<PAGE>
S A L O M O N B R O T H E R S
Variable Series Funds Inc
[GRAPHIC]
Annual
Report
1999
DECEMBER 31, 1999
o CAPITAL FUND
<PAGE>
[GRAPHIC]
SALOMON BROTHERS VARIABLE SERIES FUNDS INC
Our Message to You
DEAR SHAREHOLDER:
We are pleased to provide you with the annual report for the Salomon Brothers
Variable Capital Fund ("Fund") for the year ended December 31, 1999. This letter
discusses general economic and market conditions as well as Fund highlights
during the reporting period. A detailed summary of performance and current Fund
holdings can be found in the appropriate sections that follow. We hope you find
this report useful and informative.
INVESTMENT STRATEGY & PERFORMANCE UPDATE
The Fund seeks capital appreciation through investments primarily in equity
securities. The Fund seeks to achieve its investment objective through
investments in securities that are believed to have above-average capital
appreciation potential. The Fund invests primarily in equity securities of U.S.
companies. These companies may range in size from established large
capitalization companies (i.e., over $5 billion in market capitalization) to
small capitalization companies (i.e., less than $1 billion in market
capitalization) at the beginning of their life cycles. Such investments may also
involve above-average risk. The Fund may invest in seasoned, established
companies, relatively small new companies as well as new issues.
The Fund's shares returned 22.08% for the year ended December 31, 1999. In
comparison, the Russell 3000 Index returned 20.90% and the Standard & Poor's 500
Index ("S&P 500") returned 21.03% for the same time period. (The S&P 500 is a
market capitalization-weighted measure of 500 widely held common stocks. 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.)
During 1999, our broad market strategy yielded attractive results despite it not
being in favor. We attribute this to a combination of owning stocks in most
categories (we participated in the major trends and market rotations) and our
valuation discipline (reducing losses when we made mistakes). We believe our
overweighting of our strongest ideas historically has been a big contributor.
This year however, this strategy generated mixed results with top investments
such as Rogers Cantel doing well while our tobacco stocks (which we have
virtually eliminated) did poorly.
<PAGE>
The Fund's investment strategy is known as a broad market strategy. We attempt
to find the best opportunities across the market, wherever they may be. It is an
"all cap" or "multicap" strategy in that we invest in large-, small- and mid-
size companies. Our strategy can also be characterized as a "style neutral" or a
"blend" portfolio in that we purchase both growth and value stocks. (Value
investing consists of identifying securities of companies that are believed to
be undervalued in the market. Growth investing focuses on the stocks of
corporations that are exhibiting or are expected to exhibit faster-than-average
growth within their industry.) In fact, one of our primary goals is to find out-
of-favor value stocks that can blossom into growth stocks. These include some of
our biggest winners because we buy them when they are inexpensive and hold them
through the entire period of appreciation as investors hopefully recognize their
true potential.
Because we own some stocks from most categories, we tend to own some winners
under most market conditions and our strategy can result in a unique,
diversified portfolio of stocks that few other subaccounts can match. We think
that these are two key advantages to our investment strategy.
Our core investment style is a bottom-up stock picking strategy. (Bottom-up
investing is an asset management style that de-emphasizes the significance of
economic and market cycles, focusing instead on the analysis of individual
stocks.) We focus on understanding a company's business, its strategy, its
competitive position and its industry. We also determine if management is
credible and has the right team to lead the company. Our financial analysis
focuses on the company's resources to meet its goals, the consistency of the
numbers to determine their quality (for instance, are receivables growing much
faster than sales, a sign that current sales may overstate the long-term trend)
and is used as a framework for valuation and risk assessment. These and other
factors are what drive our stock selection process. And if we think that the
risk and reward trade-off of a particular company's stock is favorable, we will
generally invest.
As portfolio managers, we have a role in addition to stock picking; we are
required to put all of our individual security selections into a portfolio that
meets a set of investment objectives. We use tools such as diversification and
position weighting to determine exactly how much of each security to own in the
portfolio. For instance, in the Fund, our best ideas generally get very high
weightings, as much as 5% of the portfolio at times. This strategy, known as
high position concentration, can generate above-market return potential if
executed properly. (Of course, past performance is not indicative of future
results.)
2
<PAGE>
At the same time we always factor in excess risk. A good idea that has a very
high-risk profile tends to get a lower weighting such as 1% of the portfolio, in
order to diversify risk and help to dampen portfolio volatility. And while no
guarantees can be made, this way we can take individual risks on behalf of our
shareholders without creating an overly risky portfolio.
MARKET OVERVIEW AND OUTLOOK
The 1999 stock market will go down in history as one of the most unusual markets
of all time. After recovering from the effects of the 1998 Asian economic
crises, the stock market soared to new heights and featured increased
volatility. During the beginning of the year, the stock market was very narrow
with only a small group of blue-chip growth stocks appreciating. In mid April,
we experienced a violent rotation into undervalued broad market stocks. By the
end of the year, while the market broadening continued to help some stocks, most
of the market's focus had shifted to the NASDAQ-listed technology companies.
During 1999, market indices such as the S&P 500 and the Russell 3000 were up
over 20%; the NASDAQ increased by 85.59% led by both blue chip and speculative
technology issues.
The most fundamental change in the market that we observed in 1999 was that all
of the historical rules of security analysis were discarded. Particularly in the
Internet sector, the market rewarded concepts over profits. In many cases it
became disrespectful to report earnings -- the market instead focused on issues
such as potential customers instead of profitable sales to actual customers.
While the market seems to think that profitability and cash flow are no longer
important, the strategy of "buying sales" (i.e. losing money on sales in order
to establish a market share position) is as old as commerce itself. The only
differences this time is that the market is ignoring the fact that in the end
companies need to generate cash flow and profits in order to thrive.
How does one invest in this environment? The biggest adjustment to our process
in 1999 has been to increase our focus on the Internet. The development of the
Internet is one of those events that will change the way we live and work
forever. It is as fundamental a change as the development of telephones or the
harnessing of electricity. This happens regularly throughout history and we are
living through one of those times right now.
3
<PAGE>
When you look closely at the Fund's portfolio you will see that little of your
money is invested in traditional Internet companies (i.e., the "dot.coms"). We
find the long-term risk and reward proposition in most of these companies to be
very unattractive. Most of them do not have sustainable business models (i.e.,
they will always lose money) while others have valuations that assume they will
be the only survivors in the eventual shakeout. You will see a lot of your money
invested in companies that benefit from or build the Internet. Companies such as
Seagate (disk drives and software for storage as well as indirect exposure with
partial ownership of companies such as Veritas), Federated Department Stores (a
leader in the "clicks and mortar" e-commerce strategy and owner of several
valuable Internet businesses), and GTE (merging with Bell Atlantic, the combined
company will be the leading U.S. wireless company also offering telecom services
such as local, long distance and high speed Internet access).
It is our strong belief that over time the leading established companies that
embrace today's new technologies should emerge as the dominant and most
profitable companies in the economy. Their stocks should recognize this over
time. On the other hand, we believe the stock market will eventually lose
patience with those traditional Internet companies that cannot transform
themselves into growth companies with enough profits to support their stock
price.
Going forward, we expect many companies to reap the benefits of their current
investments in technology. We also expect many technology companies to continue
to grow as they innovate. There will also be a maturing in the technology
sector, as it has become a bigger part of the market and economy than energy was
in 1980. During the next decade the technology sector will not go the way of the
energy sector. However, the two share a common factor. The early 1980s
expectations of oil prices soaring to $100 per barrel led to extreme valuations
for these companies and a gold rush effect of too much capital being put into
the sector. Eventually the laws of large numbers and diminishing returns caught
up to the sector. Cost of energy became too large of an input into the economy
and people figured out ways to utilize it more efficiently at the same time that
capacity was expanding rapidly. With technology companies representing about 30%
of the S&P 500, similar long-term risks exist in the technology sector. This is
partly offset by the fact that technology investment improves productivity while
higher energy prices are merely increased costs. We keep these factors in mind
even when we are only forecasting out a year as stock prices discount the
long-term prospects of companies.
4
<PAGE>
Expect the Fund to consistently apply its investment strategy in the future. We
will invest in both users and manufacturers of technology when we believe that
their risk reward and ratios are favorable. Most of all we will look for the
best opportunities that we can find, regardless of the part of the market they
currently reside in.
Thank you for your investment in the Salomon Brothers Variable Capital Fund. We
look forward to helping you pursue your financial goals in the new century.
Sincerely,
/s/ Heath B. McLendon /s/ Ross S. Margolies
Heath B. McLendon Ross S. Margolies
Chairman and President Executive Vice President
January 28, 2000
5
<PAGE>
The following graph depicts the performance of the Capital 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 (unaudited)
SALOMON BROTHERS VARIABLE CAPITAL FUND
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
Jun-98 10,971 10,932
Dec-98 11,812 11,788
Jun-99 13,374 13,123
Dec-99 14,420 14,246
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 changes which, if reflected, would reduce
the performance shown.
- --------------------------------------------------------------------------------
Historical Performance
- --------------------------------------------------------------------------------
Net Asset Value
---------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividend Distribution Returns+
- --------------------------------------------------------------------------------
12/31/99 $11.57 $13.67 $0.07 $0.39 22.08%
- --------------------------------------------------------------------------------
Inception*-- 12/31/98 10.00 11.57 0.09 0.15 18.12++
================================================================================
$0.16 $0.54
================================================================================
- --------------------------------------------------------------------------------
Average Annual Total Returns+
- --------------------------------------------------------------------------------
Year Ended 12/31/99 22.08%
- --------------------------------------------------------------------------------
Inception* through 12/31/99 21.67
================================================================================
- --------------------------------------------------------------------------------
Cumulative Total Return+
- --------------------------------------------------------------------------------
Inception* through 12/31/99 44.20%
================================================================================
+ Assumes the reinvestment of all dividends and capital gains distributions
at net asset value. Total returns do not reflect expenses associated with
the separate account such as administrative fees, account charges and
surrender charges which, if reflected, would reduce the total returns for
all periods shown.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
* Inception date is February 17, 1998.
6
<PAGE>
Schedule of Investments
December 31, 1999
<TABLE>
<CAPTION>
Shares Security Value
<C> <S> <C> <C>
- -------------------------------------------------------------------------------
COMMON STOCK -- 83.5%
Basic Industries -- 8.2%
10,900 AK Steel Holding Corp............................... $ 205,737
10,700 Crown Cork & Seal Co., Inc.......................... 239,412
7,600 The Geon Co......................................... 247,000
4,100 International Paper Co.............................. 231,394
21,200 The LTV Corp........................................ 87,450
4,500 Olin Corp........................................... 89,156
6,400 OM Group, Inc....................................... 220,400
----------
1,320,549
----------
Capital Goods -- 1.0%
41,000 Harnischfeger Industries, Inc....................... 16,656
2,600 Ingersoll-Rand Co................................... 143,162
----------
159,818
----------
Communications -- 9.3%
4,500 Bell Atlantic Corp.................................. 277,031
3,300 GTE Corp............................................ 232,856
3,000 MCI WorldCom, Inc. (a).............................. 159,188
1,800 NTL Inc. (a)........................................ 224,550
Rogers Cantel Mobile Communications Inc., Class B
7,600 Shares (a).......................................... 276,450
3,300 SBC Communications Inc.............................. 160,875
13,400 Sinclair Broadcast Group, Inc., Class A Shares (a).. 163,522
----------
1,494,472
----------
Consumer Cyclicals -- 7.4%
4,400 Costco Wholesale Corp. ............................. 401,500
9,700 Federated Department Stores, Inc. (a)............... 490,456
10,971 Fine Host Corp. (a)(b).............................. 102,892
12,600 PRIMEDIA Inc. (a)................................... 207,900
----------
1,202,748
----------
Consumer Non-Cyclicals -- 21.4%
AT&T Corp. - Liberty Media Group, Class A Shares
4,350 (a)................................................. 246,862
2,400 Delhaize America, Inc., Class A Shares.............. 48,750
13,000 Delhaize America, Inc., Class B Shares.............. 271,375
3,200 Hannaford Bros. Co.................................. 221,800
7,600 Hearst-Argyle Television, Inc. (a).................. 202,350
10,800 Hormel Foods Corp................................... 438,750
11,300 John B. Sanfilippo & Son, Inc. (a).................. 45,200
10,700 Michael Foods, Inc.................................. 263,488
45,700 Nabisco Group Holdings Corp......................... 485,563
6,700 News Corp. Ltd. ADR................................. 224,031
15,000 The Pepsi Bottling Group, Inc....................... 248,438
5,500 Philip Morris Cos. Inc.............................. 127,531
10,700 Safeway Inc. (a).................................... 380,519
15,000 Tyson Foods, Inc., Class A Shares................... 243,750
----------
3,448,407
----------
Energy -- 9.9%
6,500 Conoco Inc., Class B Shares......................... 161,687
12,100 Devon Energy Corp................................... 397,787
12,100 Paradigm Geophysical Ltd. (a)....................... 59,366
15,900 R&B Falcon Corp. (a)................................ 210,675
4,400 Suncor Energy, Inc.................................. 183,700
</TABLE>
See Notes to Financial Statements.
7
<PAGE>
Schedule of Investments
December 31, 1999 (continued)
<TABLE>
<CAPTION>
Shares Security Value
<C> <S> <C> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------
Energy -- 9.9% (continued)
20,600 Tesoro Petroleum Corp. (a).... $ 238,188
6,500 Tosco Corp.................... 176,719
8,700 Valero Energy Corp............ 172,913
----------
1,601,035
----------
Financial Services -- 8.1%
6,400 Bank of New York Co., Inc..... 256,000
4,500 Comerica Inc.................. 210,094
4,400 FleetBoston Financial Corp.... 153,175
2,200 Goldman Sachs Group, Inc...... 207,212
4,300 Mercantile Bankshares Corp.... 137,331
Peoples Heritage Financial
9,400 Group, Inc.................... 141,588
6,500 Protective Life Corp.......... 206,781
----------
1,312,181
----------
Health Care -- 1.5%
5,400 Pharmacia & Upjohn, Inc....... 243,000
----------
Technology -- 15.8%
4,300 3Com Corp. (a)................ 202,100
Advanced Micro Devices, Inc.
7,800 (a)........................... 225,712
4,400 Amdocs Ltd. (a)............... 151,800
Comverse Technology, Inc.
1,100 (a)........................... 159,225
Cypress Semiconductor Corp.
6,000 (a)........................... 194,250
8,800 Digital Microwave Corp. (a)... 206,250
International Business
1,300 Machines Corp................. 140,400
7,500 Newbridge Networks Corp. (a).. 169,219
1,500 Plantronics, Inc. (a)......... 107,344
19,500 S3 Inc. (a)................... 225,469
11,900 Seagate Technology, Inc. (a).. 554,094
14,100 SpeedFam-IPEC, Inc. (a)....... 182,419
900 Technology Solutions Co. (a).. 29,475
----------
2,547,757
----------
Transportation -- 0.9%
United Parcel Service Inc.,
2,000 Class B Shares................ 138,000
----------
TOTAL COMMON STOCK
(Cost -- $12,062,882)......... 13,467,967
----------
<CAPTION>
Face
Amount
----------
<C> <S> <C> <C> <C> <C> <C> <C> <C>
CONVERTIBLE CORPORATE BONDS -- 1.2%
Consumer Cyclicals -- 1.2%
Sunbeam Corp., Sr. Sub.
Debentures:
$1,000,000 Zero coupon due 3/25/18 (c)... 155,000
250,000 Zero coupon due 3/25/18 ...... 38,750
----------
TOTAL CONVERTIBLE CORPORATE
BONDS
(Cost -- $212,735)............ 193,750
----------
</TABLE>
See Notes to Financial Statements.
8
<PAGE>
Schedule of Investments
December 31, 1999 (continued)
<TABLE>
<CAPTION>
Face
Amount Security Value
<C> <S> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------
CORPORATE BONDS -- 1.4%
Capital Goods -- 1.3%
Harnischfeger
Industries, Inc.,
Debentures:
$ 160,000 8.900% due 3/1/22 (d)... $ 65,600
175,000 8.700% due 6/15/22 (d).. 71,750
7.250% due 12/15/25
125,000 (d)..................... 51,250
40,000 6.875% due 2/15/27 (d).. 16,400
-----------
205,000
-----------
Consumer Cyclicals -- 0.0%
15,000 Breed Technologies Inc.,
9.250% due 4/15/08 (d).. 450
-----------
Financial Services -- 0.1%
125,000 ContiFinancial Corp.,
Sr. Notes 7.500% due
3/15/02................. 15,000
-----------
TOTAL CORPORATE BONDS
(Cost -- $259,652)...... 220,450
-----------
<CAPTION>
Contracts
<C> <S> <C> <C> <C> <C> <C> <C> <C>
- -------
PURCHASED OPTIONS (a) -- 0.7%
4 Amazon.com, Inc., Put @
$80, Expire 1/22/00..... 3,600
20 Rite Aid Corp., Put @
$10, Expire 1/22/00..... 812
9 S&P 500 Index, Call @
$1,375, Expire 1/22/00.. 92,025
10 S&P 500 Index, Put @
$1,425, Expire 1/22/00.. 14,250
-----------
TOTAL PURCHASED OPTIONS
(Cost -- $110,079)...... 110,687
-----------
SUB-TOTAL INVESTMENTS
(Cost -- $12,645,348)... 13,992,854
-----------
<CAPTION>
Face
Amount
<C> <S> <C> <C> <C> <C> <C> <C> <C>
- -------
REPURCHASE AGREEMENT -- 13.2%
$2,135,000 State Street Bank &
Trust Co., 3.000% due
1/3/00; Proceeds at
maturity -- $2,135,534;
(Fully collateralized by
U.S. Treasury Bonds,
6.125% due 8/15/07;
Market value --
$2,182,269)
(Cost -- $2,135,000).... 2,135,000
-----------
TOTAL INVESTMENTS -- 100%
(Cost -- $14,780,348*).. $16,127,854
===========
</TABLE>
- ------
(a) Non-income producing security.
(b) Fair valued at December 31, 1999.
(c) 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.
(d) Security is currently in default.
* 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.
9
<PAGE>
Statement of Assets and Liabilities
December 31, 1999
<TABLE>
<S> <C>
ASSETS:
Investments, at value (Cost -- $12,645,348)....................... $13,992,854
Repurchase agreement, at value (Cost -- $2,135,000)............... 2,135,000
Cash.............................................................. 712
Receivable for Fund shares sold................................... 39,809
Receivable for securities and options sold........................ 42,745
Receivable from investment manager................................ 22,374
Dividend and interest receivable.................................. 14,541
Deferred organization costs....................................... 19,564
Prepaid expenses.................................................. 388
-----------
Total Assets...................................................... 16,267,987
-----------
LIABILITIES:
Payable for securities and options purchased...................... 45,306
Payable for Fund shares purchased................................. 2,271
Administration fees payable....................................... 594
Accrued expenses.................................................. 30,449
-----------
Total Liabilities................................................. 78,620
-----------
Total Net Assets.................................................. $16,189,367
===========
NET ASSETS:
Par value of capital shares....................................... $ 1,184
Capital paid in excess of par value............................... 14,428,061
Accumulated net realized gain from security transactions and
options.......................................................... 412,616
Net unrealized appreciation of investments........................ 1,347,506
-----------
Total Net Assets.................................................. $16,189,367
===========
Shares Outstanding................................................. 1,184,382
-----------
Net Asset Value, per share......................................... $13.67
-----------
</TABLE>
See Notes to Financial Statements.
10
<PAGE>
Statement of Operations
For the Year Ended December 31, 1999
<TABLE>
<S> <C>
INCOME:
Dividends......................................................... $ 84,085
Interest.......................................................... 61,146
Less: Foreign withholding tax..................................... (436)
----------
Total Investment Income........................................... 144,795
----------
EXPENSES:
Management fees (Note 2).......................................... 61,892
Shareholder communications........................................ 29,000
Audit and legal................................................... 16,302
Custody........................................................... 13,199
Shareholder and system servicing fees............................. 7,321
Amortization of deferred organization costs....................... 6,245
Directors' fees................................................... 5,600
Administration fees (Note 2)...................................... 3,641
Registration fees................................................. 2,099
Other............................................................. 2,584
----------
Total Expenses.................................................... 147,883
Less: Management fee waiver and expense reimbursement (Note 2).... (75,069)
----------
Net Expenses...................................................... 72,814
----------
Net Investment Income.............................................. 71,981
----------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS AND OPTIONS (NOTES 3 AND 5):
Net Realized Gain (Loss) From:
Security transactions (excluding short-term securities)........... 953,050
Options purchased................................................. (117,861)
Options written................................................... 17,987
----------
Net Realized Gain................................................. 853,176
----------
Change in Net Unrealized Appreciation of Investments:
Beginning of year................................................. 480,856
End of year....................................................... 1,347,506
----------
Increase in Net Unrealized Appreciation........................... 866,650
----------
Net Gain on Investments and Options................................ 1,719,826
----------
Increase in Net Assets From Operations............................. $1,791,807
==========
</TABLE>
See Notes to Financial Statements.
11
<PAGE>
Statements of Changes in Net Assets
For the Years Ended December 31,
<TABLE>
<CAPTION>
1999 1998(a)
----------- ----------
<S> <C> <C>
OPERATIONS:
Net investment income................................ $ 71,981 $ 32,247
Net realized gains................................... 853,176 51,566
Increase in net unrealized appreciation.............. 866,650 480,856
----------- ----------
Increase in Net Assets From Operations............... 1,791,807 564,669
----------- ----------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income................................ (71,981) (32,219)
Net realized gains................................... (438,071) (54,083)
----------- ----------
Decrease in Net Assets From Distributions to
Shareholders........................................ (510,052) (86,302)
----------- ----------
FUND SHARE TRANSACTIONS (NOTE 9):
Net proceeds from sale of shares..................... 13,806,423 3,867,574
Net asset value of shares issued for reinvestment of
dividends........................................... 510,052 86,302
Cost of shares reacquired............................ (3,698,746) (142,370)
----------- ----------
Increase in Net Assets From Fund Share Transactions.. 10,617,729 3,811,506
----------- ----------
Increase in Net Assets................................ 11,899,484 4,289,873
NET ASSETS:
Beginning of year.................................... 4,289,883 10
----------- ----------
End of year.......................................... $16,189,367 $4,289,883
=========== ==========
</TABLE>
- ------
(a) For the period from February 17, 1998 (commencement of operations) to De-
cember 31, 1998.
See Notes to Financial Statements.
12
<PAGE>
Notes to Financial Statements
1. Organization and 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 seven other investment portfolios:
Salomon Brothers Variable Small Cap Growth Fund, 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 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; (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 year ended December 31, 1999, SBAM waived all of the management fees
payable by the Fund and reimbursed expenses of $13,177.
13
<PAGE>
Notes to Financial Statements
(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 SSB Citi Fund Management LLC
("SSBC"), formerly known as SSBC Fund Management Inc., an affiliate of SBAM,
pursuant to a Sub-Administration Agreement between SBAM and SSBC.
CFBDS, Inc. acts as the Fund's distributor. For the year ended December 31,
1999, Salomon Smith Barney Inc. ("SSB"), another subsidiary of SSBH, received
brokerage commissions of $400 from the Fund.
3. Investments
During the year ended December 31, 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........................................................... $16,461,638
===========
Sales............................................................... $ 8,179,099
===========
</TABLE>
At December 31, 1999, the aggregate gross unrealized appreciation and deprecia-
tion of investments for Federal income tax purposes were substantially as fol-
lows:
<TABLE>
<S> <C>
Gross unrealized appreciation....................................... $1,913,086
Gross unrealized depreciation....................................... (565,580)
----------
Net unrealized appreciation......................................... $1,347,506
==========
</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 December 31, 1999, the Fund had purchased call and put options with a total
cost of $110,079.
14
<PAGE>
Notes to Financial Statements
(continued)
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 Fund enters into options for hedging purposes. The risk associated with
purchasing options is limited to the premium originally paid. 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 year ended
December 31, 1999:
<TABLE>
<CAPTION>
Number of
Contracts Premiums
--------- --------
<S> <C> <C>
Options written, outstanding at December 31, 1998.......... -- $ 0
Options written during the year ended December 31, 1999.... 105 29,895
Options canceled in closing purchase transactions.......... (87) (26,101)
Options expired............................................ (18) (3,794)
--- -------
Options written, outstanding at December 31, 1999.......... -- $ 0
=== =======
</TABLE>
The following written put option transactions occurred during the year ended
December 31, 1999:
<TABLE>
<CAPTION>
Number of
Contracts Premiums
--------- --------
<S> <C> <C>
Options written, outstanding at December 31, 1998.......... -- $ 0
Options written during the year ended December 31, 1999.... 81 15,757
Options canceled in closing purchase transactions.......... (60) (12,520)
Options expired............................................ (21) (3,237)
--- -------
Options written, outstanding at December 31, 1999.......... -- $ 0
=== =======
</TABLE>
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, cash and other liquid securities
are segregated to cover the amount of 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 December 31, 1999, the Fund did not hold any when-issued securities.
15
<PAGE>
Notes to Financial Statements
(continued)
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. Beginning
on the date the Fund enters into a TBA transaction, cash or other liquid
securities are segregated to cover the amount of the TBA transaction. These
transactions are subject to market fluctuations and their current value is
determined in the same manner as for other securities.
At December 31, 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 December 31, 1999, the Fund did not have any securities on loan.
9. Capital Stock
At December 31, 1999, the Series had 10,000,000,000 shares of capital stock au-
thorized 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 dis-
tributions made by the Fund.
Transactions in shares were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1999 December 31, 1998(a)
----------------- --------------------
<S> <C> <C>
Shares sold............................ 1,068,547 376,499
Shares issued on reinvestment of
dividends............................. 37,504 7,459
Shares reacquired...................... (292,353) (13,275)
--------- -------
Net Increase........................... 813,698 370,683
========= =======
</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:
<TABLE>
<CAPTION>
1999 1998(1)
------- -------
<S> <C> <C>
Net Asset Value, Beginning of Year.......................... $ 11.57 $10.00
------- ------
Income From Operations:
Net investment income (2).................................. 0.07 0.09
Net realized and unrealized gains.......................... 2.49 1.72
------- ------
Total Income From Operations............................... 2.56 1.81
------- ------
Less Distributions From:
Net investment income...................................... (0.07) (0.09)
Net realized gains......................................... (0.39) (0.15)
------- ------
Total Distributions........................................ (0.46) (0.24)
------- ------
Net Asset Value, End of Year................................ $ 13.67 $11.57
======= ======
Total Return (3)............................................ 22.08% 18.12%++
Net Assets, End of Year (000s).............................. $16,189 $4,290
Ratios to Average Net Assets (2):
Expenses (4)............................................... 1.00% 1.00%+
Net investment income...................................... 0.99% 1.35%+
Portfolio Turnover Rate..................................... 119% 116%
</TABLE>
- ------
(1) For the period from February 17, 1998 (commencement of operations) through
December 31, 1998.
(2) SBAM has waived all of its management fees for year ended December 31, 1999
and the period ended December 31, 1998. In addition, SBAM has reimbursed
the Fund for $13,177 and $33,776 in expenses for the year ended December
31, 1999 and the period ended December 31, 1998, respectively. 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>
Net Investment Income Expense Ratios Without Fee
Per Share Decreases Waivers and Reimbursement
--------------------- --------------------------
<S> <C> <C>
1999............ $0.06 1.99%
1998............ 0.15 3.26+
</TABLE>
(3) Total returns do not reflect expenses associated with the separate account
such as administrative fees, account charges and surrender charges which,
if reflected, would reduce the total returns for all periods shown.
(4) As a result of a voluntary expense limitation, expense ratios will not ex-
ceed 1.00%.
++Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized.
17
<PAGE>
Report of Independent Accountants
To the Board of Directors and Shareholders of
Salomon Brothers Variable Capital Fund
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Salomon Brothers Variable Capital
Fund ("Fund") at December 31, 1999, the results of its operations for the year
then ended, and the changes in its net assets and the financial highlights for
the year then ended and for the period February 17, 1998 (commencement of
operations) through December 31, 1998, in conformity with accounting principles
generally accepted in the United States. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with auditing standards
generally accepted in the United States which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits, which included confirmation of
securities at December 31, 1999 by correspondence with the custodian and
brokers, provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
New York, N.Y.
February 15, 2000
18
<PAGE>
Tax Information
(unaudited)
For Federal tax purposes the Fund hereby designates for the fiscal year ended
December 31, 1999:
. A corporate dividends received deduction of 9.57%.
. Total long-term capital gain distributions paid of $2,931.
19
<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 LLC
1177 Avenue of the Americas
New York, New York 10036
Directors
CHARLES F. B ARBER
Consultant; formerly Chairman; ASARCO Incorporated
CAROL L. COLMAN
Consultant, Colman Consulting
DANIEL P. C RONIN
Vice President-General Counsel,
Pfizer International Inc.
HEATH B. MCLENDON
Chairman and President;
Managing Director, Salomon Smith Barney Inc.
President and Director, SSB Citi Fund Management LLC
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
ANTHONY PACE
Controller
CHRISTINA T. SYDOR
Secretary
<PAGE>
====================
Salomon Brothers
====================
Asset Management
SEVEN WORLD TRADE CENTER o NEW YORK, NEW YORK 10048
Annual
SALOMON BROTHERS Report
Variable Series Funds Inc 1999
DECEMBER 31, 1999
. INVESTORS FUND
<PAGE>
SALOMON BROTHERS VARIABLE SERIES FUNDS INC
Our Message to You
DEAR SHAREHOLDER:
We are pleased to provide you with the annual report for the Salomon Brothers
Variable Investors Fund ("Fund") for the year ended December 31, 1999. This
letter discusses general economic and market conditions as well as major Fund
developments during the reporting period. A detailed summary of performance and
current Fund holdings can be found in the appropriate sections that follow. We
hope you find this report to be useful and informative.
INVESTMENT STRATEGY
The Fund continues to focus on stocks with attractive valuations and favorable
earnings growth prospects. Despite the strong performance of the major market
indices in 1999, we continue to find attractively valued opportunities.
Recently, we have added to consumer staples names like Safeway and Ralston
Purina. We have also modestly increased our financials weighting due to
attractive valuations. If we see a correction in selected technology names, we
will look to increase our weighting in that sector as well. And while no
guarantees can be made, we are confident that our value strategy should continue
to reward shareholders over time.
Morningstar, Inc.'s large-cap growth category returned 36.0% for the year ended
December 31, 1999 versus 5.9% for the large-cap value category for the same time
period. (Morningstar, Inc. is a major fund rating organization.) The Fund
comfortably outperformed its large-cap value peers, returning 11.65%, but lagged
the broad market.
MARKET OVERVIEW AND OUTLOOK
The stock market finished its fifth consecutive year of returns in excess of 20%
with the Standard & Poor's 500 Index ("S&P 500"), a market capitalization-
weighted measure of 500 widely held common stocks, returning 21.03%. Once again,
large-cap growth stocks, particularly in the technology sector, dominated the
stock market's performance. The major market indices performed quite well
despite increasing interest rates throughout the year. At the beginning of 1999,
the 30-year U.S. Treasury Bond yielded 5.1%; by year-end, the yield had
increased to 6.5%.
During the second quarter of 1999, higher interest rates in the U.S. caused
investors to take profits in the technology sector and look beyond the narrow
group of stocks that had driven the market's performance. Investors shifted into
cyclical stocks as a result of improving worldwide economic growth. This
rotation into value stocks proved fleeting, however, as growth stocks returned
to the forefront again in the third quarter. As interest rates continued to
increase, many investors sought out companies exhibiting strong unit growth,
particularly technology stocks. Market breadth narrowed once again.
Moreover, the focus on technology stocks gained considerable momentum
1
<PAGE>
during the fourth quarter of 1999. As a result of the technology sector's strong
performance throughout the year, technology stocks at year end accounted for
roughly 30% of the S&P 500, up from 19% a year ago.
As previously noted, 1999 stock market returns were narrowly distributed. In
fact, only half the stocks in the S&P 500 had a positive return for the year.
Just seven stocks accounted for half of the S&P 500's performance; these stocks
included Microsoft, Cisco, GE, Wal-Mart, Oracle, Nortel and Qualcomm. Large-cap
growth stocks, driven by the technology sector, significantly outperformed their
large-cap value peers.
In 1999, the S&P 500's performance was predominately led by technology; the
consumer staples, health care, transportation and utility sectors had negative
returns for the year. The Fund benefited from its technology holdings, but our
underweight position penalized our relative performance. Within technology,
3Com, Corning, Hewlett-Packard, Alcatel and Texas Instruments led the Fund's
performance. Other significant contributors included Liberty Media and Morgan
Stanley Dean Witter. The Fund's tobacco holdings, which have subsequently been
reduced, held back performance.
In 2000, we expect the U.S. economy to begin to slow as a result of recent and
anticipated interest rate increases by the Federal Reserve Board. With interest
rates and commodity prices trending up and corporate profits and GDP growth
expected to slow, stock market returns may not be as buoyant as in recent years.
Given the significant weighting of the technology sector in the S&P 500, the
performance of technology stocks will have an important impact on the market's
overall performance. We do expect market breadth to improve this year, which we
are already beginning to see. In a broader market, stock selection should become
more important than sector momentum. Given our strong and experienced team of
analysts, we would expect the Fund to benefit from this anticipated increased
market breadth. (Of course, no guarantees can be given that these expected
market conditions will take place.)
We appreciate your investment with the Salomon Brothers Variable Investors Fund.
We look forward to serving your financial needs in the new century.
Cordially,
/s/ Heath B. McLendon /s/ John B. Cunningham
Heath B. McLendon John B. Cunningham
Chairman and President Vice President
January 20, 2000
2
<PAGE>
The graph to the right depicts the performance of the Investors 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 (unaudited)
SALOMON BROTHERS VARIABLE INVESTORS FUND
Comparison of $10,000 Investment in the Fund with
Standard & Poor's 500 Stock Index
[GRAPH]
[PLOT POINTS TO COME]
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.
- --------------------------------------------------------------------------------
Historical Performance
- --------------------------------------------------------------------------------
Net Asset Value
-------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividend Distribution Returns+
- --------------------------------------------------------------------------------
12/31/99 $11.01 $12.23 $0.06 $0.00 11.65%
- --------------------------------------------------------------------------------
Inception* -- 12/31/98 10.00 11.01 0.05 0.00 10.55++
- --------------------------------------------------------------------------------
$0.11 $0.00
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Average Annual Total Returns+
- --------------------------------------------------------------------------------
Year Ended 12/31/99 11.65%
- --------------------------------------------------------------------------------
Inception* through 12/31/99 11.94
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Cumulative Total Return+
- --------------------------------------------------------------------------------
Inception* through 12/31/99 23.43%
- --------------------------------------------------------------------------------
+ Assumes the reinvestment of all dividends and capital gains distributions
at net asset value. Total returns do not reflect expenses associated with
the separate account such as administrative fees, account charges and
surrender charges which, if reflected, would reduce the total returns for
all periods shown.
++ 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
December 31, 1999
<TABLE>
<CAPTION>
Shares Security Value
<C> <S> <C>
- --------------------------------------------------------------------------------
COMMON STOCK -- 91.1%
Basic Industries -- 3.5%
10,200 Alcoa Inc. .............................................. $ 846,600
17,900 International Paper Co. ................................. 1,010,231
----------
1,856,831
----------
Capital Goods -- 3.9%
14,600 Honeywell International Inc. ............................ 842,237
12,800 Ingersoll-Rand Co........................................ 704,800
12,400 Tyco International Ltd. ................................. 482,050
----------
2,029,087
----------
Communications -- 7.7%
16,500 Bell Atlantic Corp....................................... 1,015,781
3,200 General Motors Corp., Class H Shares (a)................. 307,200
13,700 GTE Corp. ............................................... 966,706
15,750 MCI WorldCom, Inc. (a)................................... 835,734
18,700 SBC Communications Inc. ................................. 911,625
----------
4,037,046
----------
Consumer Cyclicals -- 4.9%
9,000 Costco Wholesale Corp. (a)............................... 821,250
11,600 Dayton Hudson Corp. ..................................... 851,875
17,600 Federated Department Stores, Inc. (a).................... 889,900
----------
2,563,025
----------
Consumer Non-Cyclicals -- 16.7%
16,000 AT&T Corp. - Liberty Media Group, Class A Shares (a)..... 908,000
20,800 Coca-Cola Enterprises Inc................................ 418,600
21,100 Delhaize America, Inc.................................... 428,594
71,900 Nabisco Group Holdings Corp.............................. 763,938
37,400 News Corp. Ltd. ADR...................................... 1,250,563
53,000 Pepsi Bottling Group, Inc................................ 877,813
25,900 Philip Morris Cos. Inc................................... 600,556
16,300 R.J. Reynolds Tobacco Holdings, Inc...................... 287,288
33,200 Ralston Purina Co........................................ 925,450
30,000 Safeway Inc. (a)......................................... 1,066,875
41,100 Tyson Foods Inc., Class A Shares......................... 667,875
8,900 Viacom Inc., Class B Shares (a).......................... 537,894
----------
8,733,446
----------
Energy -- 10.2%
9,600 Amerada Hess Corp. ...................................... 544,800
7,000 Atlantic Richfield Co. .................................. 605,500
21,700 Burlington Resources Inc. ............................... 717,456
30,900 Conoco Inc., Class A Shares.............................. 764,775
13,100 Royal Dutch Petroleum Co. ............................... 791,731
14,100 Total Fina S.A. ADR...................................... 976,425
14,500 Unocal Corp. ............................................ 486,656
18,500 USX Marathon Group....................................... 456,719
----------
5,344,062
----------
Financial Services -- 17.7%
4,400 American Express Co...................................... 731,500
7,300 American General Corp.................................... 553,887
</TABLE>
See Notes to Financial Statements.
4
<PAGE>
Schedule of Investments
December 31, 1999 (continued)
<TABLE>
<CAPTION>
Shares Security Value
<C> <S> <C>
- --------------------------------------------------------------------------------
Financial Services -- 17.7% (continued)
16,100 Associates First Capital Corp............................ $ 441,744
29,700 The Bank of New York Co., Inc............................ 1,188,000
12,100 The Chase Manhattan Corp................................. 940,019
17,600 Comerica, Inc............................................ 821,700
21,200 Fleet Boston Financial Corp.............................. 738,025
11,800 Freddie Mac.............................................. 555,338
8,000 Goldman Sachs Group, Inc................................. 753,500
17,600 Household International, Inc............................. 655,600
9,500 Morgan Stanley Dean Witter & Co.......................... 1,356,125
16,900 UnumProvident Corp....................................... 541,856
----------
9,277,294
----------
Health Care -- 7.6%
14,100 Abbott Laboratories, Inc. ............................... 512,006
11,800 American Home Products Corp. ............................ 465,362
21,600 Becton, Dickinson & Co. ................................. 577,800
12,800 Eli Lilly & Co. ......................................... 851,200
11,200 Merck & Co., Inc. ....................................... 751,100
18,500 Pharmacia & Upjohn, Inc. ................................ 832,500
----------
3,989,968
----------
Technology -- 15.0%
15,600 3Com Corp. (a)........................................... 733,200
25,900 Alcatel S.A. ADR......................................... 1,165,500
17,600 Compuware Corp. (a)...................................... 655,600
7,200 Corning Inc. ............................................ 928,350
9,600 Hewlett-Packard Co. ..................................... 1,093,800
8,600 Intel Corp. ............................................. 707,887
9,500 International Business Machines Corp. (a)................ 1,026,000
22,400 Seagate Technology Inc. ................................. 1,043,000
5,200 Texas Instruments Inc. .................................. 503,750
----------
7,857,087
----------
Transportation -- 2.3%
17,900 Canadian National Railway Co. ........................... 470,994
17,200 Canadian Pacific Ltd. ................................... 370,875
5,500 Union Pacific Corp. ..................................... 239,938
1,800 United Parcel Service, Inc., Class B Shares.............. 124,200
----------
1,206,007
----------
Utilities -- 1.6%
12,400 The Coastal Corp. ....................................... 439,425
13,200 The Williams Cos., Inc. ................................. 403,425
----------
842,850
----------
TOTAL COMMON STOCK
(Cost -- $43,988,382).................................... 47,736,703
----------
</TABLE>
See Notes to Financial Statements.
5
<PAGE>
Schedule of Investments
December 31, 1999 (continued)
<TABLE>
<CAPTION>
Face
Amount Security Value
<C> <S> <C>
- -------------------------------------------------------------------------------
CONVERTIBLE CORPORATE BONDS -- 0.8%
Telecommunications & Utilities -- 0.8%
NTL Inc.:
$ 75,000 7.000% due 12/15/08.................................. $ 198,375
225,000 5.750% due 12/15/09 (b).............................. 243,000
-----------
TOTAL CONVERTIBLE CORPORATE BONDS
(Cost -- $302,137)................................... 441,375
-----------
<CAPTION>
Contracts
<C> <S> <C>
- --------
PURCHASED OPTIONS (a) -- 0.1%
44 American Express Co., Put @ $150, Expire 1/22/00..... 6,325
52 Texas Instruments Inc., Put @ $57.5, Expire 1/22/00.. 484
80 Tyco International Ltd., Put @ $40, Expire 1/22/00... 24,000
Tyco International Ltd., Put @ $42.5, Expire
44 1/22/00.............................................. 20,625
-----------
TOTAL PURCHASED OPTIONS
(Cost -- $96,555).................................... 51,434
-----------
<CAPTION>
Face
Amount
<C> <S> <C>
- --------
REPURCHASE AGREEMENT -- 8.0%
$4,209,000 State Street Bank & Trust Co., 3.000% due 1/3/00;
Proceeds at maturity -- $4,210,052; (Fully
collateralized by U.S.
Treasury Bonds, 9.125% due 5/15/18; Market value --
$4,298,044) (Cost -- $4,209,000) .................. 4,209,000
-----------
TOTAL INVESTMENTS -- 100%
(Cost -- $48,596,074*)............................... $52,438,512
===========
</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.
6
<PAGE>
Statement of Assets and Liabilities
December 31, 1999
<TABLE>
<S> <C>
ASSETS:
Investments, at value (Cost -- $48,596,074)....................... $52,438,512
Receivable for Fund shares sold................................... 108,832
Receivable for securities and options sold........................ 163,370
Interest and dividends receivable................................. 69,923
Deferred organization costs....................................... 19,564
Prepaid expenses.................................................. 699
-----------
Total Assets...................................................... 52,800,900
-----------
LIABILITIES:
Options written (Premiums received -- $117,925) (Note 5).......... 147,550
Payable for Fund shares purchased................................. 59,500
Management fees payable........................................... 4,649
Administration fees payable....................................... 2,061
Payable to bank................................................... 989
Accrued expenses.................................................. 44,218
-----------
Total Liabilities................................................. 258,967
-----------
Total Net Assets................................................... $52,541,933
===========
NET ASSETS:
Par value of capital shares....................................... $ 4,295
Capital paid in excess of par value............................... 49,029,478
Accumulated net realized loss on investments and options.......... (304,653)
Net unrealized appreciation of investments and options............ 3,812,813
-----------
Total Net Assets................................................... $52,541,933
===========
Shares Outstanding................................................. 4,295,219
-----------
Net Asset Value, per share......................................... $12.23
-----------
</TABLE>
See Notes to Financial Statements.
7
<PAGE>
Statement of Operations
For the Year Ended December 31, 1999
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest.......................................................... $ 134,047
Dividends......................................................... 401,984
Less: Foreign withholding tax..................................... (7,056)
----------
Total Investment Income........................................... 528,975
----------
EXPENSES:
Management fees (Note 2).......................................... 195,640
Shareholder communications........................................ 42,499
Audit and legal................................................... 18,402
Custody........................................................... 15,001
Administration fees (Note 2)...................................... 13,974
Registration fees................................................. 12,800
Shareholder and system servicing fees............................. 7,520
Amortization of deferred organization costs....................... 6,245
Directors' fees................................................... 5,600
Other............................................................. 3,712
----------
Total Expenses.................................................... 321,393
Less: Management fee waiver (Note 2).............................. (46,955)
----------
Net Expenses...................................................... 274,438
----------
Net Investment Income.............................................. 254,537
----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND OPTIONS
(NOTES 3 AND 5):
Realized Gain (Loss) From:
Security transactions (excluding short-term securities)........... (66,650)
Options purchased................................................. 35,825
Options written................................................... 13,365
----------
Net Realized Loss................................................. (17,460)
----------
Change in Net Unrealized Appreciation of Investments and Options:
Beginning of year................................................. 1,361,226
End of year....................................................... 3,812,813
----------
Increase in Net Unrealized Appreciation........................... 2,451,587
----------
Net Gain on Investments and Options ............................... 2,434,127
----------
Increase in Net Assets From Operations............................. $2,688,664
==========
</TABLE>
See Notes to Financial Statements.
8
<PAGE>
Statements of Changes in Net Assets
For the Years Ended December 31,
<TABLE>
<CAPTION>
1999 1998(a)
----------- -----------
<S> <C> <C>
OPERATIONS:
Net investment income............................... $ 254,537 $ 52,000
Net realized loss................................... (17,460) (290,609)
Increase in net unrealized appreciation............. 2,451,587 1,361,226
----------- -----------
Increase in Net Assets From Operations.............. 2,688,664 1,122,617
----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income............................... (265,202) (50,003)
Capital............................................. -- (3,019)
----------- -----------
Decrease in Net Assets From Distributions to
Shareholders....................................... (265,202) (53,022)
----------- -----------
FUND SHARE TRANSACTIONS (NOTE 10):
Net proceeds from sale of shares.................... 42,532,124 13,154,932
Net asset value of shares issued for reinvestment of
dividends.......................................... 265,202 53,022
Cost of shares reacquired........................... (5,716,552) (1,239,862)
----------- -----------
Increase in Net Assets From Fund Share
Transactions....................................... 37,080,774 11,968,092
----------- -----------
Increase in Net Assets............................... 39,504,236 13,037,687
NET ASSETS:
Beginning of year................................... 13,037,697 10
----------- -----------
End of year*........................................ $52,541,933 $13,037,697
=========== ===========
* Includes undistributed net investment income of: .. -- $701
=========== ===========
</TABLE>
- ------
(a) For the period from February 17, 1998 (commencement of operations) to De-
cember 31, 1998.
See Notes to Financial Statements.
9
<PAGE>
Notes to Financial Statements
1. Organization and 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
seven 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 Small Cap Growth 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 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, 1999, 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. Accordingly, a portion of
overdistributed net investment income amounting to $12,084 was reclassified to
paid-in capital. 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 Co. 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 0.70% of its average daily net
assets. This fee is calculated daily and paid monthly.
10
<PAGE>
Notes to Financial Statements
(continued)
For the year ended December 31, 1999, SBAM waived a portion of the management
fees amounting to $46,955.
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 SSB Citi Fund Management LLC
("SSBC"), formerly known as SSBC Fund Management Inc., an affiliate of SBAM,
pursuant to a Sub-Administration Agreement between SBAM and SSBC.
CFBDS, Inc. acts as the Fund's distributor. For the year ended December 31,
1999, Salomon Smith Barney Inc. ("SSB"), another subsidiary of SSBH, received
brokerage commissions of $474 from the Fund.
3. Investments
During the year ended December 31, 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........................................................... $47,135,879
===========
Sales............................................................... $13,197,628
===========
</TABLE>
At December 31, 1999, the aggregate gross unrealized appreciation and deprecia-
tion of investments for Federal income tax purposes were substantially as fol-
lows:
<TABLE>
<S> <C>
Gross unrealized appreciation...................................... $ 6,664,317
Gross unrealized depreciation...................................... (2,821,879)
-----------
Net unrealized appreciation........................................ $ 3,842,438
===========
</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 December 31, 1999, the Fund held purchased put options with a total cost of
$96,555.
11
<PAGE>
Notes to Financial Statements
(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 Fund enters into options for hedging purposes. The risk associated with
purchasing options is limited to the premium originally paid. 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 year ended
December 31, 1999:
<TABLE>
<CAPTION>
Number of
Contracts Premiums
--------- --------
<S> <C> <C>
Options written, outstanding at December 31, 1998........... 0 $ 0
Options written ............................................ 242 132,434
Options canceled in closing purchase transactions........... (22) (14,509)
--- --------
Options written, outstanding at December 31, 1999........... 220 $117,925
=== ========
</TABLE>
The following table represents the written call option contracts open at Decem-
ber 31, 1999:
<TABLE>
<CAPTION>
Number 0f Strike
Contracts Expiration Price Value
--------- ---------- ------ ---------
<C> <S> <C> <C> <C>
44 American Express Co.................. 1/22/00 $170 $ (19,525)
52 Texas Instruments Inc................ 1/22/00 75 (119,600)
80 Tyco International Ltd............... 1/22/00 45 (6,500)
44 Tyco International Ltd............... 1/22/00 47.5 (1,925)
---------
Total Options Written (Premiums
received -- $117,925)................ $(147,550)
=========
</TABLE>
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, cash or other liquid securities
are segregated to cover the amount of 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 December 31, 1999, the Fund did not hold any when-issued securities.
12
<PAGE>
Notes to Financial Statements
(continued)
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. Beginning
on the date the Fund enters into a TBA transaction, cash or other liquid
securities are segregated in the amount of the TBA transaction. These
transactions are subject to market fluctuations and their current value is
determined in the same manner as for other securities.
At December 31, 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 December 31, 1999, the Fund did not have any securities on loan.
9. Capital Loss Carryforward
At December 31, 1999, the Fund had, for Federal income tax purposes, a capital
loss carryforward of approximately $97,000, available to offset future capital
gains through December 31, 2007. 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 December 31, 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>
Year Ended Year Ended
December 31, 1999 December 31, 1998(a)
----------------- --------------------
<S> <C> <C>
Shares sold............................ 3,579,315 1,299,803
Shares issued on reinvestment of
dividends............................. 21,756 4,816
Shares reacquired...................... (489,624) (120,848)
--------- ---------
Net Increase........................... 3,111,447 1,183,771
========= =========
</TABLE>
- ------
(a) For the period February 17, 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:
<TABLE>
<CAPTION>
1999 1998(1)
------- -------
<S> <C> <C>
Net Asset Value, Beginning of Year.......................... $ 11.01 $ 10.00
------- -------
Income From Operations:
Net investment income (2).................................. 0.06 0.05
Net realized and unrealized gain .......................... 1.22 1.01
------- -------
Total Income From Operations............................... 1.28 1.06
------- -------
Less Distributions From:
Net investment income...................................... (0.06) (0.05)
Capital.................................................... -- (0.00)*
------- -------
Total Distributions........................................ (0.06) (0.05)
------- -------
Net Asset Value, End of Year................................ $ 12.23 $ 11.01
======= =======
Total Return (3)............................................ 11.65% 10.55%++
Net Assets, End of Year (000s).............................. $52,542 $13,038
Ratios to Average Net Assets (2):
Expenses (4)............................................... 0.98% 1.00%+
Net investment income...................................... 0.91 1.14+
Portfolio Turnover Rate..................................... 51% 62%
</TABLE>
- ------
(1) For the period from February 17, 1998 (commencement of operations) through
December 31, 1998.
(2) SBAM has waived all or part of its management fees for the year ended
December 31, 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 1.15%
1998............... 0.04 2.07+
</TABLE>
(3) Total returns do not reflect expenses associated with the separate account
such as administrative fees, account charges and surrender charges which,
if reflected, would reduce the total returns for all periods shown.
(4) As a result of a voluntary expense limitation, expense ratios will not
exceed 1.00%.
* 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>
Report of Independent Accountants
To the Board of Directors and Shareholders of
Salomon Brothers Variable Investors Fund
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Salomon Brothers Variable
Investors Fund ("Fund") at December 31, 1999, the results of its operations for
the year then ended, and the changes in its net assets and the financial
highlights for the year then ended and for the period February 17, 1998
(commencement of operations) through December 31, 1998, in conformity with
accounting principles generally accepted in the United States. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with auditing standards generally accepted in the United States which require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included confirmation
of securities at December 31, 1999 by correspondence with the custodian and
brokers, provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
New York, N.Y.
February 15, 2000
15
<PAGE>
Tax Information
(unaudited)
For Federal tax purposes the Fund hereby designates for the fiscal year ended
December 31, 1999:
. A corporate dividends received deduction of 100%.
16
<PAGE>
Salomon Brothers Variable Series Funds Inc
<TABLE>
<S> <C>
INVESTMENT MANAGER Officers
Salomon Brothers Asset Management Inc HEATH B. MCLENDON
7World Trade Center Chairman and President
New York, New York 10048 LEWIS E. DAIDONE
Executive Vice President and Treasurer
CUSTODIAN ROSS S. MARGOLIES
PNC Bank, N.A. Executive Vice President
17th and Chestnut Streets BETH A. SEMMEL
Philadelphia, Pennsylvania 19103 Executive Vice President
PETER J. WILBY
LEGAL COUNSEL Executive Vice President
Simpson Thacher & Bartlett GEORGE J. WILLIAMSON
425 Lexington Avenue Executive Vice President
New York, New York 10017 JOHN B. CUNNINGHAM
Vice President
INDEPENDENT ACCOUNTANTS ANTHONY PACE
PricewaterhouseCoopers LLP Controller
1177 Avenue of the Americas CHRISTINA T. SYDOR
New York, New York 10036 Secretary
</TABLE>
Directors
CHARLES F. BARBER
Consultant; formerly Chairman; ASARCO Incorporated
CAROL L. COLMAN
Consultant, Colman Consulting
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, SSB Citi Fund Management LLC
and Travelers Investment Advisers, Inc.
<PAGE>
Salomon Brothers
Asset Management
SEVEN WORLD TRADE CENTER . NEW YORK, NEW YORK 10048
<PAGE>
SALOMON BROTHERS
Variable Series Funds Inc
[GRAPHIC]
Annual Report 1999
DECEMBER 31, 1999
. HIGH YIELD BOND FUND
<PAGE>
SALOMON BROTHERS VARIABLE SERIES FUNDS INC
Our Message to You
DEAR SHAREHOLDER:
We are pleased to provide the annual report for the Salomon Brothers Variable
High Yield Bond Fund ("Fund") for the year ended December 31, 1999. This letter
discusses general economic and market conditions as well as Fund highlights
during the reporting period. A detailed summary of performance and current Fund
holdings can be found in the appropriate sections that follow. We hope you find
this report useful and informative.
INVESTMENT STRATEGY AND PERFORMANCE UPDATE
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 investment manager to be of comparable quality. The Fund
commenced operations on May 1, 1998. For the year ended December 31, 1999, the
Fund returned 5.56% versus the 1.73% return for the Salomon Smith Barney High
Yield Market Index1 over the same period.
MARKET OVERVIEW
While benefiting from a strong economy, the high-yield bond market suffered from
the following:
1. a back-up in U.S. Treasuries due to concern about rising inflation;
2. mutual fund outflows;
3. a heavy new issues calendar;
4. a reduction in broker-dealer liquidity;
5. a volatile stock market; and
6. 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 supported by mutual fund
inflows. The high-yield market rallied in the first four months of the year.
However, in the second quarter of 1999, continued strong U.S. economic growth
led to concerns about rising inflation. Heightened credit concerns also
developed as default rates increased, particularly in commodities issuers
exposed to global competition and pricing volatility, and in more speculative
telecommunications issuers whose access to alternative capital markets was
limited.
- -------------
1 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.
1
<PAGE>
These factors rattled individual investors, resulting in prolonged mutual fund
outflows, which occurred for as long as nine consecutive weeks through the end
of October and totaled roughly $422 million for the year. Finally, tightening
broker-dealer liquidity and a heavy new issues calendar in the second and third
quarters further constrained liquidity in the high-yield bond market. As a
result, high-yield market returns were negative for the period from May through
October.
As the period progressed, the high-yield market, driven by technical, credit and
liquidity concerns, became increasingly selective in new issues and secondary
markets and:
. preferred larger, more liquid issues from higher quality issuers;
. punished underperformers and negative news; and
. demanded tighter covenant packages and higher yields from new issues,
which effectively re-priced the secondary market to lower levels.
However, new issues volume declined to relatively low levels late in the year
while in November and December, mutual fund outflows moderated and
Collateralized Bond Obligation ("CBO") buying activity picked up dramatically,
alleviating some of the pressure on liquidity in the high-yield market and
enabling the market to recover modestly and post a positive return for the year.
For the period, the high-yield market's top performers included: commodities
industries such as metals/mining, energy and paper & forest products, which
benefited from material improvement in commodities prices; telecommunications,
due to explosive industry growth, mergers & acquisitions activity and private
equity investment; gaming, which benefited from investors' preference for
defensive credits; and cable & media, which benefited from mergers and
acquisitions activity.
The financial sector also outperformed as a result of savings & loans benefiting
from:
. strong new home mortgage volume; and
. their use of adjustable rate mortgages, a natural hedge against rising
interest rates.
The worst performers included: health care, due to the industry's troubles with
the recently imposed Medicare reimbursement system; textiles, which is suffering
from cheaper imports; and consumer products, supermarkets/drugstores, automotive
and services/other, which were all adversely affected by credit concerns at
certain issuers. The capital goods sector also underperformed due to the
market's preference for more defensive, higher-growth industry sectors. In terms
of credit quality, investors favored the higher-quality credit tiers, such as
"BB" issues, as they shunned "CCC" and lower quality single-B issues due to
heightened credit concerns. "BB", "B" and "CCC" issues showed returns of 2.34%,
1.02% and negative 8.43%, respectively.
2
<PAGE>
The Fund benefited from overweightings in the metals/mining, cable & media and
gaming sectors. It was also helped by underweightings in the textiles,
supermarkets/drugstores, health care sectors and "CCC"-rated issues. Performance
was hurt, however, by an overweighting in capital goods and underweightings in
telecommunications, energy and paper & forest products. During 1999, the Fund
responded to market conditions by significantly increasing its overweighted
position in cable & media, increasing its gaming exposure from an underweighting
to an overweighting, trimming its overweighted position in capital goods and
eliminating its already underweighted positions in health care and
supermarkets/drugstores.
On December 31, 1999, the high-yield market yielded 11.41%, up from 10.28% at
year-end 1998. The excess yield over U.S. Treasuries was 5.00%, down from 5.66%
at 1998 year-end. We believe that these levels still represent attractive
long-term value.
Going forward, we expect the high-yield bond market to modestly improve over the
next six months as expectations for continued robust economic growth and
improved technical factors, including:
. mutual fund investors returning to the market after selling in late
1999 for tax or Y2K reasons;
. continued strong CBO demand; and
. fund managers investing excess balance sheet cash held over the New
Year for Y2K reasons, are partially offset by continued interest rate
and credit concerns.
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 new
century.
Cordially,
/s/ Heath B. McLendon /s/ Peter J. Wilby
Heath B. McLendon Peter J. Wilby
Chairman and President Executive Vice President
January 24, 2000
3
<PAGE>
The following graph depicts the performance of the High Yield Bond 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 (unaudited)
SALOMON BROTHERS VARIABLE HIGH YIELD BOND FUND
Comparison of $10,000 Investment in the Fund with Salomon Smith Barney High
Yield Market Index
High Yield Bond Fund Salomon Brothers High-Yield Market Index
-------------------- ----------------------------------------
5/1/98 10,000 10,000
6-98 10,080 10,049
12-98 10,014 9,902
6-99 10,338 10,078
12/31/99 10,566 9,775
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>
Net Asset Value
-----------------------
Beginning End Income Capital Gain Return Total
Year Ended of Year of Year Dividend Distribution of Capital Returns+
======================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
12/31/99 $9.58 $9.22 $0.88 $0.00 $0.01 5.56%
- ----------------------------------------------------------------------------------------------------------------------
Inception* -- 12/31/98 10.00 9.58 0.43 0.00 0.00 0.14++
======================================================================================================================
$1.31 $0.00 $0.01
======================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Average Annual Total Returns+
- --------------------------------------------------------------------------------
Year Ended 12/31/99 5.56%
- --------------------------------------------------------------------------------
Inception* through 12/31/99 3.36%
================================================================================
- --------------------------------------------------------------------------------
Cumulative Total Return+
- --------------------------------------------------------------------------------
Inception* through 12/31/99 5.66%
================================================================================
+ Assumes the reinvestment of all dividends and capital gains distributions
at net asset value. Total returns do not reflect expenses associated with
the separate account such as administrative fees, account charges and
surrender charges which, if reflected, would reduce the total returns for
all periods shown.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
* Inception date is May 1, 1998.
4
<PAGE>
Schedule of Investments
December 31, 1999
<TABLE>
<CAPTION>
Face
Amount Security Value
<C> <S> <C>
- -------------------------------------------------------------------------------
CORPORATE BONDS -- 58.7%
Basic Industries -- 8.6%
Glencore Nickel Property Ltd., Company Guaranteed,
$125,000 9.000% due 12/1/14 ..................................... $ 108,281
Indesco International Inc., Sr. Sub. Notes, 9.750% due
125,000 4/15/08................................................. 56,250
Lyondell Chemical Co., Series B, Sr. Secured Notes,
125,000 9.875% due 5/1/07....................................... 129,688
125,000 Millar Western Forest, Sr. Notes, 9.875% due 5/15/08.... 125,000
125,000 Octel Development PLC, Sr. Notes, 10.000% due 5/1/06.... 128,750
P&L Coal Holdings Corp., Series B, Sr. Sub. Notes,
125,000 9.625% due 5/15/08...................................... 121,875
----------
669,844
----------
Consumer Cyclicals -- 6.1%
Cole National Group, Inc., Sr. Sub. Notes, 8.625% due
125,000 8/15/07................................................. 95,000
HMH Properties, Inc., Series B, Sr. Notes, 7.875% due
125,000 8/1/08.................................................. 111,875
125,000 Leslie's Poolmart, Sr. Notes, 10.375% due 7/15/04....... 111,875
Pillowtex Corp., Series B, Sr. Sub. Notes, 9.000% due
75,000 12/15/07................................................ 32,250
Prime Hospitality Corp., Series B, Sr. Sub. Notes,
125,000 9.750% due 4/1/07....................................... 121,875
----------
472,875
----------
Consumer Non-Cyclicals -- 10.8%
American Safety Razor Co., Series B, Sr. Notes, 9.875%
125,000 due 8/1/05.............................................. 123,125
Anchor Advanced Products, Sr. Notes, 11.750% due
50,000 4/1/04.................................................. 43,000
125,000 Delta Beverage Group, Sr. Notes, 9.750% due 12/15/03.... 123,750
Hines Horticulture Inc., Series B, Sr. Sub. Notes,
125,000 11.750% due 10/15/05.................................... 129,375
Home Interiors & Gifts, Company Guaranteed, 10.125% due
125,000 6/1/08.................................................. 106,875
Horseshoe Gaming L.L.C., Series B, Sr. Sub. Notes,
125,000 9.375% due 6/15/07...................................... 124,687
Imperial Holly Corp., Sr. Sub. Notes, 9.750% due
125,000 12/15/07................................................ 90,625
Revlon Consumer Products, Sr. Sub. Notes, 8.625% due
20,000 2/1/08.................................................. 10,200
Sun International Hotels, Sub. Debentures, 9.000% due
90,000 3/15/07................................................. 86,850
----------
838,487
----------
Energy -- 2.0%
Canadian Forest Oil Ltd., Sr. Sub. Notes., 8.750% due
100,000 9/15/07................................................. 95,750
100,000 Clark R&M Inc., Sr. Sub. Notes, 8.875% due 11/15/07..... 60,500
----------
156,250
----------
----------
123,201
----------
Financial Services -- 1.6%
125,000 Airplanes Pass-Through Trust, Class D, Company
Guaranteed, 10.875% due 3/15/12......................... 108,201
ContiFinancial Corp., Sr. Notes:
50,000 7.500% due 3/15/02...................................... 6,000
75,000 8.125% due 4/1/08....................................... 9,000
Housing Related -- 1.5%
125,000 Forest City Enterprises, Sr. Notes, 8.500% due 3/15/08.. 117,344
----------
Manufacturing -- 6.0%
Breed Technologies Inc., Sr. Sub. Notes, 9.250% due
100,000 4/15/08 (a)(b).......................................... 3,000
Federal Mogul Corp., Company Guaranteed, 7.500% due
125,000 1/15/09................................................. 113,281
50,000 Hexcel Corp., Sr. Sub. Notes, 9.750% due 1/15/09........ 42,000
High Voltage Engineering, Sr. Notes, 10.500% due
75,000 8/15/04................................................. 66,375
Motors & Gears, Inc., Series D, Sr. Notes, 10.750% due
125,000 11/15/06................................................ 120,156
125,000 Sequa Corp., Sr. Notes, 9.000% due 8/1/09............... 121,563
----------
466,375
----------
</TABLE>
See Notes to Financial Statements.
5
<PAGE>
Schedule of Investments
December 31, 1999 (continued)
<TABLE>
<CAPTION>
Face
Amount Security Value
<C> <S> <C>
- -------------------------------------------------------------------------------
Media & Telecommunications -- 17.4%
Allbritton Communications, Series B, Sr. Sub.
$ 125,000 Debentures, 9.750% due 11/30/07........................ $ 126,563
Centennial Cellular, Sr. Sub. Notes, 10.750% due
50,000 12/15/08............................................... 53,875
Century Communications Corp., Series B, Sr. Discount
75,000 Notes, zero coupon due 1/15/08......................... 33,375
125,000 CSC Holdings Inc., Sr. Debentures, 7.625% due 7/15/18.. 116,250
Hollinger International Publishing, Sr. Sub. Notes,
125,000 9.250% due 2/1/06...................................... 124,063
125,000 Insight Midwest, Sr. Notes, 9.750% due 10/1/09 (c)..... 130,000
Intermedia Communications Inc., Series B, Sr. Notes,
75,000 8.600% due 6/1/08...................................... 69,375
Nextel Communications, Sr. Serial Redeemable Discount
Notes, zero coupon until 2/15/03, 9.950% thereafter,
200,000 due 2/15/08............................................ 141,500
NTL Inc., Series B, Sr. Notes, zero coupon until
150,000 4/1/03, 9.750% thereafter, due 4/1/08.................. 104,625
125,000 Rogers Communications, Sr. Notes, 8.875% due 7/15/07... 127,031
Telewest Communication PLC, Sr. Discount Notes, zero
coupon until 4/15/04, 9.250% thereafter, due 4/15/09
125,000 (c).................................................... 79,531
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....................... 128,000
World Color Press Inc., Sr. Sub. Notes, 8.375% due
125,000 11/15/08............................................... 122,969
----------
1,357,157
----------
Services & Other -- 3.7%
50,000 Allied Waste North America, Sr. Sub. Notes, 10.000% due
8/1/09 (c)............................................. 44,750
Iron Mountain Inc., Sr. Sub. Notes, 8.750% due
125,000 9/30/09................................................ 120,938
Safety-Kleen Services, Sr. Sub. Notes, 9.250% due
125,000 6/1/08................................................. 124,062
----------
289,750
----------
Transportation -- 1.0%
Enterprises Shipholding Inc., Sr. Notes, 8.875% due
125,000 5/1/08................................................. 75,000
----------
TOTAL CORPORATE BONDS
(Cost -- $5,205,464)................................... 4,566,283
----------
Argentina -- 4.8%
Republic of Argentina:
200,000 11.750% due 4/7/09..................................... 201,500
175,000 Discount Bonds, Series L-GL, 6.875% due 3/31/23 (d).... 139,125
35,000 Series BGL5, 11.375% due 1/30/17....................... 34,886
----------
375,511
----------
Brazil -- 6.9%
Federal Republic of Brazil:
206,000 14.500% due 10/15/09................................... 228,763
133,076 C Bonds, 8.000% due 4/15/14 (e)........................ 100,141
140,000 DCB, Series L, 7.000% due 4/15/12 (d).................. 104,825
125,000 NMB, Series L, 7.000% due 4/15/09 (d).................. 101,875
----------
535,604
----------
SOVEREIGN BONDS -- 31.2%
Bulgaria -- 1.3%
Republic of Bulgaria, Discount Bonds, Series A, 6.500%
125,000 due 7/28/24 (d)........................................ 100,391
----------
Colombia -- 2.1%
Republic of Colombia:
30,000 11.442% due 8/13/05 (d)................................ 29,025
125,000 9.750% due 4/23/09..................................... 116,875
20,000 8.700% due 2/15/16..................................... 15,700
----------
161,600
----------
</TABLE>
See Notes to Financial Statements.
6
<PAGE>
Schedule of Investments
December 31, 1999 (continued)
<TABLE>
<CAPTION>
Face
Amount Security Value
<C> <S> <C>
- -------------------------------------------------------------------------------
Croatia -- 1.5%
Republic of Croatia, FRB, Series A, 6.456% due 7/31/10
$130,000 (d)..................................................... $ 116,350
----------
Ecuador -- 0.8%
Republic of Ecuador, Par Bonds, 4.000% due 2/28/25
185,000 (a)(d).................................................. 59,102
----------
Ivory Coast -- 0.3%
125,000 Republic of Ivory Coast, FLIRB, 2.000% due 3/29/18 (d).. 23,125
----------
Mexico -- 2.7%
Republic of Mexico:
250,000 Par Bonds, Series W-B, 6.250% due 12/31/19.............. 197,031
15,000 Series XW, 10.375% due 2/17/09.......................... 16,050
----------
213,081
----------
Panama -- 1.6%
150,000 Republic of Panama, 8.875% due 9/30/27.................. 127,125
----------
Philippines -- 0.8%
60,000 Republic of the Philippines, 9.875% due 1/15/19......... 59,513
----------
Peru -- 1.2%
150,000 Republic of Peru, FLIRB, 3.750% due 3/7/17 (d).......... 92,250
----------
Poland -- 0.8%
Republic of Poland:
50,000 Par Bonds, 3.500% due 10/27/24 (d)...................... 30,813
50,000 RSTA Bonds, 4.000% due 10/27/24 (d)..................... 33,062
----------
63,875
----------
Russia -- 2.6%
Russian Government:
50,000 11.500% due 6/10/03..................................... 38,375
135,000 12.750% due 6/24/28..................................... 94,162
400,000 IAN due 12/15/15 (a)(b)................................. 72,000
----------
204,537
----------
Venezuela -- 3.8%
Republic of Venezuela:
125,000 13.625% due 8/15/18..................................... 111,875
55,000 9.250% due 9/15/27...................................... 36,575
190,475 DCB, Series DL, 7.000% due 12/18/07 (c)................. 150,475
----------
298,925
----------
TOTAL SOVEREIGN BONDS
(Cost -- $2,191,820).................................... 2,430,989
----------
LOAN PARTICIPATIONS -- 3.9%
Algeria -- 1.7%
The People's Democratic Republic of Algeria:
125,000 Tranche 1, 6.812% due 9/4/06 (Chase) (d)(f)............. 96,562
50,000 Tranche 3, 6.812% due 3/4/10 (First Boston) (d)(f)...... 35,875
----------
132,437
----------
Morocco -- 1.1%
95,000 Kingdom of Morocco, Tranche A, 6.843% due 1/1/09 (Chase)
(d)(f).................................................. 86,687
----------
Russia -- 1.1%
525,000 Russian Government, Principal Loan due 12/15/20 (J.P.
Morgan, SBC Warburg) (a)(b)(f).......................... 86,625
----------
TOTAL LOAN PARTICIPATIONS
(Cost -- $230,662)...................................... 305,749
----------
</TABLE>
See Notes to Financial Statements.
7
<PAGE>
Schedule of Investments
December 31, 1999 (continued)
Shares Security Value
- -------------------------------------------------------------------------------
PREFERRED STOCK (b) -- 0.0%
219 TCR Holding Corp., Class B Shares.............. $ 2
121 TCR Holding Corp., Class C Shares.............. 1
318 TCR Holding Corp., Class D Shares.............. 3
658 TCR Holding Corp., Class E Shares.............. 7
----------
TOTAL PREFERRED STOCK
(Cost -- $78).................................. 13
----------
Warrants
--------
WARRANTS (b) -- 0.4%
300 United Mexican States Warrants, Expire 2/18/00
(Cost -- $24,060) ............................. 30,000
----------
Contracts
---------
PURCHASED OPTIONS (b) -- 0.0%
750 Hong Kong Dollar, Put @ HKD 7.802%, Expire
1/20/00........................................ 450
1,550 Hong Kong Dollar, Put @ HKD 7.816%, Expire
1/26/00........................................ 16
----------
TOTAL PURCHASED OPTIONS (Cost -- $20,856)...... 466
----------
Face
Amount
------
REPURCHASE AGREEMENT -- 5.8%
$449,000 State Street Bank & Trust Co., 3.000% due
1/3/00; Proceeds at maturity -- $449,112;
(Fully collateralized by U.S. Treasury Bonds,
8.500% due 2/15/20; Market value -- $461,700)
(Cost -- $449,000)............................ 449,000
----------
TOTAL INVESTMENTS -- 100%
(Cost -- $8,121,940*) ......................... $7,782,500
==========
- ------
(a) Security is in default.
(b) Non-income producing securities.
(c) 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.
(d) Rate shown reflects rate in effect at December 31, 1999 on instrument with
variable rates or step coupon rates.
(e) Payment-in-kind security for which all or part of the interest earned is
capitalized as additional principal.
(f) Participation interests were acquired through the financial institutions
indicated parenthetically.
* Aggregate cost for Federal income tax purposes is substantially the same.
Abbreviations used in this schedule:
------------------------------------
DCB -- Debt Conversion Bonds.
FLIRB -- Front-Loaded Interest Reduction Bonds.
FRB -- Floating Rate Bonds.
HKD -- Hong Kong Dollar.
IAN -- Interest Arrears Notes.
NMB -- New Money Bonds.
RSTA -- Revolving Short-Term Agreement.
See Notes to Financial Statements.
8
<PAGE>
Statement of Assets and Liabilities
December 31, 1999
<TABLE>
<S> <C>
ASSETS:
Investments, at value (Cost -- $8,121,940)......................... $7,782,500
Cash............................................................... 628
Receivable for Fund shares sold.................................... 580
Interest receivable................................................ 177,620
Receivable from investment manager................................. 14,651
Prepaid expenses................................................... 464
Other assets....................................................... 2,382
----------
Total Assets....................................................... 7,978,825
----------
LIABILITIES:
Payable for Fund shares purchased.................................. 2,637
Administration fee payable......................................... 350
Accrued expenses................................................... 35,938
----------
Total Liabilities.................................................. 38,925
----------
Total Net Assets.................................................... $7,939,900
==========
NET ASSETS:
Par value of capital shares........................................ $ 861
Capital paid in excess of par value................................ 8,566,581
Accumulated net realized loss from security transactions........... (288,102)
Net unrealized depreciation of investments......................... (339,440)
----------
Total Net Assets.................................................... $7,939,900
==========
Shares Outstanding.................................................. 861,076
----------
Net Asset Value, per share.......................................... $9.22
----------
</TABLE>
See Notes to Financial Statements.
9
<PAGE>
Statement of Operations
For the Year Ended December 31, 1999
<TABLE>
<S> <C>
INCOME:
Interest........................................................... $ 777,453
---------
EXPENSES:
Management fees (Note 2)........................................... 55,217
Shareholder communications......................................... 29,000
Audit and legal.................................................... 18,102
Shareholder and system servicing fees.............................. 12,271
Directors' fees.................................................... 5,600
Administration fees (Note 2)....................................... 3,681
Registration fees.................................................. 3,500
Custody............................................................ 1,800
Other.............................................................. 3,632
---------
Total Expenses..................................................... 132,803
Less: Management fee waiver and expense reimbursement (Note 2)..... (59,180)
---------
Net Expenses....................................................... 73,623
---------
Net Investment Income............................................... 703,830
---------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (NOTE 3):
Net Realized Loss From Security Transactions (excluding short-term
securities):
Proceeds from sales................................................ 4,003,807
Cost of securities sold............................................ 4,231,110
---------
Net Realized Loss.................................................. (227,303)
---------
Increase in Net Unrealized Depreciation of Investments:
Beginning of year.................................................. (275,564)
End of year........................................................ (339,440)
---------
Increase in Net Unrealized Depreciation............................ (63,876)
---------
Net Loss on Investments............................................. (291,179)
---------
Increase in Net Assets From Operations.............................. $ 412,651
=========
</TABLE>
See Notes to Financial Statements.
10
<PAGE>
Statements of Changes in Net Assets
For the Years Ended December 31,
<TABLE>
<CAPTION>
1999 1998(a)
OPERATIONS: ---------- -----------
<S> <C> <C>
Net investment income................................ $ 703,830 $ 300,589
Net realized loss.................................... (227,303) (60,799)
Increase in net unrealized depreciation.............. (63,876) (275,564)
---------- -----------
Increase (Decrease) in Net Assets From Operations.... 412,651 (35,774)
---------- -----------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income................................ (703,830) (300,589)
Capital.............................................. (6,198) (435)
---------- -----------
Decrease in Net Assets From Distributions to
Shareholders........................................ (710,028) (301,024)
---------- -----------
FUND SHARE TRANSACTIONS (NOTE 12):
Net proceeds from sale of shares..................... 4,847,107 8,698,225
Net asset value of shares issued for reinvestment of
dividends........................................... 572,293 301,024
Cost of shares reacquired............................ (4,131,224) (1,713,350)
---------- -----------
Increase in Net Assets From Fund Share Transactions.. 1,288,176 7,285,899
---------- -----------
Increase in Net Assets................................ 990,799 6,949,101
NET ASSETS:
Beginning of year.................................... 6,949,101 --
---------- -----------
End of year.......................................... $7,939,900 $ 6,949,101
========== ===========
</TABLE>
- ------
(a) For the period from May 1, 1998 (commencement of operations) to December
31, 1998.
See Notes to Financial Statements.
11
<PAGE>
Notes to Financial Statements
1. Organization and 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 seven other investment portfolios: Salomon Brothers Variable Capital
Fund, Salomon Brothers Variable Small Cap Growth 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 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 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; (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.
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 year ended December 31, 1999, SBAM waived all of its management fees
and reimbursed expenses of $3,963.
12
<PAGE>
Notes to Financial Statements
(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 SSB Citi Fund Management LLC
("SSBC"), formerly known as SSBC Fund Management Inc., an affiliate of SBAM,
pursuant to a Sub-Administration Agreement between SBAM and SSBC.
CFBDS, Inc. acts as the Fund's distributor. For the year ended December 31,
1999, Salomon Smith Barney Inc. ("SSB"), another subsidiary of SSBH, received
no brokerage commissions from the Fund.
3. Investments
During the year ended December 31, 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............................................................ $5,225,888
==========
Sales ............................................................... $4,003,807
==========
</TABLE>
At December 31, 1999, the aggregate gross unrealized appreciation and deprecia-
tion of investments for Federal income tax purposes were substantially as fol-
lows:
<TABLE>
<S> <C>
Gross unrealized appreciation....................................... $ 373,935
Gross unrealized depreciation....................................... (713,375)
---------
Net unrealized depreciation......................................... $(339,440)
=========
</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 December 31, 1999, the Fund did not have any open reverse repurchase agree-
ments.
13
<PAGE>
Notes to Financial Statements
(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 December 31, 1999, the Fund held purchased put options with a total cost of
$20,856.
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 Fund enters into options for hedging purposes. The risk associated with
purchasing options is limited to the premium originally paid. 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 year ended December 31, 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, cash or other liquid securities
are segregated to cover the amount of 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 December 31, 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. Beginning
on the date the Fund enters into a TBA transaction, cash or other liquid
securities are segregated in the amount of the TBA transaction. These
transactions are subject to market fluctuations and their current value is
determined in the same manner as for other securities.
At December 31, 1999, the Fund did not hold any TBA securities.
14
<PAGE>
Notes to Financial Statements
(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 December 31, 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 December 31, 1999, the Fund held loan participations with a total cost of
$230,662.
11. Capital Loss Carryforward
At December 31, 1999, the Fund had, for Federal income tax purposes, a capital
loss carryforward of approximately $227,000, available to offset future capital
gains. To the extent that these carryforward losses can be used to offset net
realized capital gains, such gains, if any, will not be distributed. Expiration
occurs on December 31 of the year indicated:
<TABLE>
<CAPTION>
2006 2007 Total
------- -------- --------
<S> <C> <C> <C>
Carryforward Amounts.................................. $61,000 $166,000 $227,000
======= ======== ========
</TABLE>
12. Capital Stock
At December 31, 1999, the Series had 10,000,000,000 shares of capital stock au-
thorized 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 dis-
tributions made by the Fund.
Transactions in shares were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1999 December 31, 1998(a)
----------------- --------------------
<S> <C> <C>
Shares sold............................ 493,131 871,685
Shares issued on reinvestment of
dividends............................. 62,274 31,422
Shares reacquired...................... (419,906) (177,530)
-------- --------
Net Increase........................... 135,499 725,577
======== ========
</TABLE>
- ------
(a) For the period May 1, 1998 (commencement of operations) through December
31, 1998.
15
<PAGE>
Financial Highlights
For a share of capital stock outstanding for the year ended December 31:
<TABLE>
<CAPTION>
1999 1998(1)
------ -------
<S> <C> <C>
Net Asset Value, Beginning of Year........................... $ 9.58 $10.00
------ ------
Income (Loss) From Operations:
Net investment income (2)................................... 0.88 0.43
Net realized and unrealized loss............................ (0.35) (0.42)
------ ------
Total Income From Operations................................ 0.53 0.01
------ ------
Less Distributions From:
Net investment income....................................... (0.88) (0.43)
Capital..................................................... (0.01) (0.00)*
------ ------
Total Distributions......................................... (0.89) (0.43)
------ ------
Net Asset Value, End of Year................................. $ 9.22 $ 9.58
====== ======
Total Return (3)............................................. 5.56% 0.14%++
Net Assets, End of Year (000s)............................... $7,940 $6,949
Ratios to Average Net Assets (2):
Expenses (4)................................................ 1.00% 1.00%+
Net investment income....................................... 9.56% 7.25%+
Portfolio Turnover Rate...................................... 58% 37%
</TABLE>
- ------
(1) For the period from May 1, 1998 (commencement of operations) through Decem-
ber 31, 1998.
(2) SBAM has waived all or a portion of its management fees for the year ended
December 31, 1999 and the period ended December 31, 1998. In addition, SBAM
has reimbursed the Fund for expenses of $3,963 and $11,942 for year ended
December 31, 1999 and the period ended December 31, 1998, respectively. If
such fees were not waived and expenses not reimbursed, the per share de-
crease in net investment income and the actual expense 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.................. $0.07 1.80%
1998.................. 0.06 2.04+
</TABLE>
(3) Total returns do not reflect expenses associated with the separate account
such as administrative fees, account charges and surrender charges which,
if reflected, would reduce the total returns for all periods shown.
(4) As a result of a voluntary expense limitation, expense ratios will not ex-
ceed 1.00%.
* 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.
16
<PAGE>
Report of Independent Accountants
To the Board of Directors and Shareholders of
Salomon Brothers Variable High Yield Bond Fund
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Salomon Brothers Variable High
Yield Bond Fund ("Fund") at December 31, 1999, the results of its operations
for the year then ended, and the changes in its net assets and the financial
highlights for the year then ended and for the period May 1, 1998 (commencement
of operations) through December 31, 1998, in conformity with accounting
principles generally accepted in the United States. These financial statements
and financial highlights (hereafter referred to as "financial statements") are
the responsibility of the Fund's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with auditing standards
generally accepted in the United States which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits, which included confirmation of
securities at December 31, 1999 by correspondence with the custodian, provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
New York, N.Y.
February 15, 2000
17
<PAGE>
[This page intentionally left blank]
<PAGE>
Salomon Brothers Variable Series Funds Inc
INVESTMENT MANAGER
Salomon Brothers Asset Management Inc
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
Directors
CHARLES F. BARBER
Consultant; formerly Chairman; ASARCO Inc.
CAROL L. COLMAN
Consultant, Colman Consulting
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, SSB Citi Fund Management LLC
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
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
<PAGE>
[LOGO OF SALOMON BROTHERS]
SEVEN WORLD TRADE CENTER . NEW YORK, NEW YORK 10048
<PAGE>
SALOMON BROTHERS
Variable Series Funds Inc
[GRAPHIC]
Annual Report 1999
DECEMBER 31, 1999
. SMALL CAP
GROWTH FUND
<PAGE>
SALOMON BROTHERS VARIABLE SERIES FUNDS INC
Our Message to You
DEAR SHAREHOLDER:
We are pleased to provide the first annual report for the Salomon Brothers
Variable Small Cap Growth Fund ("Fund") for the period ended December 31, 1999.
This letter discusses general economic and market conditions as well as Fund
highlights during the reporting period. A detailed summary of performance and
current Fund holdings can be found in the appropriate sections that follow. We
hope you find this report useful and informative.
INVESTMENT STRATEGY & PERFORMANCE UPDATE
The Fund seeks long-term growth of capital. The Fund seeks to achieve its
objective by investing primarily in securities of companies with market
capitalizations similar to that of companies included in the Russell 2000 Index.
The Russell 2000 Index includes companies with market capitalizations below the
top 1,000 stocks of the equity market. As of June 30, 1999, the market
capitalization of companies included in the Russell 2000 Index ranged from $80
million to $2.6 billion.
Since its inception on November 8, 1999 through December 31, 1999, the Fund
returned 21.60%.
MARKET OVERVIEW & PORTFOLIO HIGHLIGHTS
The performance of the small-cap sector was driven by the technology and
communications sectors which posted exceptional returns in 1999. In selecting
the Fund's investments, we emphasize companies which we believe have favorable
growth prospects and potential for significant capital appreciation. In
selecting individual companies for investment, we look for companies that, in
our view:
. Either occupy a dominant position in an emerging industry or a growing
market share in larger, fragmented industries;
. Have favorable near-term earnings trends;
. Exhibit high return on equity;
. Have strong financial conditions; and
. Have experienced and effective management.
We use a bottom-up approach to identify companies that we think will deliver
sustainable revenue and earnings growth. (Bottom-up investing is a management
style that de-emphasizes the significance of economic and market cycles,
focusing instead on the analysis of individual stocks.) Ideally, companies
should be in the early stages of sustainable high growth driven by new products,
technology or consolidation within an industry. The Fund continues to look for
many such opportunities in the technology, communications and consumer sectors,
and has recently begun to increase weightings in health care.
1
<PAGE>
The Fund's performance since inception is due in large part to its holdings in
the technology, telecom and consumer sectors.1 The Fund's holding in Oak
Industries (subsequently acquired by Corning, Inc. in early 2000), a leading
vendor of optical components used in telecommunications networking equipment,
positively contributed to its performance during the period. As a critical
element of the Internet's physical infrastructure, the optical components market
should, in our view, continue to grow well in excess of 100% per year due to
high demand from Internet and data service providers for higher-bandwidth,
optic-based equipment. We maintain positions in several companies poised to
benefit from the continued growth of the Internet's overall infrastructure.
MARKET OUTLOOK
While no guarantees can be given, we believe that the small-cap growth market
should broaden somewhat beyond the narrow focus on technology and
telecommunications stocks in 2000. However, in our opinion, these two sectors
should continue to provide market leadership. We are maintaining the Fund's
strategy of focusing on high-growth companies with powerful franchises and
market position, and firmly believe that our investment style can offer
investors the potential for significant long-term price appreciation.
Thank you for your investment in the Salomon Brothers Variable Small Cap Growth
Fund. We look forward to helping you pursue your financial goals in the new
century.
Sincerely,
/s/ Heath B. McLendon /s/ Matthew P. Ziehl
Heath B. McLendon Matthew P. Ziehl
Chairman and President Vice President
Member of Small Cap Growth
Portfolio Management Team
January 31, 2000
- ---------
1 Please note that Portfolio holdings are subject to change.
2
<PAGE>
Schedule of Investments
December 31, 1999
<TABLE>
<CAPTION>
Shares Security Value
<C> <S> <C>
- -------------------------------------------------------------------------------
COMMON STOCK -- 77.0%
Basic Industries -- 3.1%
600 The Geon Co............................................. $ 19,500
700 OM Group, Inc........................................... 24,106
800 Steel Dynamics, Inc. (a)................................ 12,750
----------
56,356
----------
Communications -- 9.2%
200 Cox Radio, Inc., Class A Shares (a)..................... 19,950
500 Electric Lightwave, Inc., Class A Shares (a)............ 9,375
300 Entercom Communications Corp. (a)....................... 19,800
800 GST Telecommunications, Inc. (a)........................ 7,250
700 ICG Communications Inc. (a)............................. 13,125
300 Intermedia Communications Inc. (a)...................... 11,644
200 Metromedia Fiber Network, Inc., Class A Shares (a)...... 9,587
300 Pac-West Telecom, Inc.(a)............................... 7,950
300 Pegasus Communications Corp. (a)........................ 29,325
Rogers Cantel Mobile Communications Inc., Class B Shares
400 (a)..................................................... 14,550
600 Sinclair Broadcast Group, Inc., Class A Shares (a)...... 7,322
200 WinStar Communications, Inc.(a)......................... 14,975
----------
164,853
----------
Consumer -- 11.3%
300 Abercrombie & Fitch Co., Class A Shares (a)............. 8,006
300 Charles River Associates Inc. (a)....................... 10,050
100 Coca-Cola Bottling Co. Consolidated..................... 4,738
600 Cost Plus, Inc. (a)..................................... 21,375
100 Cutter & Buck Inc. (a).................................. 1,513
800 DeVry, Inc. (a)......................................... 14,900
200 FactSet Research Systems Inc............................ 15,925
800 Fossil, Inc. (a)........................................ 18,500
200 MAXIMUS, Inc. (a)....................................... 6,787
800 Michael Foods, Inc...................................... 19,700
300 On Assignment, Inc. (a)................................. 8,962
800 The Profit Recovery Group International, Inc. (a)....... 21,250
300 QRS Corp. (a)........................................... 31,294
500 Station Casinos, Inc. (a)............................... 11,219
300 Trex Co., Inc. (a)...................................... 8,025
----------
202,244
----------
Energy -- 4.5%
1,600 Newfield Exploration Co. (a)............................ 42,800
100 Paradigm Geophysical Ltd. (a)........................... 491
1,000 Pogo Producing Co....................................... 20,500
300 Rowan Companies, Inc. (a)............................... 6,506
200 SEACOR SMIT Inc. (a).................................... 10,350
----------
80,647
----------
Financial Services -- 4.8%
400 Banknorth Group, Inc.................................... 10,700
400 Commerce Bancorp, Inc................................... 16,175
</TABLE>
See Notes to Financial Statements.
3
<PAGE>
Schedule of Investments
December 31, 1999 (continued)
<TABLE>
<CAPTION>
Shares Security Value
<C> <S> <C>
- --------------------------------------------------------------------------------
Financial Services -- 4.8% (continued)
200 Cousins Properties, Inc.................................. $ 6,788
500 Legg Mason, Inc.......................................... 18,125
200 PS Business Parks, Inc................................... 4,550
600 Protective Life Corp..................................... 19,087
400 Westamerica Bancorporation............................... 11,175
----------
86,600
----------
Health Care -- 3.3%
600 Alpharma Inc., Class A Shares............................ 18,450
200 COR Therapeutics, Inc. (a)............................... 5,375
100 IDEC Pharmaceuticals Corp. (a)........................... 9,825
500 Health Management Associates, Inc., Class A Shares (a)... 6,687
700 MedQuist Inc. (a)........................................ 18,069
----------
58,406
----------
Technology -- 40.8%
250 Applied Micro Circuits Corp. (a)......................... 31,813
700 ASM International N.V. (a)............................... 16,100
1,000 Brooktrout Technology Inc. (a)........................... 18,563
225 Commerce One, Inc. (a)................................... 44,213
500 Concord Communications, Inc. (a)......................... 22,188
1,300 Digital Microwave Corp. (a).............................. 30,469
200 Drugstore.com, Inc. (a).................................. 7,238
400 eCollege.com, Inc. (a)................................... 4,375
300 Engage Technologies, Inc. (a)............................ 18,000
400 Exar Corp. (a)........................................... 23,550
300 Inet Technologies, Inc. (a).............................. 20,962
1,000 Insight Enterprises, Inc. (a)............................ 40,625
800 Keane, Inc. (a).......................................... 25,400
100 The Knot, Inc. (a)....................................... 844
600 Legato Systems, Inc. (a)................................. 41,287
400 Micro Linear Corp. (a)................................... 3,425
1,500 Micron Electronics Inc. (a).............................. 16,687
100 MTI Technology Corp. (a)................................. 3,687
700 Network Appliance, Inc. (a).............................. 58,144
700 Newport Corp............................................. 32,025
500 Oak Industries Inc....................................... 53,063
200 Ortel Corp. (a).......................................... 24,000
1,200 PairGain Technologies, Inc. (a).......................... 17,025
100 PlanetRx.com, Inc. (a)................................... 1,450
400 Polycom, Inc. (a)........................................ 25,475
1,200 S3 Inc. (a).............................................. 13,875
500 Sawtek Inc. (a).......................................... 33,281
800 Siebel Systems, Inc. (a)................................. 67,200
300 Technology Solutions Co. (a)............................. 9,825
100 TranSwitch Corp. (a)..................................... 7,256
250 Visual Networks, Inc. (a)................................ 19,812
----------
731,857
----------
TOTAL COMMON STOCK
(Cost -- $1,164,889)..................................... 1,380,963
----------
</TABLE>
See Notes to Financial Statements.
4
<PAGE>
Schedule of Investments
December 31, 1999 (continued)
<TABLE>
<CAPTION>
Contracts Security Value
<C> <S> <C>
- -------------------------------------------------------------------------------
PURCHASED OPTIONS (a) -- 0.0%
IDEC Pharmaceuticals Corp., Put @ $55 Expire 1/22/00
2 (Cost -- $928)......................................... $ 25
----------
SUB-TOTAL INVESTMENTS
(Cost -- $1,165,817)................................... 1,380,988
----------
<CAPTION>
Face
Amount
------
<C> <S> <C>
REPURCHASE AGREEMENTS -- 23.0%
$206,000 J.P. Morgan Securities, 2.900% due 1/3/00; Proceeds at
maturity -- $206,050;
(Fully collateralized by U.S. Treasury Bonds, 9.000%
due 11/15/18;
Market value -- $210,120)............................. 206,000
206,000 State Street Bank & Trust Co., 3.000% due 1/3/00;
Proceeds at maturity -- $206,052;
(Fully collateralized by U.S. Treasury Bonds, 8.500%
due 2/15/20;
Market value -- $212,625)............................. 206,000
----------
TOTAL REPURCHASE AGREEMENTS
(Cost -- $412,000)..................................... 412,000
----------
TOTAL INVESTMENTS
(Cost -- $1,577,817*).................................. $1,792,988
==========
</TABLE>
- ------
(a) Non-income producing security.
* Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
5
<PAGE>
Statement of Assets and Liabilities
December 31, 1999
<TABLE>
<S> <C>
ASSETS:
Investments, at value (Cost -- $1,165,817)......................... $1,380,988
Repurchase agreements, at value (Cost -- $412,000)................. 412,000
Cash............................................................... 711
Receivable from investment manager................................. 27,494
Receivable for Fund shares sold.................................... 19,402
Dividends and interest receivable.................................. 86
----------
Total Assets....................................................... 1,840,681
----------
LIABILITIES:
Payable for securities purchased................................... 9,469
Administration fee payable......................................... 66
Accrued expenses................................................... 30,320
----------
Total Liabilities.................................................. 39,855
----------
Total Net Assets.................................................... $1,800,826
==========
NET ASSETS:
Par value of capital shares........................................ $ 148
Capital paid in excess of par value................................ 1,531,218
Undistributed net investment income................................ 318
Accumulated net realized gain from security transactions and
options........................................................... 53,971
Net unrealized appreciation of investments and options............. 215,171
----------
Total Net Assets.................................................... $1,800,826
==========
Shares Outstanding.................................................. 148,040
----------
Net Asset Value, per share.......................................... $ 12.16
----------
</TABLE>
See Notes to Financial Statements.
6
<PAGE>
Statement of Operations
For the Period Ended December 31, 1999(a)
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest............................................................ $ 2,779
Dividends........................................................... 462
--------
Total Investment Income............................................. 3,241
--------
EXPENSES:
Audit and legal..................................................... 16,500
Shareholder communications.......................................... 8,000
Custody............................................................. 2,200
Management fees (Note 2)............................................ 1,462
Shareholder and system servicing fees............................... 1,120
Registration fees................................................... 500
Administration fees (Note 2)........................................ 97
Other............................................................... 2,000
--------
Total Expenses...................................................... 31,879
Less: Management fee waiver and expense reimbursement (Note 2)...... (28,956)
--------
Net Expenses........................................................ 2,923
--------
Net Investment Income................................................ 318
--------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND OPTIONS (NOTES
3 AND 5):
Realized Gain (Loss) From:
Security transactions (excluding short-term securities)............. 59,379
Options purchased................................................... (907)
Options written..................................................... (4,501)
--------
Net Realized Gain................................................... 53,971
--------
Change in Net Unrealized Appreciation of Investments and Options:
Beginning of period................................................. --
End of period....................................................... 215,171
--------
Increase in Net Unrealized Appreciation............................. 215,171
--------
Net Gain on Investments and Options.................................. 269,142
--------
Increase in Net Assets From Operations............................... $269,460
========
</TABLE>
- ------
(a) For the period from November 8, 1999 (commencement of operations) to Decem-
ber 31, 1999.
See Notes to Financial Statements.
7
<PAGE>
Statement of Changes in Net Assets
For the Period Ended December 31, 1999(a)
<TABLE>
<S> <C>
OPERATIONS:
Net investment income.............................................. $ 318
Net realized gain.................................................. 53,971
Change in net unrealized appreciation.............................. 215,171
----------
Increase in Net Assets From Operations............................. 269,460
----------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income.............................................. --
Net realized gains................................................. --
----------
Decrease in Net Assets From Distributions to Shareholders.......... --
----------
FUND SHARE TRANSACTIONS (Note 9):
Net proceeds from sale of shares................................... 1,531,686
Cost of shares reacquired.......................................... (320)
----------
Increase in Net Assets From Fund Share Transactions................ 1,531,366
----------
Increase in Net Assets.............................................. 1,800,826
NET ASSETS:
Beginning of period................................................ --
----------
End of period*..................................................... $1,800,826
==========
* Includes undistributed net investment income of: ................. $318
====
</TABLE>
- ------
(a) For the period from November 8, 1999 (commencement of operations) to Decem-
ber 31, 1999.
See Notes to Financial Statements.
8
<PAGE>
Notes to Financial Statements
1. Organization and Significant Accounting Policies
Salomon Brothers Variable Small Cap Growth 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. 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 seven 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
Investors 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 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; (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.
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 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 0.75% of its average daily net
assets. This fee is calculated daily and paid monthly.
9
<PAGE>
Notes to Financial Statements
(continued)
For the period ended December 31, 1999, SBAM waived all of its management fees
and reimbursed expenses amounting to $27,494.
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 SSB Citi Fund Management LLC
("SSBC"), formerly known as SSBC Fund Management Inc., an affiliate of SBAM,
pursuant to a Sub-Administration Agreement between SBAM and SSBC.
CFBDS, Inc. acts as the Fund's distributor. For the period ended December 31,
1999, Salomon Smith Barney Inc. ("SSB"), another subsidiary of SSBH, received
brokerage commissions of $474 from the Fund.
3. Investments
During the period ended December 31, 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............................................................ $1,380,896
==========
Sales................................................................ $ 275,387
==========
</TABLE>
At December 31, 1999, the aggregate gross unrealized appreciation and deprecia-
tion of investments for Federal income tax purposes were substantially as fol-
lows:
<TABLE>
<S> <C>
Gross unrealized appreciation....................................... $ 257,807
Gross unrealized depreciation....................................... (42,636)
----------
Net unrealized appreciation......................................... $ 215,171
==========
</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 December 31, 1999, the Fund held purchased put options with a total cost of
$928.
10
<PAGE>
Notes to Financial Statements
(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 Fund enters into options for hedging purposes. The risk associated with
purchasing options is limited to the premium originally paid. 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 represents the written call option transactions which occurred
during the period ended December 31, 1999:
<TABLE>
<CAPTION>
Number of
Contracts Premiums
--------- --------
<S> <C> <C>
Options written, outstanding at November 8, 1999 (inception
date)..................................................... 0 $ 0
Options written during the year ended December 31, 1999.... 4 5,513
Options cancelled in closing purchase transactions......... (4) (5,513)
------ ------
Options written, outstanding at December 31, 1999.......... 0 $ 0
====== ======
</TABLE>
The following represents the written put option transactions which occurred
during the period ended December 31, 1999:
<TABLE>
<CAPTION>
Number of
Contracts Premiums
--------- --------
<S> <C> <C>
Options written, outstanding at November 8, 1999 (inception
date)..................................................... 0 $ 0
Options written during the period ended December 31, 1999.. 1 48
Options cancelled in closing purchase transactions......... (1) (48)
------ ------
Options written, outstanding at December 31, 1999.......... 0 $ 0
====== ======
</TABLE>
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, cash or other liquid securities
are segregated to cover the amount of 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 December 31, 1999, the Fund did not hold any when-issued securities.
11
<PAGE>
Notes to Financial Statements
(continued)
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. Beginning
on the date the Fund enters into a TBA transaction, cash or other liquid
securities are segregated in the amount of the TBA transaction. These
transactions are subject to market fluctuations and their current value is
determined in the same manner as for other securities.
At December 31, 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 December 31, 1999, the Fund did not have any securities on loan.
9. Capital Stock
At December 31, 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>
Period Ended
December 31, 1999(a)
--------------------
<S> <C>
Shares sold................................................ 148,068
Shares issued on reinvestment of dividends................. --
Shares reacquired.......................................... (28)
-------
Net Increase............................................... 148,040
=======
</TABLE>
- ------
(a) For the period November 8, 1999 (commencement of operations) through
December 31, 1999.
12
<PAGE>
Financial Highlights
For a share of capital stock outstanding for the period ended December 31:
<TABLE>
<CAPTION>
1999(1)
-------
<S> <C>
Net Asset Value, Beginning of Year................................... $10.00
------
Income From Operations:
Net investment income (2)........................................... --
Net realized and unrealized gain ................................... 2.16
------
Total Income From Operations........................................ 2.16
------
Less Distributions From:
Net investment income............................................... --
Net realized gains.................................................. --
------
Total Distributions................................................. --
------
Net Asset Value, End of Year......................................... $12.16
======
Total Return (3)..................................................... 21.60%++
Net Assets, End of Year (000s)....................................... $1,801
Ratios to Average Net Assets (2):
Expenses (4)........................................................ 1.50%+
Net investment income............................................... 0.16+
Portfolio Turnover Rate.............................................. 16%
</TABLE>
- ------
(1) For the period from November 8, 1999 (commencement of operations) through
December 31, 1999.
(2) SBAM has waived all or part of its management fees for the period ended
December 31, 1999. In addition, SBAM has reimbursed the Fund for $27,494 in
expenses for the period ended December 31, 1999. 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............... $0.20 16.36%+
</TABLE>
(3) Total returns do not reflect expenses associated with the separate account
such as administrative fees, account charges and surrender charges which,
if reflected, would reduce the total returns for all periods shown.
(4) As a result of a voluntary expense limitation, expense ratios will not
exceed 1.50%.
* 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.
13
<PAGE>
Report of Independent Accountants
To the Board of Directors and Shareholders of
Salomon Brothers Variable Small Cap Growth Fund
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Salomon Brothers Variable Small
Cap Growth Fund ("Fund") at December 31, 1999, and the results of its
operations, the changes in its net assets and the financial highlights for the
period from November 8, 1999 (commencement of operations) through December 31,
1999, in conformity with accounting principles generally accepted in the United
States. These financial statements and financial highlights (hereafter referred
to as "financial statements") are the responsibility of the Fund's management;
our responsibility is to express an opinion on these financial statements based
on our audit. We conducted our audit of these financial statements in
accordance with auditing standards generally accepted in the United States
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit, which included
confirmation of securities at December 31, 1999 by correspondence with the
custodian and brokers, provides a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
New York, N.Y.
February 15, 2000
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
Directors
CHARLES F. BARBER
Consultant; formerly Chairman; ASARCO Incorporated
CAROL L. COLMAN
Consultant, Colman Consulting
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, SSB Citi Fund Management LLC
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
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
<PAGE>
[LOGO OF SALOMON BROTHERS]
SEVEN WORLD TRADE CENTER . NEW YORK, NEW YORK 10048
<PAGE>
SALOMON BROTHERS
Variable Series Funds Inc
[GRAPHIC]
Annual
Report
1999
DECEMBER 31, 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 annual report for the Salomon Brothers
Variable Strategic Bond Fund ("Fund") for the year ended December 31, 1999. This
letter discusses general economic and market conditions as well as Fund
highlights during the reporting period. A detailed summary of performance and
current Fund holdings can be found in the appropriate sections that follow. We
hope you find this report useful and informative.
INVESTMENT STRATEGY & PERFORMANCE UPDATE
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 year ended December
31, 1999, the Fund returned 0.37%. In comparison, the Salomon Smith Barney Broad
Investment-Grade ("BIG") Bond Index1 returned a negative 0.83% and the Lehman
Brothers Aggregate Bond Index2 returned a negative 0.82%. The Fund's
outperformance relative to the BIG Index can be attributed to its allocation to
the high-yield and emerging market debt sectors, which had a stellar year
relative to the investment-grade bond sector.
1999 proved to be a difficult year for the U.S. bond markets. A strong domestic
economy, more than doubling of 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 yield curve shows the difference
between short- and long-term rates.) The Federal Reserve Board ("Fed") added to
the bond market's malaise by adopting a tightening bias in May and then raising
the federal funds rate by 75 basis points in three 25-basis-points increments to
5.5% over the remaining seven months of the year. Many thought that U.S.
Treasury bonds might act as a safe haven in the period leading up to Y2K.
However, this expectation proved incorrect and the 30-year Treasury bond posted
its worst one-year return ever, declining by 14.89%.
_______________
1 The Salomon Smith Barney Broad Investment-Grade (BIG) Bond Index includes
institutionally traded U.S. Treasury Bonds, government-sponsored bonds
(U.S. Agency and supranational), mortgage-backed securities and corporate
securities. 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 The Lehman Brothers Aggregate Bond Index is a broad measure of the
performance of taxable bonds in the U.S. market, with maturities of at
least one year.
1
<PAGE>
Financial markets began 1999 under the shadow of the 1998 financial crisis.
Caution prevailed among bond investors who remained overweighted in high-quality
bonds such as U.S. Treasuries. Investor fears proved to be well-founded by
mid-January, when Brazil devalued its currency, the Real 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
hindsight, the episode became a bottoming event that boosted the confidence of
investors to venture out of U.S. Treasuries into higher-yielding bonds. We
believe that the Fund was well-positioned for the market's "flight to risk" with
average allocations during 1999 of approximately 30% and 20% to U.S. high-yield
and the emerging market debt sectors, respectively.
Rebounding from a tough 1998, emerging markets debt ("EMD") was by far the
best-performing bond market, posting a total return of 25.99% for the year as
measured by the JP Morgan Emerging Markets Bond Index Plus3. EMD benefited from
an increase in global economic activity, improving fundamentals in a number of
key countries and rising oil prices.
The improved outlook for world economic growth encouraged investors, throughout
the year, to increase commitments to emerging markets debt. The strength of the
economic recovery in Asia, an important market for Latin American exports, had a
positive effect on EMD. Evidence of cyclical recoveries in Argentina, Brazil and
Venezuela also improved the outlook for investors. Oil price strength over the
past three months (up approximately 4%) and especially over the full year (up
over 100%) continued to drive many emerging economies. Russia, Algeria,
Venezuela, Mexico and Colombia should all benefit from rising oil prices.
The high-yield bond market, while not nearly as strong as emerging markets debt,
also performed well relative to U.S. investment-grade bonds. High-Yield bonds as
measured by the Salomon Smith Barney High-Yield Market Index returned 1.73%4,
outperforming investment-grade bonds by 2.56% for the year.
We forecast that the Fed will raise interest rates 75 points to 6.25% in 2000.5
This tightening should likely do more to flatten the yield curve than move the
overall bond market to significantly higher levels.
_______________
3 The JP Morgan Emerging Markets Bond Index Plus ("EMBI+") is a total return
index that tracks the traded market for U.S. dollar-dominated Brady and other
sovereign restructured bonds traded in emerging markets.
4 The Salomon Smith Barney High Yield Market Index covers a significant portion
of the below-investment-grade U.S. corporate bond market.
5 On February 2, 2000 after this letter was written, the Fed raised interest
rates 0.25% to 5.75%.
2
<PAGE>
If the Fed is successful in offsetting rising inflation, we anticipate that
long-term interest rates should start to fall toward the end of 2000 and into
2001. We remain optimistic on the outlook for EMD and high-yield paper. EMD
should perform well as the strength in the global economy keeps commodity prices
well supported in 2000. In addition, we expect high-yield bonds to benefit from
declining default rates, strong merger and acquisition activity, wide spreads
and solid growth, coupled with low to moderate inflation in the U.S.
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 new
century.
Sincerely,
/s/ Heath B. McLendon /s/ Peter J. Wilby
Heath B. McLendon Peter J. Wilby
Chairman and President Executive Vice President
January 28, 2000
3
<PAGE>
The following graph depicts the performance of the strategic Bond 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 (unaudited)
SALOMON BROTHERS VARIABLE STRATEGIC BOND FUND
Comparison of $10,000 investment in the Fund with Lehman Brothers Aggregate
Bond Index.
[GRAPH]
Strategic Lehman Brothers
Bond Fund Aggregate Bond Index
2/17/98 10,000 10,000
6/98 10,190 10,269
12/98 10,617 10,739
6/99 10,533 10,591
12/31/99 10,657 10,650
Past performance is not predictive of future performance. The graph does not
reflect expenses associated with the separate account as administrative fees,
account as charges which, if reflected, would reduce the performance shown.
- --------------------------------------------------------------------------------
Historical Performance
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
-------------------
Beginning End Income Capital Gain Return of Total
Year Ended of Year of Year Dividend Distribution Capital Returns
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
12/31/99 $10.13 $ 9.66 $0.51 $0.00 $0.00 0.37%
- ----------------------------------------------------------------------------------------------------------------------------------
Inception*-- 12/31/98 10.00 10.13 0.47 0.01 0.01 6.18++
- ----------------------------------------------------------------------------------------------------------------------------------
$0.98 $0.01 $0.01
- ----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Average Annual Total Returns+
- ----------------------------------------------------------------------------------------------------------------------------------
Year Ended 12/31/99 0.37%
- ----------------------------------------------------------------------------------------------------------------------------------
Inception* through 12/31/99 3.47
- ----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Cumulative Total Return+
- ----------------------------------------------------------------------------------------------------------------------------------
Inception* through 12/31/99 6.57%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Assumes the reinvestment of all dividends and capital gains distributions at
net asset value. Total returns do not reflect expenses associated with the
separate accounts such as administrative fees, account charges and surrender
charges which, if reflected, would reduce the total return for all periods
shown.
++ 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
December 31, 1999
<TABLE>
<CAPTION>
Face
Amount Security Value
- -------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCIES & OBLIGATIONS -- 22.6%
<C> <S> <C>
U.S. Treasury Notes:
$ 10,000 4.750% due 2/15/04............................ $ 9,438
645,000 4.750% due 11/15/08 (a)....................... 569,387
U.S. Treasury Bonds:
10,000 6.125% due 11/15/27 (a)....................... 9,313
35,000 5.500% due 8/15/28 (a)........................ 29,875
250,000 5.250% due 2/15/29 (a)........................ 207,120
Federal National Mortgage Association:
900,000 6.000%, 30 year (b)(c)........................ 823,500
1,000,000 6.500%, 30 year (b)(c)........................ 942,180
2,000,000 7.500%, 30 year (b)(c)........................ 1,978,740
-----------
TOTAL U.S. GOVERNMENT AGENCIES & OBLIGATIONS
(Cost -- $4,768,540).......................... 4,569,553
-----------
ASSET-BACKED SECURITIES -- 0.4%
100,000 Contimortgage Home Equity Loan, Series 1999-3,
Class B, 7.000% due 7/25/30 (Cost --
$84,187).................................... 74,656
-----------
COMMERCIAL MORTGAGE-BACKED SECURITIES -- 1.6%
125,000 Commercial Mortgage Asset Trust, Series 1999-
C1, Class C, 7.350% due 8/17/13.............. 114,375
DLJ Commercial Mortgage Corp.:
987,404 Series 1998-CF2, Class S, 0.848% due
11/12/31(d).................................. 48,445
589,700 Series 1998-CG1, Class S, 0.703% due 5/10/23
(d).......................................... 23,588
150,000 LB Commercial Conduit Mortgage Trust, Series
1999-C1, Class A2, 6.780% due 4/15/09........ 143,111
-----------
TOTAL COMMERCIAL MORTGAGE-BACKED SECURITIES
(Cost -- $346,857)............................ 329,519
-----------
MORTGAGE-BACKED SECURITIES -- 3.5%
89,792 Countrywide Mortgage Backed Securities, Inc.,
Series 1994-J, Class B1, 7.750% due 6/25/24.. 88,291
FANNIEMAE-ACES:
55,224 Series 1996-M6, Class A, 7.393% due 8/17/03... 55,242
1,294,516 Series 1999-M3, Class N, 1.041% due 6/25/38
(d).......................................... 72,782
24,408 First Union Residential Securitization, Series
1998-A, Class B2, 7.000% due 8/25/28......... 21,319
98,765 GE Capital Mortgage Services Inc., Series
1998-15, Class B1, 6.750% due 11/25/28....... 88,426
93,917 Green Tree Financial Corp., Series 1997-6,
Class A8, 7.070% due 1/15/29................. 89,985
115,161 Mid-State Trust, Series 6, Class A1, 7.340%
due 7/1/35................................... 111,922
PNC Mortgage Securities:
24,589 Series 1998-4, Class 3B3, 6.750% due 5/25/28.. 20,678
24,572 Series 1998-4, Class CB3, 6.838% due 5/25/28.. 20,572
24,472 Series 1998-5, Class CB3, 6.734% due 7/25/28.. 20,610
74,407 Series 1999-1, Class CB2, 6.772% due 3/25/29.. 65,525
64,302 Series 1999-2, Class DB3, 6.904% due 4/25/29.. 53,472
-----------
TOTAL MORTGAGE-BACKED SECURITIES
(Cost -- $755,105)............................ 708,824
-----------
CORPORATE BONDS & NOTES -- 18.2%
Basic Industries -- 3.0%
125,000 AEI Resources Inc., 10.500% due 12/15/05 (e).. 88,750
125,000 Algoma Steel Inc., 1st Mortgage, 12.375% due
7/15/05...................................... 118,125
100,000 Doman Industries Ltd., 12.000% due 7/1/04..... 104,250
125,000 Lyondell Chemical, Sr. Secured Notes, Series
B, 9.875% due 5/1/07......................... 129,688
125,000 PCI Chemicals Canada Inc., Series B, Sr.
Secured Notes, 9.250% due 10/15/07 (a)....... 96,563
25,000 Praxair, Inc., 6.150% due 4/15/03............. 23,906
25,000 Raytheon Co., 6.150% due 11/1/08.............. 22,125
45,000 Service Corporation International, 6.000% due
12/15/05..................................... 34,088
-----------
617,495
-----------
</TABLE>
See Notes to Financial Statements.
5
<PAGE>
Schedule of Investments
December 31, 1999 (continued)
<TABLE>
<CAPTION>
Face
Amount Security Value
- -------------------------------------------------------------------------------
Consumer Cyclicals -- 0.9%
<C> <S> <C>
$ 125,000 HMH Properties Inc., Series B, Sr. Notes,
7.875% due 8/1/08............................ $ 111,875
75,000 Staples Inc., Sr. Notes, 7.125% due 8/15/07
(a).......................................... 72,000
-----------
183,875
-----------
Consumer Non-Cyclicals -- 1.4%
125,000 French Fragrances, Inc., Series B, Sr. Notes,
10.375% due 5/15/07 (a)...................... 121,250
125,000 Park Place Entertainment, Sr. Sub. Notes,
7.875% due 12/15/05.......................... 120,000
60,000 Pueblo Xtra International, Sr. Notes, 9.500%
due 8/1/03................................... 36,600
-----------
277,850
-----------
Energy -- 1.0%
125,000 Belco Oil & Gas Corp., Sr. Sub. Notes, 8.875%
due 9/15/07.................................. 120,000
125,000 Clark R & M Inc., Sr. Sub. Notes, 8.875% due
11/15/07 (a)................................. 75,625
-----------
195,625
-----------
Financial Services -- 2.3%
100,000 Bank of America Corp., Sr. Notes, 6.625% due
6/15/04...................................... 97,750
125,000 Contifinancial Corp., Sr. Notes, 8.125% due
4/1/08....................................... 15,000
50,000 Countywide Home Loans, Inc., Medium Term
Notes, 6.250% due 4/15/09.................... 44,938
100,000 Ford Motor Credit Co., 7.375% due 10/28/09
(a).......................................... 99,000
10,000 Merrill Lynch & Co., Inc., 6.000% due
11/15/04..................................... 9,475
Paine Webber Group Inc.:
50,000 7.625% due 12/1/09........................... 48,688
50,000 Sub. Notes, 7.750% due 9/1/02................ 50,250
100,000 TPSA Finance BV, 7.750% due 12/10/08 (e)...... 93,375
-----------
458,476
-----------
Housing Related -- 1.2%
250,000 Forest City Enterprises, Sr. Notes, 8.500% due
3/15/08 (a).................................. 234,688
-----------
Manufacturing -- 1.3%
125,000 Axiohm Transaction Solution Inc., 9.750% due
10/1/07 (a)(f)............................... 28,750
125,000 Breed Technologies Inc., Sr. Sub. Notes,
9.250% due 4/15/08 (f)(g).................... 3,750
75,000 High Voltage Engineering Corp., Sr. Notes,
10.500% due 8/15/04.......................... 66,375
125,000 Navistar International Corp., Sr. Sub. Notes,
8.000% due 2/1/08 (a)........................ 120,313
50,000 TRW Inc., 6.450% due 6/15/01.................. 49,375
-----------
268,563
-----------
Media & Telecommunications -- 5.2%
17,091 Adelphia Communications, Sr. Notes, 9.500% due
2/15/04 (i).................................. 16,835
125,000 Albritton Communications, Sr. Sub. Debentures,
9.750% due 11/30/07.......................... 126,563
75,000 Centennial Cellular, Sr. Sub. Notes, 10.750%
due 12/15/08 (a)............................. 80,813
125,000 Century Communications, Sr. Notes, 8.875% due
1/15/07 (a).................................. 122,500
200,000 Charter Communications Holdings LLC, Sr.
Discount Notes, zero coupon until 4/1/04,
9.920% thereafter due 4/1/11................. 118,000
125,000 CSC Holdings Inc., Sr. Debentures, 7.625% due
7/15/18 (a).................................. 116,250
125,000 Falcon Holding Group L.P., Series B, Sr.
Debentures, 8.375% due 4/15/10............... 126,250
125,000 Granite Broadcasting Corp., Sr. Sub. Notes,
8.875% due 5/15/08........................... 121,563
125,000 Hollinger International Publishing Inc., Sr.
Sub. Notes, 9.250% due 3/15/07 (a)........... 124,063
100,000 Telewest Communication PLC, Debentures, zero
coupon until 10/1/00, 11.000% thereafter due
10/1/07...................................... 93,500
-----------
1,046,337
-----------
</TABLE>
See Notes to Financial Statements.
6
<PAGE>
Schedule of Investments
December 31, 1999 (continued)
<TABLE>
<CAPTION>
Face
Amount Security Value
- -------------------------------------------------------------------------------
Real Estate Investment Trust -- 0.2%
<C> <S> <C>
$ 50,000 Spieker Properties L.P., 7.250% due 5/1/09.... $ 46,563
-----------
Services & Other -- 1.0%
20,000 Comdisco, Inc., Sr. Notes, 6.130% due
1/30/02...................................... 19,350
125,000 Sitel Corp., Sr. Sub. Notes, 9.250% due
3/15/06 (a).................................. 115,156
75,000 Sprint Capital Corp., Medium Term Notes,
6.500% due 11/15/01.......................... 74,344
-----------
208,850
-----------
Transportation -- 0.5%
100,000 Atlantic Express Transportation Corp., Sr.
Secured Notes, 10.750% due 2/1/04 (a)........ 97,500
-----------
Utilities -- 0.2%
40,000 GTE Corp., Debentures, 6.940% due 4/15/28..... 36,150
-----------
TOTAL CORPORATE BONDS & NOTES
(Cost -- $4,236,444).......................... 3,671,972
-----------
SOVEREIGN BONDS (h) -- 26.9%
Argentina -- 2.2%
Republic of Argentina:
200,000 11.750% due 4/7/09............................ 201,500
75,000 11.375% due 1/30/17 (a)....................... 74,756
176,000 FRB, 6.8125% due 3/31/05 (j).................. 161,040
-----------
437,296
-----------
Australia -- 0.6%
120,000 AUD Commerzbank, 10.250% due 4/20/00.............. 79,474
70,000 AUD General Electric Capital Corp., 5.875% due
7/7/00....................................... 45,794
-----------
125,268
-----------
Brazil -- 4.3%
Federal Republic of Brazil:
195,000 14.500% due 10/15/09 (a)...................... 216,548
554,285 C Bonds, 8.000% due 4/15/14 (a)(i)............ 417,100
250,000 DCB, Series L, 7.000% due 4/15/12 (j)......... 187,188
56,400 Series EI, 6.9375% due 4/15/06 (j)............ 49,632
-----------
870,468
-----------
Bulgaria -- 0.8%
Republic of Bulgaria:
125,000 FLIRB, Series A, 2.750% due 7/28/12 (j)....... 90,313
100,000 IAB, 6.500% due 7/28/11 (j)................... 79,250
-----------
169,563
-----------
Canada -- 0.7%
200,000 CAD Merrill Lynch & Co., 5.970% due 9/11/00....... 138,156
-----------
Colombia -- 0.9%
175,000 Republic of Colombia, 10.875% due 3/9/04 (a).. 179,813
-----------
Croatia -- 0.5%
108,180 Republic of Croatia, Series B, 6.456% due
7/31/06 (j).................................. 99,796
-----------
</TABLE>
See Notes to Financial Statements.
7
<PAGE>
Schedule of Investments
December 31, 1999 (continued)
<TABLE>
<CAPTION>
Face
Amount Security Value
- -------------------------------------------------------------------------------
Germany -- 3.9%
<C> <C> <S> <C>
40,000 EUR Bundesschatzanweisungen, 4.000% due 6/16/00... $ 40,391
Deutschland Republic:
310,000 EUR 5.875% due 5/15/00............................ 314,979
190,000 EUR 5.625% due 1/4/28............................. 181,967
KFW International Finance:
100,000 PLN 16.300% due 6/24/03........................... 26,207
22,000,000 JPY 2.050% due 9/21/09............................ 221,373
-----------
784,917
-----------
Greece -- 2.0%
Hellenic Republic:
5,200,000 GRD 11.000% due 2/25/00........................... 15,919
12,000,000 GRD 7.600% due 1/22/02............................ 37,275
77,800,000 GRD 8.900% due 4/1/03............................. 254,108
30,000,000 GRD 6.600% due 1/15/04............................ 92,278
-----------
399,580
-----------
Italy -- 0.1%
30,000 EUR Buoni Poliennali Del Tes, 5.250% due 11/1/29.. 26,957
-----------
Ivory Coast -- 0.3%
300,000 Republic of Ivory Coast, FLIRB, 2.000% due
3/29/18 (j).................................. 55,500
-----------
Mexico -- 2.7%
United Mexican States:
140,000 10.375% due 2/17/09........................... 149,800
500,000 Par Bonds, Series W-B, 6.250% due 12/31/19.... 394,063
-----------
543,863
-----------
Norway -- 0.6%
1,000,000 NOK Norwegian Government, T-Bills, 5.250% due
3/15/00...................................... 124,744
-----------
Panama -- 0.4%
100,000 Republic of Panama, 8.875% due 9/30/27........ 84,750
-----------
Peru -- 0.8%
250,000 Republic of Peru, PDI, 4.500% due 3/7/17
(a)(j)....................................... 171,563
-----------
Philippines -- 0.2%
50,000 Bangko Sentral Pilipinas, 8.600% due 6/15/27.. 42,125
-----------
Poland -- 0.7%
590,000 PLN Nordic Investment Bank, 17.750% due 4/15/02... 151,704
-----------
Russia -- 1.9%
Russian Government:
600,000 IAN, due 12/15/15 (f)(g)...................... 108,000
400,000 Ministry of Finance, 12.750% due 6/24/28 (a).. 279,000
-----------
387,000
-----------
Slovenia -- 0.1%
30,000 EUR Republic of Slovenia, 5.375% due 5/27/05...... 29,826
-----------
Spain -- 0.3%
50,000 EUR Kingdom of Spain, 6.150% due 1/31/13.......... 52,242
-----------
</TABLE>
See Notes to Financial Statements.
8
<PAGE>
Schedule of Investments
December 31, 1999 (continued)
See Notes to Financial Statements.
<TABLE>
<CAPTION>
Face
Amount Security Value
- -------------------------------------------------------------------------------
<C> <C> <S> <C>
Supra National -- 0.4%
100,000 PLN European Bank of Reconstruction and
Development, 10.500% due 1/25/01............. $ 22,850
73,000 CAD European Investment Bank, 7.500% due 3/23/00.. 50,617
-----------
73,467
-----------
Sweden -- 0.3%
400,000 SEK Kingdom of Sweden, 10.250% due 5/5/03......... 54,131
-----------
United Kingdom -- 0.1%
50,000 PLN Sudwest Landesbank London, 17.500% due
5/5/03....................................... 13,429
-----------
Venezuela -- 2.1%
Republic of Venezuela:
250,000 13.625% due 8/15/18 (a)....................... 223,750
300,000 Par Bonds, 6.750% due 3/31/20 (including
rights)...................................... 204,563
-----------
428,313
-----------
TOTAL SOVEREIGN BONDS
(Cost -- $5,347,150).......................... 5,444,471
-----------
LOAN PARTICIPATIONS -- 1.4%
Algeria -- 0.4%
$ 125,000 The People's Democratic Republic of Algeria,
Tranche 3, 6.812% due 3/4/10 (Chase) (j)(k).. 89,688
-----------
Morocco -- 1.0%
219,880 Kingdom of Morocco, Tranche A, 6.843% due
1/1/09 (J.P. Morgan) (j)(k).................. 200,641
-----------
TOTAL LOAN PARTICIPATIONS
(Cost -- $261,447)............................ 290,329
-----------
COMMERCIAL PAPER -- 9.8%
1,000,000 Consolidation Coal Co., Annualized Yield
6.520% due 1/19/00........................... 996,740
1,000,000 Tyco International Group, Annualized Yield
6.520% due 1/19/00........................... 996,740
-----------
TOTAL COMMERCIAL PAPER
(Cost -- $1,993,480).......................... 1,993,480
-----------
<CAPTION>
Warrants
<C> <C> <S> <C>
- -------------
WARRANTS -- 0.0%
62 United Mexican States, Expire 2/18/00 (g)
(Cost -- $2,043).............................. 6,200
-----------
<CAPTION>
Contracts
- -------------
<C> <C> <S> <C>
PURCHASED OPTIONS -- 0.0%
950,000 Hong Kong Dollar, Put @ HKD 7.8025, Expire
1/20/00 (g) (Cost -- $7,125).................. 570
-----------
SUB-TOTAL INVESTMENTS (Cost -- $17,802,378)... 17,089,574
-----------
</TABLE>
9
<PAGE>
Schedule of Investments
December 31, 1999 (continued)
See Notes to Financial Statements.
<TABLE>
<CAPTION>
Face
Amount Security Value
- -------------------------------------------------------------------------------
REPURCHASE AGREEMENTS -- 15.6%
<C> <S> <C>
$ 1,573,500 State Street Bank & Trust Co., 3.000% due
1/3/00; Proceeds at maturity -- $1,573,893;
(Fully collateralized by U.S. Treasury Bonds,
8.500% due 2/15/20; Market value --
$1,609,875) (a).............................. $ 1,573,500
1,573,500 SBC Warburg Dillon Read, 3.000% due 1/3/00;
Proceeds at maturity-- $1,573,893; (Fully
collateralized by U.S. Treasury Bonds, 7.875%
due 2/15/21; Market value -- $1,606,020)..... 1,573,500
-----------
TOTAL REPURCHASE AGREEMENTS
(Cost -- $3,147,000).......................... 3,147,000
-----------
TOTAL INVESTMENTS -- 100%
(Cost -- $20,949,378*)........................ $20,236,574
===========
</TABLE>
- ------
(a) All or part of the security is segregated as collateral for mortgage dollar
rolls/TBAs.
(b) Mortgage dollar roll (See Note 10).
(c) Security is issued on a to-be-announced ("TBA") basis (See Note 9).
(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) Security is currently in default.
(g) Non-income producing security.
(h) Principal denominated in U.S. dollars unless otherwise indicated.
(i) Payment-in-kind security for which all or part of the interest earned is
paid by the issuance of additional bonds.
(j) Rate shown reflects current rate in effect at 12/31/99 on instrument with
variable rates or step coupon rates.
(k) Participation interests were acquired through the financial institutions
indicated parenthetically.
* 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.
FRB -- Floating Rate Bonds.
GRD -- Greek Drachma.
IAB -- Interest Arrears Bonds.
IAN -- Interest Arrears Notes.
JPY -- Japanese Yen.
NOK -- Norwegian Krone.
PDI -- Past Due Interest.
PLN -- Polish Zloty.
SEK -- Swedish Krona.
10
<PAGE>
Statement of Assets and Liabilities
December 31, 1999
<TABLE>
<S> <C>
ASSETS:
Investments, at value (Cost -- $17,802,378)...................... $17,089,574
Repurchase agreements, at value (Cost -- $3,147,000)............. 3,147,000
Cash............................................................. 587
Interest receivable.............................................. 306,962
Receivable from investment manager............................... 5,551
Receivable for open forward foreign currency contracts........... 16,214
Deferred organization costs...................................... 19,564
Prepaid expenses................................................. 614
-----------
Total Assets..................................................... 20,586,066
-----------
LIABILITIES:
Payable for securities purchased................................. 3,809,325
Payable for Fund shares purchased................................ 19,024
Payable for open forward foreign currency contracts.............. 10,234
Administration fees payable...................................... 709
Payable to bank, foreign currency (Cost -- $158)................. 158
Accrued expenses................................................. 37,534
-----------
Total Liabilities................................................ 3,876,984
-----------
Total Net Assets................................................. $16,709,082
===========
NET ASSETS:
Par value of capital shares...................................... $ 1,730
Capital paid in excess of par value.............................. 17,464,119
Overdistributed net investment income............................ (14,518)
Accumulated net realized loss from security transactions and
foreign currencies.............................................. (33,133)
Net unrealized depreciation of investments and foreign
currencies...................................................... (709,116)
-----------
Total Net Assets................................................. $16,709,082
===========
Shares Outstanding................................................ 1,730,467
-----------
Net Asset Value, per share........................................ $9.66
-----------
</TABLE>
See Notes to Financial Statements.
11
<PAGE>
Statement of Operations
For the Year Ended December 31, 1999
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest.......................................................... $1,070,152
----------
EXPENSES:
Management fees (Note 2).......................................... 98,038
Shareholder communications........................................ 26,000
Audit and legal................................................... 18,402
Shareholder and system servicing fees............................. 13,621
Custody........................................................... 10,701
Administration fees (Note 2)...................................... 6,536
Amortization of deferred organization costs....................... 6,245
Directors' fees................................................... 5,600
Registration fees................................................. 4,800
Other............................................................. 3,755
----------
Total Expenses.................................................... 193,698
Less: Management fee waiver (Note 2).............................. (62,980)
----------
Net Expenses...................................................... 130,718
----------
Net Investment Income.............................................. 939,434
----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCIES (NOTES 3 AND 6):
Realized Gain (Loss) From:
Security transactions (excluding short-term securities)........... (63,561)
Foreign currency transactions..................................... 20,441
----------
Net Realized Loss................................................. (43,120)
----------
Change in Net Unrealized Appreciation (Depreciation) of
Investments and Foreign Currencies:
Beginning of year................................................. 94,088
End of year....................................................... (709,116)
----------
Increase in Net Unrealized Depreciation........................... (803,204)
----------
Net Loss on Investments and Foreign Currencies..................... (846,324)
----------
Increase in Net Assets From Operations............................. $ 93,110
==========
</TABLE>
See Notes to Financial Statements.
12
<PAGE>
Statements of Changes in Net Assets
For the Years Ended December 31,
<TABLE>
<CAPTION>
1999 1998(a)
------------ -----------
<S> <C> <C>
OPERATIONS:
Net investment income.............................. $ 939,434 $ 376,149
Net realized loss.................................. (43,120) (22,952)
(Increase) decrease in net unrealized
depreciation...................................... (803,204) 94,088
------------ -----------
Increase in Net Assets From Operations............. 93,110 447,285
------------ -----------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income.............................. (832,612) (457,427)
Net realized gains................................. -- (7,123)
Capital............................................ (2,419) (12,709)
------------ -----------
Decrease in Net Assets From Distributions to
Shareholders...................................... (835,031) (477,259)
------------ -----------
FUND SHARE TRANSACTIONS (NOTE 14):
Net proceeds from sale of shares................... 17,170,169 11,352,077
Net asset value of shares issued for reinvestment
of dividends...................................... 835,031 477,259
Cost of shares reacquired.......................... (10,992,052) (1,361,517)
------------ -----------
Increase in Net Assets From Fund Share
Transactions...................................... 7,013,148 10,467,819
------------ -----------
Increase in Net Assets.............................. 6,271,227 10,437,845
NET ASSETS:
Beginning of year.................................. 10,437,855 10
------------ -----------
End of year*....................................... $ 16,709,082 $10,437,855
============ ===========
* Includes overdistributed net investment income of:
................................................... $(14,518) $(99,447)
============ ===========
</TABLE>
- ------
(a) For the period from February 17, 1998 (commencement of operations) to De-
cember 31, 1998.
See Notes to Financial Statements.
13
<PAGE>
Statement of Cash Flows
For the Year Ended December 31, 1999
<TABLE>
<S> <C>
CASH FLOWS USED BY OPERATING ACTIVITIES:
Purchases of long-term portfolio investments.................... $(17,637,922)
Proceeds from disposition of long-term portfolio investments and
principal paydowns............................................. 14,194,274
Net purchase of short-term portfolio investments................ (3,608,480)
------------
(7,052,128)
Net investment income........................................... 939,434
Amortization of net premium/discount on investments............. (72,572)
Amortization of organization expenses........................... 6,245
Interest in payment-in-kind bonds............................... (10,220)
Net change in receivables/payables related to operations........ (49,023)
------------
Net Cash Flows Used By Operating Activities..................... (6,238,264)
------------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Net proceeds from sale of shares................................ 17,219,626
Cost of shares reacquired....................................... (10,974,686)
Proceeds from shares issued in reinvestment of dividends........ 835,031
Dividends and distributions paid................................ (835,031)
------------
Net Cash Flows Provided By Financing Activities................. 6,244,940
------------
Net Increase in Cash............................................. 6,676
Payable to Bank, Beginning of Year............................... (6,089)
------------
Cash, End of Year................................................ $ 587
============
</TABLE>
See Notes to Financial Statements.
14
<PAGE>
Notes to Financial Statements
1. Organization and 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 seven 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 Small Cap Growth 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 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 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, 1999, 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 year ended December 31, 1999, SBAM waived a portion of its management
fees amounting to $62,980.
15
<PAGE>
Notes to Financial Statements
(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 SSB Citi Fund Management LLC
("SSBC"), formerly known as SSBC Fund Management Inc., an affiliate of SBAM,
pursuant to a Sub-Administration Agreement between SBAM and SSBC.
CFBDS, Inc. acts as the Fund's distributor. For the year ended December 31,
1999, Salomon Smith Barney Inc., another subsidiary of SSBH, did not receive
any brokerage commissions from the Fund.
3. Investments
During the year ended December 31, 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.......................... $ 4,729,466
Other investment securities..................................... 12,950,802
-----------
$17,680,268
===========
Sales:
U.S. government agencies & obligations.......................... $ 4,965,594
Other investment securities..................................... 9,228,680
-----------
$14,194,274
===========
At December 31, 1999, the aggregate gross unrealized appreciation and deprecia-
tion of investments for Federal income tax purposes were substantially as fol-
lows:
Gross unrealized appreciation..................................... $ 279,925
Gross unrealized depreciation..................................... (992,729)
-----------
Net unrealized depreciation....................................... $ (712,804)
===========
</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.
During the year ended December 31, 1999, the Fund did not have any open reverse
repurchase agreements.
16
<PAGE>
Notes to Financial Statements
(continued)
6. Forward Foreign Currency Contracts
At December 31, 1999, the Fund had open forward foreign currency contracts as
described below. The Fund bears the market risk that arises from changes in
foreign currency exchange rates. The unrealized gain (loss) on the contracts
reflected in the accompanying financial statements were as follows:
<TABLE>
<CAPTION>
Local Market Settlement Unrealized
Forward Foreign Currency Currency Value Date Gain (Loss)
Contracts ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
To Buy:
British Pound................... 58,998 $ 95,249 1/18/00 $(1,453)
British Pound................... 89,106 143,865 1/28/00 (2,788)
Euro............................ 31,078 31,354 1/18/00 (1,417)
Euro............................ 156,671 158,181 1/28/00 (1,819)
-------
(7,477)
-------
To Sell:
British Pound................... 146,778 236,977 1/28/00 5,845
Euro............................ 54,927 55,457 1/28/00 2,472
Euro............................ 93,573 94,475 1/28/00 525
Greek Drachma................... 34,644,978 105,583 1/28/00 4,552
Japanese Yen.................... 22,333,269 218,878 1/28/00 (1,522)
-------
11,872
-------
Forward Foreign Cross Currency
Contracts **
<CAPTION>
Market Value
To Buy: ---------------------
Swedish
Euro Krone
---------- ----------
<S> <C> <C> <C> <C>
Euro vs. Swedish Krone........... $116,789 $118,024 1/28/00 (1,235)
<CAPTION>
Greek
Euro Drachma
---------- ----------
<S> <C> <C> <C> <C>
Euro vs. Greek Drachma........... $171,639 $171,620 1/28/00 19
<CAPTION>
Market Value
To Sell: ---------------------
Japanese
Euro Yen
---------- ----------
<S> <C> <C> <C> <C>
Euro vs. Japanese Yen............ $151,446 $153,873 1/28/00 2,427
<CAPTION>
Greek
Euro Drachma
---------- ----------
<S> <C> <C> <C> <C>
Euro vs. Greek Drachma........... $161,543 $161,862 1/28/00 319
<CAPTION>
Swedish
Euro Krone
---------- ----------
<S> <C> <C> <C> <C>
Euro vs. Swedish Krone........... $78,542 $78,597 1/28/00 55
-------
1,585
-------
Net Unrealized Gain on Open Forward Foreign &
Cross Currency Contracts......................................... $ 5,980
=======
** Local currency on Cross Currency Forwards
Buy Sell
---------- ----------
Buy Euro vs. Swedish Krone....... 115,674 1,000,000
Buy Euro vs. Greek Drachma....... 170,000 56,314,200
Sell Buy
---------- ----------
Sell Euro vs. Japanese Yen....... 150,000 15,700,500
Sell Euro vs. Greek Drachma...... 160,000 53,112,000
Sell Euro vs. Swedish Krone...... 77,792 665,942
</TABLE>
17
<PAGE>
Notes to Financial Statements
(continued)
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 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 December 31, 1999, the Fund held purchased put options with a total cost of
$7,125.
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 Fund enters into options for hedging purposes. The risk associated with
purchasing options is limited to the premium originally paid. 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 year ended December 31, 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, cash or other liquid securities
are segregated to cover the amount of 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 December 31, 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. Beginning on the date the Fund enters
into a TBA transaction, cash or other liquid securities are segregated in the
amount of the TBA transaction. These transactions are subject to market
fluctuations and their current value is determined in the same manner as for
other securities.
At December 31, 1999, the Fund held TBA securities with a total cost of
$3,879,524.
18
<PAGE>
Notes to Financial Statements
(continued)
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 year
ended December 31, 1999 was approximately $2,617,000.
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 December 31, 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 December 31, 1999, the Fund held loan participations with a total cost of
$261,447.
13. Capital Loss Carryforward
At December 31, 1999, the Fund had for Federal income tax purposes approxi-
mately $5,000 of capital loss carryforwards available to offset future realized
gains through December 31, 2007. To the extent that these capital carryforward
losses are used to offset capital gains, it is probable that the gains so off-
set will not be distributed.
14. Capital Stock
At December 31, 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>
Year Ended Year Ended
December 31, 1999 December 31, 1998(a)
----------------- --------------------
<S> <C> <C>
Shares sold............................ 1,704,962 1,113,904
Shares issued on reinvestment of
dividends............................. 86,532 47,113
Shares reacquired...................... (1,091,851) (130,194)
---------- ---------
Net Increase........................... 699,643 1,030,823
========== =========
</TABLE>
- ------
(a) For the period February 17, 1998 (commencement of operations) through De-
cember 31, 1998.
19
<PAGE>
Financial Highlights
For a share of capital stock outstanding for the year ended December 31:
<TABLE>
<CAPTION>
1999 1998(1)
------- -------
<S> <C> <C>
Net Asset Value, Beginning of Year.......................... $ 10.13 $ 10.00
------- -------
Income (Loss) From Operations:
Net investment income (2).................................. 0.60 0.38
Net realized and unrealized gain (loss).................... (0.56) 0.24
------- -------
Total Income From Operations............................... 0.04 0.62
------- -------
Less Distributions From:
Net investment income...................................... (0.51) (0.47)
Net realized gains......................................... -- (0.01)
Capital.................................................... -- (0.01)
------- -------
Total Distributions........................................ (0.51) (0.49)
------- -------
Net Asset Value, End of Year................................ $ 9.66 $ 10.13
======= =======
Total Return (3)............................................ 0.37% 6.18%++
Net Assets, End of Year (000s).............................. $16,709 $10,438
Ratios to Average Net Assets (2):
Expenses (4)............................................... 1.00% 1.00%+
Net investment income...................................... 7.19% 6.23%+
Portfolio Turnover Rate..................................... 120% 84%
</TABLE>
- ------
(1) For the period from February 17, 1998 (commencement of operations) through
December 31, 1998.
(2) SBAM has waived all or a portion of its management fees for the year ended
December 31, 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 de-
crease 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.......................... $0.06 1.48%
1998.......................... 0.04 1.79+
</TABLE>
(3) Total returns do not reflect expenses associated with the separate account
such as administrative fees, account charges and surrender charges which,
if reflected would reduce the total returns for all periods shown.
(4) As a result of a voluntary expense limitation, expense ratios will not ex-
ceed 1.00%.
++ Total return is not annualized, as it may not be representative of the to-
tal return for the year.
+ Annualized.
20
<PAGE>
Report of Independent Accountants
To the Board of Directors and Shareholders of
Salomon Brothers Variable Strategic Bond Fund
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations, of
changes in net assets and of cash flows and the financial highlights present
fairly, in all material respects, the financial position of Salomon Brothers
Variable Strategic Bond Fund ("Fund") at December 31, 1999, the results of its
operations and its cash flows for the year then ended, and the changes in its
net assets and the financial highlights for the year then ended and for the
period February 17, 1998 (commencement of operations) through December 31,
1998, in conformity with accounting principles generally accepted in the United
States. These financial statements and financial highlights (hereafter referred
to as "financial statements") are the responsibility of the Fund's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these financial statements in
accordance with auditing standards generally accepted in the United States
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at December 31, 1999 by correspondence with the
custodian and brokers, provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
New York, N.Y.
February 15, 2000
21
<PAGE>
Tax Information
(unaudited)
A total of 5.00% of the ordinary dividends paid by the Fund from net investment
income are derived from Federal obligations and may be exempt from taxation at
the state level.
22
<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
Consultant, Colman Consulting
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, SSB Citi Fund Management LLC
and Travelers Investment Advisers, Inc.
<PAGE>
----------------------
Salomon Brothers
-----------------------
Asset Management
Seven World Trade Center . New York, New York 10048
<PAGE>
SALOMON BROTHERS
Variable Series Funds Inc
[GRAPHIC]
Annual Report 1999
DECEMBER 31, 1999
. TOTAL RETURN FUND
<PAGE>
SALOMON BROTHERS VARIABLE SERIES FUNDS INC
Our Message to You
DEAR SHAREHOLDER:
We are pleased to provide the annual report for the Salomon Brothers Variable
Total Return Fund ("Fund") for the year ended December 31, 1999. This letter
discusses general economic and market conditions as well as major Fund
developments during the reporting period. A detailed summary of performance and
current Fund holdings can be found in the appropriate sections that follow. We
hope you find this report to be useful and informative.
INVESTMENT STRATEGY AND PERFORMANCE UPDATE
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 year
ended December 31, 1999, the Fund generated a return of 0.78%. In comparison,
the 50% Salomon Smith Barney Broad Investment Grade Bond/50% Standard & Poor's
500 Index1 returned 10.10% for the same time period. The Standard & Poor's 500
Index ("S&P 500")/2/ returned 21.03% for the year.
Both the stock and bond markets were characterized by higher levels of
volatility in 1999. Investors continued to favor growth stocks and value stocks
languished. (Growth stocks are shares of companies that are exhibiting or are
expected to exhibit faster-than-average growth within their industry. Value
stocks are those securities of companies believed to be undervalued.) In
addition, concerns regarding the future direction of interest rates negatively
impacted the bond market which hurt the Fund's performance.
During 1999, the Fund's investment focus shifted to a high quality growth at a
reasonable price approach for equity holdings and its bond allocation was
changed toward owning higher quality issues. In addition, the Fund's benchmark
index was also changed to 60% stocks - 40% bonds to help make its performance
more competitive. The Fund's repositioning was started at mid-year and was
carefully implemented throughout the last half of the period, allowing us to
increase the Fund's investments in the stocks of high quality companies. We are
confident that this repositioning should benefit the Portfolio over the
long-term.
- ---------------
1 The 50% Salomon Smith Barney Broad Investment Grade Bond and 50% Standard &
Poor's 500 Stock Index consists of domestic corporate, government and
agency securities and 500 widely-held common stocks.
2 The S&P 500 is a market capitalization-weighted measure of 500 widely held
common stocks.
1
<PAGE>
And while no guarantees can be made, during 2000 we believe that conditions
should favor the high quality, long-term growth companies held in the portfolio.
Some of the holdings we reduced or sold during the year include: May Department
Stores, Geon Co., Vulcan Materials, Marsh & McLennan and Crescent Real Estate.
Companies that were purchased include: Walt Disney, General Electric, McDonalds,
Bristol-Myers Squibb, Gillette, Time-Warner and IBM.
MARKET UPDATE AND OUTLOOK
Economic conditions were bolstered by the monetary easings applied by the
Federal Reserve Board in 1998 and then there was a shift toward higher rates in
1999. Stock market performance was dominated by very high price multiple
technology stocks. Going forward, we look for moderate growth in the U.S. and a
gradual improvement overseas, along with a trend toward moderately higher
interest rates.
We will continue to seek to buy growing companies at reasonable prices as well
as 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.
The Fund continues to focus on stocks with attractive valuations and favorable
earnings growth prospects. And while no assurances can be made, we remain
confident that our value strategy will continue to reward shareholders over
time.
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 new
century.
Sincerely,
/s/ Heath B. McLendon /s/ George J. Williamson
Heath B. McLendon George J. Williamson
Chairman and President Executive Vice President
January 24, 2000
2
<PAGE>
The following graph depicts the performance of the Total Return 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 (unaudited)
SALOMON BROTHERS VARIABLE TOTAL RETURN FUND
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>
Total Return Fund Salomon Brothers Broad 50% Salomon Brothers Grade Bond Index and
S&P 500 Index Investment Grade Bond Index Broad Investment 50% S&P 500 Index
<S> <C> <C> <C> <C>
2/17/98 10,000 10,000 10,000 10,000
Mar-98 10,350 10,792 10,039 10,415
Jun-98 10,261 11,149 10,271 10,710
Sep-98 10,011 10,042 10,697 10,370
Dec-98 10,583 12,177 10,741 11,459
Jun-99 11,092 13,680 10,592 12,136
12/31/99 10,667 14,733 10,651 12,692
</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.
- --------------------------------------------------------------------------------
Historical Performace
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
------------------------
Beginning End Income Capital Gain Return Total
Year Ended of Year of Year Dividend Distribution of Capital Returns+
=========================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
12/31/99 $10.40 $10.23 $0.24 $0.00 $0.01 0.78%
- -------------------------------------------------------------------------------------------------------------------------
Inception* -- 12/31/98 10.00 10.40 0.15 0.03 0.00 5.83++
=========================================================================================================================
$0.39 $0.03 $0.01
=========================================================================================================================
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Average Annual Total Returns+
- -------------------------------------------------------------------------------------------------------------------------
<S> <C>
Year Ended 12/31/99 0.78%
- -------------------------------------------------------------------------------------------------------------------------
Inception* through 12/31/99 3.52
=========================================================================================================================
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Cumulative Total Return+
- -------------------------------------------------------------------------------------------------------------------------
<S> <C>
Inception* through 12/31/99 6.66%
=========================================================================================================================
</TABLE>
+ Assumes the reinvestment of all dividends and capital gains distributions
at net asset value. Total returns do not reflect expenses associated with
the separate account such as administrative fees, account charges and
surrender charges which, if reflected, would reduce the total returns for
all periods shown.
++ 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
December 31, 1999
<TABLE>
<CAPTION>
Shares Security Value
<C> <S> <C>
- --------------------------------------------------------------------------------
COMMON STOCK -- 48.7%
Basic Industries -- 0.2%
5,900 USEC Inc.............................................. $ 41,300
-----------
Capital Goods -- 2.1%
1,300 Cooper Industries Inc................................. 52,569
1,600 General Electric Co. ................................. 247,600
2,000 Honeywell International Inc........................... 115,375
-----------
415,544
-----------
Communications -- 4.6%
4,650 AT&T Corp............................................. 235,988
1,800 BCE Inc. ............................................. 162,338
1,000 Bell Atlantic Corp. .................................. 61,563
1,600 GTE Corp.............................................. 112,900
1,050 MCI WorldCom, Inc. (a)................................ 55,716
2,300 SBC Communications Inc................................ 112,125
2,600 US West, Inc.......................................... 187,200
-----------
927,830
-----------
Consumer Cyclicals -- 2.5%
1,400 Costco Wholesale Corp. (a)............................ 127,750
1,174 DaimlerChrysler AG.................................... 91,866
2,300 Eastman Kodak Co...................................... 152,375
700 J.C. Penney Co. ...................................... 13,956
5,000 Kmart Corp. (a)....................................... 50,312
2,100 Sears, Roebuck & Co................................... 63,919
-----------
500,178
-----------
Consumer Non-Cyclicals -- 14.6%
3,800 Anheuser-Busch Co., Inc............................... 269,325
4,100 Avon Products Inc. ................................... 135,300
3,500 The Coca-Cola Co...................................... 203,875
11,800 Coca-Cola Enterprises Inc............................. 237,475
1,966 Delhaize America, Inc., Class B Shares ............... 41,040
5,000 The Gillette Co....................................... 205,938
3,600 H.J. Heinz Co. ....................................... 143,325
2,800 Hormel Foods Corp..................................... 113,750
1,800 Kimberly-Clark Corp. ................................. 117,450
4,900 McDonald's Corp. ..................................... 197,531
3,500 News Corp. Ltd., ADR.................................. 117,031
5,100 Pepsico, Inc. ........................................ 179,775
1,800 Philip Morris Cos. Inc. .............................. 41,737
1,800 The Procter & Gamble Co. ............................. 197,212
2,100 Ralston-Purina Group.................................. 58,537
4,500 Rite Aid Corp......................................... 50,344
4,600 Safeway Inc. (a)...................................... 163,587
4,600 Sara Lee Corp. ....................................... 101,487
2,800 Time Warner Inc. ..................................... 202,825
5,100 The Walt Disney Co.................................... 149,175
-----------
2,926,719
-----------
Energy -- 3.3%
1,400 Amerada Hess Corp. ................................... 79,450
1,794 BP Amoco PLC, ADR..................................... 106,407
1,600 Exxon Mobil Corp...................................... 128,900
</TABLE>
See Notes to Financial Statements.
4
<PAGE>
Schedule of Investments
December 31, 1999 (continued)
<TABLE>
<CAPTION>
Shares Security Value
<C> <S> <C>
- --------------------------------------------------------------------------------
Energy -- 3.3% (continued)
1,700 Royal Dutch Petroleum Co. ............................ $ 102,744
2,500 Schlumberger Ltd. .................................... 140,625
2,100 Suncor Energy, Inc.................................... 87,675
484 Transocean Sedco Forex Inc............................ 16,305
-----------
662,106
-----------
Financial Services -- 7.1%
6,300 Allstate Corp......................................... 151,200
1,255 American International Group, Inc..................... 135,697
3,500 Associates First Capital Corp......................... 96,031
2,778 Bank of America Corp.................................. 139,421
96 Berkshire Hathaway Inc., Class B Shares (a)........... 175,680
2,000 Chase Manhattan Corp. ................................ 155,375
1,800 Chubb Corp............................................ 101,363
1,600 CIGNA Corp............................................ 128,900
3,000 First Union Corp...................................... 98,437
2,200 Fleet Boston Financial Corp. ......................... 76,587
4,700 Horace Mann Educators Corp............................ 92,237
1,900 Mercantile Bankshares Corp. .......................... 60,681
-----------
1,411,609
-----------
Health Care -- 7.0%
4,600 Abbott Laboratories................................... 167,038
3,300 American Home Products Corp. ......................... 130,144
2,300 Bausch & Lomb Inc. ................................... 157,406
2,400 Bristol-Myers Squibb Co. ............................. 154,050
1,600 Johnson & Johnson..................................... 149,000
3,600 Merck & Co., Inc...................................... 241,425
5,300 Pfizer Inc............................................ 171,919
3,000 Pharmacia & Upjohn, Inc............................... 135,000
1,200 Warner-Lambert Co..................................... 98,325
-----------
1,404,307
-----------
Technology -- 5.4%
3,500 Alcatel SA, ADR....................................... 157,500
1,200 Beckman Coulter, Inc.................................. 61,050
500 Intel Corp............................................ 41,156
5,600 International Business Machines Corp.................. 604,800
6,500 Reynolds and Reynolds Co., Class A Shares............. 146,250
3,100 Xerox Corp. .......................................... 70,331
-----------
1,081,087
-----------
Transportation -- 1.0%
2,700 Canadian National Railway Co.......................... 71,044
1,800 Union Pacific Corp.................................... 78,525
600 United Parcel Service Inc., Class B Shares............ 41,400
-----------
190,969
-----------
Utilities -- 0.9%
2,300 American Electric Power Co., Inc. .................... 73,888
2,800 Edison International.................................. 73,325
1,200 Reliant Energy, Inc................................... 27,450
-----------
174,663
-----------
TOTAL COMMON STOCK
(Cost -- $9,752,094).................................. 9,736,312
-----------
</TABLE>
See Notes to Financial Statements.
5
<PAGE>
Schedule of Investments
December 31, 1999 (continued)
<TABLE>
<CAPTION>
Shares Security Value
<C> <S> <C>
- -------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCK -- 0.1%
Consumer Cyclical -- 0.0%
100 BTI Capital Trust, 6.500%........................ $ 6
------------
Energy -- 0.1%
2,000 Tesoro Petroleum Corp., 7.250%................... 24,000
------------
TOTAL CONVERTIBLE PREFERRED STOCK
(Cost -- $25,032)................................ 24,006
------------
<CAPTION>
Face
Amount
<C> <S> <C>
- -------
U.S. GOVERNMENT AGENCIES & OBLIGATIONS -- 18.0%
U.S. Treasury Bonds:
$ 290,000 6.000% due 8/15/04............................... 285,514
435,000 6.000% due 8/15/09............................... 421,698
300,000 6.125% due 8/15/29 (b)........................... 286,023
200,000 Federal Home Loan Mortgage Corp. (FHLMC), 6.250%
due 7/15/04...................................... 195,500
Federal National Mortgage Association (FNMA):
442,796 6.500% due 7/1/28................................ 417,472
218,475 7.000% due 2/1/29................................ 211,305
100,000 7.000% due 15 years (c)(d)....................... 98,875
240,000 6.000% due 30 years (c)(d)....................... 219,600
300,000 6.500% due 30 years (c)(d)....................... 282,654
600,000 7.000% due 30 years (c)(d)....................... 579,936
300,000 7.500% due 30 years (c)(d)....................... 296,811
300,000 8.000% due 30 years (c)(d)....................... 302,250
------------
TOTAL U.S. GOVERNMENT AGENCIES & OBLIGATIONS
(Cost -- $3,719,305)............................. 3,597,638
------------
ASSET-BACKED SECURITIES -- 3.7%
245,000 Contimortgage Home Equity Loan Trust, Series
1998-2, Class A3, 6.130% due 3/15/13............. 243,163
250,000 Ford Credit Auto Owner Trust, Series 1999-B,
Class A4, 5.800% due 6/15/02..................... 246,797
250,000 Nationsbank Credit Card Master Trust, Series
1995-1, Class A, 6.450% due 4/15/03.............. 250,340
------------
TOTAL ASSET-BACKED SECURITIES
(Cost -- $744,536)............................... 740,300
------------
COMMERCIAL MORTGAGE-BACKED SECURITIES -- 1.1%
75,000 Commercial Mortgage Asset Trust, Series 1999-C1,
Class C, 7.350% due 8/17/13...................... 68,625
150,000 LB Commercial Conduit Mortgage Trust, Series
1999-C1, Class A2, 6.780% due 4/15/09............ 143,111
------------
TOTAL COMMERCIAL MORTGAGE-BACKED SECURITIES
(Cost -- $219,364)............................... 211,736
------------
CONVERTIBLE CORPORATE BONDS -- 0.4%
Communications -- 0.1%
15,000 Rogers Communication Inc., 2.000% due 11/26/05... 13,050
------------
Technology -- 0.3%
50,000 Quantum Corp., 7.000% due 8/1/04................. 38,000
25,000 S3 Inc., 5.750% due 10/1/03...................... 23,344
------------
61,344
------------
TOTAL CONVERTIBLE CORPORATE BONDS
(Cost -- $77,919)................................ 74,394
------------
</TABLE>
See Notes to Financial Statements.
6
<PAGE>
Schedule of Investments
December 31, 1999 (continued)
<TABLE>
<CAPTION>
Face
Amount Security Value
<C> <S> <C>
- -------------------------------------------------------------------------------
CORPORATE BONDS -- 12.3%
Basic Industries -- 0.9%
$ 50,000 Praxair Inc., Notes, 6.150% due 4/15/03............. $ 47,813
50,000 Raytheon Co., Notes, 6.150% due 11/1/08............. 44,250
100,000 TRW Inc., Notes, 6.450% due 6/15/01................. 98,750
-----------
190,813
-----------
Consumer Cyclicals -- 1.3%
200,000 Sears Roebuck Acceptance Corp., 7.000% due 6/15/07
(b)................................................. 189,250
75,000 Staples Inc., Sr. Notes, 7.125% due 8/15/07......... 72,000
-----------
261,250
-----------
Financial Services -- 7.8%
250,000 Aristar Inc., Sr. Notes, 7.250% due 6/15/06......... 244,063
300,000 Bank of America Corp., Sr. Notes, 6.625% due
6/15/04............................................. 293,250
50,000 Countrywide Home Loan, Co., Medium-Term Notes,
6.250% due 4/15/09.................................. 44,937
175,000 Ford Motor Credit Co., Sr. Notes, 7.375% due
10/28/09 (b)........................................ 173,250
150,000 Fremont General Corp., Series B, Sr. Notes, 7.700%
due 3/17/04......................................... 145,312
250,000 Lehman Brothers Holdings Inc., Sr. Sub. Notes,
7.250% due 4/15/03.................................. 248,125
200,000 Merrill Lynch & Co., Notes, 6.000% due 11/15/04..... 189,500
225,000 Paine Webber Group Inc., 7.625% due 12/1/09......... 219,094
-----------
1,557,531
-----------
Media -- 0.7%
90,000 A.H. Belo Corp., Sr. Debentures, 7.250% due 9/15/27
(b)................................................. 79,087
75,000 GTE Corp., Debentures, 6.940% due 4/15/28 (b)....... 67,781
-----------
146,868
-----------
Real Estate Investment Trust -- 0.5%
100,000 Spieker Properties LP, 7.250% due 5/1/09............ 93,125
-----------
Services & Other -- 1.1%
140,000 Comdisco, Inc., Sr. Notes, 6.000% due 1/30/02....... 135,450
100,000 Service Corp. International., 6.000% due 12/15/05... 75,750
-----------
211,200
-----------
TOTAL CORPORATE BONDS
(Cost -- $2,566,364)................................ 2,460,787
-----------
SUB-TOTAL INVESTMENTS
(Cost -- $17,104,614)............................... 16,845,173
-----------
REPURCHASE AGREEMENT -- 15.7%
3,127,000 State Street Bank & Trust Co., 3.000% due 1/3/00;
Proceeds at maturity -- $3,127,782; (Fully
collateralized by U.S. Treasury Bonds, 8.750% due
5/15/17; Market value -- $3,190,531)(b) (Cost --
$3,127,000)....................................... 3,127,000
-----------
TOTAL INVESTMENTS -- 100%
(Cost -- $20,231,614*).............................. $19,972,173
===========
</TABLE>
- ------
(a) Non-income producing security.
(b) All or part of the security is segregated as collateral for mortgage dollar
rolls/TBAs.
(c) Mortgage Dollar Roll (See Note 9).
(d) Security is issued on a to-be-announced ("TBA") basis (See Note 8).
* 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
December 31, 1999
See Notes to Financial Statements.
<TABLE>
<S> <C>
ASSETS:
Investments, at value (Cost -- $17,104,614)....................... $16,845,173
Repurchase agreement, at value (Cost -- $3,127,000)............... 3,127,000
Cash.............................................................. 949
Receivable for securities sold.................................... 8,016
Dividend and interest receivable.................................. 86,029
Receivable from investment manager................................ 22,568
Deferred organization costs....................................... 19,564
Prepaid expenses.................................................. 543
-----------
Total Assets...................................................... 20,109,842
-----------
LIABILITIES:
Payable for securities purchased.................................. 2,403,508
Payable for Fund shares purchased................................. 83,771
Administration fees payable....................................... 745
Accrued expenses.................................................. 38,005
-----------
Total Liabilities................................................. 2,526,029
-----------
Total Net Assets.................................................. $17,583,813
===========
NET ASSETS:
Par value of capital shares....................................... $ 1,720
Capital paid in excess of par value............................... 17,967,499
Accumulated net realized loss from security transactions.......... (125,965)
Net unrealized depreciation of investments........................ (259,441)
-----------
Total Net Assets.................................................. $17,583,813
===========
Shares Outstanding................................................. 1,719,629
-----------
Net Asset Value, per share......................................... $10.23
-----------
</TABLE>
8
<PAGE>
Statement of Operations
For the Year Ended December 31, 1999
See Notes to Financial Statements.
<TABLE>
<S> <C>
INCOME:
Interest........................................................... $ 427,890
Dividends.......................................................... 102,630
Less: Foreign withholding tax...................................... (608)
---------
Total Investment Income............................................ 529,912
---------
EXPENSES:
Management fees (Note 2)........................................... 94,293
Shareholder communications......................................... 39,501
Audit and legal.................................................... 18,102
Shareholder and system servicing fees.............................. 12,771
Amortization of deferred organization costs........................ 6,245
Administration fees (Note 2)....................................... 5,893
Directors' fees.................................................... 5,600
Registration fees.................................................. 4,700
Custody............................................................ 4,299
Other.............................................................. 3,299
---------
Total Expenses..................................................... 194,703
Less: Management fee waiver (Note 2)............................... (76,836)
---------
Net Expenses....................................................... 117,867
---------
Net Investment Income............................................... 412,045
---------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (NOTE 3):
Net Realized Loss From Security Transactions (excluding short-term
securities):
Proceeds from sales................................................ 6,716,118
Cost of securities sold............................................ 6,843,805
---------
Net Realized Loss.................................................. (127,687)
---------
Change in Net Unrealized Appreciation (Depreciation) of
Investments:
Beginning of year.................................................. 128,833
End of year........................................................ (259,441)
---------
Increase in Net Unrealized Depreciation............................ (388,274)
---------
Net Loss on Investments............................................. (515,961)
---------
Net Decrease in Net Assets From Operations.......................... $(103,916)
=========
</TABLE>
9
<PAGE>
Statements of Changes in Net Assets
For the Years Ended December 31,
See Notes to Financial Statements.
<TABLE>
<CAPTION>
1999 1998(a)
----------- ----------
<S> <C> <C>
OPERATIONS:
Net investment income................................ $ 412,045 $ 86,143
Net realized gain (loss)............................. (127,687) 18,275
(Increase) decrease in net unrealized depreciation... (388,274) 128,833
----------- ----------
Increase (Decrease) in Net Assets From Operations.... (103,916) 233,251
----------- ----------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income................................ (411,266) (85,021)
Net realized gains................................... (296) (18,158)
Capital.............................................. (13,504) --
----------- ----------
Decrease in Net Assets From Distributions to
Shareholders........................................ (425,066) (103,179)
----------- ----------
FUND SHARE TRANSACTIONS (NOTE 12):
Net proceeds from sale of shares..................... 15,352,257 6,287,126
Net asset value of shares issued for reinvestment of
dividends........................................... 422,553 101,349
Cost of shares reacquired............................ (3,632,987) (647,545)
----------- ----------
Increase in Net Assets From Fund Share Transactions.. 12,141,823 5,740,930
----------- ----------
Increase in Net Assets................................ 11,612,841 5,871,002
NET ASSETS:
Beginning of year.................................... 5,970,972 99,970
----------- ----------
End of year*......................................... $17,583,813 $5,970,972
=========== ==========
* Includes undistributed net investment income of:.... -- $1,097
=========== ==========
</TABLE>
- ------
(a) For the period from February 17, 1998 (commencement of operations) to De-
cember 31, 1998.
10
<PAGE>
Statement of Cash Flows
For the Year Ended December 31, 1999
<TABLE>
<S> <C>
CASH FLOWS USED BY OPERATING ACTIVITIES:
Purchases of long-term portfolio investments.................... $(16,589,196)
Proceeds from disposition of long-term portfolio investments and
principal paydowns............................................. 6,708,102
Net purchases of short-term portfolio investments............... (2,298,000)
------------
(12,179,094)
Net investment income........................................... 412,045
Amortization of net premium/discount on investments............. (8,051)
Amortization of organization expenses........................... 6,245
Net change in receivable/payables related to operations......... (34,458)
------------
Net Cash Flows Used By Operating Activities..................... (11,803,313)
------------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Proceeds from sales of shares................................... 15,355,784
Cost of shares reacquired....................................... (3,549,471)
Proceeds from shares issued in reinvestment of dividends........ 422,553
Dividend paid................................................... (425,066)
------------
Net Cash Flows Provided By Financing Activities................. 11,803,800
------------
Net Increase in Cash............................................. 487
Cash, Beginning of Year.......................................... 462
------------
Cash, End of Year................................................ $ 949
============
</TABLE>
See Notes to Financial Statements.
11
<PAGE>
Notes to Financial Statements
1. Organization and 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 seven 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 Small Cap Growth 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, 1999, 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 0.80% of its average daily net
assets. This fee is calculated daily and paid monthly.
For the year ended December 31, 1999, SBAM waived a portion of its management
fees amounting to $76,836.
12
<PAGE>
Notes to Financial Statements
(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 SSB Citi Fund Management LLC
("SSBC"), formerly known as SSBC Fund Management Inc., an affiliate of SBAM,
pursuant to a Sub-Administration Agreement between SBAM and SSBC.
CFBDS, Inc. acts as the Fund's distributor. For the year ended December 31,
1999, Salomon Smith Barney Inc. ("SSB"), another subsidiary of SSBH, received
brokerage commissions of $678 from the Fund.
3. Investments
During the year ended December 31, 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.......................... $ 4,536,565
Other investment securities..................................... 13,465,608
-----------
$18,002,173
===========
Sales:
U.S. government agencies & obligations.......................... $ 3,752,768
Other investment securities..................................... 2,963,350
-----------
$ 6,716,118
===========
At December 31, 1999, the aggregate gross unrealized appreciation and deprecia-
tion of investments for Federal income tax purposes were substantially as fol-
lows:
Gross unrealized appreciation..................................... $ 645,987
Gross unrealized depreciation..................................... (905,428)
-----------
Net unrealized depreciation....................................... $ (259,441)
===========
</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 segregate cash or other liquid securities with re-
spect to the reverse repurchase agreements.
During the year ended December 31, 1999, the Fund did not have any open reverse
repurchase agreements.
13
<PAGE>
Notes to Financial Statements
(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 December 31, 1999, the Fund did not have any open purchased call or put op-
tions.
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 Fund enters into options for hedging purposes. The risk associated with
purchasing options is limited to the premium originally paid. The risk in writ-
ing a covered call option is that the Fund gives up the opportunity to partici-
pate in any increase in the price of the underlying security beyond the exer-
cise 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 year ended December 31, 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, cash or other liquid securities
are segregated to cover the amount of 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 December 31, 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. Beginning on the date the Fund enters
into a TBA transaction, cash or other liquid securities are segregated to cover
the amount of the TBA transaction. These transactions are subject to market
fluctuations and their current value is determined in the same manner as for
other securities.
At December 31, 1999, the Fund held TBA securities with a total cost of
$1,814,333.
14
<PAGE>
Notes to Financial Statements
(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 year
ended December 31, 1999 was approximately $784,000.
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 December 31, 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 December 31, 1999, the Fund did not have any investments in loan participa-
tions.
12. Capital Loss Carryforward
At December 31, 1999, the Fund had, for Federal income tax purposes, a capital
loss carryforward of approximately $12,300, available to offset future capital
gains through December 31, 2007. To the extent that these carryforward losses
are used to offset capital gains, it is probable that the gains so offset will
not be distributed.
13. Capital Stock
At December 31, 1999, the Series had 10,000,000,000 shares of capital stock au-
thorized 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 dis-
tributions made by the Fund.
15
<PAGE>
Notes to Financial Statements
(continued)
Transactions in shares were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1999 December 31, 1998(a)
----------------- --------------------
<S> <C> <C>
Shares sold............................ 1,449,515 617,277
Shares issued on reinvestment of
dividends............................. 41,305 9,745
Shares reacquired...................... (345,070) (63,140)
--------- -------
Net Increase........................... 1,145,750 563,882
========= =======
</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:
<TABLE>
<CAPTION>
1999 1998(1)
------- -------
<S> <C> <C>
Net Asset Value, Beginning of Year.......................... $ 10.40 $10.00
------- ------
Income (Loss) From Operations:
Net investment income (2).................................. 0.24 0.15
Net realized and unrealized gain (loss) ................... (0.16) 0.43
------- ------
Total Income From Operations............................... 0.08 0.58
------- ------
Less Distributions From:
Net investment income...................................... (0.24) (0.15)
Net realized gains......................................... -- (0.03)
Capital ................................................... (0.01) --
------- ------
Total Distributions........................................ (0.25) (0.18)
------- ------
Net Asset Value, End of Year................................ $ 10.23 $10.40
======= ======
Total Return (3)............................................ 0.78% 5.83%++
Net Assets, End of Year (000s).............................. $17,584 $5,971
Ratios to Average Net Assets (2):
Expenses (4)............................................... 1.00% 1.00%+
Net investment income...................................... 3.50% 3.57%+
Portfolio Turnover Rate..................................... 63% 56%
</TABLE>
- ------
(1) For the period from February 17, 1998 (commencement of operations) through
December 31, 1998.
(2) SBAM has waived all or a part of its management fees for the year ended De-
cember 31, 1999 and the period ended December 31, 1998. In addition, SBAM
has reimbursed the Fund for $26,591 of expenses for the period ended Decem-
ber 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 Ratio Without
Net Investment Income Fee Waiver and/or
Per Share Decreases Expense Reimbursement
--------------------- ---------------------
<S> <C> <C>
1999.......................... $0.05 1.65%
1998.......................... 0.08 2.90+
</TABLE>
(3) Total returns do not reflect expenses associated with the separate account
such as administrative fees, account charges and surrender charges which,
if reflected, would reduce the total returns for all periods shown.
(4) As a result of a voluntary expense limitation, expense ratios will not ex-
ceed 1.00%.
++Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized.
17
<PAGE>
Report of Independent Accountants
To the Board of Directors and Shareholders of
Salomon Brothers Variable Total Return Fund
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations, of
changes in net assets and of cash flows and the financial highlights present
fairly, in all material respects, the financial position of Salomon Brothers
Variable Total Return Fund ("Fund") at December 31, 1999, the results of its
operations and its cash flows for the year then ended and the changes in its
net assets and the financial highlights for the year then ended and for the pe-
riod February 17, 1998 (commencement of operations) through December 31, 1998,
in conformity with accounting principles generally accepted in the United
States. These financial statements and financial highlights (hereafter referred
to as "financial statements") are the responsibility of the Fund's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these financial statements in accor-
dance with auditing standards generally accepted in the United States which re-
quire that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and dis-
closures in the financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall finan-
cial statement presentation. We believe that our audits, which included confir-
mation of securities at December 31, 1999 by correspondence with the custodian
and brokers, provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
New York, N.Y.
February 15, 2000
18
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Tax Information
(unaudited)
For Federal tax purposes the Fund hereby designates for the fiscal year ended
December 31, 1999:
. A corporate dividends received deduction of 22.70%.
A total of 17.91% of the ordinary dividends paid by the Fund from net invest-
ment income are derived from Federal obligations and may be exempt from taxa-
tion at the state level.
19
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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
Directors
CHARLES F. BARBER
Consultant; formerly Chairman;
ASARCO Incorporated
CAROL L. COLMAN
Consultant, Colman Consulting
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, SSB Citi Fund Management LLC
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
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
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[LOGO OF SALOMON BROTHERS]
SEVEN WORLD TRADE CENTER . NEW YORK, NEW YORK 10048
