate may be entitled in law or equity by reason of any breach of
this agreement by the Company, and the failure or omission of the Investment
Manager to request a change of the Company's or the Fund's name or a cessation
of the use of the name of "Salomon Brothers" as described in this paragraph 10
shall not under any circumstances be deemed a waiver of the right to require
such change or cessation at any time thereafter for the same or any subsequent
breach.
10. Except to the extent necessary to perform the Investment
Manager's obligations under this agreement, nothing herein shall be deemed to
limit or restrict the right of the Investment Manager, or any affiliate of the
Investment Manager, or any employee of
<PAGE>
<PAGE>
5
the Investment Manager, to engage in any other business or to devote time and
attention to the management or other aspects of any other business, whether of a
similar or dissimilar nature, or to render services of any kind to any other
corporation, firm, individual or association.
11. This agreement shall be governed by the laws of the State of
New York.
<PAGE>
<PAGE>
6
If the foregoing correctly sets forth the agreement between the
Company and the Investment Manager, please so indicate by signing and returning
to the Company the enclosed copy hereof.
Very truly yours,
SALOMON BROTHERS SERIES VARIABLE
FUNDS INC
By:
------------------------------
Name: Michael S. Hyland
Title: President
ACCEPTED:
SALOMON BROTHERS ASSET
MANAGEMENT INC
By:
--------------------------------
Name: Michael S. Hyland
Title: President
<PAGE>
<PAGE>
MANAGEMENT CONTRACT
SALOMON BROTHERS VARIABLE SERIES FUNDS INC
7 World Trade Center
New York, New York 10048
January 2, 1998
Salomon Brothers Asset Management Inc
7 World Trade Center
New York, New York 10048
Dear Sirs:
This will confirm the agreement between the undersigned (the
"Company") and you (the "Investment Manager") as follows:
1. The Company is an open-end investment company which currently
has seven investment portfolios -- Salomon Brothers Variable U.S. Government
Income Fund, Salomon Brothers Variable High Yield Bond Fund, Salomon Brothers
Variable Strategic Bond Fund, Salomon Brothers Variable Total Return Fund,
Salomon Brothers Variable Asia Growth Fund, Salomon Brothers Variable Investors
Fund and Salomon Brothers Variable Capital Fund. The Company proposes to engage
in the business of investing and reinvesting the assets of the Salomon Brothers
Variable Capital Fund (the "Fund") in the manner and in accordance with the
investment objective and limitations specified in the Company's Articles of
Incorporation, (the "Articles") and the currently effective prospectus,
including the documents incorporated by reference therein (the "Prospectus"),
relating to the Company and the Fund, included in the Company's Registration
Statement, as amended from time to time (the "Registration Statement"), filed by
the Company under the Investment Company Act of 1940, as amended (the "1940
Act"), and the Securities Act of 1933, as amended. Copies of the documents
referred to in the preceding sentence have been furnished to the Investment
Manager. Any amendments to these documents shall be furnished to the Investment
Manager.
2. The Company employs the Investment Manager to (a) make
investment strategy decisions for the Fund, (b) manage the investing and
reinvesting of the Fund's assets as specified in paragraph 1, (c) place purchase
and sale orders on behalf of the Fund and (d) provide continuous supervision of
the Fund's investment portfolios. At the Investment Manager's own expense and
subject to its supervision, the Investment Manager may delegate the performance
of all or a part of its services under this agreement to others.
3. (a) The Investment Manager shall, at its expense, (i) provide
the Fund with office space, office facilities and personnel reasonably necessary
for performance of the services to be provided by the Investment Manager
pursuant to this Agreement, (ii) provide the Fund with persons satisfactory to
the Company's Board of Directors to serve as officers
<PAGE>
<PAGE>
2
and employees of the Fund and (iii) provide the office space, facilities,
equipment and personnel necessary to perform the following services for the
Fund: (A) review purchases and sales of portfolio instruments and review the
Fund's portfolios to assess compliance with the Fund's stated investment
objectives and limitations and compliance with the 1940 Act and other applicable
laws and regulations, (B) record keeping, reporting, and maintaining
registration statements and proxy statements to the extent such records, reports
and documents are not maintained or furnished by the Fund's transfer agent,
custodian, administrative and accounting services agent, or other agents
employed by the Fund, (C) supervision of Fund operations, including coordination
of functions of transfer agent, custodian, administrative and accounting
services agent, accountants, counsel and other parties performing services or
operational functions for the Fund; and (D) certain administrative and clerical
services not otherwise provided by the Fund's transfer agent, custodian,
administrative and accounting services agent, or other agents employed by the
Fund.
(b) Except as provided in subparagraph (a), the Company shall be
responsible for all of the Fund's expenses and liabilities, including
organizational expenses; taxes; interest; fees (including fees paid to its
directors who are not affiliated with the Investment Manager or any of its
affiliates); fees payable to the Securities and Exchange Commission; state
securities qualification fees; costs of preparing and printing prospectuses for
regulatory purposes and for distribution to existing shareholders; advisory and
administration fees; charges of the custodian, transfer agent, administrative
and accounting services agent and any other agent employed by the Fund;
insurance premiums; auditing and legal expenses; costs of shareholders' reports
and shareholders' meetings; charges and expenses of any entity used for pricing
the Fund's portfolio securities and calculating the net asset value of the
Fund's shares; any extraordinary expenses; brokerage fees and commissions, if
any, in connection with the purchase or sale of portfolio securities; and
payments to the Fund's distributor for activities intended to result in the sale
of Fund shares.
4. As manager of the Fund's assets, the Investment Manager shall
make investments for the Fund's accounts in accordance with the investment
objectives and limitations set forth in the Articles, the Prospectus, the 1940
Act, the provisions of the Internal Revenue Code of 1986, as amended, relating
to regulated investment companies, applicable banking laws and regulations, and
policy decisions adopted by the Company's Board of Directors from time to time.
The Investment Manager shall advise the Company's officers and Board of
Directors, at such times as the Company's Board of Directors may specify, of
investments made for the Fund's account and shall, when requested by the
Company's officers or Board of Directors, supply the reasons for making such
investments.
5. The Investment Manager is authorized on behalf of the Company,
from time to time when deemed to be in the best interests of the Company and to
the extent permitted by applicable law, to purchase and/or sell securities in
which the Investment Manager or any of its affiliates underwrites, deals in
and/or makes a market and/or may perform or seek to perform investment banking
services for issuers of such securities. The Investment Manager is further
authorized, to the extent permitted by applicable law, to select brokers for the
execution of trades for the Company, which broker may be an affiliate of the
Investment Manager, provided that the affiliated broker's charge for the
transaction is
<PAGE>
<PAGE>
3
reasonable and fair compared to the usual and customary levels charged by other
brokers in connection with comparable transactions involving similar securities.
6. In consideration of the Investment Manager's undertaking to
render the services described in this agreement, the Company agrees that the
Investment Manager shall not be liable under this agreement for any error of
judgment or mistake of law or for any loss suffered by the Company in connection
with the performance of this agreement, provided that nothing in this agreement
shall be deemed to protect or purport to protect the Investment Manager against
any liability to the Company or its stockholders to which the Investment Manager
would otherwise be subject by reason of willful misfeasance, bad faith or gross
negligence in the performance of its duties under this agreement or by reason of
its reckless disregard of its obligations and duties hereunder ("disabling
conduct"). The Fund will indemnify the Investment Manager against, and hold it
harmless from, any and all losses, claims, damages, liabilities or expenses,
including reasonable counsel fees and expenses and any amounts paid in
satisfaction of judgments, in compromise or as fines or penalties, not resulting
from disabling conduct by the Investment Manager. Indemnification shall be made
only following: (i) a final decision on the merits by a court or other body
before whom the proceeding was brought that the Investment Manager was not
liable by reason of disabling conduct, or (ii) in the absence of such a
decision, a reasonable determination, based upon a review of the facts, that the
Investment Manager was not liable by reason of disabling conduct by (a) the vote
of a majority of a quorum of directors of the Company who are neither
"interested persons" of the Company nor parties to the proceeding
("disinterested non-party directors"), or (b) an independent legal counsel in a
written opinion. The Investment Manager shall be entitled to advances from the
Fund for payment of the reasonable expenses incurred by it in connection with
the matter as to which it is seeking indemnification in the manner and to the
fullest extent permissible under law. The Investment Manager shall provide to
the Fund a written affirmation of its good faith belief that the standard of
conduct necessary for indemnification by the Fund has been met and a written
undertaking to repay any such advance if it should ultimately be determined that
the standard of conduct has not been met. In addition, at least one of the
following additional conditions shall be met: (a) the Investment Manager shall
provide security in form and amount acceptable to the Fund for its undertaking;
(b) the Fund is insured against losses arising by reason of the advance; or (c)
a majority of a quorum of disinterested non-party directors, or independent
legal counsel, in a written opinion, shall have determined, based on a review of
facts readily available to the Fund at the time the advance is proposed to be
made, that there is reason to believe that the Investment Manager will
ultimately be found to be entitled to indemnification. For purposes of this
paragraph 6 only, the term "Investment Manager" shall be deemed to include
affiliates of the Investment Manager to whom the Investment Manager has
delegated the exercise of all or any of its powers, discretion and duties under
this agreement.
7. In consideration of the services to be rendered by the
Investment Manager under this agreement, each Fund shall pay the Investment
Manager a monthly fee on the first business day of each month at an annual rate
1.00% of the average daily value (as determined on the days and at the time set
forth in the Prospectus for determining net asset value per share) of the Fund's
net assets during the preceding month. If the fee payable to the Investment
Manager pursuant to this paragraph 7 begins to accrue before the end of any
<PAGE>
<PAGE>
4
month or if this agreement terminates before the end of any month, the fee for
the period from such date to the end of such month or from the beginning of such
month to the date of termination, as the case may be, shall be prorated
according to the proportion which such period bears to the full month in which
such effectiveness or termination occurs. For purposes of calculating each such
monthly fee, the value of the Fund's net assets shall be computed in the manner
specified in the Prospectus and the Articles for the computation of the value of
the Fund's net assets in connection with the determination of the net asset
value of shares of the Fund's capital stock.
8. This agreement shall continue in effect until two years from
the date hereof and thereafter for successive annual periods, provided that such
continuance is specifically approved at least annually (a) by the vote of a
majority of the Fund's outstanding voting securities (as defined in the 1940
Act) or by the Company's Board of Directors and (b) by the vote, cast in person
at a meeting called for the purpose, of a majority of the Company's directors
who are not parties to this agreement or "interested persons" (as defined in the
1940 Act) of any such party. This agreement may be terminated at any time,
without the payment of any penalty, by a vote of a majority of the Fund's
outstanding voting securities (as defined in the 1940 Act) or by a vote of a
majority of the Company's entire Board of Directors on 60 days' written notice
to the Investment Manager or by the Investment Manager on 60 days' written
notice to the Company. This agreement shall terminate automatically in the event
of its assignment (as defined in the 1940 Act). The respective agreements,
covenants, indemnities and other statements set forth in Section 6 hereof shall
remain in full force and effect regardless of any termination or cancellation of
this agreement. All property of the Fund shall be returned to the Fund as soon
as reasonably practicable after the termination of this agreement.
9. Upon expiration or earlier termination of this agreement, the
Company shall, if reference to "Salomon Brothers" is made in the corporate name
of the Company or in the name of the Fund and if the Investment Manager requests
in writing, as promptly as practicable change its corporate name and the name of
the Fund so as to eliminate all reference to "Salomon Brothers", and thereafter
the Company and the Fund shall cease transacting business in any corporate name
using the words "Salomon Brothers" or any other reference to the Investment
Manager or "Salomon Brothers". The foregoing rights of the Investment Manager
and obligations of the Company shall not deprive the Investment Manager, or any
affiliate thereof which has "Salomon Brothers" in its name, of, but shall be in
addition to, any other rights or remedies to which the Investment Manager and
any such affiliate may be entitled in law or equity by reason of any breach of
this agreement by the Company, and the failure or omission of the Investment
Manager to request a change of the Company's or the Fund's name or a cessation
of the use of the name of "Salomon Brothers" as described in this paragraph 10
shall not under any circumstances be deemed a waiver of the right to require
such change or cessation at any time thereafter for the same or any subsequent
breach.
10. Except to the extent necessary to perform the Investment
Manager's obligations under this agreement, nothing herein shall be deemed to
limit or restrict the right of the Investment Manager, or any affiliate of the
Investment Manager, or any employee of
<PAGE>
<PAGE>
5
the Investment Manager, to engage in any other business or to devote time and
attention to the management or other aspects of any other business, whether of a
similar or dissimilar nature, or to render services of any kind to any other
corporation, firm, individual or association.
11. This agreement shall be governed by the laws of the State of
New York.
<PAGE>
<PAGE>
6
If the foregoing correctly sets forth the agreement between the
Company and the Investment Manager, please so indicate by signing and returning
to the Company the enclosed copy hereof.
Very truly yours,
SALOMON BROTHERS SERIES VARIABLE
FUNDS INC
By:
---------------------------------
Name: Michael S. Hyland
Title: President
ACCEPTED:
SALOMON BROTHERS ASSET
MANAGEMENT INC
By:
-------------------------------
Name: Michael S. Hyland
Title: President
<PAGE>
<PAGE>
SUBADVISORY CONSULTING AGREEMENT
Agreement dated January 2, 1998, by and between SALOMON BROTHERS ASSET
MANAGEMENT INC, a Delaware Corporation ("SBAM") and SALOMON BROTHERS ASSET
MANAGEMENT LIMITED, a company incorporated under the laws of England ("SBAM
Limited").
WHEREAS, pursuant to the Management Contract dated as of January 2, 1998
between SBAM and Salomon Brothers Variable Series Funds Inc (the "Management
Contract"), SBAM is the Investment Manager to the Salomon Brothers Strategic
Bond Fund (the "Fund") portfolio of Salomon Brothers Variable Series Funds Inc
(the "Company"), an open-end management investment company;
WHEREAS, SBAM desires to retain SBAM Limited to assist SBAM in
furnishing an investment program to the Fund;
NOW, THEREFORE, in consideration of the mutual agreements herein made,
SBAM and SBAM Limited agree as follows:
1. SBAM hereby employs SBAM Limited to serve as Sub-Adviser Consultant
to SBAM with respect to such portion of the assets of the Fund as SBAM shall
allocate (the "Designated Portion"), it being contemplated that all of such
assets are to be invested in the securities of non-U.S. issuers. SBAM Limited
will have full power to direct the investment and reinvestment of the assets of
the Designated Portion of the Fund in accordance with the requirements of the
Management Contract. SBAM Limited hereby accepts such employment and agrees, for
the compensation herein provided, to assume all obligations herein set forth.
2. SBAM will pay SBAM Limited, as full compensation for all services
provided under this Subadvisory Consulting Agreement, a portion of the fee (such
portion herein referred to as the "Subadvisory Consulting Fee") payable to SBAM
under the Management Contract. The Subadvisory Consulting Fee shall be an amount
equal to the fee payable under the Management Contract multiplied by the current
value of the net assets of the Designated Portion of the Fund and divided by the
current value of the net assets of the Fund. The Subadvisory Consulting Fee
shall be accrued for each calendar day in the period commencing as of the date
first above written and ending on the date on which this Subadvisory Consulting
Agreement terminates and the sum of the daily fee accruals shall be paid to SBAM
Limited by SBAM at such times and for such periods as SBAM Limited and SBAM
shall agree.
3. This Agreement shall become effective as of the date first above
written and shall remain in force for two years from the date hereof, and for
such successive annual periods thereafter but only so long as each such
continuance is specifically approved at least annually by (1) a vote of the
holders of a majority of the outstanding voting securities of the Fund (as
defined in the Investment Company Act of 1940, as amended (the "1940 Act")) or
by the Company's Board of Directors and (2) a majority of the Directors of the
Company who are not parties to this Agreement or interested persons of any such
parties (other than as Directors of the Company), by vote cast in person at a
meeting duly called for the purpose of voting on such approval.
<PAGE>
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2
4. This Agreement may be terminated at any time without the payment of
any penalty: (1) by a vote of a majority of the entire Board of Directors of the
Company on sixty (60) days' written notice to SBAM Limited and SBAM; (2) by vote
of the holders of a majority of the outstanding voting securities of the Fund
(as defined in the 1940 Act); or (3) by SBAM Limited or SBAM on 60 days' written
notice to the Company.
This Agreement shall automatically terminate in the event of its
assignment, the term "assignment" for this purpose having the meaning defined in
Section 2(a)(4) of the 1940 Act and the rules thereunder.
5. Nothing contained herein shall limit the obligations of SBAM under
the Management Contract.
6. To the extent that state law is not preempted by the provisions of
any law of the United States heretofore or hereafter enacted, as the same may be
amended from time to time, this Agreement shall be administered, construed and
enforced in accordance with the laws of the State of New York.
7. This Agreement may be executed in two or more counterparts, each of
which shall be deemed to be an original, but all of which together shall
constitute one and the same instrument.
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<PAGE>
3
IN WITNESS WHEREOF, the parties hereto have caused this Subadvisory
Consulting Agreement to be executed by their officers thereunto duly authorized.
SALOMON BROTHERS ASSET MANAGEMENT INC
By:_____________________________________
Michael S. Hyland
President
SALOMON BROTHERS ASSET MANAGEMENT
LIMITED
By:_____________________________________
Name:
Title:
<PAGE>
<PAGE>
SUBADVISORY AGREEMENT
Agreement, dated as of January 2, 1998 between Salomon Brothers
Asset Management Inc, a Delaware Corporation (the "Investment Manager") and
Salomon Brothers Asset Management Asia Pacific Limited (the "Subadviser"), a
company incorporated in Hong Kong and registered with the Hong Kong Securities
and Futures Commission as an investment adviser (registration number IAC
001015), relating to the Salomon Brothers Variable Asia Growth Fund (the
"Fund"), an investment portfolio of Salomon Brothers Variable Series Funds Inc,
an open-end investment company (the "Company").
1. The Company proposes to engage in the business of investing
and reinvesting the assets of the Fund in the manner and in accordance with the
investment objective and limitations specified in the Company's Articles of
Incorporation (the "Articles") and the currently effective prospectus, including
the statement of additional information and any other documents incorporated by
reference therein (the "Prospectus"), relating to the Company and the Fund,
included in the Company's Registration Statement, as amended from time to time
(the "Registration Statement"), filed by the Company under the Investment
Company Act of 1940, as amended (the "1940 Act"), and the Securities Act of
1933, as amended. Copies of the documents referred to in the preceding sentence
have been furnished by the Investment Manager to the Subadviser. Any amendments
to these documents shall be furnished by the Investment Manager to the
Subadviser.
2. Pursuant to Section 2 of the Investment Management Agreement
dated the date hereof between the Company and the Investment Manager relating to
the Fund (the "Investment Management Agreement"), the Investment Manager hereby
delegates the performance of certain of its services to the Subadviser to the
extent and on the terms set forth in this agreement. The Subadviser accepts such
delegation and agrees to render the services herein set forth for the
compensation herein provided.
3. The Subadviser shall (a) make investment strategy decisions
for the Fund, (b) manage the investing and reinvesting of the Fund's assets as
specified in paragraph 1, (c) place purchase and sale orders on behalf of the
Fund and (d) provide continuous supervision of the Fund's investment portfolio.
The Subadviser shall, at its expense, (i) provide office space, office
facilities and personnel reasonably necessary for performance of the services to
be provided by the Subadviser pursuant to this agreement, and (ii) provide one
or more persons satisfactory to the Company's Board of Directors to serve as
officers and employees of the Fund.
4. As manager of the Fund's assets, the Subadviser shall make
investments for the Fund's account in accordance with the investment objective
and limitations set forth in the
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<PAGE>
2
Articles, the Prospectus, the 1940 Act, the provisions of the Internal Revenue
Code of 1986, as amended, relating to regulated investment companies, applicable
banking laws and regulations, and policy decisions adopted by the Company's
Board of Directors from time to time. The Subadviser shall advise the Investment
Manager, the Company's officers and Board of Directors, at such times as the
Company's Board of Directors may specify, of investments made for the Fund's
account and shall, when requested by the Subadviser and/or the Company's
officers or Board of Directors, supply the reasons for making such investments.
5. The Subadviser is authorized on behalf of the Company, from
time to time when deemed to be in the best interests of the Company and to the
extent permitted by applicable law, to purchase and/or sell securities in which
the Subadviser, Investment Manager or any of their affiliates underwrites, deals
in and/or makes a market and/or may perform or seek to perform investment
banking services for issuers of such securities. The Subadviser is further
authorized, to the extent permitted by applicable law, to select brokers for the
execution of trades for the Company, which broker may be an affiliate of the
Subadviser and the Investment Manager, provided that the affiliated broker's
charge for the transaction is reasonable and fair compared to the usual and
customary levels charged by other brokers in connection with comparable
transactions involving similar securities.
6. In consideration of the Subadviser's undertaking to render the
services described in this agreement, the Investment Manager agrees that the
Subadviser shall not be liable under this agreement for any error of judgment or
mistake of law or for any loss suffered by the Company (including any Hong Kong
taxes or related expenses imposed on the Fund in relation to matters
contemplated by this agreement) in connection with the performance of this
agreement, provided that nothing in this agreement shall be deemed to protect or
purport to protect the Subadviser against any liability to the Company or its
stockholders to which the Subadviser would otherwise be subject by reason of
willful misfeasance, bad faith or gross negligence in the performance of its
duties under this agreement or by reason of its reckless disregard of its
obligations and duties hereunder ("disabling conduct"). To the extent the
Investment Manager obtains indemnification from the Fund, the Investment Manager
will indemnify the Subadviser against, and hold it harmless from, any and all
losses, claims, damages, liabilities or expenses (including any Hong Kong taxes
or related expenses imposed on the Fund in relation to the matters contemplated
by this agreement), including reasonable counsel fees and expenses and any
amounts paid in satisfaction of judgments, in compromise or as fines or
penalties, not resulting from disabling conduct by the Subadviser.
Indemnification shall be made only following: (i) a final decision on the merits
by a court or other body before whom the proceeding was brought that the
Subadviser was not liable by reason of disabling conduct, or (ii) in the absence
<PAGE>
<PAGE>
3
of such a decision, a reasonable determination, based upon a review of the
facts, that the Subadviser was not liable by reason of disabling conduct by (a)
the vote of a majority of a quorum of directors of the Company who are neither
"interested persons" of the Company nor parties to the proceeding
("disinterested non-party directors"), or (b) an independent legal counsel in a
written opinion. To the extent the Investment Manager receives the same from the
Fund, the Subadviser shall be entitled to advances from the Investment Manager
for payment of the reasonable expenses incurred by it in connection with the
matter as to which it is seeking indemnification in the manner and to the
fullest extent permissible under law. The Subadviser shall provide to the
Investment Manager, who in turn will provide to the Fund, a written affirmation
of the Subadviser's good faith belief that the standard of conduct necessary for
indemnification has been met and a written undertaking to repay any such advance
if it should ultimately be determined that the standard of conduct has not been
met. In addition, at least one of the following additional conditions shall be
met: (a) the Subadviser shall provide security in form and amount acceptable to
the Investment Manager for its undertaking; (b) the Fund is insured against
losses arising by reason of the advance; or (c) a majority of a quorum of
disinterested non-party directors, or independent legal counsel, in a written
opinion, shall have determined, based on a review of facts readily available to
the Fund at the time the advance is proposed to be made, that there is reason to
believe that the Subadviser will ultimately be found to be entitled to
indemnification.
7. In consideration of the services to be rendered by the
Subadviser under this agreement, the Investment Manager shall pay the Investment
Adviser, in respect of each quarter of its service, a lump sum fee in such
amount as shall be agreed between the parties hereto from time to time. Such
agreement may be recorded in an agreement substantially in the form of
Attachment A hereto. The quarterly fee referred to in the preceding sentence
shall be paid by the Investment Manager to the Subadviser in arrears. Any amount
payable to the Subadviser under this agreement shall be computed in U.S.
dollars. The fee due for any quarter during which this agreement remains in
effect for less than a full quarter will be determined on a pro rata basis.
8. This agreement shall continue in effect until two years from
the date hereof and thereafter for successive annual periods, provided that such
continuance is specifically approved at least annually (a) by the vote of a
majority of the Fund's outstanding voting securities (as defined in the 1940
Act) or by the Company's Board of Directors and (b) by the vote, cast in person
at a meeting called for the purpose, of a majority of the Company's directors
who are not parties to this agreement or "interested persons" (as defined in the
1940 Act) of any such party. This agreement may be terminated at any time,
without the payment of any penalty, (i) by a vote of a majority of the Fund's
<PAGE>
<PAGE>
4
outstanding voting securities (as defined in the 1940 Act), (ii) by a vote of a
majority of the Company's entire Board of Directors on 60 days' written notice
to the Investment Manager and the Subadviser or (iii) by either the Subadviser
or the Investment Manager on 60 days' written notice to the other party and the
Company. This agreement shall terminate automatically in the event of its
assignment (as defined in the 1940 Act). Termination of this agreement shall not
relieve either the Investment Manager nor the Subadviser from any liability or
obligation in respect of any matters, undertakings or conditions which shall not
have been done, observed or performed prior to such termination. The respective
agreements, covenants, indemnities and other statements set forth in Section 6
hereof shall remain in full force and effect regardless of any termination or
cancellation of this agreement. All property of the Fund shall be returned to
the Fund as soon as reasonably practicable after the termination of this
agreement.
9. Upon expiration or earlier termination of this agreement, the
Company shall, if reference to "Salomon Brothers" is made in the corporate name
of the Company or in the name of the Fund and if the Investment Manager requests
in writing, as promptly as practicable change its corporate name and the name of
the Fund so as to eliminate all reference to "Salomon Brothers", and thereafter
the Company and the Fund shall cease transacting business in any corporate name
using the words "Salomon Brothers" or any other reference to the Investment
Manager or "Salomon Brothers". The foregoing rights of the Investment Manager
and obligations of the Company shall not deprive the Investment Manager, or any
affiliate thereof which has "Salomon Brothers" in its name, of, but shall be in
addition to, any other rights or remedies to which the Investment Manager and
any such affiliate may be entitled in law or equity by reason of any breach of
this agreement by the Company, and the failure or omission of the Investment
Manager to request a change of the Company's or the Fund's name or a cessation
of the use of the name of "Salomon Brothers" as described in this paragraph 10
shall not under any circumstances be deemed a waiver of the right to require
such change or cessation at any time thereafter for the same or any subsequent
breach.
10. Except to the extent necessary to perform the Investment
Manager's obligations under this agreement, nothing herein shall be deemed to
limit or restrict the right of the Investment Manager, or any affiliate of the
Investment Manager, or any employee of the Investment Manager, to engage in any
other business or to devote time and attention to the management or other
aspects of any other business, whether of a similar or dissimilar nature, or to
render services of any kind to any other corporation, firm, individual or
association.
11. Each of the parties hereto undertakes to notify the other of
any material change in any information supplied in, or pursuant to, this
agreement within a reasonable time after
<PAGE>
<PAGE>
5
such change. The Subadviser undertakes (i) to notify the Investment Manager of
any change in its directors or portfolio manager with responsibility for the
Fund within a reasonable time after such change and (ii) to provide, on demand,
such financial and other information relating to itself or its business as the
Investment Manager may from time to time reasonably require. The Investment
Manager acknowledges that the Subadviser may be required by law or the rules of
any governmental or other regulatory authority to disclose information relating
to the Fund.
12. This agreement shall be governed by the laws of the State of
New York.
<PAGE>
<PAGE>
6
IN WITNESS WHEREOF, the parties hereto have caused this agreement
to be executed by their officers designated below as of the date hereinabove
written.
SALOMON BROTHERS ASSET MANAGEMENT
ASIA PACIFIC LIMITED
By:
---------------------------------
Name:
Title:
SALOMON BROTHERS ASSET
MANAGEMENT INC
By:
---------------------------------
Name: Michael S. Hyland
Title: President
<PAGE>
<PAGE>
7
Attachment A
From: Salomon Brothers Asset Management Asia Pacific Limited
To: Salomon Brothers Asset Management Inc
Date: _________________________
This confirms that the amount of the quarterly fee under paragraph 7 of our
agreement effective , 1997 for the period set forth below shall be
as follows:
Period: from ___________ to ____________
Amount of Quarterly Fee: ___________________
Please initial next to your name above and return to indicate your confirmation.
<PAGE>
<PAGE>
DISTRIBUTION AGREEMENT
January 2, 1998
Salomon Brothers Asset Management Inc
7 World Trade Center
New York, New York 10048
Dear Sirs:
This is to confirm that, in consideration of the agreements
hereinafter contained, Salomon Brothers Variable Series Funds Inc (the
"Company"), an open-end, professionally managed investment company organized as
a corporation under the laws of the State of Maryland, has agreed that Salomon
Brothers Inc ("SBI") shall be, for the period of this Agreement, the distributor
of shares (the "Shares") of Salomon Brothers Variable U.S. Government Income
Fund, Salomon Brothers Variable High Yield Bond Fund, Salomon Brothers Variable
Strategic Bond Fund, Salomon Brothers Variable Total Return Fund, Salomon
Brothers Variable Asia Growth Fund, Salomon Brothers Variable Investors Fund,
and Salomon Brothers Variable Capital Fund (each a "Fund" and, collectively, the
"Funds"), each an investment portfolio of the Company.
1. Services as Distributor
1.1 SBI will act as agent for the distribution of the Shares
covered by the registration statement, prospectus and statement of additional
information then in effect under the Securities Act of 1933, as amended (the
"1933 Act"), and the Investment Company Act of 1940, as amended (the "1940
Act").
1.2 SBI agrees to use its best efforts to solicit orders for the
sale of the Shares at the public offering price, as determined in accordance
with the registration statement, and will undertake such advertising and
promotion as it believes is reasonable in connection with such solicitation.
1.3 All activities by SBI as distributor of the Shares shall
comply with all applicable laws, rules and regulations, including, without
limitation, all rules and regulations made or adopted by the Securities and
Exchange Commission (the "SEC") or by any securities association registered
under the Securities Exchange Act of 1934, as amended.
1.4 SBI will transmit any orders received by it for purchase or
redemption of shares of any Fund to First Data Investor Services Group, Inc.
("First Data"), the Funds'
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<PAGE>
2
transfer agent and dividend disbursing agent, or any successor to First Data of
which any Fund has notified SBI in writing.
1.5 SBI acknowledges that, whenever in the judgment of any Fund's
officers such action is warranted for any reason, including, without limitation,
market, economic or political conditions, those officers may decline to accept
any orders for, or make any sales of, the Shares until such time as those
officers deem it advisable to accept such orders and to make such sales.
1.6 SBI will act only on its own behalf as principal should it
choose to enter into selling agreements in the form of Exhibit A attached hereto
with selected dealers or others.
1.7 As compensation for its services hereunder, SBI shall be
entitled to such compensation as is described in the Funds' current registration
statement.
2. Duties of the Funds
2.1 Each Fund agrees at its own expense to execute any and all
documents, to furnish any and all information and to take any other actions that
may be reasonably necessary in connection with the qualification of the Shares
for sale in those states that SBI may designate.
2.2 Each Fund shall furnish from time to time, for use in
connection with the sale of the Shares, such information reports with respect to
a Fund and its Shares as SBI may reasonably request, all of which shall be
signed by one or more of the Fund's duly authorized officers; and each Fund
warrants that the statements contained in any such reports, when so signed by
one or more of a Fund's officers, shall be true and correct. Each Fund shall
also furnish SBI upon request with: (a) annual audits of its books and accounts
made by independent public accountants regularly retained by each Fund, (b)
semiannual unaudited financial statements pertaining to each Fund, (c) quarterly
earnings statements prepared by each Fund, (d) a monthly itemized list of the
securities in the portfolio of the Fund, (e) monthly balance sheets as soon as
practicable after the end of each month and (f) from time to time such
additional information regarding each Fund's financial condition as SBI may
reasonably request.
3. Representations and Warranties
Each Fund represents to SBI that all registration statements,
prospectuses and statements of additional information filed by any Fund with the
SEC under the 1933 Act and the 1940 Act with respect to the shares of any Fund
have been carefully prepared in conformity with the requirements of the 1933
Act, the 1940 Act and the rules and regulations of the SEC thereunder. As used
in this Agreement the terms "registration statement", "prospectus" and
"statement of additional information" shall mean any registration statement,
prospectus and statement of additional information filed by any Fund with the
SEC and any amendments and supplements thereto which at any time shall have been
filed with the SEC.
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<PAGE>
3
Each Fund represents and warrants to SBI that any registration statement,
prospectus and statement of additional information, when such registration
statement becomes effective, will include all statements required to be
contained therein in conformity with the 1933 Act, the 1940 Act and the rules
and regulations of the SEC; that all statements of fact contained in any
registration statement, prospectus or statement of additional information will
be materially true and correct when such registration statement becomes
effective; and that neither any registration statement nor any prospectus or
statement of additional information when such registration statement becomes
effective will include an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading to a purchaser of a Fund's shares. SBI may, but shall not
be obligated to, propose from time to time such amendment or amendments to any
registration statement and such supplement or supplements to any prospectus or
statement of additional information as, in the light of future developments,
may, in the opinion of SBI's counsel, be necessary or advisable. If any Fund
shall not propose such amendment or amendments and/or supplement or supplements
within fifteen days after receipt by such Fund of a written request from SBI to
do so, SBI may, at its option, terminate this Agreement as to that Fund. No Fund
shall file any amendment to any registration statement or supplement to any
prospectus or statement of additional information without giving SBI reasonable
notice thereof in advance; provided, however, that nothing contained in this
Agreement shall in any way limit any Fund's right to file at any time such
amendments to any registration statement and/or supplements to any prospectus or
statement of additional information, of whatever character, as such Fund may
deem advisable, such right being in all respects absolute and unconditional.
4. Indemnification
4.1 Each Fund authorizes SBI and any dealers with whom SBI has
entered into dealer agreements to use any prospectus or statement of additional
information furnished by a Fund from time to time, in connection with the sale
of a Fund's shares. Each Fund agrees to indemnify, defend and hold SBI, its
several officers and directors, and any person who controls SBI within the
meaning of Section 15 of the 1933 Act, free and harmless from and against any
and all claims, demands, liabilities and expenses (including the cost of
investigating or defending such claims, demands or liabilities and any counsel
fees incurred in connection therewith) which SBI, its officers and directors, or
any such controlling person, may incur under the 1933 Act, the 1940 Act or
common law or otherwise, arising out of or based upon any untrue statement or
alleged untrue statement of a material fact contained in any registration
statement, any prospectus or any statement of additional information, or arising
out of or based upon any omission or alleged omission to state a material fact
required to be stated in any registration statement, any prospectus or any
statement of additional information, or necessary to make the statements in any
of them, in light of the circumstances under which they were made, not
misleading; provided, however, that no Fund's agreement to indemnify SBI, its
officers or directors, and any such controlling person shall be deemed to cover
any claims, demands, liabilities or expenses arising out of or based upon any
statements or representations made by SBI or its representatives or agents other
than such statements and representations as are contained in any registration
statement, prospectus or statement of additional information and in such
financial and other statements as are furnished to SBI pursuant to paragraph 2.2
hereof; and further provided that neither any Fund's agreement to
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<PAGE>
4
indemnify SBI, nor any Fund's representations and warranties hereinbefore set
forth in paragraph 3 shall be deemed to cover any liability to any Fund or its
shareholders to which SBI would otherwise be subject by reason of willful
misfeasance, bad faith or gross negligence in the performance of its duties, or
by reason of SBI's reckless disregard of its obligations and duties under this
Agreement. Each Fund's agreement to indemnify SBI, its officers and directors,
and any such controlling person, as aforesaid, is expressly conditioned upon
such Fund being notified of any action brought against SBI, its officers or
directors, or any such controlling person, such notification to be given by
letter or by telegram addressed to such Fund at its principal office in New
York, New York and sent to such Fund by the person against whom such action is
brought, within ten days after the summons or other first legal process shall
have been served. The failure so to notify any Fund of any such action shall not
relieve such Fund from any liability that such Fund may have to the person
against whom such action is brought by reason of any such untrue or alleged
untrue statement or omission or alleged omission otherwise than on account of
such Fund's indemnity agreement contained in this paragraph 4.1. Each Fund's
indemnification agreement contained in this paragraph 4.1 and each Fund's
representations and warranties in this Agreement shall remain operative and in
full force and effect regardless of any investigation made by or on behalf of
SBI, its officers and directors, or any controlling person, and shall survive
the delivery of any of such Fund's shares. This agreement of indemnity will
inure exclusively to SBI's benefit, to the benefit of its several officers and
directors, and their respective estates, and to the benefit of the controlling
persons and their successors. Each Fund agrees to notify SBI promptly of the
commencement of any litigation or proceedings against such Fund or any of its
officers or directors in connection with the issuance and sale of any of such
Fund's shares.
4.2 SBI agrees to indemnify, defend and hold each Fund, its
several officers and directors, and any person who controls any Fund within the
meaning of Section 15 of the 1933 Act, free and harmless from and against any
and all claims, demands, liabilities and expenses (including the costs of
investigating or defending such claims, demands or liabilities and any counsel
fees incurred in connection therewith) that any Fund, its officers or directors
or any such controlling person may incur under the 1933 Act, the 1940 Act or
common law or otherwise, but only to the extent that such liability or expense
incurred by such Fund, its officers or directors or such controlling person
resulting from such claims or demands shall arise out of or be based upon (a)
any unauthorized sales literature, advertisements, information, statements or
representations or (b) any untrue or alleged untrue statement of a material fact
contained in information, furnished in writing by SBI to such Fund and used in
the answers to any of the items of the registration statement or in the
corresponding statements made in the prospectus or statement of additional
information, or shall arise out of or be based upon any omission or alleged
omission to state a material fact in connection with such information furnished
in writing by SBI to such Fund and required to be stated in such answers or
necessary to make such information not misleading. SBI's agreement to indemnify
any Fund, its officers and directors, and any such controlling person, as
aforesaid, is expressly conditioned upon SBI being notified of any action
brought against such Fund, its officers or directors, or any such controlling
person, such notification to be given by letter or telegram addressed to SBI at
its principal office in New York, New York and sent to SBI by the person against
whom such action is brought, within ten days after the summons or other first
legal process shall have been served. The failure so to notify SBI of any such
action
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<PAGE>
5
shall not relieve SBI from any liability that SBI may have to any Fund, its
officers or directors, or to such controlling person by reason of any such
untrue or alleged untrue statement or omission or alleged omission otherwise
than on account of SBI's indemnity agreement contained in this paragraph 4.2.
SBI agrees to notify each Fund promptly of the commencement of any litigation or
proceedings against SBI or any of its officers or directors in connection with
the issuance and sale of any Fund's shares.
4.3 In case any action shall be brought against any indemnified
party under paragraph 4.1 or 4.2, and it shall notify the indemnifying party of
the commencement thereof, the indemnifying party shall be entitled to
participate in, and, to the extent that it shall wish to do so, to assume the
defense thereof with counsel satisfactory to such indemnified party. If the
indemnifying party opts to assume the defense of such action, the indemnifying
party will not be liable to the indemnified party for any legal or other
expenses subsequently incurred by the indemnified party in connection with the
defense thereof other than (a) reasonable costs of investigation or the
furnishing of documents or witnesses and (b) all reasonable fees and expenses of
separate counsel to such indemnified party if (i) the indemnifying party and the
indemnified party shall have agreed to the retention of such counsel or (ii) the
indemnified party shall have concluded reasonably that representation of the
indemnifying party and the indemnified party by the same counsel would be
inappropriate due to actual or potential differing interests between them in the
conduct of the defense of such action.
5. Effectiveness of Registration
None of the Shares shall be offered by either SBI or any Fund
under any of the provisions of this Agreement and no orders for the purchase or
sale of the Shares hereunder shall be accepted by any Fund if and so long as the
effectiveness of the registration statement then in effect or any necessary
amendments thereto shall be suspended under any of the provisions of the 1933
Act or if and so long as a current prospectus as required by Section 5(b)(2) of
the 1933 Act is not on file with the SEC; provided, however, that nothing
contained in this paragraph 5 shall in any way restrict or have an application
to or bearing upon any Fund's obligation to repurchase its Shares from any
shareholder in accordance with the provisions of such Fund's prospectus,
statement of additional information or articles of incorporation.
6. Notice to SBI
Each Fund agrees to advise SBI immediately in writing:
(a) of any request by the SEC for amendments to the registration
statement, prospectuses or statements of additional information then in effect
or for additional information;
(b) in the event of the issuance by the SEC of any stop order
suspending the effectiveness of the registration statement, prospectus or
statement of additional information then in effect or the initiation of any
proceeding for that purpose;
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6
(c) of the happening of any event that makes untrue any statement
of a material fact made in the registration statement, prospectus or statement
of additional information then in effect or that requires the making of a change
in such registration statement, prospectus or statement of additional
information in order to make the statements therein, in light of the
circumstances under which they were made, not misleading; and
(d) of all actions of the SEC with respect to any amendment to
any registration statement, prospectus or statement of additional information
which may from time to time be filed with the SEC.
7. Term of Agreement
This Agreement shall continue for two years from the date hereof
and thereafter shall continue automatically for successive annual periods,
provided such continuance is specifically approved at least annually by (i) the
Company's Board of Directors with respect to each Fund, or (ii) by a vote of a
majority (as defined in the 1940 Act) of each Fund's outstanding voting
securities, provided that in either event the continuance is also approved by
the majority of the Directors of the Company who are not interested persons (as
defined in the 1940 Act) of any party to this Agreement, by vote cast in person
at a meeting called for the purpose of voting on such approval. This Agreement
is terminable as to any Fund, without penalty, on 60 days' notice by the
Company's Board of Directors, by vote of the holders of a majority of such
Fund's shares, or on 90 days' notice by SBI. This Agreement will also terminate
automatically in the event of its assignment (as defined in the 1940 Act).
8. Miscellaneous
Each Fund recognizes that directors, officers and employees of
SBI may from time to time serve as directors, trustees, officers and employees
of corporations and business trusts (including other investment companies) and
that such other corporations and trusts may include the name "Salomon" or
"Salomon Brothers" as part of their names, and that SBI or its affiliates may
enter into distribution or other agreements with such other corporations and
trusts. If SBI, or an affiliate, ceases to act as the distributor of any Fund's
shares, the Fund agrees that, at SBI's request, such Fund's license to use the
words "Salomon Brothers" will terminate and it will take all necessary action to
change the name of such Fund to a name not including the words "Salomon" or
"Salomon Brothers."
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7
Please confirm that the foregoing is in accordance with your
understanding by indicating your acceptance thereof at the place below
indicated, whereupon it shall become a binding agreement between us.
Very truly yours,
SALOMON BROTHERS VARIABLE SERIES
FUNDS INC
By:
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Michael S. Hyland
President
Accepted:
SALOMON BROTHERS INC
By:
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CUSTODIAN SERVICES AGREEMENT
THIS AGREEMENT is made as of ________, 1997 by and between PNC BANK,
NATIONAL ASSOCIATION, a national banking association ("PNC Bank"), and SALOMON
BROTHERS VARIABLE SERIES FUNDS, INC., a Maryland corporation (the "Fund").
W I T N E S S E T H:
WHEREAS, the Fund is registered as an open-end management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act");
and
WHEREAS, the Fund wishes to retain PNC Bank to provide custodian
services to its investment portfolios listed on Exhibit A attached hereto and
made a part hereof, as such Exhibit A may be amended from time to time (each a
"Portfolio"), and PNC Bank wishes to furnish custodian services, ei ther
directly or through an affiliate or affiliates, as more fully described herein.
NOW, THEREFORE, In consideration of the premises and mutual covenants
herein contained, and intending to be legally bound hereby, the parties hereto
agree as follows: 1. Definitions. As Used in This Agreement:
(a) "1933 Act" means the Securities Act of 1933, as amended.
(b) "1934 Act" means the Securities Exchange Act of 1934, as amended.
(c) "Authorized Person" means any officer of the Fund and any other
person duly authorized by the Fund's Board of Directors to give Oral
Instructions and Written Instructions on behalf of the Fund and listed on the
Authorized Persons Appendix
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attached hereto and made a part hereof or any amendment thereto as may be
received by PNC Bank. An Authorized Person's scope of authority may be limited
by the Fund by setting forth such limitation in the Authorized Persons Appendix.
(d) "Book-Entry System" means Federal Reserve Treasury book-entry
system for United States and federal agency securities, its successor or
successors, and its nominee or nominees and any book-entry system maintained by
an exchange registered with the SEC under the 1934 Act.
(e) "CEA" means the Commodities Exchange Act, as amended.
(f) "Oral Instructions" mean oral instructions received by PNC Bank
from an Authorized Person or from a person reasonably believed by PNC Bank to be
an Authorized Person.
(g) "PNC Bank" means PNC Bank, National Association or a subsidiary or
affiliate of PNC Bank, National Association.
(h) "SEC" means the Securities and Exchange Commission.
(i) "Securities Laws" mean the 1933 Act, the 1934 Act, the 1940 Act
and the CEA.
(j) "Shares" mean the shares of beneficial interest of any series or
class of the Fund.
(k) "Property" means:
(i) any and all securities and other investment items
which the Fund may from time to time deposit, or
cause to be deposited, with PNC Bank or which PNC
Bank may from time to time hold for the Fund;
(ii) all income in respect of any of such securities or
other investment items;
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(iii) all proceeds of the sale of any of such securities
or investment items; and
(iv) all proceeds of the sale of securities issued by
the Fund, which are received by PNC Bank from time
to time, from or on behalf of the Fund.
(l) "Written Instructions" mean written instructions signed by two
Authorized Persons and received by PNC Bank. The instructions may be delivered
by hand, mail, tested telegram, cable, telex or facsimile sending device.
2. Appointment. The Fund hereby appoints PNC Bank to provide custodian
services to the Fund, on behalf of each of its investment portfolios (each, a
"Portfolio"), and PNC Bank accepts such appointment and agrees to furnish such
services.
3. Delivery of Documents. The Fund has provided or, where applicable,
will provide PNC Bank with the following:
(a) certified or authenticated copies of the resolutions of the Fund's
Board of Directors, approving the appointment of PNC Bank or its affiliates to
provide services;
(b) a copy of the Fund's most recent effective registration statement;
(c) a copy of each Portfolio's advisory agreements;
(d) a copy of the distribution agreement with respect to each class of
Shares;
(e) a copy of each Portfolio's administration agreement if PNC Bank is
not providing the Portfolio with such services;
(f) copies of any shareholder servicing agreements made in respect of
the Fund or a Portfolio; and
(g) certified or authenticated copies of any and all amendments or
supplements to the foregoing.
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4. Compliance With Laws.
PNC Bank undertakes to comply with all applicable requirements of the
Securities Laws and any laws, rules and regulations of governmental authorities
having jurisdiction with respect to the duties to be performed by PNC Bank
hereunder. Except as specifically set forth herein, PNC Bank assumes no
responsibility for such compliance by the Fund or any Portfolio.
5. Instructions.
(a) Unless otherwise provided in this Agreement, PNC Bank shall act
only upon Oral Instructions and Written Instructions.
(b) PNC Bank shall be entitled to rely upon any Oral Instructions and
Written Instructions it receives from an Authorized Person (or from a person
reasonably believed by PNC Bank to be an Authorized Person) pursuant to this
Agreement. PNC Bank may assume that any Oral Instructions or Written
Instructions received hereunder are not in any way inconsistent with the
provisions of organizational documents of the Fund or of any vote, resolution or
proceeding of the Fund's Board of Directors or of the Fund's shareholders,
unless and until PNC Bank receives Written Instructions to the contrary.
(c) The Fund agrees to forward to PNC Bank Written Instructions
confirming Oral Instructions (except where such Oral Instructions are given by
PNC Bank or its affiliates) so that PNC Bank receives the Written Instructions
by the close of business on the same day that such Oral Instructions are
received. The fact that such confirming Written Instructions are not received
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by PNC Bank shall in no way invalidate the transactions or enforceability of the
transactions authorized by the Oral Instructions. Where Oral Instructions or
Written Instructions reasonably appear to have been received from an Authorized
Person, PNC Bank shall incur no liability to the Fund in acting upon such Oral
Instructions or Written Instructions provided that PNC Bank's actions comply
with the other provisions of this Agreement.
6. Right to Receive Advice.
(a) Advice of the Fund. If PNC Bank is in doubt as to any action it
should or should not take, PNC Bank may request directions or advice, including
Oral Instructions or Written Instructions, from the Fund.
(b) Advice of Counsel. If PNC Bank shall be in doubt as to any
question of law pertaining to any action it should or should not take, PNC Bank
may request advice at its own cost from such counsel of its own choosing (who
may be counsel for the Fund, the Fund's investment adviser or PNC Bank, at the
option of PNC Bank).
(c) Conflicting Advice. In the event of a conflict between directions,
advice or Oral Instructions or Written Instructions PNC Bank receives from the
Fund, and the advice it receives from counsel, PNC Bank shall be entitled to
rely upon and follow the advice of counsel. In the event PNC Bank so relies on
the advice of counsel, PNC Bank remains liable for any action or omission on the
part of PNC Bank which constitutes willful misfeasance, bad faith, gross
negligence or reckless
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disregard by PNC Bank of any duties, obligations or responsibilities set forth
in this Agreement.
(d) Protection of PNC Bank. PNC Bank shall be protected in any action
it takes or does not take in reliance upon directions, advice or Oral
Instructions or Written Instructions it receives from the Fund or from counsel
and which PNC Bank believes, in good faith, to be consistent with those
directions, advice or Oral Instructions or Written Instructions. Nothing in this
section shall be construed so as to impose an obligation upon PNC Bank (i) to
seek such directions, advice or Oral Instructions or Written Instructions, or
(ii) to act in accordance with such directions, advice or Oral Instructions or
Written Instructions unless, under the terms of other provisions of this
Agreement, the same is a condition of PNC Bank's properly taking or not taking
such action. Nothing in this subsection shall excuse PNC Bank when an action or
omission on the part of PNC Bank constitutes willful misfeasance, bad faith,
gross negligence or reckless disregard by PNC Bank of any duties, obligations or
responsibilities set forth in this Agreement.
7. Records; Visits. The books and records pertaining to the Fund and any
Portfolio, which are in the possession or under the control of PNC Bank, shall
be the property of the Fund. Such books and records shall be prepared and
maintained as required by the 1940 Act and other applicable securities laws,
rules and regulations. The Fund and Authorized Persons shall have access to such
books and records at all times during PNC Bank's normal business hours. Upon the
reasonable request of the Fund, copies
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of any such books and records shall be provided by PNC Bank to the Fund or to an
aut horized representative of the Fund, at the Fund's expense.
8. Confidentiality. PNC Bank agrees to keep confidential all records of the
Fund and information relating to the Fund and its shareholders, unless the
release of such records or information is otherwise consented to, in writing, by
the Fund. The Fund agrees that such consent shall not be unreasonably withheld
and may not be withheld where PNC Bank may be exposed to civil or criminal
contempt proceedings or when required to divulge such information or records to
duly constituted authorities.
9. Cooperation with Accountants. PNC Bank shall cooperate with the Fund's
independent public accountants and shall take all reasonable action in the
performance of its obligations under this Agreement to ensure that the necessary
information is made available to such accountants for the expression of their
opinion, as required by the Fund.
10. Disaster Recovery. PNC Bank shall enter into and shall maintain in
effect with appropriate parties one or more agreements making reasonable
provisions for emergency use of electronic data processing equipment to the
extent appropriate equipment is available. In the event of equipment failures,
PNC Bank shall, at no additional expense to the Fund, take reasonable steps to
minimize service interruptions. PNC Bank shall have no liability with respect to
the loss of data or service interruptions caused by equipment failure provided
such loss or
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interruption is not caused by PNC Bank's own willful misfeasance, bad faith,
gross negligence or reckless disregard of its duties or obligations under this
Agreement.
11. Compensation. As compensation for custody services rendered by PNC
Bank during the term of this Agreement, the Fund, on behalf of each of the
Portfolios, will pay to PNC Bank a fee or fees as may be agreed to in writing
from time to time by the Fund and PNC Bank.
12. Indemnification. The Fund, on behalf of each Portfolio, agrees to
indemnify and hold harmless PNC Bank and its affiliates from all taxes, charges,
expenses, assessments, claims and liabilities (including, without limitation,
liabilities arising under the Securities Laws and any state and foreign
securities and blue sky laws, and amendments thereto, and expenses, including
(without limitation) attorneys' fees and disbursements, arising directly or
indirectly from any action or omission to act which PNC Bank takes (i) at the
request or on the direction of or in reliance on the advice of the Fund or (ii)
upon Oral Instructions or Written Instructions. Neither PNC Bank, nor any of its
affiliates, shall be indemnified against any liability (or any expenses incident
to such liability) arising out of PNC Bank's or its affiliates' own willful
misfeasance, bad faith, gross negligence or reckless disregard of its duties
under this Agreement.
13. Responsibility of PNC Bank.
(a) PNC Bank shall be under no duty to take any action on behalf of
the Fund or any Portfolio except as specifically set
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forth herein or as may be specifically agreed to by PNC Bank in writing. PNC
Bank shall be obligated to exercise care and diligence in the performance of its
duties hereunder, to act in good faith and to use its best efforts, within
reasonable limits, in performing services provided for under this Agreement. PNC
Bank shall be liable for any damages arising out of PNC Bank's failure to
perform its duties under this agreement to the extent such damages arise cut
of PNC Bank's willful misfeasance, bad faith, gross negligence or reckless
disregard of its duties under this Agreement.
(b) Without limiting the generality of the foregoing or of any other
provision of this Agreement, (i) PNC Bank shall not be under any duty or
obligation to inquire into and shall not be liable for (A) the validity or
invalidity or authority or lack thereof of any Oral Instruction or Written
Instruction, notice or other instrument which conforms to the applicable
requirements of this Agreement, and which PNC Bank reasonably believes to be
genuine; or (B) subject to section 10, delays or errors or loss of data
occurring by reason of circumstances beyond PNC Bank's control, including acts
of civil or military authority, national emergencies, fire, flood, catastrophe,
acts of God, insurrection, war, riots or failure of the mails, transportation,
communication or power supply.
(c) Notwithstanding anything in this Agreement to the contrary,
neither PNC Bank nor its affiliates shall be liable to the Fund or to any
Portfolio for any consequential, special or indirect losses or damages which the
Fund may incur or suffer by
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or as a consequence of PNC Bank's or its affiliates' performance of the services
provided hereunder, whether or not the likelihood of such losses or damages was
known by PNC Bank or its affiliates.
14. Description of Services.
(a) Delivery of the Property. The Fund will deliver or arrange for
delivery to PNC Bank, all the Property owned by the Portfolios, including cash
received as a result of the distribution of Shares, during the period that is
set forth in this Agreement. PNC Bank will not be responsible for such property
until actual receipt.
(b) Receipt and Disbursement of Money. PNC Bank, acting upon Written
Instructions, shall open and maintain separate accounts in the Fund's name using
all cash received from or for the account of the Fund, subject to the terms of
this Agreement. In addition, upon Written Instructions, PNC Bank shall open
separate custodial accounts for each separate series or Portfolio of the Fund
(collectively, the "Accounts") and shall hold in the Accounts all cash received
from or for the Accounts of the Fund specifically designated to each separate
series or Portfolio.
PNC Bank shall make cash payments from or for the Accounts of a
Portfolio only for:
(i) purchases of securities in the name of a Portfolio or
PNC Bank or PNC Bank's nominee as provided in
sub-section (j) and for which PNC Bank has received a
copy of the broker's or dealer's confirmation or
payee's invoice, as appropriate;
(ii) purchase or redemption of Shares of the Fund delivered
to PNC Bank;
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(iii) payment of, subject to Written Instructions, interest,
taxes, administration, accounting, distribution,
advisory, management fees or similar expenses which are
to be borne by a Portfolio;
(iv) payment to, subject to receipt of Written Instructions,
the Fund's transfer agent, as agent for the
shareholders, an amount equal to the amount of
dividends and distributions stated in the Written
Instructions to be distributed in cash by the transfer
agent to shareholders, or, in lieu of paying the Fund's
transfer agent, PNC Bank may arrange for the direct
payment of cash dividends and distributions to
shareholders in accordance with procedures mutually
agreed upon from time to time by and among the Fund,
PNC Bank and the Fund's transfer agent.
(v) payments, upon receipt Written Instructions, in
connection with the conversion, exchange or surrender
of securities owned or subscribed to by the Fund and
held by or delivered to PNC Bank;
(vi) payments of the amounts of dividends received with
respect to securities sold short;
(vii) payments made to a sub-custodian pursuant to provisions
in sub-section (c) of this Section; and
(viii) payments, upon Written Instructions, made for other
proper Fund purposes.
PNC Bank is hereby authorized to endorse and collect all checks,
drafts or other orders for the payment of money received as custodian for
the Accounts.
(c) Receipt of Securities; Subcustodians.
(i) PNC Bank shall hold all securities received by it for
the Accounts in a separate account that physically
segregates such securities from those of any other
persons, firms or corporations, except for securities
held in a Book-Entry System. All such securities shall
be held or disposed of only upon Written Instructions
of the Fund pursuant to the terms of this Agreement.
PNC Bank shall have no power or authority to assign,
hypothecate, pledge or otherwise dispose of any such
securities or investment, except upon the express terms
of this Agreement and upon Written Instructions,
accompanied by a
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certified resolution of the Fund's Board of Directors,
authorizing the transaction. In no case may any member
of the Fund's Board of Directors, or any officer,
employee or agent of the Fund withdraw any securities.
At PNC Bank's own expense and for its own convenience,
PNC Bank may enter into sub-custodian agreements with
other United States banks or trust companies to perform
duties described in this subsection (c). Such bank or
trust company shall have an aggregate capital, surplus
and undivided profits, according to its last published
report, of at least one million dollars ($1,000,000),
if it is a subsidiary or affiliate of PNC Bank, or at
least twenty million dollars ($20,000,000) if such bank
or trust company is not a subsidiary or affiliate of
PNC Bank. In addition, such bank or trust company must
be qualified to act as custodian and agree to comply
with the relevant provisions of the 1940 Act and other
applicable rules and regulations. Any such arrangement
will not be entered into without prior written notice
to the Fund.
PNC Bank shall remain responsible for the performance
of all of its duties as described in this Agreement and
shall hold the Fund and each Portfolio harmless from
its own acts or omissions, under the standards of care
provided for herein, or the acts and omissions of any
sub-custodian chosen by PNC Bank under the terms of
this sub-section (c).
(d) Transactions Requiring Instructions. Upon receipt of Oral
Instructions or Written Instructions and not otherwise, PNC Bank, directly or
through the use of the Book-Entry System, shall:
(i) deliver any securities held for a Portfolio
against the receipt of payment for the sale of
such securities;
(ii) execute and deliver to such persons as may be
designated in such Oral Instructions or Written
Instructions, proxies, consents, authorizations, and
any other instruments whereby the authority of a
Portfolio as owner of any securities may be exercised;
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(iii) deliver any securities to the issuer thereof, or its
agent, when such securities are called, redeemed,
retired or otherwise become payable; provided that, in
any such case, the cash or other consideration is to be
delivered to PNC Bank;
(iv) deliver any securities held for a Portfolio against
receipt of other securities or cash issued or paid in
connection with the liquidation, reorganization,
refinancing, tender offer, merger, consolidation or
recapitalization of any corporation, or the exercise of
any conversion privilege;
(v) deliver any securities held for a Portfolio to any
protective committee, reorganization committee or other
person in connection with the reorganization,
refinancing, merger, consolidation, recapitalization or
sale of assets of any corporation, and receive and hold
under the terms of this Agreement such certificates of
deposit, interim receipts or other instruments or
documents as may be issued to it to evidence such
delivery;
(vi) make such transfer or exchanges of the assets of the
Portfolios and take such other steps as shall be stated
in said Oral Instructions or Written Instructions to be
for the purpose of effectuating a duly authorized plan
of liquidation, reorganization, merger, consolidation
or recapitalization of the Fund;
(vii) release securities belonging to a Portfolio to any bank
or trust company for the purpose of a pledge or
hypothecation to secure any loan incurred by the Fund
on behalf of that Portfolio; provided, however, that
securities shall be released only upon payment to PNC
Bank of the monies borrowed, except that in cases where
additional collateral is required to secure a borrowing
already made subject to proper prior authorization,
further securities may be released for that purpose;
and repay such loan upon redelivery to it of the
securities pledged or hypothecated th erefor and upon
surrender of the note or notes evidencing the loan;
(viii) release and deliver securities owned by a Portfolio in
connection with any repurchase agreement entered into
on behalf of the Fund,
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but only on receipt of payment therefor; and payout
moneys of the Fund in connection with such repurchase
agreements, but only upon the delivery of the
securities;
(ix) release and deliver or exchange securities owned by the
Fund in connection with any conversion of such
securities, pursuant to their terms, into other
securities;
(x) release and deliver securities owned by the fund for
the purpose of redeeming in kind shares of the Fund
upon delivery thereof to PNC Bank; and
(xi) release and deliver or exchange securities owned by the
Fund for other corporate purposes.
PNC Bank must also receive a certified resolution
describing the nature of the corporate purpose and the
name and address of the person(s) to whom delivery
shall be made when such action is pursuant to
sub-paragraph d.
(e) Use of Book-Entry System. The Fund shall deliver to PNC Bank
certified resolutions of the Fund's Board of Directors approving, authorizing
and instructing PNC Bank on a continuous basis, to deposit in the Book-Entry
System all securities belonging to the Portfolios eligible for deposit therein
and to utilize the Book-Entry System to the extent possible in connection with
settlements of purchases and sales of securities by the Portfolios, and
deliveries and returns of securities loaned, subject to repurchase agreements or
used as collateral in connection with borrowings. PNC Bank shall continue to
perform such duties until it receives Written Instructions or Oral Instructions
authorizing contrary actions.
PNC Bank shall administer the Book-Entry System as follows:
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(i) With respect to securities of each Portfolio which are
maintained in the Book-Entry System, the records of PNC
Bank shall identify by Book-Entry or otherwise those
securities belonging to each Portfolio. PNC Bank shall
furnish to the Fund a detailed statement of the
Property held for each Portfolio under this Agreement
at least monthly and from time to time and upon written
request.
(ii) Securities and any cash of each Portfolio deposited in
the Book-Entry System will at all times be segregated
from any assets and cash controlled by PNC Bank in
other than a fiduciary or custodian capacity but may be
commingled with other assets held in such capacities.
PNC Bank and its sub-custodian, if any, will pay out
money only upon receipt of securities and will deliver
securities only upon the receipt of money.
(iii) All books and records maintained by PNC Bank which
relate to the Fund's participation in the Book-Entry
System will at all times during PNC Bank's regular
business hours be open to the inspection of Authorized
Persons, and PNC Bank will furnish to the Fund all
information in respect of the services rendered as it
may require.
PNC Bank will also provide the Fund with such reports on its own
system of internal control as the Fund may reasonably request from time to time.
(f) Registration of Securities. All Securities held for a Portfolio
which are issued or issuable only in bearer form, except such securities held in
the Book-Entry System, shall be held by PNC Bank in bearer form; all other
securities held for a Portfolio may be registered in the name of the Fund on
behalf of that Portfolio, PNC Bank, the Book-Entry System, a sub-custodian, or
any duly appointed nominees of the Fund, PNC Bank, Book-Entry System or
sub-custodian. The Fund reserves the right to instruct PNC Bank as to the method
of registration and safekeeping of the
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securities of the Fund. The Fund agrees to furnish to PNC Bank appropriate
instruments to enable PNC Bank to hold or deliver in proper form for transfer,
or to register in the name of its nominee or in the name of the Book-Entry
System, any securities which it may hold for the Accounts and which may from
time to time be registered in the name of the Fund on behalf of a Portfolio.
(g) Voting and Other Action. Neither PNC Bank nor its nominee shall
vote any of the securities held pursuant to this Agreement by or for the account
of a Portfolio, except in accordance with Written Instructions. PNC Bank,
directly or through the use of the Book-Entry System, shall execute in blank
and promptly deliver all notices, proxies and proxy soliciting materials to the
registered holder of such securities. If the registered holder is not the Fund
on behalf of a Portfolio, then Written Instructions or Oral Instructions must
designate the person who owns such securities.
(h) Transactions Not Requiring Instructions. In the absence of
contrary Written Instructions, PNC Bank is authorized to take the following
actions:
(i) Collection of Income and other Payments.
(A) collect and receive for the account of each
Portfolio, all income, dividends, distributions,
coupons, option premiums, other payments and
similar items, included or to be included in the
Property, and, in addition, promptly advise each
Portfolio of such receipt and credit such income,
as collected, to each Portfolio's custodian
account;
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(B) endorse and deposit for collection, in the name of
the Fund, checks, drafts, or other orders for the
payment of money;
(C) receive and hold for the account of each Portfolio
all securities received as a distribution on the
Portfolio's securities as a result of a stock
dividend, share split-up or reorganization,
recapitalization, readjustment or other
rearrangement or distribution of rights or
similar securities issued with respect to any
securities belonging to a Portfolio and held by
PNC Bank hereunder;
(D) present for payment and collect the amount payable
upon all securities which may mature or be called,
redeemed, or retired, or otherwise become payable
on the date such securities become payable; and
(E) take any action which may be necessary and proper
in connection with the collection and receipt of
such income and other payments and the endorsement
for collection of checks, drafts, and other
negotiable instruments.
(ii) Miscellaneous Transactions.
(A) deliver or cause to be delivered Property against
payment or other consideration or written receipt
therefor in the following cases:
(1) for examination by a broker or dealer selling
for the account of a Portfolio in accordance
with street delivery custom;
(2) for the exchange of interim receipts or
temporary securities for definitive
securities; and
(3) for transfer of securities into the name of
the Fund on behalf of a Portfolio or PNC Bank
or nominee of either, or for exchange of
securities for a different number of bonds,
certificates, or other evidence, representing
the same aggregate face amount or number of
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units bearing the same interest rate, maturity
date and call provisions, if any; provided
that, in any such case, the new securities are
to be delivered to PNC Bank.
(B) Unless and until PNC Bank receives Oral
Instructions or Written Instructions to the
contrary, PNC Bank shall:
(1) pay all income items held by it which call for
payment upon presentation and hold the cash
received by it upon such payment for the
account of each Portfolio;
(2) collect interest and cash dividends received,
with notice to the Fund, to the account of
each Portfolio;
(3) hold for the account of each Portfolio all
stock dividends, rights and similar securities
issued with respect to any securities held by
PNC Bank; and
(4) execute as agent on behalf of the Fund all
necessary ownership certificates required by
the Internal Revenue Code or the Income Tax
Regulations of the United States Treasury
Department or under the laws of any state now
or hereafter in effect, inserting the Fund's
name, on behalf of a Portfolio, on such
certificate as the owner of the securities
covered thereby, to the extent it may lawfully
do so.
(i) Segregated Accounts.
(i) PNC Bank shall upon receipt of Written Instructions or Oral
Instructions establish and maintain segregated accounts on
its records for and on behalf of each Portfolio. Such
accounts may be used to transfer cash and securities,
including securities in the Book-Entry System:
(A) for the purposes of compliance by the Fund with the
procedures required by a securities or option exchange,
providing
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such procedures comply with the 1940 Act and
any releases of the SEC relating to the maintenance of
segregated accounts by registered investment companies;
and
(B) Upon receipt of Written Instructions, for other proper
corporate purposes.
(ii) PNC Bank shall arrange for the establishment of IRA
custodian accounts for such shareholders holding Shares
through IRA accounts, in accordance with the Fund's
prospectuses, the Internal Revenue Code of 1986, as amended
(including regulations promulgated thereunder), and with
such other procedures as are mutually agreed upon from time
to time by and among the Fund, PNC Bank and the Fund's
transfer agent.
(j) Purchases of Securities. PNC Bank shall settle purchased
securities upon receipt of Oral Instructions or Written Instructions from the
Fund or its investment advisers that specify:
(i) the name of the issuer and the
title of the securities, including CUSIP
number if applicable;
(ii) the number of shares or the principal amount
purchased and accrued interest, if any;
(iii) the date of purchase and settlement;
(iv) the purchase price per unit;
(v) the total amount payable upon such purchase;
(vi) the Portfolio involved; and
(vii) the name of the person from whom or the broker
through whom the purchase was made. PNC Bank shall
upon receipt of securities purchased by or for a
Portfolio pay out of the moneys held for the
account of the Portfolio the total amount payable
to the person from whom or the broker through whom
the purchase was made, provided that the same
conforms to the total amount payable as set forth
in such Oral Instructions or Written Instructions.
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(k) Sales of Securities. PNC Bank shall settle sold securities upon
receipt of Oral Instructions or Written Instructions from the Fund that specify:
(i) the name of the issuer and the title of the
security, including CUSIP number if applicable;
(ii) the number of shares or principal amount sold,
and accrued interest, if any;
(iii) the date of trade and settlement;
(iv) the sale price per unit;
(v) the total amount payable to the Fund upon
such sale;
(vi) the name of the broker through whom or the person
to whom the sale was made; and
(vii) the location to which the security must be
delivered and delivery deadline, if any; and
(viii) the Portfolio involved.
PNC Bank shall deliver the securities upon receipt of the total amount
payable to the Portfolio upon such sale, provided that the total amount payable
is the same as was set forth in the Oral Instructions or Written Instructions.
Subject to the foregoing, PNC Bank may accept payment in such form as shall be
satisfactory to it, and may deliver securities and arrange for payment in
accordance with the customs prevailing among dealers in securities.
(l) Reports; Proxy Materials.
(i) PNC Bank shall furnish to the Fund the following
reports:
(A) such periodic and special reports as the Fund may
reasonably request;
(B) a monthly statement summarizing all transactions and
entries for the account
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of each Portfolio, listing each Portfolio securities
belonging to each Portfolio with the adjusted average
cost of each issue and the market value at the end of
such month and stating the cash acco unt of each
Portfolio including disbursements;
(C) the reports required to be furnished to the Fund
pursuant to Rule 17f-4; and
(D) such other information as may be agreed upon from time
to time between the Fund and PNC Bank.
(ii) PNC Bank shall transmit promptly to the Fund any
proxy statement, proxy material, notice of a call
or conversion or similar communication received
by it as custodian of the Property. PNC Bank
shall be under no other obligation to inform the
Fund as to such actions or events.
(m) Collections. All collections of monies or other property in
respect, or which are to become part, of the Property (but not the safekeeping
thereof upon receipt by PNC Bank) shall be at the sole risk of the Fund. If
payment is not received by PNC Bank within a reasonable time after proper
demands have been made, PNC Bank shall notify the Fund in writing, including
copies of all demand letters, any written responses, memoranda of all oral
responses and shall await instructions from the Fund. PNC Bank shall not be
obliged to take legal action for collection unless and until reasonably
indemnified to its satisfaction. PNC Bank shall also notify the Fund as soon as
reasonably practicable whenever income due on securities is not collected in due
course and shall provide the Fund with periodic status reports of such income
collected after a reasonable time.
15. Duration and Termination. This Agreement shall continue until
terminated by the Fund or by PNC Bank on sixty
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(60) days' prior written notice to the other party. In the event this Agreement
is terminated (pending appointment of a successor to PNC Bank or vote of the
shareholders of the Fund to dissolve or to function without a custodian of its
cash, securities or other property), PNC Bank shall not deliver cash, securities
or other property of the Portfolios to the Fund. It may deliver them to a bank
or trust company of PNC Bank's choice, having an aggregate capital, surplus and
undivided profits, as shown by its last published report, of not less than
twenty million dollars ($20,000,000), as a custodian for the Fund to be held
under terms similar to those of this Agreement. PNC Bank shall not be required
to make any such delivery or payment until full payment shall have been made to
PNC Bank of all of its fees, compensation, costs and expenses. PNC Bank shall
have a security interest in and shall have a right of setoff against the
Property as security for the payment of such fees, compensation, costs and
expenses.
16. Notices. All notices and other communications, including Written
Instructions, shall be in writing or by confirming telegram, cable, telex or
facsimile sending device. Notice shall be addressed (a) if to PNC Bank at
Airport Business Center, International Court 2, 200 Stevens Drive, Lest er,
Pennsylvania 19113, marked for the attention of the Custodian Services
Department (or its successor), (b) if to the Fund, at ______ , Attn: _________
or (c) if to neither of the foregoing, at such other address as shall have been
given by like notice to the sender of any such notice or other communication by
the other
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party. If notice is sent by confirming telegram, cable, telex or facsimile
sending device, it shall be deemed to have been given immediately. If notice is
sent by first-class mail, it shall be deemed to have been given five days after
it has been mailed. If notice is sen t by messenger, it shall be deemed to have
been given on the day it is delivered.
17. Amendments. This Agreement, or any term hereof, may be changed or
waived only by a written amendment, signed by the party against whom enforcement
of such change or waiver is sought.
18. Delegation; Assignment. PNC Bank may assign its rights and
delegate its duties hereunder to any wholly-owned direct or indirect subsidiary
of PNC Bank, National Association or PNC Bank Corp., provided that (i) PNC Bank
gives the Fund thirty (30) days' prior written notice; (ii) the delegate (or
assignee) agrees with PNC Bank and the Fund to comply with all relevant
provisions of the 1940 Act; and (iii) PNC Bank and such delegate (or assignee)
promptly provide such information as the Fund may request, and respond to such
questions as the Fund may ask, relative to the delegation (or
assignment), including (without limitation) the capabilities of the delegate
(or assignee).
19. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
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20. Further Actions. Each party agrees to perform such further acts
and execute such further documents as are necessary to effectuate the purposes
hereof.
21. Miscellaneous.
(a) Entire Agreement. This Agreement embodies the entire agreement and
understanding between the parties and supersedes all prior agreements and
understandings relating to the subject matter hereof, provided that the parties
may embody in one or more separate documents their agreement, if any, with
respect to delegated duties and Oral Instructions.
(b) Captions. The captions in this Agreement are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect.
(c) Governing Law. This Agreement shall be deemed to be a contract
made in Pennsylvania and governed by Pennsylvania law, without regard to
principles of conflicts of law.
(d) Partial Invalidity. If any provision of this Agreement shall be
held or made invalid by a court decision, statute, rule or otherwise, the
remainder of this Agreement shall not be affected thereby.
(e) Successors and Assigns. This Agreement shall be binding upon and
shall inure to the benefit of the parties hereto and their respective successors
and permitted assigns.
(f) Facsimile Signatures. The facsimile signature of any party to this
Agreement shall constitute the valid and binding execution hereof by such party.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed as of the day and year first above written.
PNC BANK, NATIONAL ASSOCIATION
By:
----------------------------------
Title:
-------------------------------
SALOMON BROTHERS VARIABLE SERIES
FUNDS, INC.
By:
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Title:
--------------------------------
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EXHIBIT A
THIS EXHIBIT A, dated as of ________, 1997, is Exhibit A to that
certain Custodian Services Agreement dated as of _________, 1997 between PNC
Bank and Salomon Brothers Variable Series Funds, Inc.
PORTFOLIOS
U.S. Government Income Fund
High Yield Bond Fund
Strategic Bond Fund
Total Return Bond Fund
Investors Fund
Capital Fund
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AUTHORIZED PERSONS APPENDIX
NAME (Type) SIGNATURE
_______________________________ __________________________________
_______________________________ __________________________________
_______________________________ __________________________________
_______________________________ __________________________________
_______________________________ __________________________________
_______________________________ __________________________________
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GLOBAL CUSTODY AGREEMENT
This AGREEMENT is effective ___________________, 199_, and is between
THE CHASE MANHATTAN BANK ("Bank") and
("Customer").
1. Customer Accounts.
Bank shall establish and maintain the following accounts ("Accounts"):
(a) A custody account in the name of Customer ("Custody Account") for
any and all stocks, shares, bonds, debentures, notes, mortgages or other
obligations for the payment of money, bullion, coin and any certificates,
receipts, warrants or other instruments representing rights to receive, purchase
or subscribe for the same or evidencing or representing any other rights or
interests therein and other similar property whether certificated or
uncertificated as may be received by Bank or its Subcustodian (as defined in
Section 3) for the account of Customer ("Securities"); and
(b) A deposit account in the name of Customer ("Deposit Account") for
any and all cash in any currency received by Bank or its Subcustodian for the
account of Customer, which cash shall not be subject to withdrawal by draft or
check.
Customer warrants its authority to: 1) deposit the cash and Securities
("Assets") received in the Accounts and 2) give Instructions (as defined in
Section 11) concerning the Accounts. Bank may deliver securities of the same
class in place of those deposited in the Custody Account.
Upon written agreement between Bank and Customer, additional Accounts
may be established and separately accounted for as additional Accounts
hereunder.
2. Maintenance of Securities and Cash at Bank and Subcustodian Locations.
Unless Instructions specifically require another location acceptable to
Bank:
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(a) Securities shall be held in the country or other jurisdiction in
which the principal trading market for such Securities is located, where such
Securities are to be presented for payment or where such Securities are
acquired; and
(b) Cash shall be credited to an account in a country or other
jurisdiction in which such cash may be legally deposited or is the legal
currency for the payment of public or private debts.
Cash may be held pursuant to Instructions in either interest or
non-interest bearing accounts as may be available for the particular currency.
To the extent Instructions are issued and Bank can comply with such
Instructions, Bank is authorized to maintain cash balances on deposit for
Customer with itself or one of its "Affiliates" at such reasonable rates of
interest as may from time to time be paid on such accounts, or in non-interest
bearing accounts as Customer may direct, if acceptable to Bank. For purposes
hereof, the term "Affiliate" shall mean an entity controlling, controlled by, or
under common control with, Bank.
If Customer wishes to have any of its Assets held in the custody of an
institution other than the established Subcustodians as defined in Section 3 (or
their securities depositories), such arrangement must be authorized by a written
agreement, signed by Bank and Customer.
3. Subcustodians and Securities Depositories.
Bank may act hereunder through the subcustodians listed in Schedule A
hereof with which Bank has entered into subcustodial agreements
("Subcustodians"). Customer authorizes Bank to hold Assets in the Accounts in
accounts which Bank has established with one or more of its branches or
Subcustodians. Bank and Subcustodians are authorized to hold any of the
Securities in their account with any securities depository in which they
participate.
Bank reserves the right to add new, replace or remove Subcustodians.
Customer shall be given reasonable notice by Bank of any amendment to Schedule
A. Upon request by Customer, Bank shall identify the name, address and principal
place of business of any Subcustodian of Customer's Assets and the name and
address of the governmental agency or other regulatory authority that supervises
or regulates such Subcustodian.
4. Use of Subcustodian.
(a) Bank shall identify the Assets on its books as belonging to
Customer.
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(b) A Subcustodian shall hold such Assets together with assets belonging
to other customers of Bank in accounts identified on such Subcustodian's books
as custody accounts for the exclusive benefit of customers of Bank.
(c) Any Assets in the Accounts held by a Subcustodian shall be subject
only to the instructions of Bank or its agent. Any Securities held in a
securities depository for the account of a Subcustodian shall be subject only to
the instructions of such Subcustodian.
(d) Any agreement Bank enters into with a Subcustodian for holding
Bank's customers' assets shall provide that such assets shall not be subject to
any right, charge, security interest, lien or claim of any kind in favor of such
Subcustodian except for safe custody or administration, and that the beneficial
ownership of such assets shall be freely transferable without the payment of
money or value other than for safe custody or administration. The foregoing
shall not apply to the extent of any special agreement or arrangement made by
Customer with any particular Subcustodian.
5. Deposit Account Transactions.
(a) Bank or its Subcustodians shall make payments from the Deposit
Account upon receipt of Instructions which include all information required by
Bank.
(b) In the event that any payment to be made under this Section 5
exceeds the funds available in the Deposit Account, Bank, in its discretion, may
advance Customer such excess amount which shall be deemed a loan payable on
demand, bearing interest at the rate customarily charged by Bank on similar
loans.
(c) If Bank credits the Deposit Account on a payable date, or at any
time prior to actual collection and reconciliation to the Deposit Account, with
interest, dividends, redemptions or any other amount due, Customer shall
promptly return any such amount upon oral or written notification: (i) that such
amount has not been received in the ordinary course of business or (ii) that
such amount was incorrectly credited. If Customer does not promptly return any
amount upon such notification, Bank shall be entitled, upon oral or written
notification to Customer, to reverse such credit by debiting the Deposit Account
for the amount previously credited. Bank or its Subcustodian shall have no duty
or obligation to institute legal proceedings, file a claim or a proof of claim
in any insolvency proceeding or take any other action with respect to the
collection of such amount, but may act for Customer upon Instructions after
consultation with Customer.
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6. Custody Account Transactions.
(a) Securities shall be transferred, exchanged or delivered by Bank or
its Subcustodian upon receipt by Bank of Instructions which include all
information required by Bank. Settlement and payment for Securities received
for, and delivery of Securities out of, the Custody Account may be made in
accordance with the customary or established securities trading or securities
processing practices and procedures in the jurisdiction or market in which the
transaction occurs, including, without limitation, delivery of Securities to a
purchaser, dealer or their agents against a receipt with the expectation of
receiving later payment and free delivery. Delivery of Securities out of the
Custody Account may also be made in any manner specifically required by
Instructions acceptable to Bank.
(b) Bank, in its discretion, may credit or debit the Accounts on a
contractual settlement date with cash or Securities with respect to any sale,
exchange or purchase of Securities. Otherwise, such transactions shall be
credited or debited to the Accounts on the date cash or Securities are actually
received by Bank and reconciled to the Account.
(i) Bank may reverse credits or debits made to the Accounts in its
discretion if the related transaction fails to settle within a reasonable
period, determined by Bank in its discretion, after the contractual settlement
date for the related transaction.
(ii) If any Securities delivered pursuant to this Section 6 are returned
by the recipient thereof, Bank may reverse the credits and debits of the
particular transaction at any time.
7. Actions of Bank.
Bank shall follow Instructions received regarding assets held in the
Accounts. However, until it receives Instructions to the contrary, Bank shall:
(i) Present for payment any Securities which are called, redeemed or
retired or otherwise become payable and all coupons and other income items which
call for payment upon presentation, to the extent that Bank or Subcustodian is
actually aware of such opportunities.
(ii) Execute in the name of Customer such ownership and other
certificates as may be required to obtain payments in respect of Securities.
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(iii) Exchange interim receipts or temporary Securities for
definitive Securities.
(iv) Appoint brokers and agents for any transaction involving the
Securities, including, without limitation, Affiliates of Bank or any
Subcustodian.
(v) Issue statements to Customer, at times mutually agreed upon,
identifying the Assets in the Accounts.
Bank shall send Customer an advice or notification of any transfers of
Assets to or from the Accounts. Such statements, advices or notifications shall
indicate the identity of the entity having custody of the Assets. Unless
Customer sends Bank a written exception or objection to any Bank statement
within sixty (60) days of receipt, Customer shall be deemed to have approved
such statement. In such event, or where Customer has otherwise approved any such
statement, Bank shall, to the extent permitted by law, be released, relieved and
discharged with respect to all matters set forth in such statement or reasonably
implied therefrom as though it had been settled by the decree of a court of
competent jurisdiction in an action where Customer and all persons having or
claiming an interest in Customer or Customer's Accounts were parties.
All collections of funds or other property paid or distributed in
respect of Securities in the Custody Account shall be made at the risk of
Customer. Bank shall have no liability for any loss occasioned by delay in the
actual receipt of notice by Bank or by its Subcustodians of any payment,
redemption or other transaction regarding Securities in the Custody Account in
respect of which Bank has agreed to take any action hereunder.
8. Corporate Actions; Proxies; Tax Reclaims.
(a) Corporate Actions. Whenever Bank receives information concerning the
Securities which requires discretionary action by the beneficial owner of the
Securities (other than a proxy), such as subscription rights, bonus issues,
stock repurchase plans and rights offerings, or legal notices or other material
intended to be transmitted to securities holders ("Corporate Actions"), Bank
shall give Customer notice of such Corporate Actions to the extent that Bank's
central corporate actions department has actual knowledge of a Corporate Action
in time to notify its customers.
When a rights entitlement or a fractional interest resulting from a
rights issue, stock dividend, stock split or similar Corporate Action is
received which bears an expiration date, Bank shall endeavor to obtain
Instructions from Customer or its Authorized Person, but if Instructions are
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not received in time for Bank to take timely action, or actual notice of such
Corporate Action was received too late to seek Instructions, Bank is authorized
to sell such rights entitlement or fractional interest and to credit the Deposit
Account with the proceeds or take any other action it deems, in good faith, to
be appropriate in which case it shall be held harmless for any such action.
(b) Proxy Voting. Bank shall provide proxy voting services, if elected
by Customer, in accordance with the terms of the proxy voting services rider
hereto. Proxy voting services may be provided by Bank or, in whole or in part,
by one or more third parties appointed by Bank (which may be Affiliates of
Bank).
(c) Tax Reclaims.
(i) Subject to the provisions hereof, Bank shall apply for a reduction
of withholding tax and any refund of any tax paid or tax credits which apply in
each applicable market in respect of income payments on Securities for the
benefit of Customer which Bank believes may be available to such Customer.
(ii) The provision of tax reclaim services by Bank is conditional upon
Bank receiving from the beneficial owner of Securities (A) a declaration of its
identity and place of residence and (B) certain other documentation (pro forma
copies of which are available from Bank). Customer acknowledges that, if Bank
does not receive such declarations, documentation and information, additional
United Kingdom taxation shall be deducted from all income received in respect of
Securities issued outside the United Kingdom and that U.S. non-resident alien
tax or U.S. backup withholding tax shall be deducted from U.S. source income.
Customer shall provide to Bank such documentation and information as it may
require in connection with taxation, and warrants that, when given, this
information shall be true and correct in every respect, not misleading in any
way, and contain all material information. Customer undertakes to notify Bank
immediately if any such information requires updating or amendment.
(iii) Bank shall not be liable to Customer or any third party for any
tax, fines or penalties payable by Bank or Customer, and shall be indemnified
accordingly, whether these result from the inaccurate completion of documents by
Customer or any third party, or as a result of the provision to Bank or any
third party of inaccurate or misleading information or the withholding of
material information by Customer or any other third party, or as a result of any
delay of any revenue authority or any other matter beyond the control of Bank.
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(iv) Customer confirms that Bank is authorized to deduct from any cash
received or credited to the Deposit Account any taxes or levies required by any
revenue or governmental authority for whatever reason in respect of the
Securities or Cash Accounts.
(v) Bank shall perform tax reclaim services only with respect to
taxation levied by the revenue authorities of the countries notified to Customer
from time to time and Bank may, by notification in writing, at its absolute
discretion, supplement or amend the markets in which the tax reclaim services
are offered. Other than as expressly provided in this sub-clause, Bank shall
have no responsibility with regard to Customer's tax position or status in any
jurisdiction.
(vi) Customer confirms that Bank is authorized to disclose any
information requested by any revenue authority or any governmental body in
relation to Customer or the Securities and/or Cash held for Customer.
(vii) Tax reclaim services may be provided by Bank or, in whole or in
part, by one or more third parties appointed by Bank (which may be Affiliates of
Bank); provided that Bank shall be liable for the performance of any such third
party to the same extent as Bank would have been if it performed such services
itself.
9. Nominees.
Securities which are ordinarily held in registered form may be
registered in a nominee name of Bank, Subcustodian or securities depository, as
the case may be. Bank may without notice to Customer cause any such Securities
to cease to be registered in the name of any such nominee and to be registered
in the name of Customer. In the event that any Securities registered in a
nominee name are called for partial redemption by the issuer, Bank may allot the
called portion to the respective beneficial holders of such class of security in
any manner Bank deems to be fair and equitable. Customer shall hold Bank,
Subcustodians, and their respective nominees harmless from any liability arising
directly or indirectly from their status as a mere record holder of Securities
in the Custody Account.
10. Authorized Persons.
As used herein, the term "Authorized Person" means employees or agents
including investment managers as have been designated by written notice from
Customer or its designated agent to act on behalf of Customer hereunder. Such
persons shall continue to be Authorized Persons until such time as Bank receives
Instructions from Customer or its designated agent that any such employee or
agent is no longer an Authorized Person.
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11. Instructions.
The term "Instructions" means instructions of any Authorized Person
received by Bank, via telephone, telex, facsimile transmission, bank wire or
other teleprocess or electronic instruction or trade information system
acceptable to Bank which Bank believes in good faith to have been given by
Authorized Persons or which are transmitted with proper testing or
authentication pursuant to terms and conditions which Bank may specify. Unless
otherwise expressly provided, all Instructions shall continue in full force and
effect until canceled or superseded.
Any Instructions delivered to Bank by telephone shall promptly
thereafter be confirmed in writing by an Authorized Person (which confirmation
may bear the facsimile signature of such Person), but Customer shall hold Bank
harmless for the failure of an Authorized Person to send such confirmation in
writing, the failure of such confirmation to conform to the telephone
instructions received or Bank's failure to produce such confirmation at any
subsequent time. Bank may electronically record any Instructions given by
telephone, and any other telephone discussions with respect to the Custody
Account. Customer shall be responsible for safeguarding any testkeys,
identification codes or other security devices which Bank shall make available
to Customer or its Authorized Persons.
12. Standard of Care; Liabilities.
(a) Bank shall be responsible for the performance of only such duties as
are set forth herein or expressly contained in Instructions which are consistent
with the provisions hereof as follows:
(i) Bank shall use reasonable care with respect to its obligations
hereunder and the safekeeping of Assets. Bank shall be liable to Customer for
any loss which shall occur as the result of the failure of a Subcustodian to
exercise reasonable care with respect to the safekeeping of such Assets to the
same extent that Bank would be liable to Customer if Bank were holding such
Assets in New York. In the event of any loss to Customer by reason of the
failure of Bank or its Subcustodian to utilize reasonable care, Bank shall be
liable to Customer only to the extent of Customer's direct damages, to be
determined based on the market value of the property which is the subject of the
loss at the date of discovery of such loss and without reference to any special
conditions or circumstances. Bank shall have no liability whatsoever for any
consequential, special, indirect or speculative loss or damages (including, but
not limited to, lost profits) suffered by Customer in connection with the
transactions contemplated hereby and the relationship established hereby even if
Bank
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has been advised as to the possibility of the same and regardless of the
form of the action. Bank shall not be responsible for the insolvency of any
Subcustodian which is not a branch or Affiliate of Bank.
(ii) Bank shall not be responsible for any act, omission, default or the
solvency of any broker or agent which it or a Subcustodian appoints unless such
appointment was made negligently or in bad faith.
(iii) Bank shall be indemnified by, and without liability to Customer
for any action taken or omitted by Bank whether pursuant to Instructions or
otherwise within the scope hereof if such act or omission was in good faith,
without negligence. In performing its obligations hereunder, Bank may rely on
the genuineness of any document which it believes in good faith to have been
validly executed.
(iv) Customer shall pay for and hold Bank harmless from any liability or
loss resulting from the imposition or assessment of any taxes or other
governmental charges, and any related expenses with respect to income from or
Assets in the Accounts.
(v) Bank shall be entitled to rely, and may act, upon the advice of
counsel (who may be counsel for Customer) on all matters and shall be without
liability for any action reasonably taken or omitted pursuant to such advice.
(vi) Bank need not maintain any insurance for the benefit of
Customer.
(vii) Without limiting the foregoing, Bank shall not be liable for any
loss which results from: 1) the general risk of investing, or 2) investing or
holding Assets in a particular country including, but not limited to, losses
resulting from malfunction, interruption of or error in the transmission of
information caused by any machines or system or interruption of communication
facilities, abnormal operating conditions, nationalization, expropriation or
other governmental actions; regulation of the banking or securities industry;
currency restrictions, devaluations or fluctuations; and market conditions which
prevent the orderly execution of securities transactions or affect the value of
Assets.
(viii) Neither party shall be liable to the other for any loss due to
forces beyond their control including, but not limited to strikes or work
stoppages, acts of war (whether declared or undeclared) or terrorism,
insurrection, revolution, nuclear fusion, fission or radiation, or acts of God.
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(b) Consistent with and without limiting the first paragraph of this
Section 12, it is specifically acknowledged that Bank shall have no duty or
responsibility to:
(i) question Instructions or make any suggestions to Customer or
an Authorized Person regarding such Instructions;
(ii) supervise or make recommendations with respect to
investments or the retention of Securities;
(iii) advise Customer or an Authorized Person regarding any default in
the payment of principal or income of any security other than as provided in
Section 5(c) hereof;
(iv) evaluate or report to Customer or an Authorized Person regarding
the financial condition of any broker, agent or other party to which Securities
are delivered or payments are made pursuant hereto; and
(v) review or reconcile trade confirmations received from brokers.
Customer or its Authorized Persons (as defined in Section 10) issuing
Instructions shall bear any responsibility to review such confirmations against
Instructions issued to and statements issued by Bank.
(c) Customer authorizes Bank to act hereunder notwithstanding that Bank
or any of its divisions or Affiliates may have a material interest in a
transaction, or circumstances are such that Bank may have a potential conflict
of duty or interest including the fact that Bank or any of its Affiliates may
provide brokerage services to other customers, act as financial advisor to the
issuer of Securities, act as a lender to the issuer of Securities, act in the
same transaction as agent for more than one customer, have a material interest
in the issue of Securities, or earn profits from any of the activities listed
herein.
13. Fees and Expenses.
Customer shall pay Bank for its services hereunder the fees set forth in
Schedule B hereto or such other amounts as may be agreed upon in writing,
together with Bank's reasonable out-of-pocket or incidental expenses, including,
but not limited to, legal fees. Bank shall have a lien on and is authorized to
charge any Accounts of Customer for any amount owing to Bank under any provision
hereof
14. Miscellaneous.
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(a) Foreign Exchange Transactions. To facilitate the administration of
Customer's trading and investment activity, Bank is authorized to enter into
spot or forward foreign exchange contracts with Customer or an Authorized Person
for Customer and may also provide foreign exchange through its subsidiaries,
Affiliates or Subcustodians. Instructions, including standing instructions, may
be issued with respect to such contracts but Bank may establish rules or
limitations concerning any foreign exchange facility made available. In all
cases where Bank, its subsidiaries, Affiliates or Subcustodians enter into a
foreign exchange contract related to Accounts, the terms and conditions of the
then current foreign exchange contract of Bank, its subsidiary, Affiliate or
Subcustodian and, to the extent not inconsistent, this Agreement shall apply to
such transaction.
(b) Certification of Residency, etc. Customer certifies that it is a
resident of the United States and shall notify Bank of any changes in residency.
Bank may rely upon this certification or the certification of such other facts
as may be required to administer Bank's obligations hereunder. Customer shall
indemnify Bank against all losses, liability, claims or demands arising directly
or indirectly from any such certifications.
(c) Access to Records. Bank shall allow Customer's independent public
accountant reasonable access to the records of Bank relating to the Assets as is
required in connection with their examination of books and records pertaining to
Customer's affairs. Subject to restrictions under applicable law, Bank shall
also obtain an undertaking to permit Customer's independent public accountants
reasonable access to the records of any Subcustodian which has physical
possession of any Assets as may be required in connection with the examination
of Customer's books and records.
(d) Governing Law; Successors and Assigns, Captions THIS AGREEMENT SHALL
BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS
MADE AND TO BE PERFORMED IN NEW YORK and shall not be assignable by either
party, but shall bind the successors in interest of Customer and Bank. The
captions given to the sections and subsections of this Agreement are for
convenience of reference only and are not to be used to interpret this
Agreement.
(e) Entire Agreement; Applicable Riders. Customer represents that the
Assets deposited in the Accounts are (Check one):
Employee Benefit Plan or other assets subject to the Employee
Retirement Income Security Act of 1974, as amended ("ERISA");
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<PAGE>
Investment Company assets subject to certain U.S. Securities and
Exchange Commission rules and regulations;
Neither of the above.
This Agreement consists exclusively of this document together with
Schedules A and B, Exhibits I - _______ and the following Rider(s) [Check
applicable rider(s)]:
ERISA
INVESTMENT COMPANY
__ PROXY VOTING
SPECIAL TERMS AND CONDITIONS
There are no other provisions hereof and this Agreement supersedes any
other agreements, whether written or oral, between the parties. Any amendment
hereto must be in writing, executed by both parties.
(f) Severability. In the event that one or more provisions hereof are
held invalid, illegal or unenforceable in any respect on the basis of any
particular circumstances or in any jurisdiction, the validity, legality and
enforceability of such provision or provisions under other circumstances or in
other jurisdictions and of the remaining provisions shall not in any way be
affected or impaired.
(g) Waiver. Except as otherwise provided herein, no failure or delay on
the part of either party in exercising any power or right hereunder operates as
a waiver, nor does any single or partial exercise of any power or right preclude
any other or further exercise, or the exercise of any other power or right. No
waiver by a party of any provision hereof, or waiver of any breach or default,
is effective unless in writing and signed by the party against whom the waiver
is to be enforced.
(h) Representations and Warranties. (i) Customer hereby represents and
warrants to Bank that: (A) it has full authority and power to deposit and
control the Securities and cash deposited in the Accounts; (B) it has all
necessary authority to use Bank as its custodian; (C) this Agreement is its
legal, valid and binding obligation, enforceable in accordance with its terms;
(D) it shall have full authority and power to borrow moneys and enter into
foreign exchange transactions; and (E) it has not relied on any oral or written
representation made by Bank or any person on its behalf, and
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<PAGE>
acknowledges that this Agreement sets out to the fullest extent the duties of
Bank. (ii) Bank hereby represents and warrants to Customer that: (A) it has the
power and authority to perform its obligations hereunder, (B) this Agreement
constitutes a legal, valid and binding obligation on it; enforceable in
accordance with its terms; and (C) that it has taken all necessary action to
authorize the execution and delivery hereof.
(i) Notices. All notices hereunder shall be effective when actually
received. Any notices or other communications which may be required
hereunder are to be sent to the parties at the following addresses or such
other addresses as may subsequently be given to the other party in writing:
(a) Bank: The Chase Manhattan Bank, 4 Chase MetroTech Center, Brooklyn, NY
11245, Attention: Global Custody Division; and (b) Customer:
,
,
(j) Termination. This Agreement may be terminated by Customer or Bank by
giving sixty (60) days written notice to the other, provided that such notice to
Bank shall specify the names of the persons to whom Bank shall deliver the
Assets in the Accounts. If notice of termination is given by Bank, Customer
shall, within sixty (60) days following receipt of the notice, deliver to Bank
Instructions specifying the names of the persons to whom Bank shall deliver the
Assets. In either case Bank shall deliver the Assets to the persons so
specified, after deducting any amounts which Bank determines in good faith to be
owed to it under Section 13. If within sixty (60) days following receipt of a
notice of termination by Bank, Bank does not receive Instructions from Customer
specifying the names of the persons to whom Bank shall deliver the Assets, Bank,
at its election, may deliver the Assets to a bank or trust company doing
business in the State of New York to be held and disposed of pursuant to the
provisions hereof, or to Authorized Persons, or may continue to hold the Assets
until Instructions are provided to Bank.
(k) Money Laundering. Customer warrants and undertakes to Bank for
itself and its agents that all Customer's customers are properly identified in
accordance with U.S. Money Laundering Regulations as in effect from time to
time.
(l) Imputation of certain information. Bank shall not be held
responsible for and shall not be required to have regard to information held by
any person by imputation or information of which Bank is not aware by virtue of
a "Chinese Wall" arrangement. If Bank becomes aware of confidential information
which in good faith it feels inhibits it from effecting a transaction hereunder
Bank may refrain from effecting it.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first-above written.
CUSTOMER
By:____________________________________________
Title:
Date:
THE CHASE MANHATTAN BANK
By:____________________________________________
Title:
Date:
78111
STATE OF )
: ss.
COUNTY OF )
On this day of
, 199 , before me personally came
, to me known, who
being by me duly sworn, did depose and say that he/she resides in
at
, that he/she is
of
, the entity described in and which executed the foregoing
instrument; that he/she knows the seal of said entity, that the seal affixed to
said instrument is such seal, that it was so affixed by order of said entity,
and that he/she signed his/her name thereto by like order.
<PAGE>
<PAGE>
Sworn to before me this
day of , 199 .
Notary
STATE OF NEW YORK )
: ss.
COUNTY OF NEW YORK )
On this day of
, 199 , before me personally came
, to me known, who being by me duly sworn, did depose and say that
he/she resides in at
; that
he/she is a Vice President of THE CHASE MANHATTAN BANK, the corporation
described in and which executed the foregoing instrument; that he/she knows the
seal of said corporation, that the seal affixed to said instrument is such
corporate seal, that it was so affixed by order of the Board of Directors of
said corporation, and that he/she signed his/her name thereto by like order.
Sworn to before me this
day of , 199 .
Notary
Investment Company Rider to Global Custody Agreement
Between The Chase Manhattan Bank and
-----------------------------------------
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<PAGE>
effective __________________
Customer represents that the Assets being placed in Bank's custody are
subject to the Investment Company Act of 1940, as amended (the "1940 Act"), as
the same may be amended from time to time.
Except to the extent that Bank has specifically agreed to comply with a
condition of a rule, regulation, interpretation promulgated by or under the
authority of the Securities and Exchange Commission ("SEC") or the Exemptive
Order applicable to accounts of this nature issued to Bank (1940 Act, Release
No. 12053, November 20, 1981), as amended, or unless Bank has otherwise
specifically agreed, Customer shall be solely responsible to assure that the
maintenance of Assets hereunder complies with such rules, regulations,
interpretations or exemptive order promulgated by or under the authority of the
Securities Exchange Commission.
The following modifications are made to the Agreement:
Section 3. Subcustodians and Securities Depositories.
Add the following language to the end of Section 3:
The terms Subcustodian and securities depositories as used herein shall
mean a branch of a qualified U.S. bank, an eligible foreign custodian or an
eligible foreign securities depository, which are further defined as follows:
(a) "qualified U.S. Bank" shall mean a qualified U.S. bank as defined
in Rule 17f-5 under the 1940 Act;
(b) "eligible foreign custodian" shall mean (i) a banking institution or
trust company, incorporated or organized under the laws of a country other than
the United States, that is regulated as such by that country's government or an
agency thereof and that has shareholders' equity in excess of $200 million in
U.S. currency (or a foreign currency equivalent thereof) as of the close of its
fiscal year most recently completed prior to the date hereof, (ii) a majority
owned direct or indirect subsidiary of a qualified U.S. bank or bank holding
company that is incorporated or organized under the laws of a country other
than the United States and that has shareholders' equity in excess of
$100 million in U.S. currency (or a foreign currency equivalent thereof) as
of the close of its fiscal year most recently completed prior to the date
hereof, (iii) a banking institution or trust company incorporated or organized
under the laws of a country other than the United States or a majority owned
direct or indirect subsidiary of a qualified U.S. bank
<PAGE>
<PAGE>
or bank holding company that is incorporated or organized under the laws of a
country other than the United States which has such other qualifications as
shall be specified in Instructions and approved by Bank; or (iv) any other
entity that shall have been so qualified by exemptive order, rule or other
appropriate action of the SEC; and
(c) "eligible foreign securities depository" shall mean a securities
depository or clearing agency, incorporated or organized under the laws of a
country other than the United States, which operates (i) the central system for
handling securities or equivalent book-entries in that country, or (ii) a
transnational system for the central handling of securities or equivalent
book-entries.
Customer represents that its Board of Directors has approved each of the
Subcustodians listed in Schedule A hereto and the terms of the subcustody
agreements between Bank and each Subcustodian, which are attached as Exhibits I
through of Schedule A, and further represents that its Board has determined that
the use of each Subcustodian and the terms of each subcustody agreement are
consistent with the best interests of the Fund(s) and its (their) shareholders.
Bank shall supply Customer with any amendment to Schedule A for approval.
Customer has supplied or shall supply Bank with certified copies of its Board of
Directors resolution(s) with respect to the foregoing prior to placing Assets
with any Subcustodian so approved.
Section 11. Instructions.
Add the following language to the end of Section 11:
Deposit Account Payments and Custody Account Transactions made pursuant
to Section 5 and 6 hereof may be made only for the purposes listed below.
Instructions must specify the purpose for which any transaction is to be made
and Customer shall be solely responsible to assure that Instructions are in
accord with any limitations or restrictions applicable to Customer by law or as
may be set forth in its prospectus.
(a) In connection with the purchase or sale of Securities at prices as
confirmed by Instructions;
(b) When Securities are called, redeemed or retired, or otherwise
become payable;
(c) In exchange for or upon conversion into other securities alone or
other securities and cash pursuant to any plan or merger, consolidation,
reorganization, recapitalization or readjustment;
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<PAGE>
(d) Upon conversion of Securities pursuant to their terms into other
securities;
(e) Upon exercise of subscription, purchase or other similar rights
represented by Securities;
(f) For the payment of interest, taxes, management or supervisory fees,
distributions or operating expenses;
(g) In connection with any borrowings by Customer requiring a pledge of
Securities, but only against receipt of amounts borrowed;
(h) In connection with any loans, but only against receipt of adequate
collateral as specified in Instructions which shall reflect any restrictions
applicable to Customer;
(i) For the purpose of redeeming shares of the capital stock of Customer
and the delivery to, or the crediting to the account of, Bank, its Subcustodian
or Customer's transfer agent, such shares to be purchased or redeemed;
(j) For the purpose of redeeming in kind shares of Customer against
delivery to Bank, its Subcustodian or Customer's transfer agent of such shares
to be so redeemed;
(k) For delivery in accordance with the provisions of any agreement
among Customer, Bank and a broker-dealer registered under the Securities
Exchange Act of 1934 and a member of The National Association of Securities
Dealers, Inc., relating to compliance with the rules of The Options Clearing
Corporation and of any registered national securities exchange, or of any
similar organization or organizations, regarding escrow or other arrangements in
connection with transactions by Customer;
(l) For release of Securities to designated brokers under covered call
options, provided, however, that such Securities shall be released only upon
payment to Bank of monies for the premium due and a receipt for the Securities
which are to be held in escrow. Upon exercise of the option, or at expiration,
Bank shall receive from brokers the Securities previously deposited. Bank shall
act strictly in accordance with Instructions in the delivery of Securities to be
held in escrow and shall have no responsibility or liability for any such
Securities which are not returned promptly when due other than to make proper
request for such return;
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<PAGE>
(m) For spot or forward foreign exchange transactions to facilitate
security trading, receipt of income from Securities or related transactions;
(n) For other proper purposes as may be specified in Instructions issued
by an officer of Customer which shall include a statement of the purpose for
which the delivery or payment is to be made, the amount of the payment or
specific Securities to be delivered, the name of the person or persons to whom
delivery or payment is to be made, and a certification that the purpose is a
proper purpose under the instruments governing Customer; and
(o) Upon the termination hereof as set forth in Section 14(j).
Section 12. Standard of Care; Liabilities.
Add the following at the end of Section as 12:
(d) Bank hereby warrants to Customer that in its opinion, after due
inquiry, the established procedures to be followed by each of its branches, each
branch of a qualified U.S. Bank, each eligible foreign custodian and each
eligible foreign securities depository holding Customer's Securities pursuant
hereto afford protection for such Securities at least equal to that afforded by
Bank's established procedures with respect to similar securities held by Bank
and its securities depositories in New York.
Section 14. Access to Records.
Add the following language to the end of Section 14(c):
Upon reasonable request from Customer, Bank shall furnish Customer such
reports (or portions thereof) of Bank's system of internal accounting controls
applicable to Bank's duties hereunder. Bank shall endeavor to obtain and furnish
Customer with such similar reports as it may reasonably request with respect to
each Subcustodian and securities depository holding Assets.
GLOBAL PROXY SERVICE RIDER
To Global Custody Agreement
Between
THE CHASE MANHATTAN BANK
AND
------------------------------------
<PAGE>
<PAGE>
dated 199_.
1. Global Proxy Services ("Proxy Services") shall be provided for the countries
listed in the procedures and guidelines ("Procedures") furnished to Customer, as
the same may be amended by Bank from time to time on prior notice to Customer.
The Procedures are incorporated by reference herein and form a part of this
Rider.
2. Proxy Services shall consist of those elements as set forth in the
Procedures, and shall include (a) notifications ("Notifications") by Bank to
Customer of the dates of pending shareholder meetings, resolutions to be voted
upon and the return dates as may be received by Bank or provided to Bank by its
Subcustodians or third parties, and (b) voting by Bank of proxies based on
Customer Directions. Original proxy materials or copies thereof shall not be
provided. Notifications shall generally be in English and, where necessary,
shall be summarized and translated from such non-English materials as have been
made available to Bank or its Subcustodian. In this respect Bank's only
obligation is to provide information from sources it believes to be reliable
and/or to provide materials summarized and/or translated in good faith. Bank
reserves the right to provide Notifications, or parts thereof, in the language
received. Upon reasonable advance request by Customer, backup information
relative to Notifications, such as annual reports, explanatory material
concerning resolutions, management recommendations or other material relevant to
the exercise of proxy voting rights shall be provided as available, but without
translation.
3. While Bank shall attempt to provide accurate and complete Notifications,
whether or not translated, Bank shall not be liable for any losses or other
consequences that may result from reliance by Customer upon Notifications where
Bank prepared the same in good faith.
4. Notwithstanding the fact that Bank may act in a fiduciary capacity with
respect to Customer under other agreements or otherwise under the Agreement, in
performing Proxy Services Bank shall be acting solely as the agent of Customer,
and shall not exercise any discretion with regard to such Proxy Services.
5. Proxy voting may be precluded or restricted in a variety of circumstances,
including, without limitation, where the relevant Securities are: (i) on loan;
(ii) at registrar for registration or reregistration; (iii) the subject of a
conversion or other corporate action; (iv) not held in a name subject to the
control of Bank or its Subcustodian or are otherwise held in a manner which
precludes voting; (v) not capable of being voted on account of local market
regulations or
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<PAGE>
practices or restrictions by the issuer; or (vi) held in a margin or collateral
account.
6. Customer acknowledges that in certain countries Bank may be unable to vote
individual proxies but shall only be able to vote proxies on a net basis (e.g.,
a net yes or no vote given the voting instructions received from all customers).
7. Customer shall not make any use of the information provided hereunder, except
in connection with the funds or plans covered hereby, and shall in no event
sell, license, give or otherwise make the information provided hereunder
available, to any third party, and shall not directly or indirectly compete with
Bank or diminish the market for Proxy Services by provision of such information,
in whole or in part, for compensation or otherwise, to any third party.
8. The names of Authorized Persons for Proxy Services shall be furnished to Bank
in accordance with 10 of the Agreement. Proxy Services fees shall be as set
forth in 13 of the Agreement or as separately agreed.
SPECIAL TERMS AND CONDITIONS RIDER
GLOBAL CUSTODY AGREEMENT
WITH
- -----------------------------------
DATE
- -----------------------------------
DOMESTIC ONLY
SPECIAL TERMS AND CONDITIONS RIDER
Domestic Corporate Actions and Proxies
With respect to domestic U.S. and Canadian Securities (the latter if held in
DTC), the following provisions shall apply rather than the provisions of Section
8 of the Agreement and the Global Proxy Service rider:
Bank shall send to Customer or the Authorized Person for a Custody
Account, such proxies (signed in blank, if issued in the name of
<PAGE>
<PAGE>
Bank's nominee or the nominee of a central depository) and communications with
respect to Securities in the Custody Account as call for voting or relate to
legal proceedings within a reasonable time after sufficient copies are received
by Bank for forwarding to its customers. In addition, Bank shall follow coupon
payments, redemptions, exchanges or similar matters with respect to Securities
in the Custody Account and advise Customer or the Authorized Person for such
Account of rights issued, tender offers or any other discretionary rights with
respect to such Securities, in each case, of which Bank has received notice from
the issuer of the Securities, or as to which notice is published in publications
routinely utilized by Bank for this purpose.
Fees
The fees referenced in Section 13 hereof cover only domestic and euro-dollar
holdings. There shall be no Schedule A hereto, as there are no foreign assets in
the Accounts.
DOMESTIC AND GLOBAL
SPECIAL TERMS AND CONDITIONS RIDER
Domestic Corporate Actions and Proxies
With respect to domestic U.S. and Canadian Securities (the latter if held in
DTC), the following provisions shall apply rather than the pertinent provisions
of Section 8 of the Agreement and the Global Proxy Service rider:
Bank shall send to Customer or the Authorized Person for a Custody
Account, such proxies (signed in blank, if issued in the name of Bank's nominee
or the nominee of a central depository) and communications with respect to
Securities in the Custody Account as call for voting or relate to legal
proceedings within a reasonable time after sufficient copies are received by
Bank for forwarding to its customers. In addition, Bank shall follow coupon
payments, redemptions, exchanges or similar matters with respect to Securities
in the Custody Account and advise Customer or the Authorized Person for such
Account of rights issued, tender offers or any other discretionary rights with
respect to such Securities, in each case, of which Bank has received notice from
the issuer of the Securities, or as to which notice is published in publications
routinely utilized by Bank for this purpose.
<PAGE>
<PAGE>
TRANSFER AGENCY AND SERVICES AGREEMENT
THIS AGREEMENT, dated as of this 2nd day of January, 1998 between
SALOMON BROTHERS VARIABLE SERIES FUNDS INC (the "Fund"), a Maryland
corporation having its principal place of business at 7 World Trade Center, 38th
Floor, New York, NY 10048 and FIRST DATA INVESTOR SERVICES GROUP, INC.
("Investor Services Group"), a Massachusetts corporation with principal offices
at 4400 Computer Drive, Westboro, Massachusetts 01581.
WITNESSETH
WHEREAS, the Fund is authorized to issue Shares in separate series,
with each such series representing interests in a separate portfolio of
securities or other assets.
WHEREAS, the Fund initially intends to offer Shares in those Portfolios
identified in the attached Exhibit 1, each such Portfolio, together with all
other Portfolios subsequently established by the Fund shall be subject to this
Agreement in accordance with Article 14;
WHEREAS, the Fund on behalf of the Portfolios, desires to appoint
Investor Services Group as its transfer agent, dividend disbursing agent and
agent in connection with certain other activities and Investor Services Group
desires to accept such appointment;
NOW, THEREFORE, in consideration of the mutual covenants and promises
hereinafter set forth, the Fund and Investor Services Group agree as follows:
Article 1 Definitions.
1.1 Whenever used in this Agreement, the following words and phrases,
unless the context otherwise requires, shall have the following meanings:
(a) "Articles of Incorporation" shall mean the Articles of
Incorporation, Declaration of Trust, or other similar organizational
document as the case may be, of the Fund as the same may be amended
from time to time.
(b) "Authorized Person" shall be deemed to include (i) any
authorized officer of the Fund; or (ii) any person, whether or not such
person is an officer or employee of the Fund, duly authorized to give
Oral Instructions or Written Instructions on behalf of the Fund as
indicated in writing to Investor Services Group from time to time.
(c) "Board of Directors" shall mean the Board of Directors or
Board of Trustees of the Fund, as the case may be.
(d) "Commission" shall mean the Securities and Exchange
Commission.
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2
(e) "Custodian" refers to any custodian or subcustodian of
securities and other property which the Fund may from time to time
deposit, or cause to be deposited or held under the name or account of
such a custodian pursuant to a Custodian Agreement.
(f) "1934 Act" shall mean the Securities Exchange Act of 1934
and the rules and regulations promulgated thereunder, all as amended
from time to time.
(g) "1940 Act" shall mean the Investment Company Act of 1940
and the rules and regulations promulgated thereunder, all as amended
from time to time.
(h) "Oral Instructions" shall mean instructions, other than
Written Instructions, actually received by Investor Services Group from
a person reasonably believed by Investor Services Group to be an
Authorized Person;
(i) "Portfolio" shall mean each separate series of shares
offered by the Fund representing interests in a separate portfolio of
securities and other assets;
(j) "Prospectus" shall mean the most recently dated Fund
Prospectus and Statement of Additional Information, including any
supplements thereto if any, which has become effective under the
Securities Act of 1933 and the 1940 Act.
(k) "Shares" refers collectively to such shares of capital
stock or beneficial interest, as the case may be, or class thereof, of
each respective Portfolio of the Fund as may be issued from time to
time.
(l) "Shareholder" shall mean a record owner of Shares of each
respective Portfolio of the Fund.
(m) "Written Instructions" shall mean a written communication
signed by a person reasonably believed by Investor Services Group to be
an Authorized Person and actually received by Investor Services Group.
Written Instructions shall include manually executed originals and
authorized electronic transmissions, including telefacsimile of a
manually executed original or other process.
Article 2 Appointment of Investor Services Group.
The Fund, on behalf of the Portfolios, hereby appoints and constitutes
Investor Services Group as transfer agent and dividend disbursing agent for
Shares of each respective Portfolio of the Fund and as shareholder servicing
agent for the Fund and Investor Services Group hereby accepts such appointments
and agrees to perform the duties hereinafter set forth.
<PAGE>
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3
Article 3 Duties of Investor Services Group.
3.1 Investor Services Group shall be responsible for:
(a) Administering and/or performing the customary services of
a transfer agent; acting as service agent in connection with dividend
and distribution functions; and for performing shareholder account and
administrative agent functions in connection with the issuance,
transfer and redemption or repurchase (including coordination with the
Custodian) of Shares of each Portfolio, as more fully described in the
written schedule of Duties of Investor Services Group annexed hereto as
Schedule A and incorporated herein, and in accordance with the terms of
the Prospectus of the Fund on behalf of the applicable Portfolio,
applicable law and the procedures established from time to time between
Investor Services Group and the Fund.
(b) Recording the issuance of Shares and maintaining pursuant
to Rule 17Ad-10(e) of the 1934 Act a record of the total number of
Shares of each Portfolio which are authorized, based upon data provided
to it by the Fund, and issued and outstanding. Investor Services Group
shall provide the Fund on a regular basis with the total number of
Shares of each Portfolio which are authorized and issued and
outstanding and shall have no obligation, when recording the issuance
of Shares, to monitor the issuance of such Shares or to take cognizance
of any laws relating to the issue or sale of such Shares, which
functions shall be the sole responsibility of the Fund.
(c) Notwithstanding any of the foregoing provisions of this
Agreement, Investor Services Group shall be under no duty or obligation
to inquire into, and shall not be liable for: (i) the legality of the
issuance or sale of any Shares or the sufficiency of the amount to be
received therefor; (ii) the legality of the redemption of any Shares,
or the propriety of the amount to be paid therefor; (iii) the legality
of the declaration of any dividend by the Board of Directors, or the
legality of the issuance of any Shares in payment of any dividend; or
(iv) the legality of any recapitalization or readjustment of the
Shares.
3.2 In addition and to the extent required by law, the Fund shall (i)
identify to Investor Services Group in writing those transactions and assets to
be treated as exempt from blue sky reporting for each State and (ii) verify the
establishment of transactions for each State on the system prior to activation
and thereafter monitor the daily activity for each State. The responsibility of
Investor Services Group for the Fund's blue sky State registration status is
solely limited to the initial establishment of transactions subject to blue sky
compliance by the Fund and the reporting of such transactions to the Fund as
provided above.
3.3 In addition to the duties set forth herein, Investor Services Group
shall perform such other duties and functions, and shall be paid such amounts
therefor, as may from time to time be agreed upon in writing between the Fund
and Investor Services Group.
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4
Article 4 Recordkeeping and Other Information.
4.1 Investor Services Group shall create and maintain all records
required of it pursuant to its duties hereunder and as set forth in Schedule A
in accordance with all applicable laws, rules and regulations, including records
required by Section 31(a) of the 1940 Act. All records shall be available during
regular business hours for inspection and use by the Fund. Where applicable,
such records shall be maintained by Investor Services Group for the periods and
in the places required by Rule 31a-2 under the 1940 Act.
4.2 Upon reasonable notice by the Fund, Investor Services Group shall
make available during regular business hours such of its facilities and premises
employed in connection with the performance of its duties under this Agreement
for reasonable visitation by the Fund, or any other person retained by the Fund
as may be necessary for the Fund to evaluate the quality of the services
performed by Investor Services Group pursuant hereto.
4.3 To the extent required by Section 31 of the 1940 Act, Investor
Services Group agrees that all such records prepared or maintained by Investor
Services Group relating to the services to be performed by Investor Services
Group hereunder are the property of the Fund and will be preserved, maintained
and made available in accordance with such section, and will be surrendered
promptly to the Fund on and in accordance with the Fund's request.
4.4 In case of any requests or demands for the inspection of
Shareholder records of the Fund, Investor Services Group will notify the Fund of
such request and secure Written Instructions as to the handling of such request.
Investor Services Group reserves the right, however, upon prior written notice
to the Fund, to exhibit the Shareholder records to any person whenever it is
advised by its counsel that it may be held liable for the failure to comply with
such request.
Article 5 Fund Instructions.
5.1 Investor Services Group will have no liability when acting upon
Written or Oral Instructions believed to have been executed or orally
communicated by an Authorized Person and will not be held to have any notice of
any change of authority of any person until receipt of a Written Instruction
thereof from the Fund. Investor Services Group will also have no liability when
processing Share certificates which it reasonably believes to bear the proper
manual or facsimile signatures of the officers of the Fund and the proper
countersignature of Investor Services Group.
5.2 At any time, Investor Services Group may request Written
Instructions from the Fund and may seek advice from legal counsel for the Fund,
or its own legal counsel, with respect to any matter arising in connection with
this Agreement, and it shall not be liable for any action taken or not taken or
suffered by it in good faith in accordance with such Written Instructions or in
accordance with the opinion of counsel for the Fund or for Investor Services
Group.
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5
Written Instructions requested by Investor Services Group will be provided by
the Fund within a reasonable period of time.
5.3 Investor Services Group, its officers, agents or employees, shall
accept Oral Instructions or Written Instructions given to them by any person
representing or acting on behalf of the Fund only if said representative is an
Authorized Person. The Fund agrees that all Oral Instructions shall be followed
within one business day by confirming Written Instructions, and that the Fund's
failure to so confirm shall not impair in any respect Investor Services Group's
right to rely on Oral Instructions.
Article 6 Compensation.
6.1 The Fund on behalf of each of the Portfolios will compensate
Investor Services Group for the performance of its obligations hereunder in
accordance with the fees set forth in the written Fee Schedule annexed hereto as
Schedule B and incorporated herein.
6.2 In addition to those fees set forth in Section 6.1 above, the Fund
on behalf of each of the Portfolios (but only from the assets of the particular
Portfolio) agrees to pay, and will be billed separately for, out-of-pocket
expenses incurred by Investor Services Group in the performance of its duties
hereunder. Out-of-pocket expenses shall include, but shall not be limited to,
the items specified in the written schedule of out-of-pocket charges annexed
hereto as Schedule C and incorporated herein. Schedule C may be modified by
written agreement between the parties. Unspecified out-of-pocket expenses shall
be limited to those out-of-pocket expenses reasonably incurred by Investor
Services Group in the performance of its obligations hereunder.
6.3 Investor Services Group will transmit an invoice to the Fund as
soon as practicable after the end of each calendar month which will be detailed
in accordance with Schedule A, and the Fund on behalf of each of the Portfolios
agrees to pay all fees and out-of-pocket expenses within thirty (30) days
following the receipt of the respective invoice.
6.4 Any compensation agreed to hereunder may be adjusted from time to
time by attaching to Schedule B, a revised Fee Schedule executed and dated by
the parties hereto.
Article 7 Documents.
In connection with the appointment of Investor Services Group, the Fund
shall, on or before the date this Agreement goes into effect, but in any case
within a reasonable period of time for Investor Services Group to prepare to
perform its duties hereunder, deliver or caused to be delivered to Investor
Services Group the documents set forth in the written schedule of Fund Documents
annexed hereto as Schedule D.
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6
Article 8 Transfer Agent System.
8.1 Investor Services Group shall retain title to and ownership of any
and all data bases, computer programs, screen formats, report formats,
interactive design techniques, derivative works, inventions, discoveries,
patentable or copyrightable matters, concepts, expertise, patents, copyrights,
trade secrets, and other related legal rights utilized by Investor Services
Group in connection with the services provided by Investor Services Group to the
Fund herein (the "Investor Services Group System").
8.2 Investor Services Group hereby grants to the Fund a limited license
to the Investor Services Group System for the sole and limited purpose of having
Investor Services Group provide the services contemplated hereunder and nothing
contained in this Agreement shall be construed or interpreted otherwise and such
license shall immediately terminate with the termination of this Agreement.
8.3 In the event that the Fund, including any affiliate or agent of the
Fund or any third party acting on behalf of the Fund is provided with direct
access to the Investor Services Group System for either account inquiry or to
transmit transaction information, including but not limited to maintenance,
exchanges, purchases and redemptions, such direct access capability shall be
limited to direct entry to the Investor Services Group System by means of
on-line mainframe terminal entry or PC emulation of such mainframe terminal
entry and any other non-conforming method of transmission of information to the
Investor Services Group System is strictly prohibited without the prior written
consent of Investor Services Group.
Article 9 Representations and Warranties.
9.1 Investor Services Group represents and warrants to the Fund that:
(a) it is a corporation duly organized, existing and in good
standing under the laws of the Commonwealth of Massachusetts;
(b) it is empowered under applicable laws and by its Articles
of Incorporation and By-Laws to enter into and perform this Agreement;
(c) all requisite corporate proceedings have been taken to
authorize it to enter into this Agreement;
(d) it is duly registered with its appropriate regulatory
agency as a transfer agent and such registration will remain in effect
for the duration of this Agreement; and
(e) it has and will continue to have access to the necessary
facilities, equipment and personnel to perform its duties and
obligations under this Agreement.
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7
(f) the various procedures and systems which it has
implemented with regard to safeguarding from loss or damage
attributable to fire, theft or any other cause, each Portfolio's blank
checks, records and other data and Investor Services Group's records,
data equipment facilities and other property used in the performance of
its obligations hereunder are adequate and that it will make such
changes therein from time to time as may be reasonably necessary for
the secure performance of its obligations thereunder.
9.2 The Fund represents and warrants to Investor Services Group that:
(a) it is duly organized, existing and in good standing under
the laws of the jurisdiction in which it is organized;
(b) it is empowered under applicable laws and by its Articles
of Incorporation and By-Laws to enter into this Agreement;
(c) all corporate proceedings required by said Articles of
Incorporation, By-Laws and applicable laws have been taken to authorize
it to enter into this Agreement;
(d) a registration statement under the Securities Act of 1933,
as amended, and the 1940 Act on behalf of each of the Portfolios is
currently effective and will remain effective; and to the extent
required by applicable law, all appropriate state securities law
filings have been made and will continue to be made, with respect to
all Shares of the Fund being offered for sale; and
(e) all outstanding Shares are validly issued, fully paid and
non-assessable and when Shares are hereafter issued in accordance with
the terms of the Fund's Articles of Incorporation and its Prospectus
with respect to each Portfolio, such Shares shall be validly issued,
fully paid and non-assessable.
9.3 THIS IS A SERVICE AGREEMENT. EXCEPT AS EXPRESSLY PROVIDED IN THIS
AGREEMENT, INVESTOR SERVICES GROUP DISCLAIMS ALL OTHER REPRESENTATIONS OR
WARRANTIES, EXPRESS OR IMPLIED, MADE TO THE FUND OR ANY OTHER PERSON, INCLUDING,
WITHOUT LIMITATION, ANY WARRANTIES REGARDING QUALITY, SUITABILITY,
MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE OR OTHERWISE (IRRESPECTIVE OF
ANY COURSE OF DEALING, CUSTOM OR USAGE OF TRADE) OF ANY SERVICES OR ANY GOODS
PROVIDED INCIDENTAL TO SERVICES PROVIDED UNDER THIS AGREEMENT. INVESTOR SERVICES
GROUP DISCLAIMS ANY WARRANTY OF TITLE OR NON-INFRINGEMENT EXCEPT AS OTHERWISE
SET FORTH IN THIS AGREEMENT.
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8
Article 10 Indemnification.
10.1 Each party hereto (the "Indemnifying Party") will indemnify the
other party (the "Indemnified Party") against and hold it harmless from any and
all losses, claims, damages, liabilities or expenses of any sort or kind
(including reasonable counsel fees and expenses) resulting from any claim,
demand, action or suit or other proceeding (a "Claim") unless such Claim has
resulted from a negligent failure to act or omission to act or bad faith of the
Indemnified Party in the performance of its duties hereunder. In addition,
Investor Services Group shall not be responsible for and the Fund shall
indemnify and hold Investor Services Group harmless from and against, any Claim
which may be asserted against Investor Services Group or for which Investor
Services Group may be held to be liable arising out of or attributable to any of
the following:
(a) any actions of Investor Services Group required to be
taken pursuant to this Agreement unless such Claim resulted from a
negligent act or omission to act or bad faith by Investor Services
Group in the performance of its duties hereunder;
(b) Investor Services Group's reasonable reliance on, or
reasonable use of information, data, records and documents (including
but not limited to magnetic tapes, computer printouts, hard copies and
microfilm copies) received by Investor Services Group from the Fund, or
any authorized third party acting on behalf of the Fund, including but
not limited to the prior transfer agent for the Fund, in the
performance of Investor Services Group's duties and obligations
hereunder;
(c) the reliance on, or the implementation of, any Written or
Oral Instructions or any other instructions or requests of the Fund on
behalf of the applicable Portfolio;
(d) the offer or sales of shares in violation of any
requirement under the securities laws or regulations of any state that
such shares be registered in such state or in violation of any stop
order or other determination or ruling by any state with respect to the
offer or sale of such shares in such state; and
(e) the Fund's refusal or failure to comply with the terms of
this Agreement, or any Claim which arises out of the Fund's negligence
or misconduct or the breach of any representation or warranty of the
Fund made herein.
10.2 In any case in which the Indemnifying Party may be asked to
indemnify or hold the Indemnified Party harmless, the Indemnified Party will
notify the Indemnifying Party promptly after identifying any situation which it
believes presents or appears likely to present a claim for indemnification
against the Indemnifying Party although the failure to do so shall not prevent
recovery by the Indemnified Party and shall keep the Indemnifying Party advised
with respect to all developments concerning such situation. The Indemnifying
Party shall have the option to defend the Indemnified Party against any Claim
which may be the subject of this indemnification, and, in the event that the
Indemnifying Party so elects, such defense shall be conducted by
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9
counsel chosen by the Indemnifying Party and reasonably satisfactory to the
Indemnified Party, and thereupon the Indemnifying Party shall take over complete
defense of the Claim and the Indemnified Party shall sustain no further legal or
other expenses in respect of such Claim. The Indemnified Party will not confess
any Claim or make any compromise in any case in which the Indemnifying Party
will be asked to provide indemnification, except with the Indemnifying Party's
prior written consent. The obligations of the parties hereto under this Article
10 shall survive the termination of this Agreement.
10.3 Any claim for indemnification under this Agreement must be made
prior to the earlier of:
(a) one year after the Indemnifying Party becomes aware of the
event for which indemnification is claimed; or
(b) one year after the earlier of the termination of this
Agreement or the expiration of the term of this Agreement.
10.4 Except for remedies that cannot be waived as a matter of law (and
injunctive or provisional relief), the provisions of this Article 10 shall be
Investor Services Group's sole and exclusive remedy for claims or other actions
or proceedings to which the Fund's indemnification obligations pursuant to this
Article 10 may apply.
10.5 Any obligation of the Fund under this Article 10 to indemnify or
reimburse Investor Services Group in connection with any claim, cost, expense,
loss, damage, charge, payment or liability that is attributable to a particular
Portfolio shall be satisfied from the assets of the Portfolio in question and
not from the assets of any other Portfolio.
Article 11 Standard of Care.
11.1 Investor Services Group shall at all times act in good faith and
agrees to use its best efforts within commercially reasonable limits to ensure
the accuracy of all services performed under this Agreement, but assumes no
responsibility for loss or damage to the Fund unless said errors are caused by
Investor Services Group's own negligence, bad faith or willful misconduct or
that of its employees.
11.2 Each party shall have the duty to mitigate damages for which the
other party may become responsible.
Article 12 Consequential Damages.
IN NO EVENT AND UNDER NO CIRCUMSTANCES SHALL EITHER PARTY UNDER THIS
AGREEMENT BE LIABLE TO THE OTHER PARTY FOR INDIRECT LOSS OF PROFITS, REPUTATION
OR BUSINESS OR ANY OTHER CONSEQUENTIAL OR
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10
SPECIAL DAMAGES UNDER ANY PROVISION OF THIS AGREEMENT OR FOR ANY ACT OR FAILURE
TO ACT THEREUNDER.
Article 13 Term and Termination.
13.1 This Agreement shall be effective on the date first written above
and shall continue for a period of three (3) years (the "Initial Term").
13.2 Upon the expiration of the Initial Term, this Agreement shall
automatically renew for successive terms of three (3) years ("Renewal Terms")
each, unless the Fund or Investor Services Group provides written notice to the
other of its intent not to renew. Such notice must be received not less than
ninety (90) days prior to the expiration of the Initial Term or the then current
Renewal Term.
13.3 In the event a termination notice is given by the Fund, all
expenses associated with movement of records and materials and conversion
thereof to a successor transfer agent will be borne by the Fund. Investor
Services Group will reasonably cooperate with the Fund and any successor
transfer agent or agents in the substitution process.
13.4 If a party hereto is guilty of a material failure to perform its
duties and obligations hereunder (a "Defaulting Party") the other party (the
"Non-Defaulting Party") may give written notice thereof to the Defaulting Party,
and if such material breach shall not have been remedied within thirty (30) days
after such written notice is given, then the Non-Defaulting Party may terminate
this Agreement by giving thirty (30) days written notice of such termination to
the Defaulting Party. In all cases, termination by the Non-Defaulting Party
shall not constitute a waiver by the Non-Defaulting Party of any rights it might
have under this Agreement or otherwise against the Defaulting Party.
Article 14 Additional Portfolios
14.1 In the event that the Fund establishes one or more Portfolios in
addition to those identified in Exhibit 1, with respect to which the Fund
desires to have Investor Services Group render services as transfer agent under
the terms hereof, the Fund shall so notify Investor Services Group in writing,
and if Investor Services Group agrees in writing to provide such services,
Exhibit 1 shall be amended to include such additional Portfolios.
Article 15 Confidentiality.
15.1 The parties agree that the Proprietary Information (defined below)
and the contents of this Agreement (collectively "Confidential Information") are
confidential information of the parties and their respective licensors. The Fund
and Investor Services Group shall exercise at
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11
least the same degree of care, but not less than reasonable care, to safeguard
the confidentiality of the Confidential Information of the other as it would
exercise to protect its own confidential information of a similar nature. The
Fund and Investor Services Group shall not duplicate, sell or disclose to others
the Confidential Information of the other, in whole or in part, without the
prior written permission of the other party. The Fund and Investor Services
Group may, however, disclose Confidential Information to their respective parent
corporation, their respective affiliates, their subsidiaries and affiliated
companies and employees, provided that each shall use reasonable efforts to
ensure that the Confidential Information is not duplicated or disclosed in
breach of this Agreement. The Fund and Investor Services Group may also disclose
the Confidential Information to independent contractors, auditors, and
professional advisors, provided they first agree to be bound by the
confidentiality obligations substantially similar to this Section 15.1.
Notwithstanding the previous sentence, in no event shall either the Fund or
Investor Services Group disclose the Confidential Information to any competitor
of the other without specific, prior written consent.
15.2 Proprietary Information means:
(a) any data or information that is competitively sensitive
material, and not generally known to the public, including, but not
limited to, information about product plans, marketing strategies,
finance, operations, customer relationships, customer profiles, sales
estimates, business plans, and internal performance results relating to
the past, present or future business activities of the Fund or Investor
Services Group, their respective subsidiaries and affiliated companies
and the customers, clients and suppliers of any of them;
(b) any scientific or technical information, design, process,
procedure, formula, or improvement that is commercially valuable and
secret in the sense that its confidentiality affords the Fund or
Investor Services Group a competitive advantage over its competitors;
and
(c) all confidential or proprietary concepts, documentation,
reports, data, specifications, computer software, source code, object
code, flow charts, databases, inventions, know-how, show-how and trade
secrets, whether or not patentable or copyrightable.
15.3 Confidential Information includes, without limitation, all
documents, inventions, substances, engineering and laboratory notebooks,
drawings, diagrams, specifications, bills of material, equipment, prototypes and
models, and any other tangible manifestation of the foregoing of either party
which now exist or come into the control or possession of the other. The term
"Confidential Information" does not include any information which (i) at the
time of disclosure or thereafter is generally available to the public (other
than as a result of disclosure directly or indirectly by either party in
violation hereof), (ii) is or becomes available to either party on a
nonconfidential basis from a source other than the Fund or Investor Services
Group, as the case may be, provided that, after due inquiry, such source was not
prohibited from disclosing such
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12
information to such party by a legal, contractual or fiduciary obligation owed
to either party or (iii) either party can establish is already in such party's
possession (other than information furnished by or on behalf of either party).
15.4 If either party becomes legally compelled (including by
deposition, interrogatory, request for documents, subpoena, civil investigative
demand or similar process) to disclose any Confidential Information, such party
will provide the other party with prompt prior written notice of such
requirements so that such other party may seek a protective order or other
appropriate remedy. If such protective order or other remedy is not obtained,
each party agrees to disclose only that portion of the Confidential Information
which such party is advised by written opinion of outside counsel is legally
required to be disclosed and to take all reasonable steps to preserve the
confidentiality of the Confidential Information (including by obtaining an
appropriate protective order or other reliable assurance that confidential
treatment will be accorded the Confidential Information). In addition, each
party agrees to not oppose any action (and will, if and to the extent requested
by the other party, cooperate with, assist and join with the other party at the
other party's expense, in any reasonable action) by the other party to obtain an
appropriate protective order or other reliable assurance that confidential
treatment will be accorded the Confidential Information.
Article 16 Force Majeure.
No party shall be liable for any default or delay in the performance of
its obligations under this Agreement if and to the extent such default or delay
is caused, directly or indirectly, by (i) fire, flood, elements of nature or
other acts of God; (ii) any outbreak or escalation of hostilities, war, riots or
civil disorders in any country, (iii) any act or omission of any governmental
authority; (iv) any labor disputes (whether or not the employees' demands are
reasonable or within the party's power to satisfy); or (v) nonperformance by a
third party or any similar cause beyond the reasonable control of such party,
including without limitation, failures or fluctuations in telecommunications or
other equipment. In any such event, the non-performing party shall be excused
from any further performance and observance of the obligations so affected only
for as long as such circumstances prevail and such party continues to use
commercially reasonable efforts to recommence performance or observance as soon
as practicable.
Article 17 Assignment and Subcontracting.
This Agreement, its benefits and obligations shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
permitted assigns. This Agreement may not be assigned or otherwise transferred
by either party hereto, without the prior written consent of the other party,
which consent shall not be unreasonably withheld; provided, however, that
Investor Services Group may, in its sole discretion, assign all its right, title
and interest in this Agreement to an affiliate, parent or subsidiary, or upon
prior written consent of the Fund to the
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13
purchaser of substantially all of its business. Investor Services Group may, in
its sole discretion, engage subcontractors to perform any of the obligations
contained in this Agreement to be performed by Investor Services Group provided
that Investor Services Group shall remain liable hereunder for any acts or
omissions of any subcontractor as if performed by Investor Services Group.
Article 18 Arbitration.
18.1 Any claim or controversy arising out of or relating to this
Agreement, or breach hereof, shall be settled by arbitration administered by the
American Arbitration Association in Boston, Massachusetts in accordance with its
applicable rules, except that the Federal Rules of Evidence and the Federal
Rules of Civil Procedure with respect to the discovery process shall apply.
18.2 The parties hereby agree that judgment upon the award rendered by
the arbitrator may be entered in any court having jurisdiction.
18.3 The parties acknowledge and agree that the performance of the
obligations under this Agreement necessitates the use of instrumentalities of
interstate commerce and, notwithstanding other general choice of law provisions
in this Agreement, the parties agree that the Federal Arbitration Act shall
govern and control with respect to the provisions of this Article 18.
Article 19 Notice.
Any notice or other instrument authorized or required by this Agreement
to be given in writing to the Fund or Investor Services Group, shall be
sufficiently given if addressed to that party and received by it at its office
set forth below or at such other place as it may from time to time designate in
writing.
To the Fund:
Salomon Brothers Variable Series Funds Inc
7 World Trade Center
38th Floor
New York, NY 10048
Attention:
To Investor Services Group:
First Data Investor Services Group, Inc.
4400 Computer Drive
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14
Westboro, Massachusetts 01581
Attention: President
with a copy to Investor Services Group's General Counsel
Article 20 Governing Law/Venue.
The Agreement shall be governed exclusively by the laws of the State of
New York without reference to the choice of law provisions thereof. Each party
hereto hereby agrees that (i) the Supreme Court of New York sitting in New York
County shall have exclusive jurisdiction over any and all disputes arising
hereunder; (ii) hereby consents to the personal jurisdiction of such court over
the parties hereto, hereby waiving any defense of lack of personal jurisdiction;
and (iii) appoints the person to whom notices hereunder are to be sent as agent
for service of process.
Article 21 Counterparts.
This Agreement may be executed in any number of counterparts, each of
which shall be deemed to be an original; but such counterparts shall, together,
constitute only one instrument.
Article 22 Captions.
The captions of this Agreement are included for convenience of
reference only and in no way define or limit any of the provisions hereof or
otherwise affect their construction or effect.
Article 23 Publicity.
Neither Investor Services Group nor the Fund shall release or publish
news releases, public announcements, advertising or other publicity relating to
this Agreement or to the transactions contemplated by it without the prior
review and written approval of the other party; provided, however, that either
party may make such disclosures as are required by legal, accounting or
regulatory requirements after making reasonable efforts in the circumstances to
consult in advance with the other party.
Article 24 Relationship of Parties/Non-Solicitation.
24.1 The parties agree that they are independent contractors and not
partners or co-venturers and nothing contained herein shall be interpreted or
construed otherwise.
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15
Article 25 Entire Agreement; Severability.
25.1 This Agreement, including Schedules, Addenda, and Exhibits hereto,
constitutes the entire Agreement between the parties with respect to the subject
matter hereof and supersedes all prior and contemporaneous proposals,
agreements, contracts, representations, and understandings, whether written or
oral, between the parties with respect to the subject matter hereof. No change,
termination, modification, or waiver of any term or condition of the Agreement
shall be valid unless in writing signed by each party. A party's waiver of a
breach of any term or condition in the Agreement shall not be deemed a waiver of
any subsequent breach of the same or another term or condition.
25.2 The parties intend every provision of this Agreement to be
severable. If a court of competent jurisdiction determines that any term or
provision is illegal or invalid for any reason, the illegality or invalidity
shall not affect the validity of the remainder of this Agreement. In such case,
the parties shall in good faith modify or substitute such provision consistent
with the original intent of the parties. Without limiting the generality of this
paragraph, if a court determines that any remedy stated in this Agreement has
failed of its essential purpose, then all other provisions of this Agreement,
including the limitations on liability and exclusion of damages, shall remain
fully effective.
Article 26 Miscellaneous
Any amount owing to Investor Services Group under Articles 6 or 10 that
are attributable to a particular Portfolio shall be paid by the Fund only from
and to the extent of the assets of that Portfolio and not from the assets of any
other Portfolio.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized officers, as of the day and year first above
written.
SALOMON BROTHERS VARIABLE
SERIES FUNDS INC
By:_____________________________________
Title:__________________________________
FIRST DATA INVESTOR SERVICES GROUP, INC.
By:_____________________________________
Title:__________________________________
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Exhibit 1
LIST OF PORTFOLIOS
Salomon Brothers Variable U.S. Government Income Fund
Salomon Brothers Variable High Yield Bond Fund
Salomon Brothers Variable Strategic Bond Fund
Salomon Brothers Variable Total Return Fund
Salomon Brothers Variable Asia Growth Fund
Salomon Brothers Variable Investors Fund
Salomon Brothers Variable Capital Fund
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Schedule A
DUTIES OF Investor Services Group
1. Shareholder Information. Investor Services Group shall maintain a
record of the number of Shares held by each Shareholder of record which shall
include name, address, taxpayer identification and which shall indicate whether
such Shares are held in certificates or uncertificated form.
2. Shareholder Services. Investor Services Group shall respond as
appropriate to all inquiries and communications from Shareholders relating to
Shareholder accounts with respect to its duties hereunder and as may be from
time to time mutually agreed upon between Investor Services Group and the Fund.
Investor Services Group shall provide the Fund with reports concerning
shareholder inquiries and the responses therto by Investor Services Group, in
such form and at such times as are agreed to by the Fund and Investor Services
Group.
3. Share Certificates.
(a) At the expense of the Fund, the Fund shall supply Investor
Services Group with an adequate supply of blank share certificates to meet
Investor Services Group requirements therefor. Such Share certificates shall be
properly signed by facsimile. The Fund agrees that, notwithstanding the death,
resignation, or removal of any officer of the Fund whose signature appears on
such certificates, Investor Services Group or its agent may continue to
countersign certificates which bear such signatures until otherwise directed by
Written Instructions.
(b) Investor Services Group shall issue replacement Share
certificates in lieu of certificates which have been lost, stolen or destroyed,
upon receipt by Investor Services Group of properly executed affidavits and lost
certificate bonds, in form satisfactory to Investor Services Group, with the
Fund and Investor Services Group as obligees under the bond.
(c) Investor Services Group shall also maintain a record of
each certificate issued, the number of Shares represented thereby and the
Shareholder of record. With respect to Shares held in open accounts or
uncertificated form (i.e., no certificate being issued with respect thereto)
Investor Services Group shall maintain comparable records of the Shareholders
thereof, including their names, addresses and taxpayer identification. Investor
Services Group shall further maintain a stop transfer record on lost and/or
replaced certificates.
4. Mailing Communications to Shareholders; Proxy Materials. Investor
Services Group will address and mail to Shareholders of the Fund, all reports to
Shareholders, dividend and distribution notices and proxy material for the
Fund's meetings of Shareholders. In connection with meetings of Shareholders,
Investor Services Group will prepare Shareholder lists, mail and certify as to
the mailing of proxy materials, process and tabulate returned proxy cards,
report on proxies voted prior to meetings, act as inspector of election at
meetings and certify Shares voted at meetings.
5. Sales of Shares.
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2
(a) Investor Services Group shall not be required to issue any
Shares of the Fund where it has received a Written Instruction from the Fund or
official notice from any appropriate authority that the sale of the Shares of
the Fund has been suspended or discontinued. The existence of such Written
Instructions or such official notice shall be conclusive evidence of the right
of Investor Services Group to rely on such Written Instructions or official
notice.
(b) In the event that any check or other order for the payment
of money is returned unpaid for any reason, Investor Services Group will
endeavor to: (i) give prompt notice of such return to the Fund or its designee;
(ii) place a stop transfer order against all Shares issued as a result of such
check or order; and (iii) take such actions as Investor Services Group may from
time to time deem appropriate.
6. Transfer and Repurchase.
(a) Investor Services Group shall process all requests to
transfer or redeem Shares in accordance with the transfer or repurchase
procedures set forth in the Fund's Prospectus.
(b) Investor Services Group will transfer or repurchase Shares
upon receipt of Oral or Written Instructions or otherwise pursuant to the
Prospectus and Share certificates, if any, properly endorsed for transfer or
redemption, accompanied by such documents as Investor Services Group reasonably
may deem necessary.
(c) Investor Services Group reserves the right to refuse to
transfer or repurchase Shares until it is satisfied that the endorsement on the
instructions is valid and genuine. Investor Services Group also reserves the
right to refuse to transfer or repurchase Shares until it is satisfied that the
requested transfer or repurchase is legally authorized, and it shall incur no
liability for the refusal, in good faith, to make transfers or repurchases which
Investor Services Group, in its good judgment, deems improper or unauthorized,
or until it is reasonably satisfied that there is no basis to any claims adverse
to such transfer or repurchase.
(d) When Shares are redeemed, Investor Services Group shall,
upon receipt of the instructions and documents in proper form, deliver to the
Custodian and the Fund or its designee a notification setting forth the number
of Shares to be repurchased. Such repurchased shares shall be reflected on
appropriate accounts maintained by Investor Services Group reflecting
outstanding Shares of the Fund and Shares attributed to individual accounts.
(e) Investor Services Group shall upon receipt of the monies
provided to it by the Custodian for the repurchase of Shares, pay such monies as
are received from the Custodian, all in accordance with the procedures described
in the written instruction received by Investor Services Group from the Fund.
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3
(f) Investor Services Group shall not process or effect any
repurchase with respect to Shares of the Fund after receipt by Investor Services
Group or its agent of notification of the suspension of the determination of the
net asset value of the Fund.
7. Dividends.
(a) Upon the declaration of each dividend and each capital
gains distribution by the Board of Directors of the Fund with respect to Shares
of the Fund, the Fund shall furnish or cause to be furnished to Investor
Services Group Written Instructions setting forth the date of the declaration of
such dividend or distribution, the ex-dividend date, the date of payment
thereof, the record date as of which Shareholders entitled to payment shall be
determined, the amount payable per Share to the Shareholders of record as of
that date, the total amount payable on the payment date and whether such
dividend or distribution is to be paid in Shares at net asset value.
(b) On or before the payment date specified in such resolution
of the Board of Directors, the Fund will provide Investor Services Group with
sufficient cash to make payment to the Shareholders of record as of such payment
date.
(c) If Investor Services Group does not receive sufficient
cash from the Fund to make total dividend and/or distribution payments to all
Shareholders of the Fund as of the record date, Investor Services Group will,
upon notifying the Fund, withhold payment to all Shareholders of record as of
the record date until sufficient cash is provided to Investor Services Group.
8. In addition to and neither in lieu nor in contravention of the
services set forth above, Investor Services Group shall: (i) perform all the
customary services of a transfer agent, registrar, dividend disbursing agent and
agent of the dividend reinvestment and cash purchase plan as described herein
consistent with those requirements in effect as at the date of this Agreement.
The detailed definition, frequency, limitations and associated costs (if any)
set out in the attached fee schedule, include but are not limited to:
maintaining all Shareholder accounts, preparing Shareholder meeting lists,
mailing proxies, tabulating proxies, mailing Shareholder reports to current
Shareholders, withholding taxes on U.S. resident and non-resident alien accounts
where applicable, preparing and filing U.S. Treasury Department Forms 1099 and
other appropriate forms required with respect to dividends and distributions by
federal authorities for all Shareholders.
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Schedule B
FEE SCHEDULE
I. Fees:
Salomon Brothers Variable Series Funds, Inc. shall pay the Transfer Agent with
respect to each Portfolio an annualized fee of $8.50 per open account per year.
Such fees shall be billed by the transfer agent monthly in arrears on a
prorated basis of 1/12th of the annualized fee for all accounts that
are open during such month.
Closed Accounts $ 2.50 per account/year
IRA Accounts $10.00 per account/year
DCXchange'sm' Fee $15.00 per account/year
II. Annual Fee Adjustment:
The per account fees will be incrementally adjusted annually relative
to the Consumer Price Index (CPI) change plus 2 percent.
III. Programming Costs, with respect to the whole Fund if a Dedicated Team
is requested (Charges for Client Requested Enhancements)
(a) Dedicated Team:
Programmer $100,000 per annum
BSA $ 85,000 per annum
Tester $ 65,000 per annum
(b) System Enhancements (Non Dedicated Team):
Programmer $150.00 per hour
The above rates are subject to an annual 5% increase after the one year
anniversary of the effective date of this Agreement.
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Schedule C
OUT-OF-POCKET EXPENSES
The Fund shall reimburse Investor Services Group monthly for applicable
out-of-pocket expenses, including, but not limited to the following items:
Microfiche/microfilm production
Magnetic media tapes and freight
Printing costs, including certificates, envelopes, checks and
stationery
Postage (bulk, pre-sort, ZIP+4, barcoding, first class) direct
pass through to the Fund
Due diligence mailings
Telephone and telecommunication costs, including all lease,
maintenance and line costs
Ad hoc reports
Proxy solicitations, mailings and tabulations
Daily & Distribution advice mailings
Shipping, Certified and Overnight mail and insurance
Year-end form production and mailings
Terminals, communication lines, printers and other equipment and
any expenses incurred in connection with such terminals and lines
Duplicating services
Courier services
Incoming and outgoing wire charges
Federal Reserve charges for check clearance
Overtime, as approved by the Fund
Temporary staff, as approved by the Fund
Travel and entertainment, as approved by the Fund
Record retention, retrieval and destruction costs, including, but
not limited to exit fees charged by third party record keeping
vendors
Third party audit reviews
Ad hoc SQL time
Insurance
Such other miscellaneous expenses reasonably incurred by Investor
Services Group in performing its duties and responsibilities under
this Agreement.
The Fund agrees that postage and mailing expenses will be paid on the
day of or prior to mailing as agreed with Investor Services Group. In addition,
the Fund will promptly reimburse Investor Services Group for any other
unscheduled expenses incurred by Investor Services Group whenever the Fund and
Investor Services Group mutually agree that such expenses are not otherwise
properly borne by Investor Services Group as part of its duties and obligations
under the Agreement.
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Schedule D
FUND DOCUMENTS
Certified copy of the Articles of Incorporation of the Fund, as amended
Certified copy of the By-laws of the Fund, as amended,
Copy of the resolution of the Board of Directors authorizing the
execution and delivery of this Agreement
Specimens of the certificates for Shares of the Fund, if applicable, in
the form approved by the Board of Directors of the Fund, with a
certificate of the Secretary of the Fund as to such approval
All account application forms and other documents relating to
Shareholder accounts or to any plan, program or service offered by
the Fund
Certified list of Shareholders of the Fund with the name, address and
taxpayer identification number of each Shareholder, and the number
of Shares of the Fund held by each, certificate numbers and
denominations (if any certificates have been issued), lists of any
accounts against which stop transfer orders have been placed,
together with the reasons therefore, and the number of Shares
redeemed by the Fund
All notices issued by the Fund with respect to the Shares in
accordance with and pursuant to the Articles of Incorporation or
By-laws of the Fund or as required by law.
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FORM OF ADMINISTRATION AGREEMENT
JANUARY 2, 1998
SALOMON BROTHERS ASSET MANAGEMENT INC
7 WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
Dear Sirs:
Salomon Brothers Variable Series Funds Inc (the "Company") a
corporation organized under the laws of the state of Maryland, confirms its
agreement with Salomon Brothers Asset Management Inc ("SBAM") with respect to
[name of Portfolio] (the "Fund") as follows:
1. INVESTMENT DESCRIPTION; APPOINTMENT
The Fund desires to employ its capital by investing and reinvesting in
investments of the kind and in accordance with the limitations specified in the
Company's Articles of Incorporation, as amended from time to time, in the
Company's Prospectus(es) and Statement(s) of Additional Information as from time
to time in effect, and in such manner and to the extent as may from time to time
be approved by the Board of Directors of the Company. Copies of the Company's
Prospectus, Statement of Additional Information and the Articles of
Incorporation have been submitted to SBAM. The Fund employs SBAM (in such
capacity, the "Adviser") as its investment adviser and desires to employ and
hereby appoints SBAM as its administrator. SBAM accepts this appointment and
agrees to furnish services for the compensation set forth below. SBAM is hereby
authorized to retain third parties and is hereby authorized to delegate some or
all of its duties and obligations hereunder to such persons provided that such
persons shall remain under the general supervision of SBAM.
2. SERVICES AS ADMINISTRATOR
Subject to the supervision and direction of the Board of Directors of
the Company, SBAM will (a) assist in supervising all aspects of the Fund's
operations except those performed by the Fund's Adviser under its investment
advisory agreement; (b) supply the Fund with office facilities (which may be
SBAM's own offices) for providing its services under this agreement, statistical
and research data, data processing services, clerical, accounting and
bookkeeping services, including but not limited to, the calculation of the net
asset value of shares of the Fund, the calculation of applicable contingent
deferred sales charges and similar fees and charges, the calculation of
distribution fees, internal auditing and legal services, internal executive and
administrative services, and stationary and office
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2
supplies; and (c) prepare Board materials reports to the shareholders of the
Fund, tax returns and reports to and filings with the Securities and Exchange
Commission and state blue sky authorities.
3. COMPENSATION
In consideration of services rendered pursuant to this Agreement, the
Fund will pay SBAM on the first business day of each month a fee for the
previous month at an annual rate of .05% of the Fund's average daily net assets.
Upon any termination of this Agreement before the end of any month, the fee for
such part of the month shall be prorated according to the proportion which such
period bears to the full monthly period and shall be payable upon the date of
termination of this Agreement. For the purpose of determining fees payable to
SBAM, the value of the Fund's net assets shall be computed at the times and in
the manner specified in the Prospectus and Statement of Additional Information
as from time to time in effect.
4. EXPENSES
SBAM will bear all expenses in connection with the performance of its
services under this Agreement. The Fund will bear certain other expenses to be
incurred in its operation, including: taxes, interest, brokerage fees and
commissions, if any; fees of Directors of the Fund who are not officers,
directors, or employees of Salomon Brothers Inc., Smith Barney Inc., the Adviser
or SBAM; Securities and Exchange Commission fees and state blue sky
qualification fees; charges of custodians and transfer and dividend disbursing
agents; the Fund's and Board members' proportionate share of insurance premiums,
professional association dues and/or assessments; outside auditing and legal
expenses, costs of maintenance of corporate existence; costs attributable to
investor services, including without limitation, telephone and personnel
expenses; costs of preparing and printing prospectuses and statements of
additional information for regulatory purposes and for distribution to existing
shareholders; costs of shareholders' reports and meetings, and meetings of the
officers or Board of Directors of the Fund; and any extraordinary expenses.
5. STANDARD OF CARE
SBAM shall exercise its best judgment in rendering the services listed
in paragraph 2 above. SBAM shall not be liable for any error of judgment or
mistake of law or for any loss suffered by the Fund in connection with the
matters to which this Agreement relates provided that nothing in this Agreement
shall be deemed to protect or purport to protect SBAM against liability to the
Fund or to its shareholders to which SBAM would otherwise be subject by reason
of willful misfeasance, bad faith or gross negligence on its part in the
performance of its duties or by reason of SBAM's reckless disregard of its
obligations and duties under this Agreement.
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3
6. TERM OF AGREEMENT
This Agreement shall continue automatically (unless terminated as
provided herein) for successive annual periods provided that such continuance is
specifically approved at least annually by the Board of Directors of the Fund.
This Agreement is terminable, without penalty, on 60 days' written notice, by
the Board of Directors of the Company or by vote of holders of a majority of the
Fund's shares, or upon 90 days' written notice, by SBAM.
7. SERVICE TO OTHER COMPANIES OR ACCOUNTS
The Fund understands that SBAM now acts, will continue to act and may
act in the future as administrator to one or more other investment companies,
and the Fund has no objection to SBAM's so acting. The Fund understands that the
persons employed by SBAM to assist in the performance of SBAM's duties hereunder
will not devote their full time to such service and nothing contained herein
shall be deemed to limit or restrict the right of SBAM or any affiliate of SBAM
to engage in and devote time and attention to other businesses or to render
services of whatever kind or nature.
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4
If the foregoing is in accordance with your understanding, kindly
indicate your acceptance hereof by signing and returning to us the enclosed copy
hereof.
Very truly yours,
Salomon Brothers Variable Series
Funds Inc
By: ___________________________
Title:_________________________
Accepted:
Salomon Brothers Asset Management Inc
By: __________________________________
Title:________________________________
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PARTICIPATION AGREEMENT
BY AND AMONG
[NAME OF LIFE COMPANY],
ON BEHALF OF ITSELF AND
ITS SEPARATE ACCOUNTS
AND
SALOMON BROTHERS VARIABLE SERIES FUNDS INC
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2
PARTICIPATION AGREEMENT
THIS AGREEMENT, made and entered into as of January 2, 1998
("Agreement"), by and among Salomon Brothers Variable Series Funds Inc, a
Maryland corporation (the "Fund"), and [NAME OF LIFE COMPANY], a [STATE] life
insurance company ("LIFE COMPANY"), on behalf of itself and each of its
segregated asset accounts listed in Schedule A hereto, as the parties hereto may
amend from time to time (each, an "Account," and collectively, the "Accounts").
WITNESSETH THAT:
WHEREAS, the Fund is registered with the Securities and Exchange
Commission ("SEC") as an open-end management investment company under the
Investment Company Act of 1940, as amended (the "1940 Act");
WHEREAS, the Fund is available to the extent set forth herein to
act as the investment vehicle for separate accounts established for variable
life insurance policies and variable annuity contracts to be offered by
insurance companies which have entered into participation agreements with the
Fund and ("Participating Insurance Companies");
WHEREAS, the Fund currently consists of seven separate investment
portfolios, shares ("Shares") of each of which are registered under the
Securities Act of 1933, as amended (the "1933 Act");
WHEREAS, the Fund will make Shares of each investment portfolio
of the Fund listed on Schedule A hereto (each, a "Portfolio" and collectively,
the "Portfolios") as the Parties hereto may amend from time to time available
for purchase by the Accounts;
WHEREAS, the Fund has applied for an order (the "Order") from the
SEC to permit Participating Insurance Companies and variable annuity and
variable life insurance separate accounts exemptions from the provisions of
sections 9(a), 13(a), 15(a), and 15(b) of the 1940 Act and Rules 6e-2(b)(15) and
6e- 3(T)(b)(15) thereunder, to the extent necessary to permit shares of the Fund
to be sold to and held by variable annuity and variable life insurance separate
accounts of both affiliated and unaffiliated life insurance companies;
WHEREAS, LIFE COMPANY will be the issuer of certain variable
annuity contracts and variable life insurance policies (collectively, the
"Contracts") as set forth on Schedule A hereto, as the Parties hereto may amend
from time to time, which Contracts, if required by applicable law, will be
registered under the 1933 Act;
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3
WHEREAS, LIFE COMPANY will, to the extent set forth herein, fund
the variable life insurance policies and variable annuity contracts through the
Accounts, each of which may be divided into two or more subaccounts
("Subaccounts"; reference herein to an "Account" includes reference to each
Subaccount thereof to the extent the context requires);
WHEREAS, LIFE COMPANY will serve as the depositor of the
Accounts, each of which is registered as a unit investment trust under the 1940
Act (or exempt therefrom), and the security interests deemed to be issued by the
Accounts under the Contracts will be registered as securities under the 1933 Act
(or exempt therefrom);
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, LIFE COMPANY intends to purchase Shares in one or more of the
Portfolios on behalf of the Accounts to fund the Contracts; and
NOW, THEREFORE, in consideration of the mutual benefits and
promises contained herein, the Parties hereto agree as follows:
SECTION 1. AVAILABLE PORTFOLIOS
1.1 AVAILABLE PORTFOLIOS.
The Fund will make Shares of each Portfolio listed on Schedule A
available to LIFE COMPANY for purchase and redemption at net asset value next
computed and with no sales charges, in accordance with the Fund's then current
prospectus and subject to the terms and conditions of this Agreement. The Board
of Directors of the Fund may refuse to sell Shares of any Portfolio to any
person, or suspend or terminate the offering of Shares of any Portfolio if such
action is required by law or by regulatory authorities having jurisdiction or
if, in the sole discretion of the Directors acting in good faith and in light of
their fiduciary duties under federal and any applicable state laws, such action
is deemed in the best interests of the shareholders of such Portfolio.
1.2 ADDITION, DELETION OR MODIFICATION OF PORTFOLIOS.
The Parties hereto may agree, from time to time, to add other
Portfolios to provide additional funding alternatives for the Contracts, or to
delete or modify existing Portfolios, by amending Schedule A hereto. Upon such
amendment to Schedule A, any applicable reference to a Portfolio, the Fund, or
its Shares herein shall include a reference to all Portfolios set forth on
Schedule A as then amended. Schedule A, as amended from time to time, is
incorporated herein by reference and is a part hereof.
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4
1.3 NO SALES TO THE GENERAL PUBLIC.
The Fund represents that shares of the Portfolios will be sold
only to Participating Insurance Companies, their separate accounts and qualified
pension and retirement plans ("Plans") and that no Shares of any Portfolio have
been or will be sold to the general public.
SECTION 2. PROCESSING TRANSACTIONS
2.1 PLACING ORDERS.
(a) The Fund or its designated agent will use its best effort to
provide LIFE COMPANY with the net asset value per Share for each Portfolio by
6:30 p.m. Eastern Time on each Business Day. As used herein, "Business Day"
shall mean any day on which (i) the New York Stock Exchange is open for regular
trading, and (ii) the Fund calculates the Portfolios' net asset value.
(b) LIFE COMPANY will use the data provided by the Fund each
Business Day pursuant to paragraph (a) immediately above to calculate Account
unit values and to process transactions that receive that same Business Day's
Account unit values. LIFE COMPANY will perform such Account processing the same
Business Day, and will place corresponding orders to purchase or redeem Shares
with the Fund by 9:00 a.m. Eastern Time the following Business Day.
(c) With respect to payment of the purchase price by LIFE COMPANY
and of redemption proceeds by the Fund, LIFE COMPANY and the Fund shall net
purchase and redemption orders with respect to each Portfolio and shall transmit
one net payment per Portfolio in accordance with Section 2.2, below.
(d) If the Fund provides materially incorrect Share net asset
value information (as determined under SEC guidelines), LIFE COMPANY shall be
entitled to an adjustment to the number of Shares purchased or redeemed to
reflect the correct net asset value per Share. Any material error in the
calculation or reporting of net asset value per Share, dividend or capital gain
information shall be reported promptly upon discovery to LIFE COMPANY.
2.2 PAYMENTS.
(a) LIFE COMPANY shall pay for Shares of each Portfolio on the
same day that it notifies the Fund of a purchase request for such Shares.
Payment for Shares shall be made in federal funds transmitted to the Fund by
wire to be received by the Fund by 1:00 P.M. Eastern Time on the day the Fund is
notified of the purchase request for Shares. If payment in federal funds for any
purchase is not received, or is received by the Fund after 1:00 p.m. Eastern
Time on such Business Day, the
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5
LIFE COMPANY shall promptly, upon the Fund's request, reimburse the Fund for any
charges, costs, fees, interest or other expenses incurred by the Fund in
connection with any advances to, or borrowings or overdrafts by, the Fund, or
any similar expenses incurred by the Fund, as a result of non-payment or late
payment.
(b) The Fund will wire payment in federal funds for net
redemptions to an account designated by LIFE COMPANY by 1:00 p.m. Eastern Time
on the business day succeeding the day the order is placed, to the extent
practicable, but in any event within five (5) calendar days after the date the
order is placed in order to enable LIFE COMPANY to pay redemption proceeds
within the time specified in Section 22(e) of the 1940 Act. The Fund shall not
bear any responsibility whatsoever for the proper disbursement or crediting of
redemption proceeds by LIFE COMPANY.
2.3 APPLICABLE PRICE.
(a) Share purchase payments and redemption orders that result
from purchase payments, premium payments, surrenders and other transactions
under Contracts (collectively, "Contract transactions") and that LIFE COMPANY
receives prior to the close of regular trading on the New York Stock Exchange on
a Business Day will be executed at the net asset values of the appropriate
Portfolios next computed after receipt by the Fund or its designated agent of
the orders. For purposes of this Section 2.3(a), LIFE COMPANY shall be the
designated agent of the Fund for receipt of orders relating to Contract
transactions on each Business Day and receipt by such designated agent shall
constitute receipt by the Fund; provided that the Fund receives notice of such
orders by 9:00 a.m. Eastern Time on the following Business Day.
(b) All other Share purchases and redemptions by LIFE COMPANY
will be effected at the net asset values of the appropriate Portfolios next
computed after receipt by the Fund or its designated agent of the order
therefor, and such orders will be irrevocable.
2.4 DIVIDENDS AND DISTRIBUTIONS.
The Fund will furnish notice by wire or telephone (followed by
written confirmation) on or prior to the payment date to LIFE COMPANY of any
income dividends or capital gain distributions payable on the Shares of any
Portfolio. LIFE COMPANY hereby elects to reinvest all dividends and capital
gains distributions in additional Shares of the corresponding Portfolio at the
ex-dividend date net asset values until LIFE COMPANY otherwise notifies the Fund
in writing, it being agreed by the Parties that the ex-dividend date and the
payment date with respect to any dividend or distribution will be the same
Business Day. LIFE COMPANY reserves the right to revoke this election and to
receive all such income dividends and capital gain distributions in cash. Any
such revocation will take effect with
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6
respect to the next income dividend or capital gain distribution following
receipt by the Fund of such notification from LIFE COMPANY.
2.5 BOOK ENTRY.
Issuance and transfer of Portfolio Shares will be by book entry
only. Stock certificates will not be issued to LIFE COMPANY. Shares ordered from
the Fund will be recorded in an appropriate title for LIFE COMPANY, on behalf of
its Accounts.
SECTION 3. COSTS AND EXPENSES
3.1 GENERAL.
(a) Except as otherwise specifically provided herein, each party
will bear all expenses incident to its performance under this Agreement.
(b) The Fund shall pay no fee or other compensation to the LIFE
COMPANY under this agreement, except that if the Fund or any Portfolio adopts
and implements a plan pursuant to Rule 12b-1 to finance distribution expenses,
then the Fund may make payments to the LIFE COMPANY or to the underwriter for
the Contracts if and in amounts agreed to by the Fund in writing. Presently, no
such payments are contemplated.
3.2 REGISTRATION.
(a) The Fund will bear the cost of its registering as a
management investment company under the 1940 Act and registering its Shares
under the 1933 Act, and keeping such registrations current and effective;
including, without limitation, the preparation of and filing with the SEC of
Forms N-SAR and Rule 24f-2 Notices with respect to the Fund and its Shares and
payment of all applicable registration or filing fees with respect to any of the
foregoing.
(b) LIFE COMPANY will bear the cost of registering, to the extent
required, each Account as a unit investment trust under the 1940 Act and
registering units of interest under the Contracts under the 1933 Act and keeping
such registrations current and effective; including, without limitation, the
preparation and filing with the SEC of Forms N-SAR and Rule 24f-2 Notices with
respect to each Account and its units of interest and payment of all applicable
registration or filing fees with respect to any of the foregoing.
3.3 DISTRIBUTION EXPENSES.
LIFE COMPANY will bear the expenses of distribution. These
expenses would include by way of illustration, but are not limited to, the costs
of distributing to Contract owners,
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7
annuitants, insureds or participants (as appropriate) under the Contracts
(collectively, "Participants") the following documents, whether they relate to
the Account or the Fund: prospectuses, statements of additional information,
proxy materials and periodic reports. These costs would also include the costs
of preparing, printing, and distributing sales literature and advertising
relating to the Portfolios (all of which require the prior written consent of
the Fund), as well as filing such materials with, and obtaining approval from,
the SEC, NASD, any state insurance regulatory authority, and any other
appropriate regulatory authority, to the extent required.
3.4 OTHER EXPENSES.
(a) The Fund will bear, or arrange for others to bear, the costs
of preparing, filing with the SEC and setting for printing the Fund's
prospectus, statement of additional information and any amendments or
supplements thereto (collectively, the "Fund Prospectus"), periodic reports to
shareholders, the Fund proxy material and other shareholder communications.
(b) LIFE COMPANY will bear the costs of preparing, filing with
the SEC and setting for printing each Account's prospectus, statement of
additional information and any amendments or supplements thereto (collectively,
the "Account Prospectus"), any periodic reports to Participants, voting
instruction solicitation material, and other Participant communications.
(c) LIFE COMPANY will print in quantity and deliver to existing
Participants the documents described in Section 3.4(b) above and the prospectus
provided by the Fund in camera ready or computer diskette form. The Fund will
print the Fund statement of additional information, proxy materials relating to
the Fund and periodic reports of the Fund.
3.5 PARTIES TO COOPERATE.
Each party agrees to cooperate with the other, in arranging to
print, mail and/or deliver, in a timely manner, combined or coordinated
prospectuses or other materials of the Fund and the Accounts.
SECTION 4. LEGAL COMPLIANCE
4.1 TAX LAWS.
(a) The Fund represents and warrants that it will elect to be
qualified as a regulated investment company ("RIC") under Subchapter M of the
Internal Revenue Code of 1986, as
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8
amended (the "Code"), and represents that it will use its best efforts to
qualify and to maintain its qualification as a RIC and to comply with the
diversification requirements set forth in Section 817(h) of the Code and the
regulations thereunder. The Fund will notify LIFE COMPANY immediately upon
having a reasonable basis for believing that it has ceased to so qualify or so
comply, or that it might not so qualify or so comply in the future.
(b) LIFE COMPANY represents and warrants that the Contracts
currently are and will be treated as annuity contracts or life insurance
contracts under applicable provisions of the Code and that it will use its best
efforts to maintain such treatment; LIFE COMPANY will notify the Fund
immediately upon having a reasonable basis for believing that any of the
Contracts have ceased to be so treated or that they might not be so treated in
the future.
(c) LIFE COMPANY represents and warrants that each Account is a
"segregated asset account" and that interests in each Account are offered
exclusively through the purchase of or transfer into a "variable contract,"
within the meaning of such terms under Section 817 of the Code and the
regulations thereunder. LIFE COMPANY will use its best efforts to continue to
meet such definitional requirements, and it will notify the Fund immediately
upon having a reasonable basis for believing that such requirements have ceased
to be met or that they might not be met in the future.
4.2 INSURANCE AND CERTAIN OTHER LAWS.
(a) LIFE COMPANY represents and warrants that (i) it is an
insurance company duly organized, validly existing and in good standing under
all applicable laws and has full corporate power, authority and legal right to
execute, deliver and perform its duties and comply with its obligations under
this Agreement, (ii) it has legally and validly established and maintains each
Account as a segregated asset account under all applicable laws and regulations,
and (iii) the Contracts comply in all material respects with all applicable
federal and state laws and regulations.
(b) The Fund represents and warrants that it is a corporation
duly organized, validly existing, and in good standing under the laws of the
State of Maryland and has full corporate power, authority, and legal right to
execute, deliver, and perform its duties and comply with its obligations under
this Agreement. Notwithstanding the foregoing, the Fund, makes no
representations as to whether any aspect of its operations (including, but not
limited to, fees and expenses and investment policies) otherwise complies with
the insurance laws or regulations of any state.
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9
(c) LIFE COMPANY acknowledges and agrees that it is the
responsibility of LIFE COMPANY and other Participating Insurance Companies to
determine investment restrictions under state insurance law applicable to any
Portfolio, and that the Fund shall bear no responsibility to LIFE COMPANY, for
any such determination or the correctness of such determination. LIFE COMPANY
has determined that the investment restrictions set forth in the current Fund
Prospectus are sufficient to comply with all investment restrictions under state
insurance laws that are currently applicable to the Portfolios as a result of
the Accounts' investment therein. LIFE COMPANY shall inform the Fund of any
additional investment restrictions imposed by state insurance law after the date
of this agreement that may become applicable to the Fund or any Portfolio from
time to time as a result of the Accounts' investment therein. Upon receipt of
any such information from LIFE COMPANY or any other Participating Insurance
Company, the Fund shall determine whether it is in the best interests of
shareholders to comply with any such restrictions. If the Fund determines that
it is not in the best interests of shareholders to comply with a restriction
determined to be applicable by the LIFE COMPANY, the Fund shall so inform LIFE
COMPANY, and the Fund and LIFE COMPANY shall discuss alternative accommodations
in the circumstances.
4.3 SECURITIES LAWS.
(a) LIFE COMPANY represents and warrants that (i) interests in
each Account pursuant to the Contracts will be registered under the 1933 Act to
the extent required by the 1933 Act, (ii) the Contracts will be duly authorized
for issuance and sold in compliance with all applicable federal and state laws,
including, without limitation, the 1933 Act, the 1934 Act, the 1940 Act and
applicable state law, (iii) each Account is and will remain registered under the
1940 Act, to the extent required by the 1940 Act, (iv) each Account does and
will comply in all material respects with the requirements of the 1940 Act and
the rules thereunder, to the extent required, (v) each Account's 1933 Act
registration statement relating to the Contracts, together with any amendments
thereto, will at all times comply in all material respects with the requirements
of the 1933 Act and the rules thereunder, (vi) LIFE COMPANY will amend the
registration statement for its Contracts under the 1933 Act and for its Accounts
under the 1940 Act from time to time as required in order to effect the
continuous offering of its Contracts or as may otherwise be required by
applicable law, (vii) each Account Prospectus will at all times comply in all
material respects with the requirements of the 1933 Act and the rules
thereunder, (viii) all of its directors, officers, employees, investment
advisers, and other individuals/entities having access to the funds and/or
securities of any Portfolio are and continue to be at all times covered by a
blanket fidelity bond or similar coverage for the benefit of the Fund in an
amount not less than $___ million. The aforesaid bond includes coverage for
larceny and embezzlement and is issued by a reputable bonding company.
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10
(b) The Fund represents and warrants that (i) Shares sold
pursuant to this Agreement will be registered under the 1933 Act to the extent
required by the 1933 Act and will be duly authorized for issuance and sold in
compliance with Maryland law, (ii) the Fund is and will remain registered under
the 1940 Act to the extent required by the 1940 Act, (iii) the Fund will amend
the registration statement under the 1933 Act and the 1940 Act from time to time
as required in order to effect the continuous offering of its Shares, (iv) the
Fund does and will comply in all material respects with the requirements of the
1940 Act and the rules thereunder, (v) the Fund's 1933 Act registration
statement, together with any amendments thereto, will at all times comply in all
material respects with the requirements of the 1933 Act and rules thereunder,
(vi) the Fund's Prospectus will at all times comply in all material respects
with the requirements of the 1933 Act and the rules thereunder and (vii) all of
its directors, officers, employees, investment advisers, and other
individuals/entities having access to the funds and/or securities of any
Portfolio are and continue to be at all times covered by a blanket fidelity bond
or similar coverage for the benefit of the Fund in an amount not less than the
minimal coverage as required currently by Rule 17g-(1) of the 1940 Act or
related provisions as may be promulgated from time to time. The aforesaid bond
includes coverage for larceny and embezzlement and is issued by a reputable
bonding company.
(c) The Fund will at its expense register and qualify its Shares
for sale in accordance with the laws of any state or other jurisdiction if and
to the extent reasonably deemed advisable by the Fund.
4.4 NOTICE OF CERTAIN PROCEEDINGS AND OTHER
CIRCUMSTANCES.
(a) The Fund will immediately notify LIFE COMPANY of (i) the
issuance by any court or regulatory body of any stop order, cease and desist
order, or other similar order with respect to the Fund's registration statement
under the 1933 Act or the Fund Prospectus, (ii) any request by the SEC for any
amendment to such registration statement or the Fund Prospectus that may affect
the offering of Shares of any Portfolio, (iii) the initiation of any proceedings
for that purpose or for any other purpose relating to the registration or
offering of Shares of any Portfolio, or (iv) any other action or circumstances
that may prevent the lawful offer or sale of Shares of any Portfolio in any
state or jurisdiction, including, without limitation, any circumstances in which
such Shares are not registered and are not, in all material respects, issued and
sold in accordance with applicable state and federal law. The Fund will make
every reasonable effort to prevent the issuance of any such stop order, cease
and desist order or similar order and, if any such order is issued, to obtain
the lifting thereof at the earliest possible time.
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11
(b) LIFE COMPANY will immediately notify the Fund of (i) the
issuance by any court or regulatory body of any stop order, cease and desist
order, or other similar order with respect to each Account's registration
statement under the 1933 Act relating to the Contracts or each Account
Prospectus, (ii) any request by the SEC for any amendment to such registration
statement or Account Prospectus that may affect the offering of Shares of any
Portfolio, (iii) the initiation of any proceedings for that purpose or for any
other purpose relating to the registration or offering of each Account's
interests pursuant to the Contracts, or (iv) any other action or circumstances
that may prevent the lawful offer or sale of said interests in any state or
jurisdiction, including, without limitation, any circumstances in which said
interests are not registered and are not, in all material respects, issued and
sold in accordance with applicable state and federal law. LIFE COMPANY will make
every reasonable effort to prevent the issuance of any such stop order, cease
and desist order or similar order and, if any such order is issued, to obtain
the lifting thereof at the earliest possible time.
4.5 DOCUMENTS PROVIDED BY LIFE COMPANY; INFORMATION
ABOUT THE FUND.
(a) LIFE COMPANY will provide to the Fund or its designated agent
at least one (1) complete copy of all SEC registration statements, Account
Prospectuses, reports, any preliminary and final voting instruction solicitation
material, applications for exemptions, requests for no-action letters, and all
amendments to any of the above, that relate to each Account or the Contracts,
contemporaneously with the filing of such document with the SEC or other
regulatory authorities.
(b) LIFE COMPANY will provide to the Fund or its designated agent
at least one (1) complete copy of each piece of sales literature or other
promotional material in which any Portfolio, the Fund or any of its affiliates
is named, at least ten (10) Business Days prior to its use or such shorter
period as the Parties hereto may, from time to time, agree upon. No such
material shall be used if the Fund or its designated agent objects to such use
within ten (10) Business Days after receipt of such material or such shorter
period as the Parties hereto may, from time to time, agree upon.
(c) Neither LIFE COMPANY nor any of its affiliates, will give any
information or make any representations or statements on behalf of or concerning
any Portfolio, the Fund or its affiliates in connection with the sale of the
Contracts other than (i) the information or representations contained in the
then current registration statement, including the Fund Prospectus contained
therein, relating to Shares, as such registration statement and the Fund
Prospectus may be amended from time to time; (ii) in reports or proxy materials
for the Fund; (iii) in published reports for the Fund that are in the public
domain and approved by the Fund for distribution by LIFE COMPANY; or (iv) in
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12
sales literature or other promotional material approved by the Fund for use by
LIFE COMPANY, except with the express written permission of the Fund.
(d) LIFE COMPANY shall adopt and implement procedures reasonably
designed to ensure that information concerning the Fund and its affiliates that
is intended for use only by brokers or agents selling the Contracts (i.e.,
information that is not intended for distribution to Participants) ("broker only
materials") is so used, and neither the Fund nor any of its affiliates shall be
liable for any losses, damages or expenses relating to the improper use of such
broker only materials.
(e) For the purposes of this Section 4.5, the phrase "sales
literature or other promotional material" includes, but is not limited to,
advertisements (such as material published, or designed for use in, a newspaper,
magazine, or other periodical, radio, television, telephone or tape recording,
videotape display, signs or billboards, motion pictures, or other public media
(e.g., on-line networks such as the Internet or other electronic messages)),
sales literature (i.e., any written communication distributed or made generally
available to customers or the public, including brochures, circulars, research
reports, market letters, form letters, seminar texts, reprints or excerpts of
any other advertisement, sales literature, or published article), educational or
training materials or other communications distributed or made generally
available to some or all agents or employees, registration statements,
prospectuses, statements of additional information, shareholder reports, and
proxy materials and any other material constituting sales literature or
advertising under the NASD rules, the 1933 Act or the 1940 Act.
4.6 DOCUMENTS PROVIDED BY FUND; INFORMATION ABOUT LIFE
COMPANY.
(a) The Fund will provide to LIFE COMPANY at least one (1)
complete copy of all SEC registration statements, Fund Prospectuses, reports,
any preliminary and final proxy material, applications for exemptions, requests
for no-action letters, and all amendments to any of the above, that relate to
the Fund or the Shares of a Portfolio, contemporaneously with the filing of such
document with the SEC or other regulatory authorities.
(b) The Fund will provide to LIFE COMPANY camera ready or
computer diskette copies of all Fund prospectuses, and printed copies of all
statements of additional information, proxy materials, periodic reports to
shareholders and other materials required by law to be sent to Participants who
have allocated any Contract value to a Portfolio. The Fund will provide such
copies to LIFE COMPANY in a timely manner so as to enable LIFE COMPANY to print
and distribute such materials within the time required by law to be furnished to
Participants.
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13
(c) The Fund will provide to LIFE COMPANY or its designated agent
at least one (1) complete copy of each piece of sales literature or other
promotional material in which LIFE COMPANY, or any of its respective affiliates
is named, or that refers to the Contracts, at least ten (10) Business Days prior
to its use or such shorter period as the Parties hereto may, from time to time,
agree upon. No such material shall be used if LIFE COMPANY or its designated
agent reasonably objects to such use within ten (10) Business Days after receipt
of such material or such shorter period as the Parties hereto may, from time to
time, agree upon.
(d) Neither the Fund nor any of its affiliates will give any
information or make any representations or statements on behalf of or concerning
LIFE COMPANY, each Account, or the Contracts other than (i) the information or
representations contained in the registration statement, including each Account
Prospectus contained therein, relating to the Contracts, as such registration
statement and Account Prospectus may be amended from time to time; (ii) in
published reports for the Account or the Contracts that are in the public domain
and approved by LIFE COMPANY for distribution; or (iii) in sales literature or
other promotional material approved by LIFE COMPANY or its affiliates, except
with the express written permission of LIFE COMPANY.
(e) The Fund shall cause its principal underwriter to adopt and
implement procedures reasonably designed to ensure that information concerning
LIFE COMPANY, and its respective affiliates that is intended for use only by
brokers or agents selling the Contracts (i.e., information that is not intended
for distribution to Participants) ("broker only materials") is so used, and
neither LIFE COMPANY, nor any of its respective affiliates shall be liable for
any losses, damages or expenses relating to the improper use of such broker only
materials.
(f) For purposes of this Section 4.6, the phrase "sales
literature or other promotional material" includes, but is not limited to,
advertisements (such as material published, or designed for use in, a newspaper,
magazine, or other periodical, radio, television, telephone or tape recording,
videotape display, signs or billboards, motion pictures, or other public media
(i.e., any written communication distributed or made generally available to
customers or the public, including brochures, circulars, research reports,
market letters, form letters, seminar texts, reprints or excerpts of any other
advertisement, sales literature, or published article), educational or training
materials or other communications distributed or made generally available to
some or all agents or employees, registration statements, prospectuses,
statements of additional information, shareholder reports, and proxy materials
and any other material constituting sales literature or advertising under the
NASD rules, the 1933 Act or the 1940 Act.
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14
SECTION 5. MIXED AND SHARED FUNDING
LIFE COMPANY acknowledges that the Fund has filed an application
with the SEC to request an order granting relief from various provisions of the
1940 Act and the rules thereunder to the extent necessary to permit Fund shares
to be sold to and held by variable annuity and variable life insurance separate
accounts of both affiliated and unaffiliated Participating Insurance Companies,
as well as by Plans. Any conditions or undertakings that may be imposed on LIFE
COMPANY and the Fund by virtue of such order shall be incorporated herein by
reference, as of the date such order is granted, as though set forth herein in
full, and the parties to this Agreement shall comply with such conditions and
undertakings to the extent applicable to each such party.
SECTION 6. TERMINATION
6.1 EVENTS OF TERMINATION.
Subject to Section 6.4 below, this Agreement will terminate as to
a Portfolio:
(a) at the option of any party, with or without cause,
upon six (6) months advance written notice to the other parties;
or
(b) at the option of the Fund upon institution of formal
processing against LIFE COMPANY or its affiliates by the NASD, the SEC, any
state insurance regulator or any other regulatory body regarding LIFE COMPANY's
obligations under this Agreement or related to the sale of the Contracts, the
operation of each Account, or the purchase of Shares, if, in each case, the Fund
reasonably determines that such proceedings, or the facts on which such
proceedings would be based, have a material likelihood of imposing material
adverse consequences on the Portfolio with respect to which the Agreement is to
be terminated; or
(c) at the option of LIFE COMPANY upon institution of formal
proceedings against the Fund, its principal underwriter, or its investment
adviser by the NASD, the SEC, or any state insurance regulator or any other
regulatory body regarding the Fund's obligations under this Agreement or related
to the operation or management of the applicable Portfolio or the purchase of
the applicable Portfolios, if, in each case, LIFE COMPANY reasonably determines
that such proceedings, or the facts on which such proceedings would be based,
have a material likelihood of imposing material adverse consequences on LIFE
COMPANY, or the Subaccount corresponding to the Portfolio with respect to which
the Agreement is to be terminated; or
(d) at the option of any party in the event that (i) a
Portfolio's Shares are not registered and, in all material respects, issued and
sold in accordance with any applicable
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15
federal or state law, or (ii) such law precludes the use of such Shares as an
underlying investment medium of the Contracts issued or to be issued by LIFE
COMPANY; or
(e) at the option of LIFE COMPANY if the applicable Portfolio
ceases to qualify as a RIC under Subchapter M of the Code or under successor or
similar provisions or fails to comply with the diversification requirements of
Section 817(h) of the Code or such requirements under successor or similar
provisions and the Fund, upon written request fails to provide reasonable
assurance that it will take action to cure or correct such failure; or
(f) at the option of the Fund if the Contracts issued by LIFE
COMPANY cease to qualify as annuity contracts or life insurance contracts under
the Code or if interests in an Account under the Contracts are not registered,
where required, and, in all material respects, are not issued or sold in
accordance with any applicable federal or state law; or
(g) at the option of the Fund by written notice to LIFE COMPANY,
if the Fund shall determine in its sole judgment exercised in good faith, that
LIFE COMPANY and/or its affiliated companies has suffered a material adverse
change in its business, operations, financial condition or prospects since the
date of this Agreement or is the subject of material adverse publicity; or
(h) at the option of LIFE COMPANY by written notice to the Fund,
if LIFE COMPANY shall determine in its sole judgment exercised in good faith,
that the Fund and/or its affiliated companies has suffered a material adverse
change in its business, operations, financial condition or prospects since the
date of this Agreement or is the subject of material adverse publicity; or
(i) at the option of either party upon a determination by a
majority of the Fund's Board of Directors, or a majority of the Fund's
disinterested directors, that an irreconcilable material conflict exists among
the interests of: (1) all contract owners of variable insurance products of all
separate accounts; or (2) the interests of the Participating Insurance Companies
investing in the Fund; or
(j) upon another party's material breach of any
provision of this Agreement; or
(k) at the option of the Fund if it suspends or terminates the
offering of Shares of the applicable Portfolio to all Participating Insurance
Companies or only designated Participating Insurance Companies, if such action
is required by law or by regulatory authorities having jurisdiction or if, in
the sole discretion of the Fund acting in good faith, suspension or termination
is necessary in the best interests of the
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16
shareholders of the applicable Portfolio (it being understood that
"shareholders" for this purpose shall mean Participants), such notice effective
immediately upon receipt of written notice, it being understood that a lack
Participating Insurance Companies interest in the applicable Portfolio may be
grounds for a suspension or termination as to such Portfolio.
6.2 NOTICE REQUIREMENT FOR TERMINATION.
No termination of this Agreement will be effective unless and
until the party terminating this Agreement gives prior written notice to the
other party to this Agreement of its intent to terminate, and such notice shall
set forth the basis for such termination. Furthermore:
(a) in the event that any termination is based upon the
provisions of Section 6.1(a) hereof, such prior written notice shall be given at
least six (6) months in advance of the effective date of termination unless a
shorter time is agreed to by the Parties hereto;
(b) in the event that any termination is based upon the
provisions of Section 6.1(b), 6.1(c), 6.1(g) or 6.1(h) hereof, such prior
written notice shall be given at least thirty (30) days in advance of the
effective date of termination unless a shorter time is agreed to by the Parties
hereto; and
(c) in the event that any termination is based upon the
provisions of Section 6.1(d), 6.1(e), 6.1(f), 6.1(j) or 6.1(k) hereof, such
prior written notice shall be given at least fifteen (15) days in advance of the
effective date unless a shorter time is agreed to by the parties.
6.3 FUND TO REMAIN AVAILABLE.
Notwithstanding any termination of this Agreement, the Fund will,
if mutually agreed to by the Fund and LIFE COMPANY, continue to make available
additional shares of a Portfolio pursuant to the terms and conditions of this
Agreement, for all Contracts in effect on the effective date of termination of
this Agreement (hereinafter referred to as "Existing Contracts"). Specifically,
without limitation, the owners of the Existing Contracts will be permitted to
reallocate investments in Portfolios of the Fund (as in effect on such date),
redeem investments in Portfolios of the Fund and/or invest in Portfolios of the
Fund upon the making of additional purchase payments under the Existing
Contracts. The parties agree that this Section 6.3 will not apply to any
terminations under the conditions of the Order and the effect of such
terminations will be governed by the Order.
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17
6.4 SURVIVAL OF WARRANTIES AND INDEMNIFICATIONS.
All warranties and indemnifications will survive the termination
of this Agreement.
SECTION 7. PARTIES TO COOPERATE RESPECTING TERMINATION
The Parties hereto agree to cooperate and give reasonable
assistance to one another in taking all necessary and appropriate steps for the
purpose of ensuring that an Account owns no Shares of the applicable Portfolio
after the Final Termination Date with respect thereto, or, in the case of a
termination pursuant to Section 6.1(a), the termination date specified in the
notice of termination. Such steps may include combining the affected Account
with another Account, substituting other mutual fund shares for those of the
affected Portfolio, or otherwise terminating participation by the Contracts in
such Portfolio.
SECTION 8. ASSIGNMENT
This Agreement may not be assigned by any party, except with the
prior written consent of all the Parties.
SECTION 9. NOTICES
Notices and communications required or permitted by Section 9
hereof will be given by means mutually acceptable to the Parties concerned. Each
other notice or communication required or permitted by this Agreement will be
given to the following persons at the following addresses and facsimile numbers,
or such other persons, addresses or facsimile numbers as the party receiving
such notices or communications may subsequently direct in writing:
LIFE COMPANY
Street Address
City, State Zip Code
Facsimile:
Attn.: [NAME OF PERSON]
SALOMON BROTHERS VARIABLE SERIES INC.
7 World Trade Center
New York, NY 10048
Facsimile:
Attn.: [NAME OF PERSON]
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18
SECTION 10. VOTING PROCEDURES
Subject to the cost allocation procedures set forth in Section 3
hereof, LIFE COMPANY will distribute all proxy material furnished by the Fund to
Participants to whom pass-through voting privileges are required to be extended
and will solicit voting instructions from Participants. LIFE COMPANY will vote
Shares in accordance with timely instructions received from Participants. LIFE
COMPANY will vote Shares that are (a) not attributable to Participants to whom
pass-through voting privileges are extended, or (b) attributable to
Participants, but for which no timely instructions have been received, in the
same proportion as Shares for which said instructions have been received from
Participants, so long as and to the extent that the SEC continues to interpret
the 1940 Act to require pass through voting privileges for Participants. Neither
LIFE COMPANY nor any of its affiliates will in any way recommend action in
connection with or oppose or interfere with the solicitation of proxies for the
Shares held for such Participants. LIFE COMPANY reserves the right to vote
shares held in any Account in its own right, to the extent permitted by law.
LIFE COMPANY shall be responsible for assuring that each of its Accounts holding
Shares calculates voting privileges in a manner consistent with that of other
Participating Insurance Companies or in the manner required by the Order
obtained by the Fund. The Fund will notify LIFE COMPANY of any amendments to the
Order it has obtained.
SECTION 11. FOREIGN TAX CREDITS
The Fund agrees to consult in advance with LIFE COMPANY
concerning any decision to elect or not to elect pursuant to Section 853 of the
Code to pass through the benefit of any foreign tax credits to its shareholders.
SECTION 12. INDEMNIFICATION
12.1 OF THE FUND BY LIFE COMPANY.
(a) Except to the extent provided in Sections 12.1(b) and
12.1(c), below, LIFE COMPANY agrees to indemnify and hold harmless the Fund, its
affiliates, and each person, if any, who controls the Fund or its affiliates
within the meaning of Section 15 of the 1933 Act and each of their respective
directors and officers (collectively, the "Indemnified Parties" for purposes of
this Section 12.1) against any and all losses, claims, damages, liabilities
(including amounts paid in settlement with the written consent of LIFE
COMPANY)or actions in respect thereof (including, to the extent reasonable,
legal and other expenses), to which the Indemnified Parties may become subject
under any statute, regulation, at common law or otherwise insofar as such
losses, claims, damages, liabilities or actions:
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19
(i) arise out of or are based upon any untrue
statement or alleged untrue statement of any
material fact contained in any Account's 1933
Act registration statement, any Account
Prospectus, the Contracts, or sales literature
or advertising for the Contracts (or any
amendment or supplement to any of the
foregoing), or arise out of or are based upon
the omission or the alleged omission to state
therein a material fact required to be stated
therein or necessary to make the statements
therein not misleading; provided, that this
agreement to indemnify shall not apply as to
any Indemnified Party if such statement or
omission or such alleged statement or omission
was made in reliance upon and in conformity
with written information furnished to LIFE
COMPANY by or on behalf of the Fund for use in
any Account's 1933 Act registration statement,
any Account Prospectus, the Contracts, or sales
literature or advertising (or any amendment or
supplement to any of the foregoing); or
(ii) arise out of or as a result of any other
statements or representations (other than
statements or representations contained in the
Fund's 1933 Act registration statement, the
Fund Prospectus, sales literature or
advertising of the Fund, or any amendment or
supplement to any of the foregoing, not
supplied for use therein by or on behalf of
LIFE COMPANY, or its affiliates and on which
such persons have reasonably relied) or the
negligent, illegal or fraudulent conduct of
LIFE COMPANY,or its respective affiliates or
persons under their control (including, without
limitation, their employees and "Associated
Persons," as that term is defined in paragraph
(m) of Article I of the NASD's By-Laws) or
subject to its authorization, including without
limitation, broker-dealers or agents authorized
to sell the Contracts, in connection with the
sale, marketing or distribution of the
Contracts or Shares; or
(iii) arise out of or are based upon any untrue
statement or alleged untrue statement of any
material fact contained in the Fund's 1933 Act
registration statement, the Fund Prospectus,
sales literature or advertising of the Fund, or
any amendment or supplement to any of the
foregoing, or the omission or alleged omission
to state therein a material fact required to be
stated therein or necessary to make the
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20
statements therein not misleading if such a statement
or omission was made in reliance upon and in
conformity with information furnished to the Fund or
its affiliates by or on behalf of LIFE COMPANY or its
affiliates for use in the Fund's 1933 Act registration
statement, the Fund Prospectus, sales literature or
advertising of the Fund, or any amendment or
supplement to any of the foregoing; or
(iv) arise as a result of any failure by LIFE
COMPANY or persons under its control (or
subject to its authorization) to perform the
obligations, provide the services and furnish
the materials required under the terms of this
Agreement, or any material breach of any
representation and/or warranty made by LIFE
COMPANY in this Agreement or arise out of or
result from any other material breach of this
Agreement by LIFE COMPANY or persons under its
control (or subject to its authorization); or
(v) arise as a result of failure to transmit a request for
purchase or redemption of Shares or payment therefor
on a timely basis in accordance with the procedures
set forth in this Agreement or any unauthorized use of
the trade names of the Fund.
(b) This indemnification is in addition to any liability that
LIFE COMPANY may otherwise have. LIFE COMPANY shall not be liable under this
Section 12.1 with respect to any losses, claims, damages, liabilities or actions
to which an Indemnified Party would otherwise be subject by reason of willful
misfeasance, bad faith, or gross negligence in the performance by that
Indemnified Party of its duties or by reason of that Indemnified Party's
reckless disregard of obligations or duties (i) under this Agreement, or (ii) to
the Fund.
(c) LIFE COMPANY shall not be liable under this Section 12.1 with
respect to any action against an Indemnified Party unless the Fund shall have
notified LIFE COMPANY in writing within a reasonable time after the summons or
other first legal process giving information of the nature of the action shall
have been served upon such Indemnified Party (or after such Indemnified Party
shall have received notice of such service on any designated agent), but LIFE
COMPANY shall be relieved of liability under this Section 12.1 only to the
extent the indemnifying party is damaged solely by reason of such party's
failure to so notify and failure to notify LIFE COMPANY of any such action shall
not relieve LIFE COMPANY from any liability which they may have to the
Indemnified Party against whom such action is brought otherwise than on account
of this Section 12.1. Except as otherwise provided herein, in case any such
action is
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21
brought against an Indemnified Party, LIFE COMPANY shall be entitled to
participate, at its own expense, in the defense of such action and also shall be
entitled to assume the defense thereof, with counsel approved by the Indemnified
Party named in the action, which approval shall not be unreasonably withheld.
After notice from LIFE COMPANY to such Indemnified Party of LIFE COMPANY's
election to assume the defense thereof, the Indemnified Party will cooperate
fully with LIFE COMPANY and shall bear the fees and expenses of any additional
counsel retained by it, and neither LIFE COMPANY will be liable to such
Indemnified Party under this Agreement for any legal or other expenses
subsequently incurred by such Indemnified Party independently in connection with
the defense thereof, other than reasonable costs of investigation.
12.2 OF LIFE COMPANY BY THE FUND.
(a) Except to the extent provided in Sections 12.2(b), 12.2(c)
and 12.2(d), below, the Fund agrees to indemnify and hold harmless LIFE COMPANY,
its affiliates, and each person, if any, who controls LIFE COMPANY or its
affiliates within the meaning of Section 15 of the 1933 Act and each of their
respective directors and officers (collectively, the "Indemnified Parties" for
purposes of this Section 12.2) against any and all losses, claims, damages,
liabilities (including amounts paid in settlement with the written consent of
the Fund) or actions in respect thereof (including, to the extent reasonable,
legal and other expenses), to which the Indemnified Parties may become subject
under any statute, regulation, at common law, or otherwise; insofar as such
losses, claims, damages, liabilities or actions:
(i) arise out of or are based upon any untrue
statement or alleged untrue statement of any
material fact contained in the Fund's 1933 Act
registration statement, Prospectus or sales
literature or advertising of the Fund (or any
amendment or supplement to any of the
foregoing), or arise out of or are based upon
the omission or the alleged omission to state
therein a material fact required to be stated
therein or necessary to make the statements
therein not misleading; provided, that this
agreement to indemnify shall not apply to any
Indemnified Party if such statement or omission
or such alleged statement or omission was made
in reliance upon and in conformity with written
information furnished to the Fund or its
affiliates by or on behalf of LIFE COMPANY or
its affiliates for use in the Fund's 1933 Act
registration statement, the Fund Prospectus, or
in sales literature or advertising or otherwise
for use in connection with the sale of
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22
Contracts or Shares (or any amendment or
supplement to any of the foregoing); or
(ii) arise out of or as a result of any other
statements or representations (other than
statements or representations contained in any
Account's 1933 Act registration statement, any
Account Prospectus, sales literature or
advertising for the Contracts, or any amendment
or supplement to any of the foregoing, not
supplied for use therein by or on behalf of the
Fund or its affiliates and on which such
persons have reasonably relied) or the
negligent, illegal or fraudulent conduct of the
Fund or its affiliates or persons under its
control (including, without limitation, their
employees and "Associated Persons" as that Term
is defined in Section (n) of Article 1 of the
NASD BY-Laws), in connection with the sale,
marketing or distribution of Fund Shares; or
(iii) arise out of or are based upon any untrue
statement or alleged untrue statement of any
material fact contained in any Account's 1933
Act registration statement, any Account
Prospectus, sales literature or advertising
covering the Contracts, or any amendment or
supplement to any of the foregoing, or the
omission or alleged omission to state therein a
material fact required to be stated therein or
necessary to make the statements therein not
misleading, if such statement or omission was
made in reliance upon and in conformity with
written information furnished to LIFE
COMPANY,or its affiliates by or on behalf of
the Fund for use in any Account's 1933 Act
registration statement, any Account Prospectus,
sales literature or advertising covering the
Contracts, or any amendment or supplement to
any of the foregoing; or
(iv) arise as a result of any failure by the Fund to
perform the obligations, provide the services
and furnish the materials required of it under
the terms of this Agreement or any material
breach of any representation and/or warranty
made by the Fund in this Agreement or arise out
of or result from any other material breach of
this Agreement by the Fund.
(b) This indemnification is in addition to any
liability that the Fund may otherwise have. The Fund shall not
be liable under this Section 12.2 with respect to any losses,
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23
claims, damages, liabilities or actions to which an Indemnified Party would
otherwise be subject by reason of willful misfeasance, bad faith, or gross
negligence in the performance by that Indemnified Party of its duties or by
reason of such Indemnified Party's reckless disregard of its obligations and
duties (i) under this Agreement, or (ii) to LIFE COMPANY, each Account or
Participants.
(c) The Fund shall not be liable under this Section 12.2 with
respect to any action against an Indemnified Party unless the Indemnified Party
shall have notified the Fund in writing within a reasonable time after the
summons or other first legal process giving information of the nature of the
action shall have been served upon such Indemnified Party (or after such
Indemnified Party shall have received notice of such service on any designated
agent), but the Fund shall be relieved of liability under this Section 12.2 only
to the extent the indemnifying party is damaged solely by reason of such party's
failure to so notify and failure to notify the Fund of any such action shall not
relieve the Fund from any liability which it may have to the Indemnified Party
against whom such action is brought otherwise than on account of this Section
12.2. Except as otherwise provided herein, in case any such action is brought
against an Indemnified Party, the Fund will be entitled to participate, at its
own expense, in the defense of such action and also shall be entitled to assume
the defense thereof (which shall include, without limitation, the conduct of any
ruling request and closing agreement or other settlement proceeding with the
IRS), with counsel approved by the Indemnified Party named in the action, which
approval shall not be unreasonably withheld. After notice from the Fund to such
Indemnified Party of the Fund's election to assume the defense thereof, the
Indemnified Party will cooperate fully with the Fund and shall bear the fees and
expenses of any additional counsel retained by it, and the Fund will not be
liable to such Indemnified Party under this Agreement for any legal or other
expenses subsequently incurred by such Indemnified Party independently in
connection with the defense thereof, other than reasonable costs of
investigation.
(d) In no event shall the Fund be liable under the
indemnification provisions contained in this Agreement to any individual or
entity, including, without limitation, LIFE COMPANY or any other Participating
Insurance Company or any Participant, with respect to any losses, claims,
damages, liabilities or expenses that arise out of or result from (i) a breach
of any representation, warranty, and/or covenant made by LIFE COMPANY hereunder
or by any Participating Insurance Company under an agreement containing
substantially similar representations, warranties and covenants; (ii) the
failure by LIFE COMPANY or any Participating Insurance Company to maintain its
segregated asset account (which invests in any Portfolio) as a legally and
validly established segregated asset account under applicable state law and as a
duly registered unit investment trust under the provisions of the 1940 Act
(unless exempt therefrom); or (iii)
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24
the failure by LIFE COMPANY or any Participating Insurance Company to maintain
its variable annuity or life insurance contracts (with respect to which any
Portfolio serves as an underlying funding vehicle) as annuity contracts or life
insurance contracts under applicable provisions of the Code.
12.3 EFFECT OF NOTICE.
Any notice given by the indemnifying party to an Indemnified
Party referred to in Sections 12.1(c) or 12.2(c) above of participation in or
control of any action by the indemnifying party will in no event be deemed to be
an admission by the indemnifying party of liability, culpability or
responsibility, and the indemnifying party will remain free to contest liability
with respect to the claim among the Parties or otherwise.
12.4 SUCCESSORS.
A successor by law of any party shall be entitled to the benefits
of the indemnification contained in this Section 12.
12.5 OBLIGATIONS OF THE FUND.
All persons dealing with the Fund must look solely to the
property of the applicable Portfolio for the enforcement of any claims against
the Fund as neither the Board, Officers, agents or shareholders assume any
personal liability for obligations entered into on behalf of the Fund.
SECTION 13. APPLICABLE LAW
(a) This Agreement will be construed and the provisions hereof
interpreted under and in accordance with New York law, without regard for that
state's principles of conflict of laws.
(b) This Agreement shall be subject to the provisions of the 1933
Act, 1934 and 1940 acts, and the rules and regulations and rulings thereunder,
including such exemptions from those statutes, rules and regulations as the SEC
may grant (including, but not limited to, the Order) and the terms hereof shall
be interpreted and construed in accordance therewith.
SECTION 14. EXECUTION IN COUNTERPARTS
This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together with constitute one and the same
instrument.
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25
SECTION 15. SEVERABILITY
If any provision of this Agreement is held or made invalid by a
court decision, statute, rule or otherwise, the remainder of this Agreement will
not be affected thereby.
SECTION 16. RIGHTS CUMULATIVE
The rights, remedies and obligations contained in this Agreement
are cumulative and are in addition to any and all rights, remedies and
obligations, at law or in equity, that the Parties are entitled to under federal
and state laws.
SECTION 17. HEADINGS
The Table of Contents and headings used in this Agreement are for
purposes of reference only and shall not limit or define the meaning of the
provisions of this Agreement.
SECTION 18. CONFIDENTIALITY
Subject to the requirements of legal process and regulatory
authority, each party hereto shall treat as confidential the names and addresses
of customers of the other party and all information reasonably identified as
confidential in writing by any other party hereto and, except as permitted by
this Agreement, shall not, without the express written consent of the affected
party, disclose, disseminate or utilize such names and addresses and other
confidential information until such time as it may come into the public domain.
SECTION 19. TRADEMARKS AND FUND NAMES
Salomon Brothers Asset Management Inc, the adviser to the Fund
and its affiliates, own all right, title and interest in and to the names,
trademarks and service marks "Salomon" and "Salomon Brothers" and such other
tradenames, trademarks and service marks as may be identified to LIFE COMPANY
from time to time, (the "Salomon licensed marks"). Upon termination of this
Agreement LIFE COMPANY and its affiliates shall cease to use the Salomon
licensed marks.
SECTION 20. PARTIES TO COOPERATE
Each party to this Agreement will cooperate with each other party
and all appropriate governmental authorities (including, without limitation, the
SEC, the NASD and state insurance regulators) and will permit each other and
such authorities reasonable access to its books and records (including
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26
copies thereof) in connection with any investigation or inquiry relating to this
Agreement or the transactions contemplated hereby.
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27
IN WITNESS WHEREOF, the Parties have caused this Agreement to be
executed in their names and on their behalf by and through their duly authorized
officers signing below.
SALOMON BROTHERS VARIABLE
SERIES FUNDS INC
Attest: __________________ By: ________________________
Name: __________________ Name: ________________________
Title: __________________ Title:________________________
[NAME OF LIFE COMPANY], on
behalf of itself and its
separate accounts
Attest: __________________ By: ______________________
Name: __________________ Name: ________________________
Title: __________________ Title:________________________
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<PAGE>
SCHEDULE A
PORTFOLIOS AVAILABLE UNDER THE CONTRACTS
- ----------------------------------------
[LIST APPLICABLE PORTFOLIOS]
SEPARATE ACCOUNTS UTILIZING THE FUNDS
- -------------------------------------
[LIST APPLICABLE SEPARATE ACCOUNTS]
CONTRACTS FUNDED BY THE SEPARATE ACCOUNTS
- -----------------------------------------
[LIST APPLICABLE CONTRACTS]
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[LETTERHEAD]
December 15, 1997
Salomon Brothers Variable Series Funds Inc
Seven World Trade Center
New York, New York 10048
Registration Statement on Form N-1A
(Registration No. 333-38045)
--------------------------
Dear Ladies and Gentlemen:
We have acted as special Maryland counsel to Salomon Brothers Variable
Series Funds Inc, a Maryland corporation (the "Corporation"), in connection with
the registration under the Securities Act of 1933, as amended, and the
Investment Company Act of 1940, as amended, pursuant to a Registration Statement
on Form N-1A of the Corporation (Registration Nos. 333-38045) (as amended, the
"Registration Statement") filed with the Securities and Exchange Commission (the
"Commission"), of an indefinite number of shares of capital stock, par value
$.001 per share, up to ten billion (10,000,000,000) shares of capital stock, as
authorized by the Corporation's Charter. The authorized capital stock is
initially classified as "Common Stock," of which one billion (1,000,000,000)
shares are further initially classified as a series of Common Stock designated
the "Salomon Brothers Variable Investors Fund," one billion (1,000,000,000)
shares are further initially classified as a series of Common Stock designated
the "Salomon Brothers Variable Capital Fund," one billion (1,000,000,000) shares
are further initially classified as a series of Common Stock designated the
"Salomon Brothers Variable Total Return Fund," one billion (1,000,000,000)
shares are further initially classified as a series of Common Stock designated
the "Salomon Brothers Variable High Yield Bond Fund," one billion
(1,000,000,000) shares are further initially classified as a series of Common
Stock designated the "Salomon Brothers Variable Strategic Bond Fund," one
billion (1,000,000,000) shares are further initially classified as a series of
Common Stock designated the "Salomon Brothers Variable U.S. Government Income
Fund" and one billion (1,000,000,000) shares are further initially classified as
a series of Common Stock designated the "Salomon Brothers Variable Asia Growth
Fund"
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<PAGE>
Piper & Marbury
Salomon Brothers Variable Series Funds Inc L.L.P.
December 15, 1997
Page 2
(collectively, the "Shares") The remaining three billion (3,000,000,000)
shares of authorized but unissued Common Stock remain undesignated as to series
or class.
In this capacity, we have examined the Charter and By-Laws of the
Corporation, the Registration Statement, drafts of the resolutions to be
approved by the Corporation's Board of Directors authorizing the issuance of the
Shares, and such other documents as we have considered necessary. We have also
examined a certificate of corporate officer dated the date hereof (the
"Certificate"). In rendering our opinion, we are relying on the Certificate and
have made no independent investigation or inquiries as to the matters set forth
therein. In reaching the opinions set forth below, we have assumed all documents
submitted to us as originals are authentic, all documents submitted to us as
certified or photostatic copies conform to the original documents, all
signatures on all documents submitted to us for examination are genuine, and all
public records reviewed are accurate and complete.
We are of the opinion and so advise you that assuming the resolutions
authorizing the issuance and delivery of the Shares upon the terms set forth in
the Registration Statement are approved by the Board of Directors of the
Corporation, such Shares will be duly authorized, and such Shares, when issued
and delivered as contemplated by the Registration Statement, will be validly
issued, fully paid and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to us under the heading "Counsel" in
the Statement of Additional Information supplementing the Prospectus included in
the Registration Statement.
Very truly yours,
PIPER & MARBURY L.L.P.
-2-
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CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Pre-Effective Amendment No. 1 to the registration
statement on Form N-1A (the "Registration Statement") of our report dated
December 12, 1997, relating to the Statements of Assets and Liabilities of
Salomon Brothers Variable Strategic Bond Fund, Salomon Brothers Variable Total
Return Fund, Salomon Brothers Variable Investors Fund and Salomon Brothers
Variable Capital Fund (four of the portfolios constituting Salomon Brothers
Variable Series Funds, Inc.), which appears in such Statement of Additional
Information. We also consent to the reference to us under the heading
"Independent Accountants" in such Statement of Additional Information.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
December 12, 1997
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PURCHASE AGREEMENT
Salomon Brothers Variable Series Funds Inc (the "Company"), a
Maryland corporation, and Salomon Brothers Asset Management Inc ("SBAM"), a
Delaware corporation, hereby agree as follows:
1. The Company hereby offers SBAM and SBAM hereby purchases
one (1) share of the capital stock of each of the Variable Strategic Bond
Fund, the Variable Investors Fund and the Variable Capital Fund, and
9,997 shares of the capital stock of the Investors Fund, (par value $.001 per
share) for consideration of $10.00 per share (collectively, the "Shares"). SBAM
hereby acknowledges receipt of a purchase confirmation reflecting the purchase
of the Shares, and the Company hereby acknowledges receipt from SBAM of funds in
the amount of $100,000.00 in full payment for the Shares.
2. SBAM represents and warrants to the Company that the Shares
are being acquired for investment purposes and not with a view to the
distribution thereof.
3. SBAM agrees that if it or any direct or indirect transferee
of any of the Shares redeems any of the Shares prior to the fifth anniversary of
the date the Company begins its investment activities, SBAM will pay to the
Company an amount equal to the number resulting from multiplying the Company's
total unamortized organizational expenses by a fraction, the numerator of which
is equal to the number of Shares redeemed by SBAM or such transferee and the
denominator of which is equal to the number of Shares outstanding as of the date
of such redemption, as long as the administration position of the staff of the
Securities Exchange Commission requires such reimbursement.
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2
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the __th day of December, 1997.
SALOMON BROTHERS VARIABLE SERIES FUNDS
INC
Attest:
_______________________ By:__________________________
Michael S. Hyland
President
(SEAL)
SALOMON BROTHERS ASSET MANAGEMENT INC
Attest:
_______________________ By:__________________________
Michael S. Hyland
President
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