<PAGE>
SALOMON BROTHERS Semi-
Variable Series Funds Inc Annual
Report
[GRAPHIC] 1999
June 30, 1999
. Capital Fund
<PAGE>
[GRAPHIC]
THE SALOMON BROTHERS VARIABLE SERIES FUNDS INC
Our Message to You
Dear Shareholder:
We are pleased to provide you with the semi-annual report for the Salomon
Brothers Variable Capital Fund ("Fund") for the period ended June 30, 1999. This
letter will briefly discuss general economic and market conditions as well as
Fund developments during the reporting period. A detailed summary of performance
and current Fund holdings can be found in the appropriate sections that follow.
The first half of 1999 was a period of economic growth at home and recovery
abroad. Following the events surrounding the Russian debt default in August of
1998 -- which included a dive in bond yields and a 0.75% decrease in interest
rates -- yields have recovered quite well. Investor optimism, however, was
tempered by concerns about inflation, interest rates, and continued economic
growth.
The long anticipated slowdown in U.S. economic activity again failed to
materialize. Global stock markets continued to rise led by better than expected
profit growth and continued merger and acquisition activity. The risks of higher
U.S. economic growth were more fairly reflected in the U.S. yield curve at the
end of the first quarter of 1999 than they were at the beginning.
The stronger than expected growth caused interest rates to rise in the first
quarter. The 30-year U.S. Treasury bond had its third worst quarter of the
1990s. In fact, only the first quarters of 1994 and 1996 were worse. The Lehman
Brothers Government/Corporate Index declined about 1.2% in the first quarter of
1999. U.S. Treasuries underperformed as spreads narrowed in all sectors.
During the six-months ended June 30, 1999, the U.S. economy continued to show
signs of benign inflation and productivity-driven growth. Domestic demand growth
outstripped even optimistic estimates of the economy's long-term capacity, and a
combination of rising productivity, a flood of goods from abroad, and more
intensive use of labor kept inflation from overheating. Globally, there were
strong signs that the world economy had bottomed and was on the road to
recovery. While the biggest market risk in the period remained the lingering
threat of eventual overheating resulting in Federal Reserve Board tightening,
policy-makers, led by Chairman Greenspan, held their stance on the sidelines
until implementing a well-telegraphed 25 basis point tightening on June 30,
1999.
1
<PAGE>
THE VARIABLE CAPITAL FUND
The Fund's primary investment objective is to seek capital appreciation through
investments primarily in common stock, or securities convertible into common
stocks, that are believed to have above-average price appreciation potential.
These securities may also involve above-average risk. Current income is an
incidental consideration.
For the six months ended June 30, 1999, the Fund returned 13.22%. In comparison,
the Russell 3000 Index* generated a total return of 11.36%.
Continued improvement in international stability after last summer's economic
turmoil caused investors to focus on cyclical stocks that had mostly under-
performed for the last several quarters. As a result, the market experienced
both an increase in breadth and a significant rotation into cyclicals.
Importantly, this increase in market breadth permitted sector rotations without
causing a significant sell-off in the broad market averages.
The Fund demonstrated the benefits associated with its all-capitalization
strategy as the first half of 1999 showed improved market breadth. The all-
capitalization strategy -- sometimes described as broad market strategy --
attempts to exceed the returns associated with popular market indices by
purchasing companies of all sizes which are the most attractive to own at the
time. While the 20 largest growth stocks have generally driven market returns
over the past few years, in our opinion many of these stocks are overpriced and
provide small margins of safety for investors. In contrast, during this same
period we have found small-cap and mid-cap companies that have attractive
business prospects, and, yet, their stocks have larger margins of safety. We
believe investors can benefit from a disciplined process of security analysis
that assesses company fundamentals, strategic positioning, and valuation to
determine whether a given company represents an attractive investment.
Certain communications services, consumer staples, and technology stocks drove
the Fund's performance gains in the period. During the recent energy rally, we
took some profits from the run-up in refiners and reinvested in strategically
well-positioned energy production companies.
- ------------
* The Russell 3000 Index measures the performance of the 3,000 largest U.S.
companies based on total market capitalization, which represents approximately
98% of the investable U.S. equity market. The index is unmanaged and not
subject to the same management and trading expenses of a mutual fund. All
figures represent past performance and are not a guarantee of future results.
Investment returns and principal value will fluctuate and redemption values
may be more or less than the original cost.
2
<PAGE>
Over the period, we also established new positions in certain media stocks and
selectively exited technology positions that had reached our assessment of full
value. Average individual position size has decreased modestly as the portfolio
has added a number of new ideas. Finally, we increased positions in a few
existing holdings that are experiencing improving business fundamentals that, in
our opinion, are not yet reflected in current market prices.
The rotation that has recently taken place in the equity markets has principally
benefited three categories: value stocks, cyclical stocks, and small/mid-cap
stocks. We believe that this rotation, while no longer in its early stages, will
continue to evolve. At the same time, while many market valuation indicators
appear expensive, we are still able to find selected companies that have
attractive fundamental profiles at reasonable prices.
While the secular case supporting the long term bull market still appears to be
intact, the cyclical recovery of many depressed economies around the world does
create the potential for rising U.S. interest rates. This, in turn, could dampen
near term enthusiasm for U.S. equities. Our strategy in the Fund is not to try
to time markets but, rather, to continue to evaluate the risk/reward of each
security we own and use position size to reflect our views of risk and potential
return. Overall, the portfolio continues to be positioned with companies that
have favorable growth characteristics yet retain reasonable current valuations.
Thank you for your investment in the Salomon Brothers Variable Capital Fund. We
look forward to helping you pursue your financial goals in the years to come.
Cordially,
/s/ Heath B. McLendon
Heath B. McLendon
Chairman and President
August 3, 1999
3
<PAGE>
The following graph depicts the performance of the Fund versus the Russell 3000
Index. It is important to note that the Fund is a professionally managed mutual
fund while the index is not available for investment and is unmanaged. The
comparison is shown for illustrative purposes only.
HISTORICAL PERFORMANCE --
SALOMON BROTHERS VARIABLE CAPITAL FUND (unaudited)
Comparison of $10,000 Investment in the Fund with the Russell 3000 Index
[LINE GRAPH]
Capital Fund Russell 3000 Index
2/17/98 10,000 10,000
3/98 10,780 10,737
6/98 10,971 10,932
9/98 9,661 9,709
12/98 11,812 11,788
3/99 11,619 12,186
6/30/99 13,374 13,123
Past performance is not predictive of future performance. The graph does not
reflect expenses associated with the separate account as administrative fees,
account charges and surrender changes which, if reflected, would reduce the
performance shown.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Historical Performance
- -----------------------------------------------------------------------------------------------
Net Asset Value
---------------
Beginning End Income Capital Gain Total
Period Ended of Period of Period Dividend Distribution Returns+++
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
6/30/99 $11.57 $13.10 $ 0.00 $0.00 13.22%
- -----------------------------------------------------------------------------------------------
Inception* -- 12/31/98 10.00 11.57 0.09 0.15 18.12
- -----------------------------------------------------------------------------------------------
$ 0.09 $ 0.15
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
Average Annual Total Returns+
- -----------------------------------------------------------------------------------------------
Six Months Ended 6/30/99++ 13.22%
- -----------------------------------------------------------------------------------------------
Year Ended 6/30/99 21.91
- -----------------------------------------------------------------------------------------------
Inception* through 6/30/99 23.80
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
Cumulative Total Return+
- -----------------------------------------------------------------------------------------------
Inception* through 6/30/99 33.73%
- -----------------------------------------------------------------------------------------------
</TABLE>
+ Assumes the reinvestment of all dividends and capital gains
distributions at net asset value.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
* Inception date is February 17, 1998.
4
<PAGE>
Schedule of Investments
June 30, 1999 (unaudited)
<TABLE>
<CAPTION>
Shares Security Value
<C> <S> <C>
- -------------------------------------------------------------------------------
COMMON STOCK -- 85.5%
Basic Industries -- 5.9%
2,300 Crown Cork & Seal Co., Inc. ............................ $ 65,550
3,000 Geon Co. ............................................... 96,750
1,400 Martin Marietta Materials, Inc. ........................ 82,600
2,500 OM Group, Inc. ......................................... 86,250
1,400 Vulcan Materials Co. ................................... 67,550
----------
398,700
----------
Capital Goods -- 2.2%
7,000 Harnishfeger Industries, Inc. .......................... 14,000
1,000 Ingersoll-Rand Co. ..................................... 64,625
1,600 York International Corp. ............................... 68,500
----------
147,125
----------
Communications -- 10.5%
1,400 Bell Atlantic Corp. .................................... 91,525
800 Frontier Corp. ......................................... 47,200
268 General Motors Corp., Class H Shares.................... 15,075
700 GTE Corp. .............................................. 53,025
700 MCI WorldCom, Inc. (a).................................. 60,375
1,200 NTL Inc. (a)............................................ 103,425
4,500 PanAmSat Corp. (a)...................................... 175,219
Rogers Cantel Mobile Communications Inc., Class B Shares
10,500 (a)..................................................... 172,594
----------
718,438
----------
Consumer Cyclicals -- 7.4%
2,000 Costco Cos., Inc. (a)................................... 160,125
3,500 Federated Department Stores, Inc. (a)................... 185,281
10,971 Fine Host Corp. (a)..................................... 102,563
5,000 Hollinger International Inc. ........................... 59,375
----------
507,344
----------
Consumer Non-Cyclicals -- 24.6%
2,500 AT&T Corp. - Liberty Media Group, Class A Shares (a).... 91,875
20,000 Food Lion Inc., Class B Shares.......................... 231,250
1,000 Hannaford Bros. Co. .................................... 53,500
1,500 Hearst-Argyle Television, Inc. (a)...................... 36,000
5,900 Hormel Foods Corp. ..................................... 237,475
6,000 John B. Sanfilippo & Son, Inc. (a)...................... 22,875
3,500 Michael Foods, Inc. .................................... 82,250
8,500 Nabisco Group Holdings Corp. ........................... 166,281
3,200 News Corp. Ltd. ADR..................................... 101,000
5,500 Philip Morris Cos. Inc. ................................ 221,031
3,000 R.J. Reynolds Tobacco Holdings, Inc. (a)................ 94,500
2,500 Sinclair Broadcast Group, Inc., Class A Shares (a)...... 40,938
5,000 Tyson Foods, Inc., Class A Shares (a)................... 112,500
U.S. Satellite Broadcasting Co., Inc., Class A Shares
5,500 (a)..................................................... 98,978
2,000 Viacom Inc., Class B Shares (a)......................... 88,000
----------
1,678,453
----------
Energy -- 6.8%
2,500 Devon Energy Corp. ..................................... 89,375
5,500 Paradigm Geophysical Ltd. (a)........................... 37,469
2,500 Suncor Energy, Inc. .................................... 102,812
</TABLE>
See Notes to Financial Statements.
5
<PAGE>
Schedule of Investments
June 30, 1999 (unaudited) (continued)
<TABLE>
<CAPTION>
Shares Security Value
<C> <S> <C>
- --------------------------------------------------------------------------------
Energy -- 6.8% (continued)
8,500 Tesoro Petroleum Corp. (a)................................ $ 135,469
3,700 Tosco Corp. .............................................. 95,969
----------
461,094
----------
Financial Services -- 8.7%
3,500 Bank of New York Co., Inc. ............................... 128,406
2,000 Fleet Financial Group, Inc. .............................. 88,750
900 Goldman Sachs Group, Inc. ................................ 65,025
5,000 Independence Community Bank Corp. ........................ 67,500
5,000 Peoples Heritage Financial Group, Inc. ................... 94,063
2,200 Protective Life Corp. .................................... 72,600
2,200 Reinsurance Group of America, Inc. ....................... 73,700
----------
590,044
----------
Health Care -- 2.4%
4,500 CombiChem, Inc. (a)....................................... 18,281
2,500 Pharmacia & Upjohn, Inc. ................................. 142,031
----------
160,312
----------
Technology -- 14.6%
1,700 ADC Telecommunications, Inc. (a).......................... 77,456
2,700 Amdocs Ltd. (a)........................................... 61,425
900 Comverse Technology, Inc. (a)............................. 67,950
800 Hewlett-Packard Co. ...................................... 80,400
500 International Business Machines Corp. .................... 64,625
5,500 Latitude Communications, Inc. (a)......................... 71,500
1,200 Legato Systems, Inc. (a).................................. 69,300
1,500 Plantronics, Inc. (a)..................................... 97,687
11,000 S3 Inc. (a)............................................... 100,031
5,500 Seagate Technology, Inc. (a).............................. 140,938
5,000 SpeedFam-IPEC, Inc. (a)................................... 80,313
1,200 Tellabs, Inc. (a)......................................... 81,075
----------
992,700
----------
Utilities -- 2.4%
5,500 Azurix Corp. (a).......................................... 110,000
4,200 KN Energy, Inc. .......................................... 56,175
----------
166,175
----------
TOTAL COMMON STOCK
(Cost -- $4,857,202)...................................... 5,820,385
----------
CONVERTIBLE PREFERRED STOCK -- 0.2%
Consumer Cyclicals -- 0.2%
2,500 BTI Capital Trust, 6.500% (Cost -- $96,608)............... 13,437
----------
</TABLE>
<TABLE>
<CAPTION>
Face
Amount Security Value
<C> <S> <C>
- -------------------------------------------------------------------------------
CONVERTIBLE CORPORATE BONDS -- 1.8%
Consumer Cyclicals -- 1.4%
$550,000 Sunbeam Corp., Sr. Sub. Debentures, zero coupon due 3/25/18
(b)........................................................ 92,125
-------
Technology -- 0.4%
125,000 Aspect Telecommunication, zero coupon due 8/10/18.......... 27,344
-------
TOTAL CONVERTIBLE CORPORATE BONDS
(Cost -- $126,789)......................................... 119,469
-------
</TABLE>
See Notes to Financial Statements.
6
<PAGE>
Schedule of Investments
June 30, 1999 (unaudited) (continued)
<TABLE>
<CAPTION>
Face
Amount Security Value
<C> <S> <C>
- -------------------------------------------------------------------------------
CORPORATE BONDS & NOTES -- 2.6%
Basic Industries -- 1.1%
Harnischfeger Industries Inc, Debentures:
$60,000 8.900% due 3/1/22 (c).................................... $ 36,900
25,000 8.700% due 6/15/22 (c)................................... 15,375
40,000 6.875% due 2/15/27 (c)................................... 24,600
----------
76,875
----------
Financial Services -- 1.5%
125,000 Contifinancial Corp., Sr. Notes, 8.375% due 8/15/03...... 103,750
----------
TOTAL CORPORATE BONDS & NOTES
(Cost -- $165,705)...................................... 180,625
----------
</TABLE>
<TABLE>
<CAPTION>
Contracts Security Value
<C> <S> <C>
- ------------------------------------------------------------------------------
PURCHASED OPTIONS(a) -- 0.1%
Call Options -- 0.0%
6 Iridium World Communications Ltd., Call @ $12.50,
Expire 7/17/99......................................... 487
24 Iridium World Communications Ltd., Call @ $20, Expire
7/17/99................................................ 375
24 Iridium World Communications Ltd., Call @ $20, Expire
10/16/99............................................... 1,650
----------
2,512
----------
Put Options -- 0.1%
20 Amazon.com, Inc., Put @ $70, Expire 7/17/99............ 250
6 Amazon.com, Inc., Put @ $90, Expire 7/17/99............ 300
12 America Online, Inc., Put @ $80, Expire 7/17/99........ 225
6 America Online, Inc., Put @ $100, Expire 7/17/99....... 1,125
1 Interactive Week Internet Index, Put @ $290, Expire
7/17/99................................................ 575
2 Interactive Week Internet Index, Put @ $310, Expire
7/17/99................................................ 2,400
11 Iridium World Communications Ltd., Put @ $5, Expire
7/17/99................................................ 69
10 Iridium World Communications Ltd., Put @ $7.5, Expire
7/17/99................................................ 625
11 Iridium World Communications Ltd., Put @ $10, Expire
7/17/99................................................ 1,719
----------
7,288
----------
TOTAL PURCHASED OPTIONS
(Cost -- $29,689)...................................... 9,800
----------
</TABLE>
<TABLE>
<CAPTION>
Face
Amount Security Value
<C> <S> <C>
- -------------------------------------------------------------------------------
REPURCHASE AGREEMENT -- 9.8%
$668,000 State Street Bank & Trust Co., 4.700% due 7/1/99;
Proceeds at maturity -- $668,087;
(Fully collateralized by U.S. Treasury Bonds, 8.500% due
2/15/20; Market value -- $687,053) (Cost -- $668,000)
(d)...................................................... 668,000
----------
TOTAL INVESTMENTS -- 100%
(Cost -- $5,943,993*).................................... $6,811,716
==========
</TABLE>
- ------
(a) Non-income producing security.
(b) Security is exempt from registration under Rule 144A of the Securities Act
of 1933. This security may be resold in transactions that are exempt from
registration, normally to qualified institutional buyers.
(c) Security is currently in default.
(d) Security is segregated to cover written options.
* Aggregate cost for Federal income tax purposes is substantially the same.
Abbreviations used in this schedule:
ADR--American Depository Receipt.
See Notes to Financial Statements.
7
<PAGE>
Statement of Assets and Liabilities
June 30, 1999 (unaudited)
<TABLE>
<S> <C>
ASSETS:
Investments, at value (Cost -- $5,943,993)......................... $6,811,716
Cash............................................................... 342
Receivable for securities sold..................................... 48,071
Deferred organization costs........................................ 22,712
Dividends and interest receivable.................................. 8,077
Receivable from investment manager................................. 6,469
Prepaid expenses................................................... 1,173
----------
Total Assets....................................................... 6,898,560
----------
LIABILITIES:
Payable for securities purchased................................... 403,680
Payable for written options........................................ 21,700
Administration fee payable......................................... 2,397
Accrued expenses................................................... 20,069
----------
Total Liabilities.................................................. 447,846
----------
Total Net Assets................................................... $6,450,714
==========
NET ASSETS:
Par value of capital shares........................................ $ 493
Capital paid in excess of par value................................ 5,298,252
Undistributed net investment income................................ 30,464
Accumulated net realized gain from security transactions and
options........................................................... 256,341
Net unrealized appreciation of investments and options............. 865,164
----------
Total Net Assets................................................... $6,450,714
==========
Shares Outstanding.................................................. 492,602
----------
Net Asset Value, per share.......................................... $13.10
----------
</TABLE>
See Notes to Financial Statements.
8
<PAGE>
Statement of Operations
For the Six Months Ended June 30, 1999 (unaudited)
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends (net of foreign withholding tax of $251).................. $ 32,905
Interest............................................................ 21,580
--------
Total Investment Income............................................. 54,485
--------
EXPENSES:
Management fees (Note 2)............................................ 20,418
Audit and legal..................................................... 9,620
Custody............................................................. 4,165
Shareholder communications.......................................... 3,967
Shareholder and system servicing fees............................... 3,630
Amortization of deferred organization costs......................... 3,097
Directors' fees..................................................... 2,529
Administration fees................................................. 1,201
Registration fees................................................... 1,041
Other............................................................... 1,240
--------
Total Expenses...................................................... 50,908
Less: Management fee waiver and expense reimbursement (Note 2)...... (26,887)
--------
Net Expenses........................................................ 24,021
--------
Net Investment Income................................................ 30,464
--------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS AND OPTIONS (NOTES 3 AND 5):
Realized Gain (Loss) From:
Security transactions (excluding short-term securities)............. 284,052
Options purchased................................................... (30,399)
Options written..................................................... 5,177
--------
Net Realized Gain................................................... 258,830
--------
Change in Net Unrealized Appreciation of Investments and Options:
Beginning of period................................................. 480,856
End of period....................................................... 865,164
--------
Increase in Net Unrealized Appreciation............................. 384,308
--------
Net Gain on Investments and Options.................................. 643,138
--------
Increase in Net Assets From Operations............................... $673,602
========
</TABLE>
See Notes to Financial Statements.
9
<PAGE>
Statements of Changes in Net Assets
For the Six Months Ended June 30, 1999 (unaudited) and the Period Ended
December 31, 1998(a)
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
OPERATIONS:
Net investment income................................. $ 30,464 $ 32,247
Net realized gain..................................... 258,830 51,566
Increase in net unrealized appreciation............... 384,308 480,856
---------- ----------
Increase in Net Assets From Operations................ 673,602 564,669
---------- ----------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income................................. -- (32,219)
Net realized gains.................................... -- (54,083)
---------- ----------
Decrease in Net Assets From Distributions to
Shareholders......................................... -- (86,302)
---------- ----------
FUND SHARE TRANSACTIONS (NOTE 9):
Net proceeds from sale of shares...................... 2,622,467 3,867,574
Net asset value of shares issued for reinvestment of
dividends............................................ -- 86,302
Cost of shares reacquired............................. (1,135,238) (142,370)
---------- ----------
Increase in Net Assets From Fund Share Transactions... 1,487,229 3,811,506
---------- ----------
Increase in Net Assets................................. 2,160,831 4,289,873
NET ASSETS:
Beginning of period................................... 4,289,883 10
---------- ----------
End of period*........................................ $6,450,714 $4,289,883
========== ==========
*Includes undistributed net investment income of:..... $30,464 $0
========== ==========
</TABLE>
- ------
(a) For the period from February 17, 1998 (commencement of operations) to De-
cember 31, 1998.
See Notes to Financial Statements.
10
<PAGE>
Notes to Financial Statements
(unaudited)
1. Significant Accounting Policies
Salomon Brothers Variable Capital Fund ("Fund") is a separate non-diversified
investment portfolio of the Salomon Brothers Variable Series Funds Inc
("Series") whose primary investment objective is to seek capital appreciation.
The Series, a Maryland corporation, is registered under the Investment Company
Act of 1940, as amended ("1940 Act"), as an open-end management investment
company and consists of this Fund and six other investment portfolios: Salomon
Brothers Variable Total Return Fund, Salomon Brothers Variable High Yield Bond
Fund, Salomon Brothers Variable Investors Fund, Salomon Brothers Variable
Strategic Bond Fund, Salomon Brothers Variable U.S. Government Income Fund and
Salomon Brothers Variable Asia Growth Fund. The U.S. Government Income Fund and
Asia Growth Fund have not yet commenced operations. The financial statements
and financial highlights for the other investment portfolios are presented in
separate shareholder reports. The Fund and each other investment portfolio of
the Series is offered exclusively for use with certain variable annuity and
variable life insurance contracts offered through the separate accounts of
various life insurance companies and qualified pension and retirement plans.
The significant accounting policies consistently followed by the Fund are: (a)
security transactions are accounted for on trade date; (b) securities traded on
national securities markets are valued at the closing prices on such markets;
securities traded in the over-the-counter market and securities for which no
sales price was reported are valued at the mean of the current bid and asked
prices; debt securities are valued using either prices or estimates of market
values provided by market markers or independent pricing services. Securities
and assets for which market quotations are not readily available are valued at
fair value as determined in good faith by or under the direction of the Board
of Directors of the Fund; (c) securities maturing within 60 days are valued at
cost plus accreted discount, or minus amortized premium, which approximates
market value; (d) dividend income is recorded on the ex-dividend date; (e)
interest income, adjusted for accretion of original issue or market discount,
is recorded on the accrual basis; (f) gains or losses on the sale of securities
are calculated by using the specific identification method; (g) dividends and
distributions to shareholders are recorded on the ex-dividend date; (h) the
accounting records are maintained in U.S. dollars. All assets and liabilities
denominated in foreign currencies are translated into U.S. dollars based on the
rate of exchange of such currencies against U.S. dollars on the date of
valuation. Purchases and sales of securities, and income and expenses are
translated at the rate of exchange quoted on the respective date that such
transactions are recorded. Differences between income and expense amounts
recorded and collected or paid are recorded as currency gains or losses (i) the
character of income and gains to be distributed are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles. At December 31, 1998, reclassifications were made to the capital
accounts of the Fund to reflect permanent book/tax differences and income and
gains available for distributions under income tax regulations. Net investment
income, net realized gains and net assets were not affected by this change; (j)
the Fund intends to comply with the applicable provisions of the Internal
Revenue Code of 1986, as amended, pertaining to regulated investment companies
and to make distributions of taxable income sufficient to relieve the Fund from
substantially all Federal income and excise taxes; and (k) estimates and
assumptions are required to be made regarding assets, liabilities and changes
in net assets resulting from operations when financial statements are prepared.
Changes in the economic environment, financial markets and any other parameters
used in determining these estimates could cause actual results to differ.
Organization costs amounting to $31,250 were incurred with the organization of
the Fund. These costs are being amortized ratably over a five year period from
commencement of operations.
2. Management Agreement and Transactions with Affiliated Persons
Salomon Brothers Asset Management Inc ("SBAM"), a wholly owned subsidiary of
Salomon Brothers Holding Company Inc., which in turn is wholly owned by Salomon
Smith Barney Holdings, Inc. ("SSBH"), acts as investment manager to the Fund.
Under the investment management agreement, the Fund pays an investment
management fee calculated at the annual rate of 0.85% of its average daily net
assets. This fee is calculated daily and paid monthly.
For the six months ended June 30, 1999, SBAM waived all of the management fees
payable by the Fund and reimbursed expenses of $6,469.
11
<PAGE>
Notes to Financial Statements
(unaudited) (continued)
SBAM also acts as administrator to the Fund. As compensation for its services
the Fund pays SBAM a fee calculated at an annual rate of 0.05% of its average
daily net assets. This fee is calculated daily and paid monthly. SBAM has
delegated its responsibilities as administrator to SSBC Fund Management Inc.
("SSBC"), formerly known as Mutual Management Corp., an affiliate of SBAM,
pursuant to a Sub-Administration Agreement between SBAM and SSBC.
CFBDS, Inc. acts as the Fund's distributor. For the six months ended June 30,
1999, Salomon Smith Barney Inc. ("SSB"), another subsidiary of SSBH, received
brokerage commissions of $400 from the Fund.
3. Investments
During the six months ended June 30, 1999, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding short-
term securities) were as follows:
<TABLE>
<S> <C>
Purchases............................................................ $3,982,032
==========
Sales................................................................ $2,298,623
==========
</TABLE>
At June 30, 1999, the aggregate gross unrealized appreciation and depreciation
of investments for Federal income tax purposes were substantially as follows:
<TABLE>
<S> <C>
Gross unrealized appreciation....................................... $1,072,568
Gross unrealized depreciation....................................... (204,845)
----------
Net unrealized appreciation......................................... $ 867,723
==========
</TABLE>
4. Repurchase Agreements
The Fund purchases (and its custodian takes possession of) U.S. government se-
curities from banks and securities dealers subject to agreements to resell the
securities to the seller at a future date (generally, the next business day) at
an agreed-upon higher repurchase price. The Fund requires maintenance of the
market value of the collateral in amounts at least equal to the repurchase
price.
5. Options Contracts
The Fund may from time to time enter into options contracts. Premiums paid when
put or call options are purchased by the Fund, represent investments, which are
marked-to-market daily. When a purchased option expires, the Fund will realize
a loss in the amount of the premium paid. When the Fund enters into a closing
sales transaction, the Fund will realize a gain or loss depending on whether
the proceeds from the closing sales transaction are greater or less than the
premium paid for the option. When the Fund exercises a put option, it will re-
alize a gain or loss from the sale of the underlying security and the proceeds
from such sale will be decreased by the premium originally paid. When the Fund
exercises a call option, the cost of the security which the Fund purchases upon
exercise will be increased by the premium originally paid.
At June 30, 1999, the Fund had outstanding 54 contracts of purchased call op-
tions and 79 contracts of purchased put options.
When the Fund writes a call or put option, an amount equal to the premium re-
ceived by the Fund is recorded as a liability, the value of which is marked-to-
market daily. When a written option expires, the Fund realizes a gain equal to
the amount of the premium received. When the Fund enters into a closing pur-
chase transaction, the Fund realizes a gain or loss depending upon whether the
cost of the closing transaction is greater or less than the premium originally
received, without regard to any unrealized gain or loss on the underlying secu-
rity, and the liability related to such option is eliminated. When a written
call option is exercised the proceeds of the security sold will be increased by
the premium originally received. When a written put
12
<PAGE>
Notes to Financial Statements
(unaudited) (continued)
option is exercised, the amount of the premium originally received will reduce
the cost of the security which the Fund purchased upon exercise. When written
index options are exercised, settlement is made in cash.
The risk associated with purchasing options is limited to the premium
originally paid. The Fund enters into options for hedging purposes. The risk in
writing a covered call option is that the Fund gives up the opportunity to
participate in any increase in the price of the underlying security beyond the
exercise price. The risk in writing a put option is that the Fund is exposed to
the risk of loss if the market price of the underlying security declines.
The following written call option transactions occurred during the six months
ended June 30, 1999:
<TABLE>
<CAPTION>
Number of
Contracts Premiums
--------- --------
<S> <C> <C>
Options written, outstanding at December 31, 1998.......... -- $ 0
Options written during the six months ended June 30, 1999.. 54 16,940
Options canceled in closing purchase transactions.......... (12) (4,866)
--- -------
Options written, outstanding at June 30, 1999.............. 42 $12,074
=== =======
</TABLE>
The following represents the written call option contracts open at June 30,
1999:
<TABLE>
<CAPTION>
Number of Strike
Contracts Expiration Price Value
--------- ---------- ------ --------
<C> <S> <C> <C> <C>
12 Iridium World Communications Ltd. .... 10/16/99 $ 5.0 $ (6,900)
18 Iridium World Communications Ltd. .... 10/16/99 7.5 (7,200)
12 Iridium World Communications Ltd. .... 10/16/99 12.5 (2,625)
--------
Total Call Options Written (Premiums
received -- $12,074)................. $(16,725)
========
</TABLE>
The following written put option transactions occurred during the six months
ended June 30, 1999:
<TABLE>
<CAPTION>
Number of
Contracts Premiums
--------- --------
<S> <C> <C>
Options written, outstanding at December 31, 1998.......... -- $ 0
Options written during the six months ended June 30, 1999.. 54 10,198
Options canceled in closing purchase transactions.......... (23) (3,131)
--- -------
Options written, outstanding at June 30, 1999.............. 31 $ 7,067
=== =======
</TABLE>
The following represents the written put option contracts open at June 30,
1999:
<TABLE>
<CAPTION>
Number of Strike
Contracts Expiration Price Value
--------- ---------- ------ -------
<C> <S> <C> <C> <C>
9 Amazon.com, Inc. ...................... 7/17/99 $60.0 $ (169)
6 Amazon.com, Inc. ...................... 7/17/99 80.0 (337)
6 America Online, Inc. .................. 7/17/99 90.0 (375)
5 Iridium World Communications Ltd. ..... 1/22/00 7.5 (1,719)
5 Iridium World Communications Ltd. ..... 1/22/00 10.0 (2,375)
-------
Total Put Options Written (Premiums
received -- $7,067)................... $(4,975)
=======
</TABLE>
13
<PAGE>
Notes to Financial Statements
(unaudited) (continued)
6. Securities Traded on a When Issued Basis
The Fund may from time to time purchase securities on a when-issued basis. In a
when-issued transaction, the Fund commits to purchasing securities which have
not yet been issued by the issuer. Securities purchased on a when-issued basis,
are not settled until they are delivered to the Fund. Beginning on the date the
Fund enters into the when-issued transaction, the custodian maintains cash and
other liquid securities in a segregated account equal in value to the purchase
price of the when-issued security. These transactions are subject to market
fluctuations and their current value is determined in the same manner as for
other securities.
At June 30, 1999, the Fund did not hold any when-issued securities.
7. Securities Traded on a To-Be-Announced Basis
The Fund may trade securities on a "to-be-announced" ("TBA") basis. In a TBA
transaction, the Fund commits to purchasing or selling securities for which
specific information is not yet known at the time of the trade, particularly
the face amount and maturity date in Government National Mortgage Association
("GNMA") transactions. Securities purchased on a TBA basis are not settled
until they are delivered to the Fund, normally 15 to 45 days later. These
transactions are subject to market fluctuations and their current value is
determined in the same manner as for other securities.
At June 30, 1999, the Fund did not hold any TBA securities.
8. Lending of Securities
The Fund may lend its securities to brokers, dealers and other financial
organizations. The Fund has an agreement with its custodian whereby the
custodian may lend securities owned by the Fund to brokers, dealers and other
financial organizations. Fees earned by the Fund on securities lending are
recorded in interest income. Loans of securities by the Fund are collateralized
by cash and other liquid securities that are maintained at all times in an
amount at least equal to the current market value of the loaned securities,
plus a margin which may vary depending on the type of securities loaned. The
custodian establishes and maintains the collateral in a segregated account. The
Fund maintains exposure for the risk of any losses in the investment of amounts
received as collateral.
At June 30, 1999, the Fund did not have any securities on loan.
9. Capital Stock
At June 30, 1999, the Series had 10,000,000,000 shares of capital stock autho-
rized with a par value of $0.001 per share. Each share represents an equal pro-
portionate interest and has an equal entitlement to any dividends and distribu-
tions made by the Fund.
Transactions in shares were as follows:
<TABLE>
<CAPTION>
Six Months Ended Period Ended
June 30, 1999 December 31, 1998(a)
---------------- --------------------
<S> <C> <C>
Shares sold............................... 217,372 376,499
Shares issued on reinvestment............. -- 7,459
Shares reacquired......................... (95,454) (13,275)
------- -------
Net Increase.............................. 121,918 370,683
======= =======
</TABLE>
(a) For the period February 17, 1998 (commencement of operations) through De-
cember 31, 1998.
14
<PAGE>
Financial Highlights
For a share of capital stock outstanding for the year ended December 31, except
where noted:
<TABLE>
<CAPTION>
1999(1) 1998(2)
------- -------
<S> <C> <C>
Net Asset Value, Beginning of Period.......................... $11.57 $10.00
------ ------
Income From Operations:
Net investment income (3).................................... 0.06 0.09
Net realized and unrealized gain............................. 1.47 1.72
------ ------
Total Income From Operations................................. 1.53 1.81
------ ------
Less Distributions From:
Net investment income........................................ -- (0.09)
Net realized gains........................................... -- (0.15)
------ ------
Total Distributions.......................................... -- (0.24)
------ ------
Net Asset Value, End of Period................................ $13.10 $11.57
====== ======
Total Return++................................................ 13.22% 18.12%
Net Assets, End of Period (000s).............................. $6,451 $4,290
Ratios to Average Net Assets (3)+:
Expenses..................................................... 1.00% 1.00%
Net investment income........................................ 1.27% 1.35%
Portfolio Turnover Rate....................................... 50% 116%
</TABLE>
(1) For the six months ended June 30, 1999 (unaudited).
(2) For the period from February 17, 1998 (commencement of operations) through
December 31, 1998.
(3) SBAM has waived all of its management fees for the six months ended June
30, 1999 and the period ended December 31, 1998. In addition, SBAM has re-
imbursed the Fund for $6,469 and $33,776 in expenses for the six months
ended June 30, 1999 and the period ended December 31, 1998, respectively.
If such fees were not waived or expenses not reimbursed, the per share de-
crease in net investment income and the actual expense ratio would have
been as follows:
<TABLE>
<CAPTION>
Net Investment Income Expense Ratios Without Fee
Per Share Decreases Waivers and Reimbursement
--------------------- --------------------------
<S> <C> <C>
1999............ $0.05 2.12%+
1998............ 0.15 3.26+
</TABLE>
++Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized.
15
<PAGE>
[This page intentionally left blank]
<PAGE>
Salomon Brothers Variable Series Funds Inc
Investment Manager
Salomon Brothers Asset Management Inc
7 World Trade Center
New York, New York 10048
Custodian
PNC Bank, N.A.
17th and Chestnut Streets
Philadelphia, Pennsylvania 19103
Legal Counsel
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017
Directors
Charles F. Barber
Consultant; formerly Chairman; ASARCO Incorporated
Carol L. Colman
President, Colman Consulting Co., Inc.
Daniel P. Cronin
Vice President-General Counsel,
Pfizer International Inc.
Heath B. McLendon
Chairman and President;
Managing Director, Salomon Smith Barney Inc.
President and Director, SSBC Fund Management Inc.
and Travelers Investment Advisers, Inc.
Officers
Heath B. McLendon
Chairman and President
Lewis E. Daidone
Executive Vice President and Treasurer
Ross S. Margolies
Executive Vice President
Beth A. Semmel
Vice President
Peter J. Wilby
Executive Vice President
George J. Williamson
Executive Vice President
John B. Cunningham
Executive Vice President
Pamela P. Milunovich
Vice President
Anthony Pace
Controller
Christina T. Sydor
Secretary
<PAGE>
--------------------
Salomon Brothers
--------------------
Asset Management
Seven World Trade Center . New York, New York 10048
<PAGE>
SALOMON BROTHERS
Variable Series Funds Inc.
Semi-
Annual
Report
1999
JUNE 30, 1999
* HIGH YIELD BOND FUND
<PAGE>
[GRAPHIC]
THE SALOMON BROTHERS VARIABLE SERIES FUNDS INC
Our Message to You
DEAR SHAREHOLDER:
We are pleased to provide you with the semi-annual report for
the Salomon Brothers Variable High Yield Bond Fund ("Fund") for the period ended
June 30, 1999. This letter will briefly discuss general economic and market
conditions as well as Fund developments during the reporting period. A detailed
summary of performance and current Fund holdings can be found in the appropriate
sections that follow.
MARKET OVERVIEW
While benefiting from a strong economy and a booming U.S. equity market, high
yield suffered from the following:
1. A back-up in U.S. Treasuries due to concern about rising inflation;
2. slowing mutual fund inflows;
3. a heavy new issue calendar;
4. a reduction in broker/dealer liquidity; and
5. a rise in default rates, especially among marginal commodity producers.
The period began with concerns that a weak recovery in Asia and recession in
Latin America would trigger a slowdown in the U.S. economy. However, economic
growth in the U.S. was stronger than anticipated and led to concerns about
rising inflation. These inflation fears caused interest rates to trend higher
and dampened returns in the market, especially during the second quarter.
Also pressuring the high yield market during the second quarter was near-record
new issue volume, as companies scrambled to secure financings before rates rose
further, the general belief that the primary market would close during the
fourth quarter and mutual fund outflows occurring during May and June.
For the period, the high yield market's top performers included basic industries
such as metals/mining and paper & forest products, which continued to rebound
from the severe declines last fall. Several non-cyclical industries such as
gaming, consumer products and cable & media also outperformed, driven by
improving earnings and buoyed by acquisition news. Energy outperformed,
benefiting from increases in oil prices. The worst performers included health
care, due to the industry's troubles with the recently y imposed Medicare
reimbursement system, textile/apparel, which is suffering from cheaper imports,
automotive, restaurants and services. In terms of credit quality, investors
favored the lower tiers, as the better quality bonds, which trade more closely
with Treasuries, were hurt by the falling Treasury market; BB, B and CCC issues
showed returns of 0.70%, 1.60% and 7.57%, respectively.
1
<PAGE>
The Fund benefited from an overweighting in basic industries and consumer
non-cyclicals, such as gaming and food/beverage companies. It was also helped by
underweightings in textiles, restaurants and health care. Performance was hurt,
however, by overweightings in automotive and financial services and an
underweighting in energy.
On June 30, 1999, the high yield market yielded 10.70%, up from 10.28% at
year-end. The excess yield over Treasuries was 4.97% down from 5.66% at
year-end. We believe that these levels still represent attractive long-term
value. However, we expect to experience volatility through year-end due to Y2K
concerns, inflation fears and a general lack of liquidity. We are looking to
take advantage of attractive opportunities that may materialize in this
environment.
THE VARIABLE HIGH YIELD BOND FUND
The Fund's primary objective is to maximize current income, with capital
appreciation as a secondary objective. The Fund seeks to achieve its objectives
by investing primarily in a diversified portfolio of high yield fixed income
securities rated in the medium or lower rating categories or those securities
determined by the manager to be of comparable quality. The Fund commenced
operations on May 1, 1998. For the six months ended June 30, 1999, the Fund
returned 3.24% versus the 1.77% return for the Salomon Smith Barney High Yield
Market Index(*) over the same period.
Thank you for your investment in the Salomon Brothers Variable High Yield Bond
Fund. We look forward to helping you pursue your financial goals in the years to
come.
Cordially,
/s/ Heath B. McLendon
Heath B. McLendon
Chairman and President
August 13, 1999
(*) The Salomon Smith Barney High Yield Market Index covers a significant
portion of the below-investment-grade U.S. corporate bond market. All
figures represent past performance and are not a guarantee of future
results. Investment returns and principal value will fluctuate, and
redemption values may be more or less than the original cost.
2
<PAGE>
The following graph depicts the performance of the Fund versus the Salomon Smith
Barney High Yield Market Index. It is important to note that the Fund is a
professionally managed mutual fund while the index is not available for
investment and is unmanaged. The comparison is shown for illustrative purposes
only.
HISTORICAL PERFORMANCE -
SALOMON BROTHERS VARIABLE HIGH YIELD BOND FUND (unaudited)
Comparison of $10,000 Investment in the Fund with
Salomon Smith Barney High Yield Market Index
[LINE GRAPH]
High Yield Salomon Brothers
Bond High-Yield
Date Fund Market Index
-----------------------------------------------------------------
5/1/98 10,000 10,000
6/98 10,080 10,049
9/98 9,670 9,567
12/98 10,014 9,902
3/99 10,276 10,051
6/30/99 10,338 10,078
Past performance is not predictive of future performance. The graph does not
reflect expenses associated with the separate account such as administrative
fees, account charges and surrender charges which, if reflected, would reduce
the performance shown.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Historical Performance
- ----------------------------------------------------------------------------------------------------------------------------
Net Asset Value
-----------------------
Beginning End Income Capital Gain Total
Period Ended of Period of Period Dividend Distribution Returns+++
============================================================================================================================
<S> <C> <C> <C> <C> <C>
6/30/99 $9.58 $9.89 $0.00 $0.00 3.24%
============================================================================================================================
Inception(*)-- 12/31/98 10.00 9.58 0.43 0.00 0.14
============================================================================================================================
$0.43 $0.00
============================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Average Annual Total Returns+
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C>
Six Months Ended 6/30/99++ 3.24%
- ----------------------------------------------------------------------------------------------------------------------------
Year Ended 6/30/99 2.56
- ----------------------------------------------------------------------------------------------------------------------------
Inception(*) through 6/30/99 2.89
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
Cumulative Total Return+
- ----------------------------------------------------------------------------------------------------------------------------
Inception(*) through 6/30/99 3.38%
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Assumes the reinvestment of all dividends and capital gains distributions
at net asset value.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
(*) Inception date is May 1, 1998.
3
<PAGE>
Schedule of Investments
June 30, 1999 (unaudited)
<TABLE>
<CAPTION>
Face
Amount Security Value
<C> <S> <C>
- --------------------------------------------------------------------------------
CORPORATE BONDS -- 64.8%
Basic Industries -- 9.6%
$125,000 Bali Corp., Sr. Notes, 7.750% due 8/1/06................. $ 124,375
125,000 Glencore Nickel Property Ltd., 9.000% 12/1/14............ 106,250
Indesco International Inc., Sr. Sub. Notes, 9.750% due
125,000 4/15/08.................................................. 82,500
125,000 Millar Western Forest, Sr. Notes, 9.875% due 5/15/08..... 120,625
125,000 Octel Development PLC, Sr. Notes, 10.000% due 5/1/06..... 129,375
P&L Coal Holdings Corp., Series B, Sr. Sub. Notes, 9.625%
125,000 due 5/15/08.............................................. 126,250
----------
689,375
----------
Consumer Cyclicals -- 6.7%
Cole National Group, Inc., Sr. Sub. Notes, 8.625% due
125,000 8/15/07.................................................. 116,250
HMH Properties, Inc., Series B, Sr. Notes, 7.875% due
125,000 8/1/08................................................... 115,000
125,000 Leslie's Poolmart, Sr. Notes, 10.375% due 7/15/04........ 130,000
Prime Hospitality Corp., Series B, Sr. Sub. Notes, 9.750%
125,000 due 4/1/07............................................... 123,437
----------
484,687
----------
Consumer Non-Cyclicals -- 14.8%
American Safety Razor Co., Series B, Sr. Notes, 9.875%
125,000 due 8/1/05............................................... 126,250
125,000 Anchor Advanced Products, Sr. Notes, 11.750% due 4/1/04.. 128,125
125,000 Delta Beverage Group, Sr. Notes, 9.750% due 12/15/03..... 129,063
Hines Horticulture Inc., Series B, Sr. Sub. Notes,
125,000 11.750% due 10/15/05..................................... 133,437
125,000 Home Interiors & Gifts, 10.125% due 6/1/08............... 125,000
Horseshoe Gaming L.L.C., Series B, Sr. Sub. Notes, 9.375%
125,000 due 6/15/07.............................................. 126,250
Imperial Holly Corp., Sr. Sub. Notes, 9.750% due
125,000 12/15/07................................................. 123,750
Revlon Worldwide Corp., Series B, Sr. Secured Discount
125,000 Notes, zero coupon due 3/15/01........................... 85,313
90,000 Sun International Hotels, 9.000% due 3/15/07............. 90,000
----------
1,067,188
----------
Energy -- 2.7%
Canadian Forest Oil Ltd., Sr. Sub. Notes., 8.750% due
100,000 9/15/07.................................................. 96,000
100,000 Clark R&M Inc., Sr. Sub. Notes, 8.875% due 11/15/07...... 85,625
TransAmerican Energy Corp., Series B, Sr. Secured Notes,
125,000 11.500% due 6/15/02 (a).................................. 14,375
----------
196,000
----------
Contifinancial Corp. Sr. Notes:
50,000 7 .500% due 3/15/02 ..................................... 41,500
75,000 8.125% due 4/1/08........................................ 62,250
----------
228,663
----------
Financial Services -- 3.2%
Airplanes Pass-Through Trust, Sub. Bonds, Series 1, Class
125,000 D, 10.875% due 3/15/19................................... 124,913
Housing Related -- 1.7%
125,000 Forest City Enterprises, Sr. Notes, 8.500% due 3/15/08... 123,125
----------
Manufacturing -- 6.0%
BE Aerospace, Series B, Sr. Sub. Notes, 8.000% due
125,000 3/1/08................................................... 118,750
Breed Technologies Inc., Sr. Sub. Notes, 9.250% due
100,000 4/15/08.................................................. 15,000
50,000 Hexcel Corp., Sr. Sub. Notes, 9.750% due 1/15/09 (b)..... 50,312
High Voltage Engineering, Sr. Notes, 10.500% due
125,000 8/15/04.................................................. 116,875
Motors & Gears, Inc., Series D, Sr. Notes, 10.750% due
125,000 11/15/06................................................. 127,187
----------
428,124
----------
Media & Telecommunications -- 15.4%
Centennial Cellular, Sr. Sub. Notes, 10.750% due 12/15/08
50,000 (b)...................................................... 51,750
Century Communications Corp., Series B, Sr. Discount
75,000 Notes, zero coupon due 1/15/08........................... 33,750
125,000 CSC Holdings Inc., Sr. Debentures, 7.625% due 7/15/18.... 118,750
Hollinger International Publishing, Sr. Sub. Notes,
125,000 9.250% due 2/1/06........................................ 127,813
Intermedia Communications Inc., Series B, Sr. Notes,
75,000 8.600% due 6/1/08........................................ 69,750
Nextel Communications, Sr. Serial Redeemable Discount
Notes, zero coupon until 2/15/03, 9.950% thereafter, due
200,000 2/15/08.................................................. 138,500
</TABLE>
See Notes to Financial Statements.
4
<PAGE>
Schedule of Investments
June 30, 1999 (unaudited) (continued)
<TABLE>
<CAPTION>
Face
Amount Security Value
<C> <S> <C>
- -------------------------------------------------------------------------------
Media & Telecommunications -- 15.4% (continued)
NTL Inc., Series B, Sr. Notes, zero coupon until 4/1/03,
$150,000 9.75% thereafter, due 4/1/08............................ $ 102,937
125,000 Rogers Communications, Sr. Notes, 8.875% due 7/15/07.... 126,250
125,000 Telewest Communication PLC, Sr. Discount Notes, zero
coupon until 4/15/04, 9.250% thereafter, due 4/15/09
(b)..................................................... 83,438
200,000 United International Holdings Inc., Series B, Sr.
Secured Discount Notes, zero coupon until 2/15/03,
10.750% thereafter, due 2/15/08........................ 133,000
World Color Press Inc., Sr. Sub. Notes, 8.375% due
125,000 11/15/08................................................ 122,187
----------
1,108,125
----------
Services & Other -- 3.5%
125,000 Iron Mountain Inc., Sr. Sub. Notes, 8.750% due 9/30/09.. 123,750
Safety-Kleen Services, Sr. Sub. Notes, 9.250% due
125,000 6/1/08.................................................. 130,625
----------
254,375
----------
Transportation -- 1.2%
Enterprises Shipholding Inc., Sr. Notes, 8.875% due
125,000 5/1/08.................................................. 87,500
----------
TOTAL CORPORATE BONDS
(Cost -- $5,071,880).................................... 4,667,162
----------
SOVEREIGN BONDS -- 26.9%
Argentina -- 4.6%
Republic of Argentina:
116,250 FRB, 5.9375% due 3/31/05 (c)............................ 99,394
60,000 Global Bonds, 11.375% due 1/30/17....................... 51,675
200,000 Global Bonds, 11.750% due 4/7/09........................ 180,030
----------
331,069
----------
Brazil -- 4.9%
Federal Republic of Brazil:
282,552 C Bond, 8.000% due 4/15/14 (d).......................... 184,278
250,000 NMB, Series L, 5.9375% due 4/15/09 (c).................. 169,844
----------
354,122
----------
Bulgaria -- 1.2%
Republic of Bulgaria, Discount Bonds, Series A, 5.875%
125,000 due 7/28/24 (c)......................................... 85,469
----------
Colombia -- 1.4%
125,000 Republic of Colombia, Global Bonds, 9.750% due 4/23/09.. 103,281
----------
Croatia -- 1.4%
Republic of Croatia, FRB, Series A, 5.8125% due 7/31/10
130,000 (c)..................................................... 103,513
----------
Ecuador -- 1.4%
250,000 Republic of Ecuador, Par Bonds, 4.000% due 2/28/25 (c).. 97,500
----------
Ivory Coast -- 0.5%
125,000 Republic of Ivory Coast, FLIRB, 2.000% due 3/29/18 (c).. 34,063
----------
Mexico -- 4.5%
United Mexican States, Global Bonds, 11.375% due
300,000 9/15/16................................................. 320,811
----------
Philippines -- 1.0%
75,000 Republic of the Philippines, 9.875% due 1/15/19......... 73,725
----------
Poland -- 0.8%
100,000 Republic of Poland, Par Bonds, 3.000% due 10/27/24 (c).. 60,250
----------
Russia -- 1.5%
190,000 Russian Government, Global Bonds, 12.750% due 6/24/28... 108,063
----------
Venezuela -- 3.7%
Republic of Venezuela:
202,380 DCB, Series DL, 6.3125% due 12/18/07(c)................. 155,959
125,000 Global Bonds, 13.625% due 8/15/18....................... 112,812
----------
268,771
----------
TOTAL SOVEREIGN BONDS
(Cost -- $1,928,750).................................... 1,940,637
----------
</TABLE>
See Notes to Financial Statements.
5
<PAGE>
Schedule of Investments
June 30, 1999 (unaudited) (continued)
<TABLE>
<CAPTION>
Face
Amount Security Value
<C> <S> <C>
- -------------------------------------------------------------------------------
LOAN PARTICIPATIONS -- 3.3%
Algeria -- 1.1%
$125,000 The People's Democratic Republic of Algeria, Tranche 1,
6.000% due 9/4/06 (Chase) (c)(e) ...................... $ 78,125
----------
Morocco -- 1.1%
Kingdom of Morocco, Tranche A, 6.0625% due 1/1/09 (J.P.
100,000 Morgan) (c)(e)......................................... 80,750
----------
Russia -- 1.1%
Russian Government, Principal Loan, due 12/15/20 (J.P.
650,000 Morgan) (a)(e)......................................... 80,031
----------
TOTAL LOAN PARTICIPATIONS
(Cost -- $203,718)..................................... 238,906
----------
<CAPTION>
Shares Security Value
<C> <S> <C>
- -------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCK (f) -- 0.0%
Manufacturing -- 0.0%
219 TCR Holding Corp., Class B............................. 13
121 TCR Holding Corp., Class C............................. 7
318 TCR Holding Corp., Class D............................. 17
658 TOR Holding Corp., Class E............................. 41
----------
(Cost -- $78).......................................... 78
----------
<CAPTION>
Face
Amount Security Value
<C> <S> <C>
- -------------------------------------------------------------------------------
REPURCHASE AGREEMENT -- 5.0%
$358,000 State Street Bank & Trust Co., 4.700% due 7/1/99;
Proceeds at maturity -- $358,047; (Fully collateralized
by U.S. Treasury Bonds, 8.500% due 2/15/20; Market
value -- $368,973) (Cost -- $358,000).................. 358,000
----------
TOTAL INVESTMENTS -- 100%
(Cost -- $7,562,426*) $7,204,783
==========
</TABLE>
- ------
(a) Security is in default and is non-income producing.
(b) Security is exempt from registration under Rule 144A of the Securities Act
of 1933. This security may be resold in transactions that are exempt from
registration, normally to qualified institutional buyers.
(c) Rate shown reflects current rate on instrument with variable rates or step
coupon rates.
(d) Payment-in-kind security for which all or part of the interest earned is
capitalized as additional principal.
(e) Participation interests were acquired through the financial institutions
indicated parenthetically.
(f) Non-income producing securities.
* Aggregate cost for Federal income tax purposes is substantially the same.
Abbreviations used in this statement:
DCB -- Debt Conversion Bonds.
FLIRB -- Front-Loaded Interest Reduction Bonds.
FRB -- Floating Rate Bonds.
NMB -- New Money Bonds.
See Notes to Financial Statements.
6
<PAGE>
Statement of Assets and Liabilities
June 30, 1999 (unaudited)
<TABLE>
<S> <C>
ASSETS:
Investments, at value (Cost -- $7,562,426)......................... $7,204,783
Cash............................................................... 282
Interest receivable................................................ 142,823
Receivable for securities sold..................................... 63,375
Prepaid expenses................................................... 1,402
----------
Total Assets....................................................... 7,412,665
----------
LIABILITIES:
Payable for securities purchased................................... 23,248
Payable to investment manager...................................... 4,082
Administration fees payable........................................ 3,771
Accrued expenses................................................... 23,820
----------
Total Liabilities.................................................. 54,921
----------
Total Net Assets.................................................... $7,357,744
==========
NET ASSETS:
Par value of capital shares........................................ $ 744
Capital paid in excess of par value................................ 7,474,110
Undistributed net investment income................................ 327,862
Accumulated net realized loss on investments....................... (87,329)
Net unrealized depreciation on investments......................... (357,643)
----------
Total Net Assets.................................................... $7,357,744
==========
Shares Outstanding.................................................. 744,295
----------
Net Asset Value, per share.......................................... $9.89
----------
</TABLE>
See Notes to Financial Statements.
7
<PAGE>
Statement of Operations
For the Six Months Ended June 30, 1999 (unaudited)
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest........................................................... $ 361,814
---------
EXPENSES:
Management fees (Note 2)........................................... 25,464
Audit and legal.................................................... 9,620
Shareholder and system servicing fees.............................. 6,010
Shareholder communications......................................... 5,951
Directors' fees.................................................... 2,529
Registration fees.................................................. 1,736
Administration fees (Note 2)....................................... 1,698
Custody fees....................................................... 893
Other.............................................................. 1,433
---------
Total Expenses..................................................... 55,334
Less: Management fee waiver (Note 2)............................... (21,382)
---------
Net Expenses....................................................... 33,952
---------
Net Investment Income............................................... 327,862
---------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (NOTE 3):
Realized Loss From Security Transactions (excluding short-term
securities)
Proceeds from sales................................................ 2,176,744
Cost of securities sold............................................ 2,203,274
---------
Net Realized Loss.................................................. (26,530)
---------
Change in Net Unrealized Depreciation of Investments:
Beginning of period................................................ (275,564)
End of period...................................................... (357,643)
---------
Increase in Net Unrealized Depreciation............................ (82,079)
---------
Net Loss on Investments............................................. (108,609)
---------
Increase in Net Assets From Operations.............................. $ 219,253
=========
</TABLE>
See Notes to Financial Statements.
8
<PAGE>
Statement of Changes in Net Assets
For the Six Months Ended June 30, 1999 (unaudited)
and the Period Ended December 31, 1998(a)
<TABLE>
<CAPTION>
1999 1998
OPERATIONS: ---------- -----------
<S> <C> <C>
Net investment income................................ $ 327,862 $ 300,589
Net realized loss.................................... (26,530) (60,799)
Increase in net unrealized depreciation.............. (82,079) (275,564)
---------- -----------
Increase (Decrease) in Net Assets From Operations.... 219,253 (35,774)
---------- -----------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income................................ -- (300,589)
Capital.............................................. -- (435)
---------- -----------
Decrease in Net Assets From Distributions to
Shareholders........................................ -- (301,024)
---------- -----------
FUND SHARE TRANSACTIONS (NOTE 12):
Net proceeds from sale of shares..................... 1,580,523 8,698,225
Net asset value of shares issued for reinvestment of
dividends........................................... -- 301,024
Cost of shares reacquired............................ (1,391,133) (1,713,350)
---------- -----------
Increase in Net Assets From Fund Share Transactions.. 189,390 7,285,899
---------- -----------
Increase in Net Assets................................ 408,643 6,949,101
NET ASSETS:
Beginning of period.................................. 6,949,101 --
---------- -----------
End of period*....................................... $7,357,744 $ 6,949,101
========== ===========
* Includes undistributed net investment income of: $327,862 --
========== ===========
</TABLE>
- ------
(a) For the period from May 1, 1998 (commencement of operations) to December
31, 1998.
See Notes to Financial Statements.
9
<PAGE>
Notes to Financial Statements
(unaudited)
1. Significant Accounting Policies
Salomon Brothers Variable High Yield Bond Fund ("Fund") is a separate
diversified investment portfolio of the Salomon Brothers Variable Series Funds
Inc ("Series") whose primary investment objective is to maximize current income
and secondarily to seek capital appreciation. The Series, a Maryland
corporation, is registered under the Investment Company Act of 1940, as amended
("1940 Act"), as an open-end management investment company and consists of this
Fund and six other investment portfolios: Salomon Brothers Variable Capital
Fund, Salomon Brothers Variable Total Return Fund, Salomon Brothers Variable
Investors Fund, Salomon Brothers Variable Strategic Bond Fund, Salomon Brothers
Variable U.S. Government Income Fund and Salomon Brothers Variable Asia Growth
Fund. The U.S. Government Income Fund and Asia Growth Fund have not yet
commenced operations. The financial statements and financial highlights for the
other investment portfolios are presented in separate semi-annual reports. The
Fund and each other investment portfolio of the Series is offered exclusively
for use with certain variable annuity and variable life insurance contracts
offered through the separate accounts of various life insurance companies and
qualified pension and retirement plans.
The significant accounting policies consistently followed by the Fund are: (a)
security transactions are accounted for on trade date; (b) securities traded on
national securities markets are valued at the closing prices on such markets;
securities traded in the over-the-counter market and securities for which no
sales price was reported are valued at the mean of the current bid and asked
prices; debt securities are valued using either prices or estimates of market
values provided by market makers or independent pricing services. Securities
and assets for which market quotations are not readily available are valued at
fair value as determined in good faith by or under the direction of the Board
of Directors of the Fund; (c) securities maturing within 60 days are valued at
cost plus accreted discount, or minus amortized premium, which approximates
market value; (d) dividend income is recorded on the ex-dividend date; (e)
interest income, adjusted for accretion of original issue or market discount,
is recorded on the accrual basis; (f) gains or losses on the sale of securities
are calculated by using the specific identification method; (g) dividends and
distributions to shareholders are recorded on the ex-dividend date; (h) the
accounting records are maintained in U.S. dollars. All assets and liabilities
denominated in foreign currencies are translated into U.S. dollars based on the
rate of exchange of such currencies against U.S. dollars on the date of
valuation. Purchases and sales of securities, and income and expenses are
translated at the rate of exchange quoted on the respective date that such
transactions are recorded. Differences between income and expense amounts
recorded and collected or paid are recorded as currency gains or losses; (i)
the character of income and gains to be distributed are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles. At December 31, 1998, reclassifications were made to the
capital accounts of the Fund to reflect permanent book/tax differences and
income and gains available for distributions under income tax regulations. Net
investment income, net realized gains and net assets were not affected by this
change; (j) it is the Fund's intention to meet the requirements of the Internal
Revenue Code applicable to regulated investment companies and to distribute
substantially all of its taxable income and capital gains, if any, to its
shareholders. Therefore, no federal income tax or excise tax provision is
required; and (k) estimates and assumptions are required to be made regarding
assets, liabilities and changes in net assets resulting from operations when
financial statements are prepared. Changes in the economic environment,
financial markets and any other parameters used in determining these estimates
could cause actual results to differ.
2. Management Agreement and Transactions with Affiliated Persons
Salomon Brothers Asset Management Inc ("SBAM"), a wholly owned subsidiary of
Salomon Brothers Holding Company Inc., which in turn is wholly owned by Salomon
Smith Barney Holdings, Inc. ("SSBH"), acts as investment manager to the Fund.
Under the investment management agreement, the Fund pays an investment manage-
ment fee calculated at the annual rate of 0.75% of its average daily net as-
sets. This fee is calculated daily and paid monthly.
For the six months ended June 30, 1999, SBAM waived a portion of its management
fees amounting to $21,382.
10
<PAGE>
Notes to Financial Statements
(unaudited) (continued)
SBAM also acts as administrator to the Fund. As compensation for its services
the Fund pays SBAM a fee calculated at an annual rate of 0.05% of its average
daily net assets. This fee is calculated daily and paid monthly. SBAM has
delegated its responsibilities as administrator to SSBC Fund Management Inc.
("SSBC"), formerly known as Mutual Management Corp. ("MMC"), an affiliate of
SBAM, pursuant to a Sub-Administration Agreement between SBAM and MMC.
CFBDS, Inc. acts as the Fund's distributor. For the six months ended June 30,
1999, Salomon Smith Barney Inc. ("SSB"), another subsidiary of SSBH, received
no brokerage commissions from the Fund.
3. Investments
During the six months ended June 30, 1999, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding short-
term securities) were as follows:
<TABLE>
<S> <C>
Purchases............................................................ $2,786,560
==========
Sales ............................................................... $2,176,744
==========
</TABLE>
At June 30, 1999, the aggregate gross unrealized appreciation and depreciation
of investments for Federal income tax purposes were substantially as follows:
<TABLE>
<S> <C>
Gross unrealized appreciation....................................... $ 153,559
Gross unrealized depreciation....................................... (511,202)
---------
Net unrealized depreciation......................................... $(357,643)
=========
</TABLE>
4. Repurchase Agreements
The Fund purchases (and its custodian takes possession of) U.S. government se-
curities from banks and securities dealers subject to agreements to resell the
securities to the seller at a future date (generally, the next business day) at
an agreed-upon higher repurchase price. The Fund requires maintenance of the
market value of the collateral in amounts at least equal to the repurchase
price.
5. Reverse Repurchase Agreements
The Fund may enter into reverse repurchase agreements. A reverse repurchase
agreement involves a sale by the Fund of securities that it holds with an
agreement by the Fund to repurchase the same securities at an agreed upon price
and date. A reverse repurchase agreement involves risk that the market value of
the securities sold by the Fund may decline below the repurchase price of the
securities. The Fund will establish a segregated account with its custodian, in
which the Fund will maintain cash or other liquid securities with respect to
the reverse repurchase agreements.
At June 30, 1999, the Fund had no open reverse repurchase agreements.
11
<PAGE>
Notes to Financial Statements
(unaudited) (continued)
6. Options Contracts
The Fund may from time to time enter into options contracts. Premiums paid when
put or call options are purchased by the Fund, represent investments, which are
marked-to-market daily. When a purchased option expires, the Fund will realize
a loss in the amount of the premium paid. When the Fund enters into a closing
sales transaction, the Fund will realize a gain or loss depending on whether
the proceeds from the closing sales transaction are greater or less than the
premium paid for the option. When the Fund exercises a put option, it will re-
alize a gain or loss from the sale of the underlying security and the proceeds
from such sale will be decreased by the premium originally paid. When the Fund
exercises a call option, the cost of the security which the Fund purchases upon
exercise will be increased by the premium originally paid.
At June 30, 1999, the Fund had no open purchased call or put options.
When the Fund writes a call or put option, an amount equal to the premium
received by the Fund is recorded as a liability, the value of which is marked-
to-market daily. When a written option expires, the Fund realizes a gain equal
to the amount of the premium received. When the Fund enters into a closing
purchase transaction, the Fund realizes a gain or loss depending upon whether
the cost of the closing transaction is greater or less than the premium
originally received, without regard to any unrealized gain or loss on the
underlying security, and the liability related to such option is eliminated.
When a written call option is exercised the proceeds of the security sold will
be increased by the premium originally received. When a written put option is
exercised, the amount of the premium originally received will reduce the cost
of the security which the Fund purchased upon exercise. When written index
options are exercised, settlement is made in cash.
The risk associated with purchasing options is limited to the premium
originally paid. The Fund enters into options for hedging purposes. The risk in
writing a covered call option is that the Fund gives up the opportunity to
participate in any increase in the price of the underlying security beyond the
exercise price. The risk in writing a put option is that the Fund is exposed to
the risk of loss if the market price of the underlying security declines.
During the six months ended June 30, 1999, the Fund did not write any call or
put options.
7. Securities Traded on a When Issued Basis
The Fund may from time to time purchase securities on a when-issued basis. In a
when-issued transaction, the Fund commits to purchasing securities which have
not yet been issued by the issuer. Securities purchased on a when-issued basis,
are not settled until they are delivered to the Fund. Beginning on the date the
Fund enters into the when-issued transaction, the custodian maintains cash or
other liquid securities in a segregated account equal in value to the purchase
price of the when issued security. These transactions are subject to market
fluctuations and their current value is determined in the same manner as for
other securities.
At June 30, 1999, the Fund did not hold any when-issued securities.
8. Securities Traded on a To-Be-Announced Basis
The Fund may trade securities on a "to-be-announced" ("TBA") basis. In a TBA
transaction, the Fund commits to purchasing or selling securities for which
specific information is not yet known at the time of the trade, particularly
the face amount and maturity date in Government National Mortgage Association
("GNMA") transactions. Securities purchased on a TBA basis are not settled
until they are delivered to the Fund, normally 15 to 45 days later. These
transactions are subject to market fluctuations and their current value is
determined in the same manner as for other securities.
At June 30, 1999, the Fund did not hold any TBA securities.
12
<PAGE>
Notes to Financial Statements
(unaudited) (continued)
9. Lending of Securities
The Fund may lend its securities to brokers, dealers and other financial
organizations. The Fund has an agreement with its custodian whereby the
custodian may lend securities owned by the Fund to brokers, dealers and other
financial organizations. Fees earned by the Fund on securities lending are
recorded in interest income. Loans of securities by the Fund are collateralized
by cash or other liquid securities that are maintained at all times in an
amount at least equal to the current market value of the loaned securities,
plus a margin which may vary depending on the type of securities loaned. The
custodian establishes and maintains the collateral in a segregated account. The
Fund maintains exposure for the risk of any losses in the investment of amounts
received as collateral.
At June 30, 1999, the Fund did not have any securities on loan.
10. Loan Participations
The Fund may invest in loans arranged through private negotiation between one
or more financial institutions. The Fund's investment in any such loan may be
in the form of a participation in or an assignment of the loan.
In connection with purchasing participations, the Fund generally will have no
right to enforce compliance by the borrower with the terms of the loan
agreement relating to the loan, nor any rights of set-off against the borrower,
and the Fund may not benefit directly from any collateral supporting the loan
in which it has purchased the participation. As a result, the Fund will assume
the credit risk of both the borrower and the lender that is selling the
participation. In the event of the insolvency of the lender selling the
participation, the Fund may be treated as a general creditor of the lender and
may not benefit from any set-off between the lender and the borrower.
At June 30, 1999, the Fund held loan participations with a total cost of
$203,718.
11. Capital Loss Carryforward
At December 31, 1998, the Fund had, for Federal income tax purposes, a capital
loss carryforward of approximately $60,800, available to offset future capital
gains through December 31, 2006. To the extent that these carryforward losses
can be used to offset net realized capital gains, such gains, if any, will not
be distributed.
12. Capital Stock
At June 30, 1999, the Series had 10,000,000,000 shares of capital stock autho-
rized with a par value of $0.001 per share. Each share represents an equal pro-
portionate interest and has an equal entitlement to any dividends and distribu-
tions made by the Fund.
Transactions in shares were as follows:
<TABLE>
<CAPTION>
Six Months Ended Period Ended
June 30, 1999 December 31, 1998(a)
---------------- --------------------
<S> <C> <C>
Shares sold............................... 161,308 871,685
Shares issued on reinvestment............. -- 31,422
Shares redeemed........................... (142,590) (177,530)
-------- --------
Net Increase.............................. 18,718 725,577
======== ========
</TABLE>
- ------
(a) For the period May 1, 1998 (commencement of operations) through December
31, 1998.
13
<PAGE>
Financial Highlights
For a share of capital stock outstanding for the year ended December 31, except
where noted:
<TABLE>
<CAPTION>
1999(1) 1998(2)
------- -------
<S> <C> <C>
Net Asset Value, Beginning of Period......................... $ 9.58 $10.00
------ ------
Income (Loss) From Operations:
Net investment income (3)................................... 0.44 0.43
Net realized and unrealized loss............................ (0.13) (0.42)
------ ------
Total Income From Operations................................ 0.31 0.01
------ ------
Less Distributions From:
Net investment income....................................... -- (0.43)
Capital..................................................... -- (0.00)*
------ ------
Total Distributions......................................... -- (0.43)
------ ------
Net Asset Value, End of Period............................... $ 9.89 $ 9.58
====== ======
Total Return++............................................... 3.24% 0.14%
Net Assets, End of Period (000s)............................. $7,358 $6,949
Ratios to Average Net Assets (3)+:
Expenses.................................................... 1.00% 1.00%
Net investment income....................................... 9.66% 7.25%
Portfolio Turnover Rate...................................... 33% 37%
</TABLE>
- ------
(1) For the six months ended June 30, 1999 (unaudited).
(2) For the period from May 1, 1998 (commencement of operations) through Decem-
ber 31, 1998.
(3) SBAM has waived all or a portion of its management fees for the six months
ended June 30, 1999 and the period ended December 31, 1998. In addition,
SBAM has reimbursed the Fund for expenses of $11,942 for the period ended
December 31, 1998. If such fees were not waived and expenses not reim-
bursed, the per share decrease in net investment income and the actual ex-
pense ratio would have been as follows:
<TABLE>
<CAPTION>
Expense Ratios
Net Investment Income Without Fee Waivers
Per Share Decreases and Reimbursement
--------------------- -------------------
<S> <C> <C>
1999.................. $0.03 1.63%+
1998.................. 0.06 2.04+
</TABLE>
* Amount represents less than $0.01.
++Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized.
14
<PAGE>
[This page intentionally left blank]
<PAGE>
Salomon Brothers Variable Series Funds Inc
INVESTMENT MANAGER
Salomon Brothers Asset Management Inc
7 World Trade Center
New York, New York 10048
CUSTODIAN
PNC Bank, N.A.
17th and Chestnut Streets
Philadelphia, Pennsylvania 19103
LEGAL COUNSEL
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
Officers
HEATH B. MCLENDON
Chairman and President
LEWIS E. DAIDONE
Executive Vice President and Treasurer
ROSS S. MARGOLIES
Executive Vice President
BETH A. SEMMEL
Executive Vice President
PETER J. WILBY
Executive Vice President
GEORGE J. WILLIAMSON
Executive Vice President
JOHN B. CUNNINGHAM
Vice President
ANTHONY PACE
Controller
CHRISTINA T. SYDOR
Secretary
Directors
CHARLES F. BARBER
Consultant; formerly Chairman; ASARCO Incorporated
CAROL L. COLMAN
President, Colman Consulting Co., Inc.
DANIEL P. CRONIN
Vice President-General Counsel,
Pfizer International Inc.
HEATH B. MCLENDON
Chairman and President;
Managing Director, Salomon Smith Barney Inc.
President and Director, SSBC Fund Management Inc.
and Travelers Investment Advisers, Inc.
<PAGE>
----------------------
Salomon Brothers
----------------------
Asset Management
SEVEN WORLD TRADE CENTER o NEW YORK, NEW YORK 10048
<PAGE>
SALOMON BROTHERS
Variable Series Funds Inc
[GRAPHIC]
Semi-
Annual
Report
1999
JUNE 30,1999
* STRATEGIC BOND FUND
<PAGE>
[GRAPHIC]
SALOMON BROTHERS VARIABLE SERIES FUNDS INC
Our Message to You
DEAR SHAREHOLDER:
We are pleased to provide you with the semi-annual report for the Salomon
Brothers Variable Strategic Bond Fund ("Fund") for the period ended June 30,
1999. This letter will briefly discuss general economic and market conditions as
well as Fund developments during the reporting period. A detailed summary of
performance and current Fund holdings can be found in the appropriate sections
that follow.
MARKET OVERVIEW
During the first half of 1999, a strong domestic economy, rising oil prices and
a rebound in economic activity overseas combined to force interest rates up and
prices on investment grade bonds down across the U.S. yield curve. The Federal
Reserve Board ("Fed") added to the bond market malaise by adopting a tightening
bias in May and raising the federal-funds rate by 25 basis points to 5.0% at the
Federal Open Market Committee ("FOMC") in late June.
Financial markets began 1999 under the shadow of the 1998 financial crisis.
Caution prevailed among fixed income investors who remained overweighted in high
quality bonds such as U.S. Treasuries. Investor fears proved to be well founded
by mid-January. Brazil devalued its currency and saw its interest rates rise
sharply. Rather than Brazil serving as the catalyst for another vicious round of
contagion, financial markets seemed to shrug it off. In effect, the episode
became a bottoming event that boosted the confidence of investors to venture out
of U.S. Treasuries into higher yielding bonds.
Emerging markets debt had a stellar six months for the first half of 1999, with
Russia taking the lead as top performer. Continued strong growth in the U.S. and
the 50 basis point easing by the European Central Bank calmed investors' fears
that a major slowdown in the industrialized world would have a detrimental
impact on emerging markets. Within the emerging markets, interest rate declines
and surprisingly low inflation numbers in Brazil encouraged a resumption of
private sector capital flows to the entire Latin American region, despite the
country's devaluation earlier in the year. Additionally, the rebound in oil
prices strengthened all oil producing economies and especially those in emerging
markets. Venezuela, Ecuador, Algeria, Russia and Mexico have all benefited by
the nearly 50% increase in the price of oil since late February.
In general, the Fund's manager would expect continued volatility going forward,
though he does not necessarily expect a major correction. The Fed has engineered
a nice balance of strong economic growth, low inflation and favorable interest
rates. According to the manager, those factors, coupled with strong expected
quarterly earnings, should provide for a favorable performance for the Fund.
1
<PAGE>
THE STRATEGIC BOND FUND
The Fund's primary objective is to seek a high level of current income, with
capital appreciation as a secondary objective. The Fund seeks to achieve its
objectives by investing in a globally diverse portfolio through allocations to
segments of the fixed income market that the manager believes will best
contribute to the achievement of the Fund's investment objectives. Tactical
allocations may include U.S. and non-U.S. investment grade, high yield and
emerging market debt securities.
The Fund commenced operations on February 17, 1998. For the six months ended
June 30, 1999, the Fund returned a negative 0.79% versus a negative 1.37% for
the Lehman Brothers Aggregate Bond Index. The Fund's strategy of allocating away
from lower yielding investment grade bonds into high yielding lower rated
credits proved advantageous over the past six months. High yield bonds as
measured by the Salomon Smith Barney High Yield Index were up 1.76% and emerging
market debt, as measured by the Salomon Smith Barney Index, was up 6.2%.
Thank you for your investment in the Salomon Brothers Variable Strategic Bond
Fund. We look forward to helping you pursue your financial goals in the years to
come.
Cordially,
/s/ Heath B. McLendon
Heath B. McLendon
Chairman and President
August 11, 1999
2
<PAGE>
The following graph depicts the performance of the Fund versus the Lehman
Brothers Aggregate Bond Index. It is important to note that the Fund is a
professionally managed mutual fund while the Index is not available for
investment and is unmanaged. The comparison is shown for illustrative purposes
only.
- --------------------------------------------------------------------------------
HISTORICAL PERFORMANCE--STRATEGIC BOND FUND (Unaudited)
Comparison of $10,000 Investment in the Fund with
Lehman Brothers Aggregate Bond Index
- --------------------------------------------------------------------------------
[LINE GRAPH]
Lehman Brothers
Strategic Aggregate Bond
Date Bond Fund Index
- -------------------------------------------------
2/17/98 $10,000 $10,000
3/98 10,070 10,034
6/98 10,190 10,286
9/98 10,410 10,703
12/98 10,617 10,789
3/99 10,565 10,685
6/30/99 10,534 10,591
Past performance is not predictive of future performance. The graph does not
reflect expenses associated with the separate account as administrative fees,
account charges and surrender charges which, if reflected, would reduce the
performance shown.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Historical Performance
- ---------------------------------------------------------------------------------------------------------------------------
Net Asset Value
-------------------
Beginning End Income Capital Gain Return of Total
Period Ended of Period of Period Dividend Distribution Capital Returns+++
===========================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
6/30/99 $10.13 $10.05 $0.00 $0.00 $0.00 (0.79)%
- ---------------------------------------------------------------------------------------------------------------------------
Inception(*)-- 12/31/98 10.00 10.13 0.47 0.01 0.01 6.18
===========================================================================================================================
$0.47 $0.01 $0.01
===========================================================================================================================
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Average Annual Total Returns+
- ---------------------------------------------------------------------------------------------------------------------------
Six Months Ended 6/30/99++ (0.79)%
- ---------------------------------------------------------------------------------------------------------------------------
Year Ended 6/30/99 3.37
- ---------------------------------------------------------------------------------------------------------------------------
Inception(*) through 6/30/99 3.89
===========================================================================================================================
- ---------------------------------------------------------------------------------------------------------------------------
Cumulative Total Return+
- ---------------------------------------------------------------------------------------------------------------------------
Inception(*) through 6/30/99 5.34%
===========================================================================================================================
+ Assumes the reinvestment of all dividends and capital gains distributions at net asset value.
++ Total return is not annualized, as it may not be representative of the total return for the year.
(*) Inception date is February 17, 1998.
</TABLE>
3
<PAGE>
Schedule of Investments
June 30, 1999 (unaudited)
<TABLE>
<CAPTION>
Face
Amount Security Value
<C> <C> <S> <C>
- -------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCIES & OBLIGATIONS -- 21.7%
$ 10,000 U.S. Treasury Notes, 4.750% due 2/15/04....... $ 9,588
645,000 U.S. Treasury Notes, 4.750% due 11/15/08 (a).. 592,136
10,000 U.S. Treasury Bonds, 6.125% due 11/15/27 (a).. 9,926
35,000 U.S. Treasury Bonds, 5.500% due 8/15/28 (a)... 32,020
Federal National Mortgage Association:
900,000 6.000%, 30 year (b)(c)........................ 848,813
1,000,000 6.500%, 30 year (b)(c)........................ 968,438
1,000,000 7.500%, 30 year (b)(c)........................ 1,013,438
-----------
TOTAL U.S. GOVERNMENT AGENCIES & OBLIGATIONS
(Cost -- $3,535,776).......................... 3,474,359
-----------
ASSET-BACKED SECURITIES -- 0.5%
100,000 Contimortgage Home Equity Loan, Series 1999-3,
Class B, 7.000% due 7/25/30 (Cost --
$84,133).................................... 84,375
-----------
COMMERCIAL MORTGAGE-BACKED SECURITIES -- 1.2%
125,000 Commercial Mortgage Asset Trust, Series 1999-
C1, Class C, 7.350% due 8/17/13.............. 120,391
DLJ Commercial Mortgage Corp.:
593,752 Series 1998-CG1, Class S, 0.704% due 5/10/23
(d).......................................... 25,234
994,663 Series 1998-CF2, Class S, 0.849% due
11/12/31(d).................................. 51,910
-----------
TOTAL COMMERCIAL MORTGAGE-BACKED SECURITIES
(Cost -- $205,526)............................ 197,535
-----------
MORTGAGE-BACKED SECURITIES -- 4.3%
93,320 Countrywide Mortgage Backed Securities, Inc.,
Series 1994-J, Class B1, 7.750% due 6/25/24.. 93,320
24,601 First Union Residential Securitization, Series
1998-A, Class B2, 7.000% due 8/25/28......... 22,249
FANNIEMAE-ACES:
85,730 Series 1996-M6, Class A, 7.388% due 8/17/03... 86,239
1,298,674 Series 1999-M3, Class N, 1.044% due 6/25/38
(d).......................................... 74,748
99,278 GE Capital Mortgage Services Inc., Series
1998-15, Class B1, 6.750% due 11/25/28....... 93,073
122,740 Mid-State Trust, Series 6, Class A1, 7.340%
due 7/1/35................................... 123,661
PNC Mortgage Securities:
24,720 Series 1998-4, Class 3B3, 6.750% due 5/25/28.. 21,924
24,715 Series 1998-4, Class CB3, 6.838% due 5/25/28.. 21,618
24,657 Series 1998-5, Class CB3, 6.734% due 7/25/28.. 21,791
74,738 Series 1999-1, Class CB2, 6.772% due 3/25/29.. 69,274
64,739 Series 1999-2, Class DB3, 6.904% due 4/25/29.. 56,566
-----------
TOTAL MORTGAGED-BACKED SECURITIES
(Cost -- $713,509)............................ 684,463
-----------
CORPORATE BONDS -- 23.4%
Basic Industries -- 2.0%
125,000 AEI Resources Inc., 10.500% due 12/15/05(e)... 122,500
125,000 PCI Chemicals Canada Inc., Series B, Sr.
Secured Notes, 9.250% due 10/15/07 (a)....... 106,250
25,000 Praxair, Inc., 6.150% due 4/15/03............. 24,625
25,000 Raytheon Co., 6.150% due 11/1/08.............. 23,594
45,000 Service Corporation International, 6.000% due
12/15/05..................................... 41,513
-----------
318,482
-----------
Consumer Cyclicals -- 0.9%
125,000 HMH Properties Inc., Series B, Sr. Notes,
7.875% due 8/1/08............................ 115,000
25,000 Staples Inc., Sr. Notes, 7.125% due 8/15/07
(a).......................................... 24,969
-----------
139,969
-----------
Consumer Non-Cyclicals -- 1.9%
125,000 French Fragrances, Inc., Series B, Sr. Notes,
10.375% due 5/15/07 (a)...................... 127,031
125,000 Park Place Entertainment, Sr. Sub. Notes,
7.875% due 12/15/05.......................... 119,063
60,000 Pueblo Xtra International, Sr. Notes, 9.500%
due 8/1/03................................... 58,200
-----------
304,294
-----------
</TABLE>
See Notes to Financial Statements.
4
<PAGE>
Schedule of Investments
June 30, 1999 (unaudited) (continued)
<TABLE>
<CAPTION>
Face
Amount Security Value
<C> <C> <S> <C>
- -------------------------------------------------------------------------------
Energy -- 1.6%
$ 125,000 Clark R & M Inc., Sr. Sub. Notes, 8.875% due
11/15/07 (a)................................. $ 107,031
150,000 Pennzoil Co., Debentures, 10.250% due 11/1/05
(a).......................................... 155,625
-----------
262,656
-----------
Financial Services -- 2.7%
100,000 Bank of America Corp., Medium Term Notes,
Series H, 5.750% due 3/1/04 (a).............. 97,375
125,000 Contifinancial Corp., Sr. Notes, 8.125% due
4/1/08....................................... 103,750
15,000 First Data Corp., Medium Term Notes, 6.375%
due 12/15/07 (a)............................. 14,625
10,000 Ford Motor Credit Co., Sr. Notes, 5.800% due
1/12/09...................................... 9,163
10,000 Merrill Lynch & Co., Inc., 6.000% due
11/15/04..................................... 9,762
50,000 PaineWebber Group Inc., Sub Notes, 7.750% due
9/1/02....................................... 51,125
100,000 TPSA Finance BV, 7.750% due 12/10/08 (e)...... 98,625
50,000 U.S. Bank, 5.700% due 12/15/08................ 45,812
-----------
430,237
-----------
Housing Related -- 1.5%
250,000 Forest City Enterprises, Sr. Notes, 8.500% due
3/15/08 (a).................................. 246,250
-----------
Manufacturing -- 3.3%
125,000 Axiohm Transaction Solution Inc., 9.750% due
10/1/07 (a).................................. 62,500
150,000 BE Aerospace Inc., Series B, Sr. Sub. Notes,
9.875% due 2/1/06 (a)........................ 153,000
125,000 Breed Technologies Inc., Sr. Sub. Notes,
9.250% due 4/15/08........................... 18,750
125,000 High Voltage Engineering Corp., Sr. Notes,
10.500% due 8/15/04 (a)...................... 116,875
125,000 Navistar International Corp., Sr. Sub. Notes,
8.000% due 2/1/08 (a)........................ 129,688
50,000 TRW Inc., 6.450% due 6/15/01 (e).............. 50,000
-----------
530,813
-----------
Media and Telecommunications -- 5.8%
17,091 Adelphia Communications, Sr. Notes, 9.500% due
2/15/04 (f).................................. 17,924
75,000 Centennial Cellular, Sr. Sub. Notes, 10.750%
due 12/15/08 (a)(e).......................... 77,625
125,000 Century Communications, Sr. Notes, 8.875% due
1/15/07 (a).................................. 125,312
200,000 Charter Communications Holdings LLC., Sr.
Discount Note, zero coupon until 4/1/04,
9.920% thereafter,
due 4/1/11................................... 124,500
125,000 CSC Holdings Inc., Sr. Debentures, 7.625% due
7/15/18 (a).................................. 118,750
125,000 Falcon Holding Group L.P., Series B, Sr.
Debentures, 8.375% due 4/15/10............... 123,750
125,000 Granite Broadcasting Corp., Sr. Sub. Notes,
8.875% due 5/15/08........................... 120,625
125,000 Hollinger International Publishing Inc., Sr.
Sub. Notes, 9.250% due 3/15/07 (a)........... 127,813
100,000 Telewest Communication PLC, Debentures, zero
coupon until 10/1/00, 11.000% thereafter, due
10/1/07...................................... 89,250
-----------
925,549
-----------
Real Estate Investment Trust -- 0.3%
50,000 Spieker Properties LP, 7.250% due 5/1/09...... 48,438
-----------
Services and Other -- 1.6%
20,000 Comdisco, Inc., Mandatory Par Put Remarketed
Securities/SM/, 6.130% due 8/1/01............ 19,750
125,000 La Petite Academy, Inc., Series B, Senior
Notes, 10.000% due 5/15/08................... 122,969
125,000 Sitel Corp., Sr. Sub. Notes, 9.250% due
3/15/06 (a).................................. 119,531
-----------
262,250
-----------
Utilities -- 0.2%
40,000 GTE Corp., Debentures, 6.940% due 4/15/28..... 38,250
-----------
Transportation -- 1.6%
100,000 Atlantic Express Transportation Corp., Sr.
Secured Notes, 10.750% due 2/1/04 (a)........ 100,000
150,000 Coach USA Inc., Sr. Sub. Notes, 9.375% due
7/1/07....................................... 156,000
-----------
256,000
-----------
TOTAL CORPORATE BONDS
(Cost -- $4,047,565).......................... 3,763,188
-----------
</TABLE>
See Notes to Financial Statements.
5
<PAGE>
Schedule of Investments
June 30, 1999 (unaudited) (continued)
<TABLE>
<CAPTION>
Face
Amount(g) Security Value
<C> <C> <S> <C>
- -------------------------------------------------------------------------------
SOVEREIGN BONDS -- 21.0%
Argentina -- 2.1%
Republic of Argentina:
200,000 Global Bonds, 11.000% due 12/4/05............. $ 184,000
175,000 Global Bonds, 11.375% due 1/30/17............. 150,719
-----------
334,719
-----------
Australia -- 0.8%
70,000 AUD General Electric Cap., 5.875% due 7/7/00...... 46,640
120,000 AUD Commerzbank, 10.250% due 4/20/00.............. 82,377
10,000 AUD New South Wales Treasury Corp., 7.375% due
2/21/07...................................... 6,916
-----------
135,933
-----------
Brazil -- 3.2%
Federal Republic of Brazil:
480,941 C Bonds, 8.000% due 4/15/14 (f)............... 313,665
250,000 DCB, Series L, 5.9375% due 4/15/12 (h)........ 155,000
57,000 Series EI, 5.875% due 4/15/06 (h)............. 45,208
-----------
513,873
-----------
Bulgaria -- 0.9%
Republic of Bulgaria:
125,000 FLIRB, Series A, 2.500% due 7/28/12 (h)....... 75,625
100,000 IAB, 5.875% due 7/28/11(h).................... 68,875
-----------
144,500
-----------
Canada -- 0.2%
50,000 CAD Canadian Government, 6.000% due 6/1/08........ 35,048
-----------
Colombia -- 0.4%
75,000 Republic of Colombia, 10.875% due 3/9/04...... 71,625
-----------
Croatia -- 0.6%
110,639 Republic of Croatia, Series B, 5.8125% due
7/31/06 (h).................................. 92,799
-----------
Germany -- 0.7%
Deutschland Republic:
30,000 EUR 5.625% due 1/4/28............................. 31,840
85,000 EUR 4.000% due 9/17/99............................ 87,891
-----------
119,731
-----------
Greece -- 1.4%
Hellenic Republic:
5,200,000 GRD 11.000% due 2/25/00........................... 16,680
45,800,000 GRD 8.900% due 4/1/03............................. 156,523
2,300,000 GRD 8.700% due 4/8/05............................. 8,107
12,000,000 GRD 7.600% due 1/22/02............................ 38,723
-----------
220,033
-----------
Italy -- 0.2%
30,000 EUR Buoni Poliennali Del Tes, 5.250% due 11/1/29.. 29,574
-----------
Ivory Coast -- 0.5%
300,000 Republic of Ivory Coast, FLIRB, 2.000% due
3/29/18 (h).................................. 81,750
-----------
Mexico -- 2.3%
365,000 United Mexican States, Global Bonds, 10.375%
due 2/17/09 (a).............................. 370,931
-----------
</TABLE>
See Notes to Financial Statements.
6
<PAGE>
Schedule of Investments
June 30, 1999 (unaudited) (continued)
<TABLE>
<CAPTION>
Face
Amount(g) Security Value
<C> <C> <S> <C>
- -------------------------------------------------------------------------------
Norway -- 0.8%
1,000,000 NOK Norwegian Government, T-Bills, 6.500% due
9/15/99...................................... $ 127,246
-----------
Panama -- 0.5%
100,000 Republic of Panama, IRB, 4.000% due 7/17/14
(h).......................................... 75,125
-----------
Peru -- 1.0%
250,000 Republic of Peru, PDI, 5.500% due 3/7/17 (h).. 155,000
-----------
Philippines -- 0.3%
50,000 Bangko Sentral Pilipinas, 8.600% due 6/15/27.. 41,063
-----------
Poland -- 0.3%
100,000 PLN KFW International Finance, 16.300% due
6/24/03...................................... 29,979
90,000 PLN Nordic Investment Bank, 17.750% due 4/15/02... 26,150
-----------
56,129
-----------
Russia -- 1.1%
300,000 Russian Government, Ministry of Finance,
12.750% due 6/24/28.......................... 170,625
-----------
Slovenia -- 0.2%
30,000 EUR Republic of Slovenia, 5.375% due 5/27/05...... 31,705
-----------
Spain -- 0.3%
40,000 EUR Kingdom of Spain, 6.000% due 1/31/08.......... 45,035
-----------
Supra National -- 0.2%
100,000 PLN European Bank of Reconstruction and
Development, 10.500% due 1/25/01............. 24,991
-----------
Sweden -- 0.2%
300,000 SEK Kingdom of Sweden, 6.500% due 5/5/08.......... 39,041
-----------
United Kingdom -- 1.0%
90,000 GBP United Kingdom, Treasury Bonds, 6.500% due
12/7/03...................................... 148,065
50,000 PLN Sudwest Landesbank London, 17.500% due
5/5/03....................................... 15,194
-----------
163,259
-----------
Venezuela -- 1.8%
Republic of Venezuela:
150,000 Global Bonds, 13.625% due 8/15/18............. 135,375
202,380 DCB, Series DL, 6.3125% due 12/18/07 (h)...... 155,959
-----------
291,334
-----------
TOTAL SOVEREIGN BONDS
(Cost -- $3,421,538).......................... 3,371,069
-----------
Algeria -- 0.5%
125,000 The People's Democratic Republic of Algeria,
Tranche 3, 6.375% due 3/4/10 (Chase) (h)(i).. 70,938
-----------
LOAN PARTICIPATIONS -- 1.1%
Morocco -- 0.6%
126,190 Kingdom of Morocco, Tranche A, 5.906% due
1/1/09 (J.P. Morgan) (h)(i).................. 101,898
-----------
TOTAL LOAN PARTICIPATIONS
(Cost -- $170,027)............................ 172,836
-----------
</TABLE>
See Notes to Financial Statements.
7
<PAGE>
Schedule of Investments
June 30, 1999 (unaudited) (continued)
<TABLE>
<CAPTION>
Warrant Security Value
<C> <C> <S> <C>
- -------------------------------------------------------------------------------
WARRANT -- 0.0%
68 United Mexican States Warrants, expiring
2/18/00 (j)
(Cost -- $2,462).............................. $ 4,420
-----------
SUB-TOTAL INVESTMENTS
(Cost -- $12,180,536)......................... 11,752,245
-----------
<CAPTION>
Face
Amount Security Value
<C> <C> <S> <C>
- -------------------------------------------------------------------------------
REPURCHASE AGREEMENTS -- 26.8%
$ 1,795,000 State Street Bank & Trust Co., 4.700% due
7/1/99; Proceeds at maturity -- $1,795,234;
(Fully collateralized by U.S. Treasury Bonds,
8.500% due 2/15/20; Market value --
$1,832,141)................................. 1,795,000
2,500,000 Warburg Dillon Read Inc., 4.800% due 7/1/99;
Proceeds at maturity -- $2,500,333;
(Fully collateralized by U.S. Treasury Bonds,
7.625% due 2/15/25; Market value --
$2,550,758)................................. 2,500,000
-----------
TOTAL REPURCHASE AGREEMENTS
(Cost -- $4,295,000).......................... 4,295,000
-----------
TOTAL INVESTMENTS -- 100%
(Cost -- $16,475,536*)........................ $16,047,245
===========
</TABLE>
- ------
(a) All or part of the security is segregated as collateral for mortgage dollar
rolls.
(b) Mortgage dollar roll.
(c) Security is issued on a to-be-announced ("TBA") basis.
(d) Interest only security.
(e) Security is exempt from registration under Rule 144A of the Securities Act
of 1933. This security may be resold in transactions that are exempt from
registration, normally to qualified institutional buyers.
(f) Payment-in-kind security for which all or part of the interest earned is
paid by the issuance of additional bonds.
(g) Principal denominated in U.S. dollars unless otherwise indicated.
(h) Rate shown reflects current rate on instrument with variable rates or step
coupon rates.
(i) Participation interests were acquired through the financial institutions
indicated partenthetically.
(j) Non-income producing security.
* Aggregate cost for Federal income tax purposes is substantially the same.
Abbreviations used in this statement:
AUD -- Australian Dollar.
CAD -- Canadian Dollar.
DCB -- Debt Conversion Bonds.
EUR -- Euro.
FLIRB -- Front-Loaded Interest Reduction Bonds.
GBP -- British Pound.
GRD -- Greek Drachma.
IAB -- Interest Arrears Bonds.
IRB -- Interest Reduction Bonds.
NOK -- Norwegian Krone.
PDI -- Past Due Interest.
PLN -- Polish Zloty.
SEK -- Sweden Krona.
See Notes to Financial Statements
8
<PAGE>
Statements of Assets and Liabilities
June 30, 1999 (unaudited)
<TABLE>
<S> <C>
ASSETS:
Investments, at value (Cost -- $12,180,536)...................... $11,752,245
Repurchase agreements, at value (Cost -- $4,295,000)............. 4,295,000
Cash............................................................. 323
Cash held in foreign currency, at value (Cost -- $6,833)......... 6,814
Receivable for open forward foreign currency contracts (Note 6).. 3,537
Interest receivable.............................................. 188,073
Deferred organization costs...................................... 22,712
Prepaid expenses................................................. 1,869
-----------
Total Assets..................................................... 16,270,573
-----------
LIABILITIES:
Payable for securities purchased................................. 2,852,612
Payable to investment manager.................................... 15,722
Administration fees payable...................................... 5,816
Payable for open forward foreign currency contracts (Note 6)..... 1,806
Accrued expenses................................................. 20,228
-----------
Total Liabilities................................................ 2,896,184
-----------
Total Net Assets................................................. $13,374,389
===========
NET ASSETS:
Par value of capital shares...................................... $ 1,330
Capital paid in excess of par value.............................. 13,483,998
Undistributed net investment income.............................. 296,495
Accumulated net realized gain from security transactions and
foreign currencies.............................................. 19,117
Net unrealized depreciation of investments and foreign
currencies...................................................... (426,551)
-----------
Total Net Assets................................................. $13,374,389
===========
Shares Outstanding................................................ 1,330,287
-----------
Net Asset Value, per share........................................ $10.05
-----------
</TABLE>
See Notes to Financial Statements.
9
<PAGE>
Statements of Operations
For the Six Months Ended June 30, 1999 (unaudited)
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest........................................................... $ 451,884
---------
EXPENSES:
Management fees (Note 2)........................................... 41,957
Audit and legal.................................................... 9,620
Shareholder communications......................................... 6,446
Shareholder and system servicing fees.............................. 6,010
Custody fees....................................................... 5,951
Amortization of deferred organization costs........................ 3,097
Administration fees (Note 2)....................................... 2,797
Directors' fees.................................................... 2,529
Registration fees.................................................. 2,529
Other.............................................................. 1,240
---------
Total Expenses..................................................... 82,176
Less: Management fee waiver (Note 2)............................... (26,234)
---------
Net Expenses....................................................... 55,942
---------
Net Investment Income............................................... 395,942
---------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND
FOREIGN CURRENCIES (NOTES 3, 6 AND 10):
Realized Gain (Loss) From:
Security transactions (excluding short-term securities)............ (3,217)
Foreign currency transactions...................................... 34,240
---------
Net Realized Gain.................................................. 31,023
---------
Change in Net Unrealized Appreciation (Depreciation) of Investments
and Foreign Currencies:
Beginning of period................................................ 94,088
End of period...................................................... (426,551)
---------
Increase in Net Unrealized Depreciation............................ (520,639)
---------
Net Loss on Investments and Foreign Currencies...................... (489,616)
---------
Decrease in Net Assets From Operations.............................. $ (93,674)
=========
</TABLE>
See Notes to Financial Statements.
10
<PAGE>
Statements of Changes in Net Assets
For the Six Months Ended June 30, 1999 (unaudited) and the Period Ended
December 31, 1998(a)
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
OPERATIONS:
Net investment income.............................. $ 395,942 $ 376,149
Net realized gain (loss)........................... 31,023 (22,952)
(Increase) decrease in net unrealized
depreciation...................................... (520,639) 94,088
----------- -----------
Increase (Decrease) in Net Assets From Operations.. (93,674) 447,285
----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income.............................. -- (457,427)
Net realized gains................................. -- (7,123)
Capital............................................ -- (12,709)
----------- -----------
Decrease in Net Assets From Distributions to
Shareholders...................................... -- (477,259)
----------- -----------
FUND SHARE TRANSACTIONS (NOTE 13):
Net proceeds from sale of shares................... 10,746,327 11,352,077
Net asset value of shares issued for reinvestment
of dividends...................................... -- 477,259
Cost of shares reacquired.......................... (7,716,119) (1,361,517)
----------- -----------
Increase in Net Assets From Fund Share
Transactions...................................... 3,030,208 10,467,819
----------- -----------
Increase in Net Assets.............................. 2,936,534 10,437,845
NET ASSETS:
Beginning of period................................ 10,437,855 10
----------- -----------
End of period*..................................... $13,374,389 $10,437,855
=========== ===========
* Includes undistributed (overdistributed) net
investment income of: ............................. $296,495 $(99,447)
======== ========
</TABLE>
- ------
(a) For the period from February 17, 1998 (commencement of operations) to De-
cember 31, 1998.
See Notes to Financial Statements.
11
<PAGE>
Statement of Cash Flows
For the Six Months Ended June 30, 1999 (unaudited)
<TABLE>
<S> <C>
INCREASE IN CASH:
CASH FLOWS USED BY OPERATING ACTIVITIES:
Purchases of long-term portfolio investments.................... $(20,286,636)
Proceeds from disposition of long-term portfolio investments and
principal paydowns............................................. 19,531,056
Net sale of short-term portfolio investments.................... (2,763,000)
------------
(3,518,580)
Net investment income........................................... 395,942
Amortization of net premium/discount on investments............. (31,058)
Amortization of organization expenses........................... 3,097
Interest in payment-in-kind bonds............................... (5,064)
Net change in receivables/payables related to operations........ 90,881
------------
Net Cash Flows Used By Operating Activities..................... (3,064,782)
------------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Net proceeds from sale of shares................................ 10,795,785
Cost of shares reacquired....................................... (7,717,777)
------------
Net Cash Flows Provided By Financing Activities................. 3,078,008
------------
Net Increase in Cash............................................. 13,226
Payable to Bank, Beginning of Period............................. (6,089)
------------
Cash, End of Period.............................................. $ 7,137
============
</TABLE>
See Notes to Financial Statements.
12
<PAGE>
Notes to Financial Statements
(unaudited)
1. Significant Accounting Policies
Salomon Brothers Variable Strategic Bond Fund ("Fund"), is a separate
diversified investment portfolio of the Salomon Brothers Variable Series Funds
Inc ("Series") whose primary investment objective is to seek a high level of
current income and secondarily capital appreciation. The Series, a Maryland
corporation, is registered under the Investment Company Act of 1940, as amended
("1940 Act"), as an open-end management investment company and consists of this
Fund and six other investment portfolios: Salomon Brothers Variable Total
Return Fund, Salomon Brothers Variable High Yield Bond Fund, Salomon Brothers
Variable Investors Fund, Salomon Brothers Variable Capital Fund, Salomon
Brothers Variable U.S. Government Income Fund and Salomon Brothers Variable
Asia Growth Fund. The U.S. Government Income Fund and Asia Growth Fund have not
yet commenced operations. The financial statements and financial highlights for
the other investment portfolios are presented in separate semi-annual reports.
The Fund and each other investment portfolio of the Series is offered
exclusively for use with certain variable annuity and variable life insurance
contracts offered through the separate accounts of various life insurance
companies and qualified pension and retirement plans.
The significant accounting policies consistently followed by the Fund are: (a)
security transactions are accounted for on trade date; (b) securities traded on
national securities markets are valued at the closing prices on such markets;
securities traded in the over-the-counter market and securities for which no
sales price was reported are valued at the mean of the current bid and asked
prices; debt securities are valued using either prices or estimates of market
values provided by market markers or independent pricing services. Securities
and assets for which market quotations are not readily available are valued at
fair value as determined in good faith by or under the direction of the Board
of Directors of the Fund; (c) securities maturing within 60 days are valued at
cost plus accreted discount, or minus amortized premium, which approximates
market value; (d) dividend income is recorded on the ex-dividend date; (e)
interest income, adjusted for accretion of original issue and market discount,
is recorded on the accrual basis; (f) gains or losses on the sale of securities
are calculated by using the specific identification method; (g) dividends and
distributions to shareholders are recorded on the ex-dividend date; (h) the
accounting records are maintained in U.S. dollars. All assets and liabilities
denominated in foreign currencies are translated into U.S. dollars based on the
rate of exchange of such currencies against U.S. dollars on the date of
valuation. Purchases and sales of securities, and income and expenses are
translated at the rate of exchange quoted on the respective date that such
transactions are recorded. Differences between income and expense amounts
recorded and collected or paid are recorded as currency gains or losses; (i)
the character of income and gains to be distributed are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles. At December 31, 1998, reclassifications were made to the
Fund's capital accounts to reflect permanent book/tax differences and income
and gains available for distributions under income tax regulations. Net
investment income, net realized gains and net assets were not affected by this
change; (j) the Fund intends to comply with the applicable provisions of the
Internal Revenue Code of 1986, as amended, pertaining to regulated investment
companies and to make distributions of taxable income sufficient to relieve the
Fund from substantially all Federal income and excise taxes; and (k) estimates
and assumptions are required to be made regarding assets, liabilities and
changes in net assets resulting from operations when financial statements are
prepared. Changes in the economic environment, financial markets and any other
parameters used in determining these estimates could cause actual results to
differ.
Organization costs amounting to $31,250 were incurred with the organization of
the Fund. These costs are being amortized ratably over a five year period from
commencement of operations.
2. Management Agreement and Transactions with Affiliated Persons
Salomon Brothers Asset Management Inc ("SBAM"), a wholly owned subsidiary of
Salomon Brothers Holding Company Inc., which in turn is a wholly owned
subsidiary of Salomon Smith Barney Holdings, Inc. ("SSBH"), acts as investment
manager to the Fund. Under the investment management agreement, the Fund pays
an investment management fee calculated at the annual rate of 0.75% of its
average daily net assets. This fee is calculated daily and paid monthly.
For the six months ended June 30, 1999, SBAM waived a portion of its management
fees amounting to $26,234.
13
<PAGE>
Notes to Financial Statements
(unaudited) (continued)
SBAM also acts as administrator to the Fund. As compensation for its services
the Fund pays SBAM a fee calculated at an annual rate of 0.05% of its average
daily net assets. This fee is calculated daily and paid monthly. SBAM has
delegated its responsibilities as administrator to SSBC Fund Management Inc.
("SSBC"), formerly known as Mutual Management Corp., an affiliate of SBAM,
pursuant to a Sub-Administration Agreement between SBAM and SSBC.
CFBDS, Inc. acts as the Fund's distributor. For the six months ended June 30,
1999, Salomon Smith Barney Inc., another subsidiary of SSBH, did not receive
any brokerage commissions from the Fund.
3. Investments
During the six months ended June 30, 1999, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding short-
term securities) were as follows:
<TABLE>
<S> <C>
Purchases:
U.S. government agencies & obligations........................... $ 3,292,608
Other investment securities...................................... 6,763,388
-----------
$10,055,996
===========
</TABLE>
Sales:
<TABLE>
<S> <C>
U.S. government agencies & obligations.......................... $ 2,774,510
Other investment securities..................................... 5,511,968
-----------
$ 8,286,478
===========
At June 30, 1999, the aggregate gross unrealized appreciation and depreciation
of investments for Federal income tax purposes were substantially as follows:
Gross unrealized appreciation..................................... $ 87,404
Gross unrealized depreciation..................................... (515,695)
-----------
Net unrealized appreciation....................................... $ (428,291)
===========
</TABLE>
4. Repurchase Agreements
The Fund purchases (and its custodian takes possession of) U.S. government se-
curities from banks and securities dealers subject to agreements to resell the
securities to the seller at a future date (generally, the next business day) at
an agreed-upon higher repurchase price. The Fund requires maintenance of the
market value of the collateral in amounts at least equal to the repurchase
price.
5. Reverse Repurchase Agreements
The Fund may enter into reverse repurchase agreements. A reverse repurchase
agreement involves a sale by the Fund of securities that it holds with an
agreement by the Fund to repurchase the same securities at an agreed upon price
and date. A reverse repurchase agreement involves risk that the market value of
the securities sold by the Fund may decline below the repurchase price of the
securities. The Fund will establish a segregated account with its custodian, in
which the Fund will maintain cash or other liquid securities with respect to
the reverse repurchase agreements.
At June 30, 1999, the Fund did not have any open reverse repurchase agreements.
14
<PAGE>
Notes to Financial Statements
(unaudited) (continued)
6. Forward Foreign Currency Contracts
At June 30, 1999, the Fund had open forward currency contracts as described be-
low. The Fund bears the market risk that arises from changes in foreign cur-
rency exchange rates. The unrealized gain (loss) on the contracts reflected in
the accompanying financial statements were as follows:
<TABLE>
<CAPTION>
Local Market Settlement Unrealized
Currency Value Date Gain (Loss)
Foreign Currency Forwards -------- --------- ---------- -----------
<S> <C> <C> <C> <C>
To Buy:
Euro................................. 66,758 $ 68,991 7/28/99 $ (1,009)
Euro................................. 112,455 116,218 7/28/99 (409)
--------
(1,418)
--------
To Sell:
Australian Dollar.................... 90,000 59,589 7/28/99 (139)
British Pound........................ 94,927 149,659 7/28/99 1,381
Euro................................. 57,574 59,501 7/28/99 1,369
Norwegian Krone...................... 690,000 87,563 7/28/99 441
Swedish Krona........................ 280,000 32,990 7/28/99 (88)
--------
2,964
--------
Cross Currency Forwards**
<CAPTION>
Market Value
To Sell: ------------------
Norwegian
Euro Krone
-------- ---------
<S> <C> <C> <C> <C>
Euro vs. Norwegian Krone.............. $87,217 $87,563 7/28/99 346
<CAPTION>
Swedish
Euro Krona
-------- ---------
<S> <C> <C> <C> <C>
Euro vs. Swedish Krona................ $33,151 $32,990 7/28/99 (161)
--------
185
--------
Net Unrealized Gain on Open Foreign &
Cross Currency Forward Contracts................................... $ 1,731
========
** Local currency on Cross Currency Forwards
Sell Buy
------- --------
Sell Euro vs. Norwegian Krone......... 84,393 690,000
Sell Euro vs. Swedish Krone........... 32,078 280,000
</TABLE>
7. Options Contracts
The Fund may from time to time enter into options contracts. Premiums paid when
put or call options are purchased by the Fund, represent investments, which are
marked-to-market daily. When a purchased option expires, the Fund will realize
a loss in the amount of the premium paid. When the Fund enters into a closing
sales transaction, the Fund will realize a gain or loss depending on whether
the proceeds from the closing sales transaction are greater or less than the
premium paid for the option. When the Fund exercises a put option, it will re-
alize a gain or loss from the sale of the underlying security and the
15
<PAGE>
Notes to Financial Statements
(unaudited) (continued)
proceeds from such sale will be decreased by the premium originally paid. When
the Fund exercises a call option, the cost of the security which the Fund pur-
chases upon exercise will be increased by the premium originally paid.
At June 30, 1999, the Fund had no open purchased call or put options.
When the Fund writes a call or put option, an amount equal to the premium re-
ceived by the Fund is recorded as a liability, the value of which is marked-to-
market daily. When a written option expires, the Fund realizes a gain equal to
the amount of the premium received. When the Fund enters into a closing pur-
chase transaction, the Fund realizes a gain or loss depending upon whether the
cost of the closing transaction is greater or less than the premium originally
received, without regard to any unrealized gain or loss on the underlying secu-
rity, and the liability related to such option is eliminated. When a written
call option is exercised the proceeds of the security sold will be increased by
the premium originally received. When a written put option is exercised, the
amount of the premium originally received will reduce the cost of the security
which the Fund purchased upon exercise. When written index options are exer-
cised, settlement is made in cash.
The risk associated with purchasing options is limited to the premium
originally paid. The Fund enters into options for hedging purposes. The risk in
writing a covered call option is that the Fund gives up the opportunity to
participate in any increase in the price of the underlying security beyond the
exercise price. The risk in writing a put option is that the Fund is exposed to
the risk of loss if the market price of the underlying security declines.
During the six months ended June 30, 1999, the Fund did not write any call or
put options.
8. Securities Traded on a When Issued Basis
The Fund may from time to time purchase securities on a when-issued basis. In a
when-issued transaction, the Fund commits to purchasing securities which have
not yet been issued by the issuer. Securities purchased on a when-issued basis,
are not settled until they are delivered to the Fund. Beginning on the date the
Fund enters into the when-issued transaction, the custodian maintains cash or
other liquid securities in a segregated account equal in value to the purchase
price of the when-issued security. These transactions are subject to market
fluctuations and their current value is determined in the same manner as for
other securities.
At June 30, 1999, the Fund did not hold any when-issued securities.
9. Securities Traded on a To-Be-Announced Basis
The Fund may trade securities on a "to-be-announced" ("TBA") basis. In a TBA
transaction, the Fund commits to purchasing or selling securities which have
not yet been issued by the issuer, particularly the face amount and maturity
date in Government National Mortgage Association ("GNMA") transactions.
Securities purchased on a TBA basis are not settled until they are delivered to
the Fund, normally 15 to 45 days later. These transactions are subject to
market fluctuations and their current value is determined in the same manner as
for other securities.
At June 30, 1999, the Fund held three TBA securities with a total cost of
$2,876,706.
10. Mortgage Dollar Roll Transactions
The Fund may enter into mortgage "dollar rolls" in which the 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 specific future date. The Fund is compensated by a fee paid by
the counterparty. Dollar rolls are accounted for as financing arrangements; the
fee is accrued into interest income ratably over the term of the dollar roll
and any gain or loss on the roll is deferred until disposition of the rolled
security. The average daily balance of dollar rolls outstanding during the six
months ended June 30, 1999 was approximately $1,936,000.
16
<PAGE>
Notes to Financial Statements
(unaudited) (continued)
11. Lending of Securities
The Fund may lend its securities to brokers, dealers and other financial
organizations. The Fund has an agreement with its custodian whereby the
custodian may lend securities owned by the Fund to brokers, dealers and other
financial organizations. Fees earned by the Fund on securities lending are
recorded in interest income. Loans of securities by the Fund are collateralized
by cash or other liquid securities that are maintained at all times in an
amount at least equal to the current market value of the loaned securities,
plus a margin which may vary depending on the type of securities loaned. The
custodian establishes and maintains the collateral in a segregated account. The
Fund maintains exposure for the risk of any losses in the investment of amounts
received as collateral.
At June 30, 1999, the Fund did not have any securities on loan.
12. Loan Participations
The Fund may invest in loans arranged through private negotiation between one
or more financial institutions. The Fund's investment in any such loan may be
in the form of a participation in or an assignment of the loan.
In connection with purchasing participations, the Fund generally will have no
right to enforce compliance by the borrower with the terms of the loan
agreement relating to the loan, nor any rights of set-off against the borrower,
and the Fund may not benefit directly from any collateral supporting the loan
in which it has purchased the participation. As a result, the Fund will assume
the credit risk of both the borrower and the lender that is selling the
participation. In the event of the insolvency of the lender selling the
participation, the Fund may be treated as a general creditor of the lender and
may not benefit from any set-off between the lender and the borrower.
At June 30, 1999, the Fund held loan participations with a total cost of
$170,027.
13. Capital Stock
At June 30, 1999, the Series had 10,000,000,000 shares of capital stock
authorized with a par value of $0.001 per share. Each share represents an equal
proportionate interest and has an equal entitlement to any dividends and
distributions made by the Fund.
Transactions in shares were as follows:
<TABLE>
<CAPTION>
Six Months Ended Period Ended
June 30, 1999 December 31, 1998(a)
---------------- --------------------
<S> <C> <C>
Shares sold............................... 1,063,711 1,113,904
Shares issued on reinvestment............. -- 47,113
Shares reacquired......................... 764,248 (130,194)
--------- ---------
Net Increase.............................. 299,463 1,030,823
========= =========
</TABLE>
- ------
(a) For the period February 17, 1998 (commencement of operations) through De-
cember 31, 1998.
17
<PAGE>
Financial Highlights
For a share of capital stock outstanding for the year ended December 31, except
where noted:
<TABLE>
<CAPTION>
1999 (1) 1998 (2)
-------- --------
<S> <C> <C>
Net Asset Value, Beginning of Period....................... $ 10.13 $ 10.00
------- -------
Income (Loss) From Operations:
Net investment income (3)................................. 0.32 0.38
Net realized and unrealized gain (loss)................... (0.40) 0.24
------- -------
Total Income (Loss) From Operations....................... (0.08) 0.62
------- -------
Less Distributions From:
Net investment income..................................... -- (0.47)
Net realized gains........................................ -- (0.01)
Capital................................................... -- (0.01)
------- -------
Total Distributions....................................... -- (0.49)
------- -------
Net Asset Value, End of Period............................. $ 10.05 $ 10.13
======= =======
Total Return++............................................. (0.79)% 6.18%
Net Assets, End of Period (000s)........................... $13,374 $10,438
Ratios to Average Net Assets (3)+:
Expenses.................................................. 1.00% 1.00%
Net investment income..................................... 7.08% 6.23%
Portfolio Turnover Rate.................................... 80% 84%
</TABLE>
- ------
(1) For the six months ended June 30, 1999 (unaudited).
(2) For the period from February 17, 1998 (commencement of operations) through
December 31, 1998.
(3) SBAM has waived all or a portion of its management fees for the six months
ended June 30, 1999 and the period ended December 31, 1998. In addition,
SBAM has reimbursed the Fund for $2,558 for the period ended December 31,
1998. If such fees were not waived or expenses not reimbursed, the per
share decrease in net investment income and the actual expense ratio would
have been as follows:
<TABLE>
<CAPTION>
Expense Ratios Without
Net Investment Income Fee Waiver and
Per Share Decrease Expense Reimbursement
--------------------- ----------------------
<S> <C> <C>
1999.......................... $0.02 1.47%+
1998.......................... 0.04 1.79+
</TABLE>
++ Total return is not annualized, as it may not be representative of the to-
tal return for the year.
+ Annualized.
18
<PAGE>
[This page intentionally left blank]
<PAGE>
[This page intentionally left blank]
<PAGE>
Salomon Brothers Variable Series Funds Inc
INVESTMENT MANAGER
Salomon Brothers Asset Management Inc
7 World Trade Center
New York, New York 10048
CUSTODIAN
PNC Bank, N.A.
17th and Chestnut Streets
Philadelphia, Pennsylvania 19103
LEGAL COUNSEL
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
Officers
HEATH B. MCLENDON
Chairman and President
LEWIS E. DAIDONE
Executive Vice President and Treasurer
ROSS S. MARGOLIES
Executive Vice President
BETH A. SEMMEL
Executive Vice President
PETER J. WILBY
Executive Vice President
GEORGE J. WILLIAMSON
Executive Vice President
JOHN B. CUNNINGHAM
Vice President
ANTHONY PACE
Controller
CHRISTINA T. SYDOR
Secretary
Directors
CHARLES F. BARBER
Consultant; formerly Chairman; ASARCO Incorporated
CAROL L. COLMAN
President, Colman Consulting Co., Inc.
DANIEL P. CRONIN
Vice President-General Counsel,
Pfizer International Inc.
HEATH B. MCLENDON
Chairman and President;
Managing Director, Salomon Smith Barney Inc.
President and Director, SSBC Fund Management Inc.
and Travelers Investment Advisers, Inc.
<PAGE>
------------------------
Salomon Brothers
------------------------
Asset Management
SEVEN WORLD TRADE CENTER o NEW YORK, NEW YORK 10048
<PAGE>
Semi-
Annual
SALOMON BROTHERS Report
Variable Series Funds Inc 1999
June 30, 1999
[Art] . TOTAL RETURN FUND
<PAGE>
[Art] THE SALOMON BROTHERS VARIABLE SERIES FUNDS INC
Our Message to You
Dear Shareholder:
We are pleased to provide you with the semi-annual report for the Salomon
Brothers Variable Total Return Fund ("Fund") for the period ended June 30, 1999.
This letter will briefly discuss general economic and market conditions as well
as Fund developments during the reporting period. A detailed summary of
performance and current Fund holdings can be found in the appropriate sections
that follow.
The first half of 1999 was a period of economic growth at home and recovery
abroad. Following the events surrounding the Russian debt default in August of
1998 -- which included a dive in bond yields and a 0.75% decrease in interest
rates -- yields have recovered quite well. Investor optimism, however, was
tempered by concerns about inflation, interest rates, and continued economic
growth.
The long anticipated slowdown in U.S. economic activity again failed to happen
during the reporting period. Global stock markets continued to rise led by
better than expected profit growth and continued merger and acquisition
activity. The risks of higher U.S. economic growth were more fairly reflected in
the yield curve in the U.S. at the end of the first quarter of 1999 than they
were at the beginning.
The stronger than expected growth caused interest rates to rise in the first
quarter of 1999. The 30-year U.S. Treasury bond had its third worst quarter of
the 1990s. In fact, only the first quarters of 1994 and 1996 were worse. The
Lehman Government/Corporate Index declined about 1.2% in the first quarter of
1999. U.S. Treasuries underperformed as spreads narrowed in all sectors.
During the six-month period ended June 30, 1999, the U.S. economy continued to
show signs of benign inflation and productivity-driven growth. Domestic demand
growth outstripped even optimistic estimates of the economy's long-term
capacity, and a combination of rising productivity, a flood of goods from
abroad, and more intensive use of labor kept inflation from overheating.
Globally, there were strong signs that the world economy had bottomed and was on
the road to recovery. While the biggest market risk in the period remained the
lingering threat of eventual overheating resulting in Federal Reserve Board
tightening, policy-makers, led by Chairman Greenspan, held their stance on the
sidelines until implementing a well-telegraphed 25 basis point tightening on
June 30, 1999.
1
<PAGE>
The Variable Total Return Fund
The Fund seeks to obtain above-average income compared to a portfolio that
invests only in stocks. The Fund's secondary objective is to take advantage of
opportunities for growth of capital and income by investing in a variety of
asset classes including stocks, bonds and short-term obligations. For the six
months ended June 30, 1999, the Fund generated a return of 4.81%. This compares
with a 5.50% return for a composite index of 50% Salomon Brothers Broad
Investment Grade Bond Index and 50% S&P 500.
The Fund had a substantial inflow of funds going from $5.7 million to $12.9
million. Oil holdings and basic materials companies held in the Fund's portfolio
benefited from a strong economy and a recovery in these stocks. We gradually
increased positions in high quality growth stocks such as IBM, Pepsico, Xerox,
General Electric, and undervalued stocks such as Rite Aid, First Union, and
Chubb. We believe the outlook for growth in these companies is well defined. In
addition, no substantial sales were made during the period.
We will continue to try to buy growing companies at a reasonable price and
companies that tend to be leaders in expanding industries. In our view, the
economy should show moderate growth through the end of 2001 and we expect stock
valuations to increase moderately in response.
Thank you for your investment in the Salomon Brothers Variable Total Return
Fund. We look forward to helping you pursue your financial goals in the years to
come.
Sincerely,
/s/ Heath B. McLendon
Heath B. McLendon
Chairman and President
August 3, 1999
2
<PAGE>
The following graph depicts the performance of the Fund versus the Salomon Smith
Barney Broad Investment-Grade Bond Index, the Standard & Poor's 500 Stock Index
and the 50% Salomon Smith Barney Broad Investment-Grade Bond and 50% Standard &
Poor's 500 Stock Index. It is important to note that the Fund is a
professionally managed mutual fund while the indexes are not available for
investment and are unmanaged. The comparison is shown for illustrative purposes
only.
HISTORICAL PERFORMANCE -- TOTAL RETURN FUND (unaudited)
Comparison of $10,000 Investment in the Fund with Salomon Smith Barney Broad
Investment-Grade Bond Index, Standard & Poor's 500 Stock Index and 50% Salomon
Smith Barney Broad Investment-Grade Bond and 50% Standard & Poor's 500 Stock
Index
<TABLE>
<CAPTION>
50% SSB Broad
SSB Broad Investment-Grade
Total S&P 500 Investment-Grade Bond and 50% S&P
Return Fund Stock Index Bond Index 500 Stock Index
<S> <C> <C> <C> <C>
2/17/98 10,000 10,000 10,000 10,000
3/98 10,350 10,792 10,039 10,415
6/98 10,261 11,149 10,271 10,710
9/98 10,011 10,042 10,697 10,370
12/98 10,583 12,177 10,741 11,459
3/99 10,634 12,781 10,691 11,736
6/30/99 11,092 13,680 10,592 12,136
</TABLE>
Past performance is not predictive of future performance. The graph does not
reflect expenses associated with the separate account such as administrative
fees, account charges and surrender charges which, if reflected, would reduce
the performance shown.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Historical Performance
- -----------------------------------------------------------------------------------------------
Net Asset Value
----------------------
Beginning End Income Capital Gain Total
Period Ended of Period of Period Dividend Distribution Returns+ ++
===============================================================================================
<S> <C> <C> <C> <C> <C>
6/30/99 $10.40 $10.90 $0.00 $0.00 4.81%
- -----------------------------------------------------------------------------------------------
Inception* -- 12/31/98 10.00 10.40 0.15 0.03 5.83
===============================================================================================
$0.15 $0.03
===============================================================================================
<CAPTION>
- -----------------------------------------------------------------------------------------------
Average Annual Total Returns+
- -----------------------------------------------------------------------------------------------
<S> <C>
Six Months Ended 6/30/99++ 4.81%
- -----------------------------------------------------------------------------------------------
Year Ended 6/30/99 8.01
- -----------------------------------------------------------------------------------------------
Inception* through 6/30/99 7.83
===============================================================================================
<CAPTION>
- -----------------------------------------------------------------------------------------------
Cumulative Total Return+
- -----------------------------------------------------------------------------------------------
<S> <C>
Inception* through 6/30/99 10.92%
===============================================================================================
</TABLE>
+ Assumes the reinvestment of all dividends and capital gains distributions at
net asset value.
++ Total return is not annualized, as it may not be representative of the total
return for the year.
* Inception date is February 17, 1998.
3
<PAGE>
Schedule of Investments
June 30, 1999 (unaudited)
<TABLE>
<CAPTION>
Shares Security Value
<C> <S> <C>
- --------------------------------------------------------------------------------
COMMON STOCK -- 34.1%
Basic Industries -- 1.3%
1,400 Geon Co. ............................................. $ 45,150
3,900 USEC Inc. ............................................ 58,013
900 Vulcan Materials Co. ................................. 43,425
400 Weyerhaeuser Co. ..................................... 27,500
-----------
174,088
-----------
Capital Goods -- 1.9%
1,000 AlliedSignal Inc. .................................... 63,000
700 Cooper Industries Inc. ............................... 36,400
1,100 General Electric Co. ................................. 122,237
700 Stone & Webster Inc. ................................. 18,638
-----------
240,275
-----------
Consumer Cyclicals -- 2.7%
374 DaimlerChrysler A.G. ................................. 33,239
1,400 Eastman Kodak Co. .................................... 94,850
2,200 J.C. Penney Co. ...................................... 106,838
900 May Department Stores Co. ............................ 36,788
1,700 Sears, Roebuck & Co. ................................. 75,756
-----------
347,471
-----------
Consumer Non-Cyclicals -- 7.6%
1,500 Anheuser-Busch Co., Inc. ............................. 106,406
1,200 Avon Products Inc. ................................... 66,600
2,200 Walt Disney Co. ...................................... 67,787
3,500 Food Lion Inc., Class B Shares........................ 40,468
2,000 H.J. Heinz Co. ....................................... 100,250
1,300 Hormel Foods Corp. ................................... 52,325
900 Kimberly-Clark Corp. ................................. 51,300
1,900 McDonald's Corp. ..................................... 78,494
2,000 News Corp Ltd, ADR.................................... 63,125
3,000 Pepsico, Inc. ........................................ 116,062
1,000 Philip Morris Cos. Inc. .............................. 40,187
900 Ralston-Purina Group.................................. 27,394
3,500 Rite Aid Corp. ....................................... 86,188
3,800 Sara Lee Corp. ....................................... 86,213
-----------
982,799
-----------
Energy -- 1.7%
800 Amerada Hess Corp. ................................... 47,600
397 BP Amoco Plc, ADR..................................... 43,075
700 Exxon Corp. .......................................... 53,987
400 Schlumberger Ltd. .................................... 25,475
1,200 Suncor Energy, Inc. .................................. 49,350
-----------
219,487
-----------
Financial Services -- 5.9%
700 Allstate Corp. ....................................... 25,113
124 American International Group, Inc. ................... 14,516
1,578 Bank of America Corp. ................................ 115,687
1,200 Chase Manhattan Corp. ................................ 103,950
1,200 Chubb Corp. .......................................... 83,400
700 CIGNA Corp. .......................................... 62,300
2,000 First Union Corp. .................................... 94,000
</TABLE>
See Notes to Financial Statements.
4
<PAGE>
Schedule of Investments
June 30, 1999 (unaudited) (continued)
<TABLE>
<CAPTION>
Shares Security Value
<C> <S> <C>
- --------------------------------------------------------------------------------
Financial Services -- 5.9% (continued)
1,200 Fleet Financial Group Inc. ........................... $ 53,250
4,000 Horace Mann Educators Corp. .......................... 108,750
850 Marsh & McLennan Cos., Inc. .......................... 64,175
1,000 Mercantile Bankshares Corp. .......................... 35,375
-----------
760,516
-----------
Health Care -- 5.0%
1,300 American Home Products Corp. ......................... 74,750
1,100 Bausch & Lomb Inc. ................................... 84,150
1,600 Bristol-Myers Squibb Co. ............................. 112,700
1,000 Johnson & Johnson..................................... 98,000
1,200 Pharmacia & Upjohn, Inc. ............................. 68,175
1,100 Pfizer Inc. .......................................... 120,725
1,800 Schering-Plough Corp. ................................ 95,400
-----------
653,900
-----------
Real Estate Investment Trust -- 0.8%
900 Arden Realty, Inc. ................................... 22,162
1,100 Crescent Real Estate Equities Co. .................... 26,125
800 Glenborough Realty Trust Inc. ........................ 14,000
750 JDN Realty Corp. ..................................... 16,781
1,440 New Plan Excel Realty Trust........................... 25,920
-----------
104,988
-----------
Technology -- 2.6%
1,200 International Business Machines Corp. ................ 155,100
4,000 Reynolds and Reynolds Co., Class A Shares............. 93,250
1,400 Xerox Corp. .......................................... 82,688
-----------
331,038
-----------
Telecommunication & Utilities -- 3.9%
1,000 BCE Inc. ............................................. 49,313
1,000 Bell Atlantic Corp. .................................. 65,375
1,000 Edison International.................................. 26,750
1,100 GTE Corp. ............................................ 83,325
350 Nortel Networks Corp. ................................ 30,384
1,500 SBC Communications Inc. .............................. 87,000
1,000 The Williams Cos., Inc. .............................. 42,562
2,000 US West, Inc. ........................................ 117,500
-----------
502,209
-----------
Transportation -- 0.7%
800 Canadian National Railway Co. ........................ 53,600
600 Union Pacific Corp. .................................. 34,988
-----------
88,588
-----------
TOTAL COMMON STOCK
(Cost -- $3,897,742).................................. 4,405,359
-----------
CONVERTIBLE PREFERRED STOCK -- 1.7%
Basic Industries -- 0.2%
450 International Papers, 5.250%.......................... 23,738
-----------
Consumer Cyclical -- 0.0%
300 BTI Capital Trust, 6.500%............................. 1,612
-----------
</TABLE>
See Notes to Financial Statements.
5
<PAGE>
Schedule of Investments
June 30, 1999 (unaudited) (continued)
<TABLE>
<CAPTION>
Shares Security Value
<C> <S> <C>
- -------------------------------------------------------------------------------
Energy -- 0.7%
1,000 Pogo Trust I, 6.500%................................ $ 50,810
2,000 Tesoro Petroleum Corp., 7.250%...................... 31,500
300 Tosco Financing Trust, 5.75%........................ 14,625
------------
96,935
------------
Financial Services -- 0.4%
300 Finova Finance, 5.500%.............................. 20,700
Morgan Stanley Dean Witter & Co., Medium Term Notes,
500 Series C, Reset PERQS, 6.000% due 5/15/00 (a) ...... 26,750
------------
47,450
------------
Technology -- 0.2%
1,000 Amdoc Automatic, 6.750%............................. 22,250
------------
Transportation -- 0.2%
500 Canadian National Railway Co., 5.250%............... 26,750
------------
TOTAL CONVERTIBLE PREFERRED STOCK
(Cost -- $204,133).................................. 218,735
------------
<CAPTION>
Face
Amount Security Value
<C> <S> <C>
- -------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCIES & OBLIGATIONS -- 26.5%
$ 15,000 U.S. Treasury Notes, 6.375% due 3/31/01 (b)......... 15,220
50,000 U.S. Treasury Notes, 5.375% due 6/30/03 (b)......... 49,286
250,000 U.S. Treasury Notes, 5.250% due 8/15/03............. 245,180
300,000 U.S. Treasury Notes, 5.250% due 5/15/04............. 295,179
100,000 U.S. Treasury Notes, 6.125% due 8/15/07 (b)......... 101,106
140,000 U.S. Treasury Notes, 4.750% due 11/15/08............ 128,526
200,000 U.S. Treasury Notes, 5.500% due 5/15/09............. 195,816
200,000 U.S. Treasury Bonds, 4.500% due 9/30/00............. 197,910
95,000 U.S. Treasury Bonds, 6.125% due 11/15/27 (b)........ 94,296
75,000 U.S. Treasury Bonds, 5.250% due 11/15/28............ 66,425
365,000 U.S. Treasury Bonds, 5.625% due 5/15/08 (b)......... 357,620
Federal National Mortgage Association, 6.500%,
445,448 7/1/28.............................................. 430,272
Federal National Mortgage Association, 7.000%,
234,545 2/1/29.............................................. 232,713
Federal National Mortgage Association, 7.000%, 15
100,000 years (c)(d)........................................ 100,343
Federal National Mortgage Association, 6.000%, 30
240,000 years (c)(d)........................................ 226,350
Federal National Mortgage Association, 6.500%, 30
300,000 years (c)(d)........................................ 290,531
Federal National Mortgage Association, 7.000%, 30
100,000 years (c)(d)........................................ 99,156
Federal National Mortgage Association, 8.000%, 30
300,000 years (c)(d)........................................ 307,592
------------
TOTAL U.S GOVERNMENT AGENCIES & OBLIGATIONS
(Cost -- $3,531,500)................................ 3,433,521
------------
ASSET-BACKED SECURITIES -- 2.1%
Contimortgage Home Equity Loan Trust, Series 1998-2,
70,000 Class A3, 6.130% due 3/15/13........................ 69,715
Ford Credit Auto Owner Trust, Series 1999-B, Class
100,000 A4, 5.800% due 6/15/02.............................. 99,281
NationsBank Credit Card Master Trust, Series 1995-1,
100,000 Class A, 6.450% due 4/15/03......................... 100,859
------------
TOTAL ASSET-BACKED SECURITIES
(Cost -- $271,419).................................. 269,855
------------
COMMERCIAL MORTGAGE-BACKED SECURITIES -- 1.3%
Commercial Mortgage Asset Trust, Series 1999-C1,
75,000 Class C, 7.350% due 8/17/13......................... 72,235
DLJ Commercial Mortgage Corp., Series 1998-CG1,
103,325 Class A1A, 6.110% due 12/10/07...................... 101,291
------------
TOTAL COMMERCIAL MORTGAGE-BACKED SECURITIES
(Cost -- $176,960).................................. 173,526
------------
</TABLE>
See Notes to Financial Statements.
6
<PAGE>
Schedule of Investments
June 30, 1999 (unaudited) (continued)
<TABLE>
<CAPTION>
Face
Amount Security Value
<C> <S> <C>
- -------------------------------------------------------------------------------
CONVERTIBLE CORPORATE BONDS -- 4.7%
Capital Goods -- 0.3%
$ 50,000 Mark IV Industries, Sub. Notes, 4.750% due 11/1/04...... $ 44,813
----------
Consumer Cyclicals -- 0.4%
Interpublic Group Co. Inc., Sub. Notes, 1.870% due
50,000 6/1/06 (e).............................................. 45,625
----------
Consumer Non-Cyclicals -- 0.5%
Credit Suisse First Boston Corp., 1.000% due 4/7/05
50,000 (f)..................................................... 46,000
15,000 Rite Aid Corp., Sub. Notes, 5.250% due 9/15/02.......... 15,047
----------
61,047
----------
Energy -- 0.4%
Halter Marine Group Inc, Sub. Notes, 4.500% due
50,000 9/15/04................................................. 32,250
15,000 Kerr-McGee Corp., Sub. Debentures, 7.500% due 5/15/14... 14,962
----------
47,212
----------
Financial Services -- 0.4%
50,000 Bell Atlantic Financial Service, 5.750% due 4/1/03 (e).. 51,530
----------
Health Care -- 0.4%
20,000 Alpharma Inc, Sr. Sub. Notes, 3.000% due 6/1/06 (e)..... 25,075
10,000 Centocor Inc, Sub. Debentures, 4.750% due 2/15/05....... 11,350
15,000 Omnicare Inc, Sub. Debentures, 5.000% due 12/1/07....... 11,156
----------
47,581
----------
Media & Telecommunications -- 0.4%
25,000 NTL Inc., Sub. Notes, 7.000% due 12/15/08 (e)........... 40,906
15,000 Rogers Communication Inc., 2.000% due 11/26/05.......... 11,625
----------
52,531
----------
Technology -- 1.9%
50,000 DSC Communications Corp., 7.000% due 8/1/04............. 51,750
50,000 Integrated Process Equipment, 6.250% due 9/15/04 (b).... 38,250
25,000 Micron Technology Inc., Sub. Notes, 7.000% due 7/1/04... 25,344
Network Associates Inc, Sub. Debentures, zero coupon due
100,000 2/13/18................................................. 30,125
50,000 Quantum Corp., 7.000% due 8/1/04........................ 47,750
25,000 S3 Incorporated, 5.750% due 10/1/03..................... 21,156
25,000 Solectron Corp, zero coupon due 1/27/19 (e)............. 14,531
25,000 Wind River System Inc, 5.000% due 8/1/02................ 21,813
----------
250,719
----------
TOTAL CONVERTIBLE CORPORATE BONDS
(Cost -- $567,474)...................................... 601,058
----------
CORPORATE BONDS -- 14.7%
Basic Industries -- 1.5%
50,000 Praxair Inc., 6.150% due 4/15/03........................ 49,250
50,000 Raytheon Co., 6.150% due 11/1/08........................ 47,188
100,000 TRW Inc., 6.450% due 6/15/01 (e)........................ 100,000
----------
196,438
----------
Consumer Cyclicals -- 0.8%
30,000 Sears Roebuck Acceptance Corp., 7.000% due 6/15/07 (b).. 30,113
75,000 Staples Inc., Sr. Notes, 7.125% due 8/15/07............. 74,906
----------
105,019
----------
</TABLE>
See Notes to Financial Statements.
7
<PAGE>
Schedule of Investments
June 30, 1999 (unaudited) (continued)
<TABLE>
<CAPTION>
Face
Amount Security Value
<C> <S> <C>
- -------------------------------------------------------------------------------
Energy -- 0.5%
$ 75,000 Empresa Electric Pehuenche, 7.300% due 5/1/03......... $ 68,971
-----------
Financial Services -- 8.0%
250,000 Aristar Inc., Sr. Notes, 7.250% due 6/15/06........... 251,250
150,000 Bank of America Corp., Sr. Notes, 5.750% due 3/1/04... 146,062
150,000 Bank of America Corp., Sr. Notes, 6.625% due 6/15/04.. 148,687
35,000 Ford Motor Credit Co., Sr. Notes, 5.800% due 1/12/09.. 32,069
Fremont Gen. Corp., Series B, Sr. Notes, 7.700% due
100,000 3/17/04............................................... 99,375
65,000 Household Finance Corp., 5.875% due 2/1/09............ 59,312
Lehman Brothers Holdings Inc., Series F, Medium-Term
250,000 Notes, 7.000% due 5/15/03............................. 248,750
50,000 US Bank NA., 5.700% due 12/15/08...................... 45,813
-----------
1,031,318
-----------
Media -- 1.2%
A.H. Belo Corp., Sr. Debentures, 7.250% due 9/15/27
90,000 (b)................................................... 84,487
75,000 GTE Corp., 6.940% due 4/15/28 (b)..................... 71,719
-----------
156,206
-----------
Real Estate Investment Trust -- 0.8%
100,000 Spieker Properties LP, 7.250% due 5/1/09.............. 96,875
-----------
Services & Other -- 1.6%
40,000 Comdisco, Inc., Sr. Notes, 6.000% due 1/30/02......... 39,500
75,000 First Data Corp., 6.375% due 12/15/07 (b)............. 73,125
100,000 Service Corp. International, 6.000% due 12/15/05...... 92,250
-----------
204,875
-----------
Technology -- 0.3%
International Business Machines Corp., 5.375% due
50,000 2/1/09................................................ 45,687
-----------
TOTAL CORPORATE BONDS
(Cost -- $1,958,790).................................. 1,905,389
-----------
SUB-TOTAL INVESTMENTS
(Cost -- $10,608,018)................................. 11,007,443
-----------
REPURCHASE AGREEMENT -- 14.9%
1,930,000 State Street Bank & Trust Co., 4.700% due 7/1/99;
Proceeds at maturity -- $1,930,252; (Fully
collateralized by U.S. Treasury Bonds, 8.500% due
2/15/20; Market value -- $1,972,096) (Cost --
$1,930,000).......................................... 1,930,000
-----------
TOTAL INVESTMENTS -- 100%
(Cost -- $12,538,018*)................................ $12,937,443
===========
</TABLE>
- ------
(a) Reset Performance Equity-linked Redemption Quarterly-pay Securities ("Reset
PERQS"), which entitles the holder to convert the preferred stock to shares
of common stock of Applied Materials, Inc. on May 15, 2000 at a specified
exchange ratio.
(b) All or part of the security is segregated as collateral for mortgage dollar
rolls.
(c) Mortgage Dollar Roll.
(d) Security is issued on a to-be-announced ("TBA") basis.
(e) Security is exempt from registration under Rule 144A of the Securities Act
of 1933. This security may be resold in transactions that are exempt from
registration, normally to qualified institutional buyers.
(f) Convertible into shares of RJR Nabisco Holding Corp. common stock at a
specified exchange ratio.
* Aggregate cost for Federal income tax purposes is substantially the same.
Abbreviations used in this schedule:
ADR -- American Depository Receipt.
See Notes to Financial Statements.
8
<PAGE>
Statement of Assets and Liabilities
June 30, 1999 (unaudited)
<TABLE>
<S> <C>
ASSETS:
Investments, at value (Cost -- $10,608,018)....................... $11,007,443
Repurchase agreement, at value (Cost -- $1,930,000)............... 1,930,000
Cash.............................................................. 42
Dividend and interest receivable.................................. 63,215
Deferred organization costs....................................... 22,712
Prepaid expenses.................................................. 1,641
-----------
Total Assets...................................................... 13,025,053
-----------
LIABILITIES:
Payable for securities purchased.................................. 1,019,982
Payable to investment manager..................................... 8,367
Accrued expenses.................................................. 21,760
-----------
Total Liabilities................................................. 1,050,109
-----------
Total Net Assets.................................................. $11,974,944
===========
NET ASSETS:
Par value of capital shares....................................... $ 1,099
Capital paid in excess of par value............................... 11,414,496
Undistributed net investment income............................... 143,439
Accumulated net realized gain from security transactions.......... 16,485
Net unrealized appreciation on investments........................ 399,425
-----------
Total Net Assets.................................................. $11,974,944
===========
Shares Outstanding................................................. 1,099,033
-----------
Net Asset Value, per share......................................... $10.90
-----------
</TABLE>
See Notes to Financial Statements.
9
<PAGE>
Statement of Operations
For the Six Months Ended June 30, 1999 (unaudited)
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest.......................................................... $ 147,272
Dividends (net of foreign withholding tax of $339)................ 36,326
----------
Total Investment Income........................................... 183,598
----------
EXPENSES:
Management fees (Note 2).......................................... 33,005
Audit and legal................................................... 9,620
Shareholder and system servicing fees............................. 5,118
Shareholder communications........................................ 5,703
Amortization of deferred organization costs (Note 1).............. 3,097
Directors' fees................................................... 2,529
Administration fees............................................... 2,063
Custody........................................................... 1,785
Registration fees................................................. 1,735
Other............................................................. 1,240
----------
Total Expenses.................................................... 65,895
Less: Management fee waiver (Note 2).............................. (24,639)
----------
Net Expenses...................................................... 41,256
----------
Net Investment Income.............................................. 142,342
----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS (NOTES 3 AND 9):
Realized Gain From Security Transactions (excluding short-term
securities):
Proceeds from sales............................................... 1,605,542
Cost of securities sold........................................... 1,589,199
----------
Net Realized Gain................................................. 16,343
----------
Change in Net Unrealized Appreciation of Investments:
Beginning of period............................................... 128,833
End of period..................................................... 399,425
----------
Increase in Net Unrealized Appreciation........................... 270,592
----------
Net Gain on Investments............................................ 286,935
----------
Increase in Net Assets from Operations............................. $ 429,277
==========
</TABLE>
See Notes to Financial Statements.
10
<PAGE>
Statement of Changes in Net Assets
For the Six Months Ended June 30, 1999 (unaudited) and the Period Ended
December 31, 1998(a)
<TABLE>
<CAPTION>
1999 1998
----------- ----------
<S> <C> <C>
OPERATIONS:
Net investment income................................ $ 142,342 $ 86,143
Net realized gain.................................... 16,343 18,275
Increase in net unrealized appreciation.............. 270,592 128,833
----------- ----------
Increase in Net Assets From Operations............... 429,277 233,251
----------- ----------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income................................ -- (85,021)
Net realized gains................................... -- (18,158)
----------- ----------
Decrease in Net Assets From Distributions to
Shareholders........................................ -- (103,179)
----------- ----------
FUND SHARE TRANSACTIONS (NOTE 12):
Net proceeds from sale of shares..................... 6,942,026 6,287,126
Net asset value of shares issued for reinvestment of
dividends........................................... -- 101,349
Cost of shares reacquired............................ (1,367,331) (647,545)
----------- ----------
Increase in Net Assets From Fund Share Transactions.. 5,574,695 5,740,930
----------- ----------
Increase in Net Assets................................ 6,003,972 5,871,002
NET ASSETS:
Beginning of Period.................................. 5,970,972 99,970
----------- ----------
End of Period*....................................... $11,974,944 $5,970,972
=========== ==========
* Includes undistributed net investment income of: ... $143,439 $1,097
=========== ==========
</TABLE>
- ------
(a) For the period from February 17, 1998 (commencement of operations) to De-
cember 31, 1998.
See Notes to Financial Statements.
11
<PAGE>
Statement of Cash Flows
For the Six Months Ended June 30, 1999 (unaudited)
<TABLE>
<S> <C>
CASH FLOWS USED BY OPERATING ACTIVITIES:
Purchases of long-term portfolio investments..................... $(8,948,823)
Proceeds from disposition of long-term portfolio investments and
principal paydowns.............................................. 4,327,556
Net purchases of short-term portfolio investments................ (1,101,000)
-----------
(5,722,267)
Net investment income............................................ 142,342
Amortization of net premium/discount on investments.............. (2,760)
Amortization of organization expenses............................ 3,097
Net change in receivables/payables related to operations......... 1,201
-----------
Net Cash Flows Used By Operating Activities...................... (5,578,387)
-----------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Proceeds from sale of shares..................................... 6,945,553
Cost of shares reacquired........................................ (1,367,586)
-----------
Net Cash Flows Provided By Financing Activities.................. 5,577,967
-----------
Net Decrease in Cash.............................................. (420)
Cash, Beginning of Period......................................... 462
-----------
Cash, End of Period............................................... $ 42
===========
</TABLE>
See Notes to Financial Statements.
12
<PAGE>
Notes to Financial Statements
(unaudited)
1. Significant Accounting Policies
Salomon Brothers Variable Total Return Fund ("Fund") is a separate diversified
investment portfolio of the Salomon Brothers Variable Series Funds Inc
("Series") whose primary investment objective is to obtain above-average income
(as compared to a portfolio entirely invested in equity securities). The
Series, a Maryland corporation, is registered under the Investment Company Act
of 1940, as amended ("1940 Act"), as an open-end management investment company
and consists of this Fund and six other investment portfolios: Salomon Brothers
Variable Capital Fund, Salomon Brothers Variable High Yield Bond Fund, Salomon
Brothers Variable Investors Fund, Salomon Brothers Variable Strategic Bond
Fund, Salomon Brothers Variable U.S. Government Income Fund and Salomon
Brothers Variable Asia Growth Fund. The U.S. Government Income Fund and Asia
Growth Fund have not yet commenced operations. The financial statements and
financial highlights for the other investment portfolios are presented in
separate shareholder reports. The Fund and each other investment portfolio of
the Series is offered exclusively for use with certain variable annuity and
variable life insurance contracts offered through the separate accounts of
various life insurance companies and qualified pension and retirement plans.
The significant accounting policies consistently followed by the Fund are: (a)
security transactions are accounted for on trade date; (b) securities traded on
national securities markets are valued at the closing prices on such markets;
securities traded in the over-the-counter market and securities for which no
sales price was reported are valued at the mean of the bid and asked prices;
debt securities are valued using either prices or estimates of market values
provided by market markers or independent pricing services. Securities and
assets for which market quotations are not readily available are valued at fair
value as determined in good faith by or under the direction of the Board of
Directors of the Fund; (c) securities maturing within 60 days are valued at
cost plus accreted discount, or minus amortized premium, which approximates
market value; (d) dividend income is recorded on the ex-dividend date; (e)
interest income, adjusted for accretion of original issue and market discount,
is recorded on the accrual basis; (f) gains or losses on the sale of securities
are calculated by using the specific identification method; (g) dividends and
distributions to shareholders are recorded on the ex-dividend date; (h) the
accounting records are maintained in U.S. dollars. All assets and liabilities
denominated in foreign currencies are translated into U.S. dollars based on the
rate of exchange of such currencies against U.S. dollars on the date of
valuation. Purchases and sales of securities, and income and expenses are
translated at the rate of exchange quoted on the respective date that such
transactions are recorded. Differences between income and expense amounts
recorded and collected or paid are recorded as currency gains or losses; (i)
the character of income and gains to be distributed are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles. At December 31, 1998, reclassifications were made to the
Fund's capital accounts to reflect permanent book/tax differences and income
and gains available for distributions under income tax regulations. Net
investment income, net realized gains and net assets were not affected by this
change; (j) the Fund intends to comply with the applicable provisions of the
Internal Revenue Code of 1986, as amended, pertaining to regulated investment
companies and to make distributions of taxable income sufficient to relieve the
Fund from substantially all Federal income and excise taxes; and (k) estimates
and assumptions are required to be made regarding assets, liabilities and
changes in net assets resulting from operations when financial statements are
prepared. Changes in the economic environment, financial markets and any other
parameters used in determining these estimates could cause actual results to
differ.
Organization costs amounting to $31,250 were incurred with the organization of
the Fund. These costs are being amortized ratably over a five year period from
commencement of operations.
2. Management Agreement and Transactions with Affiliated Persons
Salomon Brothers Asset Management Inc ("SBAM"), a wholly owned subsidiary of
Salomon Brothers Holding Company Inc., which in turn is wholly owned by Salomon
Smith Barney Holdings, Inc. ("SSBH"), acts as investment manager to the Fund.
Under the investment management agreement, the Fund pays an investment
management fee calculated at the annual rate of 0.80% of its average daily net
assets. This fee is calculated daily and paid monthly.
For the six months ended June 30, 1999, SBAM waived a portion of its management
fees amounting to $24,639.
13
<PAGE>
Notes to Financial Statements
(unaudited) (continued)
SBAM also acts as administrator to the Fund. As compensation for its services
the Fund pays SBAM a fee calculated at an annual rate of 0.05% of its average
daily net assets. This fee is calculated daily and paid monthly. SBAM has dele-
gated its responsibilities as administrator to SSBC Fund Management Inc.
("SSBC"), formerly known as Mutual Management Corp., an affiliate of SBAM, pur-
suant to a Sub-Administration Agreement between SBAM and MMC.
CFBDS, Inc. acts as the Fund's distributor. For the six months ended June 30,
1999, Salomon Smith Barney Inc. ("SSB"), another subsidiary of SSBH, received
brokerage commissions of $678 from the Fund.
3. Investments
During the six months ended June 30, 1999, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding short-
term securities) were as follows:
<TABLE>
<S> <C>
Purchases:
U.S. government agencies & obligations............................ $2,093,390
Other investment securities....................................... 4,730,241
----------
$6,823,631
==========
Sales:
U.S. government agencies & obligations............................ $1,038,990
Other investment securities....................................... 566,552
----------
$1,605,542
==========
At June 30, 1999, the aggregate gross unrealized appreciation and depreciation
of investments for Federal income tax purposes were substantially as follows:
Gross unrealized appreciation....................................... $ 687,973
Gross unrealized depreciation....................................... (288,548)
----------
Net unrealized appreciation......................................... $ 399,425
==========
</TABLE>
4. Repurchase Agreements
The Fund purchases (and its custodian takes possession of) U.S. government se-
curities from banks and securities dealers subject to agreements to resell the
securities to the seller at a future date (generally, the next business day) at
an agreed-upon higher repurchase price. The Fund requires maintenance of the
market value of the collateral in amounts at least equal to the repurchase
price.
5. Reverse Repurchase Agreements
The Fund may enter into reverse repurchase agreements. A reverse repurchase
agreement involves a sale by the Fund of securities that it holds with an
agreement by the Fund to repurchase the same securities at an agreed upon price
and date. A reverse repurchase agreement involves risk that the market value of
the securities sold by the Fund may decline below the repurchase price of the
securities. The Fund will establish a segregated account with its custodian, in
which the Fund will maintain cash or other liquid securities with respect to
the reverse repurchase agreements.
At June 30, 1999, the Fund did not have any open reverse repurchase agreements.
14
<PAGE>
Notes to Financial Statements
(unaudited) (continued)
6. Options Contracts
The Fund may from time to time enter into options contracts. Premiums paid when
put or call options are purchased by the Fund, represent investments, which are
marked-to-market daily. When a purchased option expires, the Fund will realize
a loss in the amount of the premium paid. When the Fund enters into a closing
sales transaction, the Fund will realize a gain or loss depending on whether
the proceeds from the closing sales transaction are greater or less than the
premium paid for the option. When the Fund exercises a put option, it will re-
alize a gain or loss from the sale of the underlying security and the proceeds
from such sale will be decreased by the premium originally paid. When the Fund
exercises a call option, the cost of the security which the Fund purchases upon
exercise will be increased by the premium originally paid.
At June 30, 1999, the Fund had no open purchased call or put options.
When the Fund writes a call or put option, an amount equal to the premium re-
ceived by the Fund is recorded as a liability, the value of which is marked-to-
market daily. When a written option expires, the Fund realizes a gain equal to
the amount of the premium received. When the Fund enters into a closing pur-
chase transaction, the Fund realizes a gain or loss depending upon whether the
cost of the closing transaction is greater or less than the premium originally
received, without regard to any unrealized gain or loss on the underlying secu-
rity, and the liability related to such option is eliminated. When a written
call option is exercised the proceeds of the security sold will be increased by
the premium originally received. When a written put option is exercised, the
amount of the premium originally received will reduce the cost of the security
which the Fund purchased upon exercise. When written index options are exer-
cised, settlement is made in cash.
The risk associated with purchasing options is limited to the premium origi-
nally paid. The Fund enters into options for hedging purposes. The risk in
writing a covered call option is that the Fund gives up the opportunity to par-
ticipate in any increase in the price of the underlying security beyond the ex-
ercise price. The risk in writing a put option is that the Fund is exposed to
the risk of loss if the market price of the underlying security declines.
During the six months ended June 30, 1999, the Fund did not write any call or
put options.
7. Securities Traded on a When Issued Basis
The Fund may from time to time purchase securities on a when-issued basis. In a
when-issued transaction, the Fund commits to purchasing securities which have
not yet been issued by the issuer. Securities purchased on a when-issued basis,
are not settled until they are delivered to the Fund. Beginning on the date the
Fund enters into the when-issued transaction, the custodian maintains cash or
other liquid securities in a segregated account equal in value to the purchase
price of the when-issued security. These transactions are subject to market
fluctuations and their current value is determined in the same manner as for
other securities.
At June 30, 1999, the Fund did not hold any when-issued securities.
8. Securities Traded on a To-Be-Announced Basis
The Fund may trade securities on a "to-be-announced" ("TBA") basis. In a TBA
transaction, the Fund commits to purchasing or selling securities which have
not yet been issued by the issuer, particularly the face amount and maturity
date in Government National Mortgage Association ("GNMA") transactions.
Securities purchased on a TBA basis are not settled until they are delivered to
the Fund, normally 15 to 45 days later. These transactions are subject to
market fluctuations and their current value is determined in the same manner as
for other securities.
At June 30, 1999, the Fund held five TBA securities with a total cost of
$1,031,688.
15
<PAGE>
Notes to Financial Statements
(unaudited) (continued)
9. Mortgage Dollar Roll Transactions
The Fund may enter into mortgage "dollar rolls" in which the 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 specific future date. The Fund is compensated by a fee paid by
the counterparty. Dollar rolls are accounted for as financing arrangements; the
fee is accrued into interest income ratably over the term of the dollar roll
and any gain or loss on the roll is deferred until disposition of the rolled
security. The average daily balance of dollar rolls outstanding during the six
months ended June 30, 1999 was approximately $488,000.
10. Lending of Securities
The Fund may lend its securities to brokers, dealers and other financial
organizations. The Fund has an agreement with its custodian whereby the
custodian may lend securities owned by the Fund to brokers, dealers and other
financial organizations. Fees earned by the Fund on securities lending are
recorded in interest income. Loans of securities by the Fund are collateralized
by cash or other liquid securities that are maintained at all times in an
amount at least equal to the current market value of the loaned securities,
plus a margin which may vary depending on the type of securities loaned. The
custodian establishes and maintains the collateral in a segregated account. The
Fund maintains exposure for the risk of any losses in the investment of amounts
received as collateral.
At June 30, 1999, the Fund did not have any securities on loan.
11. Loan Participations
The Fund may invest in loans arranged through private negotiation between one
or more financial institutions. The Fund's investment in any such loan may be
in the form of a participation in or an assignment of the loan.
In connection with purchasing participations, the Fund generally will have no
right to enforce compliance by the borrower with the terms of the loan
agreement relating to the loan, nor any rights of set-off against the borrower,
and the Fund may not benefit directly from any collateral supporting the loan
in which it has purchased the participation. As a result, the Fund will assume
the credit risk of both the borrower and the lender that is selling the
participation. In the event of the insolvency of the lender selling the
participation, the Fund may be treated as a general creditor of the lender and
may not benefit from any set-off between the lender and the borrower.
At June 30, 1999, the Fund did not have any investments in loan participations.
12. Capital Stock
At June 30, 1999, the Series had 10,000,000,000 shares of capital stock autho-
rized with a par value of $0.001 per share. Each share represents an equal pro-
portionate interest and has an equal entitlement to any dividends and distribu-
tions made by the Fund.
Transactions in shares were as follows:
<TABLE>
<CAPTION>
Six Months Ended Period Ended
June 30, 1999 December 31, 1998(a)
---------------- --------------------
<S> <C> <C>
Shares sold............................... 654,987 617,277
Shares issued on reinvestment............. -- 9,745
Shares redeemed........................... (129,833) (63,140)
-------- -------
Net Increase.............................. 525,154 563,882
======== =======
</TABLE>
- ------
(a) For the period February 17, 1998 (commencement of operations) through De-
cember 31, 1998.
16
<PAGE>
Financial Highlights
For a share of capital stock outstanding for the year ended December 31, except
where noted:
<TABLE>
<CAPTION>
1999(1) 1998(2)
------- -------
<S> <C> <C>
Net Asset Value, Beginning of Period.......................... $ 10.40 $10.00
------- ------
Income From Operations:
Net investment income (3).................................... 0.13 0.15
Net realized and unrealized gain ............................ 0.37 0.43
------- ------
Total Income From Operations................................. 0.50 0.58
------- ------
Less Distributions From:
Net investment income........................................ -- (0.15)
Net realized gains........................................... -- (0.03)
------- ------
Total Distributions.......................................... -- (0.18)
------- ------
Net Asset Value, End of Period................................ $ 10.90 $10.40
======= ======
Total Return++................................................ 4.81% 5.83%
Net Assets, End of Period (000s).............................. $11,975 $5,971
Ratios to Average Net Assets (3)+:
Expenses..................................................... 1.00% 1.00%
Net investment income........................................ 3.45% 3.57%
Portfolio Turnover Rate....................................... 21% 56%
</TABLE>
- ------
(1) For the six months ended June 30, 1999 (unaudited).
(2) For the period from February 17, 1998 (commencement of operations) through
December 31, 1998.
(3) SBAM has waived all or a part of its management fees for the six months
ended June 30, 1999 and the period ended December 31, 1998. In addition,
SBAM has reimbursed the fund for $26,591 of expenses for the period ended
December 31, 1998. If such fees were not waived or expenses not reimbursed,
the per share decrease in net investment income and the actual expense ra-
tio would have been as follows:
<TABLE>
<CAPTION>
Expense Ratio Without
Net Investment Income Fee Waiver and/or
Per Share Decreases Expense Reimbursement
--------------------- ---------------------
<S> <C> <C>
1999.......................... $0.02 1.60%+
1998.......................... 0.08 2.90+
</TABLE>
++Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized.
17
<PAGE>
Salomon Brothers Variable Series Funds Inc
Investment Manager Officers
Salomon Brothers Asset Management Inc Heath B. McLendon
7 World Trade Center Chairman and President
New York, New York 10048 Lewis E. Daidone
Executive Vice President
Custodian and Treasurer
PNC Bank, N.A. Ross S. Margolies
17th and Chestnut Streets Executive Vice President
Philadelphia, Pennsylvania 19103 Beth A. Semmel
Executive Vice President
Legal Counsel Peter J. Wilby
Simpson Thacher & Bartlett Executive Vice President
425 Lexington Avenue George J. Williamson
New York, New York 10017 Executive Vice President
John B. Cunningham
Independent Accountants Vice President
PricewaterhouseCoopers LLP Anthony Pace
1177 Avenue of the Americas Controller
New York, New York 10036 Christina T. Sydor
Secretary
Directors
Charles F. Barber
Consultant; formerly Chairman;
ASARCO Incorporated
Carol L. Colman
President, Colman Consulting Co., Inc.
Daniel P. Cronin
Vice President-General Counsel,
Pfizer International Inc.
Heath B. McLendon
Chairman and President;
Managing Director, Salomon Smith Barney Inc.
President and Director, SSBC Fund Management Inc.
and Travelers Investment Advisers, Inc.
18
<PAGE>
[This page intentionally left blank]
<PAGE>
====================
SALOMON BROTHERS
====================
Asset Management
Seven World Trade Center . New York, New York 10048
<PAGE>
Semi-
SALOMON BROTHERS Annual
Report
Variable Series Funds Inc 1999
June 30, 1999
. INVESTORS FUND
[Art]
<PAGE>
[Art] THE SALOMON BROTHERS VARIABLE SERIES FUNDS INC
Our Message to You
Dear Shareholder:
We are pleased to provide you with the semi-annual report for the Salomon
Brothers Variable Investors Fund ("Fund") for the period ended June 30, 1999.
Performance Update
The Fund's shares returned 15.35% for the six months ended June 30, 1999. This
return compares to 12.4% for the S&P 500* and 10.9% for Lipper Inc.'s** growth
and income peer group average. (Lipper is a major fund-tracking organization.)
Market Overview
The Fund performed quite well in the first six months, significantly outpacing
both its large-cap value peer group and the S&P 500. Most of the Fund's gains
occurred during the second quarter. An increase in interest rates during the
quarter caused investors to look beyond the narrow group of large-cap growth
stocks that had driven the market's performance over several prior quarters.
Cyclical stocks rebounded nicely due to continued strong economic growth in the
United States as well as signs of economic improvement overseas. The Fund was
well positioned to benefit from the increased breadth in the market.
The shift in investor sentiment from growth to value during the second quarter
is apparent in Morningstar's*** category performance numbers. During the first
quarter, Morningstar's large-cap growth category continued its 1998 dominance by
returning 7.9% vs. 1.0% for the large-cap value category.
- ---------------
* The Standard & Poor's 500 Index ("S&P 500 Index") is an index of widely
held common stocks listed on the New York and American Stock Exchanges and
the over-the-counter markets. Figures for the S&P 500 Index include
reinvestment of dividends. The index is unmanaged and is not subject to the
same management and trading expenses of a mutual fund. All figures
represent past performance and are not a guarantee of future results.
Investment returns and principal value will fluctuate, and redemption
values may be more or less than the original cost.
** Lipper rankings show a fund's one-, five- and ten- year annualized returns
(at NAV) as of a particular reporting period. Lipper also compares a fund's
returns to the average of its peer group. The rankings are subject to
change every month. Past performance is not a guarantee of future results.
*** Morningstar proprietary ratings reflect historical risk-adjusted
performance as of 6/30/99. Ratings are load-adjusted, updated monthly and
subject to change. Morningstar ratings are calculated from each fund's 3-,
5- and 10-year average annual returns (if applicable) in excess of 90-day
Treasury bill returns with appropriate fee adjustment and risk factor that
reflects fund performance below 90-day T-bill returns. Other share classes
may vary. The highest Morningstar rating is 5 stars; the lowest is 1 star.
The top 10% of the funds in a broad asset class receive 5 stars, the next
22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive
2 stars and the next 10% receive 1 star. Different classes within a fund
share a common portfolio of securities. Past performance is not guarantee
of future results.
1
<PAGE>
During the second quarter, however, the roles reversed; the large-cap value
category returned 9.7% vs. 4.2% for the large-cap growth group.
Fund Highlights
The increased breadth in the market during the second quarter was evident in the
number of sectors and stocks that contributed to the Fund's overall six-month
performance. In particular, the technology, communications, capital goods,
energy and transportation sectors led performance. Technology standouts included
IBM, Hewlett Packard and Texas Instruments, among others. The Fund also
benefited from two takeovers -- Frontier Corporation and Atlantic Richfield.
Other significant contributors included Liberty Media, Morgan Stanley Dean
Witter and Williams Companies. The Fund's tobacco holdings held back
performance.
Market Outlook
In the near term, we expect continued volatility in the equity markets due to
the relatively high level of equity valuations and investor uncertainty over the
direction of the economy, interest rates and inflation. We do see an opportunity
for individual stocks to outperform as investors seek greater breadth in the
market by focusing on stocks with more attractive valuations. As of June 30,
1999, the average projected 1999 P/E ratio for the top 50 companies in the S&P
500 was 40x earnings compared with 28x earnings for the next 450 companies.
Although many of the largest companies deserve P/E multiple premiums, this
discrepancy is large by historical standards.
Currently, the Fund has overweight positions in the consumer staples, energy and
communication services sectors. The Fund is underweight in technology, capital
goods and healthcare. Recently, we have been trimming positions in sectors that
have performed quite well this year, such as technology, media and
telecommunications, and adding to sectors that have underperformed, such as
healthcare. We believe that the Fund should perform well relative to the S&P 500
over the near term due to the Fund's lower valuation yet similar growth
prospects.
2
<PAGE>
In closing, thank you for investing in the Salomon Brothers Variable Investors
Fund.
Cordially,
/s/ Heath B. McLendon
Heath B. McLendon
Chairman and President
July 28, 1999
3
<PAGE>
The graph to the right depicts the performance of the Fund versus the Standard &
Poor's 500 Stock Index. It is important to note that the Fund is a
professionally managed mutual fund while the index is not available for
investment and is unmanaged. The comparison is shown for illustrative purposes
only.
HISTORICAL PERFORMANCE --
SALOMON BROTHERS VARIABLE INVESTORS FUND (unaudited)
Comparison of $10,000 Investment in the Fund with
Standard & Poor's 500 Stock Index
<TABLE>
<CAPTION>
Investors Fund Standard & Poor's
500 Stock Index
<S> <C> <C>
2/17/98 10,000 10,000
3/98 10,650 10,792
6/98 10,731 11,149
9/98 9,430 10,042
12/98 11,056 12,177
3/99 11,277 12,781
6/30/99 12,752 13,680
</TABLE>
Past performance is not predictive of future performance. The graph does not
reflect expenses associated with the separate account such as administrative
fees, account charges and surrender charges which, if reflected, would reduce
the performance shown.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Historical Performance
- -----------------------------------------------------------------------------------------------
Net Asset Value
---------------------
Beginning End Income Capital Gain Total
Period Ended of Period of Period Dividend Distribution Returns+ ++
===============================================================================================
<S> <C> <C> <C> <C> <C>
6/30/99 $11.01 $12.70 $ 0.00 $0.00 15.35%
- -----------------------------------------------------------------------------------------------
Inception* -- 12/31/98 10.00 11.01 0.05 0.00 10.55
===============================================================================================
$ 0.05 $ 0.00
===============================================================================================
<CAPTION>
- -----------------------------------------------------------------------------------------------
Average Annual Total Returns+
- -----------------------------------------------------------------------------------------------
===============================================================================================
<S> <C>
Six Months Ended 6/30/99++ 15.35%
- -----------------------------------------------------------------------------------------------
Year Ended 6/30/99 18.84
- -----------------------------------------------------------------------------------------------
Inception* through 6/30/99 19.55
===============================================================================================
<CAPTION>
- -----------------------------------------------------------------------------------------------
Cumulative Total Return+
- -----------------------------------------------------------------------------------------------
===============================================================================================
<S> <C>
Inception* through 6/30/99 27.52%
===============================================================================================
</TABLE>
+ Assumes the reinvestment of all dividends and capital gains distributions at
net asset value.
++ Total return is not annualized, as it may not be representative of the total
return for the year.
* Inception date is February 17, 1998.
4
<PAGE>
Schedule of Investments
June 30, 1999 (unaudited)
<TABLE>
<CAPTION>
Shares Security Value
<C> <S> <C>
- --------------------------------------------------------------------------------
COMMON STOCK -- 89.5%
Basic Industries -- 3.4%
8,000 International Paper Co. ................................. $ 404,000
4,100 Martin Marietta Materials, Inc. ......................... 241,900
4,800 Vulcan Materials Co. .................................... 231,600
----------
877,500
----------
Capital Goods -- 3.4%
3,800 Ingersoll-Rand Co. ...................................... 245,575
4,300 Raytheon Co., Class A Shares............................. 296,163
3,700 Tyco International Ltd. ................................. 350,575
----------
892,313
----------
Consumer Cyclicals -- 6.0%
4,500 Costco Cos. Inc. (a)..................................... 360,281
6,200 Dayton Hudson Corp. ..................................... 403,000
9,200 Federated Department Stores, Inc. (a).................... 487,025
19,900 Kmart Corp. (a).......................................... 327,106
----------
1,577,412
----------
Consumer Non-Cyclicals -- 18.7%
14,144 AT&T Corp. -- Liberty Media Group, Class A Shares (a).... 519,792
27,900 Food Lion Inc., Class A Shares........................... 331,313
3,500 Hormel Foods Corp. ...................................... 140,875
30,000 Nabisco Group Holdings Corp. ............................ 586,875
17,700 News Corp Ltd. ADR....................................... 558,656
21,700 Pepsi Bottling Group, Inc. .............................. 500,456
15,500 Philip Morris Cos. Inc. ................................. 622,906
12,000 R.J. Reynolds Tobacco Holdings, Inc...................... 378,000
13,100 Ralston Purina Co. ...................................... 398,731
18,100 Tyson Foods Inc., Class A Shares......................... 407,250
9,900 Viacom Inc., Class B Shares (a).......................... 435,600
----------
4,880,454
----------
Energy -- 9.5%
4,200 Amerada Hess Corp. ...................................... 249,900
6,200 Atlantic Richfield Co. .................................. 518,088
9,900 Conoco Inc., Class A Shares.............................. 275,963
6,800 Royal Dutch Petroleum Co. ............................... 409,700
6,200 TOTAL Fina S.A. ADR...................................... 399,513
6,000 Unocal Corp. ............................................ 237,750
11,800 USX Marathon Group....................................... 384,237
----------
2,475,151
----------
Financial Services -- 15.7%
2,400 American Express Co. .................................... 312,300
3,200 American General Corp. .................................. 241,200
5,400 Associates First Capital Corp. .......................... 239,287
6,100 BankBoston Corp. ........................................ 311,862
5,500 Bank of America Corp. ................................... 403,219
12,800 Bank of New York Co., Inc. .............................. 469,600
1,200 Comerica, Inc. .......................................... 71,325
6,100 Fleet Financial Group, Inc. ............................. 270,688
5,200 Freddie Mac.............................................. 301,600
2,700 Goldman Sachs Group, Inc. ............................... 195,075
</TABLE>
See Notes to Financial Statements.
5
<PAGE>
Schedule of Investments
June 30, 1999 (unaudited) (continued)
<TABLE>
<CAPTION>
Shares Security Value
<C> <S> <C>
- --------------------------------------------------------------------------------
Financial Services -- 15.7% (continued)
5,200 Household International, Inc. ........................... $ 246,350
3,700 Morgan Stanley Dean Witter & Co. ........................ 379,250
9,600 Provident Cos., Inc. .................................... 384,000
8,700 St. Paul Cos., Inc. ..................................... 276,769
----------
4,102,525
----------
Health Care -- 6.0%
6,200 Abbott Laboratories, Inc. ............................... 282,100
5,200 American Home Products Corp. ............................ 299,000
8,500 Becton, Dickinson & Co. ................................. 255,000
3,800 Eli Lilly & Co. ......................................... 272,175
8,100 Pharmacia & Upjohn, Inc. ................................ 460,181
----------
1,568,456
----------
Real Estate Investment Trust -- 0.1%
2,200 Glenborough Realty Trust Inc. ........................... 38,500
----------
Technology -- 12.6%
13,900 Alcatel S.A. ADR......................................... 394,412
4,900 Corning Inc. ............................................ 343,613
4,500 Hewlett-Packard Co. ..................................... 452,250
3,800 Intel Corp. ............................................. 226,100
5,600 International Business Machines Corp. ................... 723,800
9,900 Seagate Technology Inc. (a).............................. 253,688
3,700 Tellabs, Inc. (a)........................................ 249,981
2,600 Texas Instruments Inc. .................................. 377,000
4,500 Xerox Corp. ............................................. 265,781
----------
3,286,625
----------
Telecommunications & Utilities -- 11.4%
7,300 Bell Atlantic Corp. ..................................... 477,238
8,100 Frontier Corp. .......................................... 477,900
4,300 General Motors Corp., Class H Shares (a)................. 241,875
6,200 GTE Corporation.......................................... 469,650
3,800 MCI Worldcom, Inc. (a)................................... 327,750
3,600 PanAmSat Corp. (a)....................................... 140,175
7,900 SBC Communications Inc. ................................. 458,200
8,000 U.S. Satellite Broadcasting Co., Inc. (a)................ 143,968
6,100 The Williams Cos., Inc. ................................. 259,631
----------
2,996,387
----------
Transportation -- 2.7%
3,900 Canadian National Railway Co. ........................... 261,300
12,700 Canadian Pacific Ltd. ................................... 302,419
2,400 Union Pacific Corp. ..................................... 139,950
----------
703,669
----------
TOTAL COMMON STOCK
(Cost -- $19,494,149).................................... 23,398,992
----------
</TABLE>
See Notes to Financial Statements.
6
<PAGE>
Schedule of Investments
June 30, 1999 (unaudited) (continued)
<TABLE>
<CAPTION>
Shares Security Value
<C> <S> <C>
- -------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS -- 0.6%
Transportation -- 0.6%
2,000 Union Pacific Capital Trust, 6.250%................... $ 104,000
800 Union Pacific Capital Trust, 6.250% (b)............... 41,600
-----------
TOTAL CONVERTIBLE PREFERRED STOCK
(Cost -- $132,702).................................... 145,600
-----------
<CAPTION>
Face
Amount Security Value
<C> <S> <C>
- -------------------------------------------------------------------------------
CONVERTIBLE CORPORATE BONDS -- 1.9%
Technology -- 1.1%
$ 300,000 Micron Technology Inc., 7.000% due 7/1/04............. 304,125
-----------
Telecommunications & Utilities -- 0.8%
125,000 NTL Inc., 7.000% due 12/15/08 (b)..................... 204,531
-----------
TOTAL CONVERTIBLE CORPORATE BONDS
(Cost -- $449,612).................................... 508,656
-----------
REPURCHASE AGREEMENT -- 8.0%
2,101,000 State Street Bank & Trust Co., 4.700% due 7/1/99;
Proceeds at maturity -- $2,101,274; (Fully
collateralized by
U.S. Treasury Bonds, 8.875% due 8/15/17; Market
value -- $2,146,535) (Cost -- $2,101,000) ........... 2,101,000
-----------
TOTAL INVESTMENTS -- 100%
(Cost -- $22,177,463*)................................ $26,154,248
===========
</TABLE>
- ------
(a) Non-income producing security.
(b) Security is exempt from registration under Rule 144A of the Securities Act
of 1933. This security may be resold in transactions that are exempt from
registration, normally to qualified institutional buyers.
* Aggregate cost for Federal income tax purposes is substantially the same.
Abbreviation used in this schedule:
ADR - American Depository Receipt.
See Notes to Financial Statements.
7
<PAGE>
Statement of Assets and Liabilities
June 30, 1999 (unaudited)
<TABLE>
<S> <C>
ASSETS:
Investments, at value (Cost -- $22,177,463)....................... $26,154,248
Cash.............................................................. 958
Receivable for securities sold.................................... 344,242
Interest receivable............................................... 11,155
Dividend receivable............................................... 24,421
Deferred organization costs....................................... 22,712
Prepaid expenses.................................................. 2,110
-----------
Total Assets...................................................... 26,559,846
-----------
LIABILITIES:
Payable for securities purchased.................................. 105,987
Payable to investment manager..................................... 42,972
Accrued expenses.................................................. 31,205
-----------
Total Liabilities................................................. 180,164
-----------
Total Net Assets................................................... $26,379,682
===========
NET ASSETS:
Par value of capital shares....................................... $ 2,078
Capital paid in excess of par value............................... 22,397,679
Undistributed net investment income............................... 90,970
Accumulated net realized loss on investments...................... (87,830)
Net unrealized appreciation of investments ....................... 3,976,785
-----------
Total Net Assets................................................... $26,379,682
===========
Shares Outstanding................................................. 2,077,659
-----------
Net Asset Value, per share......................................... $12.70
-----------
</TABLE>
See Notes to Financial Statements.
8
<PAGE>
Statement of Operations
For the Six Months Ended June 30, 1999 (unaudited)
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest.......................................................... $ 46,108
Dividends (net of foreign withholding tax of $1,810).............. 134,372
----------
Total Investment Income........................................... 180,480
----------
EXPENSES:
Management fees (Note 2).......................................... 63,148
Shareholder communications........................................ 11,158
Audit and legal................................................... 9,620
Custody fees...................................................... 7,438
Administration fees (Note 2)...................................... 4,511
Shareholder and system servicing fees............................. 3,927
Registration fees................................................. 3,719
Amortization of deferred organization costs....................... 3,097
Directors' fees................................................... 2,529
Other............................................................. 1,240
----------
Total Expenses.................................................... 110,387
Less: Management fee waiver (Note 2).............................. (20,176)
----------
Net Expenses...................................................... 90,211
----------
Net Investment Income.............................................. 90,269
----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS (NOTE 3):
Realized Gain From Security Transactions (excluding short-term
securities):
Proceeds from sales............................................... 4,167,402
Cost of securities sold........................................... 3,965,919
----------
Net Realized Gain................................................. 201,483
----------
Change in Net Unrealized Appreciation of Investments:
Beginning of period............................................... 1,361,226
End of period..................................................... 3,976,785
----------
Increase in Net Unrealized Appreciation........................... 2,615,559
----------
Net Gain on Investments............................................ 2,817,042
----------
Increase in Net Assets From Operations............................. $2,907,311
==========
</TABLE>
See Notes to Financial Statements.
9
<PAGE>
Statements of Changes in Net Assets
For the Six Months Ended June 30, 1999 (unaudited)
and the Period Ended December 31, 1998(a)
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
OPERATIONS:
Net investment income............................... $ 90,269 $ 52,000
Net realized gain (loss)............................ 201,483 (290,609)
Increase in net unrealized appreciation............. 2,615,559 1,361,226
----------- -----------
Increase in Net Assets From Operations.............. 2,907,311 1,122,617
----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income............................... -- (50,003)
Net realized gains.................................. -- (3,019)
----------- -----------
Decrease in Net Assets From Distributions to
Shareholders....................................... -- (53,022)
----------- -----------
FUND SHARE TRANSACTIONS:
Net proceeds from sale of shares.................... 12,706,829 13,154,932
Net asset value of shares issued for reinvestment of
dividends.......................................... -- 53,022
Cost of shares reacquired........................... (2,272,155) (1,239,862)
----------- -----------
Increase in Net Assets From Fund Share
Transactions....................................... 10,434,674 11,968,092
----------- -----------
Increase in Net Assets............................... 13,341,985 13,037,687
NET ASSETS:
Beginning of period................................. 13,037,697 10
----------- -----------
End of period*...................................... $26,379,682 $13,037,697
=========== ===========
* Includes undistributed net investment income of: .. $90,970 $701
======= ====
</TABLE>
- ------
(a) For the period from February 17, 1998 (commencement of operations) to De-
cember 31, 1998.
See Notes to Financial Statements.
10
<PAGE>
Notes to Financial Statements
(unaudited)
1. Significant Accounting Policies
Salomon Brothers Variable Investors Fund ("Fund") is a separate diversified
investment portfolio of the Salomon Brothers Variable Series Funds Inc
("Series") whose primary investment objective is to seek long-term growth of
capital and secondarily current income. The Series, a Maryland corporation, is
registered under the Investment Company Act of 1940, as amended ("1940 Act"),
as an open-end management investment company and consists of this Fund and six
other investment portfolios: Salomon Brothers Variable Capital Fund, Salomon
Brothers Variable Total Return Fund, Salomon Brothers Variable High Yield Bond
Fund, Salomon Brothers Variable Strategic Bond Fund, Salomon Brothers Variable
U.S. Government Income Fund and Salomon Brothers Variable Asia Growth Fund. The
U.S. Government Income Fund and Asia Growth Fund have not yet commenced
operations. The financial statements and financial highlights for the other
investment portfolios are presented in separate semi-annual reports. The Fund
and each other investment portfolio of the Series is offered exclusively for
use with certain variable annuity and variable life insurance contracts offered
through the separate accounts of various life insurance companies and qualified
pension and retirement plans.
The significant accounting policies consistently followed by the Fund are: (a)
security transactions are accounted for on trade date; (b) securities traded on
national securities markets are valued at the closing prices on such markets;
securities traded in the over-the-counter market and securities for which no
sales price was reported are valued at the mean of the current bid and asked
prices; debt securities are valued using either prices or estimates of market
values provided by market makers or independent pricing services. Securities
and assets for which market quotations are not readily available are valued at
fair value as determined in good faith by or under the direction of the Board
of Directors of the Fund; (c) securities maturing within 60 days are valued at
cost plus accreted discount, or minus amortized premium, which approximates
market value; (d) dividend income is recorded on the ex-dividend date; foreign
dividend income is recorded on the ex-dividend date or as soon as practical
after the Fund determines the existence of a dividend declaration after
exercising reasonable due diligence; (e) interest income, adjusted for
accretion of original issue or market discount, is recorded on the accrual
basis; (f) gains or losses on the sale of securities are calculated by using
the specific identification method; (g) dividends and distributions to
shareholders are recorded on the ex-dividend date; (h) the accounting records
are maintained in U.S. dollars. All assets and liabilities denominated in
foreign currencies are translated into U.S. dollars based on the rate of
exchange of such currencies against U.S. dollars on the date of valuation.
Purchases and sales of securities, and income and expenses are translated at
the rate of exchange quoted on the respective date that such transactions are
recorded. Differences between income and expense amounts recorded and collected
or paid are recorded as currency gains or losses; (i) the character of income
and gains to be distributed are determined in accordance with income tax
regulations which may differ from generally accepted accounting principles. At
December 31, 1998, reclassifications were made to the capital accounts of the
Fund to reflect permanent book/tax differences and income and gains available
for distributions under income tax regulations. Net investment income, net
realized gains and net assets were not affected by this change; (j) it is the
Fund's intention to meet the requirements of the Internal Revenue Code
applicable to regulated investment companies and to distribute substantially
all of its taxable income and capital gains, if any, to its shareholders.
Therefore, no Federal income tax or excise tax provision is required; and (k)
estimates and assumptions are required to be made regarding assets, liabilities
and changes in net assets resulting from operations when financial statements
are prepared. Changes in the economic environment, financial markets and any
other parameters used in determining these estimates could cause actual results
to differ.
Organization costs amounting to $31,250 were incurred with the organization of
the Fund. These costs are being amortized ratably over a five year period from
commencement of operations.
2. Management Agreement and Transactions with Affiliated Persons
Salomon Brothers Asset Management Inc ("SBAM"), a wholly owned subsidiary of
Salomon Brothers Holding Co. Inc., which in turn is a wholly owned by Salomon
Smith Barney Holdings, Inc. ("SSBH"), acts as investment manager to the Fund.
Under the investment management agreement, the Fund pays an investment
management fee calculated at the annual rate of 0.70% of its average daily net
assets. This fee is calculated daily and paid monthly.
11
<PAGE>
Notes to Financial Statements
(unaudited) (continued)
For the six months ended June 30, 1999, SBAM waived a portion of the management
fees accounting to $20,176.
SBAM also acts as administrator to the Fund. As compensation for its services
the Fund pays SBAM a fee calculated at an annual rate of 0.05% of its average
daily net assets. This fee is calculated daily and paid monthly. SBAM has
delegated its responsibilities as administrator to SSBC Fund Management Inc.
("SSBC"), formerly known as Mutual Management Corp., an affiliate of SBAM,
pursuant to a Sub-Administration Agreement between SBAM and SSBC.
CFBDS, Inc. acts as the Fund's distributor. For the six months ended June 30,
1999, Salomon Smith Barney Inc. ("SSB"), another subsidiary of SSBH, received
brokerage commissions of $474 from the Fund.
3. Investments
During the six months ended June 30, 1999, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding short-
term securities) were as follows:
<TABLE>
<S> <C>
Purchases........................................................... $13,623,238
===========
Sales............................................................... $ 4,167,402
===========
</TABLE>
At June 30, 1999, the aggregate gross unrealized appreciation and depreciation
of investments for Federal income tax purposes were substantially as follows:
<TABLE>
<S> <C>
Gross unrealized appreciation....................................... $4,103,047
Gross unrealized depreciation....................................... (126,262)
----------
Net unrealized appreciation......................................... $3,976,785
==========
</TABLE>
4. Repurchase Agreements
The Fund purchases (and its custodian takes possession of) U.S. government
securities from banks and securities dealers subject to agreements to resell
the securities to the seller at a future date (generally, the next business
day) at an agreed-upon higher repurchase price. The Fund requires maintenance
of the market value of the collateral in amounts at least equal to the
repurchase price.
5. Options Contracts
The Fund may from time to time enter into options contracts. Premiums paid when
put or call options are purchased by the Fund, represent investments, which are
marked-to-market daily. When a purchased option expires, the Fund will realize
a loss in the amount of the premium paid. When the Fund enters into a closing
sales transaction, the Fund will realize a gain or loss depending on whether
the proceeds from the closing sales transaction are greater or less than the
premium paid for the option. When the Fund exercises a put option, it will
realize a gain or loss from the sale of the underlying security and the
proceeds from such sale will be decreased by the premium originally paid. When
the Fund exercises a call option, the cost of the security which the Fund
purchases upon exercise will be increased by the premium originally paid.
At June 30, 1999, the Fund had no open purchased call or put options.
12
<PAGE>
Notes to Financial Statements
(unaudited) (continued)
When the Fund writes a call or put option, an amount equal to the premium
received by the Fund is recorded as a liability, the value of which is marked-
to-market daily. When a written option expires, the Fund realizes a gain equal
to the amount of the premium received. When the Fund enters into a closing
purchase transaction, the Fund realizes a gain or loss depending upon whether
the cost of the closing transaction is greater or less than the premium
originally received, without regard to any unrealized gain or loss on the
underlying security, and the liability related to such option is eliminated.
When a written call option is exercised the proceeds of the security sold will
be increased by the premium originally received. When a written put option is
exercised, the amount of the premium originally received will reduce the cost
of the security which the Fund purchased upon exercise. When written index
options are exercised, settlement is made in cash.
The risk associated with purchasing options is limited to the premium
originally paid. The Fund enters into options for hedging purposes. The risk in
writing a covered call option is that the Fund gives up the opportunity to
participate in any increase in the price of the underlying security beyond the
exercise price. The risk in writing a put option is that the Fund is exposed to
the risk of loss if the market price of the underlying security declines.
During the six months ended June 30, 1999, the Fund did not write any call or
put options.
6. Securities Traded on a When Issued Basis
The Fund may from time to time purchase securities on a when-issued basis. In a
when-issued transaction, the Fund commits to purchasing securities which have
not yet been issued by the issuer. Securities purchased on a when-issued basis,
are not settled until they are delivered to the Fund. Beginning on the date the
Fund enters into the when-issued transaction, the custodian maintains cash or
other liquid securities in a segregated account equal in value to the purchase
price of the when-issued security. These transactions are subject to market
fluctuations and their current value is determined in the same manner as for
other securities.
At June 30, 1999, the Fund did not hold any when-issued securities.
7. Securities Traded on a To-Be-Announced Basis
The Fund may trade securities on a "to-be-announced" ("TBA") basis. In a TBA
transaction, the Fund commits to purchasing or selling securities for which
specific information is not yet known at the time of the trade, particularly
the face amount and maturity date in Government National Mortgage Association
("GNMA") transactions. Securities purchased on a TBA basis are not settled
until they are delivered to the Fund, normally 15 to 45 days later. These
transactions are subject to market fluctuations and their current value is
determined in the same manner as for other securities.
At June 30, 1999, the Fund did not hold any TBA securities.
8. Lending of Securities
The Fund may lend its securities to brokers, dealers and other financial
organizations. The Fund has an agreement with its custodian whereby the
custodian may lend securities owned by the Fund to brokers, dealers and other
financial organizations. Fees earned by the Fund on securities lending are
recorded in interest income. Loans of securities by the Fund are collateralized
by cash or other liquid securities that are maintained at all times in an
amount at least equal to the current market value of the loaned securities,
plus a margin which may vary depending on the type of securities loaned. The
custodian establishes and maintains the collateral in a segregated account. The
Fund maintains exposure for the risk of any losses in the investment of amounts
received as collateral.
At June 30, 1999, the Fund did not have any securities on loan.
13
<PAGE>
Notes to Financial Statements
(unaudited) (continued)
9. Capital Loss Carryforward
At June 30, 1999, the Fund had, for Federal income tax purposes, a capital loss
carryforward of approximately $270,100, available to offset future capital
gains through December 31, 2006. To the extent that these carryforward losses
can be used to offset net realized capital gains, such gains, if any, will not
be distributed.
10. Capital Stock
At June 30, 1999, the Series had 10,000,000,000 shares of capital stock
authorized with a par value of $0.001 per share. Each share represents an equal
proportionate interest and has an equal entitlement to any dividends and
distributions made by the Fund.
Transactions in shares were as follows:
<TABLE>
<CAPTION>
Six Months Ended Period Ended
June 30, 1999 December 31, 1998(a)
---------------- --------------------
<S> <C> <C>
Shares sold............................... 1,092,968 1,299,803
Shares issued on reinvestment............. -- 4,816
Shares reacquired......................... (199,081) (120,848)
--------- ---------
Net Increase.............................. 893,887 1,183,771
========= =========
</TABLE>
- ------
(a) For the period February 17, 1998 (commencement of operations) through
December 31, 1998.
14
<PAGE>
Financial Highlights
For a share of capital stock outstanding for the year ended December 31, except
where noted:
<TABLE>
<CAPTION>
1999(1) 1998(2)
------- -------
<S> <C> <C>
Net Asset Value, Beginning of Period......................... $ 11.01 $ 10.00
------- -------
Income From Operations:
Net investment income (3)................................... 0.04 0.05
Net realized and unrealized gain ........................... 1.65 1.01
------- -------
Total Income From Operations................................ 1.69 1.06
------- -------
Less Distributions From:
Net investment income....................................... -- (0.05)
Capital..................................................... -- (0.00)*
------- -------
Total Distributions......................................... -- (0.05)
------- -------
Net Asset Value, End of Period............................... $ 12.70 $ 11.01
======= =======
Total Return++............................................... 15.35% 10.55%
Net Assets, End of Period (000s)............................. $26,380 $13,038
Ratios to Average Net Assets (3)+:
Expenses.................................................... 1.00% 1.00%
Net investment income....................................... 1.00 1.14
Portfolio Turnover Rate...................................... 25% 62%
</TABLE>
- ------
(1) For the six months ended June 30, 1999 (unaudited).
(2) For the period from February 17, 1998 (commencement of operations) through
December 31, 1998.
(3) SBAM has waived all or part of its management fees for the six months ended
June 30, 1999 and the period ended December 31, 1998. In addition, SBAM has
reimbursed the Fund for $17,030 in expenses for the period ended December
31, 1998. If such fees were not waived or expenses not reimbursed, the per
share decrease in net investment income and the actual expense ratio would
have been as follows:
<TABLE>
<CAPTION>
Expense Ratios Without
Net Investment Income Fee Waivers and/or
Per Share Decreases Expense Reimbursements
--------------------- ----------------------
<S> <C> <C>
1999............... $0.01 1.22%+
1998............... 0.04 2.07+
</TABLE>
* Amount represents less than $0.01.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
15
<PAGE>
[This page intentionally left blank]
<PAGE>
Salomon Brothers Variable Series Funds Inc
Investment Manager Officers
Salomon Brothers Asset Management Inc Heath B. McLendon
7 World Trade Center Chairman and President
New York, New York 10048 Lewis E. Daidone
Executive Vice President
Custodian and Treasurer
PNC Bank, N.A. Ross S. Margolies
17th and Chestnut Streets Executive Vice President
Philadelphia, Pennsylvania 19103 Beth A. Semmel
Executive Vice President
Legal Counsel Peter J. Wilby
Simpson Thacher & Bartlett Executive Vice President
425 Lexington Avenue George J. Williamson
New York, New York 10017 Executive Vice President
John B. Cunningham
Independent Accountants Vice President
PricewaterhouseCoopers LLP Anthony Pace
1177 Avenue of the Americas Controller
New York, New York 10036 Christina T. Sydor
Secretary
Directors
Charles F. Barber
Consultant; formerly Chairman; ASARCO Incorporated
Carol L. Colman
President, Colman Consulting Co., Inc.
Daniel P. Cronin
Vice President-General Counsel,
Pfizer International Inc.
Heath B. McLendon
Chairman and President;
Managing Director, Salomon Smith Barney Inc.
President and Director, SSBC Fund Management Inc.
and Travelers Investment Advisers, Inc.
<PAGE>
=====================
SALOMON BROTHERS
=====================
Asset Management
Seven World Trade Center . New York, New York 10048
