<PAGE>
<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 30, 1999
REGISTRATION NOS.
________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM N-1A
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933 [x]
PRE-EFFECTIVE AMENDMENT NO. [ ]
POST-EFFECTIVE AMENDMENT NO. 2 [x]
AND/OR
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940 [x]
AMENDMENT NO. 2 [x]
------------------------
SALOMON BROTHERS VARIABLE SERIES FUNDS INC
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
------------------------
7 WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (800) 725-6666
ROBERT A. VEGLIANTE
SALOMON BROTHERS ASSET MANAGEMENT INC
7 WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
(NAME AND ADDRESS OF AGENT FOR SERVICE)
------------------------
COPIES TO:
GARY SCHPERO, ESQ.
SIMPSON THACHER & BARTLETT
425 LEXINGTON AVENUE
NEW YORK, NY 10017
------------------------
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after
this Registration Statement becomes effective.
It is proposed that this filing will become effective:
[x] immediately upon filing pursuant to Rule 485(b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective
date for a previously filed post-effective amendment.
________________________________________________________________________________
<PAGE>
<PAGE>
===============================================================================
SALOMON BROTHERS
VARIABLE SERIES FUNDS INC
PROSPECTUS
-----------------------------------
Capital Fund
Investors Fund
Total Return Fund
High Yield Bond Fund
Strategic Bond Fund
Asia Growth Fund
U.S. Government Income Fund
------------------------------------
April 30, 1999
[SALOMON BROTHERS LOGO]
The funds' investment manager is Salomon Brothers Asset Management Inc,
a subsidiary of Citigroup Inc.
Shares of each fund are offered to insurance company separate accounts
which fund certain variable annuity and variable life insurance contracts and to
qualified retirement and pension plans. This prospectus should be read
together with the prospectus for those contracts.
The Securities and Exchange Commission has not approved or disapproved these
securities or determined whether this prospectus is accurate
or complete. Any statement to the contrary is a crime.
===============================================================================
<PAGE>
<PAGE>
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CONTENTS
Salomon Variable Series
Funds Inc. consists of 7
separate investment
funds, each with its own
investment objective and
policies. Each fund offers
different levels of
potential return and
involves different levels
of risk.
Fund goals, strategies and risks:
<TABLE>
<S> <C>
Capital Fund................................................................. 4
Investors Fund............................................................... 6
Total Return Fund............................................................ 8
High Yield Bond Fund......................................................... 10
Strategic Bond Fund.......................................................... 12
Asia Growth Fund............................................................. 15
U.S. Government Income Fund.................................................. 17
More on the funds' investments.................................................... 19
Management........................................................................ 24
Share transactions................................................................ 26
Dividends, distributions and taxes................................................ 27
Financial highlights.............................................................. 28
</TABLE>
- --------------------------------------------------------------------------------
THINGS YOU SHOULD KNOW BEFORE INVESTING
ABOUT THE FUNDS
<TABLE>
<CAPTION>
Equity Funds Fixed Income Funds
------------ ------------------
<S> <C>
Capital Fund High Yield Bond Fund
Investors Fund Strategic Bond Fund
Total Return Fund U.S. Government Income Fund
Asia Growth Fund
</TABLE>
ABOUT MUTUAL FUND RISKS
An investment in any of the funds is not a bank deposit and is not insured or
guaranteed by the FDIC or any other government agency.
Salomon Brothers Variable Series Funds Inc. - 3
<PAGE>
<PAGE>
CAPITAL FUND
<TABLE>
<S> <C>
INVESTMENT The fund seeks capital appreciation through investment in securities which the manager
OBJECTIVE believes have above-average capital appreciation potential.
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KEY INVESTMENTS The fund invests primarily in equity securities of U.S. companies. These companies may range
in size from established large capitalization (over $5 billion in market capitalization)
companies to small capitalization (less than $1 billion in market capitalization) companies
at the beginning of their life cycles.
- ---------------------------------------------------------------------------------------------------------------------
HOW THE The manager emphasizes individual security selection while diversifying the fund's
MANAGER investments across industries, which may help to reduce risk. The manager seeks to identify
SELECTS THE those companies which offer the greatest potential for capital appreciation through careful
FUND'S fundamental analysis of each company and its financial characteristics. The manager
INVESTMENTS evaluates companies of all sizes.
In selecting individual companies for investment, the manager looks for the following:
Share prices which appear to undervalue the company's assets or do not adequately reflect
factors such as favorable industry trends, lack of investor recognition or the short-term
nature of earnings declines.
Special situations such as existing or possible changes in management, corporate policies,
capitalization or regulatory environment which may boost earnings or the market price of the
company's shares.
Growth potential due to technological advances, new products or services, new methods of
marketing or production, changes in demand or other significant new developments which may
enhance future earnings.
- ---------------------------------------------------------------------------------------------------------------------
PRINCIPAL RISKS Equity investments may involve added risks. Investors could lose money on their investment
OF INVESTING IN in the fund, or the fund may not perform as well as other investments, if any of the
THE FUND following occurs:
The U.S. stock market declines.
Investing in An adverse event, such as negative press reports about a company in the fund's portfolio,
small depresses the value of the company's stock.
capitalization The manager's judgment about the attractiveness, relative value or potential appreciation
companies of a particular sector or security proves to be incorrect.
involves a Greater volatility of share price because of the fund's ability to invest in small cap
substantial risk companies. Compared to large cap companies, small cap companies and the market for their
of loss. equity securities are more likely to:
Be more sensitive to changes in earnings results and investor expectations
Have more limited product lines, capital resources and management depth
Experience sharper swings in market values
Be harder to sell at the times and prices the manager believes appropriate
Offer greater potential for gain and loss
The fund is not diversified, which means that it can invest a higher percentage of its
assets in any one issuer than a diversified fund. Being non-diversified may magnify the
fund's losses from adverse events affecting a particular issuer.
</TABLE>
Salomon Brothers Variable Series Funds Inc. - 4
<PAGE>
<PAGE>
<TABLE>
<S> <C>
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TOTAL RETURN AND Because the fund commenced operations in 1998, the fund does not have a sufficient operating
PERFORMANCE history to depict its performance in the graphic and table form.
The fund's total return will vary from year to year, and its performance will vary compared
with that of unmanaged U.S. stock indices. Although variations in the fund's performance are
an indication of the risks of investing in the fund, past performance does not necessarily
indicate how the fund will perform in the future.
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
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SHAREHOLDER FEES (PAID DIRECTLY FROM YOUR INVESTMENT)
Maximum sales charge on purchases None
<S> <C>
Maximum deferred sales charge on redemptions None
- -------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (PAID BY THE FUND AS
A % OF NET ASSETS)
Management fees 0.85%
- -------------------------------------------------------------------------------------------
Distribution and service (12b-1) fees None
Other expenses 2.41%
- -------------------------------------------------------------------------------------------
Total annual fund operating expenses 3.26%
<CAPTION>
<S> <C>
FEES AND EXPENSES
This table sets forth
the fees and expenses
you will pay if you
invest in shares of the
fund. Because the
manager waived all of
its management fee and
reimbursed the fund for
certain expenses during
the period ended
December 31, 1998,
actual total operating
expenses for the fund
were:
1.00%
The manager may
discontinue this waiver
at any time.
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
NUMBER OF YEARS YOU OWN YOUR SHARES 1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
Your costs would be $329 $1,004 $1,702 $ 3,558
The example assumes: You invest $10,000 for the period shown
You reinvest all distributions and dividends without a sales charge
The fund's operating expenses remain the same
Your investment has a 5% return each year
Redemption of your shares at the end of the period
<CAPTION>
<S> <C>
This example helps you
compare the cost of
investing in the fund
with other mutual
funds. Your actual cost
may be higher or lower.
</TABLE>
Salomon Brothers Variable Series Funds Inc. - 5
<PAGE>
<PAGE>
INVESTORS FUND
<TABLE>
<S> <C>
INVESTMENT The primary investment objective of the fund is to seek long-term growth of capital. Current
OBJECTIVE income is a secondary objective.
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KEY INVESTMENTS The fund invests primarily in common stocks of established U.S. companies. The fund may also
invest in other equity securities. To a lesser degree, the fund invests in income producing
securities such as debt securities.
- ---------------------------------------------------------------------------------------------------------------------
HOW THE The manager emphasizes individual security selection while diversifying the fund's
MANAGER investments across industries, which may help to reduce risk. The manager focuses on
SELECTS THE established large capitalization companies (over $5 billion in market capitalization),
FUND'S seeking to identify those companies with solid growth potential at reasonable values. The
INVESTMENTS manager employs fundamental analysis to analyze each company in detail, ranking its
management, strategy and competitive market position.
In selecting individual companies for investment, the manager looks for:
Long-term history of performance
Competitive market position
Competitive products and services
Strong cash flow
High return on equity
Strong financial condition
Experienced and effective management
Global scope
- ---------------------------------------------------------------------------------------------------------------------
PRINCIPAL RISKS Equity investments may involve added risks. Investors could lose money on their investment
OF INVESTING IN in the fund, or the fund may not perform as well as other investments, if any of the
THE FUND following occurs:
U.S. stock markets decline.
An adverse event, such as an unfavorable earnings report, negatively affects the stock
price of a company in which the fund invests.
Large capitalization stocks fall out of favor with investors.
The manager's judgment about the attractiveness, growth prospects or potential appreciation
of a particular stock proves to be incorrect.
</TABLE>
Salomon Brothers Variable Series Funds Inc. - 6
<PAGE>
<PAGE>
<TABLE>
<S> <C>
TOTAL RETURN Because the fund commenced operations in 1998, the fund does not have a sufficient operating
AND history to depict its performance in the graphic and table form.
PERFORMANCE The fund's total return will vary from year to year, and its performance will vary compared
with that of U.S. stock indices. Although variations in the fund's performance are an
indication of the risks of investing in the fund, past performance does not necessarily
indicate how the fund will perform in the future.
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------------------
SHAREHOLDER FEES (PAID DIRECTLY FROM YOUR INVESTMENT)
Maximum sales charge on purchases None
Maximum deferred sales charge on redemptions None
- -------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (PAID BY THE FUND AS
A % OF NET ASSETS)
Management fees 0.70%
- -------------------------------------------------------------------------------------------
Distribution and service (12b-1) fees None
Other expenses 1.37%
- -------------------------------------------------------------------------------------------
Total annual fund operating expenses 2.07%
<CAPTION>
<S> <C>
FEES AND EXPENSES
This table sets forth
the fees and expenses
you will pay if you
invest in shares of the
fund. Because the
manager waived all of
its management fee and
reimbursed the fund for
certain expenses during
the period ended
December 31, 1998,
actual total operating
expenses for the fund
were:
1.00%
The manager may
discontinue this waiver
at any time.
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
NUMBER OF YEARS YOU OWN YOUR SHARES 1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
Your costs would be $210 $ 649 $1,114 $ 2,400
The example assumes: You invest $10,000 for the period shown
You reinvest all distributions and dividends without a sales charge
The fund's operating expenses remain the same
Your investment has a 5% return each year
Redemption of your shares at the end of the period
<CAPTION>
<S> <C>
This example helps you
compare the cost of
investing in the fund
with other mutual
funds. Your actual cost
may be higher or lower.
</TABLE>
Salomon Brothers Variable Series Funds Inc. - 7
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
TOTAL RETURN FUND
<TABLE>
<S> <C>
INVESTMENT The fund seeks to obtain above-average income (compared to a portfolio entirely invested in
OBJECTIVE equity securities). The fund's secondary objective is to take advantage of opportunities to
achieve growth of capital and income.
- ---------------------------------------------------------------------------------------------------------------------
KEY INVESTMENTS The fund invests in a broad range of equity and fixed income securities of both U.S. and
foreign issuers. The fund varies its allocations between equity and fixed income securities
depending on the manager's view of economic and market conditions, fiscal and monetary
policy and security values. However, under normal market conditions at least 40% of the
fund's assets are allocated to equity securities.
CREDIT QUALITY: The fund's investments in fixed-income securities are primarily investment
grade but the fund may invest up to 20% of its assets in nonconvertible fixed income
securities rated below investment grade by a recognized rating agency, or in unrated
securities of equivalent quality. Securities rated below investment grade are commonly
referred to as 'junk bonds.'
MATURITY: The fund's investments in fixed-income securities may be of any maturity.
- ---------------------------------------------------------------------------------------------------------------------
HOW THE In selecting stocks for investment, the manager applies a bottom-up analysis, focusing on
MANAGER companies with:
SELECTS THE Large market capitalizations
FUND'S Favorable dividend yields and price to earnings ratios
INVESTMENTS Stocks that are less volatile than the market as a whole
Strong balance sheets
A catalyst for appreciation and restructuring potential, product innovation or new
development
The manager considers both macroeconomic and issuer specific factors in selecting debt
securities for its portfolio. In assessing the appropriate maturity, rating and sector
weighting of the fund's portfolio, the manager considers a variety of macroeconomic factors
that are expected to influence economic activity and interest rates. These factors include
fundamental economic indicators, Federal Reserve monetary policy and the relative value of
the U.S. dollar compared to other currencies. Once the manager determines the preferable
portfolio characteristics, the manager selects individual securities based upon the terms of
the securities (such as yields compared to U.S. Treasuries or comparable issues ), liquidity
and rating, sector and issuer diversification. The manager also employs fundamental research
and due diligence to assess an issuer's:
Credit quality taking into account financial condition and profitability
Future capital needs
Potential for change in rating and industry outlook
The competitive environment and management ability
</TABLE>
Salomon Brothers Variable Series Funds Inc. - 8
<PAGE>
<PAGE>
<TABLE>
<S> <C>
While investing in a mix of equity and debt securities can bring added benefits, it may PRINCIPAL RISKS
also involve additional risks. Investors could lose money in the fund or the fund's OF INVESTING IN
performance could fall below other possible investments if any of the following occurs: THE FUND
U.S. stock markets decline
An adverse event, such as an unfavorable earnings report, negatively affects the stock
price of a company in which the fund invests
Large capitalization stocks fall out of favor with investors
The manager's judgment about the attractiveness, growth prospects or potential appreciation
of a particular sector or security proves to be incorrect
The fund also has risks associated with investing in bonds. The fund could underperform
other investments if:
Interest rates go up, causing the prices of fixed-income securities to decline and reducing
the value of the fund's investments.
The issuer of a debt security owned by the fund defaults on its obligation to pay principal
or interest or has its credit rating downgraded.
During periods of declining interest rates, the issuer of a security may exercise its
option to prepay earlier than scheduled, forcing the fund to reinvest in lower yielding
securities. This is known as call or prepayment risk.
During periods of rising interest rates, the average life of certain types of securities
may be extended because of slower than expected principal payments. This market effect may
lock in a below market interest rate, increase the security's duration and reduce the value
of the security. This market effect is known as extension risk.
- ---------------------------------------------------------------------------------------------------------------------
Because the fund commenced operations in 1998, the fund does not have a sufficient TOTAL RETURN AND
operating history to depict its performance in the graphic and table form. PERFORMANCE
The fund's total return will vary from year to year, and its performance will vary compared
with that of unmanaged stock and bond indices. Although variations in the fund's
performance are an indication of the risks of investing in the fund, past performance does
not necessarily indicate how the fund will perform in the future.
</TABLE>
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------------------------------------------
SHAREHOLDER FEES (PAID DIRECTLY FROM YOUR INVESTMENT)
Maximum sales charge on purchases None
Maximum deferred sales charge on redemptions None
- -------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (PAID BY THE FUND AS A % OF NET ASSETS)
Management fees 0.80%
Distribution and service (12b-1) fees None
Other expenses 2.10%
Total annual fund operating expenses 2.90%
<CAPTION>
<S> <C>
FEES AND EXPENSES
This table sets forth
the fees and expenses
you will pay if you
invest in shares of the
fund. Because the
manager waived all of
its management fee and
reimbursed the fund for
certain expenses during
the period ended
December 31, 1998,
actual total operating
expenses for the fund
were:
1.00%
The manager may
discontinue this waiver
at any time.
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NUMBER OF YEARS YOU OWN YOUR SHARES 1 YEAR 3 YEARS 5 YEARS 10 YEARS
Your costs would be $ 293 $ 898 $1,528 $ 3,223
The example assumes: You invest $10,000 for the period shown
You reinvest all distributions and dividends without a sales charge
The fund's operating expenses remain the same
Your investment has a 5% return each year
Redemption of your shares at the end of the period
<CAPTION>
<S> <C>
This example helps you
compare the cost of
investing in the fund
with other mutual
funds. Your actual cost
may be higher or lower.
</TABLE>
Salomon Brothers Variable Series Funds Inc. - 9
<PAGE>
<PAGE>
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HIGH YIELD BOND FUND
<TABLE>
<S> <C>
INVESTMENT The fund seeks to maximize current income. As a secondary objective, the fund seeks capital
OBJECTIVE appreciation.
- ---------------------------------------------------------------------------------------------------------------------
KEY INVESTMENTS The fund invests primarily in high yield fixed income securities issued by U.S. and foreign
governments, their agencies and instrumentalities, supranational entities, and U.S. and
foreign corporations. The fund may invest up to 35% of its assets in securities of foreign
issuers, including issuers in emerging markets.
CREDIT QUALITY: The fund invests primarily in fixed income securities rated below investment
grade by a recognized rating agency or, if unrated, of equivalent quality as determined by
the manager. Below investment grade securities are commonly referred to as 'junk bonds.'
MATURITY: The fund normally maintains an average portfolio maturity of between 6 and 12
years. However, the fund may invest in individual securities of any maturity.
- ---------------------------------------------------------------------------------------------------------------------
HOW THE MANAGER Individual security selection is driven by the manager's economic view, industry outlook and
SELECTS THE FUND'S rigorous credit analysis. The manager then selects those individual securities that appear
INVESTMENTS to be most undervalued and to offer the highest potential returns relative to the amount of
credit, interest rate, liquidity and other risk presented by these securities. The manager
allocates the fund's investments across a broad range of issuers and industries, which can
help to reduce risk.
In evaluating the issuer's creditworthiness, the manager employs fundamental analysis and
considers the following factors:
The strength of the issuer's financial resources
The issuer's sensitivity to economic conditions and trends
The issuer's operating history
Experience and track record of issuer's management
- ---------------------------------------------------------------------------------------------------------------------
PRINCIPAL RISKS OF Investors could lose money on their investment in the fund, or the fund may not perform as
INVESTING IN THE FUND well as other investments, if any, of the following occurs:
The issuer of a security owned by the fund defaults on its obligation to pay principal
Investments in high and/or interest or has its credit rating downgraded.
yield securities Interest rates increase, causing the prices of fixed income securities to decline and
involve a substantial reducing the value of the fund's portfolio.
risk of loss The manager's judgment about the attractiveness, relative value or credit quality of a
particular security proves to be incorrect.
High yield securities are considered speculative and, compared to investment grade
securities, tend to have more volatile prices and are more susceptible to the following
risks:
Increased price sensitivity to changing interest rates and to adverse economic and
business developments
Greater risk of loss due to default or declining credit quality
Greater likelihood that adverse economic or company specific events will make the
issuer unable to make interest and/or principal payments
Negative market sentiment towards high yield securities depresses the price and
liquidity of high yield securities
</TABLE>
Salomon Brothers Variable Series Funds Inc. - 10
<PAGE>
<PAGE>
<TABLE>
<S> <C>
- ---------------------------------------------------------------------------------------------------------------------
TOTAL RETURN Because the fund commenced operations in 1998, the fund does not have a sufficient operating
AND history to depict its performance in the graphic and table form.
PERFORMANCE The fund's total return will vary from year to year, and its performance will vary compared
with that of unmanaged high yield securities indices. Although variations in the fund's
performance are an indication of the risks of investing in the fund, past performance does
not necessarily indicate how the fund will perform in the future.
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
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SHAREHOLDER FEES (PAID DIRECTLY FROM YOUR INVESTMENT)
Maximum sales charge on purchases None
Maximum deferred sales charge on redemptions None
- -------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (PAID BY THE FUND AS
A % OF NET ASSETS)
Management fees 0.75%
- -------------------------------------------------------------------------------------------
Distribution and service (12b-1) fees None
Other expenses 1.29%
- -------------------------------------------------------------------------------------------
Total annual fund operating expenses 2.04%
<CAPTION>
<S> <C>
FEES AND EXPENSES
This table sets forth
the fees and expenses
you will pay if you
invest in shares of the
fund. Because the
manager waived all of
its management fee and
reimbursed the fund for
certain expenses during
the period ended
December 31, 1998,
actual total operating
expenses for the fund
were:
1.00%
The manager may
discontinue this waiver
at any time.
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
NUMBER OF YEARS YOU OWN YOUR SHARES 1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
Your costs would be $207 $ 640 $1,098 $ 2,369
The example assumes: You invest $10,000 for the period shown
You reinvest all distributions and dividends without a sales charge
The fund's operating expenses remain the same
Your investment has a 5% return each year
Redemption of your shares at the end of the period
<CAPTION>
<S> <C>
This example helps you
compare the cost of
investing in the fund
with other mutual
funds. Your actual cost
may be higher or lower.
</TABLE>
Salomon Brothers Variable Series Funds Inc. - 11
<PAGE>
<PAGE>
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STRATEGIC BOND FUND
<TABLE>
<S> <C>
INVESTMENT The fund seeks a high level of current income. As a secondary objective, the fund seeks
OBJECTIVE capital appreciation.
- ---------------------------------------------------------------------------------------------------------------------
KEY INVESTMENTS The fund invests primarily in a globally diverse portfolio of fixed income securities. The
manager has broad discretion to allocate the fund's assets among the following segments of
the international market for fixed income securities:
U.S. government obligations Mortgage and asset-backed securities
Investment and non-investment grade U.S. Sovereign debt
and foreign corporate debt Brady Bonds
CREDIT QUALITY: The fund invests in fixed income securities across a range of credit
qualities and may invest a substantial portion of the fund's assets in obligations rated
below investment grade by a recognized rating agency, or, if unrated, of equivalent quality
as determined by the manager. Below investment grade securities are commonly referred to as
'junk bonds'.
MATURITY: The fund has no specific average portfolio maturity requirement, but generally
anticipates maintaining a range of 4.5 to 10 years. The fund may hold individual securities
of any maturity.
- ---------------------------------------------------------------------------------------------------------------------
HOW THE The manager uses a combination of quantitative models which seek to measure the relative
MANAGER risks and opportunities of each market segment based upon economic, market, political,
SELECTS THE currency and technical data and its own assessment of economic and market conditions to
FUND'S create an optimal risk/return allocation of the fund's assets among various segments of the
INVESTMENTS fixed income market. After the manager makes its segment allocations, the manager uses
traditional credit analysis to identify individual securities for the fund's portfolio.
In selecting corporate debt for investment, the manager considers the issuer's:
Financial condition
Sensitivity to economic conditions and trends
Operating history
Experience and track record of management
In selecting foreign government debt for investment, the manager considers the following
factors:
Economic and political conditions within the issuer's country
Overall and external debt levels and debt service ratios
Access to capital markets
Debt service payment history
In selecting U.S. government and agency obligations and mortgage-backed securities for
investment, the manager considers the following factors:
Yield curve shifts
Credit quality
Changing prepayment patterns
</TABLE>
Salomon Brothers Variable Series Funds Inc. - 12
<PAGE>
<PAGE>
<TABLE>
<S> <C>
Investors could lose money on their investment in the fund, or the fund may not perform as
well as other investments, if any of the following occurs:
Interest rates go up, causing the prices of fixed income securities to decline and
reducing the value of the fund's investments.
The issuer of a security owned by the fund defaults on its obligation to pay principal
and/or interest or has its credit rating downgraded.
During periods of declining interest rates, the issuer of a security may exercise its
option to prepay principal earlier than scheduled, forcing the fund to reinvest in lower
yielding securities. This is known as call or prepayment risk.
During periods of rising interest rates, the average life of certain types of securities
may be extended because of slower than expected principal payments. This may lock in a below
market interest rate, increase the security's duration and reduce the value of the security.
This is known as extension risk.
The manager's judgment about the attractiveness, relative value or potential appreciation
of a particular sector, security or hedging strategy proves to be incorrect.
To the extent the fund invests significantly in asset-backed and mortgage-related
securities, its exposure to prepayment and extension risks may be greater than other
investments in fixed income securities. Mortgage derivatives held by the fund may have
especially volatile prices and may have a disproportionate effect on the fund's share price.
High yield securities are considered speculative with respect to the issuer's ability to pay
interest and principal and are susceptible to default or decline in market value due to
adverse economic and business developments. The market values for high yield securities tend
to be very volatile, and these securities are less liquid than investment grade debt
securities. For these reasons, an investment in the fund is subject to increased price
sensitivity to changing interest rates and a greater risk of loss due to default or
declining credit quality. Also, negative market sentiment towards high yield securities
could depress the price and liquidity of high yield securities. This negative perception
could last for a significant period of time.
Investing in non-U.S. issuers may involve unique risks compared to investing in the
securities of U.S. issuers. These risks are more pronounced to the extent the fund invests
in issuers in countries with emerging markets or if the fund invests significantly in one
country. These risks may include:
Less information about non-U.S. issuers or markets may be available due to less rigorous
disclosure and accounting standards or regulatory practices
Many non-U.S. markets are smaller, less liquid and more volatile than U.S. markets. In a
changing market, the manager may not be able to sell the fund's portfolio securities in
amounts and at prices the manager considers reasonable
The U.S. dollar may appreciate against non-U.S. currencies or a foreign government may
impose restrictions on currency conversion or trading
The economies of non-U.S. countries may grow at a slower rate than expected or may
experience a downturn or recession
Economic, political and social developments significantly disrupt the financial markets
Foreign governmental obligations involve the risk of debt moratorium, repudiation or
renegotiation and the fund may be unable to enforce its rights against the issuers
PRINCIPAL RISKS OF
INVESTING IN THE FUND
Investment in high
yield securities
involves a substantial
risk of loss.
</TABLE>
Salomon Brothers Variable Series Funds Inc. - 13
<PAGE>
<PAGE>
<TABLE>
<S> <C>
- ---------------------------------------------------------------------------------------------------------------------
TOTAL RETURN AND Because the fund commenced operations in 1998, the fund does not have a sufficient operating
PERFORMANCE history to depict its performance in the graphic and table form.
The fund's total return will vary from year to year, and its performance will vary compared
with that of unmanaged high yield securities indices. Although variations in the fund's
performance are an indication of the risks of investing in the fund, past performance does
not necessarily indicate how the fund will perform in the future.
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------
SHAREHOLDER FEES (PAID DIRECTLY FROM YOUR INVESTMENT)
Maximum sales charge on purchases None
Maximum deferred sales charge on redemptions None
------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (PAID BY THE FUND AS A % OF NET ASSETS)
Management fees 0.75%
Distribution and service (12b-1) fees None
Other expenses 1.04%
Total annual fund operating expenses 1.79%
<CAPTION>
<S> <C>
FEES AND EXPENSES
This table sets forth the fees
and expenses you will pay if
you invest in shares of the fund
Because the manager waived all of its
management fee and reimbursed the fun
for certain expenses during the period
ended December 31, 1998, actual total
operating expenses for the fund were:
1.00%
The manager may discontinue
this waiver at any time.
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
NUMBER OF YEARS YOU OWN YOUR SHARES 1 YEAR 3 YEARS 5 YEARS 10 YEARS
Your costs would be $ 182 $563 $970 $ 2,105
</TABLE>
<TABLE>
<S> <C>
The example assumes: You invest $10,000 for the period shown
You reinvest all distributions and dividends without a sales charge
The fund's operating expenses remain the same
Your investment has a 5% return each year
Redemption of your shares at the end of the period
<CAPTION>
<S> <C>
This example helps you
compare the cost of
investing in the fund
with other mutual
funds. Your actual
cost may be higher or
lower.
</TABLE>
- --------------------------------------------------------------------------------
Salomon Brothers Variable Series Funds Inc. - 14
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
ASIA GROWTH FUND
<TABLE>
<S> <C>
INVESTMENT The fund seeks long-term capital appreciation.
OBJECTIVE
- ---------------------------------------------------------------------------------------------------------------------
KEY INVESTMENTS The fund invests primarily in equity and equity-related securities of 'Asian companies'. The
fund considers Asian companies to include companies that are organized under the laws of any
country in the Asian region other than Japan, Australia and New Zealand. The fund also
considers companies to be 'Asian companies' if Salomon Brothers Asset Management Asia
Pacific Limited, the fund's subadviser, determines that they: (i) derive at least 50% of
their revenues from goods produced or sold, investments made, or services performed in or
with one or more of the Asian countries; (ii) maintain at least 50% of their assets in one
or more of the Asian countries; or (iii) have securities which are traded principally on the
stock exchange in an Asian country. The fund is not limited in its allocation of assets
among Asian countries. More than 25% of the fund's assets may be invested in each of Hong
Kong, Malaysia, Singapore and Thailand and their currencies.
- ---------------------------------------------------------------------------------------------------------------------
HOW THE In selecting portfolio securities, the subadviser seeks to identify specific industries and
SUBADVISER companies which offer the best relative potential for long-term capital appreciation across
SELECTS THE Asian markets. Individual country weights compared to the benchmark (the Morgan Stanley
FUND'S Capital International All Country Asia Free Ex-Japan Index) are managed tactically using
INVESTMENTS fundamental and quantitative analysis. In seeking to identify individual companies within
Asian industries, the subadviser tends to focus on companies that have the greatest growth
potential and have strong cash flows.
In evaluating specific industries and country weighting, the subadviser considers macro
economic factors such as government policies, market liquidity, industry competitiveness and
business trends in an effort to identify an optimal allocation of assets among sectors and
countries. The subadviser then employs a combination of quantitative and traditional
fundamental analysis to identify individual companies within these industries which exhibit
strong returns on equity, positive cash flows and favorable price-earnings ratios.
- ---------------------------------------------------------------------------------------------------------------------
PRINCIPAL RISKS Investors could lose money on their investment in the fund, or the fund may not perform as
OF INVESTING IN well as other investments, if any of the following occurs:
THE FUND
The Asian securities markets decline.
Economic, political or social instabilities significantly disrupt the principal financial
Investments in Asian markets in the Asian region.
companies involve a Factors creating volatility in one Asian country or emerging market negatively impact
substantial risk of security values or trading in countries in the region.
loss. The U.S. dollar appreciates against Asian currencies.
One or more governments in the region imposes restrictions on currency conversion or
trading.
Asian economies grow at a slower rate than expected or experience a downturn or recession.
In changing markets the fund may not be able to sell securities in desired amounts or at
prices it considers reasonable.
The manager's judgment about the attractiveness, relative value or potential appreciation
of a particular sector or security proves to be incorrect.
</TABLE>
Salomon Brothers Variable Series Funds Inc. - 15
<PAGE>
<PAGE>
<TABLE>
<S>
- -------------------------------------------------------------------------------------------------------------------
The Asian countries in which the fund invests have securities markets that are less
liquid and more volatile than markets in the U.S. and other developed countries. In Asian
countries there is generally less information available about issuers and markets because
of less rigorous disclosure and accounting standards and regulatory practices than in the
U.S. These risks are significantly increased in the case of those Asian countries which
have emerging markets. To the extent the fund concentrates its investments in one or more
Asian countries, such as Hong Kong, the fund will be subject to greater risks than if its
assets were not so concentrated.
The fund is not diversified, which means that it can invest a higher percentage of its
assets in any one issuer than a diversified fund. Being non-diversified may magnify the
fund's losses from events affecting a particular issuer.
<CAPTION>
<S> <C>
PRINCIPAL RISKS OF
INVESTING IN THE FUND
Investments in Asian
companies involve a
substantial risk of
loss.
</TABLE>
- --------------------------------------------------------------------------------
Because the fund has not yet commenced operations, the fund can not depict its
performance in the graphic and table form.
The fund's total return will vary from year to year, and its performance will
vary compared with that of unmanaged Asian region stock indices. Although
variations in the fund's performance are an indication of the risks of
investing in the fund, past performance does not necessarily indicate how the
fund will perform in the future.
<TABLE>
<CAPTION>
<S> <C>
TOTAL RETURN AND
PERFORMANCE
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------------------
SHAREHOLDER FEES (PAID DIRECTLY FROM YOUR INVESTMENT)
Maximum sales charge on purchases None
Maximum deferred sales charge on redemptions None
- -------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (PAID BY THE FUND AS
A % OF NET ASSETS)
Management fees 1.00%
- -------------------------------------------------------------------------------------------
Distribution and service (12b-1) fees None
Other expenses* 2.10%
- -------------------------------------------------------------------------------------------
Total annual fund operating expenses* 3.10%
*Based on estimated amounts for the fiscal year ending December 31, 1999.
FEES AND EXPENSES
This table sets forth the fees and
expenses you will pay if you invest
in shares of the fund. The manager
has agreed to waive a portion of
its management fee and reimburse
the fund for certain expenses so
that the total operating expenses
of the fund for the period ending
December 31, 1999 will be:
1.50%
The manager may discontinue this
waiver at any time.
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
NUMBER OF YEARS YOU OWN YOUR SHARES 1 YEAR 3 YEARS 5 YEARS 10 YEARS
Your costs would be $313 $ 957 $1,625 $ 3,411
The example assumes: You invest $10,000 for the period shown
You reinvest all distributions and dividends without a sales charge
The fund's operating expenses remain the same
Your investment has a 5% return each year
Redemption of your shares at the end of the period
<CAPTION>
<S> <C>
This example helps you compare
the cost of investing in the fund
with other mutual funds. Your
actual cost may be higher
or lower.
</TABLE>
Salomon Brothers Variable Series Funds Inc. -16
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
U.S. GOVERNMENT INCOME FUND
<TABLE>
<S> <C>
INVESTMENT The fund seeks to obtain a high level of current income.
OBJECTIVE
- ---------------------------------------------------------------------------------------------------------------------
KEY INVESTMENTS Under normal circumstances, the fund invests in debt securities and mortgage-backed
securities issued or guaranteed by the U.S. government, its agencies or instrumentalities.
The fund may also invest in private pools of mortgages the payment of principal and interest
on which is guaranteed by the U.S. government, its agencies or instrumentalities. Agency and
instrumentality securities may be backed by the full faith and credit of the U.S. Treasury,
by the right of the issuer to borrow from the U.S. government or only by the credit of the
issuer itself.
DURATION: The fund normally maintains an average portfolio effective duration of two to four
years. Duration is an approximate measure of the sensitivity of the market value of the
fund's portfolio to changes in interest rates.
- ---------------------------------------------------------------------------------------------------------------------
HOW THE MANAGER The manager focuses on identifying undervalued sectors and securities. Specifically, the
SELECTS THE FUND'S manager:
INVESTMENTS Monitors the spreads between U.S. Treasury and government agency or instrumentality issuers
and purchases agency and instrumentality issues that it believes will provide a yield
advantage
Determines sector and maturity weightings based on intermediate and long-term assessments
of the economic environment and relative value factors based on interest rate outlook
Uses research to uncover inefficient sectors of the government and mortgage markets and
adjusts portfolio positions to take advantage of new information
Measures the potential impact of supply/demand imbalances, yield curve shifts and changing
prepayment patterns to identify individual securities that balance potential return and risk
- ---------------------------------------------------------------------------------------------------------------------
PRINCIPAL RISKS Investors could lose money on their investment in the fund or the fund's performance could
OF INVESTING IN fall below other possible investments if any of the following occurs:
THE FUND Interest rates increase, causing the prices of fixed-income securities to decline and
reducing the value of the fund's investments.
As interest rates decline, the issuers of mortgage-related securities held by the fund may
pay principal earlier than scheduled, forcing the fund to reinvest in lower yielding
securities. This is called prepayment or call risk.
As interest rates increase, slower than expected principal payments may extend the average
life of fixed income securities, locking in below-market interest rates and reducing the
value of these securities. This is called extension risk.
Increased volatility in share price to the extent the fund holds mortgage derivative
securities because of their imbedded leverage or unusual interest rate reset terms.
The manager's judgment about interest rates or the attractiveness, value or income
potential of a particular security proves incorrect.
Payments of principal and interest on mortgage pools issued by government related
organizations are not guaranteed by the U.S. government. Although mortgage pools issued by
U.S. agencies are guaranteed with respect to payments of principal and interest, such
guarantee does not apply to losses resulting from declines in the market value of such
securities.
</TABLE>
Salomon Brothers Variable Series Funds Inc. - 17
<PAGE>
<PAGE>
<TABLE>
<S>
Because the fund has not yet commenced operations, the fund can not depict its performance
in the graphic and table form.
The fund's total return will vary from year to year, and its performance will vary compared
with that of unmanaged U.S. government securities indices. Although variations in the
fund's performance are an indication of the risks of investing in the fund, past
performance does not necessarily indicate how the fund will perform in the future.
<CAPTION>
<S> <C>
TOTAL RETURN AND
PERFORMANCE
</TABLE>
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------------------
SHAREHOLDER FEES (PAID DIRECTLY FROM YOUR INVESTMENT)
Maximum sales charge on purchases None
Maximum deferred sales charge on redemptions None
- -------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (PAID BY THE FUND AS A % OF NET ASSETS)
Management fees 0.60%
Distribution and service (12b-1) fees None
Other expenses* 1.91%
Total annual fund operating expenses* 2.51%
*Based on estimated amounts for the fiscal year ending December 31, 1999.
<CAPTION>
<S> <C>
FEES AND EXPENSES
This table sets forth the fees and
expenses you will pay if you invest
in shares of the fund. The manager
has agreed to waive a portion of its
management fee and reimburse the fund
for certain expenses so that the total
operating expenses of the fund for the
period ending December 31, 1999, will be:
1.00%
The manager may discontinue this waiver
at any time.
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
<CAPTION>
NUMBER OF YEARS YOU OWN YOUR SHARES 1 YEAR 3 YEARS 5 YEARS 10 YEARS
Your costs would be $254 $ 782 $1,334 $ 2,846
The example assumes: You invest $10,000 for the period shown
You reinvest all distributions and dividends without a sales charge
The fund's operating expenses remain the same
Your investment has a 5% return each year
Redemption of your shares at the end of the period
<CAPTION>
<S> <C>
This example helps you compare the
cost of investing in the fund with other
mutual funds. Your actual cost may be
higher or lower.
</TABLE>
Salomon Brothers Variable Series Funds Inc. - 18
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
MORE ON THE FUNDS' INVESTMENTS
<TABLE>
<CAPTION>
ADDITIONAL INVESTMENTS AND INVESTMENT TECHNIQUES
- --------------------------------------------------------------------------------
<S> <C>
Each fund's ASIA GROWTH FUND
investment objective Although the fund intends to be fully invested in
and its principal equity securities of Asian companies, the fund may
investment also invest up to 35% of its assets in fixed income
strategies and risks securities issued by U.S. and foreign governments,
are described under their agencies or instrumentalities and supranational
'Fund Goals and entities. The fund may invest up to 10% of its assets
Strategies.' in non-convertible debt securities rated below
investment grade, or, if unrated, of equivalent
This section quality as determined by the subadviser.
provides additional
information about CAPITAL FUND
the funds' The fund may invest in investment grade fixed-income
investments and securities and may invest up to 20% of its net assets
certain portfolio in non-convertible debt securities rated below
management investment grade or, if unrated, of equivalent
techniques the funds quality as determined by the manager. The fund may
may use. More invest without limit in convertible debt securities.
information about The fund emphasizes those convertible debt securities
the funds' that offer the appreciation potential of common
investments and stocks. The fund may also invest up to 20% of its
portfolio management assets in securities of foreign issuers.
techniques, some of
which entail risks, HIGH YIELD BOND FUND
is included in the Although the fund invests primarily in high yield
statement of securities, the fund may also invest up to 20% of its
additional assets in equity and equity related securities.
information (SAI).
INVESTORS FUND
Any policy or The fund may invest up to 5% of its net assets in
limitation for a non-convertible debt securities rated below
fund that is investment grade or, if unrated, of equivalent
expressed as a quality as determined by the manager. The fund may
percentage of assets invest without limit in convertible debt securities.
is considered only The fund may also invest up to 20% of its assets in
at the time of securities of foreign issuers.
purchase of
portfolio STRATEGIC BOND FUND
securities. The Although the fund invests primarily in fixed-income
policy will not be securities, the fund may also invest up to 20% of its
violated if these assets in equity and equity related securities. The
limitations are fund may invest up to 100% of its assets in foreign
exceeded because of currency denominated securities, including securities
changes in the of issuers located in emerging markets.
market value of the
fund's assets or for TOTAL RETURN FUND
any other reason. The fund may invest up to 20% of its assets in
securities of foreign issuers.
</TABLE>
Salomon Brothers Variable Series Funds Inc. - 19
<PAGE>
<PAGE>
<TABLE>
- --------------------------------------------------------------------------------
<S> <C>
EQUITY INVESTMENTS
Asia Growth Fund, Subject to its particular investment policies, each
Capital Fund, of these funds may invest in all types of equity
Investors Fund, and securities. Equity securities include common stocks
Total Return Fund traded on an exchange or in the over the counter
market, preferred stocks, warrants, rights,
convertible securities, depositary receipts, trust
certificates, limited partnership interests, shares
of other investment companies and real estate
investment trusts.
- --------------------------------------------------------------------------------
FIXED INCOME INVESTMENTS
All funds, but the Subject to its particular investment policies, each
following funds only fund may invest in fixed income securities. Fixed
to a limited extent: income investments include bonds, notes (including
Asia Growth Fund, structured notes), mortgage-related securities,
Capital Fund and asset-backed securities, convertible securities,
Investors Fund Eurodollar and Yankee dollar instruments, loan
participation and assignments, preferred stocks and
money market instruments. Fixed income securities may
be issued by U.S. and foreign corporations or
entities; U.S. and foreign banks; the U.S.
government, its agencies, authorities,
instrumentalities or sponsored enterprises; state and
municipal governments; supranational organizations;
and foreign governments and their political
subdivisions. Only certain of the funds may invest in
fixed income securities of foreign issuers. See
'Foreign and emerging markets investments' below.
Fixed income securities may have all types of
interest rate payment and reset terms, including
fixed rate, adjustable rate, zero coupon, contingent,
deferred, payment in kind and auction rate features.
High Yield Bond Each of these funds may invest in mortgage-backed and
Fund, Strategic Bond asset-backed securities. Mortgage-related securities
Fund, Total Return may be issued by private companies or by agencies of
Fund and U.S. the U.S. government and represent direct or indirect
Government Income participations in, or are collateralized by and
Fund payable from, mortgage loans secured by real
property. Asset-backed securities represent
participations in, or are secured by and payable
from, assets such as installment sales or loan
contracts, leases, credit card receivables and other
categories of receivables.
Certain debt instruments may only pay principal at
maturity or may only represent the right to receive
payments of principal or payments of interest on
underlying pools of mortgages or government
securities, but not both. The value of these types of
instruments may change more drastically than debt
securities that pay both principal and interest
during periods of changing interest rates. Principal
only mortgage backed securities are particularly
subject to prepayment risk. The fund may obtain a
below market yield or incur a loss on such
instruments during periods of declining interest
rates. Interest only instruments are particularly
subject to extension risk. For mortgage derivatives
and structured securities that have imbedded leverage
features, small changes in interest or prepayment
rates may cause large and sudden price movements.
Mortgage derivatives can also become illiquid and
hard to value in declining markets.
</TABLE>
Salomon Brothers Variable Series Funds Inc. - 20
<PAGE>
<PAGE>
<TABLE>
- --------------------------------------------------------------------------------
<S> <C>
Strategic Bond Fund, Each of these funds may also enter into mortgage
Total Return Fund dollar roll transactions to earn additional income.
and U.S. Government In these transactions, the fund sells a U.S. agency
Income Fund. mortgage-backed security and simultaneously agrees to
repurchase at a future date another U.S. agency
mortgage-backed security with the same interest rate
and maturity date, but generally backed by a
different pool of mortgages. The fund loses the right
to receive interest and principal payments on the
security it sold. However, the fund benefits from the
interest earned on investing the proceeds of the sale
and may receive a fee or a lower repurchase price.
The benefits from these transactions depend upon the
manager's ability to forecast mortgage prepayment
patterns on different mortgage pools. The fund may
lose money if, during the period between the time it
agrees to the forward purchase of the mortgage
securities and the settlement date, these securities
decline in value due to market conditions or
prepayments on the underlying mortgages.
- --------------------------------------------------------------------------------
CREDIT QUALITY If a security receives different ratings, a fund will
treat the securities as being rated in the highest
rating category. Credit rating criteria are applied
at the time a fund purchases a fixed income security.
A fund may choose not to sell securities that are
downgraded after their purchase below the fund's
minimum acceptable credit rating. Each fund's credit
standards also apply to counterparties to OTC
derivatives contracts.
INVESTMENT GRADE SECURITIES
Securities are investment grade if:
They are rated in one of the top four long-term
rating categories of a nationally recognized
statistical rating organization.
They have received a comparable short-term or other
rating.
They are unrated securities that the manager
believes are of comparable quality to investment
grade securities.
- --------------------------------------------------------------------------------
HIGH YIELD, LOWER Each of these funds may invest in fixed income
QUALITY SECURITIES securities that are high yield, lower quality
securities rated by a rating organization below its
High Yield Fund, top four long-term rating categories or unrated
Strategic Bond Fund securities determined by the manager to be of
and Total Return equivalent quality. The issuers
Fund. Each of the of lower quality bonds may be highly leveraged and
following funds only have difficulty servicing their debt, especially
to a limited extent: during prolonged economic recessions or periods of
Asia Growth Fund, rising interest rates. The prices of lower quality
Capital Fund and securities are volatile and may go down due to market
Investors Fund perceptions of deteriorating issuer creditworthiness
or economic conditions. Lower quality securities may
become illiquid and hard to value in down markets.
Salomon Brothers Variable Series Funds Inc. - 21
<PAGE>
<PAGE>
</TABLE>
<TABLE>
- --------------------------------------------------------------------------------
<S> <C>
FOREIGN AND EMERGING Each of these funds may invest in foreign securities.
MARKET INVESTMENTS Investing in foreign issuers may involve unique risks
compared to investing in the securities of U.S.
All funds except issuers. Some of these risks do not apply to larger
U.S. Government Fund more developed countries. These risks are more
pronounced to the extent the fund invests in issuers
in countries with emerging markets or if the fund
invests significantly in one country. These risks may
include:
Less information about non-U.S. issuers or markets
may be available due to less rigorous disclosure and
accounting standards or regulatory practices.
Asia Growth Fund, Many non-U.S. markets are smaller, less liquid and
High Yield Bond more volatile than U.S. markets. In a changing
Fund, Strategic Bond market, the manager may not be able to sell the
Fund and Total fund's portfolio securities in amounts and at prices
Return Fund may the manager considers reasonable.
invest in emerging
market issuers. The U.S. dollar may appreciate against non-U.S.
currencies or a foreign government may impose
restrictions on currency conversion or trading.
The economies of non-U.S. countries may grow at a
slower rate than expected or may experience a
downturn or recession.
Economic, political and social developments may
adversely affect the securities markets.
Foreign governmental obligations involve the risk
of debt moratorium, repudiation or renegotiation and
the fund may be unable to enforce its rights against
the issuers.
- --------------------------------------------------------------------------------
SOVEREIGN GOVERNMENT Each of these funds may invest in all types of fixed
AND SUPRANATIONAL income securities of governmental issuers in all
DEBT countries, including emerging markets. These
sovereign debt securities may include:
All funds except
U.S. Government Fund Fixed income securities issued or guaranteed by
governments, governmental agencies or
instrumentalities and political subdivisions located
in emerging market countries.
Fixed income securities issued by government owned,
controlled or sponsored entities located in emerging
market countries.
Interests in entities organized and operated for
the purpose of restructuring the investment
characteristics of instruments issued by any of the
above issuers.
Brady Bonds, which are debt securities issued under
the framework of the Brady Plan as a means for debtor
nations to restructure their outstanding external
indebtedness.
Fixed income securities issued by corporate
issuers, banks and
finance companies located in emerging market
countries.
Participations in loans between emerging market
governments and financial institutions.
Fixed income securities issued by supranational
entities such as the World Bank or the European
Economic Community. A supranational entity is a bank,
commission or company established or financially
supported by the national governments of one or more
countries to promote reconstruction or development.
</TABLE>
Salomon Brothers Variable Series Funds Inc. - 22
<PAGE>
<PAGE>
<TABLE>
- --------------------------------------------------------------------------------
<S> <C>
DERIVATIVES AND Each of these funds may, but need not, use derivative
HEDGING TECHNIQUES contracts, such as futures and options on securities,
securities indices or currencies; options on these
All funds except futures; forward currency contracts; and interest
U.S. Government Fund rate or currency swaps. The funds do not use
derivatives as a primary investment technique and
generally limit their use to hedging. However, the
funds may use derivatives for a variety of purposes
including:
To hedge against the economic impact of adverse
changes in the market value of its securities, due to
changes in stock market prices, currency exchange
rates or interest rates
As a substitute for buying or selling securities
To increase the fund's return as a non-hedging
strategy that may be considered speculative.
A derivative contract will obligate or entitle a fund
to deliver or receive an asset or cash payment that
is based on the change in value of one or more
securities, currencies or indices. Even a small
investment in derivative contracts can have a big
impact on a fund's market, currency and interest rate
exposure. Therefore, using derivatives can
disproportionately increase losses and reduce
opportunities for gains when market prices, currency
rates or interest rates are changing. A fund may not
fully benefit from or may lose money on derivatives
if changes in their value do not correspond
accurately to changes in the value of the fund's
holdings. The other parties to certain derivative
contracts present the same types of credit risk as
issuers of fixed-income securities. Derivatives can
also make a fund less liquid and harder to value,
especially in declining markets.
- --------------------------------------------------------------------------------
TEMPORARY DEFENSIVE Each fund may depart from its principal investment
INVESTING strategies in response to adverse market, economic or
political conditions by taking temporary defensive
positions in all types of money market and short-term
debt securities. If a fund takes a temporary
defensive position, it may be unable to achieve its
investment goal.
- --------------------------------------------------------------------------------
PORTFOLIO TURNOVER Each fund may engage in active and frequent trading
to achieve its principal investment strategies.
Frequent trading also increases transaction costs,
which could detract from a fund's performance.
- --------------------------------------------------------------------------------
</TABLE>
Salomon Brothers Variable Series Funds Inc. - 23
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
MANAGEMENT
Salomon Brothers Asset Management Inc. is the investment manager for each fund.
Together with its affiliates, the manager provides a broad range of fixed income
and equity investment advisory services to various individuals located
throughout the world. The manager's principal address is 7 World Trade Center,
New York, New York 10048. It is a wholly-owned subsidiary of Citigroup, Inc.
Citigroup businesses produce a broad range of financial services -- asset
management, banking and consumer finance, credit and charge cards, insurance,
investments, investment banking and trading -- and use diverse channels to make
them available to consumer and corporate customers around the world. Salomon
Brothers Asset Management, Ltd. an affiliate of the manager, provides advisory
services to the manager in connection with Strategic Income Fund's transactions
in currencies and non-dollar denominated debt securities. Its principal address
is Victoria Plaza, 111 Buckingham Palace Row, London SW1W 0SB England. Salomon
Brothers Asia Pacific Limited is subadviser to the Asia Growth Fund and manages
the Asia Growth Fund's assets under the supervision of the manager. Its
principal address is Three Exchange Square, Hong Kong. Neither Salomon Brothers
Asset Management Limited nor Salomon Brothers Asia Pacific Limited is
compensated by the funds for its services.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
FUND PORTFOLIO MANAGER SINCE PAST 5 YEARS' BUSINESS EXPERIENCE
<S> <C> <C> <C>
Asia Growth Giampaolo G. Inception director of Salomon Brothers Asset
Fund Guarnieri Management Asia Pacific Limited since
April 1995; senior portfolio investment
manager at Credit Agricole Asset
Management Limited prior to 1995
- ---------------------------------------------------------------------------------------------
Capital Fund Ross S. Margolies Inception managing director of the manager
Robert M. Donahue, Jr. July 1998 director and equity analyst with the
manager since February, 1997; analyst at
Gabelli & Company prior to 1997
High Yield Peter J. Wilby Inception managing director of the manager
Fund
- ---------------------------------------------------------------------------------------------
Investors Ross S. Margolies July 1998 managing director of the manager
Fund John B. Cunningham July 1998 director of the manager
Strategic Peter J. Wilby Inception managing director of the manager
Bond Roger Lavan Inception director of the manager
Fund
- ---------------------------------------------------------------------------------------------
Total Return George J. Williamson July 1998 director of the manager
Fund
U.S. Roger Lavan Inception director of the manager
Government
Income Fund
<CAPTION>
<S> <C>
THE PORTFOLIO MANAGERS
The portfolio managers are primarily
responsible for the day-to-day operation
of the funds indicated beside their names
and business experience.
</TABLE>
Salomon Brothers Variable Series Funds Inc. - 24
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
MANAGEMENT FEE
Asia Growth 1.00%
Fund
<S> <C>
---------------------------------------------------------------------
Capital Fund 0.85%
High Yield Fund 0.75%
---------------------------------------------------------------------
Strategic Bond 0.75%
Fund
Investors Fund 0.70%
---------------------------------------------------------------------
Total Return 0.80%
Fund
U.S. Government 0.60%
Income Fund
* Actual management fee may be less than contractual rate due to
expense limitations. The Asia Growth and U.S. Government Income
Funds had not begun operations as of December 31, 1998.
<CAPTION>
<S> <C>
MANAGEMENT FEES
As of January 31, 1999, SBAM and its
affiliates managed approximately $21
billion of assets.
</TABLE>
<TABLE>
<S> <C>
- -----------------------------------------------------------------------------------------------------------------
CFBDS, Inc. a registered broker-dealer, serves as each fund's distributor. DISTRIBUTOR
- -----------------------------------------------------------------------------------------------------------------
SSBC Fund Management Inc. ('SSBC'), an affiliate of the manager, serves as administrator for ADMINISTRATOR
each fund. For its services as administrator, each fund pays SSBC a fee at an annual rate of
0.05% of the applicable fund's average daily net assets.
- -----------------------------------------------------------------------------------------------------------------
Information technology experts are concerned about computer systems' ability to process YEAR 2000
date-related information on and after January 1, 2000. This situation, commonly known as the ISSUE
'Year 2000' issue, could have an adverse impact on the funds. The cost of addressing the Year
2000 issue, if substantial, could adversely affect companies and governments that issue
securities held by the funds. Issuers of municipal securities and issuers located outside of
the U.S. may be more susceptible to the risks associated with the Year 2000 issue. The
manager, administrator and distributor are addressing the Year 2000 issue for their systems.
Each fund has been informed by its other service providers that they are taking similar
measures. Although the funds do not expect the Year 2000 issue to adversely affect them, the
funds cannot guarantee that the efforts of each fund (limited to requesting and receiving
reports from its service providers) or their service providers to correct the problem will be
successful.
</TABLE>
Salomon Brothers Variable Series Funds Inc. - 25
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
SHARE TRANSACTIONS
<TABLE>
<S> <C>
AVAILABILITY OF THE Each fund may sell its shares directly to separate accounts established and maintained by
FUNDS insurance companies for the purpose of funding variable annuity and variable life insurance
Individuals may not contracts and to certain qualified pension and retirement plans. The variable insurance
purchase shares products and qualified plans may or may not make investments in all the funds described in
directly from the this prospectus. Shares of the funds are sold at net asset value.
funds. You should read The interests of different variable insurance products and qualified plans investing in a
the prospectus for fund could conflict due to differences of tax treatment and other considerations. The funds
your insurance currently do not foresee any disadvantages to investors arising from the fact that each fund
company's variable may offer its shares to different insurance company separate accounts that serve as the
contract to learn how investment medium for their variable annuity and variable life products and to qualified
to purchase a variable plans. Nevertheless, the board of directors intends to monitor events to identify any
contract based on the material irreconcilable conflicts which may arise, and to determine what action, if any,
funds. should be taken in response to these conflicts. If a conflict were to occur, one or more
insurance companies' separate accounts or qualified plans might be required to withdraw
their investments in one or more funds and shares of another fund may be substituted.
In addition, the sale of shares may be suspended or terminated if required by law or
regulatory authority or is in the best interests of the funds' shareholders. Each fund
reserves the right to reject any specific purchase order.
- ---------------------------------------------------------------------------------------------------------------------
REDEMPTION OF SHARES Redemption requests may be placed by separate accounts of participating insurance companies
and by qualified plans. The redemption price of the shares of each fund will be the net
asset value next determined after receipt by the fund of a redemption request in good order.
The value of redeemed shares may be more or less than the price paid for the shares. Sales
proceeds will normally be forwarded by bank wire to the selling insurance company or
qualified plan on the next business day after receipt of a redemption request in good order
but in no event later than 7 days following receipt of instructions. Each fund may suspend
sales or postpone payment dates during any period in which any of the following conditions
exist:
the New York Stock Exchange is closed;
trading on the New York Stock Exchange is restricted;
an emergency exists as a result of which disposal by the fund of securities is not
reasonably practicable or it is not reasonably practicable for a fund to fairly determine
the value of its net assets; or
as permitted by SEC order in extraordinary circumstances.
</TABLE>
Salomon Brothers Variable Series Funds Inc. - 26
<PAGE>
<PAGE>
<TABLE>
<S> <C>
- ---------------------------------------------------------------------------------------------------------------------
SHARE PRICE Each fund's net asset value is the value of its assets minus its liabilities. Each fund
calculates its net asset value every day the New York Stock Exchange is open. Each fund
calculates its net asset value when regular trading closes on the Exchange (normally 4:00
p.m., Eastern time).
The funds generally value their securities based on market prices or quotations. The funds'
currency conversions are done when the London stock exchange closes, which is 12 noon
eastern time. When market prices are not available, or when the manager believes they are
unreliable or that the value of a security has been materially affected by events occurring
after a foreign exchange closes, the funds may price those securities at fair value. Fair
value is determined in accordance with procedures approved by the funds' board of directors.
A fund that uses fair value to price securities may value those securities higher or lower
than another fund that uses market quotations to price the same securities. International
markets may be open on days when U.S. markets are closed and the value of foreign securities
owned by a fund could change on days when an insurance company separate account or a
qualified plan cannot buy or redeem shares.
In order to buy, redeem or exchange shares at that day's price, an insurance company
separate account or a qualified plan must place its order with
the transfer agent before the New York Stock Exchange closes. If the New York Stock Exchange
closes early, the order must be placed prior to the actual closing time. Otherwise, the
investor will receive the next business day's price.
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES
<S> <C>
Each fund intends to qualify and be taxed as a 'regulated investment company'
under Subchapter M of the Internal Revenue Code of 1986 (the 'Code'), as
amended. In order to qualify to be taxed as a regulated investment company, each
fund must meet certain income and diversification tests and distribution
requirements. As a regulated investment company meeting these requirements, a
fund will not be subject to federal income tax on its net investment income and
net capital gains that it distributes to its shareholders. All income and
capital gain distributions are automatically reinvested in additional shares of
the fund at net asset value and are includable in gross income of the separate
accounts holding such shares. See the accompanying contract prospectus for
information regarding the federal income tax treatment of distributions to the
separate accounts and to holders of the contracts.
Each fund intends to pay out all of its net investment income and net realized
capital gains for each year. The funds normally pay dividends and distribute
capital gain, if any, as follows:
DIVIDENDS AND DISTRIBUTIONS
Annual distributions of income and capital gain are made at the end of the
year in which the income or gain is realized, or the beginning of the next
year.
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FUND INCOME DIVIDEND CAPITAL GAIN DISTRIBUTIONS
DISTRIBUTIONS DISTRIBUTIONS MOSTLY FROM
<S> <C> <C> <C>
Asia Growth Fund annually annually gain
Capital Fund annually annually gain
High Yield Fund annually annually income
Investors Fund annually annually gain
Strategic Bond Fund annually annually income
Total Return Fund annually annually both
U.S. Government annually annually income
Income Fund
- ---------------------------------------------------------------------------------
</TABLE>
Salomon Brothers Variable Series Funds Inc. - 27
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
The financial highlights tables are intended to help you understand the
performance of each share for the past 5 years (or since inception if less than
5 years). Certain information reflects financial results for a single share.
Total return represents the rate that a shareholder would have earned (or lost)
on a fund share assuming reinvestment of all dividends and distributions. The
information in the following tables was audited by PricewaterhouseCoopers LLP,
independent auditors, whose report, along with the fund's financial statements,
are included in the annual report (available upon request).
No information is shown for either Asia Growth Fund or U.S. Government Income
Fund since no shares for either fund were outstanding during the periods shown.
For a share of capital stock outstanding throughout each period ended December
31:
<TABLE>
<CAPTION>
CAPITAL HIGH YIELD INVESTORS
FUND BOND FUND FUND
- --------------------------------------------------------------------------------------------------------------------------------
1998(1) 1998(2) 1998(3)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 10.00 $ 10.00
------- ----------- ---------
INCOME FROM OPERATIONS:
Net investment income (4) 0.09 0.43 0.05
Net realized and unrealized gain (loss) 1.72 (0.42) 1.01
------- ----------- ---------
Total Income From Operations 1.81 0.01 1.06
------- ----------- ---------
LESS DISTRIBUTIONS FROM:
Net investment income (0.09) (0.43) (0.05)
Net realized gains (0.15) (0.00)* (0.00)*
------- ----------- ---------
Total Distributions (0.24) (0.43) (0.05)
------- ----------- ---------
NET ASSET VALUE, END OF PERIOD $ 11.57 $ 9.58 $ 11.01
------- ----------- ---------
------- ----------- ---------
TOTAL RETURN'DD' 18.12% 0.14% 10.55%
NET ASSETS, END OF PERIOD (000S) $ 4,290 $ 6,949 $ 13,038
RATIOS TO AVERAGE NET ASSETS (4)'D':
Expenses 1.00% 1.00% 1.00%
Net investment income 1.35% 7.25% 1.14%
PORTFOLIO TURNOVER RATE 116% 37% 62%
</TABLE>
---------------------------------------------------------------
(1) Capital Fund commenced operations on February 17, 1998.
(2) High Yield Bond Fund commenced operations on May 1, 1998.
(3) Investors Fund commenced operations on February 17, 1998.
(4) SBAM has waived all if its management fees for the period ended December
31, 1998 and reimbursed expenses of $33,776, $11,942 and $17,030 for
Capital Fund, High Yield Fund and Investors Fund, respectively. If such
fees were not waived or expenses reimbursed, the per share decrease in net
investment income and the actual annualized expense ratio would have been
$0.15 and 3.26% for the Capital Fund, $0.06 and 2.04% for the High Yield
Bond Fund and $0.04 and 2.07% for the Investors Fund, respectively.
* Amount represents less than $0.01.
'DD' Total return is not annualized as it may not be representative of the
total return for the year.
'D' Annualized.
Salomon Brothers Variable Series Funds Inc. - 28
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
For a share of capital stock outstanding throughout each period ended December
31:
<TABLE>
<CAPTION>
STRATEGIC TOTAL RETURN
BOND FUND FUND
- --------------------------------------------------------------------------------------------------------------------------
1998(1) 1998(2)
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $ 10.00
--------- ------------
INCOME FROM OPERATIONS:
Net investment income (3) 0.38 0.15
Net realized and unrealized gain 0.24 0.43
--------- ------------
Total Income From Operations 0.62 0.58
--------- ------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.47) (0.15)
Net realized gains (0.01) (0.03)
Capital (0.01) --
--------- ------------
Total Distributions (0.49) (0.18)
--------- ------------
NET ASSET VALUE, END OF PERIOD $ 10.13 $ 10.40
--------- ------------
--------- ------------
TOTAL RETURN'DD' 6.18% 5.83%
NET ASSETS, END OF PERIOD (000S) $10,438 $ 5,971
RATIOS TO AVERAGE NET ASSETS (3)'D':
Expenses 1.00% 1.00%
Net investment income 6.23% 3.57%
PORTFOLIO TURNOVER RATE 84% 56%
</TABLE>
---------------------------------------------------------------
(1) Strategic Bond Fund commenced operations on February 17, 1998.
(2) Total Return Fund commenced operations on February 17, 1998.
(3) SBAM has waived all of its management fees for the period ended December
31, 1998 and reimbursed expenses of $2,558 and $26,591 for the Strategic
Bond and Total Return Funds, respectively. If such fees were not waived or
expenses reimbursed, the per share decrease in net investment income and
the actual annualized expense ratio would have been $0.04 and 1.79% for
Strategic Bond Fund and $0.08 and 2.90% for Total Return Fund,
respectively.
'DD' Total return is not annualized, as it may not be representative of the
total return for the year.
'D' Annualized.
Salomon Brothers Variable Series Funds Inc. - 29
<PAGE>
<PAGE>
This Page Intentionally Left Blank
<PAGE>
<PAGE>
SALOMON BROTHERS VARIABLE SERIES FUNDS INC
- --------------------------------------------------------------------------------
Capital Fund
Investors Fund
Total Return Fund
High Yield Bond Fund
Strategic Bond Fund
Asia Growth Fund
U.S. Government Income Fund
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION ABOUT THE FUNDS
SHAREHOLDER REPORTS. Annual and semiannual reports to shareholders provide
additional information about the funds' investments. These reports discuss the
market conditions and investment strategies that significantly affected each
fund's performance during its last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION. The statement of additional information
provides more detailed information about each fund. It is incorporated by
reference into (is legally a part of) this combined prospectus.
HOW TO OBTAIN ADDITIONAL INFORMATION.
You can make inquiries about the fund or obtain shareholder reports or the
statement of additional information (without charge) by contacting the
transfer agent at 1-800-446-1013, by calling Salomon Brothers Asset Management
or writing the funds at 7 World Trade Center, 38th Floor, New York, NY 10013.
You can also review the funds' shareholder reports, prospectus and statement
of additional information at the Securities and Exchange Commission's Public
Reference Room in Washington, D.C. You can get copies of these materials for a
fee by writing to the Public Reference Section of the Commission, Washington,
D.C. 20549-6009. Information about the public reference room may be obtained
by calling 1-800-SEC-0330. You can get the same reports and information free
from the Commission's Internet web site -- http://www.sec.gov
If someone makes a statement about the funds that is not in this prospectus, you
should not rely upon that information. Neither the funds nor the distributor is
offering to sell shares of the funds to any person to whom the funds may not
lawfully sell their shares.
(Investment Company Act file no. 811-08443)
<PAGE>
<PAGE>
April 30, 1999
STATEMENT OF ADDITIONAL INFORMATION
SALOMON BROTHERS VARIABLE SERIES FUNDS INC
7 WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
888-777-1012
Salomon Brothers Variable Series Funds Inc consists of Salomon Brothers Variable
Investors Fund ('Investors Fund'), Salomon Brothers Variable Capital Fund
('Capital Fund'), Salomon Brothers Variable Total Return Fund ('Total Return
Fund'), Salomon Brothers Variable High Yield Bond Fund ('High Yield Bond Fund'),
Salomon Brothers Variable Strategic Bond Fund ('Strategic Bond Fund'), Salomon
Brothers U.S. Government Income Fund ('U.S. Government Income Fund'), and
Salomon Brothers Variable Asia Growth Fund ('Asia Growth Fund') (each, a 'fund'
and collectively, the 'funds'). Each of the funds is an investment portfolio of
the Salomon Brothers Variable Series Funds Inc (the 'Company'), 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. Each of the funds, except Capital Fund and Asia Growth
Fund, is classified as a diversified fund under the Investment Company Act of
1940, as amended (the '1940 Act').
The Prospectus indicates the extent to which each fund may purchase the
instruments or engage in the investment activities described below. References
herein to the investment manager means Salomon Brothers Asset Management Inc
('SBAM'), except with respect to Asia Growth Fund, in which case it means
Salomon Brothers Asset Management Asia Pacific Limited ('SBAM AP').
This Statement of Additional Information ('SAI') is not a prospectus and is only
authorized for distribution only when preceded or accompanied by the Company's
current Prospectus, dated April 30, 1999. This SAI supplements and should be
read in conjunction with the Prospectus, a copy of which may be obtained without
charge by writing the funds at the address, or by calling the toll-free
telephone number, listed above.
CONTENTS
<TABLE>
<S> <C>
Directors and Executive Officers of the Company............................................................ 2
Investment Objectives and Investment Policies.............................................................. 4
Risk Factors............................................................................................... 36
Investment Limitations..................................................................................... 46
Portfolio Turnover......................................................................................... 48
Portfolio Transactions..................................................................................... 48
Taxes...................................................................................................... 49
Performance Data........................................................................................... 51
Net Asset Value............................................................................................ 53
Additional Purchase and Redemption Information............................................................. 53
Investment Manager......................................................................................... 54
Administrator.............................................................................................. 56
Distributor................................................................................................ 56
Expenses................................................................................................... 56
Custodian and Transfer Agent............................................................................... 57
Independent Accountants.................................................................................... 57
Counsel.................................................................................................... 57
Capital Stock.............................................................................................. 57
Financial Statements....................................................................................... 58
Appendix -- Ratings of Debt Obligations.................................................................... A-1
</TABLE>
<PAGE>
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Overall responsibility for management and supervision of the Company rests
with the Company's Board of Directors. The Directors approve all significant
agreements between the Company and the companies that furnish services to the
funds, including agreements with the Company's distributor, administrator,
investment manager, custodian and transfer agent. The day-to-day operations of
the Company are delegated to the Company's investment manager.
The directors and executive officers of the Company are listed below. The
address of each, unless otherwise indicated, is Seven World Trade Center, New
York, New York 10048. Certain of the directors and officers are also directors
and officers of one or more other investment companies for which SBAM, the
funds' investment manager, acts as investment adviser. 'Interested persons' of
the Company (as defined in the 1940 Act) are indicated by an asterisk.
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION(S) PRINCIPAL OCCUPATION(S) HELD PAST 5 YEARS
- ------------------------------------ ----------------------- ----------------------------------------------------
<S> <C> <C>
Charles F. Barber .................. Director and Chairman, Consultant. Formerly, Chairman of the Board of
66 Glenwood Drive Audit Committee ASARCO Incorporated.
Greenwich, CT 06830
Age: 82
Carol L. Colman .................... Director and Audit President of Colman Consulting Co., Inc.
Colman Consulting Co., Inc. Committee Member
278 Hawley Road
North Salem, NY 10560
Age: 53
Daniel P. Cornin ................... Director and Audit Vice President and General Counsel of Pfizer
Pfizer, Inc. Committee Member International Inc. Senior Assisting General Counsel
235 East 42nd Street of Pfizer, Inc.
New York, NY 10017
Age: 52
Heath B. McLendon .................. Director, Chairman and Managing Director, Salomon Smith Barney, Inc.
Age: 65 President ('SSB'), from 1993 to present. Chairman, SSBC Fund
Management Inc. ('SSBC') from 1993 to present.
Giampaolo G. Guarnieri ............. Executive Vice Member of Board of Directors and Head SBAM AP from
Salomon Brothers Asset Management President January 1997 to present. Director of SBAM AP since
Asia Pacific Limited 1996. Vice President and Senior Portfolio Manager of
Three Exchange Square SBAM AP from April 1995 to June 1996. From April
Hong Kong 1995 to January 1996, Vice President and Senior Vice
Age: 34 President of Salomon Brothers Hong Kong Limited.
From January 1992 to March 1995, Senior Portfolio
Investment Manager of Credit Agricole Asset
Management (South East Asia) Limited.
Peter J. Wilby ..................... Executive Vice Managing Director of SBAM and SSB since January
Age: 40 President 1996. Prior to January 1996, Director of SBAM and
SSB.
Beth A. Semmel ..................... Executive Vice Managing Director of SBAM and SSB since December
Age: 38 President 1997. From May 1993 to December 1995, Vice President
of SBAM and SBI.
Ross S. Margolies .................. Executive Vice Managing Director of SBAM since November 1997. Prior
Age: 39 President to November 1997, Director of SBAM and SSB.
</TABLE>
2
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION(S) PRINCIPAL OCCUPATION(S) HELD PAST 5 YEARS
- ------------------------------------ ----------------------- ----------------------------------------------------
<S> <C> <C>
Eliza Lau .......................... Vice President Vice President and Portfolio Manager of SBAM AP
Salomon Brothers Asset since March 1996. From July 1994 to March 1996, Vice
Management Asia Pacific Limited President and Portfolio Manager of Salomon Brothers
Three Exchange Square Limited; from October 1991 to July 1994, research
Hong Kong analyst with SBI.
Age: 35
John B. Cunningham ................. Vice President Director of SBAM since 1991.
Age: 35
George J. Williamson ............... Executive Vice Director of SBAM and Salomon Smith Barney since
Age: 66 President January 1999. Prior to January 1999, he was a Vice
President of SBAM since 1990.
Roger M. Lavan ..................... Vice President Director of SBAM since January 1996. Prior to
Age: 35 January 1996 he was a Vice President of SBAM since
1990.
</TABLE>
DIRECTORS COMPENSATION
It is estimated that each Director of the Company, except those deemed
'interested persons' under the 1940 Act will receive $6,000 per year plus $500
for each meeting attended as compensation for serving as director. The Company
does not provide any pension or retirement benefits to directors. No
remuneration will be paid by the Company to Directors who are employees of SBAM
or its affiliates, and may therefore be considered interested persons under the
1940 Act.
<TABLE>
<CAPTION>
VARIABLE SERIES FUNDS
--------------------------------------------
COMPENSATION AGGREGATE
AGGREGATE FROM OTHER COMPENSATION
COMPENSATION FUND ADVISED FROM FUND
FROM FUND BY SBAM COMPLEX
------------ ------------ ------------
<S> <C> <C> <C>
Charles F. Barber.................................................. $ 7,217.00 $138,248.00 $146,465.00
Carol L. Colman.................................................... 7,217.00 53,298.00 60,515.00
Daniel P. Cornin................................................... 7,217.00 67,250.00 74,467.00
</TABLE>
As of the date hereof directors and officers of the Company, individually and as
a group, beneficially owned less than 1% of the outstanding shares of the funds.
PRINCIPAL HOLDERS OF SECURITIES
The following lists shareholders of record who held 5% or more of the
outstanding securities of the Funds as of April 1, 1999. Shareholders who own
greater than 25% of the outstanding shares of a class of shares are deemed to be
'control persons', as defined in the 1940 Act of such class.
<TABLE>
<CAPTION>
PERCENTAGE
FUND SHAREHOLDER HELD
- ------------------------------------------ -------------------------------------------------------- ----------
<S> <C> <C>
Asia Growth Fund.......................... Salomon Brothers Asset Management Inc 100 %
7 World Trade Center
New York, NY 10048
Capital Fund.............................. The Travelers Insurance Co. 39.655%
One Tower Square 5M5
Hartford, CT 06183
Salomon Brothers Holding Co Inc 35.183%
7 World Trade Center
New York, NY 10048
</TABLE>
3
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE
FUND SHAREHOLDER HELD
- ------------------------------------------ -------------------------------------------------------- ----------
<S> <C> <C>
Ohio National Life Co 12.980%
One Financial Way
Cincinnati, OH 45242
Sun Life of Canada (U.S.) 5.204%
PO Box 9134
Boston, MA 02117
High Yield Fund........................... Salomon Brothers Holding Co Inc 51.410%
7 World Trade Center
New York, NY 10048
The Travelers Insurance Co. 37.354%
One Tower Square 5M5
Hartford, CT 06183
The Travelers Insurance Co. 11.410%
One Tower Square 5M5
Hartford, CT 06183
Investors Fund............................ The Travelers Insurance Co. 36.865%
One Tower Square 5M5
Hartford, CT 06183
The Travelers SEP Account TM2 for Variable 34.764%
Annuities of The Travelers Insurance Co.
One Tower Square 5M5
Hartford, CT 06183
Strategic Bond Fund....................... The Travelers Insurance Co. 19.441%
One Tower Square 5M5
Hartford, CT 06183
Total Return Fund......................... Sun Life of Canada (U.S.) 50.214%
PO Box 9134
Boston, MA 02117
The Travelers Insurance Co. 13.613%
One Tower Square 5M5
Hartford, CT 06183
Ohio National Life Co 10.347%
One Financial Way
Cincinnati, OH 45242
Life of Virginia/GEFA 10.202%
6610 W Broad Street
Richmond, VA 23230
The Travelers Insurance Co. 8.092%
One Tower Square 5M5
Hartford, CT 06183
U.S. Government Income Fund............... Salomon Brothers Asset 100 %
Management Inc
7 World Trade Center
New York, NY 10048
</TABLE>
INVESTMENT OBJECTIVES AND INVESTMENT POLICIES
ASIA GROWTH FUND
General. Asia Growth Fund's objective is to achieve long-term capital
appreciation. The fund seeks to achieve its objective by investing at least 65%
of its total assets in equity and equity-related securities of Asian Companies.
Equity Securities. Equity securities in which Asia Growth Fund may invest
include common and preferred stocks (including convertible preferred stock),
bonds, notes and debentures convertible into common and preferred stock, stock
purchase warrants and rights, equity-linked debt securities, equity interests in
trusts, partnerships, joint ventures or similar enterprises, and American,
Global or other types of Depositary Receipts. Equity-linked debt securities are
debt instruments whose prices are indexed to the prices of equity securities or
securities indices. In other words, the value
4
<PAGE>
<PAGE>
at maturity or coupon rate of these equity-linked debt instruments is determined
by reference to a specific instrument or statistic. The performance of
equity-linked debt instruments depends to a great extent on the performance of
the security or index to which they are indexed, and may also be influenced by
interest rate changes in the United States and abroad. At the same time, these
instruments are subject to the credit risks associated with the issuer of the
security, and their values may decline substantially if the issuer's
creditworthiness deteriorates. Indexed instruments may be more volatile than the
underlying instruments.
Investment Limitations. There are no prescribed limits on geographic asset
distributions among Asian countries and from time to time, SBAM AP expects to
invest a significant portion of the fund's assets in Hong Kong, Malaysia,
Singapore and Thailand. Investments in each of these countries may from time to
time exceed 25% of the Fund's total assets. In addition, more than 25% of the
fund's total assets may be denominated or quoted in the currencies of any one or
more of such countries. On July 1, 1997, Britain passed Hong Kong's sovereignty
to China. The long-term political, social and financial ramifications of China's
assumption of sovereignty over Hong Kong, and the impact on the financial
markets in Hong Kong, Asia or elsewhere, are uncertain.
Investment Style. In pursuing Asia Growth Fund's investment objective, SBAM AP
will combine a traditional fundamental approach towards evaluating industry
sectors and individual securities of Asian companies with a risk management
driven approach seeking to keep the fund's volatility of return in line with or
lower than that currently experienced in the Asian markets.
SBAM AP expects to focus on certain industry groups across Asian countries in an
attempt to identify and capture the relative value of such groups on a
pan-regional basis. SBAM AP will research individual companies in an effort to
identify the investment opportunities within these industry groups which will
provide long-term capital appreciation. In addition, SBAM AP intends to meet the
management of individual companies on a periodic basis. As part of the fund's
risk management objective, SBAM AP will also concentrate on macroeconomic issues
and other variables influencing the direction of monetary policies followed by
Asian central banks.
The investment process to be implemented by SBAM AP will consist of the three
following principal (and potentially overlapping) types of approaches:
Pan Regional Industry Group Decisions. SBAM AP will seek to identify the
pan-regional industrial sectors which are likely to exhibit attractive returns
over the long-term. In selecting such industrial sectors, SBAM AP will focus on
industry cycles and competitiveness as well as the industrial characteristics of
the Asian economies. In addition, SBAM AP will review government regulations,
industrial policies, access to technology and industrial research reports
provided by industrial companies or associations and securities dealers in Asian
countries. SBAM AP will focus on those industries which represent meaningful
weightings in the total market capitalization of the Asian countries including,
but not limited to, telecommunications, consumer durables and nondurables, food
and beverage, electronics, hotels, power engineering and generation, basic
industries, public utilities, property and financial sectors. SBAM AP believes
that an investment process that places emphasis on industry groups is
appropriate given the current state of economic and financial integration being
achieved by the Asian countries and the relatively significant concentration of
market capitalization in Asian countries toward certain industrial sectors.
Fundamental Analysis. In order to identify the most attractive investment
opportunities within industry groups, SBAM AP will employ extensive research to
select investments in Asian countries that offer long-term growth potential for
investors. While the fund generally seeks to invest in securities of larger
companies within the particular Asian market, it may also invest in the
securities of medium and smaller companies that, in the opinion of SBAM AP, have
potential for growth. In particular, SBAM AP will employ the following
three-step process to evaluate particular investment opportunities for the fund.
Screening Process. SBAM AP will implement a systematic screening process in an
effort to identify individual securities it believes likely to exhibit
attractive returns over the long term. SBAM AP will screen companies according
to factors such as the perceived quality of their management and
5
<PAGE>
<PAGE>
business, overall sustainable competitiveness, historical earnings, dividend
records over at least a full business cycle, liquidity, trading volumes and
historical and expected volatility.
Financial Analysis Process. The financial analysis of selected companies will
focus on evaluating the fundamental value of the enterprise. SBAM AP will use a
value-driven process which will emphasize quantitative analysis based on return
on equity ('ROE') and its components, such as operating margins, financial
leverage, asset turnover and interest and tax burdens. In addition, the
company's cash flow generating capabilities and return on assets will be
considered. SBAM AP believes that ROE and cash flow dynamics are appropriate
variables when analyzing companies which operate in high growth markets, such as
Asia, as the ability of such companies to capture this growth by using the right
allocation of resources and asset financing is of utmost importance.
Valuation Process and Volatility Analysis. The valuation process will focus on
Price Earnings Ratio ('PER') calculations and comparisons with historical
relative PER bands and local market conditions. SBAM AP will use measures such
as PER/growth, and will evaluate whether the security enjoys accelerating
earnings growth momentum due to management changes or the introduction of new
products and/or services. In addition, where appropriate, SBAM AP will conduct
specific dividend discount model and discount cash flow analyses for specific
securities with predictable cash flows or dividend streams. Through the use of
this analysis, SBAM AP will attempt to identify companies with Strong potential
for appreciation relative to their downside exposure. Lastly, SBAM AP will
conduct a volatility analysis on selected securities in an effort to forecast
the expected risk of such securities and compare the results of such risk
analysis with these securities' expected returns. Investments may be made in
companies that do not have extensive operating experience provided that SBAM AP
believes such companies nevertheless have significant growth potential.
Risk Management and Macroeconomic/Top-Down Analysis. SBAM AP will also consider
macroeconomic variables, such as liquidity and capital flows, foreign equity and
industrial investments and the direction of monetary policies in the Asian
countries in an effort to capture individual market movements as well as attain
an optimal asset allocation mix and to identify the appropriate risk management
parameters for the fund. The macroeconomic data SBAM AP will monitor and analyze
includes, but is not limited to, gross domestic product growth, balance of
payments and current account balances, budget deficits or surpluses, inflation
and interest rates. SBAM AP intends to meet with central bankers, regional
economists and strategists on a regular basis to assess the present and future
direction of monetary policies and their likely impact on the markets of the
Asian countries.
Risk Management. As part of the fund's risk management approach and in an
attempt to better assess and control the fund's overall risk level on an ongoing
basis, SBAM AP will employ a quantitative analysis at each stage of the
investment process which will consist of analyzing and forecasting volatilities
of the Asian markets and securities. SBAM AP will use a number of
volatility-control strategies, including derivative instruments (as discussed
below), in an effort to attain an optimal asset allocation mix, for hedging
purposes in an attempt to control the fund's overall risk level and to obtain
exposure to markets in the Asian countries which have restrictions on foreign
investment.
Other Investment Strategies. In order to maintain liquidity, Asia Growth Fund
may hold and/or invest up to 35% of its total assets in debt securities
denominated in U.S. dollars or in another freely convertible currency including:
(1) short-term (less than 12 months to maturity) and medium-term (not greater
than five years to maturity) obligations issued or guaranteed by (a) the U.S.
government or the government of an Asian country, their agencies or
instrumentalities or (b) international organizations designated or supported by
multiple foreign governmental entities to promote economic reconstruction or
development ('supranational entities'); (2) finance company obligations,
corporate commercial paper and other short-term commercial obligations, in each
case rated, or issued by companies with similar securities outstanding that are
rated, 'Prime-1' or 'A' or better by Moody's Investors Service ('Moody's') or
'A-1' or 'A' or better by Standard and Poor's ('S&P') or, if unrated, of
comparable quality as determined by SBAM AP; (3) obligations (including
certificates of deposit, time deposits, demand deposits and bankers'
acceptances) of
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banks; and (4) repurchase agreements (as described below under 'Risk Factors')
with respect to securities in which the fund may invest. If at some future date,
in the opinion of SBAM AP, adverse conditions prevail in the securities markets
which makes the fund's investment strategy inconsistent with the best interests
of the fund's shareholders, the fund may invest its assets without limit in such
instruments.
Asia Growth Fund may enter into repurchase agreements and reverse repurchase
agreements, may purchase securities on a firm commitment basis, including
when-issued securities and may lend portfolio securities. The fund may also
invest in investment funds.
CAPITAL FUND
General. In seeking capital appreciation, Capital Fund may purchase securities
of seasoned issuers, relatively smaller and newer companies as well as in new
issues and may be subject to wide fluctuations in market value. Portfolio
securities may have limited marketability or may be widely and publicly traded.
The fund will not concentrate its investments in any particular industry.
Investment Grade Debt Securities. Capital Fund intends to invest primarily in
common stocks, or securities convertible into or exchangeable for common stocks,
such as convertible preferred stocks or convertible debentures. To meet
operating expenses and to meet anticipated redemption requests, the fund
generally holds a portion of its assets in short-term fixed income securities
(government obligations or investment grade debt securities) or cash or cash
equivalents. The fund's short-term investments may include repurchase agreements
with banks or brokers-dealers. When management deems it appropriate, for
temporary defensive purposes, the fund may invest without limitation in
investment grade fixed-income securities or hold assets in cash or cash
equivalents. Investment grade debt securities are debt securities rated BBB or
better by S&P or Baa or better by Moody's, or if rated by other rating agencies
or if unrated, securities deemed by SBAM to be of comparable quality.
Investments in such investment grade fixed-income securities may also be made
for the purpose of capital appreciation, as in the case of purchases of bonds
traded at a substantial discount or when SBAM believes interest rates may
decline. 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 in 'Risk Factors.'
Below Investment Grade Securities. Capital Fund from time to time may invest up
to 20% of its net assets in non-convertible debt securities rated below
investment grade by S&P and Moody's with no minimum rating required or
comparable unrated securities. There is no limit on the amount of the fund's
assets that can be invested in convertible securities rated below investment
grade. The fund may invest up to 20% of the value of the fund's assets in
securities of foreign issuers.
Capital Fund enters into repurchase agreements with respect to securities in
which it may otherwise invest. In addition, in order to meet redemptions or to
take advantage of promising investment opportunities without disturbing an
established portfolio, the fund may borrow up to an aggregate of 15% of the
value of its total assets taken at the time of borrowing. In addition, the fund
may borrow for temporary or emergency purposes an aggregate amount which may not
exceed 5% of the value of its total assets at the time of borrowing. The fund
shall borrow only from banks. Borrowings may be unsecured, or may be secured by
not more than 15% of the value of the fund's total assets. As a matter of
operating policy, however, the fund will not secure borrowings by more than 10%
of the value of the fund's total assets.
HIGH YIELD BOND FUND
General. High Yield Bond Fund's investment objective is to maximize current
income. As a secondary objective, the fund will seek capital appreciation. The
fund seeks to achieve its objective by investing primarily in a diversified
portfolio of high yield fixed-income securities rated in medium or lower rating
categories or determined by SBAM to be of comparable quality.
Investment Grade Securities. High Yield Bond Fund may invest up to 20% of its
assets in common stock, convertible securities, warrants, preferred stock or
other equity securities when consistent
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with the fund's objectives. The fund will generally hold such equity investments
as a result of purchases of unit offerings of fixed-income securities which
include such securities or in connection with an actual or proposed conversion
or exchange of fixed-income securities, but may also purchase equity securities
not associated with fixed-income securities when, in the opinion of the
investment manager, such purchase is appropriate.
There may be times when, in SBAM's judgment, conditions in the securities
markets would make pursuing the fund's basic investment strategy inconsistent
with the best interests of the fund's shareholders. At such times, the fund may
employ alternative strategies, including investment of a substantial portion of
its assets in securities rated higher than 'Baa' by Moody's or 'BBB' by S&P, or
of comparable quality. In addition, in order to maintain liquidity, the fund may
invest up to 35% of its assets in high-quality short-term money market
instruments. Such instruments may include obligations of the U.S. government or
its agencies or instrumentalities; commercial paper of issuers rated, at the
time of purchase, A-2 or better by S&P or P-2 or better by Moody's or which, in
SBAM's determination, are of comparable quality; certificates of deposit,
banker's acceptances or time deposits of U.S. banks with total assets of at
least $1 billion (including obligations of foreign branches of such banks) and
of the 75 largest foreign commercial banks in terms of total assets (including
domestic branches of such banks), and repurchase agreements with respect to such
obligations.
If at some future date, in SBAM's opinion, adverse conditions prevail in the
securities markets which makes High Yield Bond Fund's investment strategy
inconsistent with the best interests of the fund's shareholders, the fund may
invest its assets without limit in high-quality short-term money market
instruments.
Below Grade Investment Securities. High Yield Bond Fund intends to invest, under
normal market conditions, at least 65% of its assets in securities rated 'Baa'
or lower by Moody's or 'BBB' or lower by S&P, or in securities determined by
SBAM to be of comparable quality. The fund may invest up to 35% of its total
assets in foreign fixed-income securities as more fully described below. Medium
and low-rated and comparable unrated securities offer yields that fluctuate over
time, but generally are superior to the yields offered by higher rated
securities. However, such securities also involve significantly greater risks,
including price volatility and risk of default in the payment of interest and
principal, than higher rated securities. Certain of the debt securities
purchased by the Fund may be rated as low as 'C' by Moody's or 'D' by S&P or may
be comparable to securities so rated. An investment in the fund should not be
considered as a complete investment program.
In light of the risks associated with high yield debt securities, SBAM will take
various factors into consideration in evaluating the creditworthiness of an
issuer. For corporate debt securities, these will typically include the issuer's
financial resources, its sensitivity to economic conditions and trends, the
operating history of the issuer, and the experience and track record of the
issuer's management. For sovereign debt instruments, these will typically
include the economic and political conditions within the issuer's country, the
issuer's overall and external debt levels and debt service ratios, the issuer's
access to capital markets and other sources of funding, and the issuer's debt
service payment history. SBAM will also review the ratings, if any, assigned to
the security by any recognized rating agencies, although the investment
manager's judgment as to the quality of a debt security may differ from that
suggested by the rating published by a rating service. High Yield Bond Fund's
ability to achieve its investment objectives may be more dependent on SBAM's
credit analysis than would be the case if it invested in higher quality debt
securities.
The investment manager will have discretion to select the range of maturities of
the fixed-income securities in which High Yield Bond Fund may invest. The
investment manager anticipates that under current market conditions, the Fund
will have an average portfolio maturity of 10 to 15 years. However, the average
portfolio maturity may vary substantially from time to time depending on
economic and market conditions.
High Yield Bond Fund may invest up to 35% of its total assets in foreign
fixed-income securities all or a portion of which may be non-U.S. dollar
denominated and which include: (a) debt obligations issued or guaranteed by
foreign national, provincial, state, municipal or other
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governments with taxing authority or by their agencies or instrumentalities,
including Brady Bonds; (b) debt obligations of supranational entities; (c) debt
obligations of the U.S. government issued in non-dollar securities; (d) debt
obligations and other fixed-income securities of foreign corporate issuers (both
dollar and non-dollar denominated); and (e) U.S. corporate issuers (both
Eurodollar and non-dollar denominated). There is no minimum rating criteria for
the fund's investments in such securities. Moreover, substantial investments in
foreign securities may have adverse tax implications as described under 'Taxes.'
INVESTORS FUND
General. The primary investment objective of 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.
Investor Fund's policy is to retain flexibility in the management of its
portfolio, without restrictions as to the proportion of assets which may be
invested in any class of securities. It is anticipated that the fund's portfolio
will generally consist of common and preferred stocks. 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.
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. 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.
Investment Grade Fixed Income 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 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. The fund's short-term investments may
include repurchase agreements with banks or broker/dealers. When management
deems it appropriate, consistent with Investors Fund's secondary objective of
current income, or during temporary defensive periods due to economic or market
conditions, the fund may invest without limitation in fixed-income securities or
hold assets in cash or cash equivalents. The types and characteristics of
investment grade corporate debt securities and investment grade foreign debt
securities which may be purchased by the fund are identical to those of
Strategic Bond Fund. Investments in such investment grade fixed-income
securities may also be made for the purpose of capital appreciation, as in the
case of purchases of bonds traded at a substantial discount, or when interest
rates are expected to decline. Investment grade debt securities are debt
securities rated BBB or better by S&P or Baa or better by Moody's, or if rated
by other rating agencies or if unrated, securities deemed by SBAM to be of
comparable quality. See Appendix A 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 in 'Risk
Factors.'
Below Investment Grade Securities. Investors Fund from time to time may invest
up to 5% of its net assets in nonconvertible debt securities rated below
investment grade by S&P and Moody's Investors Service Moody's with no minimum
rating required or comparable unrated securities. There is no limit on the
amount of Investors Fund's assets that can be invested in convertible securities
rated below investment grade.
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STRATEGIC BOND FUND
General. The primary investment objective of Strategic Bond Fund is to seek a
high level of current income. As a secondary objective, the fund seeks capital
appreciation. The fund seeks to achieve its objectives by investing in a
globally diverse portfolio of fixed-income investments and by giving SBAM broad
discretion to deploy the fund's assets among certain segments of the
fixed-income market that SBAM believes will best contribute to the achievement
of the fund's objectives. At any point in time, SBAM will deploy the fund's
assets based on its analysis of current economic and market conditions and the
relative risks and opportunities present in the following market segments: U.S.
government obligations, investment grade domestic corporate debt, high yield
domestic corporate debt securities, mortgage-backed securities and investment
grade and high yield foreign corporate and sovereign debt securities. SBAM has
entered into a subadvisory consulting agreement with its London based affiliate,
SBAM Limited, pursuant to which SBAM Limited will provide certain advisory
services to SBAM relating to currency transactions and investments in
non-dollar-denominated debt securities for the benefit of the fund.
SBAM will determine the amount of assets to be allocated to each type of
security in which it invests based on its assessment of the maximum level of
income and capital appreciation that can be achieved from a portfolio which is
invested in these securities. In making this determination, SBAM will rely in
part on quantitative analytical techniques that measure relative risks and
opportunities of each type of security based on current and historical economic,
market, political and technical data for each type of security, as well as on
its own assessment of economic and market conditions both on a global and local
(country) basis. In performing quantitative analysis, SBAM will employ
prepayment analysis and option adjusted spread technology to evaluate mortgage
securities, mean variance optimization models to evaluate foreign debt
securities, and total rate of return analysis to measure relative risks and
opportunities in other fixed-income
markets. Economic factors considered will include current and projected levels
of growth and inflation, balance of payment status and monetary policy. The
allocation of assets to foreign debt securities will further be influenced by
current and expected currency relationships and political and sovereign factors.
SBAM will continuously review this allocation of assets and make such
adjustments as it deems appropriate. The fund does not plan to establish a
minimum or a maximum percentage of the assets which it will invest in any
particular type of fixed-income security.
In addition, SBAM will have discretion to select the range of maturities of the
various fixed-income securities in which the fund invests. The weighted average
life of the portfolio securities may vary substantially from time to time
depending on economic and market conditions.
U.S. Government Obligations and Mortgage Backed Securities. The types and
characteristics of the U.S. government obligations and mortgage backed
securities to be purchased by Strategic Bond Fund are identical to those
permissible for U.S. Government Income Fund. In addition, the fund may purchase
privately issued mortgage securities which are not guaranteed by the U.S.
government or its agencies or instrumentalities and may purchase stripped
mortgage securities, including interest-only and principal-only securities.
Strategic Bond Fund does not currently intend to invest more than 10% of its
total assets in interest-only and principal-only securities.
Equity Securities. Strategic Bond Fund may invest up to 20% of its assets in
common stock, convertible securities, warrants, preferred stock or other equity
securities when consistent with the fund's objectives. The fund will generally
hold such equity investments as a result of purchases of unit offerings of
fixed-income securities which include such securities or in connection with an
actual or proposed conversion or exchange of fixed-income securities, but may
also purchase equity securities not associated with fixed-income securities
when, in SBAM's opinion such purchase is appropriate.
In order to maintain liquidity, Strategic Bond Fund may invest up to 25% of its
assets in high-quality short-term money market instruments. Such instruments may
include obligations of the U.S. government or its agencies or instrumentalities;
commercial paper of issuers rated, at the time of purchase, A-2 or better by S&P
or P-2 or better by Moody's or which, in SBAM's determination, are of comparable
quality; certificates of deposit, banker's acceptances or time
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deposits of U.S. banks with total assets of at least $1 billion (including
obligations of foreign branches of such banks) and of the 75 largest foreign
commercial banks in terms of total assets (including domestic branches of such
banks), and repurchase agreements with respect to such obligations.
Investment Grade Securities. The investment grade corporate debt securities and
the investment grade foreign debt securities to be purchased by the Fund are
domestic and foreign debt securities rated within the four highest bond ratings
of either Moody's or S&P, or, if unrated, deemed by SBAM to be of equivalent
quality. While debt securities carrying the fourth highest quality rating ('Baa'
by Moody's or 'BBB' by S&P) are considered investment grade and are viewed to
have adequate capacity for payment of principal and interest, investments in
such securities involve a higher degree of risk than that associated with
investments in debt securities in the higher rating categories and such debt
securities lack outstanding investment characteristics and in fact have
speculative characteristics as well. For example, changes in economic conditions
or other circumstances are more likely to lead to a weakened capacity to make
principal and interest payments than is the case with higher grade debt
securities.
Below Grade Investment Securities. In pursuing Strategic Bond Fund's investment
objectives, the fund may invest predominantly in medium or lower-rated
securities, commonly known as 'junk bonds.' Investments of this type involve
significantly greater risks, including price volatility and risk of default in
the payment of interest and principal, than higher-quality securities. Although
the fund's investment manager does not anticipate investing in excess of 75% of
the fund's assets in domestic and developing country debt securities that are
rated below investment grade, the fund may invest a greater percentage in such
securities when, in SBAM's determination, the yield available from such
securities outweighs their additional risks. SBAM anticipates that under current
market conditions, a significant portion of the fund's assets will be invested
in such securities. By investing a portion of the fund's assets in securities
rated below investment grade as well as through investments in mortgage
securities and foreign debt securities, the investment manager expects to
provide investors with a higher yield than a high-quality domestic corporate
bond fund. Certain of the debt securities in which the fund may invest may be
rated as low as 'C' by Moody's or 'D' by S&P or may be considered comparable to
securities having such ratings.
In light of the risks associated with high yield corporate and sovereign debt
securities, SBAM will take various factors into consideration in evaluating the
creditworthiness of an issuer. For corporate debt securities, these will
typically include the issuer's financial resources, its sensitivity to economic
conditions and trends, the operating history of the issuer, and the experience
and track record of the issuer's management. For sovereign debt instruments,
these will typically include the economic and political conditions within the
issuer's country, the issuer's overall and external debt levels and debt service
ratios, the issuer's access to capital markets and other sources of funding, and
the issuer's debt service payment history. SBAM will also review the ratings, if
any, assigned to the security by any recognized rating agencies, although the
investment manager's judgment as to the quality of a debt security may differ
from that suggested by the rating published by a rating service. The fund's
ability to achieve its investment objectives may be more dependent on SBAM's
credit analysis than would be the case if it invested in higher quality debt
securities.
Foreign Securities and Sovereign Debt. Strategic Bond Fund may invest up to 100%
of its assets in securities of foreign issuers. Such securities may be non-U.S.
dollar denominated and there is no limit on the percentage of the fund's assets
that can be invested in non-dollar denominated securities. SBAM anticipates that
under current market conditions, a significant portion of the fund's assets will
be invested in foreign securities. The ability to spread its investments among
the fixed-income markets in a number of different countries may, however, reduce
the overall level of market risk to the extent it may reduce the fund's exposure
to a single market.
Strategic Bond Fund may invest in high yield sovereign debt issued or guaranteed
by a foreign sovereign government or one of its agencies or political
subdivisions and debt obligations issued or guaranteed by supranational
organizations. The high yield sovereign debt securities in which the fund may
invest are U.S. dollar-denominated and non-dollar-denominated debt securities,
including Brady Bonds, that are issued or guaranteed by governments or
governmental entities of developing
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and emerging market countries. SBAM expects that these countries will consist
primarily of those which have issued or have announced plans to issue Brady
Bonds, but the fund is not limited to investing in the debt of such countries.
SBAM anticipates that the fund's investments in sovereign debt will be
concentrated in Latin American countries, including Central and South American
and Caribbean countries. SBAM also expects to take advantage of additional
opportunities for investment in the debt of North African countries, such as
Nigeria and Morocco, Eastern European countries, such as Poland and Hungary, and
Southeast Asian countries, such as the Philippines. Sovereign governments may
include national, provincial, state, municipal or other foreign governments with
taxing authority. Governmental entities may include the agencies and
instrumentalities of such governments, as well as state-owned enterprises.
Strategic Bond Fund may enter into repurchase agreements and reverse repurchase
agreements, may purchase securities on a firm commitment basis, including
when-issued securities and may lend portfolio securities. The fund may also
enter into mortgage 'dollar rolls.'
TOTAL RETURN FUND
General. The primary investment objective of 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 Total Return Fund
is to invest in a broad variety of securities, including equity securities,
fixed-income securities and short-term obligations. The fund may vary the
percentage of assets invested in any one type of security in accordance with the
investment manager's view of existing and anticipated economic and market
conditions, fiscal and monetary policy and underlying security values.
Equity Securities. 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.
Total Return Fund may invest up to 20% of its total assets in foreign securities
(including American Depositary Receipts).
Fixed Income Securities. 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. 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 Total Return Fund's assets that can be invested in convertible securities
rated below investment grade.
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. The fund will not
invest more than 10% of its assets in repurchase agreements maturing in more
than seven days.
U.S. GOVERNMENT INCOME FUND
General. The investment objective of U.S. Government Income Fund is to obtain a
high level of current income. The fund seeks to attain its objective by
investing under normal circumstances 100% of its assets in debt obligations and
mortgage-backed securities issued or guaranteed by the U.S. government, its
agencies or instrumentalities. The securities in which the fund may invest are:
(1) U.S. Treasury obligations;
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(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.
(6) Repurchase Agreements collateralized by any of the above.
Any guarantee of the securities in which U.S. Government Income Fund invests
runs only to principal and interest payments on the securities and not to the
market value of such securities or the principal and interest payments on the
underlying mortgages. In addition, the guarantee only runs to the portfolio
securities held by the fund and not to the purchase of shares of the fund.
U.S. Government Income Fund currently expects that it will maintain an average
portfolio effective duration of two to four years. Duration is an approximate
measure of the sensitivity of the value of a fixed income security to changes in
interest rates. In general, the percentage change in a fixed income security's
value in response to changes in interest rates is a function of that security's
duration multiplied by the percentage point change in interest rates. The fund
may, however, invest in securities of any maturity or effective duration and
accordingly, the composition and weighted average maturity of the fund's
portfolio will vary from time to time, based upon SBAM's determination of how
best to achieve the fund's investment objective. With respect to mortgage-backed
securities in which the fund invests, average maturity and duration are
determined by using mathematical models that incorporate prepayment assumptions
and other factors that involve estimates of future economic parameters. These
estimates may vary from actual results, particularly during periods of extreme
market volatility. In addition, the average maturity and duration of
mortgage-backed derivative securities may not accurately reflect the price
volatility of such securities under certain market conditions.
While the fund seeks a high level of current income, it cannot invest in
instruments such as lower grade corporate obligations which offer higher yields
but are subject to greater credit risks. Neither the issuance by nor the
guarantee of a U.S. government agency for a security constitutes assurance that
the security will not significantly fluctuate in value or that the fund will
receive the originally anticipated yield on the security.
From time to time, a significant portion of the fund's assets may be invested in
mortgage-backed securities. The mortgage-backed securities in which the fund
invests represent participating interests in pools of fixed rate and adjustable
rate residential mortgage loans issued or guaranteed by agencies or
instrumentalities of the U.S. government.
U.S. Government Income Fund may enter into repurchase agreements and reverse
repurchase agreements, may purchase securities on a firm commitment basis,
including when-issued securities and may lend portfolio securities. The fund may
also enter into mortgage 'dollar rolls.'
RESTRICTED SECURITIES AND SECURITIES WITH LIMITED TRADING MARKETS (RULE 144A)
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
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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. 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.
One effect of Rule 144A is that certain restricted securities may now be liquid,
though there is no assurance that a liquid market for Rule 144A securities will
develop or be maintained. In promulgating Rule 144A, the Securities and Exchange
Commission (the 'Commission') stated that the ultimate responsibility for
liquidity determinations is that of an investment company's board of directors.
However, the Commission stated that the board may delegate the day-to-day
function of determining liquidity to the fund's investment adviser, provided
that the board retains sufficient oversight. The Board of Directors of each fund
has adopted policies and procedures for the purpose of determining whether
securities that are eligible for resale under Rule 144A are liquid or illiquid.
Pursuant to those policies and procedures, the Board of Directors has delegated
to the investment manager the determination as to whether a particular security
is liquid or illiquid, requiring that consideration be given to, among other
things, the frequency of trades and quotes for the security, the number of
dealers willing to sell the security and the number of potential purchasers,
dealer undertakings to make a market in the security, the nature of the security
and the time needed to dispose of the security. The Board of Directors
periodically reviews fund purchases and sales of Rule 144A securities.
All funds may purchase securities for which there is a limited trading market or
which are subject to restrictions on resale to the public. The funds 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. The funds may also purchase Rule 144A securities. The funds'
holding of Rule 144A securities which are liquid securities will not be subject
to the 15% limitation on investments in illiquid securities.
WARRANTS
Each of the Funds, except for U.S. Government Income Fund, may invest in
warrants, which are securities permitting, but not obligating, their holder to
subscribe for other securities. Warrants do not carry the right to dividends or
voting rights with respect to their underlying securities, and they do not
represent any rights in assets of the issuer. An investment in warrants may be
considered speculative. In addition, the value of a warrant does not necessarily
change with the value of the underlying securities and a warrant ceases to have
value if it is not exercised prior to its expiration date.
OTHER INVESTMENT COMPANIES
Each fund may invest in unaffiliated investment funds which invest principally
in securities in which that fund is authorized to invest, in accordance with the
limits of the 1940 Act. Each fund may invest a maximum of 10% of its total
assets in the securities of other investment companies. In addition, under the
1940 Act, not more than 5% of the fund's total assets may be invested in
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the securities of any one investment company. To the extent a fund invests in
other investment funds, the fund's shareholders will incur certain duplicative
fees and expenses, including investment advisory fees. A fund's investment in
certain investment funds will result in special U.S. federal income tax
consequences described under 'Taxes.'
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 U.S. Government Income Fund, High Yield Bond
Fund and Strategic Bond Fund will invest primarily in fixed-income securities
and 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.
FLOATING AND VARIABLE RATE INSTRUMENTS
General. Certain funds may invest in floating and variable rate obligations.
Floating or variable rate obligations bear interest at rates that are not fixed,
but vary with changes in specified market rates or indices, such as the prime
rate, and at specified intervals. Certain of the floating or variable rate
obligations that may be purchased by a fund may carry a demand feature that
would permit the holder to tender them back to the issuer at par value prior to
maturity. Such obligations include variable rate master demand notes, which are
unsecured instruments issued pursuant to an agreement between the issuer and the
holder that permit the indebtedness thereunder to vary and provide for periodic
adjustments in the interest rate. A fund will limit its purchases of floating
and variable rate obligations to those of the same quality as it otherwise is
allowed to purchase. SBAM or the applicable subadviser will monitor on an
ongoing basis the ability of an issuer of a demand instrument to pay principal
and interest on demand.
Liquidity. Certain of the floating or variable rate obligations that may be
purchased by a fund may carry a demand feature that would permit the holder to
tender them back to the issuer of the instrument or to a third party at par
value prior to maturity. Some of the demand instruments purchased by a fund are
not traded in a secondary market and derive their liquidity solely from the
ability of the holder to demand repayment from the issuer or third party
providing credit support. If a demand instrument is not traded in a secondary
market, each fund will nonetheless treat the instrument as 'readily marketable'
for the purposes of its investment restriction limiting investments in illiquid
securities unless the demand feature has a notice period of more than seven days
in which case the instrument will be characterized as 'not readily marketable'
and therefore illiquid.
Limitations. A fund's right to obtain payment at par on a demand instrument
could be affected by events occurring between the date such fund elects to
demand payment and the date payment is due that may affect the ability of the
issuer of the instrument or third party providing credit support to make payment
when due, except when such demand instruments permit same day settlement. To
facilitate settlement, these same day demand instruments may be held in book
entry form at a bank other than a fund's custodian subject to a sub-custodian
agreement approved by such fund between that bank and the fund's custodian.
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U.S. GOVERNMENT OBLIGATIONS
General. In addition to the U.S. Treasury obligations described in the
Prospectus, a fund may invest in separately traded interest components of
securities issued or guaranteed by the U.S. Treasury. The interest components of
selected securities are traded independently under the Separate Trading of
Registered Interest and Principal of Securities program ('STRIPS'). Under the
STRIPS program, the interest components are individually numbered and separately
issued by the U.S. Treasury at the request of depository financial institutions,
which then trade the component parts independently.
Securities issued or guaranteed by U.S. government agencies and
instrumentalities include obligations that are supported by: (a) the full faith
and credit of the U.S. Treasury (e.g., direct pass-through certificates of
Ginnie Maes); (b) the limited authority of the issuer or guarantor to borrow
from the U.S. Treasury (e.g., obligations of Federal Home Loan Banks); or (c)
only the credit of the issuer or guarantor (e.g., obligations of Freddie Macs).
In the case of obligations not backed by the full faith and credit of the U.S.
Treasury, the agency issuing or guaranteeing the obligation is principally
responsible for ultimate repayment.
Agencies and instrumentalities that issue or guarantee debt securities and that
have been established or sponsored by the U.S. government include, in addition
to those identified above, the Bank for Cooperatives, the Export-Import Bank,
the Federal Farm Credit System, the Federal Intermediate Credit Banks, the
Federal Land Banks, the Federal National Mortgage Association and the Student
Loan Marketing Association.
BANK OBLIGATIONS
Bank obligations that may be purchased by a fund include certificates of
deposit, banker's acceptances and fixed time deposits. A certificate of deposit
is a short-term negotiable certificate issued by a commercial bank against funds
deposited in the bank and is either interest-bearing or purchased on a discount
basis. A bankers' acceptance is a short-term draft drawn on a commercial bank by
a borrower, usually in connection with an international commercial transaction.
The borrower is liable for payment as is the bank, which unconditionally
guarantees to pay the draft at its face amount on the maturity date. Fixed time
deposits are obligations of branches of U.S. banks or foreign banks which are
payable at a stated maturity date and bear a fixed rate of interest. Although
fixed time deposits do not have a market, there are no contractual restrictions
on the right to transfer a beneficial interest in the deposit to a third party.
Bank obligations may be general obligations of the parent bank or may be limited
to the issuing branch by the terms of the specific obligations or by government
regulation.
ASSET-BACKED SECURITIES
Asset-backed securities are generally issued as pass through certificates, which
represent undivided fractional ownership interests in the underlying pool of
assets, or as debt instruments, which are generally issued as the debt of a
special purpose entity organized solely for the purpose of owning such assets
and issuing such debt. The pool of assets generally represents the obligations
of a number of different parties. Asset-backed securities frequently carry
credit protection in the form of extra collateral, subordinated certificates,
cash reserve accounts, letters of credit or other enhancements. For example,
payments of principal and interest may be guaranteed up to certain amounts and
for a certain time period by a letter of credit or other enhancement issued by a
financial institution unaffiliated with the entities issuing the securities.
Assets which, to date, have been used to back asset-backed securities include
motor vehicle installment sales contracts or installment loans secured by motor
vehicles, and receivables from revolving credit (credit card) agreements.
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MORTGAGE-BACKED SECURITIES
Mortgage-backed securities acquired by U.S. Government Income Fund will be
limited to those issued or guaranteed by the U.S. government, its agencies and
instrumentalities. Strategic Bond Fund and Total Return Fund may, in addition,
purchase privately issued mortgage securities which are not guaranteed by the
U.S. government, its agencies or instrumentalities. It should be noted that new
types of mortgage-backed securities are developed and marketed from time to time
and that, consistent with its investment limitations, a fund may invest in those
new types of mortgage-backed securities that the investment manager believes may
assist it in achieving its investment objective(s).
Mortgage-backed securities were introduced in the 1970s when the first pool of
mortgage loans was converted into a mortgage pass-through security. Since the
1970s, the mortgage-backed securities market has vastly expanded and a variety
of structures have been developed to meet investor needs.
Mortgage-backed securities are issued by lenders such as mortgage bankers,
commercial banks, and savings and loan associations. Mortgage-backed securities
generally provide monthly payments which are, in effect, a 'pass-through' of the
monthly interest and principal payments (including any prepayments) made by the
individual borrowers on the pooled mortgage loans. Principal prepayments result
from the sale of the underlying property or the refinancing or foreclosure of
underlying mortgages.
Interest and principal payments on mortgage-backed securities are typically made
monthly, and principal may be prepaid at any time because the underlying
mortgage loans or other assets generally may be prepaid at any time. As a
result, if a fund purchases such a security at a premium, a prepayment rate that
is faster than expected will reduce yield to maturity, while a prepayment rate
that is slower than expected will have the opposite effect of increasing yield
to maturity. Conversely, if a fund purchases these securities at a discount,
faster than expected prepayments will increase, while slower than expected
prepayments will reduce, yield to maturity. A slower than expected prepayment
rate may effectively change a security which was considered short or
intermediate-term at the time of purchase into a long-term security. Long-term
securities generally fluctuate more widely in response to changes in interest
rates than short or intermediate-term securities.
The yield of the mortgage securities is based on the prepayment rates
experienced over the life of the security. Prepayments tend to increase during
periods of falling interest rates, while during periods of rising interest rates
prepayments will most likely decline. Reinvestment by a fund of scheduled
principal payments and unscheduled prepayments may occur at higher or lower
rates than the original investment, thus affecting the fund's yield. Monthly
interest payments received by the fund have a compounding effect which will
increase the yield to shareholders as compared to debt obligations that pay
interest semiannually.
GUARANTEED MORTGAGE PASS-THROUGH SECURITIES
Total Return, Strategic Bond and U.S. Government Income Funds may invest in
mortgage pass-through securities representing participation interests in pools
of residential mortgage loans originated by U.S. governmental or private lenders
and guaranteed, to the extent provided in such securities, by the U.S.
government or one of its agencies or instrumentalities. Any guarantee of such
securities runs only to principal and interest payments on the securities and
not to the market value of such securities or the principal and interest
payments on the underlying mortgages. In addition, the guarantee only runs to
the portfolio securities held by a fund and not to the purchase of shares of the
fund. Such securities, which are ownership interests in the underlying mortgage
loans, differ from conventional debt securities, which provide for periodic
payment of interest in fixed amounts (usually semi-annually) and principal
payments at maturity or on specified call dates. Mortgage pass-through
securities provide for monthly payments that are a 'pass-through' of the monthly
interest and principal payments (including any prepayments) made by the
individual borrowers on the pooled mortgage loans, net of any fees paid to the
guarantor
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of such securities and the servicer of the underlying mortgage loans. Guaranteed
mortgage pass-through securities are often sold on a to-be-acquired or 'TBA'
basis. Such securities are typically sold one to three months in advance of
issuance, prior to the identification of the underlying pools of mortgage
securities but with the interest payment provisions fixed in advance. The
underlying pools of mortgage securities are identified shortly before settlement
and must meet certain parameters.
The guaranteed mortgage pass-through securities in which a fund may invest may
include those issued or guaranteed by Ginnie Mae, the Federal National Mortgage
Association ('Fannie Mae') and Freddie Mac.
Ginnie Mae Certificates. Ginnie Mae is a wholly-owned corporate instrumentality
of the United States within the Department of Housing and Urban Development. The
full faith and credit of the U.S. government is pledged to the payment of
amounts that may be required to be paid under any guarantee, but not as to the
market value of such securities. The Ginnie Mae Certificates will represent a
pro rata interest in one or more pools of the following types of mortgage loans:
(i) fixed rate level payment mortgage loans; (ii) fixed rate graduated payment
mortgage loans; (iii) fixed rate growing equity mortgage loans; (iv) fixed rate
mortgage loans secured by manufactured (mobile) homes; (v) mortgage loans on
multifamily residential properties under construction; (vi) mortgage loans on
completed multifamily projects; (vii) fixed rate mortgage loans as to which
escrowed funds are used to reduce the borrower's monthly payments during the
early years of the mortgage loans ('buydown' mortgage loans); (viii) mortgage
loans that provide for adjustments in payments based on periodic changes in
interest rates or in other payment terms of the mortgage loans; and (ix)
mortgage-backed serial notes. All of these mortgage loans will be Federal
Housing Administration Loans ('FHA Loans') or Veterans' Administration Loans
('VA Loans') and, except as otherwise specified above, will be fully amortizing
loans secured by first liens on one- to four-family housing units.
Fannie Mae Certificates. Fannie Mae is a federally chartered and privately owned
corporation organized and existing under the Federal National Mortgage
Association Charter Act. Each Fannie Mae Certificate will entitle the registered
holder thereof to receive amounts representing such holder's pro rata interest
in scheduled principal payments and interest payments (at such Fannie Mae
Certificate's pass-through rate, which is net of any servicing and guarantee
fees on the underlying mortgage loans), and any principal prepayments on the
mortgage loans in the pool represented by such Fannie Mae Certificate and such
holder's proportionate interest in the full principal amount of any foreclosed
or otherwise finally liquidated mortgage loan. The full and timely payment of
principal of and interest on each Fannie Mae Certificate, but not the market
value thereof, will be guaranteed by Fannie Mae, which guarantee is not backed
by the full faith and credit of the U.S. government. Each Fannie Mae Certificate
will represent a pro rata interest in one or more pools of FHA Loans, VA Loans
or conventional mortgage loans (i.e., mortgage loans that are not insured or
guaranteed by any governmental agency) of the following types: (i) fixed rate
level payment mortgage loans; (ii) fixed rate growing equity mortgage loans;
(iii) fixed rate graduated payment mortgage loans; (iv) variable rate California
mortgage loans; (v) other adjustable rate mortgage loans; and (vi) fixed rate
mortgage loans secured by multifamily projects.
Freddie Mac Certificates. Freddie Mac is a corporate instrumentality of the
United States created pursuant to the Emergency Home Finance Act of 1970, as
amended (the 'FHLMC Act'). Freddie Mac guarantees to each registered holder of a
Freddie Mac Certificate ultimate collection of all principal of the related
mortgage loans, without any offset or deduction, but does not, generally,
guarantee the timely payment of scheduled principal or the market value of the
securities. Freddie Mac may remit the amount due on account of its guarantee of
collection of principal at any time after default on an underlying mortgage
loan, but not later than 30 days following: (i) foreclosure sale; (ii) payment
of a claim by any mortgage insurer; or (iii) the expiration of any right of
redemption, whichever occurs later, but in any event no later than one year
after demand has been made upon the mortgagor for accelerated payment of
principal. The obligations of Freddie
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Mac under its guarantee are obligations solely of Freddie Mac and are not backed
by the full faith and credit of the U.S. government.
Freddie Mac Certificates represent a pro rata interest in a group of mortgage
loans (a 'Freddie Mac Certificate group') purchased by Freddie Mac. The mortgage
loans underlying the Freddie Mac Certificates will consist of fixed rate or
adjustable rate mortgage loans with original terms to maturity of between ten
and thirty years, substantially all of which are secured by first liens on one-
to four-family residential properties or multifamily projects. Each mortgage
loan must meet the applicable standards set forth in the FHLMC Act. A Freddie
Mac Certificate group may include whole loans, participation interests in whole
loans and undivided interests in whole loans and participations comprising
another Freddie Mac Certificate group.
ADJUSTABLE RATE MORTGAGE SECURITIES
Unlike fixed rate mortgage securities, adjustable rate mortgage securities are
collateralized by or represent interests in mortgage loans with variable rates
of interest. These variable rates of interest reset periodically to align
themselves with market rates. A fund will not benefit from increases in interest
rates to the extent that interest rates rise to the point where they cause the
current coupon of the underlying adjustable rate mortgages to exceed any maximum
allowable annual or lifetime reset limits (or cap rates') for a particular
mortgage. In this event, the value of the mortgage securities in a fund would
likely decrease. Also, a fund's net asset value could vary to the extent that
current yields on adjustable rate mortgage securities are different than market
yields during interim periods between coupon reset dates or if the timing of
changes to the index upon which the rate for the underlying mortgages is based
lags behind changes in market rates. During periods of declining interest rates,
income to a fund derived from adjustable rate mortgages which remain in a
mortgage pool will decrease in contrast to the income on fixed rate mortgages,
which will remain constant. Adjustable rate mortgages also have less potential
for appreciation in value as interest rates decline than do fixed rate
investments.
PRIVATELY-ISSUED MORTGAGE SECURITIES
Total Return Fund and Strategic Bond Fund may also purchase mortgage-backed
securities issued by private issuers which may entail greater risk than
mortgage-backed securities that are guaranteed by the U.S. government, its
agencies or instrumentalities. Privately-issued mortgage securities are issued
by private originators of, or investors in, mortgage loans, including mortgage
bankers, commercial banks, investment banks, Savings and loan associations and
special purpose subsidiaries of the foregoing. Since privately-issued mortgage
certificates are not guaranteed by an entity having the credit status of GNMA or
FHLMC, such securities generally are structured with one or more types of credit
enhancement. Such credit support falls into two categories: (i) liquidity
protection; and (ii) protection against losses resulting from ultimate default
by an obligor on the underlying assets. Liquidity protection refers to the
provision of advances, generally by the entity administering the pool of assets,
to ensure that the pass-through of payments due on the underlying pool occurs in
a timely fashion. Protection against losses resulting from ultimate default
enhances the likelihood of ultimate payment of the obligations on at least a
portion of the assets in the pool. Such protection may be provided through
guarantees, insurance policies or letters of credit obtained by the issuer or
sponsor from third parties, through various means of structuring the transaction
or through a combination of such approaches.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTI-CLASS PASS-THROUGH SECURITIES
Strategic Bond Fund and U.S. Government Income Fund may invest in collateralized
mortgage obligations ('CMOs'). CMOs are debt obligations collateralized by
mortgage loans or mortgage pass-through securities. Typically, CMOs are
collateralized by GNMA, Fannie Mae or Freddie Mae Certificates, but also may be
collateralized by whole loans or private pass-throughs (such collateral
collectively hereinafter referred to as 'mortgage assets'). Multi-class
pass-through securities are interests in a trust composed of mortgage assets.
Unless the context indicates otherwise, all
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references herein to CMOs include multi-class pass-through securities. Payments
of principal and of interest on the mortgage assets, and any reinvestment income
thereon, provide the funds to pay debt service on the CMOs or make scheduled
distributions on the multi-class pass-through securities. CMOs may be issued by
agencies or instrumentalities of the U.S. government, or by private originators
of, or investors in, mortgage loans, including savings and loan associations,
mortgage banks, commercial banks, investment banks and special purpose
subsidiaries of the foregoing. CMOs acquired by U.S. Government Income Fund will
be limited to those issued or guaranteed by agencies or instrumentalities of the
U.S. government and, if available in the future, the U.S. government.
In a CMO, a series of bonds or certificates is issued in multiple classes. Each
class of CMOs, often referred to as a 'tranche,' is issued at a specified fixed
or floating coupon rate and has a stated maturity or final distribution date.
Principal prepayments on the mortgage assets may cause the CMOs to be retired
substantially earlier than their stated maturities or final distribution dates.
Interest is paid or accrues on all classes of the CMOs on a monthly, quarterly
or semi-annual basis. The principal of and interest on the mortgage assets may
be allocated among the several classes of a series of a CMO in innumerable ways.
In one structure, payments of principal, including any principal prepayments, on
the mortgage assets are applied to the classes of a CMO in the order of their
respective stated maturities or final distribution dates, so that no payment of
principal will be made on any class of CMOs until all other classes having an
earlier stated maturity or final distribution date have been paid in full.
Strategic Bond and U.S. Government Income Funds have no present intention to
invest in CMO residuals. The market for CMOs may be less liquid than the market
for other securities. As market conditions change, and particularly during
periods of rapid or unanticipated changes in market interest rates, the
attractiveness of the CMO classes and the ability of the structure to provide
the anticipated investment characteristics may be significantly reduced. Such
changes can result in volatility in the market value, and in some instances
reduced liquidity, of the CMO class.
Strategic Bond Fund and U.S. Government Income Fund may also invest in, among
others, parallel pay CMOs and Planned Amortization Class CMOs ('PAC Bonds').
Parallel pay CMOs are structured to provide payments of principal on each
payment date to more than one class. These simultaneous payments are taken into
account in calculating the stated maturity date or final distribution date of
each class, which, as with other CMO structures, must be retired by its stated
maturity date or a final distribution date but may be retired earlier. PAC Bonds
are a type of CMO tranche or series designed to provide relatively predictable
payments of principal provided that, among other things, the actual prepayment
experience on the underlying mortgage loans falls within a predefined range. If
the actual prepayment experience on the underlying mortgage loans is at a rate
faster or slower than the predefined range or if deviations from other
assumptions occur, principal payments on the PAC Bond may be earlier or later
than predicted. The magnitude of the predefined range varies from one PAC Bond
to another; a narrower range increases the risk that prepayments on the PAC Bond
will be greater or smaller than predicted. Because of these features, PAC Bonds
generally are less subject to the risks of prepayment than are other types of
mortgage-backed securities.
STRIPPED MORTGAGE SECURITIES
Strategic Bond Fund may purchase stripped mortgage securities which are
derivative multi-class mortgage securities. Stripped mortgage securities may be
issued by agencies or instrumentalities of the U.S. government, or by private
originators of, or investors in, mortgage loans, including Savings and loan
associations, mortgage banks, commercial banks, investment banks and special
purpose subsidiaries of the foregoing. Stripped mortgage securities have greater
volatility than other types of mortgage securities. Although stripped mortgage
securities are purchased and sold by institutional investors through several
investment banking firms acting as brokers or dealers, the market for such
securities has not yet been fully developed. Accordingly, stripped mortgage
securities are generally illiquid.
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Stripped mortgage securities are structured with two or more classes of
securities that receive different proportions of the interest and principal
distributions on a pool of mortgage assets. A common type of stripped mortgage
security will have at least one class receiving only a small portion of the
interest and a larger portion of the principal from the mortgage assets, while
the other class will receive primarily interest and only a small portion of the
principal. In the most extreme case, one class will receive all of the interest
('IO' or interest only), while the other class will receive all of the principal
('PO' or principal-only class). The yield to maturity on IOs, POs and other
mortgage-backed securities that are purchased at a substantial premium or
discount generally are extremely sensitive not only to changes in prevailing
interest rates but also to the rate of principal payments (including
prepayments) on the related underlying mortgage assets, and a rapid rate of
principal payments may have a material adverse effect on such securities' yield
to maturity. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, a fund may fail to fully recoup its
initial investment in these securities even if the securities have received the
highest rating by a nationally recognized statistical rating organizations.
In addition to the stripped mortgage securities described above, Strategic Bond
Fund may invest in similar securities such as super POs and levered IOs which
are more volatile than POs, IOs and IOettes. Risks associated with instruments
such as super POs are similar in nature to those risks related to investments in
POs. Risks connected with levered IOs and IOettes are similar in nature to those
associated with IOs. Strategic Bond Fund may also invest in other similar
instruments developed in the future that are deemed consistent with its
investment objective, policies and restrictions. POs may generate taxable income
from the current accrual of original issue discount, without a corresponding
distribution of cash to the fund. See 'Taxes.'
MORTGAGE ROLLS
Strategic Bond Fund and U.S. Government Income Fund may enter into mortgage
'dollar rolls' in which a fund sells mortgage-backed securities for delivery in
the current month and simultaneously contracts to repurchase substantially
similar (same type, coupon and maturity) securities on a specified future date.
During the roll period, a fund forgoes principal and interest paid on the
mortgage-backed securities. A fund is compensated by the difference between the
current sales price and the lower forward price for the future purchase (often
referred to as the 'drop') as well as by the interest earned on the cash
proceeds of the initial sale. A fund may only enter into covered rolls. A
'covered roll' is a specific type of dollar roll for which there is an
offsetting cash position which matures on or before the forward settlement date
of the dollar roll transaction. At the time a fund enters into a mortgage
'dollar roll,' it will establish a segregated account with its custodian bank in
which it will maintain liquid assets equal in value to its obligations in
respect of dollar rolls, and accordingly, such dollar rolls will not be
considered borrowings. Mortgage dollar rolls involve the risk that the market
value of the securities the fund is obligated to repurchase under the agreement
may decline below the repurchase price. In the event the buyer of securities
under a mortgage dollar roll files for bankruptcy or becomes insolvent, the
fund's use of proceeds of the dollar roll may be restricted pending a
determination by the other party, or its trustee or receiver, whether to enforce
the fund's obligation to repurchase the securities.
INVERSE FLOATING RATE OBLIGATIONS
Certain funds may invest in inverse floating rate obligations, or 'inverse
floaters.' Inverse floaters have coupon rates that vary inversely at a multiple
of a designated floating rate (which typically is determined by reference to an
index rate, but may also be determined through a dutch auction or a remarketing
agent) (the 'reference rate'). Inverse floaters may constitute a class of
collateralized mortgage obligations ('CMOs') with a coupon rate that moves
inversely to a designated index, such as LIBOR or COFI (Cost of Funds Index).
Any rise in the reference rate of an inverse floater (as a consequence of an
increase in interest rates causes a drop in the coupon rate while any drop in
the reference rate of an inverse floater causes an increase in the coupon rate.
In addition, like most other fixed income securities, the value of inverse
floaters will generally decrease as interest rates increase.
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ZERO COUPON AND PAY-IN-KIND BONDS AND DEFERRED PAYMENT SECURITIES
Total Return Fund, High Yield Bond Fund and Strategic Bond Fund may invest in
zero coupon securities, PIK bonds and deferred payment securities. Zero coupon
securities are debt securities that pay no cash income but are sold at
substantial discounts from their value at maturity. When a zero coupon security
is held to maturity, its entire return, which consists of the amortization of
discount, comes from the difference between its purchase price and its maturity
value. This difference is known at the time of purchase, so that investors
holding zero coupon securities until maturity know at the time of their
investment what the expected return on their investment will be. Certain zero
coupon securities also are sold at substantial discounts from their maturity
value and provide for the commencement of regular interest payments at a
deferred date. Zero coupon securities may have conversion features. A fund also
may purchase PIK bonds. PIK bonds pay all or a portion of their interest in the
form of debt or equity securities. Deferred payment securities are securities
that remain zero coupon securities until a predetermined date, at which time the
stated coupon rate becomes effective and interest becomes payable at regular
intervals.
Zero coupon securities, PIK bonds and deferred payment securities tend to be
subject to greater price fluctuations in response to changes in interest rates
than are ordinary interest-paying debt securities with similar maturities. The
value of zero coupon securities appreciates more during periods of declining
interest rates and depreciates more during periods of rising interest rates than
ordinary interest-paying debt securities with similar maturities. Zero coupon
securities, PIK bonds and deferred payment securities may be issued by a wide
variety of corporate and governmental issuers. Although these instruments are
generally not traded on a national securities exchange, they are widely traded
by brokers and dealers and, to such extent, will not be considered illiquid for
the purposes of a fund's limitation on investments in illiquid securities.
Current federal income tax law requires the holder of a zero coupon security,
certain PIK bonds, deferred payment securities and certain other securities
acquired at a discount (such as Brady Bonds) to accrue income with respect to
these securities prior to the receipt of cash payments. Accordingly, to avoid
liability for federal income and excise taxes, a fund may be required to
distribute income accrued with respect to these securities and may have to
dispose of portfolio securities under disadvantageous circumstances in order to
generate cash to satisfy these distribution requirements.
HIGH YIELD SECURITIES
High Yield Bond Fund and Strategic Bond Fund may invest without limitation in
domestic and foreign 'high yield' securities, commonly known as 'junk bonds.'
Investors Fund, Capital Fund and Total Return Fund may invest without limitation
in convertible securities of this type and up to 5%, 20% and 20%, respectively,
of their net assets in non- convertible securities of this type. Asia Growth
Fund may invest without limitation in convertible non-U.S. high yield securities
and up to 10% of its total assets in nonconvertible non-U.S. high yield
securities.
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).
Under rating agency guidelines, medium- and lower-rated securities and
comparable unrated securities will likely have some quality and protective
characteristics that are outweighed by large uncertainties or major risk
exposures to adverse conditions. Medium and lower rated securities are
considered to have extremely poor prospects of ever attaining any real
investment standing, to have a current identifiable vulnerability to default or
are in default, to be unlikely to have the capacity to pay interest and repay
principal when due in the event of adverse business, financial or
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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.
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.
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).
SOVEREIGN DEBT
Supranational entities include international organizations designated or
supported by governmental entities to promote economic reconstruction or
development and international banking institutions and related government
agencies. Examples include the World Bank, the European Coal and Steel
Community, the Asian Development Bank and the Inter-American Development Bank.
Such supranational issued instruments may be denominated in multi-national
currency units. The fund will not invest more than 10% of its total assets in
issuers located in any one country (other than issuers located in the United
States).
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 'Risk Factors.' The ability and willingness of
sovereign obligors in developing and emerging market countries or the
governmental authorities that control repayment of their external debt to pay
principal and interest on such debt when due may depend on general economic and
political conditions within the relevant country. Countries such as those in
which a fund may invest have historically experienced, and may continue to
experience, high rates of inflation, high interest rates, exchange rate trade
difficulties and extreme poverty and unemployment. Many of these countries are
also characterized by political uncertainty or instability. Additional factors
which may influence the ability or willingness to service debt include, but are
not limited to, a country's cash flow situation, the availability of sufficient
foreign exchange on the date a payment is due, the relative size of its debt
service burden to the economy as a whole, and its government's policy towards
the International Monetary Fund, the World Bank and other international
agencies.
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BRADY BONDS
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 were introduced in 1989 and thus, do not have a long payment
history. They may be collateralized or uncollateralized and issued in various
currencies (although most are dollar-denominated) and they are actively traded
in the over-the-counter secondary market. Dollar-denominated, collateralized
Brady Bonds, which may be fixed rate par bonds or floating rate discount bonds,
are generally collateralized in full as to principal due at maturity by U.S.
Treasury zero coupon obligations which have the same maturity as the Brady
Bonds. Certain interest payments on these Brady Bonds may be collateralized by
cash or securities in an amount that, in the case of fixed rate bonds, is
typically equal to between 12 and 18 months of rolling interest payments or, in
the case of floating rate bonds, initially is typically equal to between 12 and
18 months rolling interest payments based on the applicable interest rate at
that time and is adjusted at regular intervals thereafter with the balance of
interest accruals in each case being uncollateralized.
The applicable funds may purchase Brady Bonds with no or limited
collateralization, and will be relying for payment of interest and (except in
the case of principal collateralized Brady Bonds) principal primarily on the
willingness and ability of the foreign government to make payment in accordance
with the terms of the Brady Bonds. In the event of a default with respect to
collateralized Brady Bonds as a result of which the payment obligations of the
issuer are accelerated, the U.S. Treasury zero coupon obligations held as
collateral for the payment of principal will not be distributed to investors,
nor will such obligations be sold and the proceeds distributed. The collateral
will be held by the collateral agent to the scheduled maturity of the defaulted
Brady Bonds, which will continue to be outstanding, at which time the face
amount of the collateral will equal the principal payments which would have then
been due on the Brady Bonds in the normal course.
Based upon current market conditions, a fund would not intend to purchase Brady
Bonds which, at the time of investment, are in default as to payments. However,
in light of the residual risk of the Brady Bonds and, among other factors, the
history of default with respect to commercial bank loans by public and private
entities of countries issuing Brady Bonds, investments in Brady Bonds are to be
viewed as speculative. A substantial portion of the Brady Bonds and other
Sovereign debt securities in which High Yield Bond and Strategic Bond Funds
invest are likely to be acquired at a discount, which involves certain
considerations discussed in 'Taxes.'
In restructuring its external debt under the Brady Plan framework, a debtor
nation negotiates with its existing bank lenders as well as multilateral
institutions such as the International Bank for Reconstruction and Development
(the 'World Bank') and the International Monetary Fund (the 'IMF'). The Brady
Plan framework, as it has developed, contemplates the exchange of external
commercial bank debt for newly issued bonds known as 'Brady Bonds.' Brady Bonds
may also be issued in respect of new money being advanced by existing lenders in
connection with the debt restructuring. The World Bank and/or the IMF support
the restructuring by providing funds pursuant to loan agreements or other
arrangements which enable the debtor nation to collateralize the new Brady Bonds
or to repurchase outstanding bank debt at a discount. Under these arrangements
with the World Bank and/or the IMF, debtor nations have been required to agree
to the implementation of certain domestic monetary and fiscal reforms. Such
reforms have included the liberalization of trade and foreign investment, the
privatization of state-owned enterprises and the setting of targets for public
spending and borrowing. These policies and programs seek to promote the debtor
country's economic growth and development. Investors should also recognize that
the Brady Plan only sets forth general guiding principles for economic reform
and debt reduction, emphasizing that solutions must be negotiated on a
case-by-case basis between debtor nations and their creditors. The investment
manager believes that economic reforms undertaken by countries in connection
with the issuance of Brady Bonds may make the debt of countries which have
issued or have announced plans to issue Brady Bonds an attractive opportunity
for
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investment. However, there can be no assurance that SBAM's expectations with
respect to Brady Bonds will be realized.
Agreements implemented under the Brady Plan to date are designed to achieve debt
and debt-service reduction through specific options negotiated by a debtor
nation with its creditors. As a result, the financial packages offered by each
country differ. The types of options have included the exchange of outstanding
commercial bank debt for bonds issued at 100% of face value of such debt which
carry a below-market stated rate of interest (generally known as par bonds),
bonds issued at a discount from the face value of such debt (generally known as
discount bonds), bonds bearing an interest rate which increases over time and
bonds issued in exchange for the advancement of new money by existing lenders.
Discount bonds issued to date under the framework of the Brady Plan have
generally borne interest computed semiannually at a rate equal to 13/16 of 1%
above the then current six month London Inter-Bank Offered Rate ('LIBOR') rate.
Regardless of the stated face amount and stated interest rate of the various
types of Brady Bonds, the applicable funds will purchase Brady Bonds in
secondary markets, as described below, in which the price and yield to the
investor reflect market conditions at the time of purchase. Brady Bonds issued
to date have traded at a deep discount from their face value. Certain sovereign
bonds are entitled to 'value recovery payments' in certain circumstances, which
in effect constitute supplemental interest payments but generally are not
collateralized. Certain Brady Bonds have been collateralized as to principal due
at maturity (typically 30 years from the date of issuance) by U.S. Treasury zero
coupon bonds with a maturity equal to the final maturity of such Brady Bonds,
although the collateral is not available to investors until the final maturity
of the Brady Bonds. Collateral purchases are financed by the IMF, the World Bank
and the debtor nations' reserves.
Brady Bonds have been issued only recently, and, accordingly, do not have a long
payment history. They may be collateralized or uncollateralized and issued in
various currencies (although most are dollar-denominated) and they are actively
traded in the over-the-counter secondary market. Dollar-denominated,
collateralized Brady Bonds, which may be fixed rate par bonds or floating rate
discount bonds, are generally collateralized in full as to principal due at
maturity by U.S. Treasury zero coupon obligations which have the same maturity
as the Brady Bonds. Certain interest payments on these Brady Bonds may be
collateralized by cash or securities in an amount that, in the case of fixed
rate bonds, is typically equal to between 12 and 18 months of rolling interest
payments or, in the case of floating rate bonds, initially is typically equal to
between 12 and 18 months rolling interest payments based on the applicable
interest rate at that time and is adjusted at regular intervals thereafter with
the balance of interest accruals in each case being uncollateralized.
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.
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REVERSE REPURCHASE AGREEMENTS
Total Return Fund, High Yield Bond Fund, Strategic Bond Fund and Asia Growth
Fund may enter into 'reverse' repurchase agreements to avoid selling securities
during unfavorable market conditions to meet redemptions. Pursuant to a reverse
repurchase agreement, a fund will sell portfolio securities and agree to
repurchase them from the buyer at a particular date and price. Whenever a fund
enters into a reverse repurchase agreement, it will establish a segregated
account of liquid assets in an amount at least equal to the repurchase price
marked to market daily (including accrued interest), and will subsequently
monitor the account to ensure that such equivalent value is maintained, in
accordance with procedures established by the Board of Directors. A fund pays
interest on amounts obtained pursuant to reverse repurchase agreements. Reverse
repurchase agreements are considered to be borrowings by a fund.
SECURITIES LENDING
Each of the funds may lend portfolio securities to brokers or dealers or other
financial institutions. The procedure for the lending of securities will include
the following features and conditions. The borrower of the securities will
deposit cash with the fund in an amount equal to a minimum of 100% of the market
value of the securities lent. The fund will invest the collateral in short-term
debt securities or cash equivalents and earn the interest thereon. A negotiated
portion of the income so earned may be paid to the borrower or the broker who
arranged the loan. If the deposit drops below the required minimum at any time,
the borrower may be called upon to post additional cash. If the additional cash
is not paid, the loan will be immediately due and the fund may use the
collateral or its own cash to replace the securities by purchase in the open
market charging any loss to the borrower. These will be 'demand' loans and may
be terminated by the fund at any time. A fund will receive any dividends and
interest paid on the securities lent and the loans will be structured to assure
that the fund will be able to exercise its voting rights on the securities. Such
loans will be authorized only to the extent that the receipt of income from such
activity would not cause any adverse tax consequences to a fund's shareholders
and only in accordance with applicable rules and regulations.
Valuation of Securities. 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.
With the exception of Capital Fund and Investors Fund, none of the funds
presently intends to lend any of its portfolio securities. Investors Fund and
Capital Fund may lend portfolio securities not exceeding 33 1/3% of the funds'
total assets taken at value.
LOAN PARTICIPATIONS AND ASSIGNMENTS
Total Return Fund, High Yield Bond Fund and Strategic Bond Fund may invest in
loan participations and assignments. The funds consider these investments to be
investments in debt securities for purposes of this Prospectus. Loan
participations typically will result in a fund having a contractual relationship
only with the lender, not with the borrower. A fund will have the right to
receive payments of principal, interest and 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.
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In connection with purchasing loan participations, a fund generally will have no
right to enforce compliance by the borrower with the terms of the loan agreement
relating to the loan, nor any rights of set-off against the borrower, and the
fund may not benefit directly from any collateral supporting the loan in which
it has purchased the participation. As a result, a fund will assume the credit
risk of both the borrower and the lender that is selling the participation. In
the event of the insolvency of the lender selling a participation, a fund may be
treated as a general creditor of the lender and may not benefit from any set-off
between the lender and the borrower. A fund will acquire loan participations
only if the lender interpositioned between the fund and the borrower is
determined by SBAM to be creditworthy. When a fund purchases assignments from
lenders, the fund will acquire direct rights against the borrower on the loan,
except that under certain circumstances such rights may be more limited than
those held by the assigning lender.
Valuation. In valuing a loan participation or assignment held by a fund for
which a secondary trading market exists, the fund will rely upon prices or
quotations provided by banks, dealers or pricing services. To the extent a
secondary trading market does not exist, a fund's loan participations and
assignments will be valued in accordance with procedures adopted by the Board of
Directors, taking into consideration, among other factors: (i) the
creditworthiness of the borrower under the loan and the lender; (ii) the current
interest rate; period until next rate reset and maturity of the loan; (iii)
recent prices in the market for similar loans; and (iv) recent prices in the
market for instruments of similar quality, rate, period until next interest rate
reset and maturity. See 'Net Asset Value.'
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.
DERIVATIVES
A detailed discussion of derivatives that may be used by the investment manager
on behalf of certain funds follows below. A fund is not obligated, however, to
use any derivatives and makes no representation as to the availability of these
techniques at this time or at any time in the future. 'Derivatives,' as used in
the Prospectus and this SAI, refers to interest rate, currency or stock or bond
index futures contracts, currency forward contracts and currency swaps, the
purchase and sale (or writing) of exchange listed and over-the-counter ('OTC')
put and call options on debt and equity securities, currencies, interest rate,
currency or stock index futures and fixed-income and stock indices and other
financial instruments, entering into various interest rate transactions such as
swaps, caps, floors, collars, entering into equity swaps, caps, floors, the
purchase and sale of indexed debt securities or trading in other similar types
of instruments.
Derivatives may be used to attempt to protect against possible changes in the
market value of securities held or to be purchased for a fund's portfolio
resulting from securities markets or currency exchange rate fluctuations, to
protect a fund's unrealized gains in the value of its securities, to facilitate
the sale of those securities for investment purposes, to manage the effective
maturity or duration of a fund's portfolio or to establish a position in the
derivatives markets as a
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temporary substitute for purchasing or selling particular securities or to seek
to enhance a fund's income or gain. A fund may use any or all types of
derivatives which it is authorized to use at any time; no particular strategy
will dictate the use of one type of transaction rather than another, as use of
any authorized derivative will be a function of numerous variables, including
market conditions. The ability of a fund to utilize derivatives successfully
will depend on numerous factors including the investment manager's ability to
predict pertinent market movements, which cannot be assured. These skills are
different from those needed to select a fund's portfolio securities.
A fund's ability to pursue certain of these strategies may be limited by the
Commodity Exchange Act, as amended, applicable regulations of the Commodity
Futures Trading Commission ('CFTC') thereunder and the federal income tax
requirements applicable to regulated investment companies which are not operated
as commodity pools.
CURRENCY TRANSACTIONS. A fund may engage in currency transactions with
counterparties to hedge the value of portfolio securities denominated in
particular currencies against fluctuations in relative value or to generate
income or gain. Currency transactions include currency forward contracts,
exchange-listed currency futures contracts and options thereon, exchange-listed
and OTC options on currencies, and currency swaps. A forward currency contract
involves a privately negotiated obligation to purchase or sell (with delivery
generally required) a specific currency at a future date, which may be any fixed
number of days from the date of the contract agreed upon by the parties, at a
price set at the time of the contract. A currency swap is an agreement to
exchange cash flows based on the notional difference among two or more
currencies and operates similarly to an interest rate swap, which is described
below under 'Swaps, Caps, Floors and Collars.' A fund may enter into currency
transactions only with counterparties that the investment manager deems to be
creditworthy.
A fund may enter into forward currency exchange contracts when the investment
manager believes that the currency of a particular country may suffer a
substantial decline against the U.S. dollar. In those circumstances, a fund may
enter into a forward contract to sell, for a fixed amount of U.S. dollars, the
amount of that currency approximating the value of some or all of the fund's
portfolio securities denominated in such currency. Forward contracts may limit
potential gain from a positive change in the relationship between the U.S.
dollar and foreign currencies.
Transaction hedging is entering into a currency transaction with respect to
specific assets or liabilities of the fund, which will generally arise in
connection with the purchase or sale of the fund's portfolio securities or the
receipt of income from them. Position hedging is entering into a currency
transaction with respect to portfolio securities positions denominated or
generally quoted in that currency. A fund will not enter into a transaction to
hedge currency exposure to an extent greater, after netting all transactions
intended wholly or partially to offset other transactions, than the aggregate
market value (at the time of entering into the transaction) of the securities
held by the fund that are denominated or generally quoted in or currently
convertible into the currency, other than with respect to proxy hedging as
described below.
A fund may cross-hedge currencies by entering into transactions to purchase or
sell one or more currencies that are expected to increase or decline in value
relative to other currencies to which the fund has or in which the fund expects
to have exposure. To reduce the effect of currency fluctuations on the value of
existing or anticipated holdings of its securities, a fund may also engage in
proxy hedging. Proxy hedging is often used when the currency to which the fund's
holdings is exposed is difficult to hedge generally or difficult to hedge
against the dollar. Proxy hedging entails entering into a forward contract to
sell a currency, the changes in the value of which are generally considered to
be linked to a currency or currencies in which some or all of the fund's
securities are or are expected to be denominated, and to buy dollars. The amount
of the contract would not exceed the market value of the fund's securities
denominated in linked currencies. Currency transactions are subject to risks
different from other portfolio transactions, as discussed under 'Risk Factors.'
FUTURES CONTRACTS. A fund may trade futures contracts: (1) on domestic and
foreign exchanges on currencies, interest rates and bond indices; and (2) on
domestic and, to the extent permitted by the CFTC, foreign exchanges on stock
indices. Futures contracts are generally bought and sold on
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the commodities exchanges on which they are listed with payment of initial and
variation margin as described below. The sale of a futures contract creates a
firm obligation by the Fund, as seller, to deliver to the buyer the specific
type of financial instrument called for in the contract at a specific future
time for a specified price (or, with respect to certain instruments, the net
cash amount). None of the funds is a commodity pool, and each fund, where
permitted, will use futures contracts and options thereon solely: (i) for bona
fide hedging purposes; and (ii) for other purposes in amounts permitted by the
rules and regulations promulgated by the CFTC. A fund's use of financial futures
contracts and options thereon will in all cases be consistent with applicable
regulatory requirements and in particular the rules and regulations of the CFTC.
Maintaining a futures contract or selling an option on a futures contract will
typically require the Fund to deposit with a financial intermediary, as security
for its obligations, an amount of cash or other specified assets ('initial
margin') that initially is from 1% to 10% of the face amount of the contract
(but may be higher in some circumstances). Additional cash or assets ('variation
margin') may be required to be deposited thereafter daily as the mark-to-market
value of the futures contract fluctuates.
A fund will not enter into a futures contract or option thereon other than for
bona fide hedging purposes if, immediately thereafter, the sum of the amount of
its initial margin and premiums required to maintain permissible non-bona fide
hedging positions in futures contracts and options thereon would exceed 5% of
the liquidation value of the fund's portfolio, after taking into account
unrealized profits and losses on existing contracts; however, in the case of an
option that is in-the-money at the time of the purchase, the in-the-money amount
may be excluded in calculating the 5% limitation. The value of all futures
contracts sold by the fund (adjusted for the historical volatility relationship
between the fund and the contracts) will not exceed the total market value of
the fund's securities. In addition, the value of a fund's long futures and
options positions (futures contracts on stock or bond indices, interest rates or
foreign currencies and call options on such futures contracts) will not exceed
the sum of: (a) liquid assets segregated for this purpose; (b) cash proceeds on
existing investments due within thirty days; and (c) accrued profits on the
particular futures or options positions.
INTEREST RATE FUTURES CONTRACTS. A fund may enter into interest rate futures
contracts in order to protect it from fluctuations in interest rates without
necessarily buying or selling fixed income securities. An interest rate futures
contract is an agreement to take or make delivery of either: (i) an amount of
cash equal to the difference between the value of a particular index of debt
securities at the beginning and at the end of the contract period; or (ii) a
specified amount of a particular debt security at a future date at a price set
at time of the contract. For example, if a fund owns bonds, and interest rates
are expected to increase, the fund might sell futures contracts on debt
securities having characteristics similar to those held in the portfolio. Such a
sale would have much the same effect as selling an equivalent value of the bonds
owned by the fund. If interest rates did increase, the value of the debt
securities in the portfolio would decline, but the value of the futures
contracts to the fund would increase at approximately the same rate, thereby
keeping the net asset value of each class of the fund from declining as much as
it otherwise would have. A fund could accomplish similar results by selling
bonds with longer maturities and investing in bonds with shorter maturities when
interest rates are expected to increase. However, since the futures market may
be more liquid than the cash market, the use of futures contracts as a risk
management technique allows a fund to maintain a defensive position without
having to sell its portfolio securities.
Similarly, when the investment manager expects that interest rates may decline,
a fund may purchase interest rate futures contracts in an attempt to hedge
against having to make subsequently anticipated purchases of bonds at the higher
prices subsequently expected to prevail. Since the fluctuations in the value of
appropriately selected futures contracts should be similar to that of the bonds
that will be purchased, a fund could take advantage of the anticipated rise in
the cost of the bonds without actually buying them until the market had
stabilized. At that time, a fund could make the intended purchase of the bonds
in the cash market and the futures contracts could be liquidated.
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At the time of delivery of securities pursuant to an interest rate futures
contract, adjustments are made to recognize differences in value arising from
the delivery of securities with a different interest rate from that specified in
the contract. In some (but not many) cases, securities called for by a futures
contract may have a shorter term than the term of the futures contract and,
consequently, may not in fact have been issued when the futures contract was
entered.
OPTIONS. As indicated in the Prospectus, in order to hedge against adverse
market shifts or to increase income or gain, certain Funds may purchase put and
call options or write 'covered' put and call options on futures contracts on
stock indices, interest rates and currencies. In addition, in order to hedge
against adverse market shifts or to increase its income, a fund may purchase put
and call options and write 'covered' put and call options on stocks, stock
indices and currencies. A fund may utilize options on currencies in order to
hedge against currency exchange rate risks. A call option is 'covered' if, so
long as the fund is obligated as the writer of the option, it will own: (i) the
underlying investment subject to the option; (ii) securities convertible or
exchangeable without the payment of any consideration into the securities
subject to the option; or (iii) a call option on the relevant security or
currency with an exercise price no higher than the exercise price on the call
option written. A put option is 'covered' if, to support its obligation to
purchase the underlying investment if a put option that a fund writes is
exercised, the fund will either (a) deposit with its custodian in a segregated
account cash, cash equivalents, U.S. government securities or other high grade
liquid debt obligations having a value at least equal to the exercise price of
the underlying investment or (b) continue to own an equivalent number of puts of
the same 'series' (that is, puts on the same underlying investment having the
same exercise prices and expiration dates as those written by the fund), or an
equivalent number of puts of the same 'class' (that is, puts on the same
underlying investment) with exercise prices greater than those that it has
written (or, if the exercise prices of the puts it holds are less than the
exercise prices of those it has written, it will deposit the difference with its
custodian in a segregated account). Parties to options transactions must make
certain payments and/or set aside certain amounts of assets in connection with
each transaction, as described in the Prospectus.
In all cases except for certain options on interest rate futures contracts, by
writing a call, a fund will limit its opportunity to profit from an increase in
the market value of the underlying investment above the exercise price of the
option for as long as the fund's obligation as writer of the option continues.
By writing a put, a fund will limit its opportunity to profit from a decrease in
the market value of the underlying investment below the exercise price of the
option for as long as the fund's obligation as writer of the option continues.
Upon the exercise of a put option written by a fund, the fund may suffer an
economic loss equal to the difference between the price at which the fund is
required to purchase the underlying investment and its market value at the time
of the option exercise, less the premium received for writing the option. Upon
the exercise of a call option written by a fund, the fund may suffer an economic
loss equal to an amount not less than the excess of the investment's market
value at the time of the option exercise over the fund's acquisition cost of the
investment, less the sum of the premium received for writing the option and the
positive difference, if any, between the call price paid to the fund and the
fund's acquisition cost of the investment.
In all cases except for certain options on interest rate futures contracts, in
purchasing a put option, a fund will seek to benefit from a decline in the
market price of the underlying investment, while in purchasing a call option, a
fund will seek to benefit from an increase in the market price of the underlying
investment. If an option purchased is not sold or exercised when it has
remaining value, or if the market price of the underlying investment remains
equal to or greater than the exercise price, in the case of a put, or remains
equal to or below the exercise price, in the case of a call, during the life of
the option, the fund will lose its investment in the option. For the purchase of
an option to be profitable, the market price of the underlying investment must
decline sufficiently below the exercise price, in the case of a put, and must
increase sufficiently above the exercise price, in the case of a call, to cover
the premium and transaction costs.
In the case of certain options on interest rate futures contracts, a fund may
purchase a put option in anticipation of a rise in interest rates, and purchase
a call option in anticipation of a fall in
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interest rates. By writing a covered call option on interest rate futures
contracts, a fund will limit its opportunity to profit from a fall in interest
rates. By writing a covered put option on interest rate futures contracts, a
fund will limit its opportunity to profit from a rise in interest rates.
A fund may choose to exercise the options it holds, permit them to expire or
terminate them prior to their expiration by entering into closing transactions.
A fund may enter into a closing purchase transaction in which the fund purchases
an option having the same terms as the option it had written or a closing sale
transaction in which the fund sells an option having the same terms as the
option it had purchased. A covered option writer unable to effect a closing
purchase transaction will not be able to sell the underlying security until the
option expires or the underlying security is delivered upon exercise, with the
result that the writer will be subject to the risk of market decline in the
underlying security during such period. Should a fund choose to exercise an
option, the fund will purchase in the open market the securities, commodities or
commodity futures contracts underlying the exercised option.
Exchange-listed options on securities and currencies, with certain exceptions,
generally settle by physical delivery of the underlying security or currency,
although in the future, cash settlement may become available. Frequently, rather
than taking or making delivery of the underlying instrument through the process
of exercising the option, listed options are closed by entering into offsetting
purchase or sale transactions that do not result in ownership of the new option.
Index options are cash settled for the net amount, if any, by which the option
is 'in-the-money' (that is, the amount by which the value of the underlying
instrument exceeds, in the case of a call option, or is less than, in the case
of a put option, the exercise price of the option) at the time the option is
exercised.
Put options and call options typically have similar structural characteristics
and operational mechanics regardless of the underlying instrument on which they
are purchased or sold. Thus, the following general discussion relates to each of
the particular types of options discussed in greater detail below. In addition,
many derivatives involving options require segregation of Fund assets in special
accounts, as described below under 'Use of Segregated and Other Special
Accounts.'
A put option gives the purchaser of the option, upon payment of a premium, the
right to sell, and the writer of the obligation to buy, the underlying security,
index, currency or other instrument at the exercise price. A fund's purchase of
a put option on a security, for example, might be designed to protect its
holdings in the underlying instrument (or, in some cases, a similar instrument)
against a substantial decline in the market value of such instrument by giving
the fund the right to sell the instrument at the option exercise price. A call
option, upon payment of a premium, gives the purchaser of the option the right
to buy, and the seller the obligation to sell, the underlying instrument at the
exercise price. A fund's purchase of a call option on a security, financial
futures contract, index, currency or other instrument might be intended to
protect the fund against an increase in the price of the underlying instrument
that it intends to purchase in the future by fixing the price at which it may
purchase the instrument. An 'American' style put or call option may be exercised
at any time during the option period, whereas a 'European' style put or call
option may be exercised only upon expiration or during a fixed period prior to
expiration. Exchange-listed options are issued by a regulated intermediary such
as the Options Clearing Corporation ('OCC'), which guarantees the performance of
the obligations of the parties to the options. The discussion below uses the OCC
as an example, but is also applicable to other similar financial intermediaries.
OCC-issued and exchange-listed options, with certain exceptions, generally
settle by physical delivery of the underlying security or currency, although in
the future, cash settlement may become available. Index options are cash settled
for the net amount, if any, by which the option is 'in-the-money' (that is, the
amount by which the value of the underlying instrument exceeds, in the case of a
call option, or is less than, in the case of a put option, the exercise price of
the option) at the time the option is exercised. Frequently, rather than taking
or making delivery of the underlying instrument through the process of
exercising the option, listed options are closed by entering into offsetting
purchase or sale transactions that do not result in ownership of the new option.
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OTC options are purchased from or sold to securities dealers, financial
institutions or other parties (collectively referred to as 'Counterparties' and
individually referred to as a 'Counterparty') through a direct bilateral
agreement with the Counterparty. In contrast to exchange-listed options, which
generally have standardized terms and performance mechanics, all of the terms of
an OTC option, including such terms as method of settlement, term, exercise
price, premium, guaranties and security, are determined by negotiation of the
parties. It is anticipated that any Portfolio authorized to use OTC options will
generally only enter into OTC options that have cash settlement provisions,
although it will not be required to do so.
If a fund sells a call option, the premium that it receives may serve as a
partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments held by the fund or will
increase the fund's income. Similarly, the sale of put options can also provide
gains for a fund.
A fund may purchase and sell call options on securities that are traded on U.S.
and foreign securities exchanges and in the OTC markets, and on securities
indices, currencies and futures contracts. All calls sold by a fund must be
'covered' (that is, the fund must own the securities or futures contract subject
to the call), or must otherwise meet the asset segregation requirements
described below for so long as the call is outstanding. Even though the fund
will receive the option premium to help protect it against loss, a call sold by
a fund will expose the fund during the term of the option to possible loss of
opportunity to realize appreciation in the market price of the underlying
security or instrument and may require the fund to hold a security or instrument
that it might otherwise have sold.
A fund reserves the right to purchase or sell options on instruments and indices
which may be developed in the future to the extent consistent with applicable
law, the fund's investment objective and the restrictions set forth herein.
A fund may purchase and sell put options on securities (whether or not it holds
the securities in its portfolio) and on securities indices, currencies and
futures contracts. In selling put options, a fund faces the risk that it may be
required to buy the underlying security at a disadvantageous price above the
market price.
(a) OPTIONS ON STOCKS AND STOCK INDICES. A fund may purchase put and call
options and write covered put and call options on stocks and stock indices
listed on domestic and foreign securities exchanges in order to hedge
against movements in the equity markets or to increase income or gain to the
fund. In addition, the fund may purchase options on stocks that are traded
over-the-counter. Options on stock indices are similar to options on
specific securities. However, because options on stock indices do not
involve the delivery of an underlying security, the option represents the
holder's right to obtain from the writer cash in an amount equal to a fixed
multiple of the amount by which the exercise price exceeds (in the case of a
put) or is less than (in the case of a call) the closing value of the
underlying stock index on the exercise date. Currently, options traded
include the Standard & Poor's 100 Index of Composite Stocks, Standard &
Poor's 500 Index of Composite Stocks (the 'S&P 500 Index'), the New York
Stock Exchange ('NYSE') Composite Index, the American Stock Exchange
('AMEX') Market Value Index, the National Over-the-Counter Index and other
standard broadly based stock market indices. Options are also traded in
certain industry or market segment indices such as the Oil Index, the
Computer Technology Index and the Transportation Index. Stock index options
are subject to position and exercise limits and other regulations imposed by
the exchange on which they are traded.
If the investment manager expects general stock market prices to rise, a
fund might purchase a call option on a stock index or a futures contract on
that index as a hedge against an increase in prices of particular equity
securities it wants ultimately to buy. If the stock index does rise, the
price of the particular equity securities intended to be purchased may also
increase, but that increase would be offset in part by the increase in the
value of the fund's index option or futures contract resulting from the
increase in the index. If, on the other hand, the investment manager expects
general stock market prices to decline, it might purchase a put option or
sell a futures contract on the index. If that index does decline, the value
of some or all of the
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equity securities in a fund's portfolio may also be expected to decline, but
that decrease would be offset in part by the increase in the value of the
fund's position in such put option or futures contract.
(b) OPTIONS ON CURRENCIES. A fund may invest in options on currencies traded on
domestic and foreign securities exchanges in order to hedge against currency
exchange rate risks or to increase income or gain.
(c) OPTIONS ON FUTURES CONTRACTS. A fund may purchase put and call options and
write covered put and call options on futures contracts on stock indices,
interest rates and currencies traded on domestic and, to the extent
permitted by the CFTC, foreign exchanges, in order to hedge all or a portion
of its investments or to increase income or gain and may enter into closing
transactions in order to terminate existing positions. There is no guarantee
that such closing transactions can be effected. An option on a stock index
futures contract, interest rate futures contract or currency futures
contract, as contrasted with the direct investment in such a contract, gives
the purchaser the right, in return for the premium paid, to assume a
position in the underlying contract at a specified exercise price at any
time on or before the expiration date of the option. Upon exercise of an
option, the delivery of the futures position by the writer of the option to
the holder of the option will be accompanied by delivery of the accumulated
balance in the writer's futures margin account. The potential loss related
to the purchase of an option on a futures contract is limited to the premium
paid for the option (plus transaction costs). While the price of the option
is fixed at the point of sale, the value of the option does change daily and
the change would be reflected in the net asset value of the fund.
The purchase of an option on a financial futures contract involves payment of a
premium for the option without any further obligation on the part of the fund.
If the fund exercises an option on a futures contract it will be obligated to
post initial margin (and potentially variation margin) for the resulting futures
position just as it would for any futures position. Futures contracts and
options thereon are generally settled by entering into an offsetting
transaction, but no assurance can be given that a position can be offset prior
to settlement or that delivery will occur.
INTEREST RATE AND EQUITY SWAPS AND RELATED TRANSACTIONS. Certain funds may enter
into interest rate and equity swaps and may purchase or sell (i.e., write)
interest rate and equity caps, floors and collars. A fund expects to enter into
these transactions in order to hedge against either a decline in the value of
the securities included in the fund's portfolio, or against an increase in the
price of the securities which it plans to purchase, or in order to preserve or
maintain a return or spread on a particular investment or portion of its
portfolio or to achieve a particular return on cash balances, or in order to
increase income or gain. Interest rate and equity swaps involve the exchange by
a fund with another party of their respective commitments to make or receive
payments based on a notional principal amount. The purchase of an interest rate
or equity cap entitles the purchaser, to the extent that a specified index
exceeds a predetermined level, to receive payments on a contractually-based
principal amount from the party selling the interest rate or equity cap. The
purchase of an interest rate or equity floor entitles the purchaser, to the
extent that a specified index falls below a predetermined rate, to receive
payments on a contractually-based principal amount from the party selling the
interest rate or equity floor. A collar is a combination of a cap and a floor
which preserve a certain return within a predetermined range of values.
A fund may enter into interest rate and equity swaps, caps, floors and collars
on either an asset-based or liability-based basis, depending on whether it is
hedging its assets or its liabilities, and will usually enter into interest rate
and equity swaps on a net basis (i.e., the two payment streams are netted out),
with the fund receiving or paying, as the case may be, only the net amount of
the two payments. The net amount of the excess, if any, of a fund's obligations
over its entitlements with respect to each interest rate or equity swap will be
accrued on a daily basis, and an amount of liquid assets having an aggregate net
asset value at least equal to the accrued excess will be maintained in a
segregated account by the fund's custodian in accordance with procedures
established by the Board of Directors. If a fund enters into an interest rate or
equity swap on other than a net basis, the fund will maintain a segregated
account in the full amount accrued on
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a daily basis of the fund's obligations with respect to the swap. A fund will
only enter into interest rate and equity swap, cap, floor or collar transactions
with counterparties the investment manager deems to be creditworthy. The
investment manager will monitor the creditworthiness of counterparties to its
interest rate and equity swap, cap, floor and collar transactions on an ongoing
basis. If there is a default by the other party to such a transaction, a fund
will have contractual remedies pursuant to the agreements related to the
transaction.
Caps, floors and collars are more recent innovations for which standardized
documentation has not yet been developed and, accordingly, they are less liquid
than swaps. To the extent a fund sells caps, floors and collars it will maintain
in a segregated account cash and/or, cash equivalents or other liquid high grade
debt securities having an aggregate net asset value at least equal to the full
amount, accrued on a daily basis, of the fund's obligations with respect to the
caps, floors or collars.
The liquidity of swap agreements will be determined by the investment manager
based on various factors, including (1) the frequency of trades and quotations,
(2) the number of dealers and prospective purchasers in the marketplace, (3)
dealer undertakings to make a market, (4) the nature of the security (including
any demand or tender features), and (5) the nature of the marketplace for trades
(including the ability to assign or offset the fund's rights and obligations
relating to the investment). Such determination will govern whether a swap will
be deemed within the percentage restriction on investments in securities that
are not readily marketable.
A fund will maintain liquid assets in a segregated custodial account to cover
its current obligations under swap agreements. If a fund enters into a swap
agreement on a net basis, it will segregate assets with a daily value at least
equal to the excess, if any, of the fund's accrued obligations under the swap
agreement over the accrued amount the fund is entitled to receive under the
agreement. If a fund enters into a swap agreement on other than a net basis, it
will segregate assets with a value equal to the full amount of the fund's
accrued obligations under the agreement.
There is no limit on the amount of interest rate and equity swap transactions
that may be entered into by a fund. These transactions do not involve the
delivery of securities or other underlying assets or principal. Accordingly, the
risk of loss with respect to interest rate and equity swaps is limited to the
net amount of payments that a fund is contractually obligated to make, if any.
The effective use of swaps and related transactions by a fund may depend, among
other things, on the fund's ability to terminate the transactions at times when
the investment manager deems it desirable to do so.
INDEXED SECURITIES. A fund may purchase securities whose prices are indexed to
the prices of other securities, securities indices, currencies, or other
financial indicators. Indexed securities typically, but not always, are debt
securities or deposits whose value at maturity or coupon rate is determined by
reference to a specific instrument or statistic. Currency-indexed securities
typically are short-term to intermediate-term debt securities whose maturity
values or interest rates are determined by reference to the values of one or
more specified foreign currencies, and may offer higher yields than U.S.
dollar-denominated securities of equivalent issuers. Currency-indexed securities
may be positively or negatively indexed; that is, their maturity value may
increase when the specified currency value increases, resulting in a security
that performs similarly to a foreign currency-denominated instrument, or their
maturity value may decline when foreign currencies increase, resulting in a
security whose price characteristics are similar to a put on the underlying
currency. Currency-indexed securities may also have prices that depend on the
values of a number of different foreign currencies relative to each other.
COMBINED TRANSACTIONS. A fund may enter into multiple transactions, including
multiple options transactions, multiple futures transactions, multiple currency
transactions (including forward currency contracts), multiple interest rate
transactions and any combination of futures, options, currency and interest rate
transactions, instead of a single derivative, as part of a single or combined
strategy when, in the judgment of the investment manager, it is in the best
interests of the fund to do so. A combined transaction will usually contain
elements of risk that are present in each of its component transactions.
Although combined transactions will normally be entered into by a fund based on
the investment manager's judgment that the combined strategies will reduce
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risk or otherwise more effectively achieve the desired portfolio management
goal, it is possible that the combination will instead increase the risks or
hinder achievement of the fund management objective.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS. Use of many derivatives by a fund
will require, among other things, that the fund segregate liquid assets with its
custodian, or a designated sub-custodian, to the extent the fund's obligations
are not otherwise 'covered' through ownership of the underlying security,
financial instrument or currency. In general, either the full amount of any
obligation by a fund to pay or deliver securities or assets must be covered at
all times by the securities, instruments or currency required to be delivered,
or, subject to any regulatory restrictions, an amount of liquid assets at least
equal to the current amount of the obligation must be segregated with the
custodian or sub-custodian in accordance with procedures established by the
Board of Directors. The segregated assets cannot be sold or transferred unless
equivalent assets are substituted in their place or it is no longer necessary to
segregate them. A call option on securities written by a fund, for example, will
require the fund to hold the securities subject to the call (or securities
convertible into the needed securities without additional consideration) or to
segregate liquid high grade debt obligations sufficient to purchase and deliver
the securities if the call is exercised. A call option sold by a fund on an
index will require the fund to own portfolio securities that correlate with the
index or to segregate liquid high grade debt obligations equal to the excess of
the index value over the exercise price on a current basis. A put option on
securities written by a fund will require the fund to segregate liquid high
grade debt obligations equal to the exercise price. Except when a fund enters
into a forward contract in connection with the purchase or sale of a security
denominated in a foreign currency or for other non-speculative purposes, which
requires no segregation, a currency contract that obligates the fund to buy or
sell a foreign currency will generally require the fund to hold an amount of
that currency or liquid securities denominated in that currency equal to the
fund's obligations or to segregate liquid high grade debt obligations equal to
the amount of the fund's obligations.
OTC options entered into by a fund, including those on securities, currency,
financial instruments or indices, and OCC-issued and exchange-listed index
options will generally provide for cash settlement, although the fund will not
be required to do so. As a result, when a fund sells these instruments it will
segregate an amount of assets equal to its obligations under the options. OCC-
issued and exchange-listed options sold by a fund other than those described
above generally settle with physical delivery, and the fund will segregate an
amount of assets equal to the full value of the option. OTC options settling
with physical delivery or with an election of either physical delivery or cash
settlement will be treated the same as other options settling with physical
delivery.
In the case of a futures contract or an option on a futures contract, a fund
must deposit initial margin and, in some instances, daily variation margin in
addition to segregating liquid assets sufficient to meet its obligations to
purchase or provide securities or currencies, or to pay the amount owed at the
expiration of an index-based futures contract. A fund will accrue the net amount
of the excess, if any, of its obligations relating to swaps over its
entitlements with respect to each swap on a daily basis and will segregate with
its custodian, or designated sub-custodian, an amount of liquid assets having an
aggregate value equal to at least the accrued excess. Caps, floors and collars
require segregation of liquid assets with a value equal to the fund's net
obligation, if any.
Derivatives may be covered by means other than those described above when
consistent with applicable regulatory policies. A fund may also enter into
offsetting transactions so that its combined position, coupled with any
segregated assets, equals its net outstanding obligation in related derivatives.
A fund could purchase a put option, for example, if the strike price of that
option is the same or higher than the strike price of a put option sold by the
fund. Moreover, instead of segregating assets if it holds a futures contract or
forward contract, a fund could purchase a put option on the same futures
contract or forward contract with a strike price as high or higher than the
price of the contract held. Other derivatives may also be offset in
combinations. If the offsetting transaction terminates at the time of or after
the primary transaction, no segregation is required, but if it terminates prior
to that time, assets equal to any remaining obligation would need to be
segregated.
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RISK FACTORS
RULE 144A SECURITIES
To the extent that liquid Rule 144A securities that a fund holds become
illiquid, due to the lack of sufficient qualified institutional buyers or market
or other conditions, the percentage of a fund's assets invested in illiquid
assets would increase. The investment manager, under the supervision of the
Boards of Directors, will monitor Fund investments in Rule 144A securities and
will consider appropriate measures to enable a fund to maintain sufficient
liquidity for operating purposes and to meet redemption requests.
FIXED INCOME SECURITIES
Many fixed income securities contain call or buy-back features that permit their
issuers to call or repurchase the securities from their holders. Such securities
may present risks based on payment expectations. Although a fund would typically
receive a premium if an issuer were to redeem a security, if an issuer exercises
such a 'call option' and redeems the security during a time of declining
interest rates, a fund may realize a capital loss on its investment if the
security was purchased at a premium and a fund may have to replace the called
security with a lower yielding security, resulting in a decreased rate of return
to the fund.
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 'Risk Factors.' None of the funds will purchase bank
obligations which SBAM or the applicable sub-adviser believes, at the time of
purchase, will be subject to exchange controls or foreign withholding taxes;
however, there can be no assurance that such laws may not become applicable to
certain of the funds' investments. In the event unforeseen exchange controls or
foreign withholding taxes are imposed with respect to a fund's investments, the
effect may be to reduce the income received by the fund on such investments.
ASSET-BACKED SECURITIES
Asset-backed securities present certain risks which are, generally, related to
limited interests, if any, in related collateral. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. Most issuers of automobile receivables permit the servicers to
retain possession of the underlying obligations. If the servicer were to sell
these obligations to another party, there is a risk that the purchaser would
acquire an interest superior to that of the holders of the related automobile
receivables. In addition, because of the large number of vehicles involved in a
typical issuance and technical requirements under state laws, the trustee for
the holders of the automobile receivables may not have a proper security
interest in all of the obligations backing such receivables. Therefore, there is
the possibility that recoveries on repossessed collateral may not, in some
cases, be available to support payments on these securities. Other types of
asset-backed securities will be subject to the risks associated with the
underlying assets. If a letter of credit or other form of credit enhancement is
exhausted or otherwise unavailable, holders of asset-backed
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securities may also experience delays in payments or losses if the full amounts
due on underlying assets are not realized. Because asset-backed securities are
relatively new, the market experience in these securities is limited and the
market's ability to sustain liquidity through all phases of the market cycle has
not been tested.
MORTGAGE-BACKED SECURITIES
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.
Prepayments on a pool of mortgage loans are influenced by a variety of economic,
geographic, social and other factors, including changes in mortgagors' housing
needs, job transfers, unemployment, mortgagors' net equity in the mortgaged
properties and servicing decisions. Generally, however, prepayments on fixed
rate mortgage loans will increase during a period of falling interest rates.
Accordingly, amounts available for reinvestment by a fund are likely to be
greater during a period of relatively low interest rates and, as a result,
likely to be reinvested at lower interest rates than during a period of
relatively high interest rates. This prepayment effect has been particularly
pronounced during recent years as borrowers have refinanced higher interest rate
mortgages into lower interest rate mortgages available in the marketplace.
Mortgage-backed securities may decrease in value as a result of increases in
interest rates and may benefit less than other fixed income securities from
declining interest rates because of the risk of prepayment.
INVERSE FLOATING RATE OBLIGATIONS
Inverse floaters exhibit substantially greater price volatility than fixed rate
obligations having similar credit quality, redemption provisions and maturity,
and inverse floater CMOs exhibit greater price volatility than the majority of
mortgage pass-through securities or CMOs. In addition, some inverse floater CMOs
exhibit extreme sensitivity to changes in prepayments. As a result, the yield to
maturity of an inverse floater CMO is sensitive not only to changes in interest
rates but also to changes in prepayment rates on the related underlying mortgage
assets.
HIGH YIELD SECURITIES
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
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markets for high yield securities contract due to adverse economic conditions or
for other reasons, certain liquid securities in a fund's portfolio may become
illiquid and the proportion of the fund's assets invested in illiquid securities
may significantly increase.
Prices for high yield securities may be affected by legislative and regulatory
developments. These laws could adversely affect a fund's net asset value and
investment practices, the secondary market for high yield securities, the
financial condition of issuers of these securities and the value of outstanding
high yield securities. For example, federal legislation requiring the
divestiture by federally insured savings and loan associations of their
investments in high yield bonds and limiting the deductibility of interest by
certain corporate issuers of high yield bonds adversely affected the market in
recent years.
High Yield Corporate Securities. While the market values of securities rated
below investment grade and comparable unrated securities tend to react less to
fluctuations in interest rate levels than do those of higher-rated securities,
the market values of certain of these securities also tend to be more sensitive
to individual corporate developments and changes in economic conditions than
higher-rated securities. In addition, such securities present a higher degree of
credit risk. Issuers of these securities are often highly leveraged and may not
have more traditional methods of financing available to them, so that their
ability to service their debt obligations during an economic downturn or during
sustained periods of rising interest rates may be impaired. The risk of loss due
to default by such issuers is significantly greater than with investment grade
securities because such securities generally are unsecured and frequently are
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.
SOVEREIGN DEBT
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 'Risk Factors.' The ability and willingness of
sovereign obligors in developing and emerging market countries or the
governmental authorities that control repayment of their external debt to pay
principal and interest on such debt when due may depend on general economic and
political conditions within the relevant country. Countries such as those in
which a fund may invest have historically experienced, and may continue to
experience, high rates of inflation, high interest rates, exchange rate trade
difficulties and extreme poverty and unemployment. Many of these countries are
also characterized by political uncertainty or instability. Additional factors
which may influence the ability or willingness to service debt include, but are
not limited to, a country's cash flow situation, the availability of sufficient
foreign exchange on the date a payment is due, the relative size of its debt
service burden to the economy as a whole, and its government's policy towards
the International Monetary Fund, the World Bank and other international
agencies.
The ability of a foreign sovereign obligor to make timely payments on its
external debt obligations will also be strongly influenced by the obligor's
balance of payments, including export performance, its access to international
credits and investments, fluctuations in interest rates and the extent of its
foreign reserves. A country whose exports are concentrated in a few commodities
or whose economy depends on certain strategic imports could be vulnerable to
fluctuations in international prices of these commodities or imports. To the
extent that a country receives payment for its exports in currencies other than
U.S. dollars, its ability to make debt payments denominated in U.S. dollars
could be adversely affected. If a foreign sovereign obligor cannot generate
sufficient earnings from foreign trade to service its external debt, it may need
to depend on continuing loans and aid from foreign governments, commercial banks
and multilateral organizations, and inflows of foreign investment. The
commitment on the part of these foreign governments, multilateral organizations
and others to make such disbursements may be conditioned on the government's
implementation of economic reforms and/or economic performance and the timely
service of its obligations. Failure to implement such reforms, achieve such
levels of economic performance or
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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.
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.
PRIVATELY ISSUED MORTGAGE SECURITIES
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.
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FOREIGN SECURITIES
General. 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.
Emerging Market Countries. 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.
Transaction Costs. Other investment risks include the possible imposition of
foreign withholding taxes on certain amounts of a fund's income, the possible
seizure or nationalization of foreign assets and the possible establishment of
exchange controls, expropriation, confiscatory taxation, other foreign
governmental laws or restrictions which might affect adversely payments due on
securities held by a fund, the lack of extensive operating experience of
eligible foreign subcustodians and legal limitations on the ability of a fund to
recover assets held in custody by a foreign subcustodian in the event of the
subcustodian's bankruptcy. Moreover, brokerage commissions and other
transactions costs on foreign securities exchanges are generally higher than in
the United States.
In addition, there may be less publicly-available information about a foreign
issuer than about a U.S. issuer, and foreign issuers may not be subject to the
same accounting, auditing and financial record-keeping standards and
requirements as U.S. issuers. In particular, the assets and profits appearing on
the financial statements of an emerging market country issuer may not reflect
its financial position or results of operations in the way they would be
reflected and the financial statements been prepared in accordance with U.S.
generally accepted accounting principles. In addition, for an issuer that keeps
accounting records in local currency, inflation accounting rules may require,
for both tax and accounting purposes, that certain assets and liabilities be
restated on the issuer's balance sheet in order to express items in terms of
currency of constant purchasing power. Inflation accounting may indirectly
generate losses or profits. Consequently, financial data may be materially
affected by restatements for inflation and may not accurately reflect the real
condition of those issuers and securities markets. See 'High Yield Securities.'
Finally, in the event of a default in any such foreign obligations, it may be
more difficult for a fund to obtain or enforce a judgment against the issuers of
such obligations. Risks associated with international investments and investing
in smaller capital markets are heightened for investments in emerging market
countries. For example, some of the currencies of emerging market countries have
experienced devaluations relative to the U.S. dollar, and major adjustments have
been made periodically in certain of such currencies. Certain of such countries
face serious exchange constraints. In addition, governments of many emerging
market countries have exercised and continue to exercise substantial influence
over many aspects of the private sector. In certain cases, the government owns
or controls many companies. Accordingly, government actions in the future
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could have a significant effect on economic conditions in developing countries
which could affect private sector companies and consequently, the value of
certain securities held in a fund's portfolio.
Certain markets are in only the earliest stages of development. There is also a
high concentration of market capitalization and trading volume in a small number
of issuers representing a limited number of industries, as well as a high
concentration of investors and financial intermediaries. Many of such markets
also may be affected by developments with respect to more established markets in
the region. Brokers in emerging market countries typically are fewer in number
and less capitalized than brokers in the United States. These factors, combined
with the U.S. regulatory requirements for open-end investment companies and the
restrictions on foreign investment, result in potentially fewer investment
opportunities for a fund and may have an adverse impact on the investment
performance of a fund.
There generally is less governmental supervision and regulation of exchanges,
brokers and issuers in foreign countries than there is in the United States. For
example, there may be no comparable provisions under certain foreign laws to
insider trading and similar investor protection securities laws that apply with
respect to securities transactions consummated in the United States. Further,
brokerage commissions and other transaction costs on foreign securities
exchanges generally are higher than in the United States.
With respect to investments in certain emerging market countries, different
legal standards may have an adverse impact on a fund. For example, while the
potential liability of a shareholder in a U.S. corporation with respect to acts
of the corporation is generally limited to the amount of the shareholder's
investment, the notion of limited liability is less clear in certain emerging
market countries. Similarly, the rights of investors in emerging market
companies may be more limited than those of shareholders of U.S. corporations.
In some countries, banks or other financial institutions may constitute a
substantial number of the leading companies or companies with the most actively
traded securities. The Investment Company Act of 1940, as amended (the '1940
Act'), limits a fund's ability to invest in any equity security of an issuer
which, in its most recent fiscal year, derived more than 15% of its revenues
from 'securities related activities,' as defined by the rules thereunder. These
provisions may also restrict a fund's investments in certain foreign banks and
other financial institutions.
The manner in which foreign investors may invest in companies in certain
emerging market countries, as well as limitations on such investments, also may
have an adverse impact on the operations of a fund. For example, the fund may be
required in some countries to invest initially through a local broker or other
entity and then have the shares purchased re-registered in the name of the fund.
Re-registration may in some instances not occur on a timely basis, resulting in
a delay during which the fund may be denied certain of its rights as an
investor.
Foreign markets have different clearance and settlement procedures, and in
certain markets there have been times when settlements have failed to keep pace
with the volume of securities transactions, making it difficult to conduct such
transactions. Further, satisfactory custodial services for investment securities
may not be available in some countries having smaller, emerging capital markets,
which may result in a fund incurring additional costs and delays in transporting
and custodying such securities outside such countries. Delays in settlement or
other problems could result in periods when assets of a fund are uninvested and
no return is earned thereon. The inability of a fund to make intended security
purchases due to settlement problems or the risk of intermediary counterparty
failures could cause a fund to forego attractive investment opportunities. The
inability to dispose of a portfolio security due to settlement problems could
result either in losses to a fund due to subsequent declines in the value of
such portfolio security or, if the fund has entered into a contract to sell the
security, could result in possible liability to the purchaser.
Rules adopted under the 1940 Act permit a fund to maintain its foreign
securities and cash in the custody of certain eligible non-U.S. banks and
securities depositories. Certain banks in foreign countries may not be 'eligible
sub-custodians,' as defined in the 1940 Act, for a fund, in which event the fund
may be precluded from purchasing securities in certain foreign countries in
which it otherwise would invest or which may result in the fund's incurring
additional costs and delays in
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providing transportation and custody services for such securities outside of
such countries. A fund may encounter difficulties in effecting on a timely basis
portfolio transactions with respect to any securities of issuers held outside
their countries. Other banks that are eligible foreign sub-custodians may be
recently organized or otherwise lack extensive operating experience. In
addition, in certain countries there may be legal restrictions or limitations on
the ability of a fund to recover assets held in custody by foreign
sub-custodians in the event of the bankruptcy of the sub-custodian.
Asia Growth Fund. Although SBAM AP expects that most of the equity securities
purchased by the fund will be traded on a stock exchange or in an
over-the-counter market, most of the Asian securities markets have substantially
less volume than U.S. or other established markets and some of the stock
exchanges in the Asian countries are in the early stages of their development.
Concentration of the fund's assets in one or a few of the Asian countries and
Asian currencies will subject the fund, to a greater extent than if the fund's
assets were less geographically concentrated, to the risks of adverse changes in
the securities and foreign exchange markets of such countries and social,
political or economic events which may occur in those countries.
BRADY BONDS
Investors should recognize that Brady Bonds have been issued only recently, and
accordingly, do not have a long payment history. Brady Bonds which have been
issued to date are rated in the categories 'BB' or 'B' by S&P or 'Ba' or 'B' by
Moody's or, in cases in which a rating by S&P or Moody's has not been assigned,
are generally considered by the investment manager to be of comparable quality.
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.
SECURITIES LENDING
A fund may have difficulty disposing of assignments and loan participations.
Because the market for such instruments is not highly liquid, the funds
anticipate that such instruments could be sold only to a limited number of
institutional investors. The lack of a highly liquid secondary market may have
an adverse impact on the value of such instruments and will have an adverse
impact on a fund's ability to dispose of particular assignments or loan
participations in response to a specific economic event, such as deterioration
in the creditworthiness of the borrower.
The Board of Directors has adopted policies and procedures for the purpose of
determining whether assignments and loan participations are liquid or illiquid.
Pursuant to those policies and procedures, the Board of Directors has delegated
to SBAM the determination as to whether a particular loan participation or
assignment is liquid or illiquid, requiring that consideration be given to,
among other things, the frequency of quotes, the number of dealers willing to
sell and the number of potential purchasers, the nature of the loan
participation or assignment and the time needed to dispose of it and the
contractual provisions of the relevant documentation. To the
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extent that liquid assignments and loan participation that a fund holds become
illiquid, due to the lack of sufficient buyers or market or other conditions,
the percentage of a fund's assets invested in illiquid assets would increase.
SBAM, under the supervision of the Board of Directors, monitors Fund investments
in assignments and loan participations and will consider appropriate measures to
enable a fund to maintain sufficient liquidity for operating purposes and to
meet redemption requests.
In 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.
DERIVATIVES
Derivatives have special risks associated with them, including possible default
by the Counterparty to the transaction, illiquidity and, to the extent the
investment manager's view as to certain market movements is incorrect, the risk
that the use of the derivatives could result in losses greater than if they had
not been used. Use of put and call options could result in losses to a fund,
force the sale or purchase of portfolio securities at inopportune times or for
prices higher than (in the case of put options) or lower than (in the case of
call options) current market values, or cause a fund to hold a security it might
otherwise sell.
The use of futures and options transactions entails certain special risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related securities position of a
fund could create the possibility that losses on the hedging instrument are
greater than gains in the value of the fund's position. In addition, futures and
options markets could be illiquid in some circumstances and certain
over-the-counter options could have no markets. As a result, in certain markets,
a fund might not be able to close out a transaction without incurring
substantial losses. Although a fund's use of futures and options transactions
for hedging should tend to minimize the risk of loss due to a decline in the
value of the hedged position, at the same time it will tend to limit any
potential gain to the fund that might result from an increase in value of the
position. There is also the risk of loss by a fund of margin deposits in the
event of bankruptcy of a broker with whom the fund has an open position in a
futures contract or option thereon. Finally, the daily variation margin
requirements for futures contracts create a greater ongoing potential financial
risk than would purchases of options, in which case the exposure is limited to
the cost of the initial premium. However, because option premiums paid by a fund
are small in relation to the market value of the investments underlying the
options, buying options can result in large amounts of leverage. The leverage
offered by trading in options could cause a fund's net asset value to be subject
to more frequent and wider fluctuation than would be the case if the fund did
not invest in options.
As is the case with futures and options strategies, the effective use of swaps
and related transactions by a fund may depend, among other things, on a fund's
ability to terminate the transactions at times when SBAM deems it desirable to
do so. To the extent a fund does not, or cannot, terminate such a transaction in
a timely manner, a fund may suffer a loss in excess of any amounts that it may
have received, or expected to receive, as a result of entering into the
transaction.
Currency hedging involves some of the same risks and considerations as other
transactions with similar instruments. Currency transactions can result in
losses to a fund if the currency being hedged fluctuates in value to a degree or
in a direction that is not anticipated. Further, the risk exists that the
perceived linkage between various currencies may not be present or may not be
present during the particular time that the fund is engaging in proxy hedging.
Currency transactions are also subject to risks different from those of other
portfolio transactions. Because currency control is of great importance to the
issuing governments and influences economic planning and policy, purchases and
sales of currency and related instruments can be adversely affected by
government exchange controls, limitations or restrictions on repatriation of
currency, and manipulations or exchange restrictions imposed by governments.
These forms of governmental actions can result in losses to a fund if it is
unable to deliver or receive currency or monies in
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settlement of obligations and could also cause hedges it has entered into to be
rendered useless, resulting in full currency exposure as well as incurring
transaction costs. Buyers and sellers of currency futures contracts are subject
to the same risks that apply to the use of futures contracts generally. Further,
settlement of a currency futures contract for the purchase of most currencies
must occur at a bank based in the issuing nation. Trading options on currency
futures contracts is relatively new, and the ability to establish and close out
positions on these options is subject to the maintenance of a liquid market that
may not always be available. Currency exchange rates may fluctuate based on
factors extrinsic to that country's economy.
Because the amount of interest and/or principal payments which the issuer of
indexed debt securities is obligated to make is linked to the prices of other
securities, securities indices, currencies, or other financial indicators, such
payments may be significantly greater or less than payment obligations in
respect of other types of debt securities. As a result, an investment in indexed
debt securities may be considered speculative. Moreover, the performance of
indexed securities depends to a great extent on the performance of and may be
more volatile than the security, currency, or other instrument to which they are
indexed, and may also be influenced by interest rate changes in the United
States and abroad. At the same time, indexed securities are subject to the
credit risks associated with the issuer of the security, and their values may
decline substantially if the issuer's creditworthiness deteriorates.
Losses resulting from the use of derivatives will reduce a fund's net asset
value, and possibly income, and the losses can be greater than if derivatives
had not been used.
Derivatives Outside the United States. When conducted outside the United States,
derivatives may not be regulated as rigorously as in the United States, may not
involve a clearing mechanism and related guarantees, and will be subject to the
risk of governmental actions affecting trading in, or the prices of, foreign
securities, currencies and other instruments. In addition, the price of any
foreign futures or foreign options contract and, therefore, the potential profit
and loss thereon, may be affected by any variance in the foreign exchange rate
between the time an order is placed and the time it is liquidated, offset or
exercised. The value of positions taken as part of non-U.S. derivatives also
could be adversely affected by: (1) other complex foreign political, legal and
economic factors, (2) lesser availability of data on which to make trading
decisions than in the United States, (3) delays in the fund's ability to act
upon economic events occurring in foreign markets during nonbusiness hours in
the United States, (4) the imposition of different exercise and settlement terms
and procedures and margin requirements than in the United States and (5) lower
trading volume and liquidity.
Options. A fund's ability to close out its position as a purchaser or seller of
an OCC-issued or exchange-listed put or call option is dependent, in part, upon
the liquidity of the particular option market. Among the possible reasons for
the absence of a liquid option market on an exchange are: (1) insufficient
trading interest in certain options, (2) restrictions on transactions imposed by
an exchange, (3) trading halts, suspensions or other restrictions imposed with
respect to particular classes or series of options or underlying securities,
including reaching daily price limits, (4) interruption of the normal operations
of the OCC or an exchange, (5) inadequacy of the facilities of an exchange or
the OCC to handle current trading volume or (6) a decision by one or more
exchanges to discontinue the trading of options (or a particular class or series
of options), in which event the relevant market for that option on that exchange
would cease to exist, although any such outstanding options on that exchange
would continue to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours during
which the underlying financial instruments are traded. To the extent that the
option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that would not be reflected in the corresponding option
markets.
Unless the parties provide for it, no central clearing or guaranty function is
involved in an OTC option. As a result, if a Counterparty fails to make or take
delivery of the security, currency or other instrument underlying an OTC option
it has entered into with the fund or fails to make a cash settlement payment due
in accordance with the terms of that option, the fund will lose any
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premium it paid for the option as well as any anticipated benefit of the
transaction. Thus, the investment manager must assess the creditworthiness of
each such Counterparty or any guarantor or credit enhancement of the
Counterparty's credit to determine the likelihood that the terms of the OTC
option will be met. A fund will enter into OTC option transactions only with
U.S. Government securities dealers recognized by the Federal Reserve Bank of New
York as 'primary dealers,' or broker-dealers, domestic or foreign banks, or
other financial institutions that the investment manager deems to be
creditworthy. In the absence of a change in the current position of the staff of
the SEC, OTC options purchased by a fund and the amount of a fund's obligation
pursuant to an OTC option sold by the fund (the cost of the sell-back plus the
in-the-money amount, if any) or the value of the assets held to cover such
options will be deemed illiquid.
Interest Rate and Equity Swap Transactions. The use of interest rate and equity
swaps is a highly specialized activity which involves investment techniques and
risks different from those associated with ordinary portfolio securities
transactions. If the investment manager is incorrect in its forecasts of market
values, interest rates and other applicable factors, the investment performance
of a fund would diminish compared with what it would have been if these
investment techniques were not utilized. Moreover, even if the investment
manager is correct in its forecasts, there is a risk that the swap position may
correlate imperfectly with the price of the asset or liability being hedged.
Because swaps and related transactions are bilateral contractual arrangements
between a fund and counterparties to the transactions, the fund's ability to
terminate such an arrangement may be considerably more limited than in the case
of an exchange traded instrument. To the extent a fund does not, or cannot,
terminate such a transaction in a timely manner, the fund may suffer a loss in
excess of any amounts that it may have received, or expected to receive, as a
result of entering into the transaction. If the other party to a swap defaults,
a fund's risk of loss is the net amount of payments that the fund contractually
is entitled to receive, if any. A fund may purchase and sell caps, floors and
collars without limitation, subject to the segregated account requirement
described above.
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INVESTMENT LIMITATIONS
Unless otherwise indicated, the investment restrictions described below are
fundamental investment policies which may be changed only when permitted by law,
if applicable, and approved by the holders of a majority of the applicable
fund's outstanding voting securities, which, as defined by the 1940 Act means
the lesser of: (i) 67% of the shares represented at a meeting at which more than
50% of the outstanding shares are represented; or (ii) more than 50% of the
outstanding shares. Except for: (i) the investment restrictions set forth below;
and (ii) each fund's investment objective(s) as described in the Prospectus, the
other policies and percentage limitations referred to in this SAI and in the
Prospectus are not fundamental policies of the funds and may be changed by vote
of the Board of Directors without shareholder approval.
If a percentage restriction on investment or utilization of assets set forth in
this SAI or the Prospectus is adhered to at the time a transaction is effected,
a later change in percentage resulting from changing values will not be
considered a violation.
INVESTORS FUND, TOTAL RETURN FUND, HIGH YIELD BOND FUND, STRATEGIC BOND FUND AND
U.S. GOVERNMENT INCOME FUND may not:
(1) purchase securities of any issuer if the purchase would cause more than
5% of the value of each fund's total assets to be invested in the
securities of any one issuer (excluding securities issued or guaranteed by
the U.S. government, its agencies or instrumentalities and bank
obligations) or cause more than 10% of the voting securities of the issuer
to be held by a fund, except that up to 25% of the value of each fund's
total assets may be invested without regard to this restriction and
provided that each fund may invest all or substantially all of its assets
in another registered investment company having substantially the same
investment objective(s) and policies and substantially the same investment
restrictions as those with respect to such fund;
(2) borrow money (including entering into reverse repurchase agreements),
except for temporary or emergency purposes and then not in excess of 10% of
the value of the total assets of the applicable fund at the time the
borrowing is made, except that for the purpose of this restriction,
short-term credits necessary for settlement of securities transactions are
not considered borrowings (a fund will not purchase additional securities
at any time its borrowings exceed 5% of total assets, provided, however,
that a fund may increase its interest in another registered investment
company having substantially the same investment objective(s) and policies
and substantially the same investment restrictions as those with respect to
such fund while such borrowings are outstanding); or
(3) invest more than 25% of the total assets of each fund in the securities
of issuers having their principal activities in any particular industry,
except for obligations issued or guaranteed by the U.S. government, its
agencies or instrumentalities or by any state, territory or any possession
of the United States or any of their authorities, agencies,
instrumentalities or political subdivisions, or with respect to repurchase
agreements collateralized by any of such obligations (for purposes of this
restriction, supranational issuers will be considered to comprise an
industry as will each foreign government that issues securities purchased
by a fund), provided, however, that each fund may invest all or
substantially all of its assets in another 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.'
CAPITAL FUND may not:
(1) borrow money, except as described under 'Investment Objective and
Policies' and except that for the purpose of this restriction, short-term
credits necessary for settlement of securities transactions are not
considered borrowings.
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(2) invest more than 25% of the total assets of the fund in the securities
of issuers having their principal activities in any particular industry,
except for obligations issued or guaranteed by the U.S. government, its
agencies or instrumentalities or by any state, territory or any possession
of the United States or any of their authorities, agencies,
instrumentalities or political subdivisions, or with respect to repurchase
agreements collateralized by any of such obligations (for purposes of this
restriction, supranational issuers will be considered to comprise an
industry as will each foreign government that issues securities purchased
by the fund), provided, however, that each fund may invest all or
substantially all of its assets in another registered investment company
having substantially the same investment objective(s) and policies and
substantially the same investment restrictions as the fund.
ASIA GROWTH FUND may not:
(1) borrow money (including entering into reverse repurchase agreements),
except for temporary or emergency purposes and then not in excess of 5% of
the value of the total assets of the applicable fund at the time the
borrowing is made, except that for the purpose of this restriction,
short-term credits necessary for settlement of securities transactions are
not considered borrowings (the fund will not purchase additional securities
at any time its borrowings exceed 5% of total assets, provided, however,
that the fund may increase its interest in another registered investment
company having substantially the same investment objective(s) and policies
and substantially the same investment restrictions as those with respect to
the fund while such borrowings are outstanding); or
(2) invest more than 25% of the total assets of each fund in the securities
of issuers having their principal activities in any particular industry,
except for obligations issued or guaranteed by the U.S. government, its
agencies or instrumentalities or by any state, territory or any possession
of the United States or any of their authorities, agencies,
instrumentalities or political subdivisions, or with respect to repurchase
agreements collateralized by any of such obligations (for purposes of this
restriction, supranational issuers will be considered to comprise an
industry as will each foreign government that issues securities purchased
by a fund, provided, however, that the fund may invest all or substantially
all of its assets in another registered investment company having
substantially the same investment objective(s) and policies and
substantially the same investment restrictions as the fund).
Each fund may not:
(1) underwrite securities of other issuers, except to the extent that the
purchase of investments directly from the issuer thereof or from an
underwriter for an issuer and the later disposition of such securities in
accordance with a fund's investment program may be deemed to be an
underwriting;
(2) purchase or sell real estate, although a fund may purchase and sell
securities of companies which deal in real estate, may purchase and sell
securities which are secured by interests in real estate and may invest in
mortgages and mortgage-backed securities;
(3) purchase or sell commodities or commodity contracts except that a fund
may engage in derivative transactions to the extent permitted by its
investment policies as stated in the Prospectus and this SAI;
(4) make loans, except that (a) a fund may purchase and hold debt
securities in accordance with its investment objective(s) and policies,
(b) a fund may enter into repurchase agreements with respect to portfolio
securities, (c) a fund may lend portfolio securities with a value not in
excess of one-third of the value of its total assets, provided that
collateral arrangements with respect to options, forward currency and
futures transactions will not be deemed to involve loans of securities, and
(d) delays in the settlement of securities transactions will not be
considered loans; or
(5) purchase the securities of other investment companies except as
permitted under the 1940 Act or in connection with a merger, consolidation,
acquisition or reorganization.
(6) issue any senior security except as permitted by the 1940 Act.
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<PAGE>
Each fund may, in the future, seek to achieve its investment objective(s) by
investing all of its assets in a no-load, open-end management investment company
for which SBAM serves as investment manager and which has substantially the same
investment objective(s) and policies and substantially the same investment
restrictions as those applicable to such fund. In such event, the fund's
applicable investment advisory agreement would be terminated since the
investment management would be performed by or on behalf of such other
registered investment company.
PORTFOLIO TURNOVER
Purchases and sales of portfolio securities may be made as considered advisable
by the investment manager in the best interests of the shareholders. Each Fund
intends to limit portfolio trading to the extent practicable and consistent with
its investment objectives. Each Fund's portfolio turnover rate may vary from
year to year, as well as within a year. Short-term gains realized from portfolio
transactions are taxable to shareholders as ordinary income. In addition, higher
portfolio turnover rates can result in corresponding increases in portfolio
transaction costs for a fund. See 'Portfolio Transactions.'
PORTFOLIO TRANSACTIONS
Subject to policy established by the Board of Directors, the investment manager
is primarily responsible for each fund's portfolio decisions and the placing of
the fund's portfolio transactions.
Fixed-income, certain short-term securities and certain equities normally will
be purchased or sold from or to issuers directly or to dealers serving as market
makers for the securities at a net price, which may include dealer spreads and
underwriting commissions. Equity securities may also be purchased or sold
through brokers who will be paid a commission.
The general policy of each fund in selecting brokers and dealers is to obtain
the best results taking into account factors such as the general execution and
operational facilities of the broker or dealer, the type and size of the
transaction involved, the creditworthiness of the broker or dealer, the
stability of the broker or dealer, execution and settlement capabilities, time
required to negotiate and execute the trade, research services and the
investment manager's arrangements related thereto (as described below), overall
performance, the dealer's risk in positioning the securities involved, and the
broker's commissions and dealer's spread or mark-up. While the investment
manager generally seeks the best price in placing its orders, a fund may not
necessarily be paying the lowest price available.
Notwithstanding the above, in compliance with Section 28(e) of the Securities
Exchange Act of 1934, the investment manager may select brokers who charge a
commission in excess of that charged by other brokers, if the investment manager
determines in good faith that the commission to be charged is reasonable in
relation to the brokerage and research services provided to the investment
manager by such brokers. Research services generally consist of research or
statistical reports or oral advice from brokers and dealers regarding particular
companies, industries or general economic conditions. The investment manager may
also have arrangements with brokers pursuant to which such brokers provide
research services to the investment manager in exchange for a certain volume of
brokerage transactions to be executed by such broker. While the payment of
higher commissions increases a fund's costs, the investment manager does not
believe that the receipt of such brokerage and research services significantly
reduces its expenses as a fund's investment manager. Arrangements for the
receipt of research services from brokers may create conflicts of interest.
Research services furnished to the investment manager by brokers who effect
securities transactions for a fund may be used by the investment manager in
servicing other investment companies and accounts which it manages. Similarly,
research services furnished to the investment manager by brokers who effect
securities transactions for other investment companies and accounts which the
investment manager manages may be used by the investment manager in servicing a
fund. Not all of these research services are used by the investment manager in
managing any particular account, including the funds.
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Under the 1940 Act, 'affiliated persons' of a fund are prohibited from dealing
with it as a principal in the purchase and sale of securities unless an
exemptive order allowing such transactions is obtained from the SEC. However,
each fund may purchase securities from underwriting syndicates of which the
investment manager or any of its affiliates as defined in the 1940 Act, is a
member under certain conditions, in accordance with Rule 10f-3 promulgated under
the 1940 Act.
Each fund contemplates that, consistent with the policy of obtaining the best
net results, brokerage transactions may be conducted through 'affiliated
broker/dealers,' as defined in the 1940 Act. The Board of Directors has adopted
procedures in accordance with Rule 17e-1 promulgated under the 1940 Act to
ensure that all brokerage commissions paid to such affiliates are reasonable and
fair in the context of the market in which such affiliates operate. Any such
compensation will be paid in accordance with applicable SEC regulations.
For the fiscal year ended December 31, 1998, the Funds paid aggregate brokerage
commissions including affiliated brokerage commissions as follows:
<TABLE>
<CAPTION>
AGGREGATE BROKERAGE
BROKERAGE COMMISSION COMMISSION PAID
PAID TO SSB
-------------------- ---------------
<S> <C> <C>
Asia Growth Fund.................................... N/A N/A
Capital Fund........................................ 12,960 1,067
High Yield Fund..................................... 0 0
Investors Fund...................................... 21,745 858
Strategic Bond Fund................................. 0 0
Total Return Fund................................... 2,152 500
U.S. Government Income Fund......................... N/A N/A
</TABLE>
TAXES
TAXATION OF A FUND
The following discussion is a brief summary of certain additional tax
considerations affecting a fund and its shareholders. No attempt is made to
present a detailed explanation of all federal, state, local and foreign tax
concerns, and the discussions set forth here and in the Prospectus do not
constitute tax advice. Investors are urged to consult their own tax advisers
with specific questions relating to federal, state, local or foreign taxes.
Each fund intends to elect to be treated as a regulated investment company (a
'RIC') under Subchapter M of the Internal Revenue Code of 1986, as amended (the
'Code'). Qualification as a RIC requires, among other things, that a fund: (a)
derive at least 90% of its gross income in each taxable year from dividends,
interest, payments with respect to securities loans and gains from the sale or
other disposition of stock or securities, foreign currencies or other income
(including gains from options, futures or forward contracts) derived with
respect to its business of investing in such stock, securities or currencies;
and (b) diversify its holdings so that, at the end of each quarter of each
taxable year: (i) at least 50% of the market value of a fund's assets is
represented by cash, cash items, U.S. government securities, securities of other
RICs and other securities with such other securities limited, in respect of any
one issuer, to an amount not greater than 5% of the value of a fund's assets and
10% of the outstanding voting securities of such issuer; and (ii) not more than
25% of the value of its assets is invested in the securities of any one issuer
(other than U.S. government securities or the securities of other RICs).
As a RIC, a fund will not be subject to federal income tax on its 'net
investment income' (i.e., its investment company taxable income, as that term is
defined in the Code, determined without regard to the deduction for dividends
paid) and 'net capital gain' (the excess of the fund's net realized long-term
capital gain over net realized short-term capital loss), if any, that it
distributes in each taxable year to its shareholders, provided that it
distributes 90% of its net investment income for such taxable year. However, a
fund would be subject to corporate income tax
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(currently at a maximum rate of 35%) on any undistributed net investment income
and net capital gain.
A fund will be subject to a non-deductible 4% excise tax to the extent that a
fund does not distribute by the end of each calendar year: (a) at least 98% of
its ordinary income for such calendar year; (b) at least 98% of its capital gain
net income for the one-year period ending, as a general rule, on October 31 of
each year; and (c) 100% of the undistributed ordinary income and capital gain
net income from the preceding calendar years (if any) pursuant to the
calculations in (a) and (b). For this purpose, any income or gain retained by a
fund that is subject to corporate tax will be considered to have been
distributed by year-end. Each Fund intends to make sufficient distributions to
avoid imposition of both the corporate level tax and the excise tax.
A fund may make investments that produce income that is not matched by a
corresponding cash distribution to the fund, such as investments in pay-in-kind
bonds or in obligations such as certain Brady Bonds or zero-coupon securities
having original issue discount (i.e., an amount equal to the excess of the
stated redemption price of the security at maturity over its issue price), or
market discount (i.e., an amount equal to the excess of the stated redemption
price of the security over the basis of such bond immediately after it was
acquired) if the fund elects to accrue market discount on a current basis. A
fund may engage in hedging or derivatives transactions involving foreign
currencies, forward contracts, options and futures contracts (including options,
futures and forward contracts on foreign currencies) and short sales that may
require the inclusion of income in advance of cash receipts. In addition, income
may continue to accrue for federal income tax purposes with respect to a
non-performing investment. Any such income would be treated as income earned by
a fund and therefore would be subject to the distribution requirements of the
Code. Because such income may not be matched by a corresponding cash
distribution to a fund, such Fund may be required to borrow money or dispose of
other securities to be able to make distributions to its investors. In addition,
if an election is not made to currently accrue market discount with respect to a
market discount bond, all or a portion of any deduction for any interest expense
incurred to purchase or hold such bond may be deferred until such bond is sold
or otherwise disposed.
A fund purchases shares in a 'passive foreign investment company' (a 'PFIC'),
the fund may be subject to U.S. federal income tax on a portion of any 'excess
distribution' or gain from the disposition of such shares even if such income is
distributed as a taxable dividend by the fund to its shareholders. Additional
charges in the nature of interest may be imposed on the fund in respect of
deferred taxes arising from such distributions or gains. If the fund were to
invest in a PFIC and elected to treat the PFIC as a 'qualified electing fund'
under the Code (a 'QEF'), in lieu of the foregoing requirements, the fund would
be required to include in income each year a portion of the ordinary earnings
and net capital gain of the QEF, even if not distributed to the fund.
Alternatively, under recently enacted legislation, the fund can elect to
mark-to-market at the end of each taxable year its shares in a PFIC; in this
case, the fund would recognize as ordinary income any increase in the value of
such shares, and as ordinary loss any decrease in such value to the extent it
did not exceed prior increases included in income. Under either election, the
fund might be required to recognize in a year income in excess of its
distributions from PFICs and its proceeds from dispositions of PFIC stock during
that year, and such income would nevertheless be subject to the 90% distribution
requirement and would be taken into account for purposes of the 4% excise tax.
Since the funds' shareholders are the separate accounts of Participating
Insurance Companies and the Plans, no discussion is included herein as to the
Federal income tax consequences to VA contract holders, VLI policy holders and
Plan Participants. For information concerning the Federal income tax
consequences to such holders, see the prospectus for such contract or policy or
the applicable Plan documents. VA contract holders, VLI policy holders and Plan
Participants should consult their tax advisers about the application of the
provisions of the tax law described in this statement of additional information
in light of their particular tax situations.
Hong Kong Tax Matters. Asia Growth Fund would be subject to Hong Kong profits
tax, which is currently charged at the rate of 16.5% for corporations and 15%
for individuals, if, by virtue of
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the fact that SBAM AP is located in Hong Kong, (a) the fund or its agents were
deemed to carry on a trade, profession or business in Hong Kong and (b) profits
from that trade, profession or business were to arise in or be derived from Hong
Kong. Hong Kong profits tax will not be payable in respect of profits from the
sale of shares and other securities transacted outside Hong Kong, interest
arising or derived from outside Hong Kong and profits in the nature of capital
gains. The sale of securities will not be treated as the sale of capital assets
if the profit or loss from such sale is regarded as attributable to a trade or
business carried on in Hong Kong. Asia Growth Fund does not currently believe
that it will be subject to Hong Kong profits tax.
Dividends which the fund pays to its shareholders are not taxable in Hong Kong
(whether through withholding or otherwise) under current legislation and
practice. No Hong Kong stamp duty will be payable in respect of transactions in
shares of Asia Growth Fund provided that the register of shareholders is
maintained outside of Hong Kong.
DIVIDENDS. Notice as to the tax status of dividends and distributions will be
mailed to shareholders annually. Dividends paid from net investment income
generally are taxable as ordinary income whether received in cash or reinvested
in additional shares. Distributions from net capital gain which are designated
as 'capital gain dividends' generally are taxable as long-term capital gain
whether received in cash or reinvested in additional shares. Since the funds'
shareholders are the separate accounts of Participating Insurance Companies and
the Plans, no discussion is included herein as to the federal income tax
consequences to VA contract holders, VLI policy holders and Plan Participants.
For information concerning the federal income tax consequences to such holders,
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.
PERFORMANCE DATA
As indicated in the Prospectus, from time to time, a fund may quote its 'yield,'
'tax-equivalent yield,' 'effective yield,' 'average annual total return' and/or
'aggregate total return' in advertisements or in reports and other
communications to shareholders and compare its performance figures to those of
other funds or accounts with similar objectives and to relevant indices.
AVERAGE ANNUAL TOTAL RETURN
A fund's 'average annual total return' figures, as described and shown in each
Prospectus, are computed according to a formula prescribed by the Commission.
The formula can be expressed as follows:
P(1+T)'pp'n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
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ERV = Ending Redeemable Value of a hypothetical $1,000 payment made at the
beginning of a 1-5 or 10-year period at the end of such period (or
fractional portion thereof), assuming reinvestment of all dividends
and distributions.
The following tables set forth the average annual total returns for each
class of shares of each of the Asia Growth Fund, High Yield Bond Fund, National
Intermediate Fund, Strategic Bond Fund, Total Return Fund, U.S. Government
Income Fund, (in each case, after management fee waiver and reimbursement of
certain expenses), for certain periods of time ending December 31, 1998 and
reflect the effects of the maximum applicable front end sales charges and any
applicable CDSCs payable by an investor under the Multiple Pricing System.
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
FROM COMMENCEMENT
OF OPERATIONS THROUGH
DECEMBER 31, 1998
---------------------
<S> <C>
Asia Growth Fund............................................. N/A
Capital Fund................................................. 18.12%
High Yield Bond Fund......................................... 0.14%
Investors Fund............................................... 10.55%
Strategic Bond Fund.......................................... 6.18%
Total Return Fund............................................ 5.83%
U.S. Government Income Fund.................................. N/A
</TABLE>
AGGREGATE TOTAL RETURN
The 'aggregate total return' figures for each fund, as described in the
Prospectus, represent the cumulative change in the value of an investment in
fund shares of such fund for the specified period and are computed by the
following formula:
AGGREGATE TOTAL RETURN = ER - P
------
P
Where: P = a hypothetical initial payment of $10,000.
ERV = Ending Redeemable Value of a hypothetical $10,000 investment made
at the beginning of a 1-, 5-, or 10-year period at the end of such
period (or fractional portion thereof), assuming reinvestment of
all dividends and distributions.
THIRTY DAY YIELD
Certain funds may advertise the yields for such funds based on a 30-day (or one
month) period according to the following formula:
<TABLE>
<S> <C>
a-b
-----
Yield = 2[(cd + 1)'pp'6 - 1]
</TABLE>
Any quotation of performance stated in terms of yield (whether or not based on a
30-day period) will be given no greater prominence than the information
prescribed under Commission rules. In addition, all advertisements containing
performance data of any kind will include a legend disclosing that such
performance data represents past performance and that the investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
Advertisements and communications may compare a fund's performance with that of
other mutual funds, as reported by Lipper Analytical Services, Inc. or similar
independent services or financial publications. From time to time,
advertisements and other Fund materials and communications may cite statistics
to reflect a fund's performance over time utilizing, comparisons to indices.
A fund's performance will vary from time to time depending upon market
conditions, the composition of its portfolio and operating expenses.
Consequently, any given performance
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quotation should not be considered representative of the performance of fund
shares for any specified period in the future. Because performance will vary, it
may not provide a basis for comparing an investment in Fund shares with certain
bank deposits or other investments that pay a fixed return for a stated period
of time. Investors comparing a fund's performance with that of other mutual
funds should give consideration to the nature, quality and maturity of the
respective investment companies' portfolio securities and market conditions. An
investor's principal is not guaranteed by any Fund.
NET ASSET VALUE
In calculating net asset value, portfolio securities listed or traded on
national securities exchanges, or reported by the National Association of
Securities Dealers Automated Quotation System ('Nasdaq') National Market
reporting system, are valued at the last sale price, or, if there have been no
sales on that day, at the mean of the current bid and ask price which represents
the current value of the security. Over-the-counter securities are valued at the
mean of the current bid and ask price.
Securities that are primarily traded on foreign exchanges generally are valued
at the closing price of such securities on their respective exchanges, except
that if the investment manager is of the opinion that such price would result in
an inappropriate value for a security, including as a result of an occurrence
subsequent to the time a value was so established then the fair value of those
securities may be determined by consideration of other factors by or under the
direction of the Board of Directors or its delegates. In valuing assets, prices
denominated in foreign currencies are converted to U.S. dollar equivalents at
the current exchange rate. Securities may be valued by independent pricing
services which use prices provided by market-makers or estimates of market
values obtained from yield data relating to instruments or securities with
similar characteristics. Short-term obligations with maturities of 60 days or
less are valued at amortized cost, which constitutes fair value as determined by
the Board of Directors. Amortized cost involves valuing an instrument at its
original cost to a fund and thereafter assuming a constant amortization to
maturity of any discount or premium, regardless of the impact of fluctuating
interest rates on the market value of the instrument. All other securities and
other assets of a fund will be valued at fair value as determined in good faith
pursuant to procedures adopted by the Board of Directors of each fund.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Purchase Information. Each fund offers its shares to the separate accounts of
Participating Insurance Companies on a continuous basis. The offering price per
share of each fund is equal to the net asset value per share at the time of
purchase. Individuals may not place orders directly with the funds. See the
prospectus of the separate account of the Participating Insurance Company or the
relevant Plan documents for more information on the purchase of fund shares and
with respect to the availability for investment in each fund.
Redemption Information. Fund shares may be redeemed at any time by the separate
accounts of the Participating Insurance Companies and the Plans. Individuals may
not place redemption orders directly with the funds. It is the responsibility of
the Participating Insurance Company to properly transmit redemption requests in
accordance with applicable requirements. VA contract holders and VLI policy
holders and Plan Participants should consult their Participating Insurance
Company in this regard. Redemption requests will be effected at the net asset
value of each fund next determined after receipt of redemption instructions by
such fund in proper form and in accordance with applicable requirements. The
value of the shares redeemed may be more or less than their original cost,
depending on each fund's then-current net asset value. No charges are imposed by
the funds when shares are redeemed.
If the Board of Directors shall determine that it is in the best interests of
the remaining shareholders of a fund, such fund may pay the redemption price in
whole, or in part, by a distribution in kind from the portfolio of the fund, in
lieu of cash, taking such securities at their
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value employed for determining such redemption price, and selecting the
securities in such manner as the Board of Directors may deem fair and equitable.
Under the 1940 Act, a fund may suspend the right of redemption or postpone the
date of payment upon redemption for any period during which the NYSE is closed,
other than customary weekend and holiday closings, or during which trading on
said Exchange is restricted, or during which (as determined by the SEC by rule
or regulation) an emergency exists as a result of which disposal or valuation of
portfolio securities is not reasonably practicable, or for such other periods as
the SEC may permit. (A fund may also suspend or postpone the recordation of the
transfer of its shares upon the occurrence of any of the foregoing conditions.)
INVESTMENT MANAGER
Each fund retains SBAM to act as its investment manager. SBAM, a wholly-owned
subsidiary of Salomon Brothers Holding Company Inc, which is wholly-owned by
Salomon Smith Barney Holdings Inc, which is in turn wholly-owned by Citigroup
Inc. ('Citigroup'), SBAM serves as the investment manager to numerous
individuals and institutions and other investment companies.
The management contract between SBAM and each respective Fund provides that SBAM
shall manage the operations of the fund, subject to policy established by the
Board of Directors. Pursuant to the applicable management contract, SBAM manages
each fund's investment portfolio, directs purchases and sales of portfolio
securities and reports thereon to the fund's officers and directors regularly.
SBAM also provides the office space, facilities, equipment and personnel
necessary to perform the following services for each fund: Commission
compliance, including record keeping, reporting requirements and registration
statements and proxies; supervision of Fund operations, including coordination
of functions of administrator, transfer agent, custodian, accountants, counsel
and other parties performing services or operational functions for each fund;
certain administrative and clerical services, including certain accounting
services, facilitation of redemption requests, exchange privileges, and account
adjustments, development of new shareholder services and maintenance of certain
books and records; and certain services to each fund's shareholders, including
assuring that investments and redemptions are completed efficiently, responding
to shareholder inquiries and maintaining a flow of information to shareholders.
In connection with SBAM's service as investment manager to the Strategic Bond
Fund, Salomon Brothers Asset Management Limited ('SBAM Limited'), whose business
address is Victoria Plaza, 111 Buckingham Palace Road, London SW1W OSB, England,
provides certain advisory services to SBAM relating to currency transactions and
investments in non-dollar-denominated debt securities for the benefit of the
Strategic Bond Fund pursuant to a subadvisory consulting agreement. At no
additional expense to the Strategic Bond Fund, SBAM pays SBAM Limited, as full
compensation for all services provided under the subadvisory consulting
agreement, a fee in an amount equal to the fee payable to SBAM under its
management contract with respect to the Strategic Bond Fund multiplied by the
current value of the net assets of the portion of the assets of the Strategic
Bond Fund as SBAM shall allocate and divided by the current value of the net
assets of the Strategic Bond Fund. Like SBAM, SBAM Limited is a wholly-owned
subsidiary of Salomon Brothers Holding Company Inc. SBAM Limited is a member of
the Investment Management Regulatory Organization Limited in the United Kingdom
and is registered as an investment adviser in the United States pursuant to the
Advisers Act.
Pursuant to a subadvisory agreement, SBAM has retained SBAM AP as subadviser to
the Asia Growth Fund (the 'Asia Subadvisory Agreement'). Subject to the
supervision of SBAM, SBAM AP will have responsibility for the day-to-day
management of the fund's portfolio. For its services under the Asia Subadvisory
Agreement, SBAM AP is compensated at no additional cost to Asia Growth Fund at a
rate agreed to between SBAM and SBAM AP from time to time. Like SBAM, SBAM AP is
a wholly-owned subsidiary of Salomon Brothers Holding Company Inc. SBAM AP is a
member of the Hong Kong Securities and Futures Commission and is registered as
an investment adviser in the United States pursuant to the Advisers Act.
Pursuant to a sub-administration agreement, SBAM has retained SBAM Limited to
provide certain administrative services to SBAM relating to the Asia Growth Fund
(the 'Subadministration Agreement'). For its
54
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<PAGE>
services under the Subadministration Agreement, SBAM Limited is compensated by
SBAM at no additional cost to the Asia Growth Fund at an annual rate of .10% of
the Asia Growth Fund's daily net assets.
Investment decisions for a particular fund are made independently from those of
other funds or accounts managed by SBAM, SBAM AP or SBAM Limited. Such other
funds or accounts may also invest in the same securities as a fund. If those
funds or accounts are prepared to invest in, or desire to dispose of, the same
security at the same time as a fund, however, transactions in such securities
will be made, insofar as feasible, for the respective funds and accounts in a
manner deemed equitable to all. In some cases, this procedure may adversely
affect the size of the position obtained for or disposed of by a fund or the
price paid or received by a fund. In addition, because of different investment
objectives, a particular security may be purchased for one or more funds or
accounts when one or more funds or accounts are selling the same security.
As compensation for its services, SBAM receives, on behalf of each fund, as
described below, a monthly management fee, at an annual rate based upon the
average daily net assets of the fund as follows: .70% for Investors Fund; .85%
for Capital Fund; .80% for Total Return Fund; .75% for High Yield Bond Fund and
Strategic Bond Fund; 60% for U.S. Government Income Fund; and 1.00% for Asia
Growth Fund.
With respect to all funds except Asia Growth Fund, for the 1998 fiscal year,
SBAM has voluntarily agreed to impose an expense cap on total fund operating
expenses (exclusive of taxes, interest and extraordinary expenses such as
litigation and indemnification expenses) at 1.00%. With respect to the Asia
Growth Fund, for the 1999 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
1.50%.
The management contract for each of the funds provides that it will continue for
an initial two year period and thereafter for successive annual periods;
provided that, with respect to each such contract, such continuance is
specifically approved at least annually: (a) by the vote of a majority of the
directors not parties to the management contract or 'interested persons' of such
parties, as defined in the 1940 Act, cast in person at a meeting called for the
specific purpose of voting on such management contract and (b) either by the
Board of Directors or a majority of the outstanding voting securities. The
management contract may be terminated on 60 days' written notice by either party
and will terminate automatically if assigned.
Under the terms of the management contract between each fund and SBAM, neither
SBAM nor its affiliates shall be liable for losses or damages incurred by the
fund (including, with respect to the Asia Growth Fund, the imposition of certain
Hong Kong tax liabilities on the fund), unless such losses or damages are
attributable to the willful misfeasance, bad faith or gross negligence on either
the part of SBAM or its affiliate or from reckless disregard by it of its
obligations and duties under the Management Contract ('disabling conduct'). In
addition, the Asia Growth Fund will indemnify SBAM and its affiliates and hold
each of them harmless against any losses or damages, including the imposition of
certain Hong Kong tax liabilities on the fund, not resulting from disabling
conduct.
Rule 17j-1 under the 1940 Act requires all registered investment companies and
their investment advisers and principal underwriters to adopt written codes of
ethics and institute procedures designed to prevent 'access persons' (as defined
in Rule 17j-1) from engaging in any fraudulent, deceptive or manipulative
trading practices. The Board of Directors for the Company has adopted a code of
ethics (the 'Fund Code') that incorporates personal trading policies and
procedures applicable to access persons of each fund, which includes officers,
directors and other specified persons who may make, participate in or otherwise
obtain information concerning the purchase or sale of securities by the fund. In
addition, the fund Code attaches and incorporates personal trading policies and
procedures applicable to access persons of the investment manager and if
applicable, any sub-adviser to each fund, which policies serve as such adviser's
code of ethics (the 'Adviser Code'). The fund and Adviser Codes have been
designed to address potential conflict of interests that can arise in connection
with the personal trading activities of investment company and investment
advisory personnel.
55
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<PAGE>
Pursuant to the fund and adviser codes, access persons are generally permitted
to engage in personal securities transactions, provided that a transaction does
not involve securities that are being purchased or sold, are being considered
for purchase or sale, or are being recommended for purchase or sale by or for a
fund. In addition, the adviser code contains specified prohibitions and blackout
periods for certain categories of securities and transactions, including a
prohibition on short-term trading and purchasing securities during an initial
public offering. The adviser code, with certain exceptions, also requires that
access persons obtain preclearance to engage in personal securities
transactions. Finally, the fund and adviser codes require access persons to
report all personal securities transactions periodically.
For the fiscal year ended December 31, 1998, SBAM has received the following
amounts as management fees and has reimbursed the Funds for expenses in the
following amounts:
<TABLE>
<CAPTION>
GROSS EXPENSES
FEES WAIVER REIMBURSED
------- ------- ----------
<S> <C> <C> <C>
Asia................................................................. N/A N/A N/A
Capital.............................................................. $20,337 $20,337 $33,776
High Yield........................................................... $31,100 $31,100 $11,942
Investors............................................................ $31,902 $31,902 $17,030
Strategic Bond....................................................... $45,286 $45,286 $ 2,558
Total Return......................................................... $19,301 $19,301 $26,591
US Government........................................................ N/A N/A N/A
</TABLE>
ADMINISTRATOR
SBAM (in such capacity, the 'Administrator') provides certain administrative
services to each fund. The services provided by the Administrator under the
applicable administration agreement include certain accounting, clerical and
bookkeeping services, Blue Sky compliance, corporate secretarial services and
assistance in the preparation and filing of tax returns and reports to
shareholders and the Commission. Each fund pays the Administrator a fee,
calculated daily and payable monthly, at an annual rate of .05% of the
applicable fund's average daily net assets. The Administrator has delegated its
responsibilities under the administration agreements to one of its affiliates.
<TABLE>
<CAPTION>
ADMINISTRATION
FEE PAID
--------------
TO SBAM
--------------
<S> <C>
Asia Growth................................................................... N/A
Capital....................................................................... $1,196
High Yield.................................................................... $2,073
Investors..................................................................... $2,279
Strategic..................................................................... $3,019
Total Return.................................................................. $1,207
US Government................................................................. N/A
</TABLE>
DISTRIBUTOR
CFBDS, located at 21 Milk Street, Boston, Massachusetts 02109, serves as each
Fund's distributor pursuant to a distribution contract. CFBDS is a wholly owned
subsidiary of Signature Financial Group, Inc.
EXPENSES
Each fund's expenses include taxes, interest, fees and salaries of such fund
directors and officers who are not directors, officers or employees of the
fund's service contractors, Commission fees, state securities qualification
fees, costs of preparing and printing prospectuses for regulatory purposes and
for distribution to existing shareholders, advisory and administration fees,
charges of
56
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<PAGE>
the custodian and of the transfer and dividend disbursing agent, certain
insurance premiums, outside auditing and legal expenses, costs of shareholder
reports and shareholder meetings and any extraordinary expenses. Each fund also
pays for brokerage fees and commissions (if any) in connection with the purchase
and sale of portfolio securities.
CUSTODIAN AND TRANSFER AGENT
Custodian. PNC Bank, N.A., located at Airport Business Center, International
Court 2, 200 Stevens Drive, Lester, Pennsylvania 19113, serves as each fund's
custodian except Asia Growth Fund. The Chase Manhattan Bank, located at 4 Chase
MetroTech Center, Brooklyn, New York 11245, serves as Asia Growth Fund's
custodian. PNC Bank and The Chase Manhattan Bank (each, a 'Custodian' and
collectively, the 'Custodians'), among other things: maintain a custody account
or accounts in the name of each fund; receive and deliver all assets for each
fund upon purchase and upon sale or maturity; collect and receive all income and
other payments and distributions on account of the assets of each fund; and make
disbursements on behalf of each fund. The custodians neither determine the
funds' investment policies, nor decide which securities each fund will buy or
sell. For their services, each custodian receives a monthly fee based upon the
daily average market value of securities held in custody and also receives
securities transaction charges, including out-of-pocket expenses. A fund may
also periodically enter into arrangements with other qualified custodians with
respect to certain types of securities or other transactions such as repurchase
agreements or derivatives transactions.
Transfer Agent. First Data Investors Services Group, Inc. (the 'Transfer
Agent'), located at P.O. Box 5127, Westborough, Massachusetts 01581-5127, serves
as each fund's transfer agent. The transfer agent registers and processes
transfers of the fund's stock, processes purchase and redemption orders, acts as
dividend disbursing agent for the fund and maintains records and handles
correspondence with respect to shareholder accounts, pursuant to a transfer
agency agreement. For these services, the transfer agent receives a monthly fee
computed separately for each fund and is reimbursed for out-of-pocket expenses.
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP ('PricewaterhouseCoopers') provides audit services,
tax return preparation and assistance and consultation in connection with review
of Commission filings. PricewaterhouseCoopers' address is 1177 Avenue of the
Americas, New York, New York 10036.
COUNSEL
Simpson Thacher & Bartlett (a partnership which includes professional
corporations) serves as counsel to each fund, and is located at 425 Lexington
Avenue, New York, New York 10017-3954.
Piper & Marbury L.L.P. of Baltimore, Maryland has issued an opinion regarding
the valid issuance of shares being offered for sale pursuant to the funds'
Prospectus.
CAPITAL STOCK
Pursuant to current interpretations of the 1940 Act, the fund anticipates that
each Participating Insurance Company will solicit voting instructions from VA
contract and VLI policy owners with respect to any matters that are presented to
a vote of shareholders, and will vote shares in proportion to the voting
instructions received. Plans will vote shares as required by applicable law and
governing Plan documents.
As used in this SAI and the Prospectus, the term 'majority', when referring to
the approvals to be obtained from shareholders in connection with matters
affecting a particular fund or any other single portfolio (e.g., approval of
investment management contracts) and requiring a vote under the 1940 Act means
the vote of the lesser of: (i) 67% of the shares of that particular portfolio,
represented at a meeting if the holders of more than 50% of the outstanding
shares of such portfolio are present in person or by proxy; or (ii) more than
50% of the outstanding shares of
57
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<PAGE>
such portfolio. Shareholders are entitled to one vote for each full share held
and fractional votes for fractional shares held.
Shares of each fund are entitled to such dividends and distributions out of the
assets belonging to that Fund as are declared in the discretion of the Board of
Directors. In determining the net asset value of a fund, assets belonging to a
fund are charged with the direct liabilities in respect of that Fund and with a
share of the general liabilities of the investment company which are normally
allocated in proportion to the relative net asset values of the respective Funds
at the time of allocation.
In the event of the liquidation or dissolution of the investment company, shares
of each fund are entitled to receive the assets attributable to it that are
available for distribution, and a proportionate distribution, based upon the
relative net assets of the fund, of any general assets not attributable to a
portfolio that are available for distribution. Shareholders are not entitled to
any preemptive rights. All shares, when issued, will be fully paid,
non-assessable, fully transferable and redeemable at the option of the holder.
Subject to the provisions of the Company' charter, determinations by the Board
of Directors as to the direct and allocable liabilities and the allocable
portion of any general assets of the investment company, with respect to a
particular fund are conclusive.
FINANCIAL STATEMENTS
The Company's annual report for the fiscal year ended December 31, 1998 is
incorporated herein by reference in its entirety.
58
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<PAGE>
APPENDIX A
DESCRIPTION OF RATINGS
A DESCRIPTION OF THE RATING POLICIES OF MOODY'S, S&P AND FITCH WITH RESPECT TO
BONDS AND COMMERCIAL PAPER APPEARS BELOW.
MOODY'S CORPORATE BOND RATINGS
AAA -- Bonds which are rated 'Aaa' are judged to be of the best quality and
carry the smallest degree of investment risk. Interest payments are protected by
a large or by an exceptionally stable margin, and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues.
AA -- Bonds which are rated 'Aa' are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A -- Bonds which are rated 'A' possess many favorable investment qualities and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
BAA -- Bonds which are rated 'Baa' are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BA -- Bonds which are rated 'Ba' are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B -- Bonds which are rated 'B' generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of maintenance and
other terms of the contract over any long period of time may be small.
CAA -- Bonds which are rated 'Caa' are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
CA -- Bonds which are rated 'Ca' represent obligations which are speculative to
a high degree. Such issues are often in default or have other marked
shortcomings.
C -- Bonds which are rated 'C' are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Moody's applies numerical modifiers '1', '2' and '3' to certain of its rating
classifications. The modifier '1' indicates that the security ranks in the
higher end of 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-1
<PAGE>
<PAGE>
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 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
<PAGE>
<PAGE>
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.
A-3
<PAGE>
<PAGE>
SALOMON BROTHERS VARIABLE SERIES FUNDS INC
PART C.
OTHER INFORMATION
ITEM 22. FINANCIAL STATEMENTS
Registrant's Annual Report for Fiscal Year December 31, 1998 is
incorporated herein by reference to the Registrant's definitive Rule 3062-1
filed on March 3, 1999 as Accession No. 0000091155-99-000127.
ITEM 23. FINANCIAL STATEMENTS AND EXHIBITS
(a) Not applicable.
(b) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ --------------------------------------------------------------------------------------------------------
<C> <S>
a -- Articles of Incorporation of Registrant.
b -- Registrant's By-Laws (filed as Exhibit 2(a) to Pre-Effective Amendment No. 1 to the Registration
Statement on Form N-1A and incorporated by reference herein).
c -- None.
d(1) -- Form of Management Contract between Registrant and Salomon Brothers Asset Management Inc relating to
the Salomon Brothers Variable U.S. Government Income Fund (filed as Exhibit 5(a) to Pre-Effective
Amendment No. 1 to the Registration Statement on Form N-1A and incorporated by reference herein).
d(2) -- Form of Management Contract between Registrant and Salomon Brothers Asset Management Inc relating to
the Salomon Brothers Variable High Yield Bond Fund (filed as Exhibit 5(b) to Pre-Effective Amendment
No. 1 to the Registration Statement on Form N-1A and incorporated by reference herein).
d(3) -- Form of Management Contract between Registrant and Salomon Brothers Asset Management Inc relating to
the Salomon Brothers Variable Strategic Bond Fund (filed as Exhibit 5(c) to Pre-Effective Amendment
No. 1 to the Registration Statement on Form N-1A and incorporated by reference herein).
d(4) -- Form of Management Contract between Registrant and Salomon Brothers Asset Management Inc relating to
the Salomon Brothers Variable Total Return Fund (filed as Exhibit 5(d) to Pre-Effective Amendment No.
1 to the Registration Statement on Form N-1A and incorporated by reference herein).
d(5) -- Form of Management Contract between Registrant and Salomon Brothers Asset Management Inc relating to
the Salomon Brothers Variable Asia Growth Fund (filed as Exhibit 5(e) to Pre-Effective Amendment No. 1
to the Registration Statement on Form N-1A and incorporated by reference herein).
d(6) -- Form of Management Contract between Registrant and Salomon Brothers Asset Management Inc relating to
the Salomon Brothers Variable Investors Fund (filed as Exhibit 5(f) to Pre-Effective Amendment No. 1
to the Registration Statement on Form N-1A and incorporated by reference herein).
d(7) -- Form of Management Contract between Registrant and Salomon Brothers Asset Management Inc relating to
the Salomon Brothers Variable Capital Fund (filed as Exhibit 5(g) to Pre-Effective Amendment No. 1 to
the Registration Statement on Form N-1A and incorporated by reference herein).
d(8) -- Form of Subadvisory Consulting Agreement between Salomon Brothers Asset Management Inc and Salomon
Brothers Asset Management Limited relating to the Salomon Brothers Variable Strategic Bond Fund (filed
as Exhibit 5(h) to Pre-Effective Amendment No. 1 to the Registration Statement on Form N-1A and
incorporated by reference herein).
d(9) -- Form of Subadvisory Agreement between Salomon Brothers Asset Management and Salomon Brothers Asset
Management Asia Pacific relating to the Salomon Brothers Variable Asia Growth Fund (filed as Exhibit
5(i) to Pre-Effective Amendment No. 1 to the Registration Statement on Form N-1A and incorporated by
reference herein).
e -- Distribution Agreement between Registrant and CFBDS. Inc. dated September 1, 1998 filed as Exhibit (e)
to Post-Effective Amendment No. 1 to the Registration Statement Form N-1A and incorporated herein
by reference.
f -- None.
g(1) -- Form of Custodian Agreement between Registrant and PNC Bank, National Association (filed as Exhibit
8(a) to Pre-Effective Amendment No. 1 to the Registration Statement on Form N-1A and incorporated by
reference herein).
g(2) -- Form of Custodian Agreement between Registrant and The Chase Manhattan Bank (filed as Exhibit 8(b) to
Pre-Effective Amendment No. 1 to the Registration Statement on Form
N-1A and incorporated by reference herein).
h(1) -- Form of Transfer Agency Agreement between Registrant and First Data Investors Services Group, Inc
(filed as Exhibit 9(a) to Pre-Effective Amendment No. 1 to the Registration Statement on Form N-1A and
incorporated by reference herein).
</TABLE>
C-1
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ --------------------------------------------------------------------------------------------------------
<C> <S>
h(2) -- Form of Administration Agreement between Registrant and Salomon Brothers Asset Management Inc (filed
as Exhibit 9(b) to Pre-Effective Amendment No. 1 to the Registration Statement on Form N-1A and
incorporated by reference herein).
h(3) -- Form of Participation Agreement (filed as Exhibit 9(c) to Pre-Effective Amendment No. 1 to the
Registration Statement on Form N-1A and incorporated by reference herein).
i -- Opinion and Consent of Counsel of Piper & Marbury L.L.P. as to the Legality of Securities Being
Registered (filed as Exhibit 10 to Pre-Effective Amendment No. 1 to the Registration Statement on
Form N-1A and incorporated by reference herein).
j -- Consent of Independent Accountants is filed herein.
k -- None.
l -- Share Purchase Agreement (filed as Exhibit 13(a) to Pre-Effective Amendment No. 1 to the Registration
Statement on Form N-1A and incorporated by reference herein).
m -- None.
n -- Financial Data Schedules for Variable U.S. Government Income Fund, Variable High Yield Bond Fund,
Variable Strategic Bond Fund, Variable Total Return Fund, Variable Asia Growth Fund, Variable
Investors Fund and Variable Capital Fund is filed herein.
o -- None.
</TABLE>
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Entities within the Salomon group own the outstanding shares of the High
Yield Bond Fund, Strategic Bond Fund, Investors Fund, Capital Fund and Total
Return Fund and, therefore may be deemed to be control persons of such Funds. As
a result, such Funds may be deemed to be under common control.
ITEM 25. INDEMNIFICATION.
Reference is made to Article VIII of Registrant's Articles of
Incorporation, Article IV of Registrant's By-Laws and Section 4 of the
Distribution Agreements between the Registrant and CFBDS, Inc.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the 'Securities Act'), may be permitted to directors,
officers and controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant understands that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
The list required by this Item 26 of officers and directors of SBAM,
Salomon Brothers Asset Management AP ('SBAM AP') and Salomon Brothers Asset
Management Limited ('SBAM Limited'), together with information as to any other
business, profession, vocation or employment of a substantial nature engaged in
by such officers and directors during the past two years, is incorporated by
reference to Schedules A and D of their respective FORM ADV filed by SBAM, SBAM
AP and SBAM Limited, respectively, pursuant to the Advisers Act (SEC File Nos.
801-32046, 801-51393 and 801-43335, respectively).
C-2
<PAGE>
<PAGE>
ITEM 27. PRINCIPAL UNDERWRITERS
(a) CFBDS, Inc., ('CFBDS') the Registrant's Distributor, is also the
distributor for the following Smith Barney funds: Concert Investment Series,
Consulting Group Capital Markets Funds, Greenwich Street Series Fund, Smith
Barney Adjustable Rate Government Income Fund, Smith Barney Aggressive Growth
Fund Inc., Smith Barney Appreciation Fund, Inc., Smith Barney Arizona Municipals
Fund Inc., Smith Barney California Municipals Fund Inc., Smith Barney Concert
Allocation Series Inc., Smith Barney Equity Funds, Smith Barney Fundamental
Value Fund Inc., Smith Barney Funds, Inc., Smith Barney Income Funds, Smith
Barney Institutional Cash Management Fund, Inc., Smith Barney Investment Funds
Inc., Smith Barney Investment Trust, Smith Barney Managed Governments Fund Inc.,
Smith Barney Managed Municipals Fund Inc., Smith Barney Massachusetts Municipals
Fund, Smith Barney Money Funds, Inc., Smith Barney Muni Funds, Smith Barney
Municipal Money Market Fund, Inc., Smith Barney Natural Resources Fund Inc.,
Smith Barney New Jersey Municipals Fund Inc., Smith Barney Oregon Municipals
Fund Inc., Smith Barney Principal Return Fund, Smith Barney Small Cap Blend
Fund, Inc., Smith Barney Telecommunications Trust, Smith Barney Variable Account
Funds, Smith Barney World Funds, Inc., Travelers Series Fund Inc., and various
series of unit investment trusts.
CFBDS also serves as the distributor for the following funds: The Travelers
Fund UL for Variable Annuities, The Travelers Fund VA for Variable Annuities,
The Travelers Fund BD for Variable Annuities, The Travelers Fund BD II for
Variable Annuities, The Travelers Fund BD III for Variable Annuities, The
Travelers Fund BD IV for Variable Annuities, The Travelers Fund ABD for Variable
Annuities, The Travelers Fund ABD II for Variable Annuities, The Travelers
Separate Account PF for Variable Annuities, The Travelers Separate Account PF II
for Variable Annuities, The Travelers Separate Account QP for Variable
Annuities, The Travelers Separate Account TM for Variable Annuities, The
Travelers Separate Account TM II for Variable Annuities, The Travelers Separate
Account Five for Variable Annuities, The Travelers Separate Account Six for
Variable Annuities, The Travelers Separate Account Seven for Variable Annuities,
The Travelers Separate Account Eight for Variable Annuities, The Travelers Fund
UL for Variable Annuities, The Travelers Fund UL II for Variable Annuities, The
Travelers Variable Life Insurance Separate Account One, The Travelers Variable
Life Insurance Separate Account Two, The Travelers Variable Life Insurance
Separate Account Three, The Travelers Variable Life Insurance Separate Account
Four, The Travelers Separate Account MGA, The Travelers Separate Account MGA II,
The Travelers Growth and Income Stock Account for Variable Annuities, The
Travelers Quality Bond Account for Variable Annuities, The Travelers Money
Market Account for Variable Annuities, The Travelers Timed Growth and Income
Stock Account for Variable Annuities, The Travelers Timed Short-Term Bond
Account for Variable Annuities, The Travelers Timed Aggressive Stock Account for
Variable Annuities, The Travelers Timed Bond Account for Variable Annuities.
In addition, CFBDS, the Registrant's Distributor, is also the distributor
for CitiFunds Multi-State Tax Free Trust, CitiFunds Premium Trust, CitiFunds
Institutional Trust, CitiFunds Tax Free Reserves, CitiFunds Trust I, CitiFunds
Trust II, CitiFunds Trust III, CitiFunds International Trust, CitiFunds Fixed
Income Trust, CitiSelect VIP Folio 200, CitiSelect VIP Folio 300, CitiSelect VIP
Folio 400, CitiSelect VIP Folio 500, CitiFunds Small Cap Growth VIP Portfolio.
CFBDS is also the placement agent for Large Cap Value Portfolio, Small Cap Value
Portfolio, International Portfolio, Foreign Bond Portfolio, Intermediate Income
Portfolio, Short-Term Portfolio, Growth & Income Portfolio, U.S. Fixed Income
Portfolio, Large Cap Growth Portfolio, Small Cap Growth Portfolio, International
Equity Portfolio, Balanced Portfolio, Government Income Portfolio, Tax Free
Reserves Portfolio, Cash Reserves Portfolio and U.S. Treasury Reserves
Portfolio.
In addition, CFBDS is also the distributor for the following Salomon
Brothers funds: Salomon Brothers Opportunity Fund Inc., Salomon Brothers
Investors Fund Inc., Salomon Brothers Capital Fund Inc., Salomon Brothers Series
Funds Inc., Salomon Brothers Institutional Series Funds Inc., Salomon Brothers
Variable Series Funds Inc.
In addition, CFBDS is also the distributor for the Centurion Funds, Inc.
(b) The information required by this Item 27 with respect to each director
and officer of CFBDS is incorporated by reference to Schedule A of Form BD filed
by CFBDS pursuant to the Securities and Exchange Act of 1934 (File No. 8-32417).
C-3
<PAGE>
<PAGE>
(c) Not applicable.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS.
(1) Salomon Brothers Asset Management Inc.
7 World Trade Center
New York, New York 10048
(2) First Data Investors Services Group, Inc..
P.O. Box 5127
Westborough, Massachusetts 01581-5127
(3) PNC Bank N.A.
Airport Business Center
International Court 2
200 Stevens Drive
Lester, Pennsylvania 19113
ITEM 29. MANAGEMENT SERVICES.
Not applicable.
ITEM 30. UNDERTAKINGS.
Registrant undertakes to furnish to each person to whom a prospectus is
delivered a copy of Registrant's latest annual report to shareholders upon
request and without charge.
C-4
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, and
the Investment Company Act of 1940, as amended, the Registrant has duly caused
this Amendment to this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, and State of
New York, on the 30th day of April, 1999.
SALOMON BROTHERS VARIABLE
SERIES FUNDS INC
(Registrant)
By /s/ HEATH B. MCLENDON
...................................
HEATH B. MCLENDON
PRESIDENT
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------------- ------------------------------------------------ ------------------
<S> <C> <C>
HEATH B. MCLENDON Director and President (Principal Executive April 30, 1999
........................................ Officer)
(HEATH B. MCLENDON)
* Director April 30, 1999
........................................
(CHARLES F. BARBER)
* Director April 30, 1999
........................................
(CAROL L. COLMAN)
* Director April 30, 1999
........................................
(DANIEL P. CONIN)
/s/ LEWIS E. DAIDONE Exective Vice President and Treasurer (Principal April 30, 1999
........................................ Financial and Accounting Officer)
LEWIS E. DAIDONE
* By: /s/ LEWIS E. DAIDONE April 30, 1999
........................................
LEWIS E. DAIDONE
AS ATTORNEY-IN-FACT
</TABLE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- ---------------------------------------------------------------------------------------------------
<S> <C>
(j) Consent of Independent Auditors
(n) Financial Data Schedule
</TABLE>
STATEMENT OF DIFFERENCES
------------------------
The dagger symbol shall be express as.................................... 'D'
The double dagger symbol shall be expressed as........................... 'DD'
Characters normally expressed as superscript shall be preceded by........ 'pp'
<PAGE>
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus and
Statement of Additional Information constituting parts of this Post-Effective
Amendment No. 2 to the Registration Statement on Form N-1A (the "Registration
Statement") of our report dated February 12, 1999, relating to the financial
statements and financial highlights appearing in the December 31, 1998 Annual
Report to Shareholders of Salomon Brothers Variable High Yield Bond Fund,
Salomon Brothers Variable Strategic Bond Fund, Salomon Brothers Variable Total
Return Fund, Salomon Brothers Variable Investors Fund and Salomon Brothers
Variable Capital Fund (five of the portfolios constituting Salomon Brothers
Variable Series Funds Inc), which is also incorporated by reference into the
Registration Statement. We also consent to the references to us under the
heading "Financial Highlights" in the Prospectus and under the heading
"Independent Accountants" in the Statement of Additional Information.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York, 10036
April 27, 1999
<PAGE>
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