<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 26, 2000
REGISTRATION NOS. 333-38045
811-8443
________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM N-1A
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933 [x]
PRE-EFFECTIVE AMENDMENT NO. [ ]
POST-EFFECTIVE AMENDMENT NO. 4 [x]
AND/OR
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940 [x]
AMENDMENT NO. 4 [x]
-------------------
SALOMON BROTHERS VARIABLE SERIES FUNDS INC
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
-------------------
7 WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (800) 725-6666
ROBERT A. VEGLIANTE
SALOMON BROTHERS ASSET MANAGEMENT INC
7 WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
(NAME AND ADDRESS OF AGENT FOR SERVICE)
-------------------
COPIES TO:
SARAH E. COGAN, ESQ.
SIMPSON THACHER & BARTLETT
425 LEXINGTON AVENUE
NEW YORK, NY 10017
-------------------
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after
this Registration Statement becomes effective.
It is proposed that this filing will become effective:
[ ] immediately upon filing pursuant to Rule 485(b)
[x] on April 28, 2000 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective
date for a
previously filed post-effective amendment.
________________________________________________________________________________
<PAGE>
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CONTENTS
Salomon Brothers Variable
Series Funds Inc consists
of 6 separate investment
funds, each with its own
investment objective and
policies. Each fund offers
different levels of
potential return and
involves different levels
of risk.
<TABLE>
<S> <C>
Fund goals, strategies and risks:
Capital Fund............................................ 4
Investors Fund.......................................... 6
Small Cap Growth Fund................................... 8
Total Return Fund....................................... 10
High Yield Bond Fund.................................... 13
Strategic Bond Fund..................................... 15
More on the funds' investments.............................. 18
Management.................................................. 23
Share transactions.......................................... 25
Dividends, distributions and taxes.......................... 26
Financial highlights........................................ 27
</TABLE>
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THINGS YOU SHOULD KNOW BEFORE INVESTING
ABOUT THE FUNDS
<TABLE>
<CAPTION>
Equity Funds Fixed Income Funds
- ------------ ------------------
<S> <C>
Capital Fund High Yield Bond Fund
Investors Fund Strategic Bond Fund
Small Cap Growth Fund
Total Return Fund
</TABLE>
ABOUT MUTUAL FUND RISKS
An investment in any of the funds is not a bank deposit and is not insured or
guaranteed by the FDIC or any other government agency.
Salomon Brothers Variable Series Funds Inc - 3
<PAGE>
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<TABLE>
<S> <C>
CAPITAL FUND
INVESTMENT The fund seeks capital appreciation through investment in securities which
OBJECTIVE the manager believes have above-average capital appreciation potential.
- ----------------------------------------------------------------------------------------------
KEY INVESTMENTS The fund invests primarily in equity securities of U.S. companies. These
companies may range in size from established large capitalization (over $5
billion in market capitalization) companies to small capitalization (less
than $1 billion in market capitalization) companies at the beginning of
their life cycles.
- ----------------------------------------------------------------------------------------------
HOW THE The manager emphasizes individual security selection while diversifying
MANAGER the fund's investments across industries, which may help to reduce risk.
SELECTS THE The manager seeks to identify those companies which offer the greatest
FUND'S potential for capital appreciation through careful fundamental analysis of
INVESTMENTS each company and its financial characteristics. The manager evaluates
companies of all sizes.
In selecting individual companies for investment, the manager looks for
the following:
Share prices which appear to undervalue the company's assets or do not
adequately reflect factors such as favorable industry trends, lack of
investor recognition or the short-term nature of earnings declines.
Special situations such as existing or possible changes in management,
corporate policies, capitalization or regulatory environment which may
boost earnings or the market price of the company's shares.
Growth potential due to technological advances, new products or services,
new methods of marketing or production, changes in demand or other
significant new developments which may enhance future earnings.
- ----------------------------------------------------------------------------------------------
PRINCIPAL RISKS Equity investments may involve added risks. Investors could lose money on
OF INVESTING IN their investment in the fund, or the fund may not perform as well as other
THE FUND investments, if any of the following occurs:
The U.S. stock market declines.
Investing in An adverse event, such as negative press reports about a company in the
small fund's portfolio, depresses the value of the company's stock.
capitalization The manager's judgment about the attractiveness, relative value or
companies potential appreciation of a particular sector or security proves to be
involves a incorrect.
substantial risk Greater volatility of share price because of the fund's ability to invest
of loss. in small cap companies. Compared to large cap companies, small cap
companies and the market for their equity securities are more likely to:
Be more sensitive to changes in earnings results and investor
expectations.
Have more limited product lines, capital resources and management
depth.
Experience sharper swings in market values.
Be harder to sell at the times and prices the manager believes
appropriate.
Offer greater potential for gain and loss.
The fund is not diversified, which means that it can invest a higher
percentage of its assets in any one issuer than a diversified fund. Being
non-diversified may magnify the fund's losses from adverse events
affecting a particular issuer.
</TABLE>
Salomon Brothers Variable Series Funds Inc - 4
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<PAGE>
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PERFORMANCE
The bar chart indicates the risks of investing in the fund by showing changes
in the fund's performance from year to year. Past performance does not
necessarily indicate how the fund will perform in the future.
QUARTERLY RETURNS: Highest: 15.11% in 2nd quarter 1999; Lowest: - 4.89% in 3rd
quarter 1999
[BAR GRAPH indicating a % total return of 22.08 during the
calendar year 1999, ending December 31.]
TOTAL RETURN
The bar chart shows the performance of the fund for the calendar year
indicated.
- --------------------------------------------------------------------------------
PERFORMANCE TABLE
THIS TABLE ASSUMES REDEMPTION OF SHARES AT THE END OF THE PERIOD, AND THE
REINVESTMENT OF DISTRIBUTIONS AND DIVIDENDS.
AVERAGE ANNUAL TOTAL RETURNS (CALENDAR YEARS ENDED DECEMBER 31, 1999)
<TABLE>
<CAPTION>
Inception Date 1 Year Since Inception
<S> <C> <C> <C>
Fund 2/17/98 22.08% 21.64%
Russell 3000 * 20.90% 19.84%
Index
</TABLE>
* Index comparison begins on 2/28/98.
COMPARATIVE PERFORMANCE
The table indicates the risk of investing in the fund by comparing the average
annual total return for the periods shown to that of Russell 3000 Index, a
broad-based unmanaged capitalization weighted index of large capitalized
companies.
- --------------------------------------------------------------------------------
FEE TABLE
SHAREHOLDER FEES (PAID DIRECTLY FROM YOUR INVESTMENT)
<TABLE>
<S> <C>
Maximum sales charge on purchases None
Maximum deferred sales charge on redemptions None
</TABLE>
ANNUAL FUND OPERATING EXPENSES (PAID BY THE FUND AS A % OF NET ASSETS)
<TABLE>
<S> <C>
Management fees 0.85%
Distribution and service (12b-1) fees None
Other expenses 1.14%
Total annual fund operating expenses 1.99%
</TABLE>
FEES AND EXPENSES
This table sets forth the fees and expenses you will pay if
you invest in shares of the fund. Because the manager waived all of its
management fee and reimbursed the fund for certain expenses during the period
ended December 31, 1999, the actual total operating expenses for the fund were:
1.00%
The manager may discontinue this waiver at any time.
- --------------------------------------------------------------------------------
EXAMPLE
<TABLE>
<CAPTION>
NUMBER OF YEARS YOU OWN YOUR SHARES 1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
Your costs would be $202 $624 $1,073 $2,317
</TABLE>
The example assumes: You invest $10,000 for the period shown
You reinvest all distributions and dividends without a
sales charge
The fund's operating expenses remain the same
Your investment has a 5% return each year
Redemption of your shares at the end of the period
This example helps you compare the cost of investing in the fund with other
mutual funds. Your actual cost may be higher or lower.
Salomon Brothers Variable Series Funds Inc - 5
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<PAGE>
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<TABLE>
<S> <C>
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INVESTORS FUND
INVESTMENT The primary investment objective of the fund is to seek long-term growth
OBJECTIVE of capital. Current income is a secondary objective.
- ----------------------------------------------------------------------------------------------
KEY INVESTMENTS The fund invests primarily in common stocks of established U.S. companies.
The fund may also invest in other equity securities. To a lesser degree,
the fund invests in income producing securities such as debt securities.
- ----------------------------------------------------------------------------------------------
HOW THE The manager emphasizes individual security selection while diversifying
MANAGER the fund's investments across industries, which may help to reduce risk.
SELECTS THE The manager focuses on established large capitalization companies (over $5
FUND'S billion in market capitalization), seeking to identify those companies
INVESTMENTS with solid growth potential at reasonable values. The manager employs
fundamental analysis to analyze each company in detail, ranking its
management, strategy and competitive market position.
In selecting individual companies for investment, the manager looks for:
Long-term history of performance.
Competitive market position.
Competitive products and services.
Strong cash flow.
High return on equity.
Strong financial condition.
Experienced and effective management.
Global scope.
- ----------------------------------------------------------------------------------------------
PRINCIPAL RISKS Equity investments may involve added risks. Investors could lose money on
OF INVESTING IN their investment in the fund, or the fund may not perform as well as other
THE FUND investments, if any of the following occurs:
U.S. stock markets decline.
An adverse event, such as an unfavorable earnings report, negatively
affects the stock price of a company in which the fund invests.
Large capitalization stocks fall out of favor with investors.
The manager's judgment about the attractiveness, growth prospects or
potential appreciation of a particular stock proves to be incorrect.
</TABLE>
Salomon Brothers Variable Series Funds Inc - 6
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<PAGE>
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PERFORMANCE
The bar chart indicates the risks of investing in the fund by showing changes
in the fund's performance from year to year. Past performance does not
necessarily indicate how the fund will perform in the future.
QUARTERLY RETURNS: Highest: 13.09% in 2nd quarter 1999; Lowest: - 9.76% in 3rd
quarter 1999
[BAR GRAPH indicating a % total return of 11.65 during the
calendar year 1999, ending December 31.]
TOTAL RETURN
The bar chart shows the performance of the fund for the calendar year
indicated.
- --------------------------------------------------------------------------------
PERFORMANCE TABLE
THIS TABLE ASSUMES REDEMPTION OF SHARES AT THE END OF THE PERIOD, AND THE
REINVESTMENT OF DISTRIBUTIONS AND DIVIDENDS.
AVERAGE ANNUAL TOTAL RETURNS (CALENDAR YEARS ENDED DECEMBER 31, 1999)
<TABLE>
<CAPTION>
Inception Date 1 Year Since Inception
<S> <C> <C> <C>
Fund 2/17/98 11.65% 11.92%
S&P 500 Index * 21.04% 21.82%
</TABLE>
* Index comparison begins on 2/28/98.
COMPARATIVE PERFORMANCE
This table indicates the risk of investing in the fund by comparing the average
annual total return for the periods shown to that of the Standard & Poor's 500
Index ('S&P 500 Index') an index of a broad-based unmanaged index of widely
held common stock.
- --------------------------------------------------------------------------------
FEE TABLE
SHAREHOLDER FEES (PAID DIRECTLY FROM YOUR INVESTMENT)
<TABLE>
<S> <C>
Maximum sales charge on purchases None
Maximum deferred sales charge on redemptions None
</TABLE>
ANNUAL FUND OPERATING EXPENSES (PAID BY THE FUND AS A % OF NET ASSETS)
<TABLE>
<S> <C>
Management fees 0.70%
Distribution and service (12b-1) fees None
Other expenses .45%
Total annual fund operating expenses 1.15%
</TABLE>
FEES AND EXPENSES
This table sets forth the fees and expenses you will pay if you invest in
shares of the fund. Because the manager waived all of its management fee and
reimbursed the fund for certain expenses during the period ended December 31,
1999, the actual total operating expenses for the fund were:
0.98%
The manager may discontinue this waiver at any time.
- --------------------------------------------------------------------------------
EXAMPLE
<TABLE>
<CAPTION>
NUMBER OF YEARS YOU OWN YOUR SHARES 1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
Your costs would be $117 $365 $633 $1,398
</TABLE>
The example assumes: You invest $10,000 for the period shown
You reinvest all distributions and dividends without a
sales charge
The fund's operating expenses remain the same
Your investment has a 5% return each year
Redemption of your shares at the end of the period
This example helps you compare the cost of investing in the fund with other
mutual funds. Your actual cost may be higher or lower.
Salomon Brothers Variable Series Funds Inc - 7
- --------------------------------------------------------------------------------
<PAGE>
<TABLE>
<S> <C>
- ----------------------------------------------------------------------------------------------
SMALL CAP GROWTH FUND
INVESTMENT The fund seeks long-term growth of capital.
OBJECTIVE
- ----------------------------------------------------------------------------------------------
PRINCIPAL The fund invests primarily in equity securities of companies with market
INVESTMENT capitalizations at the time of purchase similar to that of the companies
STRATEGY included in the Russell 2000 Index. The Russell 2000 Index includes
companies with market capitalizations below the top 1000 stocks of the
equity market. The Index is reconstituted annually, each June 30. As of
June 30, 1999, the date of the most recent Index reconstitution, the
market capitalization of companies included in the Russell 2000 Index
ranged from $80 million to $2.6 billion.
- ----------------------------------------------------------------------------------------------
HOW THE The manager emphasizes companies which it believes have favorable growth
MANAGER prospects and potential for significant capital appreciation. In selecting
SELECTS THE individual companies for investment, the manager looks for:
FUND'S
INVESTMENTS Companies that either occupy a dominant position in an emerging industry
or a growing market share in larger, fragmented indusries.
Favorable near-term sales and/or earnings trends.
High or improving return on capital.
Strong financial condition.
Experienced and effective management.
- ----------------------------------------------------------------------------------------------
PRINCIPAL While investing in equity securities historically has produced greater
RISKS OF average returns than investments in fixed income securities, equity
INVESTING IN securities may also involve added risks. Investors can lose money on their
THE FUND investment in the fund, or the fund may not perform as well as other
investments, if any of the following occurs:
Small capitalization stocks fall out of favor with investors.
Investing in Recession or adverse economic trends adversely affects the earnings or
small financial condition of small companies.
capitalization The manager's judgment about the attractiveness, growth prospects or
companies potential appreciation of the fund's investments proves to be incorrect.
involves a Greater volatility of share price because of the fund's focus on small cap
substantial risk companies. Compared to large cap companies, small cap companies and the
of loss market for their equity securities are more likely to:
Be more sensitive to changes in earnings results and investor
expectations.
Have more limited product lines, capital resources and management depth.
Experience sharper swings in market values.
Be harder to sell at the times and prices the manager believes
appropriate.
Offer greater potential for gain and loss.
Growth securities typically are sensitive to market movements because
their market prices tend to reflect future expectations. When it appears
those expectations will not be met, the prices of growth securities
typically fall.
</TABLE>
Salomon Brothers Variable Series Funds Inc - 8
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<PAGE>
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PERFORMANCE
Because the fund commenced operations in 1999, the fund does not have a
sufficient operating history to depict its performance in the graphic and table
form.
The fund's total return will vary from year to year, and its performance will
vary compared with that of unmanaged indices. Although variations in the fund's
performance are an indication of the risks of investing in the fund, past
performance does not necessarily indicate how the fund will perform in the
future. The fund's total return does not reflect any contract or insurance
charges which would lower performance.
- --------------------------------------------------------------------------------
FEE TABLE
SHAREHOLDER FEES (PAID DIRECTLY FROM YOUR INVESTMENT)
<TABLE>
<S> <C>
Maximum sales charge on purchases None
Maximum deferred sales charge on redemptions None
redemptions
</TABLE>
ANNUAL FUND OPERATING EXPENSES (PAID BY THE FUND AS A % OF NET ASSETS)
<TABLE>
<S> <C>
Management fees 0.80%
Distribution and service (12b-1) fee None
Other expenses* 2.69%
Total Annual fund operating expenses* 3.49%
</TABLE>
* Based on estimated amounts for the fiscal year ended December 31, 2000.
FEES AND EXPENSES
This table sets forth the fees and expenses you will pay if
you invest in shares of the fund. Because the manager voluntarily agreed to
waive its management fee and reimburse certain expenses for the fiscal year
ended December 31, 1999, the actual total operating expenses for the fund were:
1.50%
The manager may discontinue this waiver at any time.
- --------------------------------------------------------------------------------
EXAMPLE
<TABLE>
<CAPTION>
NUMBER OF YEARS YOU OWN YOUR SHARES 1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
Your costs would be $352 $1,071 $1,812 $3,765
</TABLE>
The example assumes: You invest $10,000 for the period shown
You reinvest all distributions and dividends without a
sales charge
The fund's operating expenses remain the same
Your investment has a 5% return each year
Redemption of your shares at the end of the period
This example helps you compare the cost of investing in the fund with other
mutual funds. Your actual cost may be higher or lower.
Salomon Brothers Variable Series Funds Inc - 9
- --------------------------------------------------------------------------------
<PAGE>
<TABLE>
<S> <C>
- ---------------------------------------------------------------------------------------------------------------
TOTAL RETURN FUND
INVESTMENT The fund seeks to obtain above-average income (compared to a portfolio
OBJECTIVE entirely invested in equity securities). The fund's secondary objective is
to take advantage of opportunities to achieve growth of capital and
income.
- ----------------------------------------------------------------------------------------------
KEY INVESTMENTS The fund invests in a broad range of equity and fixed income securities of
both U.S. and foreign issuers. The fund varies its allocations between
equity and fixed income securities depending on the manager's view of
economic and market conditions, fiscal and monetary policy and security
values. However, under normal market conditions at least 40% of the fund's
assets are allocated to equity securities.
CREDIT QUALITY: The fund's investments in fixed-income securities are
primarily investment grade but the fund may invest up to 20% of its assets
in nonconvertible fixed income securities rated below investment grade by
a recognized rating agency, or in unrated securities of equivalent
quality. Securities rated below investment grade are commonly referred to
as 'junk bonds.'
MATURITY: The fund's investments in fixed-income securities may be of any
maturity.
- ----------------------------------------------------------------------------------------------
HOW THE In selecting stocks for investment, the manager applies a bottom-up
MANAGER analysis, focusing on companies with:
SELECTS THE Large market capitalizations.
FUND'S Favorable dividend yields and price to earnings ratios.
INVESTMENTS Stocks that are less volatile than the market as a whole.
Strong balance sheets.
A catalyst for appreciation and restructuring potential, product
innovation or new development.
The manager considers both macroeconomic and issuer specific factors in
selecting debt securities for its portfolio. In assessing the appropriate
maturity, rating and sector weighting of the fund's portfolio, the manager
considers a variety of macroeconomic factors that are expected to
influence economic activity and interest rates. These factors include
fundamental economic indicators, Federal Reserve monetary policy and the
relative value of the U.S. dollar compared to other currencies. Once the
manager determines the preferable portfolio characteristics, the manager
selects individual securities based upon the terms of the securities (such
as yields compared to U.S. Treasuries or comparable issues), liquidity and
rating, sector and issuer diversification. The manager also employs
fundamental research and due diligence to assess an issuer's:
Credit quality taking into account financial condition and profitability.
Future capital needs.
Potential for change in rating and industry outlook.
The competitive environment and management ability.
</TABLE>
Salomon Brothers Variable Series Funds Inc - 10
- --------------------------------------------------------------------------------
<PAGE>
<TABLE>
<S> <C>
- ----------------------------------------------------------------------------------------------
PRINCIPAL RISKS While investing in a mix of equity and debt securities can bring added
OF INVESTING IN benefits, it may also involve additional risks. Investors could lose money
THE FUND in the fund or the fund's performance could fall below other possible
investments if any of the following occurs:
U.S. stock markets decline.
An adverse event, such as an unfavorable earnings report, negatively
affects the stock price of a company in which the fund invests.
Large capitalization stocks fall out of favor with investors.
The manager's judgment about the attractiveness, growth prospects or
potential appreciation of a particular sector or security proves to be incorrect.
The fund also has risks associated with investing in bonds. The fund could
underperform other investments if:
Interest rates go up, causing the prices of fixed-income securities to
decline and reducing the value of the fund's investments.
The issuer of a debt security owned by the fund defaults on its obligation
to pay principal or interest or has its credit rating downgraded.
During periods of declining interest rates, the issuer of a security may
exercise its option to prepay earlier than scheduled, forcing the fund to
reinvest in lower yielding securities. This is known as call or prepayment
risk.
During periods of rising interest rates, the average life of certain types
of securities may be extended because of slower than expected principal
payments. This market effect may lock in a below market interest rate,
increase the security's duration and reduce the value of the security.
This market effect is known as extension risk.
- ----------------------------------------------------------------------------------------------
</TABLE>
PERFORMANCE
The bar chart indicates the risks of investing in the fund by showing changes
in the fund's performance from year to year. Past performance does not
necessarily indicate how the fund will perform in the future.
QUARTERLY RETURNS: Highest: 4.31% in 2nd quarter 1999; Lowest: - 4.77% in 3rd
quarter 1999
[BAR GRAPH indicating a % total return of 0.78 during the
calendar year 1999, ending December 31.]
TOTAL RETURN
The bar chart shows the performance of the fund for the calendar year
indicated.
- --------------------------------------------------------------------------------
PERFORMANCE TABLE
THIS TABLE ASSUMES REDEMPTION OF SHARES AT THE END OF THE PERIOD, AND THE
REINVESTMENT OF DISTRIBUTIONS AND DIVIDENDS.
AVERAGE ANNUAL TOTAL RETURNS (CALENDAR YEARS ENDED DECEMBER 31, 1999)
<TABLE>
<CAPTION>
Inception Date 1 Year Since Inception
<S> <C> <C> <C>
Fund 2/17/98 0.78% 3.51%
S&P 500 * 21.04% 21.82%
SSB Big Index * - 0.84% 3.50%
</TABLE>
* Index comparisons begin on 2/28/98.
COMPARATIVE PERFORMANCE
The table indicates the risk of investing in the fund by comparing the average
annual total return for the periods shown to that of the Standard & Poor's
Index (S&P 500 Index), a broad based unmanaged index of widely held common
stock and the Salomon Smith Barney Broad Investment Grade Bond Index ('SSB Big
Index'), a broad-based unmanaged index of corporate bonds.
Salomon Brothers Variable Series Funds Inc - 11
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<PAGE>
FEE TABLE
SHAREHOLDER FEES (PAID DIRECTLY FROM YOUR INVESTMENT)
<TABLE>
<S> <C>
Maximum sales charge on purchases None
Maximum deferred sales charge on redemptions None
</TABLE>
Average fund operating expenses (paid by the Fund as a % of net assets)
<TABLE>
<S> <C>
Management fees 0.80%
Distribution and service (12b-1) fees None
Other expenses 0.85%
Total annual fund operating expenses 1.65%
</TABLE>
FEES AND EXPENSES
This table sets forth the fees and expenses you will pay if you invest in
shares of the fund. Because the manager waived all of its management fee and
reimbursed the fund for certain expenses during the period ended December 31,
1999, the actual total operating expenses for the fund were:
1.00%
The manager may discontinue this waiver at any time.
- --------------------------------------------------------------------------------
EXAMPLE
<TABLE>
<CAPTION>
NUMBER OF YEARS YOU OWN YOUR SHARES 1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
Your costs would be $168 $520 $897 $1,955
</TABLE>
The example assumes: You invest $10,000 for the period shown
You reinvest all distributions and dividends without a
sales charge
The fund's operating expenses remain the same
Your investment has a 5% return each year
Redemption of your shares at the end of the period
This example helps you compare the cost of investing in the fund with other
mutual funds. Your actual cost may be higher or lower.
Salomon Brothers Variable Series Funds Inc - 12
- --------------------------------------------------------------------------------
<PAGE>
<TABLE>
<S> <C>
- -----------------------------------------------------------------------------------------------
HIGH YIELD BOND FUND
INVESTMENT The fund seeks to maximize current income. As a secondary objective, the
OBJECTIVE fund seeks capital appreciation.
- ----------------------------------------------------------------------------------------------
KEY INVESTMENTS The fund invests primarily in high yield fixed income securities issued by
U.S. and foreign corporations and foreign governments and their agencies
and instrumentalities. The fund will limit its investments in emerging
markets securities to 35% of its assets.
CREDIT QUALITY: The fund invests primarily in fixed income securities
rated below investment grade by a recognized rating agency or, if unrated,
of equivalent quality as determined by the manager. Below investment grade
securities are commonly referred to as 'junk bonds.'
MATURITY: The fund normally maintains an average portfolio maturity of
between 6 and 12 years. However, the fund may invest in individual
securities of any maturity.
- ----------------------------------------------------------------------------------------------
HOW THE MANAGER Individual security selection is driven by the manager's economic view,
SELECTS THE industry outlook and rigorous credit analysis. The manager then selects
FUND'S those individual securities that appear to be most undervalued and to
INVESTMENTS offer the highest potential returns relative to the amount of credit,
interest rate, liquidity and other risk presented by these securities. The
manager allocates the fund's investments across a broad range of issuers
and industries, which can help to reduce risk.
In evaluating the issuer's creditworthiness, the manager employs
fundamental analysis and considers the following factors:
The strength of the issuer's financial resources.
The issuer's sensitivity to economic conditions and trends.
The issuer's operating history.
Experience and track record of issuer's management or political
leadership.
- ----------------------------------------------------------------------------------------------
PRINCIPAL RISKS Investors could lose money on their investment in the fund, or the fund
OF INVESTING IN may not perform as well as other investments, if any, of the following
THE FUND occurs:
The issuer of a security owned by the fund defaults on its obligation to
Investments in pay principal and/or interest or has its credit rating downgraded.
high yield Interest rates increase, causing the prices of fixed income securities to
securities decline and reducing the value of the fund's portfolio.
involve a The manager's judgment about the attractiveness, relative value or credit
substantial risk quality of a particular security proves to be incorrect.
of loss High yield securities are considered speculative and, compared to
investment grade securities, tend to have more volatile prices and are
more susceptible to the following risks:
Increased price sensitivity to changing interest rates and to adverse
economic and business developments.
Greater risk of loss due to default or declining credit quality.
Greater likelihood that adverse economic or company specific events
will make the issuer unable to make interest and/or principal payments.
Negative market sentiment towards high yield securities depresses the
price and liquidity of high yield securities.
Investing in non-U.S. issuers may involve unique risks compared to
investing in the securities of U.S. issuers. These risks are more
pronounced to the extent the fund invests in issuers in countries with
emerging markets or if the fund invests significantly in one country.
These risks may include:
Less information about non-U.S. issuers or markets may be available due to
less rigorous disclosure and accounting standards or regulatory
practices.
</TABLE>
Salomon Brothers Variable Series Funds Inc - 13
- --------------------------------------------------------------------------------
<PAGE>
<TABLE>
<S> <C>
- ----------------------------------------------------------------------------------------------
Many non-U.S. markets are smaller, less liquid and more volatile than U.S.
markets. In a changing market, the manager may not be able to sell the
fund's portfolio securities in amounts and at prices the manager
considers reasonable.
Economic, political and social developments significantly disrupt the
financial markets or interfere with the Fund's ability to enforce its
rights against foreign government issuers.
- ----------------------------------------------------------------------------------------------
</TABLE>
PERFORMANCE
The bar chart indicates the risks of investing in the fund by showing changes
in the fund's performance from years to year. Past performance does not
necessarily indicate how the fund will perform in the future.
QUARTERLY RETURNS: Highest: 3.79% in 4th quarter 1999 Lowest: - 1.52% in 3rd
quarter 1999
[BAR GRAPH indicating a % total return of 5.52 during the
calendar year 1999, ending December 31.]
TOTAL RETURN The bar chart shows the performance of the fund for the calendar
year indicated.
- --------------------------------------------------------------------------------
PERFORMANCE TABLE
THIS TABLE ASSUMES REDEMPTION OF SHARES AT THE END OF THE PERIOD, AND THE
REINVESTMENT OF DISTRIBUTIONS AND DIVIDENDS.
AVERAGE ANNUAL TOTAL RETURNS (CALENDAR YEARS ENDED DECEMBER 31, 1999)
<TABLE>
<CAPTION>
Inception 1 Year Since
Date Inception
<S> <C> <C> <C>
Fund 5/1/98 5.52 3.36%
SSB Index * 1.74% 0.30%
</TABLE>
* Index comparison begins on 5/31/98.
- --------------------------------------------------------------------------------
COMPARATIVE PERFORMANCE
The table indicates the risk of investing in the fund by comparing the average
annual total return of each class for the periods shown to that of the Salomon
Smith Barney High-Yield Market Index, ('SSB Index') a broad-based unmanaged
index of high yield securities.
- -------------------------------------------------------------------------------
FEE TABLE
SHAREHOLDERS FEES (PAID DIRECTLY FROM YOUR INVESTMENT)
<TABLE>
<S> <C>
Maximum sales charge on purchases None
Maximum deferred sales charge on redemptions None
</TABLE>
AVERAGE FUND OPERATING EXPENSE (PAID BY THE FUND AS A % OF NET ASSETS)
<TABLE>
<S> <C>
Management fees 0.75%
Distribution and service (12b-1) fees None
Other expenses 1.05%
Total annual fund operating expenses 1.80%
</TABLE>
FEES AND EXPENSES
This table sets forth the fees and expenses you will pay if
you invest in shares of the fund. Because the manager waived all of its
management fee and reimbursed the fund for certain expenses during the period
ended December 31, 1999, the actual total operating expenses for the fund were:
1.00%
The manager may discontinue this waiver at any time.
- --------------------------------------------------------------------------------
EXAMPLE
<TABLE>
<CAPTION>
NUMBER OF YEARS YOU OWN YOUR SHARES 1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
Your costs would be $183 $566 $975 $2,116
</TABLE>
The example assumes: You invest $10,000 for the period shown
You reinvest all distributions and dividends without a
sales charge
The fund's operating expenses remain the same
Your investment has a 5% return each year
Redemption of your shares at the end of the period
This example helps you compare the cost of investing in the fund with other
mutual funds. Your actual cost may be higher or lower.
Salomon Brothers Variable Series Funds Inc - 14
- --------------------------------------------------------------------------------
<PAGE>
<TABLE>
<S> <C>
- -----------------------------------------------------------------------------------------------------------------
STRATEGIC BOND FUND
INVESTMENT The fund seeks a high level of current income. As a secondary objective,
OBJECTIVE the fund seeks capital appreciation.
- ----------------------------------------------------------------------------------------------
KEY INVESTMENTS The fund invests primarily in a globally diverse portfolio of fixed income
securities. The manager has broad discretion to allocate the fund's assets
among the following segments of the international market for fixed income
securities:
U.S. government obligations
Investment and non-investment grade
U.S. and foreign corporate debt
Mortgage and asset-backed securities
Investment and non-investment grade
sovereign debt, including issuers
in emerging markets
CREDIT QUALITY: The fund invests in fixed income securities across a range
of credit qualities and may invest a substantial portion of the fund's
assets in obligations rated below investment grade by a recognized rating
agency, or, if unrated, of equivalent quality as determined by the
manager. Below investment grade securities are commonly referred to as
'junk bonds'.
MATURITY: The fund has no specific average portfolio maturity requirement,
but generally anticipates maintaining a range of 4.5 to 10 years. The fund
may hold individual securities of any maturity.
- ----------------------------------------------------------------------------------------------
HOW THE The manager uses a combination of quantitative models which seek to
MANAGER measure the relative risks and opportunities of each market segment based
SELECTS THE upon economic, market, political, currency and technical data and its own
FUND'S assessment of economic and market conditions to create an optimal
INVESTMENTS risk/return allocation of the fund's assets among various segments of the
fixed income market. After the manager makes its sector allocations, the
manager uses traditional credit analysis to identify individual securities
for the fund's portfolio.
In selecting corporate debt for investment, the manager considers the
issuer's:
Financial condition.
Sensitivity to economic conditions and trends.
Operating history.
Experience and track record of management.
In selecting foreign government debt for investment, the manager considers
the following factors:
Economic and political conditions within the issuer's country.
Overall and external debt levels and debt service ratios.
Access to capital markets.
Debt service payment history.
In selecting U.S. government and agency obligations and mortgage-backed
securities for investment, the manager considers the following factors:
Yield curve shifts.
Credit quality.
Changing prepayment patterns.
Salomon Brothers Variable Series Funds Inc - 15
- ----------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<S> <C>
- ----------------------------------------------------------------------------------------------
Principal risks Investors could lose money on their investment in the fund, or the fund
of investing in may not perform as well as other investments, if any of the following
the fund occurs:
Investment in Interest rates go up, causing the prices of fixed income securities to
high yield decline and reducing the value of the fund's investments.
securities The issuer of a security owned by the fund defaults on its obligation to
involve a pay principal and/or interest or has its credit rating downgraded.
substantial risk During periods of declining interest rates, the issuer of a security may
of loss. exercise its option to prepay principal earlier than scheduled, forcing
the fund to reinvest in lower yielding securities. This is known as call
or prepayment risk.
During periods of rising interest rates, the average life of certain types
of securities may be extended because of slower than expected principal
payments. This may lock in a below market interest rate, increase the
security's duration and reduce the value of the security. This is known as
extension risk.
The manager's judgment about the attractiveness, relative value or
potential appreciation of a particular sector, security or hedging
strategy proves to be incorrect.
To the extent the fund invests significantly in asset-backed and mortgage-
related securities, its exposure to prepayment and extension risks may be
greater than other investments in fixed income securities. Mortgage
derivatives held by the fund may have especially volatile prices and may
have a disproportionate effect on the fund's share price.
High yield securities are considered speculative with respect to the
issuer's ability to pay interest and principal and are susceptible to
default or decline in market value due to adverse economic and business
developments. The market values for high yield securities tend to be very
volatile, and these securities are less liquid than investment grade debt
securities. For these reasons, an investment in the fund is subject to
increased price sensitivity to changing interest rates and a greater risk
of loss due to default or declining credit quality. Also, negative market
sentiment towards high yield securities could depress the price and
liquidity of high yield securities. This negative perception could last
for a significant period of time.
Investing in non-U.S. issuers may involve unique risks compared to
investing in the securities of U.S. issuers. These risks are more
pronounced to the extent the fund invests in issuers in countries with
emerging markets or if the fund invests significantly in one country.
These risks may include:
Less information about non-U.S. issuers or markets may be available due to
less rigorous disclosure and accounting standards or regulatory practices.
Many non-U.S. markets are smaller, less liquid and more volatile than U.S.
markets. In a changing market, the manager may not be able to sell the
fund's portfolio securities in amounts and at prices the manager considers
reasonable.
The U.S. dollar may appreciate against non-U.S. currencies or a foreign
government may impose restrictions on currency conversion or trading.
The economies of non-U.S. countries may grow at a slower rate than
expected or may experience a downturn or recession.
Economic, political and social developments significantly disrupt the
financial markets.
Foreign governmental obligations involve the risk of debt moratorium,
repudiation or renegotiation and the fund may be unable to enforce its
rights against the issuers.
</TABLE>
Salomon Brothers Variable Series Funds Inc - 16
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
PERFORMANCE
The bar chart indicates the risks of investing in the fund by showing changes
in the fund's performance from year to year. Past performance does not
necessarily indicate how the fund will perform in the future.
QUARTERLY RETURNS: Highest: 1.68% in 4th quarter 1999; Lowest: - 0.50% in 3rd
quarter 1999
[BAR GRAPH indicating a % total return of 0.37 during the
calendar year 1999, ending December 31.]
TOTAL RETURN
The bar chart shows the performance of the fund for the calendar year
indicated.
- --------------------------------------------------------------------------------
PERFORMANCE TABLE
THIS TABLE ASSUMES REDEMPTION OF SHARES AT THE END OF THE PERIOD, AND THE
REINVESTMENT OF DISTRIBUTIONS AND DIVIDENDS.
AVERAGE ANNUAL TOTAL RETURNS (CALENDAR YEARS ENDED DECEMBER 31, 1999)
<TABLE>
<CAPTION>
Inception Date 1 Year Since Inception
<S> <C> <C> <C>
Fund 2/17/98 0.37% 3.46%
SSB Big Index * - 0.84% 3.50%
</TABLE>
* Index comparison begins on 2/28/98.
COMPARATIVE PERFORMANCE
The table indicates the risk of investing in the fund by comparing the average
annual total return for the periods shown to that of the Salomon Smith Barney
Broad Investment Grade Bond Index ('SSB Big Index'), a broad based unmanaged
index of corporate bonds.
- --------------------------------------------------------------------------------
FEE TABLE
SHAREHOLDER FEES (PAID DIRECTLY FROM YOUR INVESTMENT)
<TABLE>
<S> <C>
Maximum sales charge on purchases None
Maximum deferred sales charge on redemptions None
</TABLE>
ANNUAL FUND OPERATING EXPENSES (PAID BY THE FUND AS A % OF NET ASSETS)
<TABLE>
<S> <C>
Management fees 0.75%
Distribution and service (12b-1) fees None
Other expenses .73%
Total annual fund operating expenses 1.48%
</TABLE>
FEES AND EXPENSES
This table sets forth the fees and expenses you will pay if you invest in
shares of the fund. Because the manager waived all of its management fee and
reimbursed the fund for certain expenses during the period ended December 31,
1999, the actual total operating expenses for the fund were:
1.00%
The manager may discontinue this waiver at any time.
- --------------------------------------------------------------------------------
EXAMPLE
<TABLE>
<CAPTION>
NUMBER OF YEARS YOU OWN YOUR SHARES 1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
Your costs would be $151 $468 $808 $1,768
</TABLE>
The example assumes: You invest $10,000 for the period shown
You reinvest all distributions and dividends without a
sales charge
The fund's operating expenses remain the same
Your investment has a 5% return each year
Redemption of your shares at the end of the period
This example helps you compare the cost of investing in the fund with other
mutual funds. Your actual cost may be higher or lower.
Salomon Brothers Variable Series Funds Inc - 17
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
MORE ON THE FUNDS' INVESTMENTS
ADDITIONAL INVESTMENTS AND INVESTMENT TECHNIQUES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Each fund's investment CAPITAL FUND
objective and its principal The fund may invest in investment grade fixed-income securities and
investment strategies and may invest up to 20% of its net assets in non-convertible debt
risks are described under securities rated below investment grade or, if unrated, of
'Fund Goals and Strategies.' equivalent quality as determined by the manager. The fund may
invest without limit in convertible debt securities. The fund
This section provides emphasizes those convertible debt securities that offer the
additional information about appreciation potential of common stocks. The fund may also invest
the funds' investments and up to 20% of its assets in securities of foreign issuers.
certain portfolio management
techniques the funds may use. HIGH YIELD BOND FUND
More information about the Although the fund invests primarily in high yield securities, the
funds' investments and fund may also invest up to 20% of its assets in equity and equity
portfolio management related securities.
techniques, some of which
entail risks, is included in INVESTORS FUND
the statement of additional The fund may invest up to 5% of its net assets in non-convertible
information (SAI). debt securities rated below investment grade or, if unrated, of
equivalent quality as determined by the manager. The fund may
invest without limit in convertible debt securities. The fund may
also invest up to 20% of its assets in securities of foreign
issuers.
SMALL CAP GROWTH FUND
Any policy or limitation for The fund may invest up to 35% of its assets in equity securities of
a fund that is expressed as a companies whose market capitalizations exceed the market
percentage of assets is capitalization of companies included in the Russell 2000 Index. The
considered only at the time fund may also invest up to 25% of its assets in non-convertible
of purchase of portfolio bonds, notes and debt securities when the manager believes that
securities. The policy will their total return potential equals or exceeds the potential return
not be violated if these of equity securities. The fund may invest up to 20% of its total
limitations are exceeded assets in equity securities of foreign issuers.
because of changes in the
market value of the fund's STRATEGIC BOND FUND
assets or for any other Although the fund invests primarily in fixed-income securities, the
reason. fund may also invest up to 20% of its assets in equity and equity
related securities. The fund may invest up to 100% of its assets in
foreign currency denominated securities, including securities of
issuers located in emerging markets.
TOTAL RETURN FUND
The fund may invest up to 20% of its assets in securities of
foreign issuers.
</TABLE>
Salomon Brothers Variable Series Funds Inc - 18
- --------------------------------------------------------------------------------
<PAGE>
<TABLE>
- ---------------------------------------------------------------------------------------------------
<S> <C>
EQUITY INVESTMENTS Subject to its particular investment policies, each of these funds
may invest in all types of equity securities. Equity securities
Capital Fund, Investors Fund, include common stocks traded on an exchange or in the over the
Total Return Fund, and Small counter market, preferred stocks, warrants, rights, convertible
Cap Growth Fund securities, depositary receipts, trust certificates, limited
partnership interests, shares of other investment companies and
real estate investment trusts.
- ---------------------------------------------------------------------------------------------------
FIXED INCOME INVESTMENTS Subject to its particular investment policies, each fund may invest
in fixed income securities. Fixed income investments include bonds,
All funds, but the following notes (including structured notes), mortgage-related securities,
funds only to a limited asset-backed securities, convertible securities, Eurodollar and
extent: Capital Fund, Yankee dollar instruments, loan participation and assignments,
Investors Fund and Small Cap preferred stocks and money market instruments. Fixed income
Growth Fund securities may be issued by U.S. and foreign corporations or
entities; U.S. and foreign banks; the U.S. government, its
agencies, authorities, instrumentalities or sponsored enterprises;
state and municipal governments; supranational organizations; and
foreign governments and their political subdivisions. Only certain
of the funds may invest in fixed income securities of foreign
issuers. See 'Foreign and emerging markets investments' below.
Fixed income securities may have all types of interest rate payment
and reset terms, including fixed rate, adjustable rate, zero
coupon, contingent, deferred, payment in kind and auction rate
features.
High Yield Bond Fund, Each of these funds may invest in mortgage-backed and asset-backed
Strategic Bond Fund and Total securities. Mortgage-related securities may be issued by private
Return Fund companies or by agencies of the U.S. government and represent
direct or indirect participations in, or are collateralized by and
payable from, mortgage loans secured by real property. Asset-backed
securities represent participations in, or are secured by and
payable from, assets such as installment sales or loan contracts,
leases, credit card receivables and other categories of
receivables.
Certain debt instruments may only pay principal at maturity or may
only represent the right to receive payments of principal or
payments of interest on underlying pools of mortgages or government
securities, but not both. The value of these types of instruments
may change more drastically than debt securities that pay both
principal and interest during periods of changing interest rates.
Principal only mortgage backed securities are particularly subject
to prepayment risk. The fund may obtain a below market yield or
incur a loss on such instruments during periods of declining
interest rates. Interest only instruments are particularly subject
to extension risk. For mortgage derivatives and structured
securities that have imbedded leverage features, small changes in
interest or prepayment rates may cause large and sudden price
movements. Mortgage derivatives can also become illiquid and hard
to value in declining markets.
</TABLE>
Salomon Brothers Variable Series Funds Inc - 19
- --------------------------------------------------------------------------------
<PAGE>
<TABLE>
- -----------------------------------------------------------------------------------------------------
<S> <C>
Strategic Bond Fund and Total Each of these funds may also enter into mortgage dollar roll
Return Fund transactions to earn additional income. In these transactions, the
fund sells a U.S. agency mortgage-backed security and
simultaneously agrees to repurchase at a future date another U.S.
agency mortgage-backed security with the same interest rate and
maturity date, but generally backed by a different pool of
mortgages. The fund loses the right to receive interest and
principal payments on the security it sold. However, the fund
benefits from the interest earned on investing the proceeds of the
sale and may receive a fee or a lower repurchase price. The
benefits from these transactions depend upon the manager's ability
to forecast mortgage prepayment patterns on different mortgage
pools. The fund may lose money if, during the period between the
time it agrees to the forward purchase of the mortgage securities
and the settlement date, these securities decline in value due to
market conditions or prepayments on the underlying mortgages.
- --------------------------------------------------------------------------------
CREDIT QUALITY If a security receives different ratings, a fund will treat the
securities as being rated in the highest rating category. Credit
rating criteria are applied at the time a fund purchases a fixed
income security. A fund may choose not to sell securities that are
downgraded after their purchase below the fund's minimum acceptable
credit rating. Each fund's credit standards also apply to
counterparties to OTC derivatives contracts.
INVESTMENT GRADE SECURITIES
Securities are investment grade if:
They are rated in one of the top four long-term rating categories
of a nationally recognized statistical rating organization.
They have received a comparable short-term or other rating.
They are unrated securities that the manager believes are of
comparable quality to investment grade securities.
- ---------------------------------------------------------------------------------------------------
HIGH YIELD, LOWER QUALITY Each of these funds may invest in fixed income securities that are
SECURITIES high yield, lower quality securities rated by a rating organization
below its top four long-term rating categories or unrated
High Yield Fund, Strategic securities determined by the manager to be of equivalent quality.
Bond Fund and Total Return The issuers of lower quality bonds may be highly leveraged and have
Fund. Each of the following difficulty servicing their debt, especially during prolonged
funds only to a limited economic prices of lower quality securities are volatile and may go
extent: Capital Fund and down due to market perceptions of deteriorating issuer
Investors Fund creditworthiness or economic conditions. Lower quality securities
may become illiquid and hard to value in down markets.
</TABLE>
Salomon Brothers Variable Series Funds Inc - 20
<PAGE>
<TABLE>
- ---------------------------------------------------------------------------------------------------
<S> <C>
FOREIGN AND EMERGING MARKET Each of these funds may invest in foreign securities. Investing in
INVESTMENTS foreign issuers may involve unique risks compared to investing in
the securities of U.S. issuers. Some of these risks do not apply to
All funds larger more developed countries. These risks are more pronounced to
the extent the fund invests in issuers in countries with emerging
markets or if the fund invests significantly in one country. These
risks may include:
High Yield Bond Fund, Less information about non-U.S. issuers or markets may be available
Strategic Bond Fund, Total due to less rigorous disclosure and accounting standards or
Return Fund and Small Cap regulatory practices.
Growth Fund may invest in
emerging market issuers. Many non-U.S. markets are smaller, less liquid and more volatile
than U.S. markets. In a changing market, the manager may not be
able to sell the fund's portfolio securities in amounts and at
prices the manager considers reasonable. The U.S. dollar may
appreciate against non-U.S. currencies or a foreign government may
impose restrictions on currency conversion or trading. The
economies of non-U.S. countries may grow at a slower rate than
expected or may experience a downturn or recession. Economic,
political and social developments may adversely affect the
securities markets. Foreign governmental obligations involve the
risk of debt moratorium, repudiation or renegotiation and the fund
may be unable to enforce its rights against the issuers.
- ---------------------------------------------------------------------------------------------------
SOVEREIGN GOVERNMENT AND Each of these funds may invest in all types of fixed income
SUPRANATIONAL DEBT securities of governmental issuers in all countries, including
emerging markets. These sovereign debt securities may include:
All funds except Small Cap
Growth Fund Fixed income securities issued or guaranteed by governments,
governmental agencies or instrumentalities and political
subdivisions located in emerging market countries.
Fixed income securities issued by government owned, controlled or
sponsored entities located in emerging market countries.
Interests in entities organized and operated for the purpose of
restructuring the investment characteristics of instruments issued
by any of the above issuers.
Brady Bonds, which are debt securities issued under the framework
of the Brady Plan as a means for debtor nations to restructure
their outstanding external indebtedness.
Fixed income securities issued by corporate issuers, banks and
finance companies located in emerging market countries.
Participations in loans between emerging market governments and
financial institutions.
Fixed income securities issued by supranational entities such as
the World Bank or the European Economic Community. A supranational
entity is a bank, commission or company established or financially
supported by the national governments of one or more countries to
promote reconstruction or development.
</TABLE>
Salomon Brothers Variable Series Funds Inc - 21
<PAGE>
<TABLE>
- ----------------------------------------------------------------------------------------------------
<S> <C>
DERIVATIVES AND HEDGING Each fund may, but need not, use derivative contracts, such as
TECHNIQUES futures and options on securities, securities indices or
currencies; options on these futures; forward currency contracts;
All funds and interest rate or currency swaps. The funds do not use
derivatives as a primary investment technique and generally limit
their use to hedging. However, the funds may use derivatives for a
variety of purposes including:
To hedge against the economic impact of adverse changes in the
market value of its securities, due to changes in stock market
prices, currency exchange rates or interest rates.
As a substitute for buying or selling securities.
To increase the fund's return as a non-hedging strategy that may be
considered speculative.
A derivative contract will obligate or entitle a fund to deliver or
receive an asset or cash payment that is based on the change in
value of one or more securities, currencies or indices. Even a
small investment in derivative contracts can have a big impact on a
fund's market, currency and interest rate exposure. Therefore,
using derivatives can disproportionately increase losses and reduce
opportunities for gains when market prices, currency rates or
interest rates are changing. A fund may not fully benefit from or
may lose money on derivatives if changes in their value do not
correspond accurately to changes in the value of the fund's
holdings. The other parties to certain derivative contracts present
the same types of credit risk as issuers of fixed-income
securities. Derivatives can also make a fund less liquid and harder
to value, especially in declining markets.
- ----------------------------------------------------------------------------------------------------
TEMPORARY DEFENSIVE INVESTING Each fund may depart from its principal investment strategies in
response to adverse market, economic or political conditions by
taking temporary defensive positions in all types of money market
and short-term debt securities. If a fund takes a temporary
defensive position, it may be unable to achieve its investment
goal.
- --------------------------------------------------------------------------------
PORTFOLIO TURNOVER Each fund may engage in active and frequent trading to achieve its
principal investment strategies. Frequent trading also increases
transaction costs, which could detract from a fund's performance.
</TABLE>
- --------------------------------------------------------------------------------
Salomon Brothers Variable Series Funds Inc - 22
<PAGE>
- --------------------------------------------------------------------------------
MANAGEMENT
Salomon Brothers Asset Management Inc. is the investment manager for each fund.
Together with its affiliates, the manager provides a broad range of fixed income
and equity investment advisory services to various individuals located
throughout the world. The manager's principal address is 7 World Trade Center,
New York, New York 10048. It is a wholly-owned subsidiary of Citigroup, Inc.
Citigroup businesses produce a broad range of financial services -- asset
management, banking and consumer finance, credit and charge cards, insurance,
investments, investment banking and trading -- and use diverse channels to make
them available to consumer and corporate customers around the world. Salomon
Brothers Asset Management, Limited an affiliate of the manager, provides
advisory services to the manager in connection with Strategic Income Fund's
transactions in currencies and non-dollar denominated debt securities. Its
principal address is Victoria Plaza, 111 Buckingham Palace Row, London SW1W 0SB
England.
<TABLE>
- -------------------------------------------------------------------------------------------------------------------------------
FUND PORTFOLIO MANAGER SINCE PAST 5 YEARS' BUSINESS EXPERIENCE THE PORTFOLIO MANAGERS
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Capital Fund Ross S. Margolies Inception managing director of the manager
Robert M. Donahue, Jr. July 1998 director and equity analyst with the The portfolio managers
manager since February, 1997; analyst at are primarily
Gabelli & Company prior to 1997 responsible for the
day-to-day operation of
High Yield Fund Peter J. Wilby Inception managing director of the manager the funds indicated
Beth A. Semmel April 2000 managing director of the manager beside their names and
James E. Craige April 2000 managing director of the manager business experience.
Investors Fund John B. Cunningham July 1998 managing director of the manager
Mark McAllister April 2000 director and equity analyst with the
manager; executive vice president and
portfolio manager at JLW Capital Mgmt.
Inc. from March 1998 to May 1999. Prior to
March 1998 was a Vice President and equity
analyst at Cohen & Steers Capital
Management
Strategic Bond Peter J. Wilby Inception managing director of the manager
Fund Roger Lavan Inception director of the manager
Total Return Fund George J. Williamson July 1998 director of the manager
</TABLE>
A team of individuals employed by the manager manages the day to day operations
of the Small Cap Growth Fund.
Salomon Brothers Variable Series Funds Inc - 23
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
--------------------------------------------------------------------
ACTUAL MANAGEMENT FEE PAID DURING THE MOST
RECENT FISCAL YEAR*
Capital Fund 0.00%
<S> <C> <C>
--------------------------------------------------------------------
--------------------------------------------------------------------
High Yield 0.00%
Fund
Strategic Bond 0.27%
Fund
--------------------------------------------------------------------
Investors Fund 0.68%
Total Return 0.15%
Fund
--------------------------------------------------------------------
Small Cap 0.00%
Growth Fund
* The Fee may be less than contractual rate due to expense
limitations.
MANAGEMENT FEES
As of December 31,
1999, SBAM and its
affiliates managed
approximately
$25.3 billion of
assets.
</TABLE>
<TABLE>
<S> <C>
- -----------------------------------------------------------------------------
CFBDS, Inc. a registered broker-dealer, serves as each DISTRIBUTOR
fund's distributor.
- -----------------------------------------------------------------------------
SSB Citi Fund Management LLC ('SSB Citi'), an affiliate of ADMINISTRATOR
the manager, serves as administrator for each fund. For its
services as administrator, each fund pays SSB Citi a fee at
an annual rate of 0.05% of the applicable fund's average
daily net assets.
- -----------------------------------------------------------------------------
</TABLE>
Salomon Brothers Variable Series Funds Inc - 24
<PAGE>
- --------------------------------------------------------------------------------
SHARE TRANSACTIONS
<TABLE>
<S> <C>
AVAILABILITY OF THE Each fund may sell its shares directly to separate accounts
FUNDS established and maintained by insurance companies for the
Individuals may not purpose of funding variable annuity and variable life
purchase shares insurance contracts and to certain qualified pension and
directly from the retirement plans. The variable insurance products and
funds. You should read qualified plans may or may not make investments in all the
the prospectus for funds described in this prospectus. Shares of the funds are
your insurance sold at net asset value.
company's variable The interests of different variable insurance products and
contract to learn how qualified plans investing in a fund could conflict due to
to purchase a variable differences of tax treatment and other considerations. The
contract based on the funds currently do not foresee any disadvantages to
funds. investors arising from the fact that each fund may offer its
shares to different insurance company separate accounts that
serve as the investment medium for their variable annuity
and variable life products and to qualified plans.
Nevertheless, the board of directors intends to monitor
events to identify any material irreconcilable conflicts
which may arise, and to determine what action, if any,
should be taken in response to these conflicts. If a
conflict were to occur, one or more insurance companies'
separate accounts or qualified plans might be required to
withdraw their investments in one or more funds and shares
of another fund may be substituted.
In addition, the sale of shares may be suspended or
terminated if required by law or regulatory authority or is
in the best interests of the funds' shareholders. Each fund
reserves the right to reject any specific purchase order.
- -------------------------------------------------------------------------------------
REDEMPTION OF SHARES Redemption requests may be placed by separate accounts of
participating insurance companies and by qualified plans.
The redemption price of the shares of each fund will be the
net asset value next determined after receipt by the fund of
a redemption request in good order. The value of redeemed
shares may be more or less than the price paid for the
shares. Sales proceeds will normally be forwarded by bank
wire to the selling insurance company or qualified plan on
the next business day after receipt of a redemption request
in good order but in no event later than 7 days following
receipt of instructions. Each fund may suspend sales or
postpone payment dates during any period in which any of the
following conditions exist:
The New York Stock Exchange is closed;
Trading on the New York Stock Exchange is restricted;
An emergency exists as a result of which disposal by the
fund of securities is not reasonably practicable or it is
not reasonably practicable for a fund to fairly determine
the value of its net assets; or
As permitted by SEC order in extraordinary circumstances.
</TABLE>
Salomon Brothers Variable Series Funds Inc - 25
<PAGE>
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------------
SHARE PRICE Each fund's net asset value is the value of its assets minus
its liabilities. Each fund calculates its net asset value
every day the New York Stock Exchange is open. Each fund
calculates its net asset value when regular trading closes
on the Exchange (normally 4:00 p.m., Eastern time).
The funds generally value their securities based on market
prices or quotations. The funds' currency conversions are
done when the London stock exchange closes, which is 12 noon
eastern time. When market prices are not available, or when
the manager believes they are unreliable or that the value
of a security has been materially affected by events
occurring after a foreign exchange closes, the funds may
price those securities at fair value. Fair value is
determined in accordance with procedures approved by the
funds' board of directors. A fund that uses fair value to
price securities may value those securities higher or lower
than another fund that uses market quotations to price the
same securities. International markets may be open on days
when U.S. markets are closed and the value of foreign
securities owned by a fund could change on days when an
insurance company separate account or a qualified plan
cannot buy or redeem shares.
In order to buy, redeem or exchange shares at that day's
price, an insurance company separate account or a qualified
plan must place its order with
the transfer agent before the New York Stock Exchange
closes. If the New York Stock Exchange closes early, the
order must be placed prior to the actual closing time.
Otherwise, the investor will receive the next business day's
price.
- -------------------------------------------------------------------------------------
</TABLE>
DIVIDENDS, DISTRIBUTIONS AND TAXES
<TABLE>
<S> <C> <C> <C> <C>
Each fund intends to qualify and be taxed as a 'regulated investment DIVIDENDS
company' under Subchapter M of the Internal Revenue Code of 1986 (the AND
'Code'), as amended. In order to qualify to be taxed as a regulated DISTRIBUTIONS
investment company, each fund must meet certain income and
diversification tests and distribution requirements. As a regulated Annual distributions of
investment company meeting these requirements, a fund will not be income and capital gain
subject to federal income tax on its net investment income and net are made at the end of
capital gains that it distributes to its shareholders. All income and the year in which the
capital gain distributions are automatically reinvested in additional income or gain is
shares of the fund at net asset value and are includable in gross realized, or the
income of the separate accounts holding such shares. See the beginning of the next
accompanying contract prospectus for information regarding the federal year.
income tax treatment of distributions to the separate accounts and to
holders of the contracts.
Each fund intends to pay out all of its net investment income and net
realized capital gains for each year. The funds normally pay dividends
and distribute capital gain, if any, as follows:
- ------------------------------------------------------------------------
FUND INCOME DIVIDEND CAPITAL GAIN DISTRIBUTIONS
DISTRIBUTIONS DISTRIBUTIONS MOSTLY FROM
Capital Fund annually annually gain
High Yield Fund annually annually income
Investors Fund annually annually gain
Strategic Bond Fund annually annually income
Total Return Fund annually annually both
- ------------------------
Small Cap Growth Fund annually annually gain
</TABLE>
Salomon Brothers Variable Series Funds Inc - 26
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
The financial highlights tables are intended to help you understand the
performance of each share for the past 5 years (or since inception if less than
5 years). Certain information reflects financial results for a single share.
Total return represents the rate that a shareholder would have earned (or lost)
on a fund share assuming reinvestment of all dividends and distributions. The
information in the following tables was audited by PricewaterhouseCoopers LLP,
independent auditors, whose report, along with the fund's financial statements,
are included in the annual report (available upon request).
For a share of capital stock outstanding throughout each period ended
December 31:
<TABLE>
<CAPTION>
CAPITAL HIGH YIELD INVESTORS
FUND BOND FUND FUND
- ------------------------------------------------------------------------------------------------------------------
1999 1998(1) 1999 1998(2) 1999 1998(3)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.57 $10.00 $ 9.58 $10.00 $ 11.01 $ 10.00
------- ------ ------ ------ -------
INCOME FROM OPERATIONS:
Net investment income (4) 0.07 0.09 0.88 0.43 0.06 0.05
Net realized and unrealized gain
(loss) 2.49 1.72 (0.35) (0.42) 1.22 1.01
------- ------ ------ ------ -------
Total Income From Operations 2.56 1.81 0.53 0.01 1.28 1.06
------- ------ ------ ------ -------
LESS DISTRIBUTIONS FROM:
Net investment income (0.07) (0.09) (0.88) (0.43) (0.06) (0.05)
Net realized gains (0.39) (0.15) (0.01) (0.00)* -- (0.00)*
------- ------ ------ ------ -------
Total Distributions (0.46) (0.24) (0.89) (0.43) (0.06) (0.05)
------- ------ ------ ------ -------
NET ASSET VALUE, END OF PERIOD $ 13.67 $11.57 $ 9.22 $ 9.58 $ 12.23 $ 11.01
------- ------ ------ ------ ------- -------
------- ------ ------ ------ ------- -------
TOTAL RETURN'DD' 22.08% 18.12% 5.56% 0.14% 11.65% 10.55%
NET ASSETS, END OF PERIOD (000S) $16,189 $4,290 $7,940 $6,949 $52,542 $13,038
RATIOS TO AVERAGE NET ASSETS 'D':
Expenses 1.00%(5) 1.00%(4) 1.00%(5) 1.00%(4) 0.98%(5) 1.00%(4)
Net investment income 0.99%(5) 1.35%(4) 9.56%(5) 7.25%(4) 0.91%(5) 1.14%(4)
PORTFOLIO TURNOVER RATE 119% 116% 58% 37% 51% 62%
</TABLE>
--------------------------------------------------
(1) Capital Fund commenced operations on February 17, 1998.
(2) High Yield Bond Fund commenced operations on May 1, 1998.
(3) Investors Fund commenced operations on February 17, 1998.
(4) SBAM has waived all if its management fees for the period ended December
31, 1998 and reimbursed expenses of $33,776, $11,942 and $17,030 for
Capital Fund, High Yield Fund and Investors Fund, respectively. If such
fees were not waived or expenses reimbursed, the per share decrease in net
investment income and the actual annualized expense ratio would have been
$0.15 and 3.26% for the Capital Fund, $0.06 and 2.04% for the High Yield
Bond Fund and $0.04 and 2.07% for the Investors Fund, respectively.
(5) SBAM who waived all or part of its management fee for the year ended
December 31, 1999 and reimbursed expenses of $13,177 and $3,963 for the
Capital Fund and Investors Fund respectively. If such fees were not waived
or expenses reimbursed, the per share decrease in net investment income and
the actual annualized expense ratio would have been $0.06 and 1.99% for the
Capital Fund and $0.07 and 1.80% for the High Yield Bond Fund and $0.01 and
1.15% for the Investors Fund, respectively.
* Amount represents less than $0.01.
'DD' For periods less than a year total return is not annualized as it may not
be representative of the total return for the year.
'D' For periods less than a year.
Salomon Brothers Variable Series Funds Inc - 27
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
For a share of capital stock outstanding throughout each period ended
December 31:
<TABLE>
<CAPTION>
STRATEGIC TOTAL RETURN SMALL CAP
BOND FUND FUND GROWTH FUND
- ----------------------------------------------------------------------------------------------------
1999 1998(1) 1999 1998(2) 1999(4)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.13 $ 10.00 $ 10.40 $10.00 $10.00
------- ------- ------- ------ ------
INCOME FROM OPERATIONS:
Net investment income (3) 0.60 0.38 0.24 0.15 --
Net realized and unrealized gain (0.56) 0.24 (0.16) 0.43 2.16
------- ------- ------- ------ ------
Total Income From Operations 0.04 0.62 0.08 0.58 2.16
------- ------- ------- ------ ------
LESS DISTRIBUTIONS FROM:
Net investment income (0.51) (0.47) (0.24) (0.15) --
Net realized gains -- (0.01) -- (0.03) --
Capital -- (0.01) (0.01) -- --
------- ------- ------- ------ ------
Total Distributions (0.51) (0.49) (0.25) (0.18) --
------- ------- ------- ------ ------
NET ASSET VALUE, END OF PERIOD $ 9.66 $ 10.13 $ 10.23 $10.40 $12.16
------- ------- ------- ------ ------
------- ------- ------- ------ ------
TOTAL RETURN'DD' 0.37% 6.18% 0.78% 5.83% 21.60%'DD'
NET ASSETS, END OF PERIOD (000S) $16,709 $10,438 $17,584 $5,971 $1,801
RATIOS TO AVERAGE NET ASSETS 'D':
Expenses 1.00%(5) 1.00%(3) 1.00%(5) 1.00%(3) 1.50%'D'(5)
Net investment income 7.19%(5) 6.23%(3) 3.50%(5) 3.57%(3) 0.16'D'(5)
PORTFOLIO TURNOVER RATE 120% 84% 63% 56% 16%
</TABLE>
--------------------------------------------------
(1) Strategic Bond Fund commenced operations on February 17, 1998.
(2) Total Return Fund commenced operations on February 17, 1998.
(3) SBAM has waived all of its management fees for the period ended December
31, 1998 and reimbursed expenses of $2,558 and $26,591 for the Strategic
Bond and Total Return Funds, respectively. If such fees were not waived or
expenses reimbursed, the per share decrease in net investment income and
the actual annualized expense ratio would have been $0.04 and 1.79% for
Strategic Bond Fund and $0.08 and 2.90% for Total Return Fund,
respectively.
(4) Small Cap Growth Fund commenced operations on November 8, 1999.
(5) SBAM has waived all or parts of its management fee for the year ended
December 31, 1999 and reimbursed expenses of $27,494 for the Small Cap
Growth Fund. If such fees were not waived or expenses reimbursed, the per
share decrease is not net investment income and the actual annualized
expense ratio would have been $0.06 and 1.48% for the Strategic Bond Fund,
$0.05 and 1.65% for the Total Return Fund and $0.20 and 16.36% for Small
Cap Growth Fund, respectively.
'DD' For periods less than a year total return is not annualized, as it may
not be representative of the total return for the year.
'D' For periods of less than a year.
Salomon Brothers Variable Series Funds Inc - 28
<PAGE>
SALOMON BROTHERS VARIABLE SERIES FUNDS INC
- --------------------------------------------------------------------------------
Capital Fund
Investors Fund
Small Cap Growth Fund
Total Return Fund
High Yield Bond Fund
Strategic Bond Fund
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION ABOUT THE FUNDS
SHAREHOLDER REPORTS. Annual and semi-annual reports to shareholders provide
additional information about the funds' investments. These reports discuss the
market conditions and investment strategies that significantly affected each
fund's performance during its last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION. The statement of additional information
provides more detailed information about each fund. It is incorporated by
reference into (is legally a part of) this combined prospectus.
HOW TO OBTAIN ADDITIONAL INFORMATION.
You can make inquiries about the fund or obtain shareholder reports or the
statement of additional information (without charge) by contacting the transfer
agent at 1-800-446-1013, by calling Salomon Brothers Asset Management or by
writing the funds at 7 World Trade Center, 38th Floor, New York, NY 10048.
You can also review the funds' shareholder reports, prospectus and statement of
additional information at the Securities and Exchange Commission's Public
Reference Room in Washington, D.C. You can get copies of these materials for a
fee by writing to the Public Reference Section of the Commission, Washington,
D.C. 20549-6009. Information about the public reference room may be obtained
by calling 1-800-SEC-0330. You can get the same reports and information free
from the Commission's Internet web site -- http://www.sec.gov
If someone makes a statement about the funds that is not in this prospectus, you
should not rely upon that information. Neither the funds nor the distributor is
offering to sell shares of the funds to any person to whom the funds may not
lawfully sell their shares.
(Investment Company Act file no. 811-08443)
<PAGE>
April 29, 2000
STATEMENT OF ADDITIONAL INFORMATION
SALOMON BROTHERS VARIABLE SERIES FUNDS INC
7 WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
888-777-1012
Salomon Brothers Variable Series Funds Inc consists of Salomon Brothers Variable
Investors Fund ('Investors Fund'), Salomon Brothers Variable Capital Fund
('Capital Fund'), Salomon Brothers Variable Total Return Fund ('Total Return
Fund'), Salomon Brothers Variable High Yield Bond Fund ('High Yield Bond Fund'),
Salomon Brothers Variable Strategic Bond Fund ('Strategic Bond Fund') and
Salomon Brothers Variable Small Cap Fund ('Small Cap Fund') (each, a 'fund' and
collectively, the 'funds'). Each of the funds is an investment portfolio of the
Salomon Brothers Variable Series Funds Inc (the 'Company'), an open-end
investment company incorporated in Maryland on October 1, 1997.
Shares of the funds are sold only to: (i) separate accounts of Participating
Insurance Companies to fund the benefits for VA contracts and VLI policies; and
(ii) Qualified Pension and Retirement Plans ('Plans'). Accordingly, all
references to 'shareholders' in this Prospectus refer to such Participating
Insurance Companies and Plans and not to individual contract or policy holders
or plan participants. Each of the funds, except Capital Fund, is classified as a
diversified fund under the Investment Company Act of 1940, as amended (the
'1940 Act').
The Prospectus indicates the extent to which each fund may purchase the
instruments or engage in the investment activities described below. References
herein to the investment manager means Salomon Brothers Asset Management Inc
('SBAM').
This Statement of Additional Information ('SAI') is not a prospectus and is only
authorized for distribution only when preceded or accompanied by the Company's
current Prospectus, dated April 29, 2000. This SAI supplements and should be
read in conjunction with the Prospectus, a copy of which may be obtained without
charge by writing the funds at the address, or by calling the toll-free
telephone number, listed above.
CONTENTS
<TABLE>
<S> <C>
Directors and Executive Officers of the Company............. 2
Investment Objectives and Investment Policies............... 5
Risk Factors................................................ 34
Investment Limitations...................................... 44
Portfolio Turnover.......................................... 45
Portfolio Transactions...................................... 45
Taxes....................................................... 47
Performance Data............................................ 49
Net Asset Value............................................. 50
Additional Purchase and Redemption Information.............. 51
Investment Manager.......................................... 51
Administrator............................................... 53
Distributor................................................. 54
Expenses.................................................... 54
Custodian and Transfer Agent................................ 54
Independent Accountants..................................... 54
Counsel..................................................... 54
Capital Stock............................................... 55
Financial Statements........................................ 55
Appendix -- Ratings of Debt Obligations..................... A-1
</TABLE>
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Overall responsibility for management and supervision of the Company rests with
the Company's Board of Directors. The directors approve all significant
agreements between the Company and the companies that furnish services to the
funds, including agreements with the Company's distributor, administrator,
investment manager, custodian and transfer agent. The day-to-day operations of
the Company are delegated to the Company's investment manager.
The directors and executive officers of the Company are listed below. The
address of each, unless otherwise indicated, is Seven World Trade Center, New
York, New York 10048. Certain of the directors and officers are also directors
and officers of one or more other investment companies for which SBAM, the
funds' investment manager, acts as investment adviser. 'Interested persons' of
the Company (as defined in the 1940 Act) are indicated by an asterisk.
<TABLE>
<CAPTION>
.harles F. Barber Director and Consultant. Formerly, Chairman of the
66 Glenwood Drive Chairman, Audit Board of ASARCO Incorporated.
Greenwich, CT 06830 Committee
Age: 83
<S> <C> <C>
Carol L. Colman ..................... Director and President of Colman Consulting
Colman Consulting Co., Inc. Audit Committee
278 Hawley Road Member
North Salem, NY 10560
Age: 54
Daniel P. Cronin .................... Director and Vice President and General Counsel of
Pfizer, Inc. Audit Committee Pfizer International Inc. Senior Assisting
235 East 42nd Street Member General Counsel of Pfizer, Inc.
New York, NY 10017
Age: 54
Heath B. McLendon* .................. Director, Managing Director, Salomon Smith Barney,
Age: 66 Chairman and Inc. ('SSB'), from 1993 to present.
President Chairman, SSB Citi Fund Management Inc.
('SSB Citi') from 1993 to present.
Peter J. Wilby ...................... Executive Vice Managing Director of SBAM and SSB since
Age: 41 President January 1996. Prior to January 1996,
Director of SBAM and SSB.
Beth A. Semmel ...................... Executive Vice Managing Director of SBAM and SSB since
Age: 39 President December 1997. From May 1993 to December
1995, Vice President of SBAM and SSB.
Ross S. Margolies ................... Executive Vice Managing Director of SBAM since November
Age: 41 President 1997. Prior to November 1997, Director of
SBAM and SSB.
John B. Cunningham .................. Vice President Director of SBAM and SSB since 1991.
Age: 35
George J. Williamson ................ Executive Vice Director of SBAM and SSB since January
Age: 66 President 1999. Prior to January 1999, he was a Vice
President of SBAM and SSB since 1990.
Roger M. Lavan ...................... Vice President Director of SBAM since January 1996. Prior
Age: 35 to January 1996 he was a Vice President of
SBAM and SSB since 1990.
Anthony Pace ........................ Controller Director of SSB since 1995.
Age: 34
</TABLE>
2
<PAGE>
DIRECTORS COMPENSATION
It is estimated that each director of the Company, except those deemed
'interested persons' under the 1940 Act will receive $6,000 per year plus $500
for each meeting attended as compensation for serving as director. The Company
does not provide any pension or retirement benefits to directors. No
remuneration will be paid by the Company to directors who are employees of SBAM
or its affiliates, and may therefore be considered interested persons under the
1940 Act.
VARIABLE FUNDS
<TABLE>
<CAPTION>
COMPENSATION
AGGREGATE FROM OTHER
COMPENSATION FUNDS ADVISED TOTAL
FROM THE FUND BY SBAM(A) COMPENSATION(A)
------------- ---------- ---------------
<S> <C> <C> <C>
Charles F. Barber................................ $9,500 $125,600(15) $135,100(16)
Carol L. Colman.................................. 9,500 44,725(6) 54,225(7)
Daniel P. Cronin................................. 9,000 41,200(6) 50,200(7)
</TABLE>
- ---------
(A) The numbers in parenthesis indicate the applicable number of investment
company directorships held by that director.
As of the date hereof directors and officers of the Company, individually and as
a group, beneficially owned less than 1% of the outstanding shares of the funds.
PRINCIPAL HOLDERS OF SECURITIES
The following lists shareholders of record who held 5% or more of the
outstanding securities of the Funds as of March 23, 2000. Shareholders who own
greater than 25% of the outstanding shares of a class of shares are deemed to be
'control persons', as defined in the 1940 Act of such class.
<TABLE>
<CAPTION>
PERCENTAGE
FUND SHAREHOLDER HELD
---- ----------- ----
<S> <C> <C>
Capital Fund. The Travelers Insurance Co. 17.96%
One Tower Square 5M5
Attn: Robert Iagrossi
Hartford, CT 06183
Citicorp Life Insurance Co. 33.83%
Attn: Joanne M. Bennetti
P.O. Box 7031
Dover, DE 19903
Nationwide Insurance Co. 10.47%
NWVA8
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218-2029
The Travelers Sep Acct 6 For 8.83%
Variable Annuities of
The Travelers Insurance Co.
One Tower Square
Attn: Robert Iagrossi
Hartford, CT 06183
Ohio National Life Co 5.10%
Attn: Denis Taney
P.O. Box 237
Cincinnati, OH 45201-0237
The Travelers Insurance Co. 5.70%
Attn: Robert Iagrossi
One Tower Square 5M5
Hartford, CT 06183
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE
FUND SHAREHOLDER HELD
---- ----------- ----
<S> <C> <C>
Sun Life of Canada (U.S.) 5.20%
PO Box 9134
Boston, MA 02117
High Yield Fund................... Salomon Brothers Holding Co Inc 10.84%
7 World Trade Center
New York, NY 10048
First Citicorp Life Insurance Co. 12.74%
Attn: Joanne M. Bennetti
P.O. Box 7031
Dover, DE 19903
The Travelers Insurance Co. 36.56%
Attn: Robert Iagrossi
One Tower Square 5M5
Hartford, CT 06183
The Travelers Insurance Co. 28.40%
Attn: Robert Iagrossi
One Tower Square 5M5
Hartford, CT 06183
Nationwide Insurance Co. 5.12%
NWVA8
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218-2029
Investors Fund.................... The Travelers Insurance Co. 15.56%
Attn: Robert Iagrossi
One Tower Square 5M5
Hartford, CT 06183
First Citicorp Life Insurance Co. 12.00%
Attn: Joanne M. Bennetti
P.O. Box 7031
Dover, DE 19903
Life of Virginia/GEFA 8.48%
Attn: Linda Williams
6610 W. Broad Street
Richmond, VA 23230
The Travelers Insurance Co. 23.02%
Attn: Robert Iagrossi
One Tower Square 5M5
Hartford, CT 06183
The Travelers Sep Acct TM2 For 25.89%
Variable Annuities of
The Travelers Insurance Co.
One Tower Square 5M5
Attn: Robert Iagrossi
Hartford, CT 06183
Strategic Bond Fund............... The Travelers Insurance Co. 22.80%
Attn: Robert Iagrossi
One Tower Square 5M5
Hartford, CT 06183
Sun Life of Canada (U.S.) 36.69%
Attn: Accounting Control
P.O. Box 9134
Boston, MA 02117
Life of Virginia/GEFA 35.86%
Attn: Linda Williams
6610 W. Broad Street
Richmond, VA 23230
Total Return Fund................. Sun Life of Canada (U.S.) 26.04%
PO Box 9134
Boston, MA 02117
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE
FUND SHAREHOLDER HELD
---- ----------- ----
<S> <C> <C>
The Travelers Insurance Co. 10.71%
Attn: Robert Iagrossi
One Tower Square 5M5
Hartford, CT 06183
First Citicorp Life Insurance Co. 15.37%
Attn: Joanne M. Bennetti
P.O. Box 7031
Dover DE 19903
Ohio National Life Co 8.30%
P.O. Box 237
Attn: Dennis Taney
Cincinnati, OH 45201-0237
Life of Virginia/GEFA 22.69%
Attn: Linda Williams
6610 W Broad Street
Richmond, VA 23230
The Travelers Insurance Co. 7.09%
One Tower Square 5M5
Attn: Robert Iagrossi
Hartford, CT 06183
Small Cap Growth Fund............. Salomon Brothers Asset Management Inc 47.25%
7 World Trade Center
New York, NY 10048
The Travelers Fund BD IV 37.95%
For Variable Annuities
The Travelers Insurance Co.
Attn: Shareholder Accounting Dept.
One Tower Square 6MS
Hartford, CT 06183
The Travelers Separate A/C Ten 14.76%
For Variable Annuities
The Travelers Insurance Co.
Attn: Shareholder Accounting Dept.
One Tower Square 6MS
Hartford, CT 06183
</TABLE>
INVESTMENT OBJECTIVES AND INVESTMENT POLICIES
CAPITAL FUND
General. In seeking capital appreciation, Capital Fund may purchase securities
of seasoned issuers, relatively smaller and newer companies as well as in new
issues and may be subject to wide fluctuations in market value. Portfolio
securities may have limited marketability or may be widely and publicly traded.
The fund will not concentrate its investments in any particular industry.
Investment Grade Debt Securities. Capital Fund intends to invest primarily in
common stocks, or securities convertible into or exchangeable for common stocks,
such as convertible preferred stocks or convertible debentures. To meet
operating expenses and to meet anticipated redemption requests, the fund
generally holds a portion of its assets in short-term fixed income securities
(government obligations or investment grade debt securities) or cash or cash
equivalents. The fund's short-term investments may include repurchase agreements
with banks or brokers-dealers. When management deems it appropriate, for
temporary defensive purposes, the fund may invest without limitation in
investment grade fixed-income securities or hold assets in cash or cash
equivalents. Investment grade debt securities are debt securities rated BBB or
better by S&P or Baa or better by Moody's, or if rated by other rating agencies
or if unrated, securities deemed by SBAM to be of comparable quality.
Investments in such investment grade fixed-income securities may also be made
for the purpose of capital appreciation, as in the case of purchases of bonds
traded at a substantial discount or when SBAM believes interest rates may
decline. Certain risks
5
<PAGE>
associated with investment in debt securities carrying the fourth highest
quality rating ('Baa' by Moody's or 'BBB' by S&P) are described in 'Risk
Factors.'
Below Investment Grade Securities. Capital Fund from time to time may invest up
to 20% of its net assets in non-convertible debt securities rated below
investment grade by S&P and Moody's with no minimum rating required or
comparable unrated securities. There is no limit on the amount of the fund's
assets that can be invested in convertible securities rated below investment
grade. The fund may invest up to 20% of the value of the fund's assets in
securities of foreign issuers.
Capital Fund enters into repurchase agreements with respect to securities in
which it may otherwise invest. In addition, in order to meet redemptions or to
take advantage of promising investment opportunities without disturbing an
established portfolio, the fund may borrow up to an aggregate of 15% of the
value of its total assets taken at the time of borrowing. In addition, the fund
may borrow for temporary or emergency purposes an aggregate amount which may not
exceed 5% of the value of its total assets at the time of borrowing. The fund
shall borrow only from banks. Borrowings may be unsecured, or may be secured by
not more than 15% of the value of the fund's total assets. As a matter of
operating policy, however, the fund will not secure borrowings by more than 10%
of the value of the fund's total assets.
HIGH YIELD BOND FUND
General. High Yield Bond Fund's investment objective is to maximize current
income. As a secondary objective, the fund will seek capital appreciation. The
fund seeks to achieve its objective by investing primarily in a diversified
portfolio of high yield fixed-income securities rated in medium or lower rating
categories or determined by SBAM to be of comparable quality.
Investment Grade Securities. High Yield Bond Fund may invest up to 20% of its
assets in common stock, convertible securities, warrants, preferred stock or
other equity securities when consistent with the fund's objectives. The fund
will generally hold such equity investments as a result of purchases of unit
offerings of fixed-income securities which include such securities or in
connection with an actual or proposed conversion or exchange of fixed-income
securities, but may also purchase equity securities not associated with
fixed-income securities when, in the opinion of the investment manager, such
purchase is appropriate.
There may be times when, in SBAM's judgment, conditions in the securities
markets would make pursuing the fund's basic investment strategy inconsistent
with the best interests of the fund's shareholders. At such times, the fund may
employ alternative strategies, including investment of a substantial portion of
its assets in securities rated higher than 'Baa' by Moody's or 'BBB' by S&P, or
of comparable quality. In addition, in order to maintain liquidity, the fund may
invest up to 35% of its assets in high-quality short-term money market
instruments. Such instruments may include obligations of the U.S. government or
its agencies or instrumentalities; commercial paper of issuers rated, at the
time of purchase, A-2 or better by S&P or P-2 or better by Moody's or which, in
SBAM's determination, are of comparable quality; certificates of deposit,
banker's acceptances or time deposits of U.S. banks with total assets of at
least $1 billion (including obligations of foreign branches of such banks) and
of the 75 largest foreign commercial banks in terms of total assets (including
domestic branches of such banks), and repurchase agreements with respect to such
obligations.
If at some future date, in SBAM's opinion, adverse conditions prevail in the
securities markets which makes High Yield Bond Fund's investment strategy
inconsistent with the best interests of the fund's shareholders, the fund may
invest its assets without limit in high-quality short-term money market
instruments.
Below Grade Investment Securities. High Yield Bond Fund intends to invest, under
normal market conditions, at least 65% of its assets in securities rated 'Baa'
or lower by Moody's or 'BBB' or lower by S&P, or in securities determined by
SBAM to be of comparable quality. The fund may invest up to 35% of its total
assets in fixed-income securities of issuers located in emerging markets. Medium
and low-rated and comparable unrated securities offer yields that fluctuate over
6
<PAGE>
time, but generally are superior to the yields offered by higher rated
securities. However, such securities also involve significantly greater risks,
including price volatility and risk of default in the payment of interest and
principal, than higher rated securities. Certain of the debt securities
purchased by the Fund may be rated as low as 'C' by Moody's or 'D' by S&P or may
be comparable to securities so rated. An investment in the fund should not be
considered as a complete investment program.
In light of the risks associated with high yield debt securities, SBAM will take
various factors into consideration in evaluating the creditworthiness of an
issuer. For corporate debt securities, these will typically include the issuer's
financial resources, its sensitivity to economic conditions and trends, the
operating history of the issuer, and the experience and track record of the
issuer's management. For sovereign debt instruments, these will typically
include the economic and political conditions within the issuer's country, the
issuer's overall and external debt levels and debt service ratios, the issuer's
access to capital markets and other sources of funding, and the issuer's debt
service payment history. SBAM will also review the ratings, if any, assigned to
the security by any recognized rating agencies, although the investment
manager's judgment as to the quality of a debt security may differ from that
suggested by the rating published by a rating service. High Yield Bond Fund's
ability to achieve its investment objectives may be more dependent on SBAM's
credit analysis than would be the case if it invested in higher quality debt
securities.
The investment manager will have discretion to select the range of maturities of
the fixed-income securities in which High Yield Bond Fund may invest. The
investment manager anticipates that under current market conditions, the Fund
will have an average portfolio maturity of 10 to 15 years. However, the average
portfolio maturity may vary substantially from time to time depending on
economic and market conditions.
INVESTORS FUND
General. The primary investment objective of Investors Fund is to seek long-term
growth of capital. Current income is a secondary objective. The fund seeks to
achieve its objectives primarily through investments in common stocks of
well-known companies.
Investor Fund's policy is to retain flexibility in the management of its
portfolio, without restrictions as to the proportion of assets which may be
invested in any class of securities. It is anticipated that the fund's portfolio
will generally consist of common and preferred stocks. The fund may purchase
securities of companies located in foreign countries which SBAM deems consistent
with the investment objectives and policies of the fund, but not if upon such
purchase more than 20% of the fund's net assets would be so invested.
Investors Fund maintains a carefully selected portfolio of securities
diversified among industries and companies. The fund may invest up to 25% of its
net assets in any one industry. The fund generally purchases marketable
securities, primarily those traded on the New York Stock Exchange ('NYSE') or
other national securities exchanges, but also issues traded in the
over-the-counter market. The fund will not invest more than 15% of the value of
its total assets in illiquid securities, such as 'restricted securities' which
are illiquid, and securities that are not readily marketable. The fund's
holdings of Rule 144A securities which are liquid securities will not be subject
to the 15% limitation on investments in illiquid securities.
Investment Grade Fixed Income Securities. Under normal conditions, the selection
of common stock or securities convertible into common stock, such as convertible
preferred stock or convertible debentures, with growth possibilities will be
favored. Income-producing securities are a secondary consideration in portfolio
selection. To meet operating expenses and to meet anticipated redemption
requests, the fund generally holds a portion of its assets in short-term
fixed-income securities (governmental obligations or investment grade debt
securities) or cash or cash equivalents. The fund's short-term investments may
include repurchase agreements with banks or broker/dealers. When management
deems it appropriate, consistent with Investors Fund's secondary objective of
current income, or during temporary defensive periods due to economic or market
conditions, the fund may invest without limitation in fixed-income securities or
hold assets in cash
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or cash equivalents. The types and characteristics of investment grade corporate
debt securities and investment grade foreign debt securities which may be
purchased by the fund are identical to those of Strategic Bond Fund. Investments
in such investment grade fixed-income securities may also be made for the
purpose of capital appreciation, as in the case of purchases of bonds traded at
a substantial discount, or when interest rates are expected to decline.
Investment grade debt securities are debt securities rated BBB or better by S&P
or Baa or better by Moody's, or if rated by other rating agencies or if unrated,
securities deemed by SBAM to be of comparable quality. See Appendix A for a
description of these ratings.
Certain risks associated with investment in debt securities carrying the fourth
highest quality rating ('Baa' by Moody's or 'BBB' by S&P) are described in 'Risk
Factors.'
Below Investment Grade Securities. Investors Fund from time to time may invest
up to 5% of its net assets in nonconvertible debt securities rated below
investment grade by S&P and Moody's Investors Service Moody's with no minimum
rating required or comparable unrated securities. There is no limit on the
amount of Investors Fund's assets that can be invested in convertible securities
rated below investment grade.
STRATEGIC BOND FUND
General. The primary investment objective of Strategic Bond Fund is to seek a
high level of current income. As a secondary objective, the fund seeks capital
appreciation. The fund seeks to achieve its objectives by investing in a
globally diverse portfolio of fixed-income investments and by giving SBAM broad
discretion to deploy the fund's assets among certain segments of the
fixed-income market that SBAM believes will best contribute to the achievement
of the fund's objectives. At any point in time, SBAM will deploy the fund's
assets based on its analysis of current economic and market conditions and the
relative risks and opportunities present in the following market segments: U.S.
government obligations, investment grade domestic corporate debt, high yield
domestic corporate debt securities, mortgage-backed securities and investment
grade and high yield foreign corporate and sovereign debt securities. SBAM has
entered into a subadvisory consulting agreement with its London based affiliate,
SBAM Limited, pursuant to which SBAM Limited will provide certain advisory
services to SBAM relating to currency transactions and investments in
non-dollar-denominated debt securities for the benefit of the fund.
SBAM will determine the amount of assets to be allocated to each type of
security in which it invests based on its assessment of the maximum level of
income and capital appreciation that can be achieved from a portfolio which is
invested in these securities. In making this determination, SBAM will rely in
part on quantitative analytical techniques that measure relative risks and
opportunities of each type of security based on current and historical economic,
market, political and technical data for each type of security, as well as on
its own assessment of economic and market conditions both on a global and local
(country) basis. In performing quantitative analysis, SBAM will employ
prepayment analysis and option adjusted spread technology to evaluate mortgage
securities, mean variance optimization models to evaluate foreign debt
securities, and total rate of return analysis to measure relative risks and
opportunities in other fixed-income markets. Economic factors considered will
include current and projected levels of growth and inflation, balance of payment
status and monetary policy. The allocation of assets to foreign debt securities
will further be influenced by current and expected currency relationships and
political and sovereign factors. SBAM will continuously review this allocation
of assets and make such adjustments as it deems appropriate. The fund does not
plan to establish a minimum or a maximum percentage of the assets which it will
invest in any particular type of fixed-income security.
In addition, SBAM will have discretion to select the range of maturities of the
various fixed-income securities in which the fund invests. The weighted average
life of the portfolio securities may vary substantially from time to time
depending on economic and market conditions.
U.S. Government Obligations and Mortgage Backed Securities. The types and
characteristics of the U.S. government obligations and mortgage backed
securities to be purchased by Strategic Bond
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Fund are identical to those permissible for U.S. Government Income Fund. In
addition, the fund may purchase privately issued mortgage securities which are
not guaranteed by the U.S. government or its agencies or instrumentalities and
may purchase stripped mortgage securities, including interest-only and
principal-only securities. Strategic Bond Fund does not currently intend to
invest more than 10% of its total assets in interest-only and principal-only
securities.
Equity Securities. Strategic Bond Fund may invest up to 20% of its assets in
common stock, convertible securities, warrants, preferred stock or other equity
securities when consistent with the fund's objectives. The fund will generally
hold such equity investments as a result of purchases of unit offerings of
fixed-income securities which include such securities or in connection with an
actual or proposed conversion or exchange of fixed-income securities, but may
also purchase equity securities not associated with fixed-income securities
when, in SBAM's opinion such purchase is appropriate.
In order to maintain liquidity, Strategic Bond Fund may invest up to 25% of its
assets in high-quality short-term money market instruments. Such instruments may
include obligations of the U.S. government or its agencies or instrumentalities;
commercial paper of issuers rated, at the time of purchase, A-2 or better by S&P
or P-2 or better by Moody's or which, in SBAM's determination, are of comparable
quality; certificates of deposit, banker's acceptances or time deposits of U.S.
banks with total assets of at least $1 billion (including obligations of foreign
branches of such banks) and of the 75 largest foreign commercial banks in terms
of total assets (including domestic branches of such banks), and repurchase
agreements with respect to such obligations.
Investment Grade Securities. The investment grade corporate debt securities and
the investment grade foreign debt securities to be purchased by the Fund are
domestic and foreign debt securities rated within the four highest bond ratings
of either Moody's or S&P, or, if unrated, deemed by SBAM to be of equivalent
quality. While debt securities carrying the fourth highest quality rating ('Baa'
by Moody's or 'BBB' by S&P) are considered investment grade and are viewed to
have adequate capacity for payment of principal and interest, investments in
such securities involve a higher degree of risk than that associated with
investments in debt securities in the higher rating categories and such debt
securities lack outstanding investment characteristics and in fact have
speculative characteristics as well. For example, changes in economic conditions
or other circumstances are more likely to lead to a weakened capacity to make
principal and interest payments than is the case with higher grade debt
securities.
Below Grade Investment Securities. In pursuing Strategic Bond Fund's investment
objectives, the fund may invest predominantly in medium or lower-rated
securities, commonly known as 'junk bonds.' Investments of this type involve
significantly greater risks, including price volatility and risk of default in
the payment of interest and principal, than higher-quality securities. Although
the fund's investment manager does not anticipate investing in excess of 75% of
the fund's assets in domestic and developing country debt securities that are
rated below investment grade, the fund may invest a greater percentage in such
securities when, in SBAM's determination, the yield available from such
securities outweighs their additional risks. SBAM anticipates that under current
market conditions, a significant portion of the fund's assets will be invested
in such securities. By investing a portion of the fund's assets in securities
rated below investment grade as well as through investments in mortgage
securities and foreign debt securities, the investment manager expects to
provide investors with a higher yield than a high-quality domestic corporate
bond fund. Certain of the debt securities in which the fund may invest may be
rated as low as 'C' by Moody's or 'D' by S&P or may be considered comparable to
securities having such ratings.
In light of the risks associated with high yield corporate and sovereign debt
securities, SBAM will take various factors into consideration in evaluating the
creditworthiness of an issuer. For corporate debt securities, these will
typically include the issuer's financial resources, its sensitivity to economic
conditions and trends, the operating history of the issuer, and the experience
and track record of the issuer's management. For sovereign debt instruments,
these will typically include the economic and political conditions within the
issuer's country, the issuer's overall and external debt levels and debt service
ratios, the issuer's access to capital markets and other sources of funding,
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and the issuer's debt service payment history. SBAM will also review the
ratings, if any, assigned to the security by any recognized rating agencies,
although the investment manager's judgment as to the quality of a debt security
may differ from that suggested by the rating published by a rating service. The
fund's ability to achieve its investment objectives may be more dependent on
SBAM's credit analysis than would be the case if it invested in higher quality
debt securities.
Foreign Securities and Sovereign Debt. High Yield Bond Fund and Strategic Bond
Fund may invest up to 100% of its assets in securities of foreign issuers. Such
securities may be non-U.S. dollar denominated and there is no limit on the
percentage of the fund's assets that can be invested in non-dollar denominated
securities. SBAM anticipates that under current market conditions, a significant
portion of the fund's assets will be invested in foreign securities. The ability
to spread its investments among the fixed-income markets in a number of
different countries may, however, reduce the overall level of market risk to the
extent it may reduce the fund's exposure to a single market.
Strategic Bond Fund may invest in high yield sovereign debt issued or guaranteed
by a foreign sovereign government or one of its agencies or political
subdivisions and debt obligations issued or guaranteed by supranational
organizations. The high yield sovereign debt securities in which the fund may
invest are U.S. dollar-denominated and non-dollar-denominated debt securities,
including Brady Bonds, that are issued or guaranteed by governments or
governmental entities of developing and emerging market countries. SBAM expects
that these countries will consist primarily of those which have issued or have
announced plans to issue Brady Bonds, but the fund is not limited to investing
in the debt of such countries. SBAM anticipates that the fund's investments in
sovereign debt will be concentrated in Latin American countries, including
Central and South American and Caribbean countries. SBAM also expects to take
advantage of additional opportunities for investment in the debt of North
African countries, such as Nigeria and Morocco, Eastern European countries, such
as Poland and Hungary, and Southeast Asian countries, such as the Philippines.
Sovereign governments may include national, provincial, state, municipal or
other foreign governments with taxing authority. Governmental entities may
include the agencies and instrumentalities of such governments, as well as
state-owned enterprises.
Strategic Bond Fund may enter into repurchase agreements and reverse repurchase
agreements, may purchase securities on a firm commitment basis, including
when-issued securities and may lend portfolio securities. The fund may also
enter into mortgage 'dollar rolls.'
SMALL CAP GROWTH FUND
General. The Small Cap Growth Fund will seek to meet its objective by investing
primarily in securities of companies with market capitalizations at the time of
purchase similar to that of companies included in the Russell 2000 Index ('Small
Cap Companies'). Under normal market conditions the Small Cap Growth Fund will
invest at least 65% of its total assets in equity securities of Small Cap
Companies. The Small Cap Growth Fund also may invest up to 20% of its total
assets in equity securities of foreign issuers. The Small Cap Growth Fund may
continue to hold securities of a company whose market capitalization grows above
the capitalization of a Small Cap Company subsequent to purchase if the company
continues to satisfy the other investment policies of the Small Cap Growth Fund.
The Small Cap Growth Fund will limit its purchases of non-convertible debt
securities to investment grade obligations. For long-term debt obligations, this
includes securities that are rated Baa or better by Moody's or BBB or better by
S&P or Fitch or that are not rated but are considered by SBAM to be of
equivalent quality. See Appendix B to this Prospectus for a description of such
ratings.
To meet operating expenses, to serve as collateral in connection with certain
investment techniques and to meet anticipated redemption requests, the Small Cap
Growth Fund will generally hold a portion of its assets in short-term
fixed-income securities (government obligations or investment grade debt
securities) or cash or cash equivalents. As described below, short-term
investments may include repurchase agreements with banks or broker/dealers. When
SBAM deems it appropriate,
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during temporary defensive periods due to economic or market conditions, the
Small Cap Growth Fund may invest without limitation in fixed-income securities
or hold assets in cash or cash equivalents. To the extent the Small Cap Growth
Fund assumes a defensive position, it will not be pursuing its investment
objective of capital growth.
The Small Cap Growth Fund may enter into repurchase agreements, reverse
repurchase agreements, may purchase securities on a firm commitment basis,
including when-issued securities, and may lend portfolio securities. The Small
Cap Growth Fund may engage in short sales of securities if it contemporaneously
owns or has the right to obtain at no additional cost securities identical to
those being sold short. The Small Cap Growth Fund may also invest in investment
funds. For a description of these investment practices and the risks associated
therewith, see 'Risk Factors.'
The Small Cap Growth Fund may purchase securities for which there is a limited
trading market or which are subject to restrictions on resale to the public. The
Small Cap Growth Fund will not invest more than 15% of the value of its total
assets in illiquid securities, such as 'restricted securities' which are
illiquid, and securities that are not readily marketable. For further discussion
of illiquid securities and their associated risks, see 'Restricted Securities
and Securities with Limited Trading Markets.' The Small Cap Growth Fund may
purchase Rule 144A securities. The Small Cap Growth Fund's holdings of
Rule 144A securities which are liquid securities will not be subject to the 15%
limitation on investments in illiquid securities.
The Small Cap Growth Fund is currently authorized to use the various investment
strategies referred to under 'Derivatives.' It is not presently anticipated that
any of these strategies will be used to a significant degree by the Small Cap
Growth Fund. The Small Cap Growth Fund's ability to pursue certain of these
strategies may be limited by applicable regulations of the SEC, the Commodity
Futures Trading Commission ('CFTC') and the federal income tax requirements
applicable to regulated investment companies.
TOTAL RETURN FUND
General. The primary investment objective of Total Return Fund is to obtain
above average income (compared to a portfolio entirely invested in equity
securities). The fund's secondary objective is to take advantage of
opportunities for growth of capital and income. The policy of Total Return Fund
is to invest in a broad variety of securities, including equity securities,
fixed-income securities and short-term obligations. The fund may vary the
percentage of assets invested in any one type of security in accordance with the
investment manager's view of existing and anticipated economic and market
conditions, fiscal and monetary policy and underlying security values.
Equity Securities. Under normal market conditions, it is anticipated that at
least 40% of the fund's total assets will be invested in equity securities.
Equity securities include common and preferred stock (including convertible
preferred stock), bonds, notes and debentures convertible into common or
preferred stock, stock purchase warrants and rights, equity interests in trusts,
partnerships, joint ventures or similar enterprises and American, Global or
other types of Depositary Receipts. Most of the equity securities purchased by
the fund are expected to be traded on a stock exchange or in an over-the-counter
market.
Total Return Fund may invest up to 20% of its total assets in foreign securities
(including American Depositary Receipts).
Fixed Income Securities. SBAM will have discretion to invest in the full range
of maturities of fixed-income securities. Generally, most of the fund's
long-term debt investments will consist of 'investment grade' securities. Up to
20% of the fund's net assets may be invested in nonconvertible fixed income
securities that are rated Ba or lower by Moody's or BB or lower by S&P or
determined by SBAM to be of comparable quality. There is no limit on the amount
of Total Return Fund's assets that can be invested in convertible securities
rated below investment grade.
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Total Return Fund may enter into repurchase agreements and reverse repurchase
agreements, may purchase securities on a firm commitment basis, including
when-issued securities, and may lend portfolio securities. The fund will not
invest more than 10% of its assets in repurchase agreements maturing in more
than seven days.
RESTRICTED SECURITIES AND SECURITIES WITH LIMITED TRADING MARKETS (RULE 144A)
Each fund may purchase securities for which there is a limited trading market or
which are subject to restrictions on resale to the public. If a fund were to
assume substantial positions in securities with limited trading markets, the
activities of the fund could have an adverse effect upon the liquidity and
marketability of such securities and the fund might not be able to dispose of
its holdings in those securities at then current market prices. Circumstances
could also exist (to satisfy redemptions, for example) when portfolio securities
might have to be sold by a fund at times which otherwise might be considered to
be disadvantageous so that the fund might receive lower proceeds from such sales
than it had expected to realize. Investments in securities which are
'restricted' may involve added expenses to a fund should the fund be required to
bear registration costs with respect to such securities and could involve delays
in disposing of such securities which might have an adverse effect upon the
price and timing of sales of such securities and the liquidity of the fund with
respect to redemptions. Restricted securities and securities for which there is
a limited trading market may be significantly more difficult to value due to the
unavailability of reliable market quotations for such securities, and investment
in such securities may have an adverse impact on net asset value. Certain funds
may purchase Rule 144A securities for which there may be a secondary market of
qualified institutional buyers as contemplated by recently adopted Rule 144A
under the 1933 Act. A fund's holdings of Rule 144A securities which are liquid
securities will not be subject to the fund's applicable limitation on
investments in illiquid securities.
One effect of Rule 144A is that certain restricted securities may now be liquid,
though there is no assurance that a liquid market for Rule 144A securities will
develop or be maintained. In promulgating Rule 144A, the Securities and Exchange
Commission (the 'Commission') stated that the ultimate responsibility for
liquidity determinations is that of an investment company's board of directors.
However, the Commission stated that the board may delegate the day-to-day
function of determining liquidity to the fund's investment adviser, provided
that the board retains sufficient oversight. The Board of Directors of each fund
has adopted policies and procedures for the purpose of determining whether
securities that are eligible for resale under Rule 144A are liquid or illiquid.
Pursuant to those policies and procedures, the Board of Directors has delegated
to the investment manager the determination as to whether a particular security
is liquid or illiquid, requiring that consideration be given to, among other
things, the frequency of trades and quotes for the security, the number of
dealers willing to sell the security and the number of potential purchasers,
dealer undertakings to make a market in the security, the nature of the security
and the time needed to dispose of the security. The Board of Directors
periodically reviews fund purchases and sales of Rule 144A securities.
All funds may purchase securities for which there is a limited trading market or
which are subject to restrictions on resale to the public. The funds will not
invest more than 15% of the value of its total assets in illiquid securities,
such as 'restricted securities' which are illiquid, and securities that are not
readily marketable. The funds may also purchase Rule 144A securities. The funds'
holding of Rule 144A securities which are liquid securities will not be subject
to the 15% limitation on investments in illiquid securities.
WARRANTS
Each of the Funds, except for U.S. Government Income Fund, may invest in
warrants, which are securities permitting, but not obligating, their holder to
subscribe for other securities. Warrants do not carry the right to dividends or
voting rights with respect to their underlying securities, and they do not
represent any rights in assets of the issuer. An investment in warrants may be
considered speculative. In addition, the value of a warrant does not necessarily
change with the
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value of the underlying securities and a warrant ceases to have value if it is
not exercised prior to its expiration date.
OTHER INVESTMENT COMPANIES
Each fund may invest in unaffiliated investment funds which invest principally
in securities in which that fund is authorized to invest, in accordance with the
limits of the 1940 Act. Each fund may invest a maximum of 10% of its total
assets in the securities of other investment companies. In addition, under the
1940 Act, not more than 5% of the fund's total assets may be invested in the
securities of any one investment company. To the extent a fund invests in other
investment funds, the fund's shareholders will incur certain duplicative fees
and expenses, including investment advisory fees. A fund's investment in certain
investment funds will result in special U.S. federal income tax consequences
described under 'Taxes.'
FIXED INCOME SECURITIES
Changes in market yields will affect a fund's net asset value as prices of
fixed-income securities generally increase when interest rates decline and
decrease when interest rates rise. Prices of longer term securities generally
increase or decrease more sharply than those of shorter term securities in
response to interest rate changes, particularly if such securities were
purchased at a discount. Because U.S. Government Income Fund, High Yield Bond
Fund and Strategic Bond Fund will invest primarily in fixed-income securities
and Total Return Fund may from time to time invest in a substantial amount of
fixed-income securities, the net asset value of these fund's shares can be
expected to change as general levels of interest rates fluctuate. It should be
noted that the market values of securities rated below investment grade and
comparable unrated securities tend to react less to fluctuations in interest
rate levels than do those of higher-rated securities. Except to the extent that
values are affected independently by other factors such as developments relating
to a specific issuer, when interest rates decline, the value of a fixed-income
portfolio can generally be expected to rise. Conversely, when interest rates
rise, the value of a fixed-income portfolio can generally be expected to
decline.
FLOATING AND VARIABLE RATE INSTRUMENTS
General. Certain funds may invest in floating and variable rate obligations.
Floating or variable rate obligations bear interest at rates that are not fixed,
but vary with changes in specified market rates or indices, such as the prime
rate, and at specified intervals. Certain of the floating or variable rate
obligations that may be purchased by a fund may carry a demand feature that
would permit the holder to tender them back to the issuer at par value prior to
maturity. Such obligations include variable rate master demand notes, which are
unsecured instruments issued pursuant to an agreement between the issuer and the
holder that permit the indebtedness thereunder to vary and provide for periodic
adjustments in the interest rate. A fund will limit its purchases of floating
and variable rate obligations to those of the same quality as it otherwise is
allowed to purchase. SBAM or the applicable subadviser will monitor on an
ongoing basis the ability of an issuer of a demand instrument to pay principal
and interest on demand.
Liquidity. Certain of the floating or variable rate obligations that may be
purchased by a fund may carry a demand feature that would permit the holder to
tender them back to the issuer of the instrument or to a third party at par
value prior to maturity. Some of the demand instruments purchased by a fund are
not traded in a secondary market and derive their liquidity solely from the
ability of the holder to demand repayment from the issuer or third party
providing credit support. If a demand instrument is not traded in a secondary
market, each fund will nonetheless treat the instrument as 'readily marketable'
for the purposes of its investment restriction limiting investments in illiquid
securities unless the demand feature has a notice period of more than seven days
in which case the instrument will be characterized as 'not readily marketable'
and therefore illiquid.
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Limitations. A fund's right to obtain payment at par on a demand instrument
could be affected by events occurring between the date such fund elects to
demand payment and the date payment is due that may affect the ability of the
issuer of the instrument or third party providing credit support to make payment
when due, except when such demand instruments permit same day settlement. To
facilitate settlement, these same day demand instruments may be held in book
entry form at a bank other than a fund's custodian subject to a sub-custodian
agreement approved by such fund between that bank and the fund's custodian.
U.S. GOVERNMENT OBLIGATIONS
General. In addition to the U.S. Treasury obligations described in the
Prospectus, a fund may invest in separately traded interest components of
securities issued or guaranteed by the U.S. Treasury. The interest components of
selected securities are traded independently under the Separate Trading of
Registered Interest and Principal of Securities program ('STRIPS'). Under the
STRIPS program, the interest components are individually numbered and separately
issued by the U.S. Treasury at the request of depository financial institutions,
which then trade the component parts independently.
Securities issued or guaranteed by U.S. government agencies and
instrumentalities include obligations that are supported by: (a) the full faith
and credit of the U.S. Treasury (e.g., direct pass-through certificates of
Ginnie Maes); (b) the limited authority of the issuer or guarantor to borrow
from the U.S. Treasury (e.g., obligations of Federal Home Loan Banks); or
(c) only the credit of the issuer or guarantor (e.g., obligations of Freddie
Macs). In the case of obligations not backed by the full faith and credit of the
U.S. Treasury, the agency issuing or guaranteeing the obligation is principally
responsible for ultimate repayment.
Agencies and instrumentalities that issue or guarantee debt securities and that
have been established or sponsored by the U.S. government include, in addition
to those identified above, the Bank for Cooperatives, the Export-Import Bank,
the Federal Farm Credit System, the Federal Intermediate Credit Banks, the
Federal Land Banks, the Federal National Mortgage Association and the Student
Loan Marketing Association.
BANK OBLIGATIONS
Bank obligations that may be purchased by a fund include certificates of
deposit, banker's acceptances and fixed time deposits. A certificate of deposit
is a short-term negotiable certificate issued by a commercial bank against funds
deposited in the bank and is either interest-bearing or purchased on a discount
basis. A bankers' acceptance is a short-term draft drawn on a commercial bank by
a borrower, usually in connection with an international commercial transaction.
The borrower is liable for payment as is the bank, which unconditionally
guarantees to pay the draft at its face amount on the maturity date. Fixed time
deposits are obligations of branches of U.S. banks or foreign banks which are
payable at a stated maturity date and bear a fixed rate of interest. Although
fixed time deposits do not have a market, there are no contractual restrictions
on the right to transfer a beneficial interest in the deposit to a third party.
Bank obligations may be general obligations of the parent bank or may be limited
to the issuing branch by the terms of the specific obligations or by government
regulation.
ASSET-BACKED SECURITIES
Asset-backed securities are generally issued as pass through certificates, which
represent undivided fractional ownership interests in the underlying pool of
assets, or as debt instruments, which are generally issued as the debt of a
special purpose entity organized solely for the purpose of owning such assets
and issuing such debt. The pool of assets generally represents the obligations
of a number of different parties. Asset-backed securities frequently carry
credit protection in the form of extra collateral, subordinated certificates,
cash reserve accounts, letters of credit or other enhancements. For example,
payments of principal and interest may be guaranteed up to certain amounts and
for a certain time period by a letter of credit or other enhancement issued by a
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financial institution unaffiliated with the entities issuing the securities.
Assets which, to date, have been used to back asset-backed securities include
motor vehicle installment sales contracts or installment loans secured by motor
vehicles, and receivables from revolving credit (credit card) agreements.
MORTGAGE-BACKED SECURITIES
Mortgage-backed securities acquired by U.S. Government Income Fund will be
limited to those issued or guaranteed by the U.S. government, its agencies and
instrumentalities. Strategic Bond Fund and Total Return Fund may, in addition,
purchase privately issued mortgage securities which are not guaranteed by the
U.S. government, its agencies or instrumentalities. It should be noted that new
types of mortgage-backed securities are developed and marketed from time to time
and that, consistent with its investment limitations, a fund may invest in those
new types of mortgage-backed securities that the investment manager believes may
assist it in achieving its investment objective(s).
Mortgage-backed securities were introduced in the 1970s when the first pool of
mortgage loans was converted into a mortgage pass-through security. Since the
1970s, the mortgage-backed securities market has vastly expanded and a variety
of structures have been developed to meet investor needs.
Mortgage-backed securities are issued by lenders such as mortgage bankers,
commercial banks, and savings and loan associations. Mortgage-backed securities
generally provide monthly payments which are, in effect, a 'pass-through' of the
monthly interest and principal payments (including any prepayments) made by the
individual borrowers on the pooled mortgage loans. Principal prepayments result
from the sale of the underlying property or the refinancing or foreclosure of
underlying mortgages.
Interest and principal payments on mortgage-backed securities are typically made
monthly, and principal may be prepaid at any time because the underlying
mortgage loans or other assets generally may be prepaid at any time. As a
result, if a fund purchases such a security at a premium, a prepayment rate that
is faster than expected will reduce yield to maturity, while a prepayment rate
that is slower than expected will have the opposite effect of increasing yield
to maturity. Conversely, if a fund purchases these securities at a discount,
faster than expected prepayments will increase, while slower than expected
prepayments will reduce, yield to maturity. A slower than expected prepayment
rate may effectively change a security which was considered short or
intermediate-term at the time of purchase into a long-term security. Long-term
securities generally fluctuate more widely in response to changes in interest
rates than short or intermediate-term securities.
The yield of the mortgage securities is based on the prepayment rates
experienced over the life of the security. Prepayments tend to increase during
periods of falling interest rates, while during periods of rising interest rates
prepayments will most likely decline. Reinvestment by a fund of scheduled
principal payments and unscheduled prepayments may occur at higher or lower
rates than the original investment, thus affecting the fund's yield. Monthly
interest payments received by the fund have a compounding effect which will
increase the yield to shareholders as compared to debt obligations that pay
interest semiannually.
GUARANTEED MORTGAGE PASS-THROUGH SECURITIES
Total Return and Strategic Bond Funds may invest in mortgage pass-through
securities representing participation interests in pools of residential mortgage
loans originated by U.S. governmental or private lenders and guaranteed, to the
extent provided in such securities, by the U.S. government or one of its
agencies or instrumentalities. Any guarantee of such securities runs only to
principal and interest payments on the securities and not to the market value of
such securities or the principal and interest payments on the underlying
mortgages. In addition, the guarantee only runs to the portfolio securities held
by a fund and not to the purchase of shares of the fund. Such securities, which
are ownership interests in the underlying mortgage loans, differ
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from conventional debt securities, which provide for periodic payment of
interest in fixed amounts (usually semi-annually) and principal payments at
maturity or on specified call dates. Mortgage pass-through securities provide
for monthly payments that are a 'pass-through' of the monthly interest and
principal payments (including any prepayments) made by the individual borrowers
on the pooled mortgage loans, net of any fees paid to the guarantor of such
securities and the servicer of the underlying mortgage loans. Guaranteed
mortgage pass-through securities are often sold on a to-be-acquired or 'TBA'
basis. Such securities are typically sold one to three months in advance of
issuance, prior to the identification of the underlying pools of mortgage
securities but with the interest payment provisions fixed in advance. The
underlying pools of mortgage securities are identified shortly before settlement
and must meet certain parameters.
The guaranteed mortgage pass-through securities in which a fund may invest may
include those issued or guaranteed by Ginnie Mae, the Federal National Mortgage
Association ('Fannie Mae') and Freddie Mac.
Ginnie Mae Certificates. Ginnie Mae is a wholly-owned corporate instrumentality
of the United States within the Department of Housing and Urban Development. The
full faith and credit of the U.S. government is pledged to the payment of
amounts that may be required to be paid under any guarantee, but not as to the
market value of such securities. The Ginnie Mae Certificates will represent a
pro rata interest in one or more pools of the following types of mortgage loans:
(i) fixed rate level payment mortgage loans; (ii) fixed rate graduated payment
mortgage loans; (iii) fixed rate growing equity mortgage loans; (iv) fixed rate
mortgage loans secured by manufactured (mobile) homes; (v) mortgage loans on
multifamily residential properties under construction; (vi) mortgage loans on
completed multifamily projects; (vii) fixed rate mortgage loans as to which
escrowed funds are used to reduce the borrower's monthly payments during the
early years of the mortgage loans ('buydown' mortgage loans); (viii) mortgage
loans that provide for adjustments in payments based on periodic changes in
interest rates or in other payment terms of the mortgage loans; and
(ix) mortgage-backed serial notes. All of these mortgage loans will be Federal
Housing Administration Loans ('FHA Loans') or Veterans' Administration Loans
('VA Loans') and, except as otherwise specified above, will be fully amortizing
loans secured by first liens on one- to four-family housing units.
Fannie Mae Certificates. Fannie Mae is a federally chartered and privately owned
corporation organized and existing under the Federal National Mortgage
Association Charter Act. Each Fannie Mae Certificate will entitle the registered
holder thereof to receive amounts representing such holder's pro rata interest
in scheduled principal payments and interest payments (at such Fannie Mae
Certificate's pass-through rate, which is net of any servicing and guarantee
fees on the underlying mortgage loans), and any principal prepayments on the
mortgage loans in the pool represented by such Fannie Mae Certificate and such
holder's proportionate interest in the full principal amount of any foreclosed
or otherwise finally liquidated mortgage loan. The full and timely payment of
principal of and interest on each Fannie Mae Certificate, but not the market
value thereof, will be guaranteed by Fannie Mae, which guarantee is not backed
by the full faith and credit of the U.S. government. Each Fannie Mae Certificate
will represent a pro rata interest in one or more pools of FHA Loans, VA Loans
or conventional mortgage loans (i.e., mortgage loans that are not insured or
guaranteed by any governmental agency) of the following types: (i) fixed rate
level payment mortgage loans; (ii) fixed rate growing equity mortgage loans;
(iii) fixed rate graduated payment mortgage loans; (iv) variable rate California
mortgage loans; (v) other adjustable rate mortgage loans; and (vi) fixed rate
mortgage loans secured by multifamily projects.
Freddie Mac Certificates. Freddie Mac is a corporate instrumentality of the
United States created pursuant to the Emergency Home Finance Act of 1970, as
amended (the 'FHLMC Act'). Freddie Mac guarantees to each registered holder of a
Freddie Mac Certificate ultimate collection of all principal of the related
mortgage loans, without any offset or deduction, but does not, generally,
guarantee the timely payment of scheduled principal or the market value of the
securities. Freddie Mac may remit the amount due on account of its guarantee of
collection of principal at any time after default on an underlying mortgage
loan, but not later than 30 days following: (i) foreclosure
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sale; (ii) payment of a claim by any mortgage insurer; or (iii) the expiration
of any right of redemption, whichever occurs later, but in any event no later
than one year after demand has been made upon the mortgagor for accelerated
payment of principal. The obligations of Freddie Mac under its guarantee are
obligations solely of Freddie Mac and are not backed by the full faith and
credit of the U.S. government.
Freddie Mac Certificates represent a pro rata interest in a group of mortgage
loans (a 'Freddie Mac Certificate group') purchased by Freddie Mac. The mortgage
loans underlying the Freddie Mac Certificates will consist of fixed rate or
adjustable rate mortgage loans with original terms to maturity of between ten
and thirty years, substantially all of which are secured by first liens on one-
to four-family residential properties or multifamily projects. Each mortgage
loan must meet the applicable standards set forth in the FHLMC Act. A Freddie
Mac Certificate group may include whole loans, participation interests in whole
loans and undivided interests in whole loans and participations comprising
another Freddie Mac Certificate group.
ADJUSTABLE RATE MORTGAGE SECURITIES
Unlike fixed rate mortgage securities, adjustable rate mortgage securities are
collateralized by or represent interests in mortgage loans with variable rates
of interest. These variable rates of interest reset periodically to align
themselves with market rates. A fund will not benefit from increases in interest
rates to the extent that interest rates rise to the point where they cause the
current coupon of the underlying adjustable rate mortgages to exceed any maximum
allowable annual or lifetime reset limits (or cap rates') for a particular
mortgage. In this event, the value of the mortgage securities in a fund would
likely decrease. Also, a fund's net asset value could vary to the extent that
current yields on adjustable rate mortgage securities are different than market
yields during interim periods between coupon reset dates or if the timing of
changes to the index upon which the rate for the underlying mortgages is based
lags behind changes in market rates. During periods of declining interest rates,
income to a fund derived from adjustable rate mortgages which remain in a
mortgage pool will decrease in contrast to the income on fixed rate mortgages,
which will remain constant. Adjustable rate mortgages also have less potential
for appreciation in value as interest rates decline than do fixed rate
investments.
PRIVATELY-ISSUED MORTGAGE SECURITIES
Total Return Fund and Strategic Bond Fund may also purchase mortgage-backed
securities issued by private issuers which may entail greater risk than
mortgage-backed securities that are guaranteed by the U.S. government, its
agencies or instrumentalities. Privately-issued mortgage securities are issued
by private originators of, or investors in, mortgage loans, including mortgage
bankers, commercial banks, investment banks, Savings and loan associations and
special purpose subsidiaries of the foregoing. Since privately-issued mortgage
certificates are not guaranteed by an entity having the credit status of GNMA or
FHLMC, such securities generally are structured with one or more types of credit
enhancement. Such credit support falls into two categories: (i) liquidity
protection; and (ii) protection against losses resulting from ultimate default
by an obligor on the underlying assets. Liquidity protection refers to the
provision of advances, generally by the entity administering the pool of assets,
to ensure that the pass-through of payments due on the underlying pool occurs in
a timely fashion. Protection against losses resulting from ultimate default
enhances the likelihood of ultimate payment of the obligations on at least a
portion of the assets in the pool. Such protection may be provided through
guarantees, insurance policies or letters of credit obtained by the issuer or
sponsor from third parties, through various means of structuring the transaction
or through a combination of such approaches.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTI-CLASS PASS-THROUGH SECURITIES
Strategic Bond Fund may invest in collateralized mortgage obligations ('CMOs').
CMOs are debt obligations collateralized by mortgage loans or mortgage
pass-through securities. Typically, CMOs are collateralized by GNMA, Fannie Mae
or Freddie Mae Certificates, but also may be
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collateralized by whole loans or private pass-throughs (such collateral
collectively hereinafter referred to as 'mortgage assets'). Multi-class
pass-through securities are interests in a trust composed of mortgage assets.
Unless the context indicates otherwise, all references herein to CMOs include
multi-class pass-through securities. Payments of principal and of interest on
the mortgage assets, and any reinvestment income thereon, provide the funds to
pay debt service on the CMOs or make scheduled distributions on the multi-class
pass-through securities. CMOs may be issued by agencies or instrumentalities of
the U.S. government, or by private originators of, or investors in, mortgage
loans, including savings and loan associations, mortgage banks, commercial
banks, investment banks and special purpose subsidiaries of the foregoing.
In a CMO, a series of bonds or certificates is issued in multiple classes. Each
class of CMOs, often referred to as a 'tranche,' is issued at a specified fixed
or floating coupon rate and has a stated maturity or final distribution date.
Principal prepayments on the mortgage assets may cause the CMOs to be retired
substantially earlier than their stated maturities or final distribution dates.
Interest is paid or accrues on all classes of the CMOs on a monthly, quarterly
or semi-annual basis. The principal of and interest on the mortgage assets may
be allocated among the several classes of a series of a CMO in innumerable ways.
In one structure, payments of principal, including any principal prepayments, on
the mortgage assets are applied to the classes of a CMO in the order of their
respective stated maturities or final distribution dates, so that no payment of
principal will be made on any class of CMOs until all other classes having an
earlier stated maturity or final distribution date have been paid in full.
Strategic Bond Fund has no present intention to invest in CMO residuals. The
market for CMOs may be less liquid than the market for other securities. As
market conditions change, and particularly during periods of rapid or
unanticipated changes in market interest rates, the attractiveness of the CMO
classes and the ability of the structure to provide the anticipated investment
characteristics may be significantly reduced. Such changes can result in
volatility in the market value, and in some instances reduced liquidity, of the
CMO class.
Strategic Bond Fund may also invest in, among others, parallel pay CMOs and
Planned Amortization Class CMOs ('PAC Bonds'). Parallel pay CMOs are structured
to provide payments of principal on each payment date to more than one class.
These simultaneous payments are taken into account in calculating the stated
maturity date or final distribution date of each class, which, as with other CMO
structures, must be retired by its stated maturity date or a final distribution
date but may be retired earlier. PAC Bonds are a type of CMO tranche or series
designed to provide relatively predictable payments of principal provided that,
among other things, the actual prepayment experience on the underlying mortgage
loans falls within a predefined range. If the actual prepayment experience on
the underlying mortgage loans is at a rate faster or slower than the predefined
range or if deviations from other assumptions occur, principal payments on the
PAC Bond may be earlier or later than predicted. The magnitude of the predefined
range varies from one PAC Bond to another; a narrower range increases the risk
that prepayments on the PAC Bond will be greater or smaller than predicted.
Because of these features, PAC Bonds generally are less subject to the risks of
prepayment than are other types of mortgage-backed securities.
STRIPPED MORTGAGE SECURITIES
Strategic Bond Fund may purchase stripped mortgage securities which are
derivative multi-class mortgage securities. Stripped mortgage securities may be
issued by agencies or instrumentalities of the U.S. government, or by private
originators of, or investors in, mortgage loans, including Savings and loan
associations, mortgage banks, commercial banks, investment banks and special
purpose subsidiaries of the foregoing. Stripped mortgage securities have greater
volatility than other types of mortgage securities. Although stripped mortgage
securities are purchased and sold by institutional investors through several
investment banking firms acting as brokers or dealers, the market for such
securities has not yet been fully developed. Accordingly, stripped mortgage
securities are generally illiquid.
Stripped mortgage securities are structured with two or more classes of
securities that receive different proportions of the interest and principal
distributions on a pool of mortgage assets. A
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common type of stripped mortgage security will have at least one class receiving
only a small portion of the interest and a larger portion of the principal from
the mortgage assets, while the other class will receive primarily interest and
only a small portion of the principal. In the most extreme case, one class will
receive all of the interest ('IO' or interest only), while the other class will
receive all of the principal ('PO' or principal-only class). The yield to
maturity on IOs, POs and other mortgage-backed securities that are purchased at
a substantial premium or discount generally are extremely sensitive not only to
changes in prevailing interest rates but also to the rate of principal payments
(including prepayments) on the related underlying mortgage assets, and a rapid
rate of principal payments may have a material adverse effect on such
securities' yield to maturity. If the underlying mortgage assets experience
greater than anticipated prepayments of principal, a fund may fail to fully
recoup its initial investment in these securities even if the securities have
received the highest rating by a nationally recognized statistical rating
organizations.
In addition to the stripped mortgage securities described above, Strategic Bond
Fund may invest in similar securities such as super POs and levered IOs which
are more volatile than POs, IOs and IOettes. Risks associated with instruments
such as super POs are similar in nature to those risks related to investments in
POs. Risks connected with levered IOs and IOettes are similar in nature to those
associated with IOs. Strategic Bond Fund may also invest in other similar
instruments developed in the future that are deemed consistent with its
investment objective, policies and restrictions. POs may generate taxable income
from the current accrual of original issue discount, without a corresponding
distribution of cash to the fund. See 'Taxes.'
MORTGAGE ROLLS
Strategic Bond Fund may enter into mortgage 'dollar rolls' in which a fund sells
mortgage-backed securities for delivery in the current month and simultaneously
contracts to repurchase substantially similar (same type, coupon and maturity)
securities on a specified future date. During the roll period, a fund forgoes
principal and interest paid on the mortgage-backed securities. A fund is
compensated by the difference between the current sales price and the lower
forward price for the future purchase (often referred to as the 'drop') as well
as by the interest earned on the cash proceeds of the initial sale. A fund may
only enter into covered rolls. A 'covered roll' is a specific type of dollar
roll for which there is an offsetting cash position which matures on or before
the forward settlement date of the dollar roll transaction. At the time a fund
enters into a mortgage 'dollar roll,' it will establish a segregated account
with its custodian bank in which it will maintain liquid assets equal in value
to its obligations in respect of dollar rolls, and accordingly, such dollar
rolls will not be considered borrowings. Mortgage dollar rolls involve the risk
that the market value of the securities the fund is obligated to repurchase
under the agreement may decline below the repurchase price. In the event the
buyer of securities under a mortgage dollar roll files for bankruptcy or becomes
insolvent, the fund's use of proceeds of the dollar roll may be restricted
pending a determination by the other party, or its trustee or receiver, whether
to enforce the fund's obligation to repurchase the securities.
INVERSE FLOATING RATE OBLIGATIONS
Certain funds may invest in inverse floating rate obligations, or 'inverse
floaters.' Inverse floaters have coupon rates that vary inversely at a multiple
of a designated floating rate (which typically is determined by reference to an
index rate, but may also be determined through a dutch auction or a remarketing
agent) (the 'reference rate'). Inverse floaters may constitute a class of
collateralized mortgage obligations ('CMOs') with a coupon rate that moves
inversely to a designated index, such as LIBOR or COFI (Cost of Funds Index).
Any rise in the reference rate of an inverse floater (as a consequence of an
increase in interest rates causes a drop in the coupon rate while any drop in
the reference rate of an inverse floater causes an increase in the coupon rate.
In addition, like most other fixed income securities, the value of inverse
floaters will generally decrease as interest rates increase.
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ZERO COUPON AND PAY-IN-KIND BONDS AND DEFERRED PAYMENT SECURITIES
Total Return Fund, High Yield Bond Fund and Strategic Bond Fund may invest in
zero coupon securities, PIK bonds and deferred payment securities. Zero coupon
securities are debt securities that pay no cash income but are sold at
substantial discounts from their value at maturity. When a zero coupon security
is held to maturity, its entire return, which consists of the amortization of
discount, comes from the difference between its purchase price and its maturity
value. This difference is known at the time of purchase, so that investors
holding zero coupon securities until maturity know at the time of their
investment what the expected return on their investment will be. Certain zero
coupon securities also are sold at substantial discounts from their maturity
value and provide for the commencement of regular interest payments at a
deferred date. Zero coupon securities may have conversion features. A fund also
may purchase PIK bonds. PIK bonds pay all or a portion of their interest in the
form of debt or equity securities. Deferred payment securities are securities
that remain zero coupon securities until a predetermined date, at which time the
stated coupon rate becomes effective and interest becomes payable at regular
intervals.
Zero coupon securities, PIK bonds and deferred payment securities tend to be
subject to greater price fluctuations in response to changes in interest rates
than are ordinary interest-paying debt securities with similar maturities. The
value of zero coupon securities appreciates more during periods of declining
interest rates and depreciates more during periods of rising interest rates than
ordinary interest-paying debt securities with similar maturities. Zero coupon
securities, PIK bonds and deferred payment securities may be issued by a wide
variety of corporate and governmental issuers. Although these instruments are
generally not traded on a national securities exchange, they are widely traded
by brokers and dealers and, to such extent, will not be considered illiquid for
the purposes of a fund's limitation on investments in illiquid securities.
Current federal income tax law requires the holder of a zero coupon security,
certain PIK bonds, deferred payment securities and certain other securities
acquired at a discount (such as Brady Bonds) to accrue income with respect to
these securities prior to the receipt of cash payments. Accordingly, to avoid
liability for federal income and excise taxes, a fund may be required to
distribute income accrued with respect to these securities and may have to
dispose of portfolio securities under disadvantageous circumstances in order to
generate cash to satisfy these distribution requirements.
HIGH YIELD SECURITIES
High Yield Bond Fund and Strategic Bond Fund may invest without limitation in
domestic and foreign 'high yield' securities, commonly known as 'junk bonds.'
Investors Fund, Capital Fund and Total Return Fund may invest without limitation
in convertible securities of this type and up to 5%, 20% and 20%, respectively,
of their net assets in non- convertible securities of this type. Asia Growth
Fund may invest without limitation in convertible non-U.S. high yield securities
and up to 10% of its total assets in nonconvertible non-U.S. high yield
securities.
High yield non-U.S. and U.S. corporate securities in which the applicable Funds
may invest include bonds, debentures, notes, commercial paper and preferred
stock and will generally be unsecured. Most of the debt securities will bear
interest at fixed rates. However, a fund may also invest in corporate debt
securities with variable rates of interest or which involve equity features,
such as contingent interest or participations based on revenues, sales or
profits (i.e., interest or other payments, often in addition to a fixed rate of
return, that are based on the borrower's attainment of specified levels of
revenues, sales or profits and thus enable the holder of the security to share
in the potential success of the venture).
Under rating agency guidelines, medium- and lower-rated securities and
comparable unrated securities will likely have some quality and protective
characteristics that are outweighed by large uncertainties or major risk
exposures to adverse conditions. Medium and lower rated securities are
considered to have extremely poor prospects of ever attaining any real
investment standing, to have a current identifiable vulnerability to default or
are in default, to be unlikely to have the capacity to pay interest and repay
principal when due in the event of adverse business, financial or
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economic conditions, and/or to be in default or not current in the payment of
interest or principal. Such securities are considered speculative with respect
to the issuer's capacity to pay interest and repay principal in accordance with
the terms of the obligations. Accordingly, it is possible that these types of
factors could, in certain instances, reduce the value of securities held by a
fund with a commensurate effect on the value of the fund's shares.
Changes by recognized rating services in their ratings of any fixed-income
security and in the ability of an issuer to make payments of interest and
principal may also affect the value of these investments.
A description of the ratings used by Moody's and S&P is set forth in Appendix A.
The ratings of Moody's and S&P generally represent the opinions of those
organizations as to the quality of the securities that they rate. Such ratings,
however, are relative and subjective, are not absolute standards of quality, are
subject to change and do not evaluate the market risk or liquidity of the
securities. Ratings of a non-U.S. debt instrument, to the extent that those
ratings are undertaken, are related to evaluations of the country in which the
issuer of the instrument is located. Ratings generally take into account the
currency in which a non-U.S. debt instrument is denominated. Instruments issued
by a foreign government in other than the local currency, for example, typically
have a lower rating than local currency instruments due to the existence of an
additional risk that the government will be unable to obtain the required
foreign currency to service its foreign currency denominated debt. In general,
the ratings of debt securities or obligations issued by a non-U.S. public or
private entity will not be higher than the rating of the currency or the foreign
currency debt of the central government of the country in which the issuer is
located, regardless of the intrinsic creditworthiness of the issuer.
High yield non-U.S. and U.S. corporate securities in which the applicable funds
may invest include bonds, debentures, notes, commercial paper and preferred
stock and will generally be unsecured. Most of the debt securities will bear
interest at fixed rates. However, a fund may also invest in corporate debt
securities with variable rates of interest or which involve equity features,
such as contingent interest or participations based on revenues, sales or
profits (i.e., interest or other payments, often in addition to a fixed rate of
return, that are based on the borrower's attainment of specified levels of
revenues, sales or profits and thus enable the holder of the security to share
in the potential success of the venture).
SOVEREIGN DEBT
Supranational entities include international organizations designated or
supported by governmental entities to promote economic reconstruction or
development and international banking institutions and related government
agencies. Examples include the World Bank, the European Coal and Steel
Community, the Asian Development Bank and the Inter-American Development Bank.
Such supranational issued instruments may be denominated in multi-national
currency units. The fund will not invest more than 10% of its total assets in
issuers located in any one country (other than issuers located in the United
States).
Investing in fixed and floating rate high yield foreign sovereign debt
securities will expose funds investing in such securities to the direct or
indirect consequences of political, social or economic changes in the countries
that issue the securities. See 'Risk Factors.' The ability and willingness of
sovereign obligors in developing and emerging market countries or the
governmental authorities that control repayment of their external debt to pay
principal and interest on such debt when due may depend on general economic and
political conditions within the relevant country. Countries such as those in
which a fund may invest have historically experienced, and may continue to
experience, high rates of inflation, high interest rates, exchange rate trade
difficulties and extreme poverty and unemployment. Many of these countries are
also characterized by political uncertainty or instability. Additional factors
which may influence the ability or willingness to service debt include, but are
not limited to, a country's cash flow situation, the availability of sufficient
foreign exchange on the date a payment is due, the relative size of its debt
service burden to the economy as a whole, and its government's policy towards
the International Monetary Fund, the World Bank and other international
agencies.
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BRADY BONDS
Certain debt obligations, customarily referred to as 'Brady Bonds,' are created
through the exchange of existing commercial bank loans to foreign entities for
new obligations in connection with debt restructuring under a plan introduced by
former U.S. Secretary of the Treasury, Nicholas F. Brady (the 'Brady Plan').
Brady Bonds were introduced in 1989 and thus, do not have a long payment
history. They may be collateralized or uncollateralized and issued in various
currencies (although most are dollar-denominated) and they are actively traded
in the over-the-counter secondary market. Dollar-denominated, collateralized
Brady Bonds, which may be fixed rate par bonds or floating rate discount bonds,
are generally collateralized in full as to principal due at maturity by U.S.
Treasury zero coupon obligations which have the same maturity as the Brady
Bonds. Certain interest payments on these Brady Bonds may be collateralized by
cash or securities in an amount that, in the case of fixed rate bonds, is
typically equal to between 12 and 18 months of rolling interest payments or, in
the case of floating rate bonds, initially is typically equal to between 12 and
18 months rolling interest payments based on the applicable interest rate at
that time and is adjusted at regular intervals thereafter with the balance of
interest accruals in each case being uncollateralized.
The applicable funds may purchase Brady Bonds with no or limited
collateralization, and will be relying for payment of interest and (except in
the case of principal collateralized Brady Bonds) principal primarily on the
willingness and ability of the foreign government to make payment in accordance
with the terms of the Brady Bonds. In the event of a default with respect to
collateralized Brady Bonds as a result of which the payment obligations of the
issuer are accelerated, the U.S. Treasury zero coupon obligations held as
collateral for the payment of principal will not be distributed to investors,
nor will such obligations be sold and the proceeds distributed. The collateral
will be held by the collateral agent to the scheduled maturity of the defaulted
Brady Bonds, which will continue to be outstanding, at which time the face
amount of the collateral will equal the principal payments which would have then
been due on the Brady Bonds in the normal course.
Based upon current market conditions, a fund would not intend to purchase Brady
Bonds which, at the time of investment, are in default as to payments. However,
in light of the residual risk of the Brady Bonds and, among other factors, the
history of default with respect to commercial bank loans by public and private
entities of countries issuing Brady Bonds, investments in Brady Bonds are to be
viewed as speculative. A substantial portion of the Brady Bonds and other
Sovereign debt securities in which High Yield Bond and Strategic Bond Funds
invest are likely to be acquired at a discount, which involves certain
considerations discussed in 'Taxes.'
In restructuring its external debt under the Brady Plan framework, a debtor
nation negotiates with its existing bank lenders as well as multilateral
institutions such as the International Bank for Reconstruction and Development
(the 'World Bank') and the International Monetary Fund (the 'IMF'). The Brady
Plan framework, as it has developed, contemplates the exchange of external
commercial bank debt for newly issued bonds known as 'Brady Bonds.' Brady Bonds
may also be issued in respect of new money being advanced by existing lenders in
connection with the debt restructuring. The World Bank and/or the IMF support
the restructuring by providing funds pursuant to loan agreements or other
arrangements which enable the debtor nation to collateralize the new Brady Bonds
or to repurchase outstanding bank debt at a discount. Under these arrangements
with the World Bank and/or the IMF, debtor nations have been required to agree
to the implementation of certain domestic monetary and fiscal reforms. Such
reforms have included the liberalization of trade and foreign investment, the
privatization of state-owned enterprises and the setting of targets for public
spending and borrowing. These policies and programs seek to promote the debtor
country's economic growth and development. Investors should also recognize that
the Brady Plan only sets forth general guiding principles for economic reform
and debt reduction, emphasizing that solutions must be negotiated on a
case-by-case basis between debtor nations and their creditors. The investment
manager believes that economic reforms undertaken by countries in connection
with the issuance of Brady Bonds may make the debt of countries which have
issued or have announced plans to issue Brady Bonds an attractive opportunity
for
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investment. However, there can be no assurance that SBAM's expectations with
respect to Brady Bonds will be realized.
Agreements implemented under the Brady Plan to date are designed to achieve debt
and debt-service reduction through specific options negotiated by a debtor
nation with its creditors. As a result, the financial packages offered by each
country differ. The types of options have included the exchange of outstanding
commercial bank debt for bonds issued at 100% of face value of such debt which
carry a below-market stated rate of interest (generally known as par bonds),
bonds issued at a discount from the face value of such debt (generally known as
discount bonds), bonds bearing an interest rate which increases over time and
bonds issued in exchange for the advancement of new money by existing lenders.
Discount bonds issued to date under the framework of the Brady Plan have
generally borne interest computed semiannually at a rate equal to 13/16 of 1%
above the then current six month London Inter-Bank Offered Rate ('LIBOR') rate.
Regardless of the stated face amount and stated interest rate of the various
types of Brady Bonds, the applicable funds will purchase Brady Bonds in
secondary markets, as described below, in which the price and yield to the
investor reflect market conditions at the time of purchase. Brady Bonds issued
to date have traded at a deep discount from their face value. Certain sovereign
bonds are entitled to 'value recovery payments' in certain circumstances, which
in effect constitute supplemental interest payments but generally are not
collateralized. Certain Brady Bonds have been collateralized as to principal due
at maturity (typically 30 years from the date of issuance) by U.S. Treasury zero
coupon bonds with a maturity equal to the final maturity of such Brady Bonds,
although the collateral is not available to investors until the final maturity
of the Brady Bonds. Collateral purchases are financed by the IMF, the World Bank
and the debtor nations' reserves.
Brady Bonds have been issued only recently, and, accordingly, do not have a long
payment history. They may be collateralized or uncollateralized and issued in
various currencies (although most are dollar-denominated) and they are actively
traded in the over-the-counter secondary market. Dollar-denominated,
collateralized Brady Bonds, which may be fixed rate par bonds or floating rate
discount bonds, are generally collateralized in full as to principal due at
maturity by U.S. Treasury zero coupon obligations which have the same maturity
as the Brady Bonds. Certain interest payments on these Brady Bonds may be
collateralized by cash or securities in an amount that, in the case of fixed
rate bonds, is typically equal to between 12 and 18 months of rolling interest
payments or, in the case of floating rate bonds, initially is typically equal to
between 12 and 18 months rolling interest payments based on the applicable
interest rate at that time and is adjusted at regular intervals thereafter with
the balance of interest accruals in each case being uncollateralized.
REPURCHASE AGREEMENTS
Each fund may enter into repurchase agreements for cash management purposes. A
repurchase agreement is a transaction in which the seller of a security commits
itself at the time of the sale to repurchase that security from the buyer at a
mutually agreed upon time and price.
Each fund will enter into repurchase agreements only with dealers, domestic
banks or recognized financial institutions which, in the opinion of SBAM based
on guidelines established by the Board of Directors, are deemed creditworthy.
SBAM will monitor the value of the securities underlying the repurchase
agreement at the time the transaction is entered into and at all times during
the term of the repurchase agreement to ensure that the value of the securities
always equals or exceeds the repurchase price. Each fund requires that
additional securities be deposited if the value of the securities purchased
decreases below their resale price and does not bear the risk of a decline in
the value of the underlying security unless the seller defaults under the
repurchase obligation. In the event of default by the seller under the
repurchase agreement, a fund could experience losses and experience delays in
connection with the disposition of the underlying security. To the extent that,
in the meantime, the value of the securities that a fund has purchased has
decreased, the fund could experience a loss. Repurchase agreements with
maturities of more than seven days will be treated as illiquid securities by a
fund.
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REVERSE REPURCHASE AGREEMENTS
Total Return Fund, High Yield Bond Fund, Strategic Bond Fund, and Small Cap
Growth Fund may enter into 'reverse' repurchase agreements to avoid selling
securities during unfavorable market conditions to meet redemptions. Pursuant to
a reverse repurchase agreement, a fund will sell portfolio securities and agree
to repurchase them from the buyer at a particular date and price. Whenever a
fund enters into a reverse repurchase agreement, it will establish a segregated
account of liquid assets in an amount at least equal to the repurchase price
marked to market daily (including accrued interest), and will subsequently
monitor the account to ensure that such equivalent value is maintained, in
accordance with procedures established by the Board of Directors. A fund pays
interest on amounts obtained pursuant to reverse repurchase agreements. Reverse
repurchase agreements are considered to be borrowings by a fund.
SECURITIES LENDING
Each of the funds may lend portfolio securities to brokers or dealers or other
financial institutions. The procedure for the lending of securities will include
the following features and conditions. The borrower of the securities will
deposit cash with the fund in an amount equal to a minimum of 100% of the market
value of the securities lent. The fund will invest the collateral in short-term
debt securities or cash equivalents and earn the interest thereon. A negotiated
portion of the income so earned may be paid to the borrower or the broker who
arranged the loan. If the deposit drops below the required minimum at any time,
the borrower may be called upon to post additional cash. If the additional cash
is not paid, the loan will be immediately due and the fund may use the
collateral or its own cash to replace the securities by purchase in the open
market charging any loss to the borrower. These will be 'demand' loans and may
be terminated by the fund at any time. A fund will receive any dividends and
interest paid on the securities lent and the loans will be structured to assure
that the fund will be able to exercise its voting rights on the securities. Such
loans will be authorized only to the extent that the receipt of income from such
activity would not cause any adverse tax consequences to a fund's shareholders
and only in accordance with applicable rules and regulations.
Valuation of Securities. The value of securities loaned will be marked to market
daily. Any securities that a fund may receive as collateral will not become a
part of its portfolio at the time of the loan. In the event of a default by the
borrower, the fund will, if permitted by law, dispose of such collateral except
that the fund may retain any such part thereof that is a security in which the
fund is permitted to invest. The fund may invest the cash collateral and earn
additional income or receive an agreed- upon fee from a borrower that has
delivered cash equivalent collateral. Cash collateral received by a fund may be
invested in securities in which the fund is permitted to invest. Portfolio
securities purchased with cash collateral are subject to possible depreciation.
Voting rights may pass with the lending of portfolio securities. Loans of
securities by a fund will be subject to termination at the fund's or the
borrower's option. A fund may pay administrative and custodial fees in
connection with a securities loan and may pay a negotiated portion of the
interest or fee earned with respect to the collateral to the borrower or a
placing broker.
With the exception of Capital Fund and Investors Fund, none of the funds
presently intends to lend any of its portfolio securities. Investors Fund and
Capital Fund may lend portfolio securities not exceeding 33 1/3% of the funds'
total assets taken at value.
LOAN PARTICIPATIONS AND ASSIGNMENTS
Total Return Fund, High Yield Bond Fund and Strategic Bond Fund may invest in
loan participations and assignments. The funds consider these investments to be
investments in debt securities for purposes of this Prospectus. Loan
participations typically will result in a fund having a contractual relationship
only with the lender, not with the borrower. A fund will have the right to
receive payments of principal, interest and any fees to which it is entitled
only from the lender selling the participation and only upon receipt by the
lender of the payments from the borrower.
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In connection with purchasing loan participations, a fund generally will have no
right to enforce compliance by the borrower with the terms of the loan agreement
relating to the loan, nor any rights of set-off against the borrower, and the
fund may not benefit directly from any collateral supporting the loan in which
it has purchased the participation. As a result, a fund will assume the credit
risk of both the borrower and the lender that is selling the participation. In
the event of the insolvency of the lender selling a participation, a fund may be
treated as a general creditor of the lender and may not benefit from any set-off
between the lender and the borrower. A fund will acquire loan participations
only if the lender interpositioned between the fund and the borrower is
determined by SBAM to be creditworthy. When a fund purchases assignments from
lenders, the fund will acquire direct rights against the borrower on the loan,
except that under certain circumstances such rights may be more limited than
those held by the assigning lender.
Valuation. In valuing a loan participation or assignment held by a fund for
which a secondary trading market exists, the fund will rely upon prices or
quotations provided by banks, dealers or pricing services. To the extent a
secondary trading market does not exist, a fund's loan participations and
assignments will be valued in accordance with procedures adopted by the Board of
Directors, taking into consideration, among other factors: (i) the
creditworthiness of the borrower under the loan and the lender; (ii) the current
interest rate; period until next rate reset and maturity of the loan; (iii)
recent prices in the market for similar loans; and (iv) recent prices in the
market for instruments of similar quality, rate, period until next interest rate
reset and maturity. See 'Net Asset Value.'
FIRM COMMITMENTS AND WHEN-ISSUED SECURITIES
Each fund may purchase securities on a firm commitment basis, including
when-issued securities. Securities purchased on a firm commitment basis are
purchased for delivery beyond the normal settlement date at a stated price and
yield. No income accrues to the purchaser of a security on a firm commitment
basis prior to delivery. Such securities are recorded as an asset and are
subject to changes in value based upon changes in the general level of interest
rates. Purchasing a security on a firm commitment basis can involve a risk that
the market price at the time of delivery may be lower than the agreed upon
purchase price, in which case there could be an unrealized loss at the time of
delivery. A fund will only make commitments to purchase securities on a firm
commitment basis with the intention of actually acquiring the securities, but
may sell them before the settlement date if it is deemed advisable. A fund will
establish a segregated account in which it will maintain liquid assets in an
amount at least equal in value to the fund's commitments to purchase securities
on a firm commitment basis. If the value of these assets declines, the fund will
place additional liquid assets in the account on a daily basis so that the value
of the assets in the account is equal to the amount of such commitments.
DERIVATIVES
A detailed discussion of derivatives that may be used by the investment manager
on behalf of certain funds follows below. A fund is not obligated, however, to
use any derivatives and makes no representation as to the availability of these
techniques at this time or at any time in the future. 'Derivatives,' as used in
the Prospectus and this SAI, refers to interest rate, currency or stock or bond
index futures contracts, currency forward contracts and currency swaps, the
purchase and sale (or writing) of exchange listed and over-the-counter ('OTC')
put and call options on debt and equity securities, currencies, interest rate,
currency or stock index futures and fixed-income and stock indices and other
financial instruments, entering into various interest rate transactions such as
swaps, caps, floors, collars, entering into equity swaps, caps, floors, the
purchase and sale of indexed debt securities or trading in other similar types
of instruments.
Derivatives may be used to attempt to protect against possible changes in the
market value of securities held or to be purchased for a fund's portfolio
resulting from securities markets or currency exchange rate fluctuations, to
protect a fund's unrealized gains in the value of its securities, to facilitate
the sale of those securities for investment purposes, to manage the effective
maturity or duration of a fund's portfolio or to establish a position in the
derivatives markets as a
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temporary substitute for purchasing or selling particular securities or to seek
to enhance a fund's income or gain. A fund may use any or all types of
derivatives which it is authorized to use at any time; no particular strategy
will dictate the use of one type of transaction rather than another, as use of
any authorized derivative will be a function of numerous variables, including
market conditions. The ability of a fund to utilize derivatives successfully
will depend on numerous factors including the investment manager's ability to
predict pertinent market movements, which cannot be assured. These skills are
different from those needed to select a fund's portfolio securities.
A fund's ability to pursue certain of these strategies may be limited by the
Commodity Exchange Act, as amended, applicable regulations of the Commodity
Futures Trading Commission ('CFTC') thereunder and the federal income tax
requirements applicable to regulated investment companies which are not operated
as commodity pools.
CURRENCY TRANSACTIONS. A fund may engage in currency transactions with
counterparties to hedge the value of portfolio securities denominated in
particular currencies against fluctuations in relative value or to generate
income or gain. Currency transactions include currency forward contracts,
exchange-listed currency futures contracts and options thereon, exchange-listed
and OTC options on currencies, and currency swaps. A forward currency contract
involves a privately negotiated obligation to purchase or sell (with delivery
generally required) a specific currency at a future date, which may be any fixed
number of days from the date of the contract agreed upon by the parties, at a
price set at the time of the contract. A currency swap is an agreement to
exchange cash flows based on the notional difference among two or more
currencies and operates similarly to an interest rate swap, which is described
below under 'Swaps, Caps, Floors and Collars.' A fund may enter into currency
transactions only with counterparties that the investment manager deems to be
creditworthy.
A fund may enter into forward currency exchange contracts when the investment
manager believes that the currency of a particular country may suffer a
substantial decline against the U.S. dollar. In those circumstances, a fund may
enter into a forward contract to sell, for a fixed amount of U.S. dollars, the
amount of that currency approximating the value of some or all of the fund's
portfolio securities denominated in such currency. Forward contracts may limit
potential gain from a positive change in the relationship between the U.S.
dollar and foreign currencies.
Transaction hedging is entering into a currency transaction with respect to
specific assets or liabilities of the fund, which will generally arise in
connection with the purchase or sale of the fund's portfolio securities or the
receipt of income from them. Position hedging is entering into a currency
transaction with respect to portfolio securities positions denominated or
generally quoted in that currency. A fund will not enter into a transaction to
hedge currency exposure to an extent greater, after netting all transactions
intended wholly or partially to offset other transactions, than the aggregate
market value (at the time of entering into the transaction) of the securities
held by the fund that are denominated or generally quoted in or currently
convertible into the currency, other than with respect to proxy hedging as
described below.
A fund may cross-hedge currencies by entering into transactions to purchase or
sell one or more currencies that are expected to increase or decline in value
relative to other currencies to which the fund has or in which the fund expects
to have exposure. To reduce the effect of currency fluctuations on the value of
existing or anticipated holdings of its securities, a fund may also engage in
proxy hedging. Proxy hedging is often used when the currency to which the fund's
holdings is exposed is difficult to hedge generally or difficult to hedge
against the dollar. Proxy hedging entails entering into a forward contract to
sell a currency, the changes in the value of which are generally considered to
be linked to a currency or currencies in which some or all of the fund's
securities are or are expected to be denominated, and to buy dollars. The amount
of the contract would not exceed the market value of the fund's securities
denominated in linked currencies. Currency transactions are subject to risks
different from other portfolio transactions, as discussed under 'Risk Factors.'
FUTURES CONTRACTS. A fund may trade futures contracts: (1) on domestic and
foreign exchanges on currencies, interest rates and bond indices; and (2) on
domestic and, to the extent permitted by the CFTC, foreign exchanges on stock
indices. Futures contracts are generally bought and sold on
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the commodities exchanges on which they are listed with payment of initial and
variation margin as described below. The sale of a futures contract creates a
firm obligation by the Fund, as seller, to deliver to the buyer the specific
type of financial instrument called for in the contract at a specific future
time for a specified price (or, with respect to certain instruments, the net
cash amount). None of the funds is a commodity pool, and each fund, where
permitted, will use futures contracts and options thereon solely: (i) for bona
fide hedging purposes; and (ii) for other purposes in amounts permitted by the
rules and regulations promulgated by the CFTC. A fund's use of financial futures
contracts and options thereon will in all cases be consistent with applicable
regulatory requirements and in particular the rules and regulations of the CFTC.
Maintaining a futures contract or selling an option on a futures contract will
typically require the Fund to deposit with a financial intermediary, as security
for its obligations, an amount of cash or other specified assets ('initial
margin') that initially is from 1% to 10% of the face amount of the contract
(but may be higher in some circumstances). Additional cash or assets ('variation
margin') may be required to be deposited thereafter daily as the mark-to-market
value of the futures contract fluctuates.
A fund will not enter into a futures contract or option thereon other than for
bona fide hedging purposes if, immediately thereafter, the sum of the amount of
its initial margin and premiums required to maintain permissible non-bona fide
hedging positions in futures contracts and options thereon would exceed 5% of
the liquidation value of the fund's portfolio, after taking into account
unrealized profits and losses on existing contracts; however, in the case of an
option that is in-the-money at the time of the purchase, the in-the-money amount
may be excluded in calculating the 5% limitation. The value of all futures
contracts sold by the fund (adjusted for the historical volatility relationship
between the fund and the contracts) will not exceed the total market value of
the fund's securities. In addition, the value of a fund's long futures and
options positions (futures contracts on stock or bond indices, interest rates or
foreign currencies and call options on such futures contracts) will not exceed
the sum of: (a) liquid assets segregated for this purpose; (b) cash proceeds on
existing investments due within thirty days; and (c) accrued profits on the
particular futures or options positions.
INTEREST RATE FUTURES CONTRACTS. A fund may enter into interest rate futures
contracts in order to protect it from fluctuations in interest rates without
necessarily buying or selling fixed income securities. An interest rate futures
contract is an agreement to take or make delivery of either: (i) an amount of
cash equal to the difference between the value of a particular index of debt
securities at the beginning and at the end of the contract period; or (ii) a
specified amount of a particular debt security at a future date at a price set
at time of the contract. For example, if a fund owns bonds, and interest rates
are expected to increase, the fund might sell futures contracts on debt
securities having characteristics similar to those held in the portfolio. Such a
sale would have much the same effect as selling an equivalent value of the bonds
owned by the fund. If interest rates did increase, the value of the debt
securities in the portfolio would decline, but the value of the futures
contracts to the fund would increase at approximately the same rate, thereby
keeping the net asset value of each class of the fund from declining as much as
it otherwise would have. A fund could accomplish similar results by selling
bonds with longer maturities and investing in bonds with shorter maturities when
interest rates are expected to increase. However, since the futures market may
be more liquid than the cash market, the use of futures contracts as a risk
management technique allows a fund to maintain a defensive position without
having to sell its portfolio securities.
Similarly, when the investment manager expects that interest rates may decline,
a fund may purchase interest rate futures contracts in an attempt to hedge
against having to make subsequently anticipated purchases of bonds at the higher
prices subsequently expected to prevail. Since the fluctuations in the value of
appropriately selected futures contracts should be similar to that of the bonds
that will be purchased, a fund could take advantage of the anticipated rise in
the cost of the bonds without actually buying them until the market had
stabilized. At that time, a fund could make the intended purchase of the bonds
in the cash market and the futures contracts could be liquidated.
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At the time of delivery of securities pursuant to an interest rate futures
contract, adjustments are made to recognize differences in value arising from
the delivery of securities with a different interest rate from that specified in
the contract. In some (but not many) cases, securities called for by a futures
contract may have a shorter term than the term of the futures contract and,
consequently, may not in fact have been issued when the futures contract was
entered.
OPTIONS. As indicated in the Prospectus, in order to hedge against adverse
market shifts or to increase income or gain, certain Funds may purchase put and
call options or write 'covered' put and call options on futures contracts on
stock indices, interest rates and currencies. In addition, in order to hedge
against adverse market shifts or to increase its income, a fund may purchase put
and call options and write 'covered' put and call options on stocks, stock
indices and currencies. A fund may utilize options on currencies in order to
hedge against currency exchange rate risks. A call option is 'covered' if, so
long as the fund is obligated as the writer of the option, it will own: (i) the
underlying investment subject to the option; (ii) securities convertible or
exchangeable without the payment of any consideration into the securities
subject to the option; or (iii) a call option on the relevant security or
currency with an exercise price no higher than the exercise price on the call
option written. A put option is 'covered' if, to support its obligation to
purchase the underlying investment if a put option that a fund writes is
exercised, the fund will either (a) deposit with its custodian in a segregated
account cash, cash equivalents, U.S. government securities or other high grade
liquid debt obligations having a value at least equal to the exercise price of
the underlying investment or (b) continue to own an equivalent number of puts of
the same 'series' (that is, puts on the same underlying investment having the
same exercise prices and expiration dates as those written by the fund), or an
equivalent number of puts of the same 'class' (that is, puts on the same
underlying investment) with exercise prices greater than those that it has
written (or, if the exercise prices of the puts it holds are less than the
exercise prices of those it has written, it will deposit the difference with its
custodian in a segregated account). Parties to options transactions must make
certain payments and/or set aside certain amounts of assets in connection with
each transaction, as described in the Prospectus.
In all cases except for certain options on interest rate futures contracts, by
writing a call, a fund will limit its opportunity to profit from an increase in
the market value of the underlying investment above the exercise price of the
option for as long as the fund's obligation as writer of the option continues.
By writing a put, a fund will limit its opportunity to profit from a decrease in
the market value of the underlying investment below the exercise price of the
option for as long as the fund's obligation as writer of the option continues.
Upon the exercise of a put option written by a fund, the fund may suffer an
economic loss equal to the difference between the price at which the fund is
required to purchase the underlying investment and its market value at the time
of the option exercise, less the premium received for writing the option. Upon
the exercise of a call option written by a fund, the fund may suffer an economic
loss equal to an amount not less than the excess of the investment's market
value at the time of the option exercise over the fund's acquisition cost of the
investment, less the sum of the premium received for writing the option and the
positive difference, if any, between the call price paid to the fund and the
fund's acquisition cost of the investment.
In all cases except for certain options on interest rate futures contracts, in
purchasing a put option, a fund will seek to benefit from a decline in the
market price of the underlying investment, while in purchasing a call option, a
fund will seek to benefit from an increase in the market price of the underlying
investment. If an option purchased is not sold or exercised when it has
remaining value, or if the market price of the underlying investment remains
equal to or greater than the exercise price, in the case of a put, or remains
equal to or below the exercise price, in the case of a call, during the life of
the option, the fund will lose its investment in the option. For the purchase of
an option to be profitable, the market price of the underlying investment must
decline sufficiently below the exercise price, in the case of a put, and must
increase sufficiently above the exercise price, in the case of a call, to cover
the premium and transaction costs.
In the case of certain options on interest rate futures contracts, a fund may
purchase a put option in anticipation of a rise in interest rates, and purchase
a call option in anticipation of a fall in
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interest rates. By writing a covered call option on interest rate futures
contracts, a fund will limit its opportunity to profit from a fall in interest
rates. By writing a covered put option on interest rate futures contracts, a
fund will limit its opportunity to profit from a rise in interest rates.
A fund may choose to exercise the options it holds, permit them to expire or
terminate them prior to their expiration by entering into closing transactions.
A fund may enter into a closing purchase transaction in which the fund purchases
an option having the same terms as the option it had written or a closing sale
transaction in which the fund sells an option having the same terms as the
option it had purchased. A covered option writer unable to effect a closing
purchase transaction will not be able to sell the underlying security until the
option expires or the underlying security is delivered upon exercise, with the
result that the writer will be subject to the risk of market decline in the
underlying security during such period. Should a fund choose to exercise an
option, the fund will purchase in the open market the securities, commodities or
commodity futures contracts underlying the exercised option.
Exchange-listed options on securities and currencies, with certain exceptions,
generally settle by physical delivery of the underlying security or currency,
although in the future, cash settlement may become available. Frequently, rather
than taking or making delivery of the underlying instrument through the process
of exercising the option, listed options are closed by entering into offsetting
purchase or sale transactions that do not result in ownership of the new option.
Index options are cash settled for the net amount, if any, by which the option
is 'in-the-money' (that is, the amount by which the value of the underlying
instrument exceeds, in the case of a call option, or is less than, in the case
of a put option, the exercise price of the option) at the time the option is
exercised.
Put options and call options typically have similar structural characteristics
and operational mechanics regardless of the underlying instrument on which they
are purchased or sold. Thus, the following general discussion relates to each of
the particular types of options discussed in greater detail below. In addition,
many derivatives involving options require segregation of Fund assets in special
accounts, as described below under 'Use of Segregated and Other Special
Accounts.'
A put option gives the purchaser of the option, upon payment of a premium, the
right to sell, and the writer of the obligation to buy, the underlying security,
index, currency or other instrument at the exercise price. A fund's purchase of
a put option on a security, for example, might be designed to protect its
holdings in the underlying instrument (or, in some cases, a similar instrument)
against a substantial decline in the market value of such instrument by giving
the fund the right to sell the instrument at the option exercise price. A call
option, upon payment of a premium, gives the purchaser of the option the right
to buy, and the seller the obligation to sell, the underlying instrument at the
exercise price. A fund's purchase of a call option on a security, financial
futures contract, index, currency or other instrument might be intended to
protect the fund against an increase in the price of the underlying instrument
that it intends to purchase in the future by fixing the price at which it may
purchase the instrument. An 'American' style put or call option may be exercised
at any time during the option period, whereas a 'European' style put or call
option may be exercised only upon expiration or during a fixed period prior to
expiration. Exchange-listed options are issued by a regulated intermediary such
as the Options Clearing Corporation ('OCC'), which guarantees the performance of
the obligations of the parties to the options. The discussion below uses the OCC
as an example, but is also applicable to other similar financial intermediaries.
OCC-issued and exchange-listed options, with certain exceptions, generally
settle by physical delivery of the underlying security or currency, although in
the future, cash settlement may become available. Index options are cash settled
for the net amount, if any, by which the option is 'in-the-money' (that is, the
amount by which the value of the underlying instrument exceeds, in the case of a
call option, or is less than, in the case of a put option, the exercise price of
the option) at the time the option is exercised. Frequently, rather than taking
or making delivery of the underlying instrument through the process of
exercising the option, listed options are closed by entering into offsetting
purchase or sale transactions that do not result in ownership of the new option.
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OTC options are purchased from or sold to securities dealers, financial
institutions or other parties (collectively referred to as 'Counterparties' and
individually referred to as a 'Counterparty') through a direct bilateral
agreement with the Counterparty. In contrast to exchange-listed options, which
generally have standardized terms and performance mechanics, all of the terms of
an OTC option, including such terms as method of settlement, term, exercise
price, premium, guaranties and security, are determined by negotiation of the
parties. It is anticipated that any Portfolio authorized to use OTC options will
generally only enter into OTC options that have cash settlement provisions,
although it will not be required to do so.
If a fund sells a call option, the premium that it receives may serve as a
partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments held by the fund or will
increase the fund's income. Similarly, the sale of put options can also provide
gains for a fund.
A fund may purchase and sell call options on securities that are traded on U.S.
and foreign securities exchanges and in the OTC markets, and on securities
indices, currencies and futures contracts. All calls sold by a fund must be
'covered' (that is, the fund must own the securities or futures contract subject
to the call), or must otherwise meet the asset segregation requirements
described below for so long as the call is outstanding. Even though the fund
will receive the option premium to help protect it against loss, a call sold by
a fund will expose the fund during the term of the option to possible loss of
opportunity to realize appreciation in the market price of the underlying
security or instrument and may require the fund to hold a security or instrument
that it might otherwise have sold.
A fund reserves the right to purchase or sell options on instruments and indices
which may be developed in the future to the extent consistent with applicable
law, the fund's investment objective and the restrictions set forth herein.
A fund may purchase and sell put options on securities (whether or not it holds
the securities in its portfolio) and on securities indices, currencies and
futures contracts. In selling put options, a fund faces the risk that it may be
required to buy the underlying security at a disadvantageous price above the
market price.
(A) OPTIONS ON STOCKS AND STOCK INDICES. A fund may purchase put and call
options and write covered put and call options on stocks and stock indices
listed on domestic and foreign securities exchanges in order to hedge
against movements in the equity markets or to increase income or gain to the
fund. In addition, the fund may purchase options on stocks that are traded
over-the-counter. Options on stock indices are similar to options on
specific securities. However, because options on stock indices do not
involve the delivery of an underlying security, the option represents the
holder's right to obtain from the writer cash in an amount equal to a fixed
multiple of the amount by which the exercise price exceeds (in the case of a
put) or is less than (in the case of a call) the closing value of the
underlying stock index on the exercise date. Currently, options traded
include the Standard & Poor's 100 Index of Composite Stocks, Standard &
Poor's 500 Index of Composite Stocks (the 'S&P 500 Index'), the New York
Stock Exchange ('NYSE') Composite Index, the American Stock Exchange
('AMEX') Market Value Index, the National Over-the-Counter Index and other
standard broadly based stock market indices. Options are also traded in
certain industry or market segment indices such as the Oil Index, the
Computer Technology Index and the Transportation Index. Stock index options
are subject to position and exercise limits and other regulations imposed by
the exchange on which they are traded.
If the investment manager expects general stock market prices to rise, a
fund might purchase a call option on a stock index or a futures contract on
that index as a hedge against an increase in prices of particular equity
securities it wants ultimately to buy. If the stock index does rise, the
price of the particular equity securities intended to be purchased may also
increase, but that increase would be offset in part by the increase in the
value of the fund's index option or futures contract resulting from the
increase in the index. If, on the other hand, the investment manager expects
general stock market prices to decline, it might purchase a put option or
sell a futures contract on the index. If that index does decline, the value
of some or all of the
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equity securities in a fund's portfolio may also be expected to decline, but
that decrease would be offset in part by the increase in the value of the
fund's position in such put option or futures contract.
(B) OPTIONS ON CURRENCIES. A fund may invest in options on currencies traded on
domestic and foreign securities exchanges in order to hedge against currency
exchange rate risks or to increase income or gain.
(C) OPTIONS ON FUTURES CONTRACTS. A fund may purchase put and call options and
write covered put and call options on futures contracts on stock indices,
interest rates and currencies traded on domestic and, to the extent
permitted by the CFTC, foreign exchanges, in order to hedge all or a portion
of its investments or to increase income or gain and may enter into closing
transactions in order to terminate existing positions. There is no guarantee
that such closing transactions can be effected. An option on a stock index
futures contract, interest rate futures contract or currency futures
contract, as contrasted with the direct investment in such a contract, gives
the purchaser the right, in return for the premium paid, to assume a
position in the underlying contract at a specified exercise price at any
time on or before the expiration date of the option. Upon exercise of an
option, the delivery of the futures position by the writer of the option to
the holder of the option will be accompanied by delivery of the accumulated
balance in the writer's futures margin account. The potential loss related
to the purchase of an option on a futures contract is limited to the premium
paid for the option (plus transaction costs). While the price of the option
is fixed at the point of sale, the value of the option does change daily and
the change would be reflected in the net asset value of the fund.
The purchase of an option on a financial futures contract involves payment of a
premium for the option without any further obligation on the part of the fund.
If the fund exercises an option on a futures contract it will be obligated to
post initial margin (and potentially variation margin) for the resulting futures
position just as it would for any futures position. Futures contracts and
options thereon are generally settled by entering into an offsetting
transaction, but no assurance can be given that a position can be offset prior
to settlement or that delivery will occur.
INTEREST RATE AND EQUITY SWAPS AND RELATED TRANSACTIONS. Certain funds may enter
into interest rate and equity swaps and may purchase or sell (i.e., write)
interest rate and equity caps, floors and collars. A fund expects to enter into
these transactions in order to hedge against either a decline in the value of
the securities included in the fund's portfolio, or against an increase in the
price of the securities which it plans to purchase, or in order to preserve or
maintain a return or spread on a particular investment or portion of its
portfolio or to achieve a particular return on cash balances, or in order to
increase income or gain. Interest rate and equity swaps involve the exchange by
a fund with another party of their respective commitments to make or receive
payments based on a notional principal amount. The purchase of an interest rate
or equity cap entitles the purchaser, to the extent that a specified index
exceeds a predetermined level, to receive payments on a contractually-based
principal amount from the party selling the interest rate or equity cap. The
purchase of an interest rate or equity floor entitles the purchaser, to the
extent that a specified index falls below a predetermined rate, to receive
payments on a contractually-based principal amount from the party selling the
interest rate or equity floor. A collar is a combination of a cap and a floor
which preserve a certain return within a predetermined range of values.
A fund may enter into interest rate and equity swaps, caps, floors and collars
on either an asset-based or liability-based basis, depending on whether it is
hedging its assets or its liabilities, and will usually enter into interest rate
and equity swaps on a net basis (i.e., the two payment streams are netted out),
with the fund receiving or paying, as the case may be, only the net amount of
the two payments. The net amount of the excess, if any, of a fund's obligations
over its entitlements with respect to each interest rate or equity swap will be
accrued on a daily basis, and an amount of liquid assets having an aggregate net
asset value at least equal to the accrued excess will be maintained in a
segregated account by the fund's custodian in accordance with procedures
established by the Board of Directors. If a fund enters into an interest rate or
equity swap on other than a net basis, the fund will maintain a segregated
account in the full amount accrued on
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a daily basis of the fund's obligations with respect to the swap. A fund will
only enter into interest rate and equity swap, cap, floor or collar transactions
with counterparties the investment manager deems to be creditworthy. The
investment manager will monitor the creditworthiness of counterparties to its
interest rate and equity swap, cap, floor and collar transactions on an ongoing
basis. If there is a default by the other party to such a transaction, a fund
will have contractual remedies pursuant to the agreements related to the
transaction.
Caps, floors and collars are more recent innovations for which standardized
documentation has not yet been developed and, accordingly, they are less liquid
than swaps. To the extent a fund sells caps, floors and collars it will maintain
in a segregated account cash and/or, cash equivalents or other liquid high grade
debt securities having an aggregate net asset value at least equal to the full
amount, accrued on a daily basis, of the fund's obligations with respect to the
caps, floors or collars.
The liquidity of swap agreements will be determined by the investment manager
based on various factors, including (1) the frequency of trades and quotations,
(2) the number of dealers and prospective purchasers in the marketplace, (3)
dealer undertakings to make a market, (4) the nature of the security (including
any demand or tender features), and (5) the nature of the marketplace for trades
(including the ability to assign or offset the fund's rights and obligations
relating to the investment). Such determination will govern whether a swap will
be deemed within the percentage restriction on investments in securities that
are not readily marketable.
A fund will maintain liquid assets in a segregated custodial account to cover
its current obligations under swap agreements. If a fund enters into a swap
agreement on a net basis, it will segregate assets with a daily value at least
equal to the excess, if any, of the fund's accrued obligations under the swap
agreement over the accrued amount the fund is entitled to receive under the
agreement. If a fund enters into a swap agreement on other than a net basis, it
will segregate assets with a value equal to the full amount of the fund's
accrued obligations under the agreement.
There is no limit on the amount of interest rate and equity swap transactions
that may be entered into by a fund. These transactions do not involve the
delivery of securities or other underlying assets or principal. Accordingly, the
risk of loss with respect to interest rate and equity swaps is limited to the
net amount of payments that a fund is contractually obligated to make, if any.
The effective use of swaps and related transactions by a fund may depend, among
other things, on the fund's ability to terminate the transactions at times when
the investment manager deems it desirable to do so.
INDEXED SECURITIES. A fund may purchase securities whose prices are indexed to
the prices of other securities, securities indices, currencies, or other
financial indicators. Indexed securities typically, but not always, are debt
securities or deposits whose value at maturity or coupon rate is determined by
reference to a specific instrument or statistic. Currency-indexed securities
typically are short-term to intermediate-term debt securities whose maturity
values or interest rates are determined by reference to the values of one or
more specified foreign currencies, and may offer higher yields than U.S.
dollar-denominated securities of equivalent issuers. Currency-indexed securities
may be positively or negatively indexed; that is, their maturity value may
increase when the specified currency value increases, resulting in a security
that performs similarly to a foreign currency-denominated instrument, or their
maturity value may decline when foreign currencies increase, resulting in a
security whose price characteristics are similar to a put on the underlying
currency. Currency-indexed securities may also have prices that depend on the
values of a number of different foreign currencies relative to each other.
COMBINED TRANSACTIONS. A fund may enter into multiple transactions, including
multiple options transactions, multiple futures transactions, multiple currency
transactions (including forward currency contracts), multiple interest rate
transactions and any combination of futures, options, currency and interest rate
transactions, instead of a single derivative, as part of a single or combined
strategy when, in the judgment of the investment manager, it is in the best
interests of the fund to do so. A combined transaction will usually contain
elements of risk that are present in each of its component transactions.
Although combined transactions will normally be entered into by a fund based on
the investment manager's judgment that the combined strategies will reduce
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risk or otherwise more effectively achieve the desired portfolio management
goal, it is possible that the combination will instead increase the risks or
hinder achievement of the fund management objective.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS. Use of many derivatives by a fund
will require, among other things, that the fund segregate liquid assets with its
custodian, or a designated sub-custodian, to the extent the fund's obligations
are not otherwise 'covered' through ownership of the underlying security,
financial instrument or currency. In general, either the full amount of any
obligation by a fund to pay or deliver securities or assets must be covered at
all times by the securities, instruments or currency required to be delivered,
or, subject to any regulatory restrictions, an amount of liquid assets at least
equal to the current amount of the obligation must be segregated with the
custodian or sub-custodian in accordance with procedures established by the
Board of Directors. The segregated assets cannot be sold or transferred unless
equivalent assets are substituted in their place or it is no longer necessary to
segregate them. A call option on securities written by a fund, for example, will
require the fund to hold the securities subject to the call (or securities
convertible into the needed securities without additional consideration) or to
segregate liquid high grade debt obligations sufficient to purchase and deliver
the securities if the call is exercised. A call option sold by a fund on an
index will require the fund to own portfolio securities that correlate with the
index or to segregate liquid high grade debt obligations equal to the excess of
the index value over the exercise price on a current basis. A put option on
securities written by a fund will require the fund to segregate liquid high
grade debt obligations equal to the exercise price. Except when a fund enters
into a forward contract in connection with the purchase or sale of a security
denominated in a foreign currency or for other non-speculative purposes, which
requires no segregation, a currency contract that obligates the fund to buy or
sell a foreign currency will generally require the fund to hold an amount of
that currency or liquid securities denominated in that currency equal to the
fund's obligations or to segregate liquid high grade debt obligations equal to
the amount of the fund's obligations.
OTC options entered into by a fund, including those on securities, currency,
financial instruments or indices, and OCC-issued and exchange-listed index
options will generally provide for cash settlement, although the fund will not
be required to do so. As a result, when a fund sells these instruments it will
segregate an amount of assets equal to its obligations under the options. OCC-
issued and exchange-listed options sold by a fund other than those described
above generally settle with physical delivery, and the fund will segregate an
amount of assets equal to the full value of the option. OTC options settling
with physical delivery or with an election of either physical delivery or cash
settlement will be treated the same as other options settling with physical
delivery.
In the case of a futures contract or an option on a futures contract, a fund
must deposit initial margin and, in some instances, daily variation margin in
addition to segregating liquid assets sufficient to meet its obligations to
purchase or provide securities or currencies, or to pay the amount owed at the
expiration of an index-based futures contract. A fund will accrue the net amount
of the excess, if any, of its obligations relating to swaps over its
entitlements with respect to each swap on a daily basis and will segregate with
its custodian, or designated sub-custodian, an amount of liquid assets having an
aggregate value equal to at least the accrued excess. Caps, floors and collars
require segregation of liquid assets with a value equal to the fund's net
obligation, if any.
Derivatives may be covered by means other than those described above when
consistent with applicable regulatory policies. A fund may also enter into
offsetting transactions so that its combined position, coupled with any
segregated assets, equals its net outstanding obligation in related derivatives.
A fund could purchase a put option, for example, if the strike price of that
option is the same or higher than the strike price of a put option sold by the
fund. Moreover, instead of segregating assets if it holds a futures contract or
forward contract, a fund could purchase a put option on the same futures
contract or forward contract with a strike price as high or higher than the
price of the contract held. Other derivatives may also be offset in
combinations. If the offsetting transaction terminates at the time of or after
the primary transaction, no segregation is required, but if it terminates prior
to that time, assets equal to any remaining obligation would need to be
segregated.
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RISK FACTORS
RULE 144A SECURITIES
To the extent that liquid Rule 144A securities that a fund holds become
illiquid, due to the lack of sufficient qualified institutional buyers or market
or other conditions, the percentage of a fund's assets invested in illiquid
assets would increase. The investment manager, under the supervision of the
Boards of Directors, will monitor Fund investments in Rule 144A securities and
will consider appropriate measures to enable a fund to maintain sufficient
liquidity for operating purposes and to meet redemption requests.
FIXED INCOME SECURITIES
Many fixed income securities contain call or buy-back features that permit their
issuers to call or repurchase the securities from their holders. Such securities
may present risks based on payment expectations. Although a fund would typically
receive a premium if an issuer were to redeem a security, if an issuer exercises
such a 'call option' and redeems the security during a time of declining
interest rates, a fund may realize a capital loss on its investment if the
security was purchased at a premium and a fund may have to replace the called
security with a lower yielding security, resulting in a decreased rate of return
to the fund.
BANK OBLIGATIONS
Banks are subject to extensive governmental regulations which may limit both the
amounts and types of loans and other financial commitments which may be made and
interest rates and fees which may be charged. The profitability of this industry
is largely dependent upon the availability and cost of capital funds for the
purpose of financing lending operations under prevailing money market
conditions. Also, general economic conditions play an important part in the
operations of this industry and exposure to credit losses arising from possible
financial difficulties of borrowers might affect a bank's ability to meet its
obligations.
Investors should also be aware that securities issued or guaranteed by foreign
banks, foreign branches of U.S. banks, and foreign government and private
issuers may involve investment risks in addition to those relating to domestic
obligations. See 'Risk Factors.' None of the funds will purchase bank
obligations which SBAM or the applicable sub-adviser believes, at the time of
purchase, will be subject to exchange controls or foreign withholding taxes;
however, there can be no assurance that such laws may not become applicable to
certain of the funds' investments. In the event unforeseen exchange controls or
foreign withholding taxes are imposed with respect to a fund's investments, the
effect may be to reduce the income received by the fund on such investments.
ASSET-BACKED SECURITIES
Asset-backed securities present certain risks which are, generally, related to
limited interests, if any, in related collateral. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. Most issuers of automobile receivables permit the servicers to
retain possession of the underlying obligations. If the servicer were to sell
these obligations to another party, there is a risk that the purchaser would
acquire an interest superior to that of the holders of the related automobile
receivables. In addition, because of the large number of vehicles involved in a
typical issuance and technical requirements under state laws, the trustee for
the holders of the automobile receivables may not have a proper security
interest in all of the obligations backing such receivables. Therefore, there is
the possibility that recoveries on repossessed collateral may not, in some
cases, be available to support payments on these securities. Other types of
asset-backed securities will be subject to the risks associated with the
underlying assets. If a letter of credit or other form of credit enhancement is
exhausted or otherwise unavailable, holders of asset-backed
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securities may also experience delays in payments or losses if the full amounts
due on underlying assets are not realized. Because asset-backed securities are
relatively new, the market experience in these securities is limited and the
market's ability to sustain liquidity through all phases of the market cycle has
not been tested.
MORTGAGE-BACKED SECURITIES
Because of the reinvestment of prepayments of principal at current rates,
mortgage-backed securities may be less effective than Treasury bonds of similar
maturity at maintaining yields during periods of declining interest rates. When
interest rates rise, the value and liquidity of mortgage-backed securities may
decline sharply and generally will decline more than would be the case with
other fixed income securities; however, when interest rates decline, the value
of mortgage-backed securities may not increase as much as other fixed-income
securities due to the prepayment feature. Certain market conditions may result
in greater than expected volatility in the prices of mortgage-backed securities.
For example, in periods of supply and demand imbalances in the market for such
securities and/or in periods of sharp interest rate movements, the prices of
mortgage-backed securities may fluctuate to a greater extent than would be
expected from interest rate movements alone.
Prepayments on a pool of mortgage loans are influenced by a variety of economic,
geographic, social and other factors, including changes in mortgagors' housing
needs, job transfers, unemployment, mortgagors' net equity in the mortgaged
properties and servicing decisions. Generally, however, prepayments on fixed
rate mortgage loans will increase during a period of falling interest rates.
Accordingly, amounts available for reinvestment by a fund are likely to be
greater during a period of relatively low interest rates and, as a result,
likely to be reinvested at lower interest rates than during a period of
relatively high interest rates. This prepayment effect has been particularly
pronounced during recent years as borrowers have refinanced higher interest rate
mortgages into lower interest rate mortgages available in the marketplace.
Mortgage-backed securities may decrease in value as a result of increases in
interest rates and may benefit less than other fixed income securities from
declining interest rates because of the risk of prepayment.
INVERSE FLOATING RATE OBLIGATIONS
Inverse floaters exhibit substantially greater price volatility than fixed rate
obligations having similar credit quality, redemption provisions and maturity,
and inverse floater CMOs exhibit greater price volatility than the majority of
mortgage pass-through securities or CMOs. In addition, some inverse floater CMOs
exhibit extreme sensitivity to changes in prepayments. As a result, the yield to
maturity of an inverse floater CMO is sensitive not only to changes in interest
rates but also to changes in prepayment rates on the related underlying mortgage
assets.
HIGH YIELD SECURITIES
The secondary markets for high yield securities are not as liquid as the
secondary markets for higher rated securities. The secondary markets for high
yield securities are concentrated in relatively few market makers and
participants in the market are mostly institutional investors, including
insurance companies, banks, other financial institutions and mutual funds. In
addition, the trading volume for high yield securities is generally lower than
that for higher-rated securities and the secondary markets could contract under
adverse market or economic conditions independent of any specific adverse
changes in the condition of a particular issuer. These factors may have an
adverse effect on the ability of a fund holding such securities to dispose of
particular portfolio investments, may adversely affect the fund's net asset
value per share and may limit the ability of such a fund to obtain accurate
market quotations for purposes of valuing securities and calculating net asset
value. If a fund is not able to obtain precise or accurate market quotations for
a particular security, it will become more difficult to value such fund's
portfolio securities, and a greater degree of judgment may be necessary in
making such valuations. Less liquid secondary markets may also affect the
ability of a fund to sell securities at their fair value. If the secondary
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markets for high yield securities contract due to adverse economic conditions or
for other reasons, certain liquid securities in a fund's portfolio may become
illiquid and the proportion of the fund's assets invested in illiquid securities
may significantly increase.
Prices for high yield securities may be affected by legislative and regulatory
developments. These laws could adversely affect a fund's net asset value and
investment practices, the secondary market for high yield securities, the
financial condition of issuers of these securities and the value of outstanding
high yield securities. For example, federal legislation requiring the
divestiture by federally insured savings and loan associations of their
investments in high yield bonds and limiting the deductibility of interest by
certain corporate issuers of high yield bonds adversely affected the market in
recent years.
High Yield Corporate Securities. While the market values of securities rated
below investment grade and comparable unrated securities tend to react less to
fluctuations in interest rate levels than do those of higher-rated securities,
the market values of certain of these securities also tend to be more sensitive
to individual corporate developments and changes in economic conditions than
higher-rated securities. In addition, such securities present a higher degree of
credit risk. Issuers of these securities are often highly leveraged and may not
have more traditional methods of financing available to them, so that their
ability to service their debt obligations during an economic downturn or during
sustained periods of rising interest rates may be impaired. The risk of loss due
to default by such issuers is significantly greater than with investment grade
securities because such securities generally are unsecured and frequently are
subordinated to the prior payment of senior indebtedness. A fund also may incur
additional expenses to the extent that it is required to seek recovery upon a
default in the payment of principal or interest on its portfolio holdings.
SOVEREIGN DEBT
Investing in fixed and floating rate high yield foreign sovereign debt
securities will expose funds investing in such securities to the direct or
indirect consequences of political, social or economic changes in the countries
that issue the securities. See 'Risk Factors.' The ability and willingness of
sovereign obligors in developing and emerging market countries or the
governmental authorities that control repayment of their external debt to pay
principal and interest on such debt when due may depend on general economic and
political conditions within the relevant country. Countries such as those in
which a fund may invest have historically experienced, and may continue to
experience, high rates of inflation, high interest rates, exchange rate trade
difficulties and extreme poverty and unemployment. Many of these countries are
also characterized by political uncertainty or instability. Additional factors
which may influence the ability or willingness to service debt include, but are
not limited to, a country's cash flow situation, the availability of sufficient
foreign exchange on the date a payment is due, the relative size of its debt
service burden to the economy as a whole, and its government's policy towards
the International Monetary Fund, the World Bank and other international
agencies.
The ability of a foreign sovereign obligor to make timely payments on its
external debt obligations will also be strongly influenced by the obligor's
balance of payments, including export performance, its access to international
credits and investments, fluctuations in interest rates and the extent of its
foreign reserves. A country whose exports are concentrated in a few commodities
or whose economy depends on certain strategic imports could be vulnerable to
fluctuations in international prices of these commodities or imports. To the
extent that a country receives payment for its exports in currencies other than
U.S. dollars, its ability to make debt payments denominated in U.S. dollars
could be adversely affected. If a foreign sovereign obligor cannot generate
sufficient earnings from foreign trade to service its external debt, it may need
to depend on continuing loans and aid from foreign governments, commercial banks
and multilateral organizations, and inflows of foreign investment. The
commitment on the part of these foreign governments, multilateral organizations
and others to make such disbursements may be conditioned on the government's
implementation of economic reforms and/or economic performance and the timely
service of its obligations. Failure to implement such reforms, achieve such
levels of economic performance or
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repay principal or interest when due may result in the cancellation of such
third parties' commitments to lend funds, which may further impair the obligor's
ability or willingness to timely service its debts. The cost of servicing
external debt will also generally be adversely affected by rising international
interest rates, because many external debt obligations bear interest at rates
which are adjusted based upon international interest rates. The ability to
service external debt will also depend on the level of the relevant government's
international currency reserves and its access to foreign exchange. Currency
devaluations may affect the ability of a sovereign obligor to obtain sufficient
foreign exchange to service its external debt.
As a result of the foregoing, a governmental obligor may default on its
obligations. If such an event occurs, a fund may have limited legal recourse
against the issuer and/or guarantor. Remedies must, in some cases, be pursued in
the courts of the defaulting party itself, and the ability of the holder of
foreign sovereign debt securities to obtain recourse may be subject to the
political climate in the relevant country. In addition, no assurance can be
given that the holders of commercial bank debt will not contest payments to the
holders of other foreign sovereign debt obligations in the event of default
under their commercial bank loan agreements.
Sovereign obligors in developing and emerging market countries are among the
world's largest debtors to commercial banks, other governments, international
financial organizations and other financial institutions. These obligors have in
the past experienced substantial difficulties in servicing their external debt
obligations, which led to defaults on certain obligations and the restructuring
of certain indebtedness. Restructuring arrangements have included, among other
things, reducing and rescheduling interest and principal payments by negotiating
new or amended credit agreements or converting outstanding principal and unpaid
interest to Brady Bonds, and obtaining new credit to finance interest payments.
Holders of certain foreign sovereign debt securities may be requested to
participate in the restructuring of such obligations and to extend further loans
to their issuers. There can be no assurance that the Brady Bonds and other
foreign sovereign debt securities in which certain of the funds may invest will
not be subject to similar restructuring arrangements or to requests for new
credit which may adversely affect a fund's holdings. Furthermore, certain
participants in the secondary market for such debt may be directly involved in
negotiating the terms of these arrangements and may therefore have access to
information not available to other market participants.
PRIVATELY ISSUED MORTGAGE SECURITIES
The ratings of mortgage securities for which third-party credit enhancement
provides liquidity protection or protection against losses from default are
generally dependent upon the continued creditworthiness of the provider of the
credit enhancement. The ratings of such securities could be subject to reduction
in the event of deterioration in the creditworthiness of the credit enhancement
provider even in cases where the delinquency and loss experience on the
underlying pool of assets is better than expected. There can be no assurance
that the private issuers or credit enhancers of mortgage-backed securities can
meet their obligations under the relevant policies or other forms of credit
enhancement.
Examples of credit support arising out of the structure of the transaction
include 'senior-subordinated securities' (multiple class securities with one or
more classes subordinate to other classes as to the payment of principal thereof
and interest thereon, with the result that defaults on the underlying assets are
borne first by the holders of the subordinated class), creation of 'reserve
funds' (where cash or investments sometimes funded from a portion of the
payments on the underlying assets are held in reserve against future losses) and
'over-collateralization' (where the scheduled payments on, or the principal
amount of, the underlying assets exceed those required to make payment of the
securities and pay any Servicing or other fees). The degree of credit support
provided for each issue is generally based on historical information with
respect to the level of credit risk associated with the underlying assets.
Delinquency or loss in excess of that which is anticipated could adversely
affect the return on an investment in such security.
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FOREIGN SECURITIES
General. Investors should recognize that investing in the securities of foreign
issuers involves special considerations which are not typically associated with
investing in the securities of U.S. issuers. Investments in securities of
foreign issuers may involve risks arising from differences between U.S. and
foreign securities markets, including less volume, much greater price volatility
in and illiquidity of certain foreign securities markets, different trading and
settlement practices and less governmental supervision and regulation, from
changes in currency exchange rates, from high and volatile rates of inflation,
from economic, social and political conditions and, as with domestic
multinational corporations, from fluctuating interest rates.
Emerging Market Countries. Investment in certain emerging market securities is
restricted or controlled to varying degrees which may at times limit or preclude
investment in certain emerging market securities and increase the costs and
expenses of a fund. Certain emerging market countries require governmental
approval prior to investments by foreign persons, limit the amount of investment
by foreign persons in a particular issuer, limit the investment by foreign
persons only to a specific class of securities of an issuer that may have less
advantageous rights than other classes, restrict investment opportunities in
issuers in industries deemed important to national interests and/or impose
additional taxes on foreign investors.
Certain emerging market countries may require governmental approval for the
repatriation of investment income, capital or the proceeds of sales of
securities by foreign investors which could adversely affect a fund. In
addition, if a deterioration occurs in the country's balance of payments, it
could impose temporary restrictions on foreign capital remittances. Investing in
local markets in emerging market countries may require a fund to adopt special
procedures, seek local government approvals or take other actions, each of which
may involve additional costs to the fund.
Transaction Costs. Other investment risks include the possible imposition of
foreign withholding taxes on certain amounts of a fund's income, the possible
seizure or nationalization of foreign assets and the possible establishment of
exchange controls, expropriation, confiscatory taxation, other foreign
governmental laws or restrictions which might affect adversely payments due on
securities held by a fund, the lack of extensive operating experience of
eligible foreign subcustodians and legal limitations on the ability of a fund to
recover assets held in custody by a foreign subcustodian in the event of the
subcustodian's bankruptcy. Moreover, brokerage commissions and other
transactions costs on foreign securities exchanges are generally higher than in
the United States.
In addition, there may be less publicly-available information about a foreign
issuer than about a U.S. issuer, and foreign issuers may not be subject to the
same accounting, auditing and financial record-keeping standards and
requirements as U.S. issuers. In particular, the assets and profits appearing on
the financial statements of an emerging market country issuer may not reflect
its financial position or results of operations in the way they would be
reflected and the financial statements been prepared in accordance with U.S.
generally accepted accounting principles. In addition, for an issuer that keeps
accounting records in local currency, inflation accounting rules may require,
for both tax and accounting purposes, that certain assets and liabilities be
restated on the issuer's balance sheet in order to express items in terms of
currency of constant purchasing power. Inflation accounting may indirectly
generate losses or profits. Consequently, financial data may be materially
affected by restatements for inflation and may not accurately reflect the real
condition of those issuers and securities markets. See 'High Yield Securities.'
Finally, in the event of a default in any such foreign obligations, it may be
more difficult for a fund to obtain or enforce a judgment against the issuers of
such obligations. Risks associated with international investments and investing
in smaller capital markets are heightened for investments in emerging market
countries. For example, some of the currencies of emerging market countries have
experienced devaluations relative to the U.S. dollar, and major adjustments have
been made periodically in certain of such currencies. Certain of such countries
face serious exchange constraints. In addition, governments of many emerging
market countries have exercised and continue to exercise substantial influence
over many aspects of the private sector. In certain cases, the government owns
or controls many companies. Accordingly, government actions in the future
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could have a significant effect on economic conditions in developing countries
which could affect private sector companies and consequently, the value of
certain securities held in a fund's portfolio.
Certain markets are in only the earliest stages of development. There is also a
high concentration of market capitalization and trading volume in a small number
of issuers representing a limited number of industries, as well as a high
concentration of investors and financial intermediaries. Many of such markets
also may be affected by developments with respect to more established markets in
the region. Brokers in emerging market countries typically are fewer in number
and less capitalized than brokers in the United States. These factors, combined
with the U.S. regulatory requirements for open-end investment companies and the
restrictions on foreign investment, result in potentially fewer investment
opportunities for a fund and may have an adverse impact on the investment
performance of a fund.
There generally is less governmental supervision and regulation of exchanges,
brokers and issuers in foreign countries than there is in the United States. For
example, there may be no comparable provisions under certain foreign laws to
insider trading and similar investor protection securities laws that apply with
respect to securities transactions consummated in the United States. Further,
brokerage commissions and other transaction costs on foreign securities
exchanges generally are higher than in the United States.
With respect to investments in certain emerging market countries, different
legal standards may have an adverse impact on a fund. For example, while the
potential liability of a shareholder in a U.S. corporation with respect to acts
of the corporation is generally limited to the amount of the shareholder's
investment, the notion of limited liability is less clear in certain emerging
market countries. Similarly, the rights of investors in emerging market
companies may be more limited than those of shareholders of U.S. corporations.
In some countries, banks or other financial institutions may constitute a
substantial number of the leading companies or companies with the most actively
traded securities. The Investment Company Act of 1940, as amended (the '1940
Act'), limits a fund's ability to invest in any equity security of an issuer
which, in its most recent fiscal year, derived more than 15% of its revenues
from 'securities related activities,' as defined by the rules thereunder. These
provisions may also restrict a fund's investments in certain foreign banks and
other financial institutions.
The manner in which foreign investors may invest in companies in certain
emerging market countries, as well as limitations on such investments, also may
have an adverse impact on the operations of a fund. For example, the fund may be
required in some countries to invest initially through a local broker or other
entity and then have the shares purchased re-registered in the name of the fund.
Re-registration may in some instances not occur on a timely basis, resulting in
a delay during which the fund may be denied certain of its rights as an
investor.
Foreign markets have different clearance and settlement procedures, and in
certain markets there have been times when settlements have failed to keep pace
with the volume of securities transactions, making it difficult to conduct such
transactions. Further, satisfactory custodial services for investment securities
may not be available in some countries having smaller, emerging capital markets,
which may result in a fund incurring additional costs and delays in transporting
and custodying such securities outside such countries. Delays in settlement or
other problems could result in periods when assets of a fund are uninvested and
no return is earned thereon. The inability of a fund to make intended security
purchases due to settlement problems or the risk of intermediary counterparty
failures could cause a fund to forego attractive investment opportunities. The
inability to dispose of a portfolio security due to settlement problems could
result either in losses to a fund due to subsequent declines in the value of
such portfolio security or, if the fund has entered into a contract to sell the
security, could result in possible liability to the purchaser.
Rules adopted under the 1940 Act permit a fund to maintain its foreign
securities and cash in the custody of certain eligible non-U.S. banks and
securities depositories. Certain banks in foreign countries may not be 'eligible
sub-custodians,' as defined in the 1940 Act, for a fund, in which event the fund
may be precluded from purchasing securities in certain foreign countries in
which it otherwise would invest or which may result in the fund's incurring
additional costs and delays in
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<PAGE>
providing transportation and custody services for such securities outside of
such countries. A fund may encounter difficulties in effecting on a timely basis
portfolio transactions with respect to any securities of issuers held outside
their countries. Other banks that are eligible foreign sub-custodians may be
recently organized or otherwise lack extensive operating experience. In
addition, in certain countries there may be legal restrictions or limitations on
the ability of a fund to recover assets held in custody by foreign
sub-custodians in the event of the bankruptcy of the sub-custodian.
BRADY BONDS
Investors should recognize that Brady Bonds have been issued only recently, and
accordingly, do not have a long payment history. Brady Bonds which have been
issued to date are rated in the categories 'BB' or 'B' by S&P or 'Ba' or 'B' by
Moody's or, in cases in which a rating by S&P or Moody's has not been assigned,
are generally considered by the investment manager to be of comparable quality.
Sovereign obligors in developing and emerging market countries are among the
world's largest debtors to commercial banks, other governments, international
financial organizations and other financial institutions. These obligors have in
the past experienced substantial difficulties in servicing their external debt
obligations, which led to defaults on certain obligations and the restructuring
of certain indebtedness. Restructuring arrangements have included, among other
things, reducing and rescheduling interest and principal payments by negotiating
new or amended credit agreements or converting outstanding principal and unpaid
interest to Brady Bonds, and obtaining new credit to finance interest payments.
Holders of certain foreign sovereign debt securities may be requested to
participate in the restructuring of such obligations and to extend further loans
to their issuers. There can be no assurance that the Brady Bonds and other
foreign Sovereign debt securities in which certain of the Funds may invest will
not be subject to similar restructuring arrangements or to requests for new
credit which may adversely affect a fund's holdings. Furthermore, certain
participants in the secondary market for such debt may be directly involved in
negotiating the terms of these arrangements and may therefore have access to
information not available to other market participants.
SECURITIES LENDING
A fund may have difficulty disposing of assignments and loan participations.
Because the market for such instruments is not highly liquid, the funds
anticipate that such instruments could be sold only to a limited number of
institutional investors. The lack of a highly liquid secondary market may have
an adverse impact on the value of such instruments and will have an adverse
impact on a fund's ability to dispose of particular assignments or loan
participations in response to a specific economic event, such as deterioration
in the creditworthiness of the borrower.
The Board of Directors has adopted policies and procedures for the purpose of
determining whether assignments and loan participations are liquid or illiquid.
Pursuant to those policies and procedures, the Board of Directors has delegated
to SBAM the determination as to whether a particular loan participation or
assignment is liquid or illiquid, requiring that consideration be given to,
among other things, the frequency of quotes, the number of dealers willing to
sell and the number of potential purchasers, the nature of the loan
participation or assignment and the time needed to dispose of it and the
contractual provisions of the relevant documentation. To the extent that liquid
assignments and loan participation that a fund holds become illiquid, due to the
lack of sufficient buyers or market or other conditions, the percentage of a
fund's assets invested in illiquid assets would increase. SBAM, under the
supervision of the Board of Directors, monitors Fund investments in assignments
and loan participations and will consider appropriate measures to enable a fund
to maintain sufficient liquidity for operating purposes and to meet redemption
requests.
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In the event of the bankruptcy of the other party to a securities loan, a fund
could experience delays in recovering the securities it lent. To the extent
that, in the meantime, the value of the securities a fund lent has increased,
the fund could experience a loss.
SMALL CAPITALIZATION COMPANIES
Investments in Small Capitalization Companies may involve greater risks and
volatility than investments in larger companies. Small Capitalization Companies
may be at an earlier stage of development, may be subject to greater business
risks, may have limited product lines, reduced market liquidity for, and more
abrupt or erratic price movements in, the trading of their shares, limited
financial resources and less depth in management than more established
companies. In addition, Small Capitalization Companies may have difficulty
withstanding competition from larger more established companies in their
industries.
DERIVATIVES
Derivatives have special risks associated with them, including possible default
by the Counterparty to the transaction, illiquidity and, to the extent the
investment manager's view as to certain market movements is incorrect, the risk
that the use of the derivatives could result in losses greater than if they had
not been used. Use of put and call options could result in losses to a fund,
force the sale or purchase of portfolio securities at inopportune times or for
prices higher than (in the case of put options) or lower than (in the case of
call options) current market values, or cause a fund to hold a security it might
otherwise sell.
The use of futures and options transactions entails certain special risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related securities position of a
fund could create the possibility that losses on the hedging instrument are
greater than gains in the value of the fund's position. In addition, futures and
options markets could be illiquid in some circumstances and certain
over-the-counter options could have no markets. As a result, in certain markets,
a fund might not be able to close out a transaction without incurring
substantial losses. Although a fund's use of futures and options transactions
for hedging should tend to minimize the risk of loss due to a decline in the
value of the hedged position, at the same time it will tend to limit any
potential gain to the fund that might result from an increase in value of the
position. There is also the risk of loss by a fund of margin deposits in the
event of bankruptcy of a broker with whom the fund has an open position in a
futures contract or option thereon. Finally, the daily variation margin
requirements for futures contracts create a greater ongoing potential financial
risk than would purchases of options, in which case the exposure is limited to
the cost of the initial premium. However, because option premiums paid by a fund
are small in relation to the market value of the investments underlying the
options, buying options can result in large amounts of leverage. The leverage
offered by trading in options could cause a fund's net asset value to be subject
to more frequent and wider fluctuation than would be the case if the fund did
not invest in options.
As is the case with futures and options strategies, the effective use of swaps
and related transactions by a fund may depend, among other things, on a fund's
ability to terminate the transactions at times when SBAM deems it desirable to
do so. To the extent a fund does not, or cannot, terminate such a transaction in
a timely manner, a fund may suffer a loss in excess of any amounts that it may
have received, or expected to receive, as a result of entering into the
transaction.
Currency hedging involves some of the same risks and considerations as other
transactions with similar instruments. Currency transactions can result in
losses to a fund if the currency being hedged fluctuates in value to a degree or
in a direction that is not anticipated. Further, the risk exists that the
perceived linkage between various currencies may not be present or may not be
present during the particular time that the fund is engaging in proxy hedging.
Currency transactions are also subject to risks different from those of other
portfolio transactions. Because currency control is of great importance to the
issuing governments and influences economic
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<PAGE>
planning and policy, purchases and sales of currency and related instruments can
be adversely affected by government exchange controls, limitations or
restrictions on repatriation of currency, and manipulations or exchange
restrictions imposed by governments. These forms of governmental actions can
result in losses to a fund if it is unable to deliver or receive currency or
monies in settlement of obligations and could also cause hedges it has entered
into to be rendered useless, resulting in full currency exposure as well as
incurring transaction costs. Buyers and sellers of currency futures contracts
are subject to the same risks that apply to the use of futures contracts
generally. Further, settlement of a currency futures contract for the purchase
of most currencies must occur at a bank based in the issuing nation. Trading
options on currency futures contracts is relatively new, and the ability to
establish and close out positions on these options is subject to the maintenance
of a liquid market that may not always be available. Currency exchange rates may
fluctuate based on factors extrinsic to that country's economy.
Because the amount of interest and/or principal payments which the issuer of
indexed debt securities is obligated to make is linked to the prices of other
securities, securities indices, currencies, or other financial indicators, such
payments may be significantly greater or less than payment obligations in
respect of other types of debt securities. As a result, an investment in indexed
debt securities may be considered speculative. Moreover, the performance of
indexed securities depends to a great extent on the performance of and may be
more volatile than the security, currency, or other instrument to which they are
indexed, and may also be influenced by interest rate changes in the United
States and abroad. At the same time, indexed securities are subject to the
credit risks associated with the issuer of the security, and their values may
decline substantially if the issuer's creditworthiness deteriorates.
Losses resulting from the use of derivatives will reduce a fund's net asset
value, and possibly income, and the losses can be greater than if derivatives
had not been used.
Derivatives Outside the United States. When conducted outside the United States,
derivatives may not be regulated as rigorously as in the United States, may not
involve a clearing mechanism and related guarantees, and will be subject to the
risk of governmental actions affecting trading in, or the prices of, foreign
securities, currencies and other instruments. In addition, the price of any
foreign futures or foreign options contract and, therefore, the potential profit
and loss thereon, may be affected by any variance in the foreign exchange rate
between the time an order is placed and the time it is liquidated, offset or
exercised. The value of positions taken as part of non-U.S. derivatives also
could be adversely affected by: (1) other complex foreign political, legal and
economic factors, (2) lesser availability of data on which to make trading
decisions than in the United States, (3) delays in the fund's ability to act
upon economic events occurring in foreign markets during nonbusiness hours in
the United States, (4) the imposition of different exercise and settlement terms
and procedures and margin requirements than in the United States and (5) lower
trading volume and liquidity.
Options. A fund's ability to close out its position as a purchaser or seller of
an OCC-issued or exchange-listed put or call option is dependent, in part, upon
the liquidity of the particular option market. Among the possible reasons for
the absence of a liquid option market on an exchange are: (1) insufficient
trading interest in certain options, (2) restrictions on transactions imposed by
an exchange, (3) trading halts, suspensions or other restrictions imposed with
respect to particular classes or series of options or underlying securities,
including reaching daily price limits, (4) interruption of the normal operations
of the OCC or an exchange, (5) inadequacy of the facilities of an exchange or
the OCC to handle current trading volume or (6) a decision by one or more
exchanges to discontinue the trading of options (or a particular class or series
of options), in which event the relevant market for that option on that exchange
would cease to exist, although any such outstanding options on that exchange
would continue to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours during
which the underlying financial instruments are traded. To the extent that the
option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that would not be reflected in the corresponding option
markets.
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Unless the parties provide for it, no central clearing or guaranty function is
involved in an OTC option. As a result, if a Counterparty fails to make or take
delivery of the security, currency or other instrument underlying an OTC option
it has entered into with the fund or fails to make a cash settlement payment due
in accordance with the terms of that option, the fund will lose any premium it
paid for the option as well as any anticipated benefit of the transaction. Thus,
the investment manager must assess the creditworthiness of each such
Counterparty or any guarantor or credit enhancement of the Counterparty's credit
to determine the likelihood that the terms of the OTC option will be met. A fund
will enter into OTC option transactions only with U.S. Government securities
dealers recognized by the Federal Reserve Bank of New York as 'primary dealers,'
or broker-dealers, domestic or foreign banks, or other financial institutions
that the investment manager deems to be creditworthy. In the absence of a change
in the current position of the staff of the SEC, OTC options purchased by a fund
and the amount of a fund's obligation pursuant to an OTC option sold by the fund
(the cost of the sell-back plus the in-the-money amount, if any) or the value of
the assets held to cover such options will be deemed illiquid.
Interest Rate and Equity Swap Transactions. The use of interest rate and equity
swaps is a highly specialized activity which involves investment techniques and
risks different from those associated with ordinary portfolio securities
transactions. If the investment manager is incorrect in its forecasts of market
values, interest rates and other applicable factors, the investment performance
of a fund would diminish compared with what it would have been if these
investment techniques were not utilized. Moreover, even if the investment
manager is correct in its forecasts, there is a risk that the swap position may
correlate imperfectly with the price of the asset or liability being hedged.
Because swaps and related transactions are bilateral contractual arrangements
between a fund and counterparties to the transactions, the fund's ability to
terminate such an arrangement may be considerably more limited than in the case
of an exchange traded instrument. To the extent a fund does not, or cannot,
terminate such a transaction in a timely manner, the fund may suffer a loss in
excess of any amounts that it may have received, or expected to receive, as a
result of entering into the transaction. If the other party to a swap defaults,
a fund's risk of loss is the net amount of payments that the fund contractually
is entitled to receive, if any. A fund may purchase and sell caps, floors and
collars without limitation, subject to the segregated account requirement
described above.
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INVESTMENT LIMITATIONS
Unless otherwise indicated, the investment restrictions described below are
fundamental investment policies which may be changed only when permitted by law,
if applicable, and approved by the holders of a majority of the applicable
fund's outstanding voting securities, which, as defined by the 1940 Act means
the lesser of: (i) 67% of the shares represented at a meeting at which more than
50% of the outstanding shares are represented; or (ii) more than 50% of the
outstanding shares. Except for: (i) the investment restrictions set forth below;
and (ii) each fund's investment objective(s) as described in the Prospectus, the
other policies and percentage limitations referred to in this SAI and in the
Prospectus are not fundamental policies of the funds and may be changed by vote
of the Board of Directors without shareholder approval.
If a percentage restriction on investment or utilization of assets set forth in
this SAI or the Prospectus is adhered to at the time a transaction is effected,
a later change in percentage resulting from changing values will not be
considered a violation.
INVESTORS FUND, TOTAL RETURN FUND, HIGH YIELD BOND FUND, STRATEGIC BOND FUND,
AND SMALL CAP GROWTH FUND may not:
(1) purchase securities of any issuer if the purchase would cause more than
5% of the value of each fund's total assets to be invested in the securities
of any one issuer (excluding securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities and bank obligations) or cause
more than 10% of the voting securities of the issuer to be held by a fund,
except that up to 25% of the value of each fund's total assets may be
invested without regard to this restriction and provided that each fund may
invest all or substantially all of its assets in another registered
investment company having substantially the same investment objective(s) and
policies and substantially the same investment restrictions as those with
respect to such fund;
(2) borrow money (including entering into reverse repurchase agreements),
except for temporary or emergency purposes and then not in excess of 10% of
the value of the total assets of the applicable fund at the time the
borrowing is made (33 1/3% in the case of the International Equity Fund and
the Large Cap Growth Fund measured at all times not simply at the time of
borrowing), except that for the purpose of this restriction, short-term
credits necessary for settlement of securities transactions are not
considered borrowings (a fund will not purchase additional securities at any
time its borrowings exceed 5% of total assets, provided, however, that a
fund may increase its interest in another registered investment company
having substantially the same investment objective(s) and policies and
substantially the same investment restrictions as those with respect to such
fund while such borrowings are outstanding); or
(3) invest more than 25% of the total assets of each fund in the securities
of issuers having their principal activities in any particular industry,
except for obligations issued or guaranteed by the U.S. government, its
agencies or instrumentalities or by any state, territory or any possession
of the United States or any of their authorities, agencies,
instrumentalities or political subdivisions, or with respect to repurchase
agreements collateralized by any of such obligations (for purposes of this
restriction, supranational issuers will be considered to comprise an
industry as will each foreign government that issues securities purchased by
a fund), provided, however, that each fund may invest all or substantially
all of its assets in another registered investment company having
substantially the same investment objective(s) and policies and
substantially the same investment restrictions as those with respect to such
fund.
For purposes of investment limitations (1) and (3) above, both the borrower
under a loan and the lender selling a participation will be considered an
'issuer.'
CAPITAL FUND may not:
(1) borrow money, except as described under 'Investment Objective and
Policies' and except that for the purpose of this restriction, short-term
credits necessary for settlement of securities transactions are not
considered borrowings.
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(2) invest more than 25% of the total assets of the fund in the securities
of issuers having their principal activities in any particular industry,
except for obligations issued or guaranteed by the U.S. government, its
agencies or instrumentalities or by any state, territory or any possession
of the United States or any of their authorities, agencies,
instrumentalities or political subdivisions, or with respect to repurchase
agreements collateralized by any of such obligations (for purposes of this
restriction, supranational issuers will be considered to comprise an
industry as will each foreign government that issues securities purchased by
the fund), provided, however, that each fund may invest all or substantially
all of its assets in another registered investment company having
substantially the same investment objective(s) and policies and
substantially the same investment restrictions as the fund.
Each fund may not:
(1) underwrite securities of other issuers, except to the extent that the
purchase of investments directly from the issuer thereof or from an
underwriter for an issuer and the later disposition of such securities in
accordance with a fund's investment program may be deemed to be an
underwriting;
(2) purchase or sell real estate, although a fund may purchase and sell
securities of companies which deal in real estate, may purchase and sell
securities which are secured by interests in real estate and may invest in
mortgages and mortgage-backed securities;
(3) purchase or sell commodities or commodity contracts except that a fund
may engage in derivative transactions to the extent permitted by its
investment policies as stated in the Prospectus and this SAI;
(4) make loans, except that (a) a fund may purchase and hold debt securities
in accordance with its investment objective(s) and policies, (b) a fund may
enter into repurchase agreements with respect to portfolio securities,
(c) a fund may lend portfolio securities with a value not in excess of
one-third of the value of its total assets, provided that collateral
arrangements with respect to options, forward currency and futures
transactions will not be deemed to involve loans of securities, and
(d) delays in the settlement of securities transactions will not be
considered loans; or
(5) purchase the securities of other investment companies except as
permitted under the 1940 Act or in connection with a merger, consolidation,
acquisition or reorganization.
(6) issue any senior security except as permitted by the 1940 Act.
Each fund may, in the future, seek to achieve its investment objective(s) by
investing all of its assets in a no-load, open-end management investment company
for which SBAM serves as investment manager and which has substantially the same
investment objective(s) and policies and substantially the same investment
restrictions as those applicable to such fund. In such event, the fund's
applicable investment advisory agreement would be terminated since the
investment management would be performed by or on behalf of such other
registered investment company.
PORTFOLIO TURNOVER
Purchases and sales of portfolio securities may be made as considered advisable
by the investment manager in the best interests of the shareholders. Each Fund
intends to limit portfolio trading to the extent practicable and consistent with
its investment objectives. Each Fund's portfolio turnover rate may vary from
year to year, as well as within a year. Short-term gains realized from portfolio
transactions are taxable to shareholders as ordinary income. In addition, higher
portfolio turnover rates can result in corresponding increases in portfolio
transaction costs for a fund. See 'Portfolio Transactions.'
PORTFOLIO TRANSACTIONS
Subject to policy established by the Board of Directors, the investment manager
is primarily responsible for each fund's portfolio decisions and the placing of
the fund's portfolio transactions.
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Fixed-income, certain short-term securities and certain equities normally will
be purchased or sold from or to issuers directly or to dealers serving as market
makers for the securities at a net price, which may include dealer spreads and
underwriting commissions. Equity securities may also be purchased or sold
through brokers who will be paid a commission.
The general policy of each fund in selecting brokers and dealers is to obtain
the best results taking into account factors such as the general execution and
operational facilities of the broker or dealer, the type and size of the
transaction involved, the creditworthiness of the broker or dealer, the
stability of the broker or dealer, execution and settlement capabilities, time
required to negotiate and execute the trade, research services and the
investment manager's arrangements related thereto (as described below), overall
performance, the dealer's risk in positioning the securities involved, and the
broker's commissions and dealer's spread or mark-up. While the investment
manager generally seeks the best price in placing its orders, a fund may not
necessarily be paying the lowest price available.
Notwithstanding the above, in compliance with Section 28(e) of the Securities
Exchange Act of 1934, the investment manager may select brokers who charge a
commission in excess of that charged by other brokers, if the investment manager
determines in good faith that the commission to be charged is reasonable in
relation to the brokerage and research services provided to the investment
manager by such brokers. Research services generally consist of research or
statistical reports or oral advice from brokers and dealers regarding particular
companies, industries or general economic conditions. The investment manager may
also have arrangements with brokers pursuant to which such brokers provide
research services to the investment manager in exchange for a certain volume of
brokerage transactions to be executed by such broker. While the payment of
higher commissions increases a fund's costs, the investment manager does not
believe that the receipt of such brokerage and research services significantly
reduces its expenses as a fund's investment manager. Arrangements for the
receipt of research services from brokers may create conflicts of interest.
Research services furnished to the investment manager by brokers who effect
securities transactions for a fund may be used by the investment manager in
servicing other investment companies and accounts which it manages. Similarly,
research services furnished to the investment manager by brokers who effect
securities transactions for other investment companies and accounts which the
investment manager manages may be used by the investment manager in servicing a
fund. Not all of these research services are used by the investment manager in
managing any particular account, including the funds.
Under the 1940 Act, 'affiliated persons' of a fund are prohibited from dealing
with it as a principal in the purchase and sale of securities unless an
exemptive order allowing such transactions is obtained from the SEC. However,
each fund may purchase securities from underwriting syndicates of which the
investment manager or any of its affiliates as defined in the 1940 Act, is a
member under certain conditions, in accordance with Rule 10f-3 promulgated under
the 1940 Act.
Each fund contemplates that, consistent with the policy of obtaining the best
net results, brokerage transactions may be conducted through 'affiliated
broker/dealers,' as defined in the 1940 Act. The Board of Directors has adopted
procedures in accordance with Rule 17e-1 promulgated under the 1940 Act to
ensure that all brokerage commissions paid to such affiliates are reasonable and
fair in the context of the market in which such affiliates operate. Any such
compensation will be paid in accordance with applicable SEC regulations.
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For the fiscal year ended December 31, 1999, the Funds paid aggregate brokerage
commissions including affiliated brokerage commissions as follows:
<TABLE>
<CAPTION>
AGGREGATE BROKERAGE
BROKERAGE COMMISSION COMMISSION PAID
PAID TO SSB
---- ------
<S> <C> <C>
Capital Fund.............................. $40,985 $400
High Yield Fund........................... $ 0 $ 0
Investors Fund............................ $73,831 $474
Strategic Bond Fund....................... $ 0 $ 0
Total Return Fund......................... $ 9,876 $678
</TABLE>
TAXES
TAXATION OF A FUND
The following discussion is a brief summary of certain additional tax
considerations affecting a fund and its shareholders. No attempt is made to
present a detailed explanation of all federal, state, local and foreign tax
concerns, and the discussions set forth here and in the Prospectus do not
constitute tax advice. Investors are urged to consult their own tax advisers
with specific questions relating to federal, state, local or foreign taxes.
Each fund intends to elect to be treated as a regulated investment company (a
'RIC') under Subchapter M of the Internal Revenue Code of 1986, as amended (the
'Code'). Qualification as a RIC requires, among other things, that a fund:
(a) derive at least 90% of its gross income in each taxable year from dividends,
interest, payments with respect to securities loans and gains from the sale or
other disposition of stock or securities, foreign currencies or other income
(including gains from options, futures or forward contracts) derived with
respect to its business of investing in such stock, securities or currencies;
and (b) diversify its holdings so that, at the end of each quarter of each
taxable year: (i) at least 50% of the market value of a fund's assets is
represented by cash, cash items, U.S. government securities, securities of other
RICs and other securities with such other securities limited, in respect of any
one issuer, to an amount not greater than 5% of the value of a fund's assets and
10% of the outstanding voting securities of such issuer; and (ii) not more than
25% of the value of its assets is invested in the securities of any one issuer
(other than U.S. government securities or the securities of other RICs).
As a RIC, a fund will not be subject to federal income tax on its 'net
investment income' (i.e., its investment company taxable income, as that term is
defined in the Code, determined without regard to the deduction for dividends
paid) and 'net capital gain' (the excess of the fund's net realized long-term
capital gain over net realized short-term capital loss), if any, that it
distributes in each taxable year to its shareholders, provided that it
distributes 90% of its net investment income for such taxable year. However, a
fund would be subject to corporate income tax (currently at a maximum rate of
35%) on any undistributed net investment income and net capital gain.
A fund will be subject to a non-deductible 4% excise tax to the extent that a
fund does not distribute by the end of each calendar year: (a) at least 98% of
its ordinary income for such calendar year; (b) at least 98% of its capital gain
net income for the one-year period ending, as a general rule, on October 31 of
each year; and (c) 100% of the undistributed ordinary income and capital gain
net income from the preceding calendar years (if any) pursuant to the
calculations in (a) and (b). For this purpose, any income or gain retained by a
fund that is subject to corporate tax will be considered to have been
distributed by year-end. Each Fund intends to make sufficient distributions to
avoid imposition of both the corporate level tax and the excise tax.
A fund may make investments that produce income that is not matched by a
corresponding cash distribution to the fund, such as investments in pay-in-kind
bonds or in obligations such as certain Brady Bonds or zero-coupon securities
having original issue discount (i.e., an amount equal to the excess of the
stated redemption price of the security at maturity over its issue price), or
market discount (i.e., an amount equal to the excess of the stated redemption
price of the security over
47
<PAGE>
the basis of such bond immediately after it was acquired) if the fund elects to
accrue market discount on a current basis. A fund may engage in hedging or
derivatives transactions involving foreign currencies, forward contracts,
options and futures contracts (including options, futures and forward contracts
on foreign currencies) and short sales that may require the inclusion of income
in advance of cash receipts. In addition, income may continue to accrue for
federal income tax purposes with respect to a non-performing investment. Any
such income would be treated as income earned by a fund and therefore would be
subject to the distribution requirements of the Code. Because such income may
not be matched by a corresponding cash distribution to a fund, such Fund may be
required to borrow money or dispose of other securities to be able to make
distributions to its investors. In addition, if an election is not made to
currently accrue market discount with respect to a market discount bond, all or
a portion of any deduction for any interest expense incurred to purchase or hold
such bond may be deferred until such bond is sold or otherwise disposed.
A fund purchases shares in a 'passive foreign investment company' (a 'PFIC'),
the fund may be subject to U.S. federal income tax on a portion of any 'excess
distribution' or gain from the disposition of such shares even if such income is
distributed as a taxable dividend by the fund to its shareholders. Additional
charges in the nature of interest may be imposed on the fund in respect of
deferred taxes arising from such distributions or gains. If the fund were to
invest in a PFIC and elected to treat the PFIC as a 'qualified electing fund'
under the Code (a 'QEF'), in lieu of the foregoing requirements, the fund would
be required to include in income each year a portion of the ordinary earnings
and net capital gain of the QEF, even if not distributed to the fund.
Alternatively, under recently enacted legislation, the fund can elect to
mark-to-market at the end of each taxable year its shares in a PFIC; in this
case, the fund would recognize as ordinary income any increase in the value of
such shares, and as ordinary loss any decrease in such value to the extent it
did not exceed prior increases included in income. Under either election, the
fund might be required to recognize in a year income in excess of its
distributions from PFICs and its proceeds from dispositions of PFIC stock during
that year, and such income would nevertheless be subject to the 90% distribution
requirement and would be taken into account for purposes of the 4% excise tax.
Since the funds' shareholders are the separate accounts of Participating
Insurance Companies and the Plans, no discussion is included herein as to the
Federal income tax consequences to VA contract holders, VLI policy holders and
Plan Participants. For information concerning the Federal income tax
consequences to such holders, see the prospectus for such contract or policy or
the applicable Plan documents. VA contract holders, VLI policy holders and Plan
Participants should consult their tax advisers about the application of the
provisions of the tax law described in this statement of additional information
in light of their particular tax situations.
Dividends. Notice as to the tax status of dividends and distributions will be
mailed to shareholders annually. Dividends paid from net investment income
generally are taxable as ordinary income whether received in cash or reinvested
in additional shares. Distributions from net capital gain which are designated
as 'capital gain dividends' generally are taxable as long-term capital gain
whether received in cash or reinvested in additional shares. Since the funds'
shareholders are the separate accounts of Participating Insurance Companies and
the Plans, no discussion is included herein as to the federal income tax
consequences to VA contract holders, VLI policy holders and Plan Participants.
For information concerning the federal income tax consequences to such holders,
see the prospectus for such contract or policy or the applicable Plan documents.
Diversification. Section 817(h) of the Code requires that the investments of a
segregated asset account of an insurance company be 'adequately diversified' as
provided therein or in accordance with U.S. Treasury Regulations in order for
the account to serve as the basis for VA contracts and VLI policies. Section
817(h) and the U.S. Treasury Regulations issued thereunder provide the manner in
which a segregated asset account will treat investments in a regulated
investment company for purposes of the diversification requirements. If a fund
satisfies certain conditions, a segregated asset account owning shares of such
fund will be treated as owning the account's proportionate share of each of the
assets of the fund. Each fund intends to satisfy these conditions
48
<PAGE>
so that the shares of the fund owned by a segregated asset account of a
Participating Insurance Company will be treated as adequately diversified.
Participating Insurance Companies and Plans should consult their tax advisers
regarding specific questions as to Federal, state or local taxes.
PERFORMANCE DATA
As indicated in the Prospectus, from time to time, a fund may quote its 'yield,'
'tax-equivalent yield,' 'effective yield,' 'average annual total return' and/or
'aggregate total return' in advertisements or in reports and other
communications to shareholders and compare its performance figures to those of
other funds or accounts with similar objectives and to relevant indices.
AVERAGE ANNUAL TOTAL RETURN
A fund's 'average annual total return' figures, as described and shown in each
Prospectus, are computed according to a formula prescribed by the Commission.
The formula can be expressed as follows:
P(1+T)'pp'n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = Ending Redeemable Value of a hypothetical $1,000 payment made at the
beginning of a 1-5 or 10-year period at the end of such period (or
fractional portion thereof), assuming reinvestment of all dividends
and distributions.
The following tables set forth the average annual total returns for shares of
the Capital Fund, High Yield Bond Fund, Investors Fund, Strategic Bond Fund and
Total Return Fund (in each case, after management fee waiver and reimbursement
of certain expenses), for certain periods of time ending December 31, 1999.
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
FROM COMMENCEMENT
OF OPERATIONS THROUGH ONE YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 1999
----------------- -----------------
<S> <C> <C>
Capital Fund................................ 21.64% 22.08%
High Yield Bond Fund........................ 3.36% 5.52%
Investors Fund.............................. 11.92% 11.65%
Strategic Bond Fund......................... 3.46% 0.37%
Total Return Fund........................... 3.51% 0.78%
</TABLE>
AGGREGATE TOTAL RETURN
The 'aggregate total return' figures for each fund, as described in the
Prospectus, represent the cumulative change in the value of an investment in
fund shares of such fund for the specified period and are computed by the
following formula:
AGGREGATE TOTAL RETURN = ERV - P
-------
P
Where: P = a hypothetical initial payment of $10,000.
ERV = Ending Redeemable Value of a hypothetical $10,000 investment made
at the beginning of a 1-, 5-, or 10-year period at the end of such
period (or fractional portion thereof), assuming reinvestment of
all dividends and distributions.
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<PAGE>
The following tables set forth the aggregate total return for each Fund for
certain periods ending December 31, 1999.
AGGREGATE TOTAL RETURN
<TABLE>
<CAPTION>
FROM COMMENCEMENT
OF OPERATIONS THROUGH ONE YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 1999
----------------- -----------------
<S> <C> <C>
Capital Fund................................ 44.20% 22.08%
High Yield Bond Fund........................ 5.66% 5.52%
Investors Fund.............................. 23.43% 11.65%
Strategic Bond Fund......................... 6.57% 0.37%
Total Return Fund........................... 6.66% 0.78%
</TABLE>
THIRTY DAY YIELD
Certain funds may advertise the yields for such funds based on a 30-day (or one
month) period according to the following formula:
a-b
-----
Yield = 2[( cd + 1)'pp'6 - 1]
Any quotation of performance stated in terms of yield (whether or not based on a
30-day period) will be given no greater prominence than the information
prescribed under Commission rules. In addition, all advertisements containing
performance data of any kind will include a legend disclosing that such
performance data represents past performance and that the investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
Advertisements and communications may compare a fund's performance with that of
other mutual funds, as reported by Lipper Analytical Services, Inc. or similar
independent services or financial publications. From time to time,
advertisements and other Fund materials and communications may cite statistics
to reflect a fund's performance over time utilizing, comparisons to indices.
A fund's performance will vary from time to time depending upon market
conditions, the composition of its portfolio and operating expenses.
Consequently, any given performance quotation should not be considered
representative of the performance of fund shares for any specified period in the
future. Because performance will vary, it may not provide a basis for comparing
an investment in Fund shares with certain bank deposits or other investments
that pay a fixed return for a stated period of time. Investors comparing a
fund's performance with that of other mutual funds should give consideration to
the nature, quality and maturity of the respective investment companies'
portfolio securities and market conditions. An investor's principal is not
guaranteed by any Fund.
NET ASSET VALUE
In calculating net asset value, portfolio securities listed or traded on
national securities exchanges, or reported by the National Association of
Securities Dealers Automated Quotation System ('Nasdaq') National Market
reporting system, are valued at the last sale price, or, if there have been no
sales on that day, at the mean of the current bid and ask price which represents
the current value of the security. Over-the-counter securities are valued at the
mean of the current bid and ask price.
Securities that are primarily traded on foreign exchanges generally are valued
at the closing price of such securities on their respective exchanges, except
that if the investment manager is of the opinion that such price would result in
an inappropriate value for a security, including as a result of an occurrence
subsequent to the time a value was so established then the fair value of those
securities may be determined by consideration of other factors by or under the
direction of the Board of Directors or its delegates. In valuing assets, prices
denominated in foreign currencies are
50
<PAGE>
converted to U.S. dollar equivalents at the current exchange rate. Securities
may be valued by independent pricing services which use prices provided by
market-makers or estimates of market values obtained from yield data relating to
instruments or securities with similar characteristics. Short-term obligations
with maturities of 60 days or less are valued at amortized cost, which
constitutes fair value as determined by the Board of Directors. Amortized cost
involves valuing an instrument at its original cost to a fund and thereafter
assuming a constant amortization to maturity of any discount or premium,
regardless of the impact of fluctuating interest rates on the market value of
the instrument. All other securities and other assets of a fund will be valued
at fair value as determined in good faith pursuant to procedures adopted by the
Board of Directors of each fund.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Purchase Information. Each fund offers its shares to the separate accounts of
Participating Insurance Companies on a continuous basis. The offering price per
share of each fund is equal to the net asset value per share at the time of
purchase. Individuals may not place orders directly with the funds. See the
prospectus of the separate account of the Participating Insurance Company or the
relevant Plan documents for more information on the purchase of fund shares and
with respect to the availability for investment in each fund.
Redemption Information. Fund shares may be redeemed at any time by the separate
accounts of the Participating Insurance Companies and the Plans. Individuals may
not place redemption orders directly with the funds. It is the responsibility of
the Participating Insurance Company to properly transmit redemption requests in
accordance with applicable requirements. VA contract holders and VLI policy
holders and Plan Participants should consult their Participating Insurance
Company in this regard. Redemption requests will be effected at the net asset
value of each fund next determined after receipt of redemption instructions by
such fund in proper form and in accordance with applicable requirements. The
value of the shares redeemed may be more or less than their original cost,
depending on each fund's then-current net asset value. No charges are imposed by
the funds when shares are redeemed.
If the Board of Directors shall determine that it is in the best interests of
the remaining shareholders of a fund, such fund may pay the redemption price in
whole, or in part, by a distribution in kind from the portfolio of the fund, in
lieu of cash, taking such securities at their value employed for determining
such redemption price, and selecting the securities in such manner as the Board
of Directors may deem fair and equitable.
Under the 1940 Act, a fund may suspend the right of redemption or postpone the
date of payment upon redemption for any period during which the NYSE is closed,
other than customary weekend and holiday closings, or during which trading on
said Exchange is restricted, or during which (as determined by the SEC by rule
or regulation) an emergency exists as a result of which disposal or valuation of
portfolio securities is not reasonably practicable, or for such other periods as
the SEC may permit. (A fund may also suspend or postpone the recordation of the
transfer of its shares upon the occurrence of any of the foregoing conditions.)
INVESTMENT MANAGER
Each fund retains SBAM to act as its investment manager. SBAM, a wholly-owned
subsidiary of Salomon Brothers Holding Company Inc, which is wholly-owned by
Salomon Smith Barney Holdings Inc, which is in turn wholly-owned by Citigroup
Inc. ('Citigroup'), SBAM serves as the investment manager to numerous
individuals and institutions and other investment companies.
The management contract between SBAM and each respective Fund provides that SBAM
shall manage the operations of the fund, subject to policy established by the
Board of Directors. Pursuant to the applicable management contract, SBAM manages
each fund's investment portfolio, directs purchases and sales of portfolio
securities and reports thereon to the fund's officers and directors regularly.
SBAM also provides the office space, facilities, equipment and personnel
necessary to perform the following services for each fund: Commission
compliance, including
51
<PAGE>
record keeping, reporting requirements and registration statements and proxies;
supervision of Fund operations, including coordination of functions of
administrator, transfer agent, custodian, accountants, counsel and other parties
performing services or operational functions for each fund; certain
administrative and clerical services, including certain accounting services,
facilitation of redemption requests, exchange privileges, and account
adjustments, development of new shareholder services and maintenance of certain
books and records; and certain services to each fund's shareholders, including
assuring that investments and redemptions are completed efficiently, responding
to shareholder inquiries and maintaining a flow of information to shareholders.
In connection with SBAM's service as investment manager to the Strategic Bond
Fund, Salomon Brothers Asset Management Limited ('SBAM Limited'), whose business
address is Victoria Plaza, 111 Buckingham Palace Road, London SW1W OSB, England,
provides certain advisory services to SBAM relating to currency transactions and
investments in non-dollar-denominated debt securities for the benefit of the
Strategic Bond Fund pursuant to a subadvisory consulting agreement. At no
additional expense to the Strategic Bond Fund, SBAM pays SBAM Limited, as full
compensation for all services provided under the subadvisory consulting
agreement, a fee in an amount equal to the fee payable to SBAM under its
management contract with respect to the Strategic Bond Fund multiplied by the
current value of the net assets of the portion of the assets of the Strategic
Bond Fund as SBAM shall allocate and divided by the current value of the net
assets of the Strategic Bond Fund. Like SBAM, SBAM Limited is a wholly-owned
subsidiary of Salomon Brothers Holding Company Inc. SBAM Limited is a member of
the Investment Management Regulatory Organization Limited in the United Kingdom
and is registered as an investment adviser in the United States pursuant to the
Advisers Act.
Investment decisions for a particular fund are made independently from those of
other funds or accounts managed by SBAM and/or SBAM Limited. Such other funds or
accounts may also invest in the same securities as a fund. If those funds or
accounts are prepared to invest in, or desire to dispose of, the same security
at the same time as a fund, however, transactions in such securities will be
made, insofar as feasible, for the respective funds and accounts in a manner
deemed equitable to all. In some cases, this procedure may adversely affect the
size of the position obtained for or disposed of by a fund or the price paid or
received by a fund. In addition, because of different investment objectives, a
particular security may be purchased for one or more funds or accounts when one
or more funds or accounts are selling the same security.
As compensation for its services, SBAM receives, on behalf of each fund, as
described below, a monthly management fee, at an annual rate based upon the
average daily net assets of the fund as follows: .70% for Investors Fund; .85%
for Capital Fund; .80% for Total Return Fund; .75% for High Yield Bond Fund and
Strategic Bond Fund.
With respect to all funds, for the 1999 fiscal year, SBAM has voluntarily agreed
to impose an expense cap on total fund operating expenses (exclusive of taxes,
interest and extraordinary expenses such as litigation and indemnification
expenses) at 1.00%.
The management contract for each of the funds provides that it will continue for
an initial two year period and thereafter for successive annual periods;
provided that, with respect to each such contract, such continuance is
specifically approved at least annually: (a) by the vote of a majority of the
directors not parties to the management contract or 'interested persons' of such
parties, as defined in the 1940 Act, cast in person at a meeting called for the
specific purpose of voting on such management contract and (b) either by the
Board of Directors or a majority of the outstanding voting securities. The
management contract may be terminated on 60 days' written notice by either party
and will terminate automatically if assigned.
Under the terms of the management contract between each fund and SBAM, neither
SBAM nor its affiliates shall be liable for losses or damages incurred by the
fund, unless such losses or damages are attributable to the willful misfeasance,
bad faith or gross negligence on either the part of SBAM or its affiliate or
from reckless disregard by it of its obligations and duties under the Management
Contract ('disabling conduct').
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<PAGE>
Rule 17j-1 under the 1940 Act requires all registered investment companies and
their investment advisers and principal underwriters to adopt written codes of
ethics and institute procedures designed to prevent 'access persons' (as defined
in Rule 17j-1) from engaging in any fraudulent, deceptive or manipulative
trading practices. The Board of Directors for the Company has adopted a code of
ethics (the 'Fund Code') that incorporates personal trading policies and
procedures applicable to access persons of each fund, which includes officers,
directors and other specified persons who may make, participate in or otherwise
obtain information concerning the purchase or sale of securities by the fund. In
addition, the fund Code attaches and incorporates personal trading policies and
procedures applicable to access persons of the investment manager and if
applicable, any sub-adviser to each fund, which policies serve as such adviser's
code of ethics (the 'Adviser Code'). The fund and Adviser Codes have been
designed to address potential conflict of interests that can arise in connection
with the personal trading activities of investment company and investment
advisory personnel.
Pursuant to the fund and adviser codes, access persons are generally permitted
to engage in personal securities transactions, provided that a transaction does
not involve securities that are being purchased or sold, are being considered
for purchase or sale, or are being recommended for purchase or sale by or for a
fund. In addition, the adviser code contains specified prohibitions and blackout
periods for certain categories of securities and transactions, including a
prohibition on short-term trading and purchasing securities during an initial
public offering. The adviser code, with certain exceptions, also requires that
access persons obtain preclearance to engage in personal securities
transactions. Finally, the fund and adviser codes require access persons to
report all personal securities transactions periodically.
For the fiscal year ended December 31, 1999, SBAM has received the following
amounts as management fees and has reimbursed the Funds for expenses in the
following amounts:
<TABLE>
<CAPTION>
GROSS EXPENSES
FEES WAIVER REIMBURSED
---- ------ ----------
<S> <C> <C> <C>
Capital............................................... $ 61,892 $61,892 $13,177
High Yield............................................ $ 55,217 $55,217 $ 3,963
Investors............................................. $195,640 $46,955 $ 0
Strategic Bond........................................ $ 98,038 $62,980 $ 0
Total Return.......................................... $ 1,462 $ 1,462 $27,494
Small Cap.............................................
</TABLE>
ADMINISTRATOR
SBAM (in such capacity, the 'Administrator') provides certain administrative
services to each fund. The services provided by the Administrator under the
applicable administration agreement include certain accounting, clerical and
bookkeeping services, Blue Sky compliance, corporate secretarial services and
assistance in the preparation and filing of tax returns and reports to
shareholders and the Commission. Each fund pays the Administrator a fee,
calculated daily and payable monthly, at an annual rate of .05% of the
applicable fund's average daily net assets. The Administrator has delegated its
responsibilities under the administration agreements to one of its affiliates.
<TABLE>
<CAPTION>
ADMINISTRATION
FEE PAID
TO SBAM
-------
<S> <C>
Capital..................................................... $ 3,641
High Yield.................................................. $ 3,681
Investors................................................... $13,974
Strategic Bond.............................................. $ 6,536
Total Return................................................ $ 5,893
Small Cap................................................... $ 97
</TABLE>
53
<PAGE>
DISTRIBUTOR
CFBDS, located at 21 Milk Street, Boston, Massachusetts 02109, serves as each
Fund's distributor pursuant to a distribution contract. CFBDS is a wholly owned
subsidiary of Signature Financial Group, Inc.
EXPENSES
Each fund's expenses include taxes, interest, fees and salaries of such fund
directors and officers who are not directors, officers or employees of the
fund's service contractors, Commission fees, state securities qualification
fees, costs of preparing and printing prospectuses for regulatory purposes and
for distribution to existing shareholders, advisory and administration fees,
charges of the custodian and of the transfer and dividend disbursing agent,
certain insurance premiums, outside auditing and legal expenses, costs of
shareholder reports and shareholder meetings and any extraordinary expenses.
Each fund also pays for brokerage fees and commissions (if any) in connection
with the purchase and sale of portfolio securities.
CUSTODIAN AND TRANSFER AGENT
Custodian. PNC Bank, N.A., located at Airport Business Center, International
Court 2, 200 Stevens Drive, Lester, Pennsylvania 19113, serves as each fund's
custodian except Asia Growth Fund. The Chase Manhattan Bank, located at 4 Chase
MetroTech Center, Brooklyn, New York 11245, serves as Asia Growth Fund's
custodian. PNC Bank and The Chase Manhattan Bank (each, a 'Custodian' and
collectively, the 'Custodians'), among other things: maintain a custody account
or accounts in the name of each fund; receive and deliver all assets for each
fund upon purchase and upon sale or maturity; collect and receive all income and
other payments and distributions on account of the assets of each fund; and make
disbursements on behalf of each fund. The custodians neither determine the
funds' investment policies, nor decide which securities each fund will buy or
sell. For their services, each custodian receives a monthly fee based upon the
daily average market value of securities held in custody and also receives
securities transaction charges, including out-of-pocket expenses. A fund may
also periodically enter into arrangements with other qualified custodians with
respect to certain types of securities or other transactions such as repurchase
agreements or derivatives transactions.
Transfer Agent. PFPC Global Fund Services, Inc. (the 'Transfer Agent'), located
at P.O. Box 5127, Westborough, Massachusetts 01581-5127, serves as each fund's
transfer agent. The transfer agent registers and processes transfers of the
fund's stock, processes purchase and redemption orders, acts as dividend
disbursing agent for the fund and maintains records and handles correspondence
with respect to shareholder accounts, pursuant to a transfer agency agreement.
For these services, the transfer agent receives a monthly fee computed
separately for each fund and is reimbursed for out-of-pocket expenses.
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP ('PricewaterhouseCoopers') provides audit services,
tax return preparation and assistance and consultation in connection with review
of Commission filings. PricewaterhouseCoopers' address is 1177 Avenue of the
Americas, New York, New York 10036.
COUNSEL
Simpson Thacher & Bartlett serves as counsel to each fund, and is located at 425
Lexington Avenue, New York, New York 10017-3909.
Piper & Marbury Rudnick & Wolfe L.L.P. of Baltimore, Maryland has issued an
opinion regarding the valid issuance of shares being offered for sale pursuant
to the funds' Prospectus.
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<PAGE>
CAPITAL STOCK
Pursuant to current interpretations of the 1940 Act, the fund anticipates that
each Participating Insurance Company will solicit voting instructions from VA
contract and VLI policy owners with respect to any matters that are presented to
a vote of shareholders, and will vote shares in proportion to the voting
instructions received. Plans will vote shares as required by applicable law and
governing Plan documents.
As used in this SAI and the Prospectus, the term 'majority', when referring to
the approvals to be obtained from shareholders in connection with matters
affecting a particular fund or any other single portfolio (e.g., approval of
investment management contracts) and requiring a vote under the 1940 Act means
the vote of the lesser of: (i) 67% of the shares of that particular portfolio,
represented at a meeting if the holders of more than 50% of the outstanding
shares of such portfolio are present in person or by proxy; or (ii) more than
50% of the outstanding shares of such portfolio. Shareholders are entitled to
one vote for each full share held and fractional votes for fractional shares
held.
As of February 23, 2000, Sun Life of Canada and Life of Virginia own more than
25% of the outstanding voting securities of Strategic Bond Fund and Sun Life of
Canada owns more than 25% of the outstanding voting securities of the Total
Return Fund and Citigroup and its affiliates own a significant percentage of the
outstanding shares of each Fund except the Strategic Bond Fund and Total Return
Fund, and consequently, each may be deemed to be a 'control person,' as defined
in the 1940 Act, of such Funds.
Shares of each fund are entitled to such dividends and distributions out of the
assets belonging to that Fund as are declared in the discretion of the Board of
Directors. In determining the net asset value of a fund, assets belonging to a
fund are charged with the direct liabilities in respect of that Fund and with a
share of the general liabilities of the investment company which are normally
allocated in proportion to the relative net asset values of the respective Funds
at the time of allocation.
In the event of the liquidation or dissolution of the investment company, shares
of each fund are entitled to receive the assets attributable to it that are
available for distribution, and a proportionate distribution, based upon the
relative net assets of the fund, of any general assets not attributable to a
portfolio that are available for distribution. Shareholders are not entitled to
any preemptive rights. All shares, when issued, will be fully paid,
non-assessable, fully transferable and redeemable at the option of the holder.
Subject to the provisions of the Company' charter, determinations by the Board
of Directors as to the direct and allocable liabilities and the allocable
portion of any general assets of the investment company, with respect to a
particular fund are conclusive.
FINANCIAL STATEMENTS
The Company's annual report for the fiscal year ended December 31, 1999 is
incorporated herein by reference in its entirety.
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<PAGE>
APPENDIX A
DESCRIPTION OF RATINGS
A DESCRIPTION OF THE RATING POLICIES OF MOODY'S, S&P AND FITCH WITH RESPECT TO
BONDS AND COMMERCIAL PAPER APPEARS BELOW.
MOODY'S CORPORATE BOND RATINGS
AAA -- Bonds which are rated 'Aaa' are judged to be of the best quality and
carry the smallest degree of investment risk. Interest payments are protected by
a large or by an exceptionally stable margin, and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues.
AA -- Bonds which are rated 'Aa' are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A -- Bonds which are rated 'A' possess many favorable investment qualities and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
BAA -- Bonds which are rated 'Baa' are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BA -- Bonds which are rated 'Ba' are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B -- Bonds which are rated 'B' generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of maintenance and
other terms of the contract over any long period of time may be small.
CAA -- Bonds which are rated 'Caa' are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
CA -- Bonds which are rated 'Ca' represent obligations which are speculative to
a high degree. Such issues are often in default or have other marked
shortcomings.
C -- Bonds which are rated 'C' are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Moody's applies numerical modifiers '1', '2' and '3' to certain of its rating
classifications. The modifier '1' indicates that the security ranks in the
higher end of its generic rating category; the modifier '2' indicates a
mid-range ranking; and the modifier '3' indicates that the issue ranks in the
lower end of its generic rating category.
S&P'S CORPORATE BOND RATINGS
AAA -- This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to repay principal and pay interest.
AA -- Bonds rated 'AA' also qualify as high quality debt obligations. Capacity
to pay principal and interest is very strong, and differs from 'AAA' issues only
in small degree.
A-1
<PAGE>
A -- Bonds rated 'A' have a strong capacity to repay principal and pay interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher-rated categories.
BBB -- Bonds rated 'BBB' are regarded as having an adequate capacity to repay
principal and pay interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to repay principal and pay interest for
bonds in this category than for higher-rated categories.
BB-B-CCC-CC-C -- Bonds rated 'BB', 'B', 'CCC', 'CC' and 'C' are regarded, on
balance, as predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal in accordance with the terms of the
obligations. BB indicates the lowest degree of speculation and C the highest
degree of speculation. While such bonds will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions.
CI -- Bonds rated 'CI' are income bonds on which no interest is being paid.
D -- Bonds rated 'D' are in default. The 'D' category is used when interest
payments or principal payments are not made on the date due even if the
applicable grace period has not expired unless S&P believes that such payments
will be made during such grace period. The 'D' rating is also used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
The ratings set forth above may be modified by the addition of a plus or minus
to show relative standing within the major rating categories.
MOODY'S COMMERCIAL PAPER RATINGS
PRIME-1 -- Issuers (or related supporting institutions) rated 'Prime-1' have a
superior ability for repayment of senior short-term debt obligations. 'Prime-1'
repayment ability will often be evidenced by many of the following
characteristics: leading market positions in well-established industries, high
rates of return on funds employed, conservative capitalization structures with
moderate reliance on debt and ample asset protection, broad margins in earnings
coverage of fixed financial charges and high internal cash generation, and
well-established access to a range of financial markets and assured sources of
alternate liquidity.
PRIME-2 -- Issuers (or related supporting institutions) rated 'Prime-2' have a
strong ability for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, will be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternative liquidity is maintained.
PRIME-3 -- Issuers (or related supporting institutions) rated 'Prime-3' have an
acceptable ability for repayment of senior short-term obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and the requirement for relatively high financial
leverage. Adequate alternate liquidity is maintained.
NOT PRIME -- Issuers rated 'Not Prime' do not fall within any of the Prime
rating categories.
S&P'S COMMERCIAL PAPER RATINGS
A -- S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.
Ratings are graded into several categories, ranging from 'A-1' for the highest
quality obligations to 'D' for the lowest. The four categories are as follows:
A-1 -- This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus (+) sign designation.
A-2
<PAGE>
A-2 -- Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated 'A-1'.
A-3 -- Issues carrying this designation have adequate capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
B -- Issues rated 'B' are regarded as having only speculative capacity for
timely payment.
C -- This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D -- Debt rated 'D' is in payment default. The 'D' rating category is used when
interest payments or principal payments are not made on the date due, even if
the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period.
Like higher-rated bonds, bonds rated in the Baa or BBB categories are considered
to have adequate capacity to pay principal and interest. However, such bonds may
have speculative characteristics, and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade bonds.
After purchase by a Fund, a security may cease to be rated or its rating may be
reduced below the minimum required for purchase by such Fund. Neither event will
require a sale of such security by a Fund. However, a Fund's investment manager
will consider such event in its determination of whether such Fund should
continue to hold the security. To the extent the ratings given by Moody's, or
S&P may change as a result of changes in such organizations or their rating
systems, a Fund will attempt to use comparable ratings as standards for
investments in accordance with the investment policies contained in this
Prospectus and in the Statement of Additional Information.
A-3
<PAGE>
ITEM 22. FINANCIAL STATEMENTS
Registrant's Annual Report for Fiscal Year December 31, 1999 is
incorporated herein by reference to the Registrant's definitive Rule 30b2-1
filed on March 1, 2000 as Accession No. 0000091155-00-000168.
SALOMON BROTHERS VARIABLE SERIES FUNDS INC
PART C.
OTHER INFORMATION
ITEM 23. EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
a -- Articles of Incorporation of Registrant (filed as Exhibit 1 to Pre-Effective Amendment No. 1
to the Registration Statement on Form N-1A and incorporated by reference).
b -- Registrant's By-Laws (filed as Exhibit 2(a) to Pre-Effective Amendment No. 1 to the
Registration Statement on Form N-1A and incorporated by reference herein).
c -- None.
d(1) -- Form of Management Contract between Registrant and Salomon Brothers Asset Management Inc
relating to the Salomon Brothers Variable U.S. Government Income Fund (filed as Exhibit 5(a)
to Pre-Effective Amendment No. 1 to the Registration Statement on Form N-1A and incorporated
by reference herein).
d(2) -- Form of Management Contract between Registrant and Salomon Brothers Asset Management Inc
relating to the Salomon Brothers Variable High Yield Bond Fund (filed as Exhibit 5(b) to
Pre-Effective Amendment No. 1 to the Registration Statement on Form N-1A and incorporated by
reference herein).
d(3) -- Form of Management Contract between Registrant and Salomon Brothers Asset Management Inc
relating to the Salomon Brothers Variable Strategic Bond Fund (filed as Exhibit 5(c) to
Pre-Effective Amendment No. 1 to the Registration Statement on Form N-1A and incorporated by
reference herein).
d(4) -- Form of Management Contract between Registrant and Salomon Brothers Asset Management Inc
relating to the Salomon Brothers Variable Total Return Fund (filed as Exhibit 5(d) to Pre-
Effective Amendment No. 1 to the Registration Statement on Form N-1A and incorporated by
reference herein).
d(5) -- Form of Management Contract between Registrant and Salomon Brothers Asset Management Inc
relating to the Salomon Brothers Variable Asia Growth Fund (filed as Exhibit 5(e) to Pre-
Effective Amendment No. 1 to the Registration Statement on Form N-1A and incorporated by
reference herein).
d(6) -- Form of Management Contract between Registrant and Salomon Brothers Asset Management Inc
relating to the Salomon Brothers Variable Investors Fund (filed as Exhibit 5(f) to Pre-
Effective Amendment No. 1 to the Registration Statement on Form N-1A and incorporated by
reference herein).
d(7) -- Form of Management Contract between Registrant and Salomon Brothers Asset Management Inc
relating to the Salomon Brothers Variable Capital Fund (filed as Exhibit 5(g) to Pre-
Effective Amendment No. 1 to the Registration Statement on Form N-1A and incorporated by
reference herein).
d(8) -- Form of Management Contract between Registrant and Salomon Brothers Asset Management Inc
relating to the Salomon Brothers Variable Small Cap Growth Fund (filed as Exhibit (d) to
Post-Effective Amendment No. 3 to the Registration Statement on Form N-1A and incorporated by
reference herein).
d(9) -- Form of Subadvisory Consulting Agreement between Salomon Brothers Asset Management Inc and
Salomon Brothers Asset Management Limited relating to the Salomon Brothers Variable Strategic
Bond Fund (filed as Exhibit 5(h) to Pre-Effective Amendment No. 1 to the Registration
Statement on Form N-1A and incorporated by reference herein).
d(10) -- Form of Subadvisory Agreement between Salomon Brothers Asset Management and Salomon Brothers
Asset Management Asia Pacific relating to the Salomon Brothers Variable Asia Growth Fund
(filed as Exhibit 5(i) to Pre-Effective Amendment No. 1 to the Registration Statement on Form
N-1A and incorporated by reference herein).
d(11) -- Form of Subadvisory Agreement between Salomon Brothers Asset Management and Citibank, N.A.
relating to the Salomon Brothers Large Cap Growth Fund and Salomon Brothers International
Equity Fund will be filed by amendment.
e -- Distribution Agreement between Registrant and CFBDS. Inc. dated September 1, 1998 filed as
Exhibit (e) to Post-Effective Amendment No. 1 to the Registration Statement on Form N-1A and
incorporated herein by reference.
f -- None.
</TABLE>
C-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
g(1) -- Form of Custodian Agreement between Registrant and PNC
Bank, National Association (filed as Exhibit 8(a) to
Pre-Effective Amendment No. 1 to the Registration
Statement on Form N-1A and incorporated by reference
herein).
g(2) -- Form of Custodian Agreement between Registrant and The
Chase Manhattan Bank (filed as Exhibit 8(b) to
Pre-Effective Amendment No. 1 to the Registration
Statement on Form
N-1A and incorporated by reference herein).
h(1) -- Form of Transfer Agency Agreement between Registrant and
First Data Investors Services Group, Inc (filed as Exhibit
9(a) to Pre-Effective Amendment No. 1 to the Registration
Statement on Form N-1A and incorporated by reference
herein).
h(2) -- Form of Administration Agreement between Registrant and
Salomon Brothers Asset Management Inc (filed as Exhibit
9(b) to Pre-Effective Amendment No. 1 to the Registration
Statement on Form N-1A and incorporated by reference
herein).
h(3) -- Form of Participation Agreement (filed as Exhibit 9(c) to
Pre-Effective Amendment No. 1 to the Registration
Statement on Form N-1A and incorporated by reference
herein).
i -- Opinion and Consent of Counsel of Piper & Marbury L.L.P.
as to the Legality of Securities Being Registered (filed
as Exhibit 10 to Pre-Effective Amendment No. 1 to the
Registration Statement on Form N-1A and incorporated by
reference herein).
j -- Consent of Independent Accountants (filed herewith).
k -- None.
l -- Share Purchase Agreement (filed as Exhibit 13(a) to
Pre-Effective Amendment No. 1 to the Registration
Statement on Form N-1A and incorporated by reference
herein).
m -- None.
n -- None.
p -- Registrant's Code of Ethics (filed herewith).
</TABLE>
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Entities within the Salomon group own the outstanding shares of the High
Yield Bond Fund, Strategic Bond Fund, Investors Fund, Capital Fund and Total
Return Fund and, therefore may be deemed to be control persons of such Funds. As
a result, such Funds may be deemed to be under common control.
ITEM 25. INDEMNIFICATION.
Reference is made to Article VIII of Registrant's Articles of Incorporation,
Article IV of Registrant's By-Laws and Section 4 of the Distribution Agreements
between the Registrant and CFBDS, Inc.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the 'Securities Act'), may be permitted to directors,
officers and controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant understands that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
The list required by this Item 26 of officers and directors of SBAM, Salomon
Brothers Asset Management AP ('SBAM AP') and Salomon Brothers Asset Management
Limited ('SBAM Limited'), together with information as to any other business,
profession, vocation or employment of a substantial nature engaged in by such
officers and directors during the past two years, is incorporated by reference
to Schedules A and D of their respective FORM ADV filed by SBAM, SBAM AP and
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<PAGE>
SBAM Limited, respectively, pursuant to the Advisers Act (SEC File Nos.
801-32046, 801-51393 and 801-43335, respectively).
ITEM 27. PRINCIPAL UNDERWRITERS
(a) CFBDS, Inc., ('CFBDS') the Registrant's Distributor, is also the
distributor for the following Smith Barney funds: Concert Investment Series,
Consulting Group Capital Markets Funds, Greenwich Street Series Fund, Smith
Barney Adjustable Rate Government Income Fund, Smith Barney Aggressive Growth
Fund Inc., Smith Barney Appreciation Fund, Inc., Smith Barney Arizona Municipals
Fund Inc., Smith Barney California Municipals Fund Inc., Smith Barney Concert
Allocation Series Inc., Smith Barney Equity Funds, Smith Barney Fundamental
Value Fund Inc., Smith Barney Funds, Inc., Smith Barney Income Funds, Smith
Barney Institutional Cash Management Fund, Inc., Smith Barney Investment Funds
Inc., Smith Barney Investment Trust, Smith Barney Managed Governments Fund Inc.,
Smith Barney Managed Municipals Fund Inc., Smith Barney Massachusetts Municipals
Fund, Smith Barney Money Funds, Inc., Smith Barney Muni Funds, Smith Barney
Municipal Money Market Fund, Inc., Smith Barney Natural Resources Fund Inc.,
Smith Barney New Jersey Municipals Fund Inc., Smith Barney Oregon Municipals
Fund Inc., Smith Barney Principal Return Fund, Smith Barney Small Cap Blend
Fund, Inc., Smith Barney Telecommunications Trust, Smith Barney Variable Account
Funds, Smith Barney World Funds, Inc., Travelers Series Fund Inc., and various
series of unit investment trusts.
CFBDS also serves as the distributor for the following funds: The Travelers
Fund UL for Variable Annuities, The Travelers Fund VA for Variable Annuities,
The Travelers Fund BD for Variable Annuities, The Travelers Fund BD II for
Variable Annuities, The Travelers Fund BD III for Variable Annuities, The
Travelers Fund BD IV for Variable Annuities, The Travelers Fund ABD for Variable
Annuities, The Travelers Fund ABD II for Variable Annuities, The Travelers
Separate Account PF for Variable Annuities, The Travelers Separate Account PF II
for Variable Annuities, The Travelers Separate Account QP for Variable
Annuities, The Travelers Separate Account TM for Variable Annuities, The
Travelers Separate Account TM II for Variable Annuities, The Travelers Separate
Account Five for Variable Annuities, The Travelers Separate Account Six for
Variable Annuities, The Travelers Separate Account Seven for Variable Annuities,
The Travelers Separate Account Eight for Variable Annuities, The Travelers Fund
UL for Variable Annuities, The Travelers Fund UL II for Variable Annuities, The
Travelers Variable Life Insurance Separate Account One, The Travelers Variable
Life Insurance Separate Account Two, The Travelers Variable Life Insurance
Separate Account Three, The Travelers Variable Life Insurance Separate Account
Four, The Travelers Separate Account MGA, The Travelers Separate Account
MGA II, The Travelers Growth and Income Stock Account for Variable Annuities,
The Travelers Quality Bond Account for Variable Annuities, The Travelers Money
Market Account for Variable Annuities, The Travelers Timed Growth and Income
Stock Account for Variable Annuities, The Travelers Timed Short-Term Bond
Account for Variable Annuities, The Travelers Timed Aggressive Stock Account for
Variable Annuities, The Travelers Timed Bond Account for Variable Annuities.
In addition, CFBDS, the Registrant's Distributor, is also the distributor
for CitiFunds Multi-State Tax Free Trust, CitiFunds Premium Trust, CitiFunds
Institutional Trust, CitiFunds Tax Free Reserves, CitiFunds Trust I, CitiFunds
Trust II, CitiFunds Trust III, CitiFunds International Trust, CitiFunds Fixed
Income Trust, CitiSelect VIP Folio 200, CitiSelect VIP Folio 300, CitiSelect VIP
Folio 400, CitiSelect VIP Folio 500, CitiFunds Small Cap Growth VIP Portfolio.
CFBDS is also the placement agent for Large Cap Value Portfolio, Small Cap Value
Portfolio, International Portfolio, Foreign Bond Portfolio, Intermediate Income
Portfolio, Short-Term Portfolio, Growth & Income Portfolio, U.S. Fixed Income
Portfolio, Large Cap Growth Portfolio, Small Cap Growth Portfolio, International
Equity Portfolio, Balanced Portfolio, Government Income Portfolio, Tax Free
Reserves Portfolio, Cash Reserves Portfolio and U.S. Treasury Reserves
Portfolio.
In addition, CFBDS is also the distributor for the following Salomon
Brothers funds: Salomon Brothers Opportunity Fund Inc., Salomon Brothers
Investors Fund Inc., Salomon Brothers Capital Fund Inc., Salomon Brothers Series
Funds Inc., Salomon Brothers Institutional Series Funds Inc., Salomon Brothers
Variable Series Funds Inc.
In addition, CFBDS is also the distributor for the Centurion Funds, Inc.
C-3
<PAGE>
(b) The information required by this Item 27 with respect to each director
and officer of CFBDS is incorporated by reference to Schedule A of Form BD filed
by CFBDS pursuant to the Securities and Exchange Act of 1934 (File
No. 8-32417).
(c) Not applicable.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS.
(1) Salomon Brothers Asset Management Inc.
7 World Trade Center
New York, New York 10048
(2) PFPC Global Fund Services, Inc.
One Exchange Place
Boston, MA 02109
(3) PNC Bank N.A.
Airport Business Center
International Court 2
200 Stevens Drive
Lester, Pennsylvania 19113
(4) The Chase Manhattan Bank
Chase Metrotech Center
Brooklyn, NY 11245
ITEM 29. MANAGEMENT SERVICES.
Not applicable.
ITEM 30. UNDERTAKINGS.
Registrant undertakes to furnish to each person to whom a prospectus is
delivered a copy of Registrant's latest annual report to shareholders upon
request and without charge.
C-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
(the "Securities Act") and the Investment Company Act of 1940, as amended, the
Registrant certifies that it meets all of the requirements for effectiveness of
this Registration Statement under Rule 485(b) under the Securities Act and has
duly caused this Amendment to this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York,
and State of New York, on the 26th day of April, 2000.
SALOMON BROTHERS VARIABLE
SERIES FUNDS INC
(Registrant)
By /s/ HEATH B. MCLENDON
...................................
HEATH B. MCLENDON
PRESIDENT
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
HEATH B. MCLENDON Director and President (Principal April 26, 2000
...................................... Executive Officer)
(HEATH B. MCLENDON)
* Director April 26, 2000
......................................
(CHARLES F. BARBER)
* Director April 26, 2000
......................................
(CAROL L. COLMAN)
* Director April 26, 2000
......................................
(DANIEL P. CRONIN)
/S/ LEWIS E. DAIDONE Executive Vice President and Treasurer April 26, 2000
...................................... (Principal Financial and Accounting
(LEWIS E. DAIDONE) Officer)
*By: /s/ HEATH B. MCLENDON April 26, 2000
......................................
HEATH B. MCLENDON
AS ATTORNEY-IN-FACT
</TABLE>
<PAGE>
EXHIBIT INDEX
(j) Consent of PricewaterhouseCoopers, LLP.
(p) Registrant's Code of Ethics.
STATEMENT OF DIFFERENCES
------------------------
The dagger symbol shall be expressed as .............................. 'D'
The double dagger symbol shall be expressed as ....................... 'DD'
Characters normally expressed as superscript shall be preceded by .... 'pp'
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in this Post-Effective
Amendment No. 4 to the registration statement on Form N-1A ("Registration
Statement") for Salomon Brothers Variable Series Funds Inc of our reports
dated February 15, 2000, relating to the financial statements and
financial highlights which appear in the December 31, 1999 Annual Reports
to Shareholders of Salomon Brothers Variable High Yield Bond Fund, Salomon
Brothers Variable Strategic Bond Fund, Salomon Brothers Variable Total
Return Fund, Salomon Brothers Variable Investors Fund, Salomon Brothers
Variable Capital Fund and Salomon Brothers Variable Small Cap Growth Fund
(six of the portfolios constituting Salomon Brothers Variable Series Funds
Inc), which are also incorporated by reference into the Registration
Statement. We also consent to the references to us under the headings
"Financial Highlights" and "Independent Accountants" in such Registration
Statement.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York, 10036
April 25, 2000
<PAGE>
PERSONAL INVESTMENT POLICY
FOR
SSB CITI ASSET MANAGEMENT GROUP - NORTH AMERICA
AND CERTAIN REGISTERED INVESTMENT COMPANIES
SSB Citi Asset Management Group ("SSB Citi")(1), and those U.S.-registered
investment companies advised or managed by SSB Citi that have adopted this
policy ("Funds"), have adopted this policy on securities transactions in order
to accomplish two goals: first, to minimize conflicts and potential conflicts of
interest between employees of SSB Citi and SSB Citi's clients (including the
Funds), and between Fund directors or trustees and their Funds, and second, to
provide policies and procedures consistent with applicable law, including Rule
17j-1 under the Investment Company Act of 1940, to prevent fraudulent or
manipulative practices with respect to purchases or sales of securities held or
to be acquired by client accounts. ALL U.S. EMPLOYEES OF SSB CITI, INCLUDING
EMPLOYEES WHO SERVE AS FUND OFFICERS OR DIRECTORS, AND ALL DIRECTORS OR TRUSTEES
("DIRECTORS") OF EACH FUND, ARE COVERED PERSONS UNDER THIS POLICY. OTHER COVERED
PERSONS ARE DESCRIBED IN SECTION II BELOW.
I. STATEMENT OF PRINCIPLES - All SSB Citi employees owe a fiduciary duty
to SSB Citi's clients when conducting their personal investment
transactions. Employees must place the interests of clients first and
avoid activities, interests and relationships that might interfere with
the duty to make decisions in the best interests of the clients. All
Fund directors owe a fiduciary duty to each Fund of which they are a
director and to that Fund's shareholders when conducting their personal
investment transactions. At all times and in all matters Fund directors
shall place the interests of their Funds before their personal
interests. The fundamental standard to be followed in personal
securities transactions is that Covered Persons may not take
inappropriate advantage of their positions.
All personal securities transactions by Covered Persons shall adhere to
the requirements of this policy and shall be conducted in such a manner
as to avoid any actual or potential conflict of interest, the
appearance of such a conflict, or the abuse of the person's position of
trust and responsibility. While this policy is designed to address both
identified conflicts and potential conflicts, it cannot possibly be
written broadly enough to cover all potential situations. In this
regard, Covered Persons are expected to adhere not only to the letter,
but also the spirit of the policies contained herein.
Employees are reminded that they also are subject to other Citigroup
policies, including policies on insider trading, the purchase and sale
of securities listed on any applicable SSB Citi restricted list, the
receipt of gifts and service as a director of a publicly traded
company. Employees must never trade in a security or commodity while in
possession of material, non-public information about the issuer or the
market for those securities or commodities, even if the employee has
satisfied all other requirements of this policy.
The reputation of SSB Citi and its employees for straightforward
practices and integrity is a priceless asset, and all employees have
the duty and obligation to support and maintain it when conducting
their personal securities transactions.
(1) The investment advisory entities of SSB Citi covered by this policy include:
Salomon Brothers Asset Management Inc.; SSB Citi Fund Management LLC; Smith
Barney Asset Management Division of Salomon Smith Barney Inc.; Travelers
Investment Management Company; and the Citibank Global Asset Management Division
of Citibank, N.A. and Citicorp Trust, N.A.-California.
1
<PAGE>
II. APPLICABILITY - SSB CITI EMPLOYEES - This policy applies to all U.S.
employees of SSB Citi, including part-time employees. Each employee,
including employees who serve as Fund officers or directors, must
comply with all of the provisions of the policy applicable to SSB Citi
employees unless otherwise indicated. Certain employees are considered
to be "investment personnel" (i.e., portfolio managers, traders and
research analysts (and each of their assistants)), and as such, are
subject to certain additional restrictions outlined in the policy. All
other employees of SSB Citi are considered to be "advisory personnel."
Generally, temporary personnel and consultants working in any SSB Citi
business are subject to the same provisions of the policy as full-time
employees, and their adherence to specific requirements will be
addressed on a case-by-case basis.
The personal investment policies, procedures and restrictions referred
to herein also apply to an employee's spouse and minor children. The
policies also apply to any other account over which the employee is
deemed to have beneficial ownership. This includes: accounts of any
immediate family members sharing the same household as the employee;
accounts of persons or other third parties for whom the employee
exercises investment discretion or gives investment advice; a legal
vehicle in which the employee has a direct or indirect beneficial
interest and has power over investment decisions; accounts for the
benefit of a third party (e.g., a charity) which may be directed by the
employee (other than in the capacity of an employee); and any account
over which the employee may be deemed to have control. For a more
detailed description of beneficial ownership, see Exhibit A attached
hereto.
These policies place certain restrictions on the ability of an employee
to purchase or sell securities that are being or have been purchased or
sold by an SSB Citi managed fund or client account. The restrictions
also apply to securities that are "related" to a security being
purchased or sold by an SSB Citi managed fund or client account. A
"related security" is one whose value is derived from the value of
another security (e.g., a warrant, option or an indexed instrument).
FUND DIRECTORS - This policy applies to all directors of Funds that
have adopted this policy. The personal investment policies, procedures
and restrictions that specifically apply to Fund directors apply to all
accounts and securities in which the director has direct or indirect
beneficial ownership. See Exhibit A attached hereto for a more detailed
description of beneficial ownership.
SECURITIES are defined as stocks, notes, bonds, closed-end mutual
funds, debentures, and other evidences of indebtedness, including
senior debt, subordinated debt, investment contracts, commodity
contracts, futures and all derivative instruments such as options,
warrants and indexed instruments, or, in general, any interest or
instrument commonly known as a "security."
III. ENFORCEMENT - It is the responsibility of each Covered Person to act in
accordance with a high standard of conduct and to comply with the
policies and procedures set forth in this document. SSB Citi takes
seriously its obligation to monitor the personal investment activities
of its employees. Any violation of this policy by employees will be
considered serious, and may result in disciplinary action, which may
include the unwinding of trades, disgorgement of profits, monetary fine
or censure, and suspension or termination of employment. Any violation
of this policy by a Fund director will be reported to the Board of
Directors of the applicable Fund, which may impose such sanctions as it
deems appropriate.
2
<PAGE>
IV. OPENING AND MAINTAINING EMPLOYEE ACCOUNTS - All employee brokerage
accounts, including spouse accounts, accounts for which the employee is
deemed to have beneficial ownership, and any other accounts over which
the employee and/or spouse exercise control, must be maintained either
at Salomon Smith Barney ("SSB") or at Citicorp Investment Services
("CIS").(2) For spouses or other persons who, by reason of their
employment, are required to conduct their securities, commodities or
other financial transactions in a manner inconsistent with this policy,
or in other exceptional circumstances, employees may submit a written
request for an exemption to the Compliance Department. If approval is
granted, copies of trade confirmations and monthly statements must be
sent to the Compliance Department. In addition, all other provisions of
this policy will apply.
V. EXCLUDED ACCOUNTS AND TRANSACTIONS - The following types of
accounts/transactions need not be maintained at SSB or CIS, nor are
they subject to the other restrictions of this policy:
1. Accounts at outside mutual funds that hold only shares of
open-end funds purchased directly from that fund company. Note:
transactions relating to closed-end funds are subject to the
pre-clearance, blackout period and other restrictions of this
policy;
2. Estate or trust accounts in which an employee or related person
has a beneficial interest, but no power to affect investment
decisions. There must be no communication between the account(s)
and the employee with regard to investment decisions prior to
execution. The employee must direct the trustee/bank to furnish
copies of confirmations and statements to the Compliance
Department;
3. Fully discretionary accounts managed by either an internal or
external registered investment adviser are permitted and may be
custodied away from SSB and CIS if (i) the employee receives
permission from the Regional Director of Compliance and the
unit's Chief Investment Officer, and (ii) there is no
communication between the manager and the employee with regard to
investment decisions prior to execution. The employee must
designate that copies of trade confirmations and monthly
statements be sent to the Compliance Department;
4. Employees may participate in direct investment programs which
allow the purchase of securities directly from the issuer without
the intermediation of a broker/dealer provided that the timing
and size of the purchases are established by a pre-arranged,
regularized schedule (e.g., dividend reinvestment plans).
Employees must pre-clear the transaction at the time that the
dividend reinvestment plan is being set up. Employees also must
provide documentation of these arrangements and direct periodic
(monthly or quarterly) statements to the Compliance Department;
and
5. In addition to the foregoing, the following types of securities
are exempted from pre-clearance, blackout periods, reporting and
short-term trading requirements: open-ended mutual funds;
open-end unit investment trusts; U.S. Treasury bills, bonds and
notes; mortgage pass-throughs (e.g. Ginnie Maes) that are direct
obligations of the U.S. government; bankers acceptances; bank
(2) This requirement will become effective as to all employees on a date to be
determined by the Compliance Department and may be subject to a phase-in
implementation process.
3
<PAGE>
certificates of deposit; commercial paper; and high quality
short-term debt instruments (meaning any instrument that has a
maturity at issuance of less than 366 days and that is rated in
one of the two highest rating categories by a nationally
recognized statistical rating organization, such as S&P or
Moody's), including repurchase agreements.
VI. SECURITIES HOLDING PERIOD/SHORT-TERM TRADING - Securities transactions
must be for investment purposes rather than for speculation.
Consequently, employees may not profit from the purchase and sale, or
sale and purchase, of the same or equivalent securities within sixty
(60) calendar days, calculated on a First In, First Out (FIFO) basis
(i.e., the security may be sold on the 61st day). Citigroup securities
received as part of an employee's compensation are not subject to the
60-day holding period. All profits from short-term trades are subject
to disgorgement. However, with the prior written approval of both a
Chief Investment Officer and the Regional Director of Compliance, and
only in rare and/or unusual circumstances, an employee may execute a
short-term trade that results in a significant loss or in break-even
status.
VII. PRE-CLEARANCE - All SSB Citi employees must pre-clear all personal
securities transactions (see Section V for a listing of accounts,
transactions and securities that do not require pre-clearance). A copy
of the pre-clearance form is attached as Exhibit B. IN ADDITION,
EMPLOYEES ARE PROHIBITED FROM ENGAGING IN MORE THAN TWENTY (20)
TRANSACTIONS IN ANY CALENDAR MONTH, EXCEPT WITH PRIOR WRITTEN APPROVAL
FROM THEIR CHIEF INVESTMENT OFFICER, OR DESIGNEE. A transaction must
not be executed until the employee has received the necessary approval.
Pre-clearance is valid only on the day it is given. If a transaction is
not executed on the day pre-clearance is granted, it is required that
pre-clearance be sought again on a subsequent day (i.e., open orders,
such as limit orders, good until cancelled orders and stop-loss orders,
must be pre-cleared each day until the transaction is effected). In
connection with obtaining approval for any personal securities
transaction, employees must describe in detail any factors which might
be relevant to an analysis of the possibility of a conflict of
interest. Any trade that violates the pre-clearance process may be
unwound at the employee's expense, and the employee will be required to
absorb any resulting loss and to disgorge any resulting profit.
In addition to the foregoing, the CGAM NA Director of Global Equity
Research, or his designate, must approve all personal securities
transactions for members of the CGAM Research Department prior to
pre-clearance from the Compliance Department as set forth in this
section. Pre-approval by the Director of Research, or his designate, is
in addition to and does not replace the requirement for the
pre-clearance of all personal securities transactions.
VIII. BLACKOUT PERIODS - No Covered Person shall purchase or sell, directly
or indirectly, any security in which he/she has, or by reason of the
transaction acquires, any direct or indirect beneficial ownership if
he/she has knowledge at the time of such transaction that the security
is being purchased or sold, or is being considered for purchase or
sale, by a managed fund or client account or in the case of a Fund
director, by the director's Fund. In addition, the following Blackout
Periods apply to the categories of SSB Citi employees listed below:
1. Portfolio Managers and Portfolio Manager Assistants - may not buy
or sell any securities for personal accounts seven (7) calendar
days before or after managed funds or client accounts he/she
manages trade in that security.
4
<PAGE>
2. Traders and Trader Assistants - may not buy or sell any
securities for personal accounts three (3) calendar days before
or seven (7) calendar days after managed funds or client accounts
he/she executes trades for trade in that security.
3. Research Analysts and Research Assistants - may not buy or sell
any securities for personal accounts: seven (7) calendar days
before or after the issuance of or a change in any
recommendation; or seven (7) calendar days before or after any
managed fund or client account about which the employee is likely
to have trading or portfolio information (as determined by the
Compliance Department) trades in that security.
4. Advisory Personnel (see Section II for details) - may not buy or
sell any securities for personal accounts on the same day that a
managed fund or client account about which the employee is likely
to have trading or portfolio information (as determined by the
Compliance Department) trades in that security.
5. Unit Trust Personnel - all employees assigned to the Unit Trust
Department are prohibited from transacting in any security when a
SSB Citi-sponsored Unit Trust portfolio is buying the same (or a
related) security, until seven business days after the later of
the completion of the accumulation period or the public
announcement of the trust portfolio. Similarly, all UIT employees
are prohibited from transacting in any security held in a UIT (or
a related security) seven business days prior to the liquidation
period of the trust.
Employees in categories 1, 2 and 5 above may also be considered
Advisory Personnel for other accounts about which the employee is
likely to have trading or portfolio information (as determined by the
Compliance Department).
Any violation of the foregoing provisions will require the employee's
trade to be unwound, with the employee absorbing any resulting loss and
disgorging any resulting profit. Advisory personnel are subject to the
unwinding of the trade provision; however, they may not be required to
absorb any resulting loss (at the discretion of the Compliance
Department and the employee's supervisor). Please be reminded that,
regardless of the provisions set forth above, all employees are always
prohibited from effecting personal securities transactions based on
material, non-public information.
Blackout period requirements shall not apply to any purchase or sale,
or series of related transactions involving the same or related
securities, involving 500 or fewer shares in the aggregate if the
issuer has a market capitalization (outstanding shares multiplied by
the current price per share) greater than $10 billion and is listed on
a U.S. Stock Exchange or NASDAQ. Note: Pre-clearance is still required.
Under certain circumstances, the Compliance Department may determine
that an employee may not rely upon this "Large Cap/De Minimis"
exemption. In such a case, the employee will be notified prior to or at
the time the pre-clearance request is made.
IX. PROHIBITED TRANSACTIONS - The following transactions by SSB Citi
employees are prohibited without the prior written approval from the
Chief Investment Officer, or designee, and the Regional Compliance
Director:
1. The purchase of private placements; and
2. The acquisition of any securities in an initial public offering
(new issues of municipal debt securities may be acquired subject
to the other requirements of this policy (e.g., pre-clearance).)
5
<PAGE>
X. TRANSACTIONS IN OPTIONS AND FUTURES - SSB Citi employees may buy or
sell derivative instruments such as individual stock options, options
and futures on indexes and options and futures on fixed-income
securities, and may buy or sell physical commodities and futures and
forwards on such commodities. These transactions must comply with all
of the policies and restrictions described in this policy, including
pre-clearance, blackout periods, transactions in Citigroup securities
and the 60-day holding period. However, the 60-day holding period does
not apply to individual stock options that are part of a hedged
position where the underlying stock has been held for more than 60 days
and the entire position (including the underlying security) is closed
out.
XI. PROHIBITED RECOMMENDATIONS - No Covered Person shall recommend or
execute any securities transaction by any managed fund or client
account, or, in the case of a Fund director, by the director's Fund,
without having disclosed, in writing, to the Chief Investment Officer,
or designee, any direct or indirect interest in such securities or
issuers, except for those securities purchased pursuant to the "Large
Cap/De Minimis" exemption described in Section VIII above. Prior
written approval of such recommendation or execution also must be
received from the Chief Investment Officer, or designee. The interest
in personal accounts could be in the form of:
1. Any direct or indirect beneficial ownership of any securities of
such issuer;
2. Any contemplated transaction by the person in such securities;
3. Any position with such issuer or its affiliates; or
4. Any present or proposed business relationship between such issuer
or its affiliates and the person or any party in which such
person has a significant interest.
XII. TRANSACTIONS IN CITIGROUP SECURITIES - Unless an SSB Citi employee is a
member of a designated group subject to more restrictive provisions, or
is otherwise notified to the contrary, the employee may trade in
Citigroup securities without restriction (other than the pre-clearance
and other requirements of this policy), subject to the limitations set
forth below.
Employees whose jobs are such that they know about Citigroup's
quarterly earnings prior to release may not engage in any
transactions in Citigroup securities during the "blackout periods"
beginning on the first day of a calendar quarter and ending on the
second business day following the release of earnings for the prior
quarter. Members of the SSB Citi Executive Committee and certain
other senior SSB Citi employees are subject to these blackout
periods.
Stock option exercises are permitted during a blackout period (but
the simultaneous exercise of an option and sale of the underlying
stock is prohibited). With regard to exchange traded options, no
transactions in Citigroup options are permitted except to close or
roll an option position that expires during a blackout period.
Charitable contributions of Citigroup securities may be made during
the blackout period, but an individual's private foundation may not
sell donated Citigroup common stock during the blackout period.
"Good `til cancelled" orders on Citigroup stock must be cancelled
before entering a blackout period and no such orders may be entered
during a blackout period.
No employee may engage at any time in any personal transactions in
Citigroup securities while in possession of material non-public
information. Investments in Citigroup securities must be made with a
long-term orientation rather than for
6
<PAGE>
speculation or for the generation of short-term trading profits. In
addition, please note that employees may not engage in the following
transactions:
Short sales of Citigroup securities;
Purchases or sales of options ("puts" or "calls") on Citigroup
securities, except writing a covered call at a time when the
securities could have been sold under this policy;
Purchases or sales of futures on Citigroup securities; or
Any transactions relating to Citigroup securities that might
reasonably appear speculative.
The number of Citigroup shares an employee is entitled to in the
Citigroup Stock Purchase Plan is not treated as a long stock
position until such time as the employee has given instructions to
purchase the shares of Citigroup. Thus, employees are not permitted
to use options to hedge their financial interest in the Citigroup
Stock Purchase Plan.
Contributions into the firm's 401(k) Plan are not subject to the
restrictions and prohibitions described in this policy.
XIII. ACKNOWLEDGEMENT AND REPORTING REQUIREMENTS - SSB CITI EMPLOYEES - All
new SSB Citi employees must certify that they have received a copy of
this policy, and have read and understood its provisions. In addition,
all SSB Citi employees must:
1. Acknowledge receipt of the policy and any modifications thereof,
in writing (see Exhibit C for the form of Acknowledgement);
2. Within 10 days of becoming an SSB Citi employee, disclose in
writing all information with respect to all securities
beneficially owned and any existing personal brokerage
relationships (employees must also disclose any new brokerage
relationships whenever established). Such information should be
provided on the form attached as Exhibit D;
3. Direct their brokers to supply, on a timely basis, duplicate
copies of confirmations of all personal securities transactions
(Note: this requirement may be satisfied through the transmission
of automated feeds);
4. Within 10 days after the end of each calendar quarter, provide
information relating to securities transactions executed during
the previous quarter for all securities accounts (Note: this
requirement may be satisfied through the transmission of
automated feeds);
5. Submit an annual holdings report containing similar information
that must be current as of a date no more than 30 days before the
report is submitted, and confirm at least annually all brokerage
relationships and any and all outside business affiliations
(Note: this requirement may be satisfied through the transmission
of automated feeds or the regular receipt of monthly brokerage
statements); and
6. Certify on an annual basis that he/she has read and understood
the policy, complied with the requirements of the policy and that
he/she has pre-cleared and disclosed or reported all personal
securities transactions and securities accounts required to be
disclosed or reported pursuant to the requirements of the policy.
7
<PAGE>
FUND DIRECTORS - Fund Directors shall deliver the information required
by Items 1 through 4 of the immediately preceding paragraph, except
that a Fund director who is not an "interested person" of the Fund
within the meaning of Section 2(a)(19) of the Investment Company Act of
1940, and who would be required to make reports solely by reason of
being a Fund Director, is not required to make the initial and annual
holdings reports required by Item 2. Also, a "non-interested" Fund
Director need not supply duplicate copies of confirmations of personal
securities transactions required by Item 3, and need only make the
quarterly transactions reports required by Item 3 as to any security if
at the time of a transaction by the Director in that security, he/she
knew or in the ordinary course of fulfilling his/her official duties as
a Fund Director should have known that, during the 15-day period
immediately preceding or following the date of that transaction, that
security is or was purchased or sold by that Director's Fund or was
being considered for purchase or sale by that Director's Fund.
DISCLAIMER OF BENEFICIAL OWNERSHIP - The reports described in Items 2
and 3 above may contain a statement that the reports shall not be
construed as an admission by the person making the reports that he/she
has any direct or indirect beneficial ownership in the securities to
which the reports relate.
XIV. HANDLING OF DISGORGED PROFITS - Any amounts that are paid/disgorged by
an employee under this policy shall be donated by SSB Citi to one or
more charities. Amounts donated may be aggregated by SSB Citi and paid
to such charity or charities at the end of each year.
XV. CONFIDENTIALITY - All information obtained from any Covered Person
pursuant to this policy shall be kept in strict confidence, except that
such information will be made available to the Securities and Exchange
Commission or any other regulatory or self-regulatory organization or
to the Fund Boards of Directors to the extent required by law,
regulation or this policy.
XVI. OTHER LAWS, RULES AND STATEMENTS OF POLICY - Nothing contained in this
policy shall be interpreted as relieving any person subject to the
policy from acting in accordance with the provision of any applicable
law, rule or regulation or, in the case of SSB Citi employees, any
statement of policy or procedure governing the conduct of such person
adopted by Citigroup, its affiliates and subsidiaries.
XVII. RETENTION OF RECORDS - All records relating to personal securities
transactions hereunder and other records meeting the requirements of
applicable law, including a copy of this policy and any other policies
covering the subject matter hereof, shall be maintained in the manner
and to the extent required by applicable law, including Rule 17j-1
under the 1940 Act. The Compliance Department shall have the
responsibility for maintaining records created under this policy.
XVIII. MONITORING - SSB Citi takes seriously its obligation to monitor the
personal investment activities of its employees and to review the
periodic reports of all Covered Persons. Employee personal investment
transaction activity will be monitored by the Compliance Department.
All noted deviations from the policy requirements will be referred back
to the employee for follow-up and resolution (with a copy to be
supplied to the employee's supervisor). Any noted deviations by Fund
directors will be reported to the Board of Directors of the applicable
Fund for consideration and follow-up as contemplated by Section III
hereof.
8
<PAGE>
XIX. EXCEPTIONS TO THE POLICY - Any exceptions to this policy must have the
prior written approval of both the Chief Investment Officer and the
Regional Director of Compliance. Any questions about this policy should
be directed to the Compliance Department.
XX. BOARD REVIEW - Fund management and SSB Citi shall provide to the Board
of Directors of each Fund, on a quarterly basis, a written report of
all material violations of this policy, and at least annually, a
written report and certification meeting the requirements of Rule 17j-1
under the 1940 Act.
XXI. OTHER CODES OF ETHICS - To the extent that any officer of any Fund is
not a Covered Person hereunder, or an investment subadviser of or
principal underwriter for any Fund and their respective access persons
(as defined in Rule 17j-1) are not Covered Persons hereunder, those
persons must be covered by separate codes of ethics which are approved
in accordance with applicable law.
XXII. AMENDMENTS - SSB CITI EMPLOYEES - Unless otherwise noted herein, this
policy shall become effective as to all SSB Citi employees on March 30,
2000. This policy may be amended as to SSB Citi employees from time to
time by the Compliance Department. Any material amendment of this
policy shall be submitted to the Board of Directors of each Fund for
approval in accordance with Rule 17j-1 under the 1940 Act.
FUND DIRECTORS - This policy shall become effective as to a Fund upon
the approval and adoption of this policy by the Board of Directors of
that Fund in accordance with Rule 17j-1 under the 1940 Act or at such
earlier date as determined by the Secretary of the Fund. Any material
amendment of this policy that applies to the directors of a Fund shall
become effective as to the directors of that Fund only when the Board
of Directors of that Fund has approved the amendment in accordance with
Rule 17j-1 or at such earlier date as determined by the Secretary of
the Fund.
March 15, 2000
9
<PAGE>
EXHIBIT A
EXPLANATION OF BENEFICIAL OWNERSHIP
You are considered to have "Beneficial Ownership" of Securities if you have or
share a direct or indirect "Pecuniary Interest" in the Securities.
You have a "Pecuniary Interest" in Securities if you have the opportunity,
directly or indirectly, to profit or share in any profit derived from a
transaction in the Securities.
The following are examples of an indirect Pecuniary Interest in Securities:
1. Securities held by members of your immediate family sharing
the same household; however, this presumption may be rebutted
by convincing evidence that profits derived from transactions
in these Securities will not provide you with any economic
benefit.
"Immediate family" means any child, stepchild, grandchild,
parent, stepparent, grandparent, spouse, sibling,
mother-in-law, father-in-law, son-in-law, daughter-in-law,
brother-in-law, or sister-in-law, and includes any adoptive
relationship.
2. Your interest as a general partner in Securities held by a
general or limited partnership.
3. Your interest as a manager-member in the Securities held by a
limited liability company.
You do not have an indirect Pecuniary Interest in Securities held by a
corporation, partnership, limited liability company or other entity in which you
hold an equity interest, unless you are a controlling equityholder or you have
or share investment control over the Securities held by the entity.
The following circumstances constitute Beneficial Ownership by you of Securities
held by a trust:
1. Your ownership of Securities as a trustee where either you or
members of your immediate family have a vested interest in the
principal or income of the trust.
2. Your ownership of a vested interest in a trust.
3. Your status as a settlor of a trust, unless the consent of all
of the beneficiaries is required in order for you to revoke
the trust.
The foregoing is a summary of the meaning of "beneficial ownership". For
purposes of the attached policy, "beneficial ownership" shall be interpreted in
the same manner as it would be in determining whether a person is subject to the
provisions of Section 16 of the Securities Exchange Act of 1934 and the rules
and regulations thereunder
10
<PAGE>
SSB CITI ASSET MANAGEMENT GROUP ("SSB CITI") EXHIBIT B
EMPLOYEE TRADE PRE-APPROVAL FORM
(PAGE 1)
INSTRUCTIONS:
All employees are required to submit this form to the Compliance Department
prior to placing a trade. The Compliance Department will notify the employee as
to whether or not pre-approval is granted. Pre-approval is effective only on the
date granted.
<TABLE>
<S> <C>
I. EMPLOYEE INFORMATION
- -------------------------------------------------------------------------- ----------------------------------------------------
Employee Name: Phone Number:
- -------------------------------------------------------------------------- ----------------------------------------------------
Account Title:
- -------------------------------------------------------------------------- ----------------------------------------------------
Account Number:
- ------------------------------------------------------------------------------------------- -----------------------------------
Managed Account(s)/Mutual Fund(s) for which employee is a Covered Person:
- ------------------------------------------------------------------------------------------- -----------------------------------
<CAPTION>
II. SECURITY INFORMATION
<S> <C> <C> <C> <C> <C>
IPO [ ] Yes [ ]No PRIVATE PLACEMENT [ ] Yes [ ]No
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Security Name Security Type-e.g., Ticker Buy/Sell If Sale, Date First No. Large Cap Stock?'2'
common stock, etc. Acquired'1' Shares/Units
<S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
III. YOUR POSITION WITH THE FIRM:
<S> <C>
(Please check one of the following) [ ] Portfolio Manager / Portfolio Manager Assistant
[ ] Research Analyst / Research Analyst Assistant
[ ] Trader / Trader Assistant
[ ] Unit Trust Personnel
[ ] Other (Advisory Personnel)
</TABLE>
NOTE: All PORTFOLIO MANAGERS must complete the reverse side of this form.
All RESEARCH ANALYSTS and RESEARCH ANALYST ASSISTANTS located in
Connecticut must provide an additional form signed by Rama Krishna
or one of his designees.
IV. CERTIFICATION
I certify that I will not effect the transaction(s) described above unless and
until pre-clearance approval is obtained from the Compliance Department. I
further certify that, except as described on an attached page, to the best of my
knowledge, the proposed transaction(s) will not result in a conflict of interest
with any account managed by SSB Citi (including mutual funds managed by SSB
Citi). I further certify that, to the best of my knowledge, there are no pending
orders for any security listed above or any related security for any Managed
Accounts and/or Mutual Funds for which I am considered a Covered Person. The
proposed transaction(s) are consistent with all firm policies regarding employee
personal securities transactions.
<TABLE>
<S> <C>
SIGNATURE DATE
--------------------------------------------- --------------------------------
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
FOR USE BY THE COMPLIANCE DEPARTMENT
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
[ ] Yes [ ] No [ ] Yes [ ] No Reason not granted:
ARE SECURITIES RESTRICTED? PRE-APPROVAL GRANTED?
- ----------------------------------------------------------------------------- --------------------- ---------------------------
Compliance Department Signature: Date: Time:
- ----------------------------------------------------------------------------- --------------------- ---------------------------
</TABLE>
1. All securities sold must have been held for at least 60 days.
2. For purposes of SSB Citi's personal trading policies, a Large Cap Exemption
applies to transactions involving 500 or fewer shares in aggregate and the
stock is one that is listed on a U.S. stock exchange or NASDAQ and whose
issuer has a market capitalization (outstanding shares multiplied by
current price) of more than $10 billion.
11
<PAGE>
SSB CITI ASSET MANAGEMENT GROUP ("SSB CITI")
PAGE 2 - PORTFOLIO MANAGER CERTIFICATION
All portfolio managers must answer the following questions in order to obtain
pre-approval. All questions must be answered or the form will be returned. If a
question is not applicable, please indicate "N/A".
1. Have your client accounts purchased or sold the securities (or related
securities) in the past seven calendar days?
Yes [ ] No [ ]
2. Do you intend to purchase or sell the securities (or related securities)
for any client accounts in the next seven calendar days?
Yes [ ] No [ ]
3. Do any of your client accounts currently own the securities (or related
securities)?
Yes [ ] No [ ]
3a. If yes, and you are selling the securities for your personal account,
please explain why the sale of the securities was rejected for client
accounts but is appropriate for your personal account:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
4. Have you, in the past 7 calendar days, considered purchasing the securities
(or related securities) for your client accounts?
Yes [ ] No [ ]
4a. If yes, and you are purchasing securities for your personal account,
please explain why the purchase of the securities is appropriate for
your account but has been rejected for your client accounts:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
4b. If no, and you are purchasing securities for your personal account,
please explain why the purchase of the securities has not been
considered for your client accounts:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CERTIFICATION
I certify that I will not effect the transaction(s) described above unless and
until pre-clearance approval is obtained from the Compliance Department. I
further certify that, except as described on an attached page, to the best of my
knowledge, the proposed transaction(s) will not result in a conflict of interest
with any account managed by SSB Citi (including mutual funds managed by SSB
Citi). I further certify that, to the best of my knowledge, there are no pending
orders for any security listed above or any related securities for any Managed
Accounts and/or Mutual Funds for which I am considered a Covered Person. The
proposed transaction(s) are consistent with all firm policies regarding employee
personal securities transactions.
<TABLE>
<S> <C>
- --------------------------------------- --------------------
SIGNATURE DATE
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
FOR USE BY THE COMPLIANCE DEPARTMENT
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
[ ] Yes [ ] No [ ] Yes [ ] No Reason not granted:
ARE SECURITIES RESTRICTED? PRE-APPROVAL GRANTED?
- ----------------------------------------------------------------------------- --------------------- ---------------------------
Compliance Department Signature: Date: Time:
- ----------------------------------------------------------------------------- --------------------- ---------------------------
</TABLE>
12
<PAGE>
PERSONAL INVESTMENT POLICY EXHIBIT C
FOR
SSB CITI ASSET MANAGEMENT GROUP - NORTH AMERICA
AND CERTAIN REGISTERED INVESTMENT COMPANIES
ACKNOWLEDGMENT
I acknowledge that I have received and read the Personal Investment Policy
for SSB Citi Asset Management Group - North America and Certain Registered
Investment Companies dated March 15, 2000. I understand the provisions of
the Personal Investment Policy as described therein and agree to abide by
them.
EMPLOYEE NAME (PRINT): ___________________________
SIGNATURE: ___________________________
DATE: ___________________________
<TABLE>
---------------------------- ------------------------------- --------------------- ------------------------------------
<S> <C>
SOCIAL SECURITY NUMBER: DATE OF HIRE:
-----------------------------------------------------------------------------------------------------------------------
JOB FUNCTION & TITLE: SUPERVISOR:
-----------------------------------------------------------------------------------------------------------------------
LOCATION:
-----------------------------------------------------------------------------------------------------------------------
FLOOR AND/OR ZONE: TELEPHONE NUMBER:
----------------- ------------------------------------------- ----------- ---------------------------------------------
NASD REGISTERED EMPLOYEE (Please check one) [ ] Yes [ ] No
-----------------------------------------------------------------------------------------------------------------------
If REGISTERED, list Registration \ License:
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
This Acknowledgment form must be completed and returned no later than March
30, 2000 to the Compliance Department--Attention: Vera Sanducci-Dendy, 388
Greenwich Street, 23rd Floor, New York, NY 10013.
13
<PAGE>
EXHIBIT D
SSB CITI ASSET MANAGEMENT GROUP - NORTH AMERICA PERSONAL INVESTMENT POLICY
FINANCIAL SERVICES FIRM DISCLOSURE AND INITIAL REPORT OF SECURITIES HOLDINGS
THIS REPORT MUST BE SIGNED, DATED AND RETURNED WITHIN 10 DAYS OF EMPLOYMENT TO
THE COMPLIANCE DEPARTMENT - ATTENTION: VERA SANDUCCI-DENDY, 388 GREENWICH
STREET, 23RD FLOOR
- --------------------------------------------------------------------------------
EMPLOYEE NAME: ____________________________ DATE OF EMPLOYMENT: ________________
- --------------------------------------------------------------------------------
BROKERAGE ACCOUNTS:
[ ] I do not have a beneficial interest in any account(s) with any financial
services firm.
[ ] I maintain the following account(s) with the financial services firm(s)
listed below (attach additional information if necessary-e.g., a brokerage
statement). Please include the information required below for any broker,
dealer or bank where an account is maintained which holds securities for
your direct or indirect benefit as of the date you began your employment.
<TABLE>
- -----------------------------------------------------------------------------------------------------------------------
Name of Financial Service(s) Firm and Address Account Title Account Number
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
SECURITIES HOLDINGS:
Complete the following (or attach a copy of your most recent statement(s))
listing all of your securities holdings, with the exception of open-ended mutual
funds and U.S Government securities if:
You own securities which are held by financial services firm(s) as
described above. If you submit a copy of a statement, it must include all
of the information set forth below. Please be sure to include any
additional securities purchased since the date of the brokerage statement
which is attached. Use additional sheets if necessary.
Your securities are not held with a financial service(s) firm (e.g.,
dividend reinvestment programs).
<TABLE>
<CAPTION>
- ----------------------- ------------------- ---------------- ------------------ ---------------- ---------------------------
Title of Security Ticker Symbol # of Shares Principal Amt. Held Since Financial Services Firm
- ----------------------- ------------------- ---------------- ------------------ ---------------- ---------------------------
<S> <C> <C> <C> <C> <C>
- ----------------------- ------------------- ---------------- ------------------ ---------------- ---------------------------
- ----------------------- ------------------- ---------------- ------------------ ---------------- ---------------------------
- ----------------------- ------------------- ---------------- ------------------ ---------------- ---------------------------
</TABLE>
[ ] I have no securities holdings to report.
I certify that I have received the SSB Citi - North America Personal Investment
Policy and have read it and understood its contents. I further certify that the
above represents a complete and accurate description of my brokerage account(s)
and securities holdings as of my date of employment.
Signature: ______________________________ Date of Signature: _______________
14
