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Salomon Brothers
Variable Series Funds Inc
7 WORLD TRADE CENTER NEW YORK, NEW YORK 10048
888-777-0102
SALOMON BROTHERS VARIABLE INVESTORS FUND (THE 'INVESTORS FUND') AND SALOMON
BROTHERS VARIABLE TOTAL RETURN FUND (THE 'TOTAL RETURN FUND') ARE PORTFOLIOS OF
SALOMON BROTHERS VARIABLE SERIES FUNDS INC ('VARIABLE SERIES FUNDS'), AN
OPEN-END MANAGEMENT INVESTMENT COMPANY (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 ADDITIONAL INFORMATION RELATING TO SUCH
CONTRACT, POLICY OR PLAN. EACH OF THE FUNDS HAS A SPECIFIC INVESTMENT OBJECTIVE.
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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 INVESTORS FUND AND THE TOTAL
RETURN FUND MAY INVEST UP TO 5% AND 20%, RESPECTIVELY, OF THEIR 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.
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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
APRIL 20, 1998
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Table of Contents
Summary 3
Expense Information 5
Investment Objectives and Policies 6
Additional Investment Activities and Risk
Factors 11
Investment Limitations 25
Management 26
Determination of Net Asset Value 28
Participating Insurance Companies and Plans 29
Purchase of Shares 29
Redemption of Shares 30
Performance Information 31
Dividends and Distributions 32
Taxation 33
Account Services 34
Capital Stock 34
Appendix A A-1
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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 Funds 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 is classified as a diversified Fund under the Investment
Company Act of 1940, as amended (the '1940 Act').
THE FUNDS' 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.
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.
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.'
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, 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.'
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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 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.
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Expense Information
ANNUAL FUND OPERATING EXPENSES
Information in the table below is given as a percentage of average daily net
assets.
<TABLE>
<CAPTION>
FUND
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<S> <C>
Investors
Management Fees........................................................................... 0.70
Other Expenses (after reimbursement)*,'D'................................................. 0.30
----
Total Fund Operating expenses (after reimbursement)*...................................... 1.00%
Total Return
Management Fees........................................................................... 0.80
Other Expenses (after reimbursement)*,'D'................................................. 0.20
----
Total Fund Operating expenses (after reimbursement)*...................................... 1.00%
</TABLE>
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* 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 2.61% for the Investors Fund; and 1.91% and 2.71% for the
Total Return Fund, respectively.
'D' As of the date of this Prospectus, the Fund had only recently 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.
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
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<S> <C> <C>
Investors....................................................................... $ 10 $32
Total Return.................................................................... $ 10 $32
</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.
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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).
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 Investors 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. 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. For a description
of repurchase agreements and their associated risks, see 'Additional Investment
Activities and Risk Factors -- Repurchase Agreements.' 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 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
Investors Service ('Moody's') or Standard & Poor's Ratings Group ('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
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principal and interest payments than is the case with higher grade debt
securities.
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 the 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
'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 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.'
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 lending portfolio securities, see 'Additional Investment
Activities and Risk Factors -- Loans of Portfolio Securities.'
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 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 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.
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 Total Return
Fund is to invest in a broad variety of securities, including equity
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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 Investors 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
determined by SBAM to be of comparable quality. 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 '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 including:
(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 aforementioned 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
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SALOMON BROTHERS VARIABLE SERIES
underlying mortgages. In addition, the guarantee only runs to the portfolio
securities held by the Fund and not to the purchase of shares of the 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 in the Statement of Additional Information.
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 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
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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 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.
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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.
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
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 Total Return Fund may enter into 'reverse'
repurchase agreements to avoid selling securities during unfavorable market
conditions to meet redemptions. Pursuant to a reverse repurchase agreement, the
Fund will sell portfolio securities and agree to repurchase them from the buyer
at a particular date and price. Whenever the Fund enters into a reverse
repurchase agreement, it will establish a segregated account of liquid assets
in an amount at least equal to the
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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. The 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
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 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
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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 the 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, the 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 Total Return Fund may invest in Loan
Participations and Assignments. The Fund considers these investments to be
investments in debt securities for purposes of this Prospectus. Loan
Participations typically will result in the Fund having a contractual
relationship only with the Lender, not with the borrower. The Fund will have
the right to receive payments of principal, interest and any fees to which it
is entitled only from the Lender selling the Participation and only upon
receipt by the Lender of the payments from the borrower. In connection with
purchasing Loan Participations, the 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, the 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, the 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. The Fund
will acquire Loan Participations only if the Lender interpositioned between the
Fund and the borrower is determined by SBAM to be creditworthy. When the 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.
The Fund may have difficulty disposing of Assignments and Loan Participations.
Because the market for such instruments
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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 the 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 the Fund holds become illiquid, due to
the lack of sufficient buyers or market or other conditions, the percentage of
the 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 the
Fund to maintain sufficient liquidity for operating purposes and to meet
redemption requests.
In valuing a Loan Participation or Assignment held by the 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, the 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 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,
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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 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 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
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SALOMON BROTHERS VARIABLE SERIES
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. To the extent that a portion of a Fund's portfolio is
invested in 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 were purchased at a discount. Because 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
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SALOMON BROTHERS VARIABLE SERIES
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 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.
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. The
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 the Fund would likely decrease.
Also, the 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
the 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 Total Return Fund may also purchase
mortgage-backed securities issued by private issuers which may entail greater
risk than mortgage-backed securities that
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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 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.
HIGH YIELD SECURITIES. Medium and low rated and comparable unrated 'high yield'
securities, commonly known as 'junk bonds,' involve significantly greater
risks, including price volatility and risk of default in the payment of
interest and principal, than higher rated securities. The Investors Fund and
the Total Return Fund may invest without limitation in convertible securities
of this type and up to 5% and 20%, respectively, of their net assets in
non-convertible securities of this type.
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
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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 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
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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 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
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SALOMON BROTHERS VARIABLE SERIES
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 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
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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 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
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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.
DERIVATIVES. Each of the Funds 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
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SALOMON BROTHERS VARIABLE SERIES
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 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.
The Funds 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 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.'
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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 March 31, 1998, SBAM and such affiliates managed
approximately $27 billion of assets. 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.
Allan R. White III is a Managing Director of Salomon Brothers Inc ('Salomon
Brothers') and SBAM and is primarily responsible for the day-to-day 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 John B. Cunningham. Mr.
Cunningham has been a Vice President of SBAM since 1995. Prior to that time, Mr.
Cunningham was an Associate in the Investment Banking Group.
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.
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
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SALOMON BROTHERS VARIABLE SERIES
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 Investors Fund pays SBAM a monthly fee at
an annual rate of .70% of the Fund's average daily net assets and the Total
Return Fund pays SBAM a monthly fee at an annual rate of .80% of the Fund's
average daily net assets. With respect to each 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 1.00%.
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 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, 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, located at 7 World Trade Center, New York, New York 10048,
serves as each Fund's distributor. Salomon Brothers, 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, 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 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.
ADMINISTRATOR
Each Fund employs SBAM under administration agreements to provide certain
administrative services to the Funds.
The services provided by SBAM 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 SBAM a fee, calculated daily and payable monthly,
at an annual rate of .05% of the applicable Fund's aggregate average daily net
assets. SBAM 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.
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 may 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.
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' or 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.
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.
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,
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 such
Fund will be treated as owning the account's proportionate share of each of the
assets of the Fund. 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.
PAGE 33
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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.
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 Investors Fund, Total Return Fund, Salomon Brothers
Variable Capital Fund, Salomon Brothers Variable High Yield Bond Fund, Salomon
Brothers Variable Strategic Bond Fund, Salomon Brothers Variable U.S. Government
Income Fund and Salomon Brothers Variable Asia Growth Fund. The assets of each
Fund are segregated and separately managed. The Variable Series Funds' Board of
Directors may, in the 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 a significant percentage of the outstanding
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.
PAGE 34
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Appendix A:
Description of Ratings
A DESCRIPTION OF THE RATING POLICIES OF MOODY'S AND S&P 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, N.A.
Airport Business Center
International Court 2
200 Stevens Drive
Lester, Pennsylvania 19113
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.
-----------------------------------------------
SALOMON BROTHERS ASSET MANAGEMENT
-----------------------------------------------
STATEMENT OF DIFFERENCES
The dagger symbol shall be expressed as....................................`D'
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