<PAGE>
As filed with the Securities and Exchange Commission on April 29, 1996
Securities Act File No. 2-57073
Investment Company Act File No. 811-2667
================================================================================
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. 22 / x /
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 / x /
Amendment No. 21 / x /
SALOMON BROTHERS CAPITAL FUND INC
--------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
7 World Trade Center, New York, New York 10048
---------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (212) 668-8578
Thomas W. Brock
7 World Trade Center, New York, New York 10048
-----------------------------------------------
(Name and Address of Agent for Service)
Copy to:
Tana E. Tselepis, Corporate Secretary
7 World Trade Center, New York, New York 10048
-----------------------------------------------
Approximate Date of Proposed Public Offering:
It is proposed that this filing will become effective:
X immediately upon filing pursuant to Rule 485(b)
- ---
on ________ pursuant to Rule 485(b)
- ---
60 days after filing pursuant to Rule 485(a)
- ---
on ___________ pursuant to Rule 485(a)
- ---
The Registrant has previously registered an indefinite number of its shares
under the Securities Act of l933, as amended, pursuant to Rule 24f-2 under the
Investment Company Act of 1940, as amended. The Registrant filed its Rule 24f-2
Notice for the fiscal year ended December 31, l995 on February 28, 1996.
<PAGE>
Salomon Brothers Capital Fund Inc
CALCULATION OF REGISTRATION FEE UNDER
THE SECURITIES ACT OF 1933(1)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Proposed Proposed
Title of Maximum Maximum
Securities Amount Offering Aggregate Amount of
Being Being Price Per Offering Registration
Registered Registered* Unit (2) Price (3) Fee
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Capital Stock
(par value
$1.00 per share) 682,602 $19.50 $290,000 $100
shares
- --------------------------------------------------------------------------------
</TABLE>
* The Registrant has previously registered 13,746,810 shares of Capital Stock
under the Securities Act of 1993.
(1) The shares being registered as set forth in this table are in addition to
the indefinite number of shares of Capital Stock of Salomon Brothers
Capital Fund Inc (the "Fund"), which Registrant has registered under the
Securities Act of 1933, as amended (the "1933 Act"), pursuant to Rule 24f-2
under the Investment Company Act of 1940, as amended (the "1940 Act"). The
Registrant's Rule 24f-2 Notice for its fiscal year ended December 31, 1995
was filed on February 28, 1996.
(2) Based on the Fund's net asset value of $19.50 on April 11, 1996 pursuant to
Rule 457(d) under the 1933 Act and Rule 24e-2(a) under the 1940 Act.
(3) In response to Rule 24e-2(b) under the 1940 Act: (1) the calculation of the
maximum aggregate offering price is made pursuant to Rule 24e-2; (2)
2,277,011 shares of Capital Stock were redeemed by the Fund during the
fiscal year ended December 31, 1995; (3) 1,609,281 shares are being used
for reductions pursuant to Rule 24f-2 during the current fiscal year; and
(4) 667,730 shares are being used for reduction in this amendment pursuant
to Rule 24e-2(a).
<PAGE>
SALOMON BROTHERS CAPITAL FUND INC
Registration Statement on Form N-1A
CROSS REFERENCE SHEET
Pursuant to Rule 495(a)
under the Securities Act of 1933
Part A Prospectus Caption
- ------ ------------------
Item 1. Cover Page.............................. Cover Page
Item 2. Synopsis................................ Summary
The Fund's Expenses
Item 3. Condensed Financial
Information............................ Financial Highlights
The Fund's Performance
Item 4. General Description
Registrant............................. Summary; Investment
Objectives and Policies;
Limiting Investment Risks
Item 5. Management of the Fund.................. Management; Purchase of
Shares
Item 6. Capital Stock and Other Securities...... Dividends, Distributions
and Federal Income Taxes;
Account Services; Capital
Stock
Item 7. Purchase of Securities
Being Offered.......................... Determination of Net
Asset Value; Purchase of
Shares; Shareholder
Services
Item 8. Redemption or Repurchase................ Redemption of Shares;
Determination of
Net Asset Value;
Shareholder Services
Item 9. Pending Legal Proceedings............... Not Applicable
<PAGE>
Statement of Additional
Part B. Information Caption
- ------- -----------------------
Item 10. Cover Page.......................... Cover Page
Item 11. Table of Contents................... Table of Contents
Item 12. General Information and
History............................ Cover Page; Capital
Stock
Item 13. Investment Objectives and
Policies........................... Investment Policies;
Limiting Investment Risks
Item 14. Management of the Registrant........ Management
Item 15. Control Persons and Principal
Holders of Securities.............. Management; Capital Stock
Item 16. Investment Advisory and
Other Services..................... Management; Custodian and
Transfer Agent; Independent
Accountants
Item 17. Brokerage Allocation and............ Portfolio Transactions
Other Practices
Item 18. Capital Stock and Other............. Capital Stock
Securities
Item 19. Purchase, Redemption and Pricing
of Securities Being Offered........ Purchase of Shares; Redemption
of Shares; Determination of Net
Asset Value; Redemption in
Kind; Shareholder Services
Item 20. Tax Status.......................... Federal Income Taxes
Item 21. Underwriters........................ Management
Item 22. Calculation of Performance Data..... Performance Data
Item 23. Financial Statements................ Financial Statements
<PAGE>
SALOMON BROTHERS CAPITAL FUND INC
7 World Trade Center, New York, New York 10048
(212) 783-1301 or (800) SALOMON
Salomon Brothers Capital Fund Inc (the "Fund") is an open-end, no-load, non-di-
versified, management investment company. The Fund seeks capital appreciation
through investments in securities, primarily common stocks, which are believed
to have above-average price appreciation potential and which may also involve
above-average risk. Current income is an incidental consideration. There can be
no assurance that the Fund's objective will be attained.
This Prospectus sets forth concisely the information a prospective investor
should know before investing in the Fund. This prospectus should be read and
retained for ready reference to information about the Fund. A Statement of Ad-
ditional Information dated April 29, 1996, containing additional information
about the Fund (the "Statement of Additional Information"), has been filed with
the Securities and Exchange Commission (the "SEC") and is hereby incorporated
by reference into this Prospectus. The Statement of Additional Information is
available without charge and can be obtained by writing or calling the Fund at
the address and telephone number printed above.
TABLE OF CONTENTS
<TABLE>
<S> <C>
Summary 2
The Fund's Expenses 3
Financial Highlights 4
The Fund's Performance 5
Investment Objective and Policies 6
Limiting Investment Risks 9
Management 10
Determination of Net Asset Value 10
Purchase of Shares 11
Redemption of Shares 12
Dividends, Distributions and Federal Income Taxes 14
Shareholder Services 15
Account Services 17
Capital Stock 17
</TABLE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE AC-
CURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
SALOMON BROTHERS ASSET MANAGEMENT INC--INVESTMENT MANAGER
SALOMON BROTHERS INC--DISTRIBUTOR
APRIL 29, 1996
<PAGE>
SUMMARY
THE FUND
Salomon Brothers Capital Fund Inc (the "Fund"), an open-end, no-load, non-di-
versified, management investment company, was incorporated in Maryland on
August 23, 1976.
INVESTMENT OBJECTIVE
The Fund's investment objective is capital appreciation through investments
primarily in common stocks, or securities convertible into common stocks, which
are believed to have above-average price appreciation potential and which may
also involve above-average risk. There can be no assurance that the Fund's ob-
jective will be achieved. Current income is an incidental consideration.
THE FUND'S INVESTMENT MANAGER
Salomon Brothers Asset Management Inc ("SBAM") is the Fund's investment manag-
er. SBAM also is the investment manager to other investment companies and nu-
merous individuals and institutions. The Fund pays SBAM a management fee at an
annual rate of 1% of the Fund's average daily net assets up to $100 million,
.75% on the next $100 million, .625% on the next $200 million and .50% on aver-
age daily net assets in excess of $400 million. See "Management".
PURCHASE OF SHARES
Shares may be purchased at net asset value without a sales charge (i) through
First Data Investor Services Group, Inc. ("FDISG"), a wholly owned subsidiary
of First Data Corporation, the Fund's transfer agent, or (ii) from a selected
dealer. The minimum initial investment is $1,000. Additional investments re-
quire a minimum of $100. Investments for retirement plans are subject to a $250
minimum initial investment requirement. See "Purchase of Shares".
SALE OF SHARES
The Fund redeems shares at the next determined net asset value. Depending on
the net asset value of the Fund's shares at the time of redemption, the value
of shares on redemption may be more or less than the investor's cost. There is
no redemption fee. See "Redemption of Shares".
DIVIDENDS
The Fund intends to distribute annually substantially all of its net investment
income and net realized long-term capital gains, which will be reinvested in
additional shares of the Fund unless a shareholder requests otherwise. See
"Dividends, Distributions and Federal Income Taxes".
CERTAIN FACTORS TO BE CONSIDERED
The Fund believes that its shares are suitable for certain institutional in-
vestors, including employee benefit funds, and for individuals who can afford
the risks described herein. See "Investment Objective and Policies." The Fund's
shares are best suited for the risk portion of an investor's portfolio. An in-
vestment in the Fund's shares is not a complete investment program.
2
<PAGE>
THE FUND'S EXPENSES
The following expense table is provided to assist investors in understanding
the various costs and expenses that an investor will incur, either directly or
indirectly, as a shareholder in the Fund, based upon the Fund's actual operat-
ing expenses for its most recent fiscal year which are calculated as a percent-
age of average daily net assets. These are the only fund-related expenses that
an investor bears.
<TABLE>
<S> <C>
Management fees 1.00%
Other expenses .36%
Total Fund operating expenses 1.36%
</TABLE>
"Management fees" in the above table represents investment advisory fees paid
to SBAM for the year ended December 31, 1995. The nature of SBAM's services is
described under "Management". Pursuant to a Sub-Administration Agreement, SBAM
remitted a portion of its management fee in 1995 (equal to .08% of the Fund's
average daily net assets) to FDISG. Effective May 1, 1996, pursuant to an Ad-
ministration and Accounting Services Agreement with Investors Bank & Trust Com-
pany ("Investors Bank"), Investors Bank provides administration and accounting
services to the Fund. In accordance with the agreement with Investors Bank,
SBAM will pay Investors Bank a fee calculated daily and payable monthly, at an
annual rate of .06% of the Fund's average daily net assets. Accordingly, SBAM
has terminated the Sub-administration Agreement with FDISG. "Other expenses"
includes fees for shareholder services, custodial fees, legal and accounting
fees, printing costs and registration fees.
EXAMPLE: The following example demonstrates the projected dollar amount of to-
tal cumulative expenses that would be incurred over various periods with re-
spect to a hypothetical investment in the Fund. These amounts are based upon
payments by the Fund of operating expenses set forth in the table above, and
are also based upon the following assumptions:
A shareholder would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time period:
<TABLE>
<S> <C>
After 1 year $ 14
After 3 years $ 43
After 5 years $ 74
After 10 years $164
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EX-
PENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. Moreover,
while the example assumes a 5% annual return, the Fund's performance will vary
and may result in a return greater or less than 5%.
3
<PAGE>
FINANCIAL HIGHLIGHTS
The following selected data per share of capital stock outstanding throughout
each period and ratios has been audited by Price Waterhouse LLP, independent
accountants, for each of the ten years in the period ended December 31, 1995,
whose unqualified report thereon appears in the financial statements which are
included in the Statement of Additional Information. This information should be
read in conjunction with the financial statements and notes thereto which ap-
pear in the Statement of Additional Information.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990+ 1989 1988 1987 1986
-------- ------- -------- -------- ------- ------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of year...... $15.62 $20.80 $19.64 $19.06 $14.86 $16.75 $15.58 $16.58 $17.87 $19.75
-------- ------- -------- -------- ------- ------- ------- ------- -------- --------
Net investment income... .14 .03 .028 .10 .33 .20 .05 .01(P) .04 .13
Net gains (or losses) on
securities (both
realized and
unrealized)............ 5.27 (2.87) 3.242 .80 4.56 (1.715) 6.25 (.775) .355* 2.275
-------- ------- -------- -------- ------- ------- ------- ------- -------- --------
Total from investment
operations............ 5.41 (2.84) 3.27 .90 4.89 (1.515) 6.30 (.765) .395 2.405
-------- ------- -------- -------- ------- ------- ------- ------- -------- --------
Less dividends and
distributions:
Dividends from net
investment income...... (.14) (.03) (.035) (.105) (.325) (.285) -- -- (.13) (.25)
Distributions from net
realized gain on
investments............ (2.22) (1.51) (2.075) (.215) (.365) (.09) (5.13) (.235) (1.555) (4.035)
Distributions in excess
of net realized gains.. -- (.80) -- -- -- -- -- -- -- --
-------- ------- -------- -------- ------- ------- ------- ------- -------- --------
Total dividends and
distributions......... (2.36) (2.34) (2.11) (.32) (.69) (.375) (5.13) (.235) (1.685) (4.285)
-------- ------- -------- -------- ------- ------- ------- ------- -------- --------
Net asset value, end of
year................... $18.67 $15.62 $20.80 $19.64 $19.06 $14.86 $16.75 $15.58 $16.58 $17.87
======== ======= ======== ======== ======= ======= ======= ======= ======== ========
Total investment return
based on net asset
value per share........ +34.9% -14.2% +17.2% +4.7% +33.4% -9.1% +39.7% -4.6% +1.7% +13.7%
RATIOS/SUPPLEMENTAL DATA:
Net assets end of year
(thousands)............. $102,429 $86,704 $113,905 $103,356 $89,829 $75,815 $72,621 $64,267 $91,313 $105,215
Ratio of expenses to
average net assets++... 1.36% 1.30% 1.31% 1.34% 1.48% 1.44% 1.48% 1.27% 1.17%* 1.13%
Ratio of net investment
income to average net
assets................. .74% 0.12% 0.13% 0.58% 1.87% 1.59% 0.33% 0.03% 0.19% 0.65%
Portfolio turnover rate. 217% 152% 104% 41% 94% 156% 362% 270% 395% 279%
</TABLE>
- --------
* Net of provision for income taxes of $.057 per share. Expense ratio
including provision would be 1.45%.
(P) Calculated using average shares outstanding.
++ Net of reimbursement for the years 1986 through 1988.
+ Since May 1, 1990, the Fund has been managed by SBAM. Prior thereto, the
Lehman Management Co. division of Shearson Lehman Brothers Inc. ("Lemco")
served as the Fund's investment manager.
4
<PAGE>
THE FUND'S PERFORMANCE
TOTAL RETURN
From time to time, the Fund may advertise its "average annual total return"
over various periods of time. Such total return figures show the average annual
percentage change in value of an investment in the Fund from the beginning date
of the measuring period to the end of the measuring period. These figures re-
flect changes in the price of the Fund's shares and assume that any income div-
idends and/or capital gains distributions made by the Fund during the period
were reinvested in shares of the Fund. Figures will be given for the most cur-
rent one-, five- and ten-year periods and may be given for other periods as
well. When considering "average" total return figures for periods longer than
one year, it is important to note that the Fund's annual total return for any
one year in the period might have been greater or less than the average for the
entire period.
The Fund's average annual total return for the fiscal periods ended December
31, 1995 was as follows:
1 year + 34.88%
5 years + 13.64%
10 years + 10.23%
In 1992, the Board of Directors approved the elimination of the sales charge
and accordingly, no sales charge is reflected in the average annual total
return figures.
Furthermore, in reports or other communications to shareholders or in advertis-
ing material, the Fund may compare its performance with that of other mutual
funds as listed in the rankings prepared by Lipper Analytical Services, Inc. or
similar independent services which monitor the performance of mutual funds, fi-
nancial indices such as the Standard & Poor's Composite Index of 500 Stocks or
other industry or financial publications. It is important to note that the to-
tal return figures are based on historical earnings and are not intended to in-
dicate future performance. The Fund's Annual Report dated December 31, 1995
containing additional performance information is available without charge and
can be obtained by writing or calling the Fund at the address or telephone num-
ber printed on the front cover.
Annual and cumulative investment results for each of the Fund's fiscal years
since December 31, 1986 are shown in the table which follows.
<TABLE>
<CAPTION>
ANNUAL CUMULATIVE
--------------------- ---------------------
SALOMON BROTHERS SALOMON BROTHERS
CAPITAL FUND INC CAPITAL FUND INC
--------------------- ---------------------
YEARS ENDED CAPITAL GAINS TOTAL CAPITAL GAINS TOTAL
DECEMBER 31 REINVESTED RETURN+ REINVESTED RETURN+
- ----------- ------------- ------- ------------- -------
<S> <C> <C> <C> <C>
1986................................ +12% +14% + 12% + 14%
1987................................ + 1 + 1 + 13 + 15
1988................................ - 5 - 5 + 8 + 10
1989................................ +40 +40 + 51 + 54
1990*............................... -11 - 9 + 34 + 40
1991................................ +31 +33 + 76 + 87
1992................................ + 4 + 5 + 83 + 95
1993................................ +17 +17 +115 +129
1994................................ -14 -14 + 84 + 96
1995................................ +34 +35 +146 +165
</TABLE>
+ Income dividends and capital gain distributions reinvested.
* SBAM has managed the Fund since May 1, 1990. Prior thereto Lemco served as
the Fund's investment manager.
5
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek capital appreciation through
investments in securities which are believed to have above- average price
appreciation potential. Such investments may also involve above-average risk.
There can be no assurance that the Fund's objective will be achieved. Although
the Fund may receive current income from dividends, interest and other sources,
income is an incidental consideration to seeking capital appreciation.
In seeking capital appreciation, investments by the Fund may be in seasoned,
established companies, relatively small new 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.
The Fund anticipates that its investments generally will be in securities of
companies which it considers to reflect the following characteristics:
(1) share prices which appear to undervalue the company's assets or which ap-
pear not to take into account adequately factors such as prospective reversal
of an unfavorable industry trend, lack of investor recognition or disappointing
earnings believed to be temporary;
(2) special situations such as existing or possible changes in management or
management policies, corporate structure or control, capitalization, regulatory
environment, or other circumstances which could be expected to favor earnings
or market price of such company's shares; or
(3) growth potential due to technological advances, new methods in marketing or
production, new or unique products or services, changes in demand for products
or services or other significant new developments.
The Fund intends to invest primarily in common stocks, or securities convert-
ible into or exchangeable for common stocks, such as con vertible preferred
stocks or convertible debentures. To meet operating expenses, to serve as col-
lateral in connection with certain investment techniques and to meet antici-
pated 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. As described below, short-term
investments may include repurchase agreements with banks or broker-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 Standard & Poor's Ratings Service, a
division of McGraw-Hill Companies, Inc. ("S&P") or Baa or better by Moody's In-
vestors Service, Inc. ("Moody's"), or if rated by other rating agencies or if
unrated, securities deemed by SBAM to be of comparable quality. Debt securities
rated BBB by S&P are regarded by S&P as having adequate capacity to pay inter-
est and repay principal, while debt securities rated Baa by Moody's are re-
garded by Moody's as medium grade obligations and as having speculative charac-
teristics. 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 in-
terest rates may decline.
The Fund from time to time may invest up to 5% of its net assets in non-con-
vertible 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 securi-
ties rated below investment grade. The Fund may invest up to 20% of the value
of the Fund's assets in securities of foreign issuers.
6
<PAGE>
As discussed below, certain additional risks may be inherent in the Fund's in-
vestment objective and policies.
ILLIQUID OR RESTRICTED SECURITIES
The Fund may purchase securities for which there is a limited trading market or
which are subject to restrictions on resale to the public. If the 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 mar-
ketability 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 the 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" (see "Limiting Investment
Risks") may involve added expense to the Fund should the Fund be required to
bear registration costs with respect to such securities and could involve de-
lays 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 val-
ue. In addition to the restrictions set forth under "Limiting Investment Risks"
the Fund will not invest more than 10% of the value of its total assets in il-
liquid securities, such as "restricted securities" which may be deemed to be
illiquid, and securities that are not readily marketable. As more fully de-
scribed in the Statement of Additional Information, the Fund may purchase cer-
tain restricted securities ("Rule 144A securities") for which there is a sec-
ondary market of qualified institutional buyers as contemplated by Rule 144A
under the Securities Act of 1933. The Fund's holdings of Rule 144A securities
which are liquid securities will not be subject to the 10% limitation described
above. Rule 144A is a relatively recent development and there is no assurance
that a liquid market in Rule 144A securities will develop or be maintained. To
the extent that the number of qualified institutional buyers is reduced, a pre-
viously liquid Rule 144A security may be determined to be illiquid, thus in-
creasing the percentage of illiquid assets in the Fund's portfolio.
NON-DIVERSIFIED STATUS
As a non-diversified investment company, the Fund may invest more than 5% of
the value of its assets in the obligations of any single issuer, subject to the
diversification requirements of subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"). To the extent the Fund invests a relatively high
percentage of its assets in the securities of a limited number of issuers, the
Fund may be more susceptible to any single economic, political or regulatory
occurrence than a more widely diversified fund and may be subject to greater
risk of loss with respect to its portfolio securities.
BORROWING
To meet redemptions or to take advantage of promising investment opportunities
without disturbing an established portfolio, the Fund may borrow up to an ag-
gregate of 15% of the value of its total assets taken at the time of borrowing.
In addition, the Fund may borrow as a temporary measure an aggregate amount
which may not exceed 5% of the value of its total assets at the time of borrow-
ing.
Borrowing can increase the opportunity for capital appreciation when security
prices rise and increase the risk of loss when prices de-
7
<PAGE>
cline. Interest costs of borrowing are an expense that otherwise would not be
incurred and this could reduce the net investment income of the Fund. Although
the principal of any borrowing will be fixed, the Fund's assets may change in
value during the time the borrowing is outstanding. The Fund may be required to
liquidate portfolio securities at a time when it would be disadvantageous to do
so in order to make payments with respect to any borrowing, which could affect
SBAM's strategy and the ability of the Fund to comply with certain provisions
of the Code in order to provide "pass-through" tax treatment to shareholders.
Borrowings shall be only from banks. Borrowings may be unsecured, or may be se-
cured 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 net assets.
FOREIGN SECURITIES
Investment in securities of foreign issuers may involve risks arising from non-
U.S. accounting, auditing and financial reporting standards, from restrictions
on foreign investment and repatriation of capital, from differences between
U.S. and foreign securities markets, including less volume, much greater price
volatility in and relative illiquidity of foreign securities markets, different
trading and settlement practices and less government supervision and regula-
tion, 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. Additionally, cer-
tain amounts of the Fund's income may be subject to withholding taxes in the
foreign countries in which it invests. For a further discussion of certain
risks involved in investing in foreign securities, see the Statement of Addi-
tional Information.
HIGH YIELD/HIGH RISK SECURITIES
High-yielding securities rated below investment grade (sometimes known as "junk
bonds"), involve comparatively greater risks than higher quality securities,
including price volatility, the risk of non-payment of dividends or default in
the timely payment of interest and principal in accordance with the terms of
the obligations and a less liquid secondary market. For additional information
on these securities, which may involve a high degree of risk, see the Statement
of Additional Information under "Investment Policies."
LOANS OF PORTFOLIO SECURITIES
As indicated under "Limiting Investment Risks" below and in the Statement of
Additional Information, the Fund may from time to time lend portfolio securi-
ties to selected members of the New York Stock Exchange (the "NYSE"). Such
loans will not exceed 10% of the Fund's total assets, taken at value. The risk
of lending portfolio securities, as with other extensions of credit, consists
of possible delay in recovery of the securities or possible loss of rights in
the collateral should the borrower fail financially, which in each case would
result in a loss.
REPURCHASE AGREEMENTS
As indicated under "Limiting Investment Risks" below and in the Statement of
Additional Information, the Fund may invest in repurchase agreements in an
amount up to 25% of its total assets. Repurchase agreements are short-term
investments which are utilized from time to time to obtain a return on avail-
able cash. Entering into a repurchase agreement involves the acquisition by the
Fund from a broker-dealer or bank of an underlying security, most typically a
debt instrument, subject to the obligation of the seller to repurchase, and the
Fund to resell, usually not more than one week after its purchase, the instru-
ment at a fixed price in excess of the Fund's purchase price, such excess rep-
resenting the Fund's return on the repurchase agreement. In the event of a de-
fault by the seller under the repurchase agreement, the
8
<PAGE>
Fund could experience losses and experience delays in connection with the dis-
position of the underlying security. To the extent that, in the meantime, the
value of the securities that the Fund has purchased has decreased, the Fund
could experience a loss.
OPTIONS, FUTURES CONTRACTS AND RELATED OPTIONS, AND CURRENCY TRANSACTIONS
As a hedge against either a decline in the value of securities included in the
Fund's portfolio or against an increase in the price of securities which it
plans to purchase or in order to preserve or maintain a return or spread on a
particular investment or portion of its portfolio or to achieve a particular
return on cash balances, the Fund may enter into various types of transactions
often referred to as "derivative transactions." The Fund may also enter into
such transactions to increase income. The Fund may purchase and sell put and
call options and write covered put and call options on individual stocks and
stock indices. In addition, the Fund may purchase or sell futures contracts on
stock indices, currencies and interest rates and may purchase and sell put and
call options and write covered put and call options on such futures contracts.
The Fund may also enter into forward currency exchange contracts and purchase,
sell and write options on currencies to attempt to minimize the risk to the
Fund from adverse changes in the relationship between the U.S. dollar and for-
eign currencies.
The use of strategies involving these derivative transactions involves risks
different from those involved with direct investments in securities. The suc-
cessful use of these techniques also requires skills different from those nec-
essary to select portfolio securities. The Fund must pay certain commissions
and other costs in connection with such transactions, which may increase the
Fund's expenses and reduce return. Use of these transactions may increase the
Fund's portfolio turnover rate and increase transaction costs. A more complete
discussion of the limitations and potential risks involved in these transac-
tions is contained in the Appendix to this Prospectus and in the Statement of
Additional Information.
The foregoing investment policies (other than the policy of the Fund with re-
spect to the borrowing of money) are not fundamental and may be changed by the
Board of Directors of the Fund without the approval of shareholders.
LIMITING INVESTMENT RISKS
The Fund may not:
(1) hold more than 25% of the value of its total assets in the securities of
any single company or in the securities of companies in any one industry. As
to 50% of the value of its total assets, the Fund's investment in any one se-
curity other than United States Government obligations will not exceed 5% of
the value of its total assets and as to this 50%, the Fund will not invest in
more than 10% of the outstanding voting securities of any one issuer;
(2) borrow money or pledge or mortgage its assets, except as described under
"Investment Objective and Policies" and except that for purposes of this re-
striction, collateral arrangements with respect to the writing of options on
stocks and stock indices, the purchase and sale of futures contracts and op-
tions on futures contracts, and forward currency contracts are not deemed a
pledge of assets or a borrowing of money;
(3) underwrite securities, except in instances where the Fund has acquired
portfolio securities which it may not be free to sell publicly without regis-
tration under the Securities Act of 1933 ("restricted securities"); in such
registrations the Fund may technically be deemed an "underwriter" for pur-
poses of that Act. No more than 10% of the value of Fund's total assets may
be invested in illiquid securities;
(4) make loans other than through (a) the lending of its portfolio securities
in accor-
9
<PAGE>
dance with the procedures described under "Investment Policies--Loans of
Portfolio Securities" in the Statement of Additional Information, or (b) en-
tering into repurchase agreements in an amount up to an aggregate of 25% of
its total assets, but this restriction shall not prevent the Fund from buying
a portion of an issue of bonds, debentures or other obligations which are
liquid, or from investing up to an aggregate of 10% (including investments in
other types of illiquid securities) of the value of its total assets in por-
tions of issues of bonds, debentures or other obligations of a type privately
placed with financial institutions and which are illiquid; or
(5) invest more than 10% of the value of the Fund's total assets in securi-
ties of unseasoned issuers, including their predecessors, which have been in
operation for less than three years, and equity securities which are not
readily marketable.
The foregoing investment restrictions and those described in the Statement of
Additional Information are fundamental policies of the Fund which may be
changed only when permitted by law, if applicable, and approved by the holders
of a majority of the Fund's outstanding voting securities as defined by the In-
vestment Company Act of 1940, as amended (the "1940 Act").
MANAGEMENT
The Fund retains SBAM, located at Seven World Trade Center, New York, New York
10048, as its investment manager. SBAM is an indirect wholly owned subsidiary
of Salomon Inc. Together with affiliates in London, Frankfurt, Tokyo and Hong
Kong, SBAM provides a broad range of fixed income and equity investment advi-
sory services for individual and institutional clients located throughout the
world, and serves as investment adviser to various investment companies. On
April 30, 1990, the shareholders of the Fund approved a management contract
(the "Management Contract") between SBAM and the Fund. The continuation of the
Management Contract was approved through May 1, 1997 by the Fund's Board of Di-
rectors, including a majority of the Fund's directors who are not '"interested
persons" of the Fund or SBAM, on January 22, 1996. On January 3, 1995, Ross S.
Margolies, a Director of Salomon Brothers, assumed primary portfolio management
responsibility for the Fund. Mr. Margolies is a portfolio manager with SBAM who
manages other investments in equities, options, convertible bonds and high
yield bonds. Prior to joining SBAM in 1992, Mr. Margolies was a Senior Vice
President and analyst in the High Yield Research Department at Lehman Brothers.
Subject to policy established by the Fund's Board of Directors, which has over-
all responsibility for the business and affairs of the Fund, SBAM manages the
operations of the Fund pur suant to the Management Contract. SBAM also fur-
nishes office space and certain facilities required for conducting the business
of the Fund and pays the compensation of the Fund's officers, employees and di-
rectors affiliated with SBAM. Except for the expenses paid by SBAM that are de-
scribed herein, the Fund bears all costs of its operations. During the fiscal
year ended December 31, 1995, the Fund paid a management fee to SBAM at a rate
of 1.00% of the Fund's average daily net assets during that year. This fee is
at a higher rate than the management fees paid by most other investment compa-
nies. During the fiscal year ended December 31, 1995, the Fund's total expenses
represented 1.36% of its average daily net assets. See "The Fund's Expenses."
Pursuant to an Administration and Accounting Services Agreement with SBAM, In-
vestors Bank, 89 South Street, Boston, Massachusetts 02111, will perform cer-
tain administrative and accounting services in connection with the operations
of the Fund. As compensation for its services and at no additional cost to the
Fund,
10
<PAGE>
SBAM will pay Investors Bank a fee each month at an annual rate of .06% of the
average daily value of the Fund's net assets. FDISG, P.O. Box 9109, Boston,
Massachusetts 02205-9109, serves as the Fund's Transfer Agent and Dividend Dis-
bursing Agent.
Consistent with the Rules of Fair Practice of the National Association of Secu-
rities Dealers, Inc., and subject to seeking the most favorable price and exe-
cution available, SBAM may consider sales of shares of the Fund as a factor in
the selection of brokers to execute portfolio transactions for the Fund. The
Fund may use Salomon Brothers to execute portfolio transactions when SBAM be-
lieves that the broker's charge for the transaction does not exceed the usual
and customary levels charged by other brokers in connection with comparable
transactions involving similar securities. See the Statement of Additional In-
formation for a more complete description of the Fund's policies with respect
to portfolio transactions.
DETERMINATION OF NET ASSET VALUE
The Fund's net asset value per share for the purpose of pricing purchase and
redemption orders is determined at the regular close of business of the NYSE on
each day the NYSE is open for trading, i.e., Monday through Friday with the ex-
ception of New Year's Day, Presidents' Day, Good Friday, Memorial Day, Indepen-
dence Day, Labor Day, Thanksgiving Day and Christmas Day, and the preceding
Friday or subsequent Monday when one of those holidays falls on a Saturday or
Sunday, respectively. The net asset value per share is computed by dividing the
value of the net assets of the Fund (i.e., the value of the assets less the li-
abilities) by the total number of Fund shares outstanding. In calculating net
asset value, all portfolio securities will be valued at market value when there
is a reliable market quotation available for the securities and otherwise pur-
suant to procedures adopted by the Board of Directors.
PURCHASE OF SHARES
Shares of the Fund may be purchased through FDISG, through Salomon Brothers,
the distributor of the Fund, or from selected dealers. All investments will be
made at the net asset value per share next determined after receipt of a pur-
chase order. Shares are entitled to dividends declared beginning on the day af-
ter the purchase order is received in good order.
The minimum initial investment in Fund shares is $1,000 and subsequent invest-
ments may be made in amounts of $100 or more. Investments for retirement plans
made available by the Fund are subject to a $250 minimum initial investment re-
quirement. The minimum investment requirements may be waived or lowered for in-
vestments effected on a group basis by certain entities and their employees
such as pursuant to a payroll deduction plan. The Fund reserves the right to
reject any purchase order in whole or in part.
To make an initial purchase of shares of the Fund through FDISG, send a com-
pleted Purchase Application with your check made payable to Salomon Brothers
Capital Fund Inc, c/o First Data Investors Services Group, Inc., P.O. Box 9109,
Boston, Massachusetts 02205-9109. Subsequent investments should be sent to
FDISG at the same address. Shareholders should be sure to write the Fund ac-
count number on the check. If an investor's purchase check is not collected,
the purchase will be cancelled and FDISG will charge a fee of $10 to the share-
holder's account. FDISG does not intend to resubmit such checks for collection.
Orders for the purchase of Fund shares received by selected dealers by the
close of regular trading on the NYSE on any day that the Fund calculates its
net asset value and transmission to Salomon Brothers by the close of its
11
<PAGE>
business day (normally 5:00 p.m., New York time) will be priced according to
the net asset value determined on that day. Otherwise, the orders will be
priced as of the time the net asset value is next determined. It is the deal-
ers' responsibility that orders are transmitted so as to be received by Salomon
Brothers prior to the close of its business day.
Although most shareholders elect not to receive stock certificates, certifi-
cates for full shares can be obtained on specific written request at no cost to
the shareholder. No certificates will be issued for fractional shares.
Dividends and capital gains distributions will be reinvested automatically in
additional shares of the Fund at the net asset value per share and such shares
will automatically be credited to a shareholder's account, unless a shareholder
elects to receive dividends and capital gains distributions in cash. In addi-
tion, a shareholder who does not have a brokerage account may inform FDISG, by
notice sent to P.O. Box 9109, Boston, Massachusetts 02205-9109, that he or she
wishes to receive such dividends or distributions in cash directly from FDISG.
If such distribution is to be sent to an address other than the address on rec-
ord, a signature guarantee is required. See "Redemptions by Mail" below for in-
structions concerning signature guarantees. Such signature must be signed ex-
actly as registered with FDISG. Shareholders may change the distribution option
at any time by notification to FDISG prior to the record date of any such divi-
dend or distribution.
Salomon Brothers may enter into dealer agreements with selected dealers.
Purchases of shares made through a selected dealer should be made in accordance
with the procedures prescribed by such selected dealer.
DISTRIBUTOR
Salomon Brothers, located at Seven World Trade Center, New York, New York
10048, serves as the Fund's distributor. Salomon Brothers is a wholly owned
subsidiary of Salomon Brothers Holding Company Inc, which is in turn wholly
owned by Salomon Inc. It is also one of the largest securities dealers in the
world and a registered broker-dealer. Salomon Brothers makes markets in securi-
ties and provides a broad range of underwriting, research, and financial advi-
sory services to governments, international corporations, and institutional in-
vestors. Salomon Brothers may from time to time receive fees from the Fund in
connection with the execution of portfolio transactions on behalf of the Fund.
REDEMPTION OF SHARES
Shareholders may redeem all or any part of their shareholdings at the net asset
value of such shares. THERE IS NO REDEMPTION CHARGE. The price at which shares
will be redeemed will be the net asset value per share next determined after
the receipt of proper redemption instructions.
REDEMPTION BY MAIL
Shares may be redeemed by submitting a written request to FDISG which meets all
of the following requirements:
(1) written instructions from registered owner(s), signed exactly as shares are
registered;
(2) all certificates, if any, to be redeemed;
(3) if shares to be redeemed have a net asset value of $50,000 or more, a let-
ter or a stock power signed by the registered owner(s) with the signature(s)
guaranteed by an acceptable guarantor. A guarantee of each shareholder's signa-
ture is required for all redemptions, regardless of the amount involved, when
the proceeds are to be paid to someone other than the registered owner(s) of
the shares redeemed or are sent to other than the registered address. Signature
guarantees must be in accordance with FDISG's standards and procedures. Any one
of the following guarantors is normally
12
<PAGE>
acceptable; (a) a commercial or savings bank which is a member of the Federal
Deposit Insurance Corporation; (b) a trust company; (c) a member firm of a do-
mestic stock exchange; and (d) a foreign branch of any of the above. FDISG will
not accept dated guarantees or guarantees from a notary public; and
(4) in the case of shares held of record in the name of a corporation, trust,
fiduciary or partnership, the redemption agent requires evidence of authority
to sign and a stock power with signature(s) guaranteed.
The Fund will not credit redemption proceeds for any shares until checks re-
ceived in payment for such shares have been collected, which may take up to 15
days or more. A shareholder who anticipates the need for more immediate access
to his or her investment should purchase shares by Federal funds or bank wire,
or by a certified or cashier's check.
TO EXPEDITE PROCESSING OF REDEMPTIONS BY MAIL, SHAREHOLDERS SHOULD SUBMIT RE-
DEMPTION REQUESTS AND ALL RELATED DOCUMENTS DIRECTLY TO FIRST DATA INVESTORS
SERVICES GROUP, INC., P.O. BOX 9109, BOSTON, MASSACHUSETTS 02205-9109.
Unless other instructions are given in proper form, a check for the proceeds of
redemption will be sent to the shareholder's address of record if the share-
holder does not have a brokerage account. If a shareholder has a brokerage ac-
count, redemption proceeds will be credited to such account.
REPURCHASES THROUGH SELECTED DEALERS
In addition, Salomon Brothers will accept orders from dealers with which it has
sales agree-ments for the repurchase of shares held by in- vestors. Repurchase
orders received by the dealer prior to the close of regular trading on the NYSE
on any business day and transmitted to Salomon Brothers prior to the close of
its business day (normally 5:00 p.m., New York time) are effective that day.
Otherwise, the shares will be repurchased at the net asset value next deter-
mined. It is the responsibility of the dealer to transmit orders on a timely
basis. The dealer may charge the investor a fee for executing the order. This
repurchase arrangement is discretionary and may be withdrawn or modified at any
time.
Under the Fund's present policy, it reserves the right to redeem, upon not less
than 30 days' notice, the shares in an account which has a value of less than
$1,000 based on such shareholder's original cost (i.e., without giving effect
to changes in value caused by fluctuations in the value of portfolio securi-
ties). However, any shareholder affected by the exercise of this right will be
allowed to make additional investments prior to the date fixed for redemption
to avoid liquidation of the account.
The value of shares on redemption may be more or less than the investor's cost,
depending on the net asset value of the Fund's shares at the time of redemp-
tion.
Payment of the redemption price will be made within seven days after receipt of
the redemption instructions in good order, (or such shorter time period as may
be required) but the Fund may suspend the right of redemption during any period
when (a) trading on the NYSE is restricted or the NYSE is closed, other than
customary weekend and holiday closings the SEC has by order permitted such sus-
pension, or (c) an emergency, as defined by rules of the SEC, exists, making
disposal of portfolio securities or determination of the value of net assets of
the Fund not reasonably practicable.
TELEPHONE REDEMPTION PRIVILEGE
Shareholders having direct accounts with FDISG may redeem shares by means of
the Telephone Redemption Privilege. The Applica-
13
<PAGE>
tion for Telephone Redemption Privilege must be completed by the shareholder
with the signature(s) guaranteed in the manner described above under "Redemp-
tions by Mail" prior to initiating a telephone redemption.
Shareholders cannot apply the Telephone Redemption Privilege to shares held in
certificate form or for accounts requiring additional supporting documentation
for redemptions such as trust, corporate, estate and guardian accounts.
Proceeds from the telephone redemption will be forwarded to the shareholder by
check. The check will be made payable to the registered shareholder(s) and sent
to the address of record on the file with FDISG.
Shareholders should realize that by making redemption requests by telephone,
they may be giving up a measure of security that they may have if they were to
redeem their shares in writing. The Fund reserves the right to refuse a tele-
phone redemption if it is believed advisable to do so. Procedures for redeeming
Fund shares by telephone may be modified at any time by the Fund. Neither the
Fund nor FDISG will be liable for following redemption instructions received by
telephone, which are reasonably believed to be genuine, and the shareholder
will bear the risk of loss in the event of unauthorized or fraudulent telephone
instructions. The Fund and FDISG will employ reasonable procedures to confirm
that instructions communicated by telephone are genuine. In the absence of fol-
lowing these procedures, the Fund and/or FDISG may be liable for any losses due
to unauthorized or fraudulent instructions. When requesting a redemption by
telephone, shareholders should have available the correct account registration
and account number or tax identification number.
The Fund will not mail redemption proceeds for any shares until checks received
in payment for such shares have been collected, which may take up to 15 days or
more. A shareholder who anticipates the need for more immediate access to his
investment should purchase shares by Federal funds or bank wire, or by certi-
fied or cashier's check.
DIVIDENDS, DISTRIBUTIONS AND FEDERAL INCOME TAXES
The Fund intends to distribute to shareholders substantially all of its net in-
vestment 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 any net capital gains (i.e., the excess of net long-term capital
gains over net short-term capital losses). Any such distribution will be made
annually. Each year the Fund will notify shareholders of the tax status of div-
idends and distributions from the Fund. Dividends and distributions also may be
subject to state and local taxes.
The Fund intends to qualify and elect to be treated as a regulated investment
company under subchapter M of the Code. If so qualified, as to any taxable year
in respect to which it distributes at least 90% of its net investment income,
the Fund will not be subject to federal income tax on such income and capital
gains distributed to shareholders. The Fund is subject to a non-deductible 4%
excise tax calculated as a percentage of certain undistributed amounts of ordi-
nary income and capital gains. To the extent possible, the Fund intends to make
sufficient distributions of ordinary income and capital gains to avoid this ex-
cise tax.
If a shareholder elects to receive dividends and/or distributions in cash and
the check cannot be delivered to a shareholder due to an invalid address or
otherwise remains uncashed by the shareholder for a period of six months, the
Fund reserves the right to reinvest the dividend and/or distribution in a
shareholder's account at the then-current net asset value and to convert the
shareholder's election to automatic reinvestment in shares of the Fund.
Gain or loss, if any, recognized on the sale or other disposition of shares of
the Fund will be
14
<PAGE>
taxed as capital gain or loss if the shares are capital assets in the
shareholder's hands. Generally, a shareholder's gain or loss will be a long-
term gain or loss if the shares have been held for more than one year. If a
shareholder sells or otherwise disposes of shares of the Fund before holding
them for more than six months, any loss on the sale or other disposition of
such shares shall be treated as a long-term capital loss to the extent of any
capital gain dividends received by the shareholder with respect to such
shares. A loss realized on a sale or exchange of shares may be disallowed if
other shares are acquired within a 61-day period beginning 30 days before and
ending 30 days after the date that the shares are disposed.
Dividends and capital gains distributions, if any, will be reinvested in addi-
tional full and fractional shares of the Fund at net asset value unless the
shareholder has previously requested that such dividends and distributions be
paid in cash. See "Purchase of Shares." All dividends and distributions will
be taxable to shareholders whether reinvested in shares or received in cash.
For federal income tax purposes, distributions of net investment income (which
includes the excess of the Fund's net short-term capital gains over net long-
term captial losses) are taxable to shareholders as ordinary income. It is ex-
pected that a portion of the Fund's dividends to corporate shareholders will
qualify for the 70% dividends received deduction generally available to corpo-
rations. Distributions of net capital gains designated by the Fund as capital
gain dividends will be taxable at capital gain rates regardless of how long
the shares have been held by such shareholders, and such distributions will
not be eligible for the dividends received deduction. In general, the maximum
federal income tax rate imposed on individuals with respect to capital gain
dividends will be limited to 28%, whereas the maximum federal income tax rate
imposed on individuals with respect to ordinary income dividends will be
39.6%. Investors should consider the tax implications of buying shares shortly
before the record date of a distribution because distributions will be taxable
even though the net asset value of shares of the Fund is reduced by the dis-
tribution.
Generally, shareholders will be taxable on dividends or distributions in the
year of receipt. However, if the Fund declares a dividend or distribution in
October, November or December to shareholders of record on a specified date in
such a month which is actually paid during the following January, it will be
deemed to have been received by shareholders and paid by the Fund no later
than December 31 of the year in which the dividend or distribution is de-
clared.
The Fund may be required to withhold federal income tax at a rate of 31% from
dividends and redemption proceeds paid to non-corporate shareholders ("backup
withholding"). This tax may be withheld from dividends if (a) the payee fails
to furnish the Fund with a certified correct taxpayer identification number
(e.g., an individual's social security number), (b) the Internal Revenue Serv-
ice (the "IRS") notifies the Fund that the payee has failed to report properly
certain dividend or interest income to the IRS and to respond to notices to
that effect, or (c) when required to do so, the payee fails to certify that he
or she is not subject to withholding pursuant to these provisions. Redemption
proceeds may be subject to withholding under the circumstances described in
(a) above. Backup withholding is not an additional tax and any amounts with-
held may be credited against the shareholder's federal income tax liability.
The foregoing is intended to be general information to shareholders and poten-
tial investors in the Fund and does not constitute tax advice. Shareholders
and potential investors are urged to consult their own tax advisers regarding
fed-
15
<PAGE>
eral, state, local and, if applicable, foreign tax implications of an invest-
ment in the Fund.
SHAREHOLDER SERVICES
The Fund offers the following shareholder services. See the Statement of Addi-
tional Information for further details about these services or call or write
the Fund.
EXCHANGE PRIVILEGE. Shareholders of the Fund may exchange all or part of their
Fund shares for shares of certain Funds in the Salomon Brothers Family of Funds
without payment of any exchange fee. You may exchange your shares in any of the
following Funds currently eligible for exchange privileges:
SALOMON BROTHERS NEW YORK MUNICIPAL MONEY MARKET FUND--A money market fund that
invests primarily in high-quality, short-term obligations issued by or on be-
half of the State of New York or by its instrumentalities or political subdivi-
sions with the goal of providing as high a level of current income exempt from
regular federal, New York State and New York City personal income taxes as is
consistent with liquidity and the stability of principal. Income may not be ex-
empt from certain state or local taxes.
SALOMON BROTHERS OPPORTUNITY FUND INC-- An equity fund which invests for long-
term capital appreciation. Current income is secondary. The fund may employ
speculative investment techniques to attain its goals.
The Fund reserves the right to refuse a telephone request for exchange if it is
believed advisable to do so. Procedures for exchanging Fund shares by telephone
may be modified or terminated at any time by the Fund. Neither the Fund nor
FDISG will be liable for following exchange instructions received by telephone,
which are reasonably believed to be genuine, and the shareholder will bear the
risk of loss in the event of unauthorized or fraudulent telephone instructions.
The Fund or FDISG will employ reasonable procedures to confirm that instruc-
tions communicated by telephone are genuine. The Fund and/or FDISG may be lia-
ble for any losses due to unauthorized or fraudulent instructions in the ab-
sence of following these procedures. When requesting an exchange by telephone,
shareholders should have available the correct account registration and account
numbers or tax identification number.
The exchange of shares of one fund for shares of another fund is treated for
federal income tax purposes as a sale of the shares given in exchange by the
shareholder, and an exchanging shareholder may, therefore, realize a taxable
gain or loss in connection with an exchange.
Shareholders exercising the exchange privilege with any other fund listed above
should review the current prospectus of that fund carefully prior to making an
exchange. Further information regarding the exchange privilege is contained in
the Statement of Additional Information. To obtain the prospectuses of funds in
the Salomon Brothers Family of Funds, shareholders should contact the Fund at
the number on the back cover of this Prospectus.
The exchange privilege is available to shareholders residing in any state in
which the shares of the fund being acquired may be legally sold. Salomon Broth-
ers reserves the right to reject any exchange request. The exchange privilege
may be modified in a material manner or terminated only on 60 days' written no-
tice.
AUTOMATIC WITHDRAWAL PLAN. With an Automatic Withdrawal Plan, a shareholder can
arrange for automatic distributions to be made monthly or quarterly in amounts
not less than $50. A Withdrawal Plan may be opened with an account having a to-
tal value of at least $7,500.
16
<PAGE>
SELF EMPLOYED RETIREMENT PLAN ("SERP"). A prototype defined contribution re-
tirement plan is available for self-employed individuals who wish to contribute
earned income on behalf of themselves and each of their employees to purchase
shares of the Fund and/or certain other mutual funds managed by SBAM. Share-
holders should consult with a financial adviser regarding a SERP.
IRAS. A prototype IRA is available generally for all working individuals who
receive compensation (which for self-employed individuals includes earned in-
come) for services rendered and for all individuals who receive alimony or sep-
arate maintenance payments pursuant to a divorce or separation instrument. Con-
tributions to an IRA made available by the Fund may be invested in shares of
the Fund and/or certain other mutual funds managed by SBAM. Shareholders should
consult with a financial adviser regarding an IRA.
ACCOUNT SERVICES
Shareholders are kept informed through annual and semi-annual reports showing
current investments and other financial data for the Fund. Annual reports in-
clude audited financial statements. Shareholders will receive a Statement of
Account following each share transaction. Shareholders can write or call the
Fund at the address and telephone number on the first page of this Prospectus
with any questions relating to their investment in Fund shares.
CAPITAL STOCK
The authorized capital stock of the Fund consists of 25,000,000 shares having a
par value of $1.00 per share. All shares are of the same class, with like
rights and privileges. Each share is entitled to one vote and participates
equally in Fund dividends and distributions and in its net assets on liquida-
tion. Each shareholder is entitled to cast, at all meetings of shareholders,
such number of votes as is equal to the number of full and fractional shares
held by such share holder. The shares will be fully paid and non-assessable
when issued and will have no preference, preemptive, conversion or exchange
rights. There are no options or other special rights outstanding relating to
any such shares. The Fund will not issue any senior securities, except in con-
nection with its borrowing activities. See "Investment Objective and Policies".
Under the Fund's By-Laws, directors may be removed, with or without cause, by
the affirmative vote of a majority of the Fund's outstanding voting securi-
ties. Under the corporate law of Maryland, the Fund's state of incorporation,
and the Fund's By-Laws (except as required under the 1940 Act), the Fund is not
required and does not currently intend to hold annual meetings of sharehold-
ers for the election of directors. Shareholders, however, will have the right
to call for a special meeting of shareholders if such a request is made, in
writing, by the holders of at least 10% of the Fund's outstanding voting secu-
rities. In such cases, the Fund will assist in calling the meeting as required
under the 1940 Act and will pay the expenses of calling and holding the meet-
ing.
17
<PAGE>
APPENDIX A
In order to hedge against either a decline in the value of the securities in-
cluded in the Fund's portfolio, or against an increase in the price of the se-
curities which it plans to purchase, or in order to preserve or maintain a re-
turn 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,
the Fund may from time to time engage in certain derivatives. The Fund will
engage in such activities from time to time in SBAM's discretion and may not
necessarily be engaging in such activities when market movements occur that
could affect the value of the assets of the Fund. The Fund's ability to pursue
certain of these strategies may be limited by applicable regulations of the
Commodity Futures Trading Commission ("CFTC") and the federal income tax re-
quirements applicable to regulated investment companies.
FORWARD CURRENCY EXCHANGE CONTRACTS
In order to hedge against currency exchange rate risks or to increase income
to the Fund, the Fund may enter into forward currency exchange contracts. A
forward currency exchange contract involves an obligation to purchase or sell
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. These contracts are traded in the interbank market
conducted directly between currency traders (usually large commercial banks).
The Fund may either accept or make delivery of the currency specified at the
maturity of a forward contract or, prior to maturity, enter into a closing
transaction involving the purchase or sale of an offsetting contract. Closing
transactions with respect to forward contracts are usually effected with the
currency trader who is a party to the original forward contract. The Fund will
enter into forward currency exchange contracts only with counterparties which
SBAM deems creditworthy.
The Fund may enter into forward currency exchange contracts in several circum-
stances. For example, when the Fund enters into a contract for the purchase or
sale of a security denominated in a foreign currency, or when the Fund antici-
pates the receipt in a foreign currency of dividends or interest payments on
such a security that it holds, the Fund may desire to "lock in" the U.S. dol-
lar price of the security or the U.S. dollar equivalent of such dividend or
interest payment, as the case may be.
FUTURES CONTRACTS
The Fund may trade futures contracts on currencies, stock indices and interest
rates. A futures contract is a standardized contract for the future delivery
of a specified amount of a security or commodity at a future date at a price
set at the time of the contract. The Fund may enter into futures contracts
traded on domestic or, to the extent permitted by the CFTC, foreign exchanges.
Closing transactions with respect to futures contracts are effected on the ex-
change on which the contract was entered into (or a linked exchange). Parties
to a futures contract must make certain margin payments, as described below in
"Initial Margin and Premiums." The Fund is not a commodity pool and will use
futures contracts and options thereon solely (i) for bona fide hedging pur-
poses and (ii) for other purposes in amounts permitted by the rules and regu-
lations of the CFTC.
The Fund may trade currency futures contracts in order to hedge against cur-
rency exchange rate risks.
A stock index futures contract is an agreement to take or make delivery of an
amount of cash equal to the difference between the value of the index at the
beginning and at the end of the contract period. The Fund may enter into short
A-1
<PAGE>
stock index futures contracts in anticipation of or during a market decline to
attempt to offset the decrease in market value of equity securities in its
portfolio that might otherwise result. When the Fund is not fully invested in
equity securities and anticipates a significant market advance, it may enter
into long stock index futures contracts in order to gain rapid market exposure
that may wholly or partially offset increases in the costs of common stocks
that it intends to purchase.
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 con-
tract period or (ii) a specified amount of a particular debt security at a fu-
ture date at a price set at the beginning of the contract period. The Fund may
enter into interest rate futures contracts in order to protect the Fund from
fluctuations in interest rates without necessarily buying or selling fixed in-
come securities. For example, if the 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. Similarly, when
it expects that interest rates may decline, the 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. At the time of delivery of securities pursuant to an interest rate
futures contract, adjustments are made to recognize differences in value aris-
ing from the delivery of securities with a different interest rate from that
specified in the contract.
OPTIONS
In order to hedge against adverse market shifts and currency fluctuations, the
Fund may purchase put and call options and write "covered" put and call options
on futures contracts on stock indices, interest rates and currencies. In addi-
tion, in order to hedge against adverse market shifts or to increase its in-
come, the Fund may purchase put and call options and write "covered" put and
call options on stocks, stock indices and currencies.
A put option embodies the right of its purchaser to compel the writer of the
option to purchase from the option holder an underlying investment (i.e., a se-
curity, commodity or commodity futures contract), in the case of "American"
style options, at a specified price at any time during, or in the case of "Eu-
ropean" style options, at the end of, the option period. In contrast, a call
option gives the purchaser the right to buy the underlying investment covered
by the option from the writer of the option at the stated exercise price. A
call or put option is considered "covered" if the Fund holds cash or a posi-
tion, in the underlying securities or otherwise, which would allow immediate
satisfaction of its obligation. Parties to options transactions must make cer-
tain payments and/or set aside certain amounts of assets in connection with
each transaction, as described below in "Initial Margin and Premiums."
The 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.
The Fund may enter into a closing purchase transaction in which the Fund pur-
chases an option having the same terms as the option it had written or a clos-
ing sale transaction in which the Fund sells an option having the same terms as
the option it had purchased. Should the Fund choose to exercise an option, the
Fund will purchase in the open market the securities, commodities or commodity
futures contracts represented by those underlying the exercised option.
Exchange-listed options on securities and currencies generally settle by physi-
cal 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
A-2
<PAGE>
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 generally 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.
INITIAL MARGIN AND PREMIUMS
Parties to a futures contract must make "initial margin" payments to their cus-
todians, equal to approximately 1-5% of the contract amount, to secure perfor-
mance of the contract. There are also requirements to make "variation margin"
payments to the broker from time to time as the value of the futures contract
fluctuates. Brokers may establish deposit requirements higher than exchange
minimums. Upon purchasing an option, the Fund would pay a "premium", an amount
which is small in relation to the market value of the investment underlying
such option. The amount of the premium will reflect, among other things, the
relationship of the market price of the underlying investment to the exercise
price of the option, the term of the option and the volatility of the market
price of the underlying investment. The Fund will receive a premium when it
writes options, which increases the Fund's return on the underlying security in
the event the option expires unexercised or is closed out at a profit. When the
Fund writes an option on a futures contract, it must post margin as if it were
trading the underlying futures contract. When the Fund writes an option on a
stock index, it will establish a segregated account with the Fund's custodian
in which it will deposit cash, cash equivalents or high grade debt securities
or a combination thereof in an amount equal to the market value of the option,
and will maintain the account while the option is open. 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.
LIMITATIONS
The Fund may not enter into futures contracts or related options for purposes
other than bona fide hedging if the aggregate amount of initial margin deposits
on all such futures positions and premiums paid for unexpired options would ex-
ceed 5% of the net liquidation value of the Fund's assets. The Fund will not
enter into forward currency exchange contracts or currency futures contracts or
purchase or write options on currencies or currency futures contracts or main-
tain a net exposure to such contracts where the completion of the contracts
would obligate the Fund to deliver an amount of currency other than U.S. dol-
lars in excess of the value of the Fund's portfolio securities or other assets
denominated in that currency. With respect to futures contracts to purchase
currencies, stock indices or interest rates, the Fund will set aside cash, U.S.
debt securities or other U.S. dollar denominated money market instruments at
least equal to the value of instruments underlying the futures contracts. In
addition, the value of all futures contracts sold by the Fund may not exceed
the total market value of the Fund's portfolio securities. The degree to which
the Fund may enter into hedging transactions may also be affected by certain
provisions of the Internal Revenue Code of 1986, as amended. See--"Dividends,
Distributions and Federal Income Taxes."
RISKS
The effective use of options and futures strategies depends, among other
things, on the Fund's ability to terminate options and futures positions at
times when SBAM deems it desirable to do so. Although the Fund will not enter
into an option or futures position unless SBAM believes that a liquid market
exists for such option or future, there can be no assurance that the Fund will
be able to effect closing transactions at any particular time or at an accept-
able price. In addition, daily limits on price fluctua-
A-3
<PAGE>
tions on certain exchanges on which the Fund conducts its futures and options
transactions may prevent the prompt liquidation of positions at the optional
time, thus subjecting the Fund to the potential of loss. The Fund generally ex-
pects that its options and futures transactions will be conducted on recognized
securities or commodities exchanges. In certain instances, however, the Fund
may purchase and sell options on securities in the over-the-counter market.
Over-the-counter options are purchased from or sold to securities dealers, fi-
nancial institutions or other parties through direct bilateral agreement with
such counterparty. Since the staff of the SEC considers over-the-counter op-
tions to be illiquid, such options will be subject to the Fund's limitation on
investments in illiquid assets. The Fund's ability to terminate option posi-
tions established in the over-the-counter market may be more limited than in
the case of exchange-traded options and may also involve the risk that securi-
ties dealers participating in such transactions would fail to meet their obli-
gations to the Fund. There is also the risk of loss by the Fund of margin de-
posits in the event of bankruptcy of a broker with whom the Fund has an open
position in a futures contract or option thereon. The Fund will purchase and
sell over-the-counter options only from and to counterparties which SBAM deems
to be creditworthy.
Participation in foreign futures and foreign options transactions involves the
execution and clearing of trades on or subject to the rules of a foreign board
of trade. Neither the CFTC, the National Futures Association nor any domestic
exchange regulates activities of any foreign boards of trade or has the power
to compel enforcement of the rules of a foreign board of trade or any applica-
ble foreign laws. Generally, a foreign transaction will be governed by applica-
ble foreign law. In addition, the price of any foreign futures or foreign op-
tions 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 po-
sitions taken as part of foreign hedging transactions 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 oc-
curring in foreign markets during non-business 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.
While the Fund may enter into forward, futures and options contracts to hedge
all or a portion of its portfolio, changes in prices of commodities and securi-
ties, fluctuations in interest rates or currency rates and changes in the di-
rection of markets that are the subject of a hedge may result in a poorer over-
all performance for the Fund than if it had not engaged in any such transac-
tions. In addition, because option premiums paid by the Fund are small in rela-
tion to the market value of the investments underlying the options, buying op-
tions can result in large amounts of leverage. The leverage offered by trading
in options could cause the Fund's net asset value to be subject to more fre-
quent and wider fluctuation than would be the case if the Fund did not invest
in options. Moreover, there may be an imperfect correlation between the Fund's
portfolio holdings of securities and any forward, futures or options contracts
entered into by the Fund. Such imperfect correlation may prevent the Fund from
achieving the intended hedge or expose the Fund to risk of loss. Further, the
Fund's successful use of forward, futures and options contracts will be subject
to SBAM's ability to predict correctly movements in certain markets, in ex-
change rates and in prices of commodities and securities. No assurance can be
given that SBAM's judgment in this respect will be correct. SBAM's current ex-
pectation is to utilize these techniques from time to time as, in its opinion,
market conditions make it appropriate to do so.
A-4
<PAGE>
BOARD OF DIRECTORS
CHARLES F. BARBER*
Consultant; formerly Chairman, ASARCO Incorporated
ANDREW L. BREECH++
President, Dealer Operating
Control Service, Inc.
THOMAS W. BROCK
Chairman and Chief Executive Officer, Salomon Brothers Asset Management Inc;
Managing Director, Salomon Brothers Inc
CAROL L. COLMAN*
President, Colman Consulting Co., Inc.
WILLIAM R. DILL+
President, Anna Maria College; formerly Consultant and Director, Office of
Global Enterprise, University of Southern Maine
MICHAEL S. HYLAND
President, Salomon Brothers Asset Management Inc; Managing Director, Salomon
Brothers Inc
CLIFFORD M. KIRTLAND, JR.++
Formerly Chairman, Cox Communications Inc.
ROBERT W. LAWLESS++
President and Chief Executive Officer, Texas Tech University
LOUIS P. MATTIS+
Formerly Chairman and President, Sterling Winthrop Inc.
THOMAS F. SCHLAFLY*+
Of counsel to law firm of Peper, Martin, Jensen, Maichel & Hetlage; President,
The Saint Louis Brewery, Inc.
- ------------
*Member Audit Committee
+Member Nominating Committee
++Member of the Proxy Committee
OFFICERS
MICHAEL S. HYLAND
Chairman and President
RICHARD E. DAHLBERG
Executive Vice President
ROSS S. MARGOLIES
Executive Vice President
ALLAN R. WHITE III
Executive Vice President
LAWRENCE H. KAPLAN
Executive Vice President
and General Counsel
ALAN M. MANDEL
Treasurer
TANA E. TSELEPIS
Secretary
JANET S. TOLCHIN
Assistant Treasurer
JENNIFER G. MUZZEY
Assistant Secretary
REJI PAUL
Assistant Treasurer
<PAGE>
TELEPHONES
(212) 783-1301
(800) SALOMON (725-6666)
DISTRIBUTOR
Salomon Brothers Inc
Seven World Trade Center
New York, New York 10048
INVESTMENT MANAGER
Salomon Brothers Asset Management Inc
Seven World Trade Center
New York, New York 10048
CUSTODIAN
Investors Bank & Trust Company
89 South Street
Boston, Massachusetts 02111
TRANSFER AGENT AND
SHAREHOLDER SERVICING AGENT
First Data Investor Services Group, Inc.
P.O. Box 9109
Boston, Massachusetts 02205-9109
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
New York, New York 10036
LEGAL COUNSEL
Simpson Thacher & Bartlett
New York, New York 10017
No dealer, salesman or other person has been authorized to give any information
or to make any representations, other than those contained in this Prospectus,
in connection with the offer contained in this Prospectus, and, if given or
made, such other information or representations must not be relied upon as
having been authorized by the Fund, the distributor or the investment manager.
This Prospectus does not constitute an offering in any state in which such of-
fering may not lawfully be made.
SALOMON BROTHERS
CAPITAL FUND INC
Prospectus
April 29, 1996
-------------------
SALOMON BROTHERS
-------------------
SALOMON BROTHERS ASSET MANAGEMENT INC
<PAGE>
SALOMON BROTHERS CAPITAL FUND INC
7 World Trade Center,
New York, New York 10048
(800) SALOMON
(212) 783-1301
STATEMENT OF ADDITIONAL INFORMATION
Salomon Brothers Capital Fund Inc (the "Fund") is an open-end, non-
diversified, management investment company. The Fund seeks capital appreciation
through investments in securities, primarily common stocks, which are believed
to have above-average price appreciation potential and which may also involve
above-average risk. Current income is an incidental consideration. There can be
no assurance that the Fund's objective will be attained.
This Statement of Additional Information is not a Prospectus and is only
authorized for distribution when preceded or accompanied by the Fund's
Prospectus dated April 29, 1996 (the "Prospectus"). This Statement of Additional
Information contains additional information to that set forth in the Prospectus
and should be read in conjunction with the Prospectus, additional copies of
which may be obtained without charge by writing or calling the Fund at the
address and telephone number printed above.
April 29, 1996
<PAGE>
Table of Contents
Page
----
Investment Policies 2
Limiting Investment Risks 12
Management 13
Portfolio Transactions 19
Determination of Net Asset Value 20
Purchase of Shares 20
Redemption in Kind 20
Federal Income Taxes 21
Performance Data 24
Shareholder Services 24
Capital Stock 26
Custodian and Transfer Agent 26
Independent Accountants 26
Experts 27
Financial Statements 28
INVESTMENT POLICIES
The following information supplements the discussion of the investment
policies of the Fund found under "Investment Objective and Policies" in the
Prospectus.
Repurchase agreements
- ---------------------
As indicated in the Prospectus, the Fund may invest in repurchase
agreements in an amount up to 25% of its total assets. The Fund enters into
repurchase agreements with respect to securities in which it may otherwise
invest. The 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. Transaction costs may be incurred by
the Fund in connection with the sale of the securities if the seller does not
repurchase them in accordance with the repurchase agreement. Salomon Brothers
Asset Management Inc ("SBAM"), the Fund's investment manager, acting under the
supervision of the Fund's Board of Directors, considers on an ongoing basis the
creditworthiness of the institutions with whom it causes the Fund to enter into
repurchase agreements, and monitors the value of the collateral to assure that
it equals or exceeds the repurchase price.
Loans of Portfolio Securities
- -----------------------------
The Fund's Board of Directors may authorize the lending of portfolio
securities to selected member firms of the New York Stock Exchange ("NYSE").
Such loans will not exceed 10% of the Fund's total assets, taken at value. 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
2
<PAGE>
thereon. A negotiated portion of the income so earned may be paid as a fee to
the broker or other person who arranged the loan. If the deposit drops below the
required minimum at the time, the borrower will be called upon to post
additional cash. If the additional cash is not provided, 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. The 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 such activity would not cause any adverse tax consequences to
the Fund or its shareholders and only in accordance with applicable rules and
regulations. The borrowers may not be affiliated, directly or indirectly with
the Fund. The Fund did not lend any of its portfolio securities during 1995 and
has no present intention to do so.
The foregoing policy regarding the lending of portfolio securities is a
fundamental policy of the Fund which may be changed only when approved by the
holders of a majority of the Fund's outstanding voting securities, as defined by
the Investment Company Act of 1940, as amended (the "1940 Act").
Investments in Foreign Securities
- ---------------------------------
Investments in securities of foreign issuers may involve risks not
typically associated with investments in securities of U.S. issuers. The value
of any foreign securities held, and of any related income received, will be
affected by fluctuations in currency rates, exchange control regulations and, as
with domestic multi-national corporations, from fluctuating interest rates. Most
foreign securities markets have substantially less trading volume and are
generally not as highly regulated and supervised as U.S. securities markets.
Securities of some foreign companies are less liquid and substantially more
volatile than securities of comparable U.S. companies and are subject to
different accounting, auditing and financial reporting standards. There may be
less publicly available information about a foreign issuer than about a U.S.
issuer. In particular, the assets and profits appearing on the financial
statements of a foreign issuer may not reflect its financial position or results
of operations in the way they would be reflected had the financial statements
been prepared in accordance with the 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. Finally, in the event of a default in any such foreign
obligations, it may be more difficult for the Fund to obtain or enforce a
judgment against the issuers of such obligations. Political, social and economic
conditions such as nationalization, expropriation or confiscatory taxation,
political changes, government regulation, social instability or diplomatic
developments could adversely affect the economy of a particular country and,
thus, the Fund's investments in that country. Additionally, certain amounts of
the Fund's income may be subject to withholding taxes in the country in which it
invests.
3
<PAGE>
The Fund's investments in foreign securities also subjects the Fund to the
risks associated with 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.
Investment in certain foreign securities is restricted or controlled to
varying degrees which may at times limit or preclude investment in certain
foreign securities and increase the costs and expenses of the Fund. Certain
foreign 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. The Fund may not invest more than 20% of the value of the Fund's
assets in securities of foreign issuers.
High Yield/High Risk Securities
- -------------------------------
The Fund may invest in securities rated in medium to low rating categories
of nationally recognized statistical rating organizations and unrated securities
of comparable quality (such securities are referred to herein as "high
yield/high risk securities"). Such securities are speculative with respect to
the capacity to pay interest and repay principal or pay dividends in accordance
with the terms of the security and generally involve a greater volatility of
price than securities in higher rated categories. Under rating agency
guidelines, these lower-rated securities will likely have some quality and
protective characteristics that are outweighed by large uncertainties or major
risk exposures to adverse conditions. The Fund may invest in securities having
the lowest ratings for non-subordinated debt instruments assigned by Moody's
Investors Service, Inc. ("Moody's") or Standard & Poor's Ratings Service, a
division of McGraw-Hill Companies, Inc. ("S&P") (i.e., rated in the category "C"
by Moody's or "CCC" or lower by S&P) or in comparable unrated securities. Under
rating agency guidelines, these 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 and to be unlikely to
have the capacity to pay interest and repay principal when due or pay dividends
in the event of adverse business, financial or economic conditions. Unrated
securities deemed by SBAM to be comparable to these lower- and lowest-rated
securities will have similar characteristics. In purchasing such securities, the
Fund will rely on SBAM's analysis, judgment and experience in evaluating the
creditworthiness of an issuer of such securities. SBAM will take into
consideration, among other things, the issuer's financial resources, its
operating history, its sensitivity to economic conditions and trends, the
quality of the issuer's management and regulatory matters. The Fund is not
required to dispose of securities in the event of a decline in their credit
quality or ratings.
The market values of high yield/high risk securities tend
to reflect individual issuer developments and economic conditions
to a greater extent than do higher rated securities, which react
primarily to fluctuations in the general level of interest rates.
In addition, such securities
4
<PAGE>
present a higher degree of credit risk. Issuers of high yield/high risk
securities may be highly leveraged and may not have available to them more
traditional methods of financing. Therefore, the risk associated with acquiring
the securities of such issuers generally is greater than is the case with higher
rated securities. For example, during a sustained period of rising interest
rates or an economic downturn, issuers of high yield/high risk securities may be
more likely to experience financial stress, especially if such issuers are
highly leveraged. During such periods, service of debt obligations also may be
adversely affected by the issuer's inability to meet specific projected business
forecasts, specific issuer developments or the unavailability of additional
financing. The risk of loss due to default by the issuer is significantly
greater for the holders of high yield/high risk securities because such
securities may be unsecured and may be subordinated to other creditors of the
issuer.
High yield/high risk securities may have redemption or call features
which would permit an issuer to repurchase the securities from the Fund. If a
call were exercised by the issuer during a period of declining interest rates,
the Fund in all likelihood would have to replace the called securities with
lower yielding securities, thus decreasing the net investment income to the Fund
and dividends to shareholders.
The Fund may have difficulty disposing of certain high yield/high risk
securities, as there may be a thin trading market for such securities. To the
extent that a secondary trading market for high yield/high risk securities does
exist, it is generally not as liquid as the secondary market for higher rated
securities. Reduced secondary market liquidity may have an adverse impact on
market price and the Fund's ability to dispose of particular issues when
necessary to meet the Fund's liquidity needs or in response to a specific
economic event, such as a deterioration in the creditworthiness of the issuer.
Reduced secondary market liquidity for certain high yield/high risk securities
may also make it more difficult for the Fund to obtain accurate market
quotations for purposes of valuing the Fund's portfolio. Market quotations are
generally available on many high yield/high risk securities only from a limited
number of dealers and may not necessarily represent firm bids of such dealers of
prices for actual sales. The Fund's Board of Directors or SBAM will carefully
consider the factors affecting the market for high yield/high risk securities in
determining whether any particular security is liquid or illiquid and whether
current market quotations are readily available. If the secondary markets for
high yield securities contract due to adverse economic conditions or for other
reasons, certain liquid securities in the Fund's portfolio may become illiquid
and the proportion of the Fund's assets invested in illiquid securities may
significantly increase. Adverse publicity and investor perceptions, which may
not be based on fundamental analysis, also may decrease the value and liquidity
of high yield/high risk securities, particularly in a thinly traded market.
Factors adversely affecting the market value of high yield/high risk securities
are likely to adversely affect the Fund's net asset value. In addition, the Fund
may incur additional expenses to the extent it is required to seek recovery upon
a default on a portfolio holding or participate in the restructuring of the
obligations.
Prices for high yield securities may be affected by legislative and
regulatory developments. These laws could adversely affect the 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
5
<PAGE>
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.
Rule 144A Securities
- --------------------
As indicated in the Prospectus, the Fund may purchase certain restricted
securities ("Rule 144A securities") for which there is a secondary market of
qualified institutional buyers, as contemplated by Rule 144A under the
Securities Act of 1933. Rule 144A provides an exemption from the registration
requirements of the Securities Act for the resale of certain restricted
securities to qualified institutional buyers.
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 "SEC") stated that the ultimate
responsibility for liquidity determinations is that of an investment company's
board of directors. However, the SEC 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 has
adopted policies and procedures for the purpose of determining whether
securities that are eligible for resale under Rule 144A are liquid or illiquid
for purposes of the Fund's limitation on investment in illiquid securities.
Pursuant to those policies and procedures, the Board of Directors has delegated
to SBAM 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 the
Fund's purchases and sales of Rule 144A securities.
To the extent that liquid Rule 144A securities that the Fund holds
become illiquid, due to the lack of sufficient qualified institutional buyers or
market or other conditions, the percentage of the Fund's assets invested in
illiquid assets would increase. SBAM, under the supervision of the Board of
Directors, will monitor the Fund's investments in Rule 144A securities and will
consider appropriate measures to enable the Fund to maintain sufficient
liquidity for operating purposes and to meet redemption requests.
Forward Currency Exchange Contracts
- -----------------------------------
As indicated in the Prospectus, in order to hedge against currency
exchange rate risks or to increase income to the Fund, the Fund may enter into
forward currency exchange contracts with securities dealers, financial
institutions or other parties, through direct bilateral agreements with such
counterparties. The Fund will enter into forward currency exchange contracts
only with counterparties which SBAM deems creditworthy. In connection with the
Fund's forward currency transactions, the Fund will set aside in a segregated
account with its custodian cash, cash equivalents or high quality debt
securities in an amount equal to the amount of the contract to be used to pay
for the commitment, or will otherwise "cover" the transaction. The segregated
6
<PAGE>
account will be marked to market on a daily basis. In addition to the
circumstances set forth in the Prospectus, the Fund may enter into forward
currency exchange contracts when SBAM believes that the currency of a particular
country may suffer a substantial decline against the U.S. dollar. In those
circumstances, the 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.
Futures Contracts
- -----------------
As indicated in the Prospectus, the Fund may trade futures contracts (1)
on domestic and foreign exchanges on currencies and interest rates and (2) on
domestic and, to the extent permitted by the Commodity Futures Trading
Commission ("CFTC"), foreign exchanges on stock indices. The Fund is not a
commodity pool and 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. The Fund may not enter into
any futures contract or related option other than for bona fide hedging purposes
if, immediately thereafter, the sum of the amount of aggregate initial margin
deposits on the Fund's existing futures contracts and premiums paid for options
on futures contracts would exceed 5% of the liquidation value of the Fund's
total assets, after taking into account unrealized profits and losses on
existing contracts. In addition, the value of the Fund's long futures and
options positions (futures contracts on stock indices, interest rates or foreign
currencies and call options on such futures contracts) will not exceed the sum
of (a) cash, cash equivalents or high quality debt securities 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.
Furthermore, with respect to the sale of futures contracts by the Fund, the
value of such contracts may not exceed the total market value of the Fund's
portfolio securities.
The Fund may enter into interest rate futures contracts in order to
protect the Fund 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 the 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 the Fund from declining as much as it otherwise would have. The 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 the
Fund to maintain a defensive position without having to sell its portfolio
securities.
7
<PAGE>
Similarly, when SBAM expects that interest rates may decline, the 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, the 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, the Fund could make the intended purchase of the bonds
in the cash market and the futures contracts could be liquidated.
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, the Fund 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, the Fund may purchase put and call options and write
"covered" put and call options on stocks, stock indices and currencies. The 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 the Fund writes is exercised, the Fund will either (a) deposit with
its custodian in a segregated account cash, 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, the 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
8
<PAGE>
the option continues. By writing a put, the 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 the 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 the 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, the Fund will seek to benefit from a
decline in the market price of the underlying investment, while in purchasing a
call option, the 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, the
Fund will purchase a put option in anticipation of a rise in interest rates, and
will purchase a call option in anticipation of a fall in interest rates. By
writing a covered call option on interest rate futures contracts, the Fund will
limit its opportunity to profit from a fall in interest rates. By writing a
covered put option on interest rate futures contracts, the Fund will limit its
opportunity to profit from a rise in interest rates.
The 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. The 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 the Fund choose to exercise
an option, the Fund will purchase in the open market the securities, commodities
or commodity futures contracts represented by those 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
9
<PAGE>
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.
The Fund's ability to close out its position as a purchaser or seller of
an exchange-listed put or call option is dependent upon the existence of a
liquid secondary market on option exchanges. Among the possible reasons for the
absence of a liquid secondary market on an exchange are: (i) insufficient
trading interest in certain options; (ii) restrictions on transactions imposed
by an exchange; (iii) trading halts, suspensions or other restrictions imposed
with respect to particular classes or series of options or underlying
securities; (iv) interruption of the normal operations on an exchange; (v)
inadequacy of the facilities of an exchange or the Options Clearing Corporation
("OCC") to handle current trading volume; or (vi) 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 secondary market on that exchange (or in that
class or series of options) would cease to exist, although outstanding options
on that exchange that had been listed by the OCC as a result of trades on that
exchange would generally continue to be exercisable in accordance with their
terms.
Over-the-counter options are purchased from or sold to securities
dealers, financial institutions or other parties, through direct bilateral
agreement with such counterparties. The Fund will purchase and sell over-the-
counter options only from and to counterparties which SBAM deems to be
creditworthy.
The hours of trading for options on securities may not conform to the
hours during which the underlying securities are traded. To the extent that the
option markets close before the markets for the underlying securities,
significant price and rate movements can take place in the underlying markets
that cannot be reflected in the options markets.
(a) Options on Stocks and Stock Indices. The 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 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 S&P 100 Index, the S&P 500 Index, the NYSE Composite
Index, the 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
10
<PAGE>
options are subject to position and exercise limits and other regulations
imposed by the exchange on which they are traded.
If SBAM expects general stock market prices to rise, the 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 in fact 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, SBAM expects general stock market prices to decline, the Fund
might purchase a put option or sell a futures contract on the index. If that
index does in fact decline, the value of some or all of the equity securities in
the 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. The Fund may invest in options on currencies
---------------------
traded on domestic and foreign securities exchanges in order to hedge against
currency exchange rate risks, as described above in "Forward Currency Exchange
Contracts."
(c) Options on Futures Contracts. The 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 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.
Portfolio Turnover
- ------------------
Flexibility of investment and emphasis on capital appreciation may
involve a greater portfolio turnover rate than that of investment companies
whose objectives, for example, are production of income or maintenance of a
balanced investment position. The rate of portfolio turnover cannot be predicted
with assurance and may vary from year to year. As noted in the table under
"Financial Highlights" on page 4 of the Prospectus, over the past ten years the
Fund's portfolio turnover rate has ranged from 41% to 395% for a full year's
operation. Portfolio turnover rates for the years ended December 31, 1995 and
1994 were 217% and 152%, respectively. As has been the case in the past, future
turnover rates will be governed by changing
11
<PAGE>
market conditions, purchases and redemptions of Fund shares, the availability of
investment opportunities in other securities and the desirability of continuing
to hold a portfolio security.
LIMITING INVESTMENT RISKS
In addition to the restrictions described under "Limiting Investment
Risks" in the Prospectus, the Fund may not:
(1) Invest in companies for the purpose of exercising control or
management. (The Fund may on occasion be considered part of a control
group of a portfolio company by reason of the size or manner of its
investment, in which event the securities of such portfolio company held
by the Fund may not be publicly saleable unless registered under the
Securities Act of 1933 or pursuant to an available exemption
thereunder.);
(2) Purchase securities on margin (except for such short-term
credits as are necessary for the clearance of transactions and except
that the Fund may make deposits in connection with transactions in
options on securities) or make short sales of securities (except for
sales "against the box", i.e., when a security identical to one owned by
the Fund, or which the Fund has the right to acquire without payment of
additional consideration, is borrowed and sold short);
(3) Purchase or sell real estate, interests in real estate,
interests in real estate investment trusts, or commodities or commodity
contracts; however, the Fund (a) may purchase interests in real estate
investment trusts or companies which invest in or own real estate if the
securities of such trusts or companies are registered under the
Securities Act of 1933 and are readily marketable and (b) may enter into
futures contracts, including futures contracts on interest rates, stock
indices and currencies, and options thereon, and may engage in forward
currency contracts and buy, sell and write options on currencies;
(4) Purchase more than 3% of the stock of another investment
company, or purchase stock of other investment companies equal to more
than 5% of the Fund's net assets in the case of any one other investment
company and 10% of such net assets in the case of all other investment
companies in the aggregate. Any such purchase will be made only in the
open market where no profit to a sponsor or dealer results from the
purchase, except for the customary broker's commission. This restriction
shall not apply to investment company securities received or acquired by
the Fund pursuant to a merger or plan of reorganization (The return on
such investments will be reduced by the operating expenses, including
investment advisory and administrative fees of such investment funds and
will be further reduced by the Fund's expenses, including management
fees; that is, there will be a layering of certain fees and expenses.);
(5) Purchase or hold securities of an issuer if one or more persons
affiliated with the Fund or with SBAM owns beneficially more than 1/2 of
1% of the securities of that
12
<PAGE>
issuer and such persons owning more than 1/2 of 1% of such securities
together own beneficially more than 5% of the securities of such issuer;
(6) Buy portfolio securities from, or sell portfolio securities to,
any of the Fund's officers, directors or employees of its investment
manager or distributor, or any of their officers or directors, as
principals;
(7) Purchase or sell warrants; however, the Fund may invest in debt
or other securities which have warrants attached (not to exceed 10% of
the value of the Fund's total assets). Covered options with respect to
no more than 10% in value of the Fund's total assets will be outstanding
at any one time; or
(8) Invest in interest in oil, gas or other mineral exploration or
development programs.
The investment restrictions described above and in the Prospectus are
fundamental policies of the Fund and may be changed only when permitted by law,
if applicable, and approved by the holders of a majority of the 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.
The percentage limitations contained in the investment restrictions
described above and in the Prospectus and in the restrictions on borrowing of
money and hypothecation of assets are all applied solely at the time of any
proposed transaction on the basis of values or amounts determined at that time.
Unless otherwise specifically stated, a restriction would not be violated if a
percentage limitation were exceeded only as a result of changes in values or
amounts not resulting from a transaction subject to the restriction.
MANAGEMENT
Directors and Officers
- ----------------------
The principal occupations of the directors and executive officers of the
Fund for the past five years are listed below.
CHARLES F. BARBER,(2), 79, Director - Consultant; formerly Chairman of the
--------
Board, ASARCO Incorporated .
ANDREW L. BREECH,(4), 43, Director - President, Dealer Operating Control
--------
Service, Inc.
THOMAS W. BROCK,(1), 48, Director - Chairman and Chief Executive Officer,
--------
SBAM since January 1995; Managing Director, Salomon Brothers Inc ("SBI").
13
<PAGE>
CAROL L. COLMAN,(2), 50, Director - President, Colman Consulting Co., Inc.;
--------
formerly Managing Partner of Inferential Focus.
WILLIAM R. DILL,(3), 65, Director - President, Anna Maria College; formerly
--------
Consultant and Director, Office of Global Enterprise, University of
Southern Maine; prior to which he was President, Babson College.
MICHAEL S. HYLAND,(1), 50, Chairman of the Board, President and Director,
---------------------------------------------
SBAM; Managing Director, SBI; prior to which he was Managing Director,
First Boston Asset Management Corporation and Managing Director, First
Boston Corporation.
CLIFFORD M. KIRTLAND, JR.,(4), 72, Director - Director, Oxford Industries,
--------
Shaw Industries, Inc., and Graphic Industries, Inc.; formerly Chairman of
the Board and President of Cox Communications, Inc.
ROBERT W. LAWLESS,(4), 59, Director - President and Chief Executive
--------
Officer, Texas Tech University and Texas Tech University Health Sciences
Center; formerly Executive Vice President and Chief Operations Officer,
Southwest Airlines Corporation; Director, Central and Southwest Corp.
LOUIS P. MATTIS,(3), 54, Director - Consultant; formerly Chairman and
--------
President, Sterling Winthrop Inc. (pharmaceutical company); Executive Vice
President of Richardson-Vicks, Inc.
THOMAS F. SCHLAFLY,(2)(3), 47, Director - Of counsel to Peper, Martin,
--------
Jensen, Maichel & Hetlage (law firm); President, The Saint Louis Brewery,
Inc.
RICHARD DAHLBERG, 58, Executive Vice President, Managing Director, SBAM and
------------------------
SBI since January 1996; formerly Vice President, SBAM and SBI since June
1995; prior to that employed by Massachusetts Financial Services Company.
ALLAN R. WHITE, III, 36, Executive Vice President - Director of SBI.
------------------------
ROSS S. MARGOLIES, 37, Executive Vice President - Director of SBI, since
------------------------
1992; formerly Senior Vice President with Lehman Brothers Inc.
LAWRENCE H. KAPLAN, Age 39, Executive Vice President and General Counsel-
--------------------------------------------
Vice President and Chief Counsel of SBAM and a Vice President of Salomon
Brothers since May 1995. Prior to May 1995, he was Senior Vice President,
Director and General Counsel of Kidder Peabody Asset Management, Inc.
ALAN M. MANDEL, 38, Treasurer -Vice President of SBI, since January 1,
---------
1995; Chief Financial Officer of Hyperion Capital Management Inc. since
1991; prior to which he was Vice President of Mitchell Hutchins Asset
Management Inc.("MHAM").
14
<PAGE>
TANA E. TSELEPIS, 60, Secretary - Vice President SBI since 1989 and Senior
---------
Administrator of SBAM.
JANET TOLCHIN, 37, Assistant Treasurer - Investment Accounting Manager,
-------------------
SBAM.
REJI PAUL, 33, Assistant Treasurer - Investment Account Manager, SBAM since
-------------------
1995; formerly Assistant Vice President, MHAM since 1994; prior to which he
was Supervisor at MHAM.
JENNIFER G. MUZZEY, 36, Assistant Secretary - Employee of SBAM since June
-------------------
1994; formerly Assistant Vice President of SunAmerica Asset Management
Corporation.
- ----------------
(1) "Interested person" as defined in the 1940 Act.
(2) Audit Committee Member.
(3) Nominating Committee Member.
(4) Proxy Committee Member.
Certain of the directors and officers are also directors and officers of
one or more other investment companies for which SBAM, the Fund's investment
manager, acts as investment adviser. The address of each of the non-interested
directors is: Mr. Barber, 66 Glenwood Drive, Greenwich, Connecticut 06830; Mr.
Breech, 2120 Wilshire Boulevard, Suite 400, Santa Monica, California, 90403; Ms.
Colman, Consulting Co., Inc., P.O. Box 212, North Salem, New York 10560; Mr.
Dill, 25 Birch Lane, Cumberland Foreside, Maine 04110; Mr. Kirtland, 9 North
Parkway Square, 4200 Northside Parkway, N.W., Atlanta, Georgia 30327; Mr.
Lawless, Box 4349, Lubbock, Texas 79409; Mr. Mattis, 0024 Harlston Green, No.
31, SnowMass Village, Colorado 81615; and Mr. Schlafly, 720 Olive Street, St.
Louis, Missouri 63101. The address of the other Directors and officers is in
care of SBAM, Seven World Trade Center, 38th Floor, New York, New York 10048.
Directors of the Fund not affiliated with SBAM receive from the Fund a fee
for each Board of Directors and Board committee meeting attended and are
reimbursed for all out-of-pocket expenses relating to attendance at meetings.
Directors who are affiliated with SBAM do not receive compensation from the Fund
but are reimbursed by the Fund for all out-of-pocket expenses relating to
attendance at meetings. For the year ended December 31, 1995, such fees and
expenses borne by the Fund totaled $64,780.
As of April 1, 1996, directors and officers of the Fund as a group
beneficially owned less than 1% of the outstanding shares of the Fund.
The following table provides information concerning the compensation paid
during the fiscal year ended December 31, 1995 to each director of the Fund. The
Fund does not provide any pension or retirement benefits to directors. In
addition, no remuneration was paid during the fiscal year ended December 31,
1995 by the Fund to officers of the Fund or to Messrs. Hyland or Brock, who as
employees of SBAM may be defined as "interested persons" under the 1940
Act.
15
<PAGE>
<TABLE>
<CAPTION>
Total Compensation
Aggregate Paid to Directors from Total
Name of Compensation the Fund and other Funds Compensation
Person, Position from the Fund advised by SBAM (A) Directorships(A)
- ---------------- ------------- ------------------- ----------------
<S> <C> <C> <C>
Charles F. Barber $7,250 $107,225 (12) $114,475 (13)
Director
Andrew L. Breech $6,500 $19,500 (2) $26,000 (13)
Director
Carol L. Colman $7,250 $25,416 (3) $32,666 (4)
Director
William R. Dill $6,500 $18,750 (2) $25,250 (3)
Director
Clifford M. Kirtland, Jr. $5,750 $17,250 (2) $23,000 (3)
Director
Robert W. Lawless $7,250 $20,250 (2) $27,500 (3)
Director
Louis P. Mattis $5,000 $15,750 (2) $20,750 (3)
Director
Thomas F. Schlafly $7,250 $20,250 (2) $27,520 (3)
Director
</TABLE>
_________________________
(A) The number in parentheses indicates the applicable number of
directorships of SBAM-advised funds held by that director.
Investment Manager
- ------------------
The Fund retains SBAM to act as its investment manager. SBAM, a wholly
owned subsidiary of Salomon Brothers Holding Co., which in turn is wholly owned
by Salomon Inc, serves as the investment manager to numerous individuals and
institutions and other investment companies. On May 1, 1990, SBAM purchased
substantially all of the assets of LEMCO, the Fund's previous investment
adviser, and the Fund changed its name from Lehman Capital Fund, Inc. to Salomon
Brothers Capital Fund Inc.
The management contract ("Management Contract") between SBAM and the Fund
provides that SBAM shall manage the operations of the Fund, subject to policy
established by the Board of Directors of the Fund. The Management Contract was
initially approved by the Board of Directors of the Fund on March 15, 1990 and
the shareholders of the Fund on April 30, 1990. The continuation of the
Management Contract was approved through May 1, 1997 by the Board of Directors
on January 22, 1996. Pursuant to the Management Contract, SBAM manages the
16
<PAGE>
Fund's investment portfolio, directs purchases and sales of the Fund's portfolio
securities and reports thereon to the Fund's officers and directors regularly.
SBAM also furnishes office space and certain facilities required for conducting
the business of the Fund and pays the compensation of the Fund's officers,
employees and directors affiliated with SBAM. The Fund bears all other costs of
its operations, including the compensation of its directors not affiliated with
SBAM.
As compensation for services performed, the Fund pays SBAM a management
fee each month, based upon a percentage of the average daily value of the Fund's
net assets, at an annual rate of 1% of average daily net assets up to $100
million, .75% on the next $100 million, .625% on the next $200 million and .50%
on average daily net assets in excess of $400 million. SBAM was paid $957,755,
$1,035,255 and $1,072,845 in management fees for the years ended December 31,
1995, 1994 and 1993, respectively.
The Management Contract provides that for any fiscal year SBAM will bear
any expenses of the Fund (exclusive of interest, taxes, brokerage expenses and
extraordinary items) in excess of the most stringent expense limitation imposed
by state securities regulations applicable to the Fund, up to the amount of its
management fee for such year. There was no reimbursement in the years ended
December 31, 1995, 1994 or 1993.
The Management Contract provides that it will continue automatically for
successive annual periods provided that such continuance is specifically
approved at least annually (a) by the vote of a majority of the Fund's
outstanding voting securities or by the Fund's Board of Directors and (b) by the
vote cast in person at a meeting called for this purpose of a majority of the
Fund's directors who are not parties to the Management Contract or "interested
persons" of any such party. The Management Contract may be terminated on 60
days' written notice by either party and will terminate automatically if
assigned.
Investment decisions for the Fund are made independently from those of
other funds or accounts managed by SBAM. Such other funds or accounts may also
invest in the same securities as the Fund. If those funds or accounts are
prepared to invest in, or desire to dispose of, the same security at the same
time as the 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 the Fund or the price paid or received
by the 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.
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 Fund has
adopted a code of ethics (the "Fund Code") that incorporates personal trading
policies and procedures applicable to access persons of the 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
17
<PAGE>
personal trading policies and procedures applicable to access persons of SBAM,
as the investment manager to the Fund, which policies serve as SBAM'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 the 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.
Expenses
- --------
The Fund's expenses include taxes, interest, fees and salaries of
directors and officers who are not directors, officers or employees of the
Fund's service contractors, SEC fees, state securities qualification fees, costs
of preparing and printing prospectuses for regulatory purposes and for
distribution to existing shareholders, advisory and administration fees, charges
of the custodian 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. The Fund also
pays for brokerage fees and commissions in connection with the purchase and sale
of portfolio securities.
Administrator
- -------------
The Fund employs Investors Bank & Trust Company ("Investors Bank") under
an administration and accounting services agreement to provide certain
administrative services to the Fund. The services provided by Investors Bank
under the 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 SEC.
Investors Bank's business address is 89 South Street, Boston,
Massachusetts 02111.
For its services as administrator, SBAM pays Investors Bank a fee each
month at an annual rate of .06% of the average daily net assets of the Fund.
SBAM paid The Boston Company Advisors, Inc. (the "Boston Company"), the Fund's
previous subadministrator, a fee, calculated daily and payable monthly, at an
annual rate of .08% of the Fund's average daily net assets. For the fiscal years
ended December 31, 1995, 1994 and 1993, Boston Company received fees totaling
$76,688, $84,140 and $87,784.
18
<PAGE>
Distributor
- -----------
SBI serves as the Fund's distributor on a best efforts basis, pursuant
to a distribution agreement which was approved by the Fund's Board of Directors
and became effective on May 1, 1990. SBI receives no sales charges from the sale
of Fund shares.
PORTFOLIO TRANSACTIONS
----------------------
Total brokerage commissions paid by the Fund for the past three years
ended December 31, 1995, 1994 and 1993 were $629,443, $482,953 and $342,768,
respectively.
The Fund's general policy 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 SBAM'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 SBAM generally seeks the best
price in placing its orders, the 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, SBAM may select brokers who charge a
commission in excess of that charged by other brokers, if SBAM determines in
good faith that the commission to be charged is reasonable in relation to the
brokerage and research services provided to SBAM 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. SBAM may also have arrangements with brokers pursuant to
which such brokers provide research services to SBAM in exchange for a certain
volume of brokerage transactions to be executed by such broker. SBAM's
arrangements for the receipt of research services from brokers may create
conflicts of interest. While the payment of higher commissions increases the
Fund's costs, SBAM does not believe that the receipt of such brokerage and
research significantly reduces its expenses as the Fund's investment manager.
During the fiscal year ended December 31, 1995, SBAM directed brokerage
transactions in an amount of $55,822,070 to certain brokers that furnished
research services to SBAM. Commissions on those transactions totaled
$98,442.
Research services furnished to SBAM by brokers who effect securities
transactions for the Fund may be used by SBAM in servicing other investment
companies and accounts which it manages. Similarly, research services furnished
to SBAM by brokers who effect securities transactions for other investment
companies and accounts which SBAM manages may be used by SBAM in servicing the
Fund. Not all of these research services are used by SBAM in managing any
particular account, including the Fund.
Affiliated persons of the Fund, or affiliated persons of such persons,
may from time to time be selected to execute portfolio transactions for the
Fund. Subject to the considerations discussed above and in accordance with
procedures adopted by the Board of Directors, in order for such an affiliated
person to be permitted to effect any portfolio transactions for the Fund,
the
19
<PAGE>
commissions, fees or other remuneration received by such affiliated person must
be reasonable and fair compared to the commissions, fees or other remuneration
received by other brokers in connection with comparable transactions. This
standard would allow such an affiliated person to receive no more than the
remuneration which would be expected to be received by an unaffiliated broker in
a commensurate arm's-length transaction.
During the 1995, 1994 and 1993 fiscal years, the Fund paid $57,993, $45,612
and $31,040 in commissions to SBI. Commissions to SBI in 1995 represented 9% of
the total brokerage commissions paid by the Fund, and SBI executed 7% of the
aggregate dollar amount of transactions involving commissions during the 1995
fiscal year.
DETERMINATION OF NET ASSET VALUE
The Fund's net asset value per share for the purpose of pricing purchase
and redemption orders is determined at the close of regular trading on the NYSE
on each day the NYSE is open for trading. The net asset value per share is
computed by dividing the value of the net assets of the Fund (i.e., the value of
the assets less the liabilities) by the total number of Fund shares outstanding.
In calculating net asset value, portfolio securities listed or traded on
national securities exchanges, or reported by the NASDAQ National Market System
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. If no quotations are readily available
(as may be the case for securities of limited marketability), or if "restricted"
securities are being valued, such portfolio securities and other assets are
valued pursuant to procedures established by the Board of Directors. In
computing the net asset value of the Fund's shares, no adjustment is made for
brokerage, taxes and other expenses which may be incurred in connection with the
sale of portfolio securities or the investing of the funds received on such
sale.
PURCHASE OF SHARES
The Fund offers its shares to the public on a continuous basis. The
public offering price per share of the Fund is equal to the net asset value per
share at the time of purchase.
REDEMPTION IN KIND
If the Board of Directors shall determine that it is in the best
interests of the remaining shareholders of the Fund, the 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 values
employed for determining such redemption price, and selecting the securities in
such manner as the Board of Directors may deem fair and equitable. However, the
Fund has made an election pursuant to Rule 18f-1 under the 1940 Act requiring
that all redemptions be effected in cash to each redeeming shareholder, during
any period of 90 days, up to the lesser of $250,000 or 1% of the net assets of
the Fund. A shareholder who receives a distribution in kind may incur a
20
<PAGE>
brokerage commission upon a later disposition of such securities. The Fund does
not intend to make a practice of redeeming shares in kind.
FEDERAL INCOME TAXES
The following is a brief summary of selected federal income tax
considerations which may affect the Fund and its shareholders. This summary is
not intended as a substitute for individual tax advice and investors are urged
to consult their own tax advisers as to the federal, state and local tax
consequences to them of an investment in the Fund.
Taxation of the Fund
- --------------------
The Fund intends to qualify and 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"). As a RIC, the 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 gains (i.e., the excess of the
Fund's net long-term capital gains over net short-term capital losses), if any,
that it distributes in each taxable year to its shareholders, provided that it
distributes at least 90% of its net investment income for such taxable year.
The Fund will be subject to a non-deductible 4% excise tax to the extent
that the 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 the
excess of its capital gains over its capital losses for the one-year period
ending, as a general rule, on October 31 of each year; and (c) 100% of the
undistributed income and gains from the preceding calendar year (if any)
pursuant to the calculations in (a) and (b). For this purpose, any income or
gain retained by the Fund that is subject to corporate tax will be considered to
have been distributed by year-end.
In order to qualify as a RIC under subchapter M of the Code, the Fund must
among other things: (a) derive at least 90% of its gross income 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;
(b) derive less than 30% of its gross income from the sale or other disposition
of any of the following held for less than three months: stock, securities,
options, futures, certain forward contracts, or foreign currency transactions
(or any options, futures or forward contracts on foreign currencies) but only if
such currencies are not directly related to the Fund's principal business of
investing in stock or securities; and (c) diversify its holdings so that, at the
end of each fiscal quarter, (i) at least 50% of the market value of the Fund's
assets is represented by cash, cash items, United States Government securities,
securities of other RIC 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
the Fund's assets and 10% of the outstanding voting securities of such issuer,
and (ii) not more than 25% of
21
<PAGE>
the value of its assets is invested in the securities of any one issuer (other
than United States Government securities or the securities of other regulated
investment companies).
The Fund's investment in options, swaps and related transactions,
futures contracts and forward contracts, options on futures contracts and stock
indices and certain other securities, including transactions involving actual or
deemed short sales or foreign exchange gains or losses are subject to many
complex and special tax rules. For example, over-the-counter options on debt
securities and equity options, including options on stock and on narrow-based
stock indexes, will be subject to tax under Section 1234 of the Code, generally
producing a long-term or short-term capital gain or loss upon exercise, lapse or
closing out of the option or sale of the underlying stock or security. By
contrast, the Fund's treatment of certain other options, futures and forward
contracts entered into by the Fund is generally governed by Section 1256 of the
Code. These "Section 1256" positions generally include listed options on debt
securities, options on broad-based stock indexes, options on securities indexes,
options on futures contracts, regulated futures contracts and certain foreign
currency contracts and options thereon.
Absent a tax election to the contrary, each such Section 1256 position
held by the Fund will be marked-to-market (i.e. treated as if it were sold for
fair market value) on the last business day of the Fund's fiscal year, and all
gain or loss associated with fiscal year transactions and mark-to-market
positions at fiscal year end (except certain currency gain or loss covered by
Section 988 of the Code) will generally be treated as 60% long-term capital gain
or loss and 40% short-term capital gain or loss. The effect of Section 1256
mark-to market rules may be to accelerate income or to convert what otherwise
would have been long-term capital gains into short-term capital gains or short-
term capital losses into long-term capital losses within the Fund. The
acceleration of income on Section 1256 positions may require the Fund to accrue
taxable income without the corresponding receipt of cash. In order to generate
cash to satisfy the distribution requirements of the Code, the Fund may be
required to dispose of portfolio securities that they otherwise would have
continued to hold or to use cash flows from other sources such as the sale of
Fund shares. In these ways, any or all of these rules may affect the amount,
character and timing of income earned and in turn distributed to shareholders by
the Fund.
When the Fund holds options or contracts which substantially diminish
their risk of loss with respect to other positions (as might occur in some
hedging transactions), this combination of positions could be treated as a
"straddle" for tax purposes, resulting in possible deferral of losses,
adjustments in the holding periods of Fund securities and conversion of short-
term capital losses into long-term capital losses. Certain tax elections exist
for mixed straddles i.e., straddles comprised of at least one Section 1256
position and at least one non-Section 1256 position which may reduce or
eliminate the operation of these straddle rules.
As a RIC the Fund is also subject to the requirement that less than 30%
of its annual gross income be derived from the sale or other disposition of
securities and certain other investment held for less than three months (the
"short-short test"). This requirement may limit the Fund's ability to engage in
options, spreads, straddles, hedging transactions, forward or futures contracts
or options on any of these positions because these transactions are often
consummated in less than three months, may require the sale of portfolio
securities held less than three months and may, as
22
<PAGE>
in the case of short sales of portfolio securities reduce the holding periods of
certain securities within the Fund, resulting in additional short-short income
for the Fund.
The Fund will monitor its transactions in such options and contracts and
may make certain other tax elections in order to mitigate the effect of the
above rules and to prevent disqualification of the Fund as a regulated
investment company under subchapter M of the Code.
Taxation of Shareholders
- ------------------------
The Fund intends to distribute annually to shareholders substantially
all of its net investment income and any net capital gains. Investors should
consider the tax implications of buying shares just prior to a distribution.
Although the price of shares purchased at that time may reflect the amount of
the forthcoming distribution, those purchasing just prior to a distribution will
receive a distribution which will nevertheless be taxable to them.
It is expected that a portion of dividends of net investment income
received by corporate shareholders from the Fund will qualify for the federal
70% dividends received deduction generally available to corporations. The
dividends received deduction for corporate shareholders may be further reduced
if the securities with respect to which dividends are received by the Fund are
(1) considered to be "debt-financed" (generally, acquired with borrowed funds),
(2) held by the Fund for less than 46 days (91 days in the case of certain
preferred stock) or (3) subject to certain forms of hedges or short sales. The
amount of any dividend distribution eligible for the corporate dividends
received deduction will be designated by the Fund in a written notice within 60
days of the close of the taxable year.
Gain or loss on the sale or other disposition of Fund shares will result in
capital gain or loss to shareholders. Generally, a shareholder's capital gain or
loss will be long-term gain or loss if the shares have been held for more than
one year. In general, the maximum federal income tax rate imposed on individuals
with respect to net realized long-term capital gains will be limited to 28%,
whereas the maximum federal income tax rate imposed on individuals with respect
to net realized short-term capital gains (which are taxed at ordinary income
rates) will be 39.6%. Corporate taxpayers are subject to the same maximum
federal income tax rate of 35% on ordinary income, long-term capital gains and
short-term capital gains. If a shareholder redeems or exchanges shares of the
Fund before he or she has held them for more than six months, any short-term
capital loss on such redemption or exchange will be treated as a long-term
capital loss to the extent of any capital gain dividends received by the
shareholder (or credited to the shareholder as an undistributed capital gain)
with respect to such shares.
Under H.R. 2491, as passed by Congress and vetoed by President Clinton,
individual taxpayers would have been permitted a 50 percent deduction for any
capital gains that they recognized, and corporations would have been taxed at a
28 percent rate on capital gains, in lieu of the regular corporate rate. The
provisions generally were to have retroactive effect to January 1, 1995. It is
unclear whether similar legislation will be included as part of the 1996 budget
compromise and, if so, what the effective date will be.
23
<PAGE>
PERFORMANCE DATA
The Fund's "average annual total return" figures described and shown in
the Prospectus are computed according to a formula prescribed by the SEC. The
formula can be expressed as follows:
P(1+T)n=ERV
Where:P= a hypothetical initial payment of $1000
T = average annual total return
n = number of years
ERV = Ending Redeemable Value of a hypothetical $1,000
payment made at the beginning of the 1, 5, or 10
year periods at the end of such periods, assuming
reinvestment of all dividends and distributions.
SHAREHOLDER SERVICES
Exchange Privilege. Shareholders may exchange all or part of their Fund
------------------
shares for shares in any of the other Salomon Brothers Family of Funds listed in
the Prospectus by contacting First Data Investor Services Group, Inc., ("FDISG")
a wholly owned subsidiary of First Data Corporation. There is no charge for this
service. Special provisions, however, apply to exchange options under the IRA
program mentioned below, which provisions are described in the IRA Custodial
Agreement and related materials furnished to IRA participants.
The exchange privilege enables shareholders in any of these funds to
acquire shares in a fund with different investment objectives when they believe
that a shift between funds is an appropriate investment decision. This privilege
is available to shareholders residing in any state in which the fund shares
being acquired may legally be sold. Prior to any exchange, the shareholder
should obtain and review a copy of the current prospectus of each fund into
which an exchange is to be made. Such prospectuses may be obtained from SBAM.
Exercise of the exchange privilege is treated as a sale and repurchase
for federal income tax purposes and, depending on the circumstances, a short or
long-term capital gain or loss may be realized.
Upon receipt of proper instructions and all necessary supporting
documents, shares submitted for exchange are redeemed at the then-current net
asset value and the proceeds immediately invested in shares of the fund being
acquired at a price equal to the then current net asset value of such shares.
24
<PAGE>
All accounts involved in a telephone or telegram exchange must have the
same registration. If a new account is to be established, the dollar amount to
be exchanged must be at least as much as the minimum initial investment of the
fund whose shares are being purchased. Any new account established by exchange
will automatically be registered in the same way as the account from which
shares are exchanged and will carry the same dividend option.
The exchange privilege may be modified or terminated at any time. The
privilege is not designed for investors trying to catch short-term savings in
market prices by making frequent exchanges. The Fund reserves the right to
impose a limit on the number of exchanges a shareholder may make. Call or write
the Fund for further details.
Automatic Withdrawal Plan. An Automatic Withdrawal Plan may be opened with
-------------------------
an account having a total value of at least $7,500. All dividends and
distributions on the shares held under the Withdrawal Plan are automatically
reinvested at net asset value in full and fractional shares. Withdrawal payments
are made by FDISG, as agent, from the proceeds of the redemption of such number
of shares as may be necessary to make each periodic payment. As such redemptions
involve the use of capital, over a period of time they may exhaust the share
balance of an account held under a Withdrawal Plan. Use of a Withdrawal Plan
cannot assure realization of investment objectives, including capital growth or
protection against loss in declining markets. A Withdrawal Plan can be
terminated at any time by the investor, the Fund or FDISG upon notice in
writing.
Self-Employed Retirement Plans. The Fund offers a prototype retirement
------------------------------
plan for self-employed individuals ("SERP"). Under the SERP, self-employed
individuals may contribute earned income to purchase shares of the Fund and/or
certain other mutual funds managed by SBAM.
Boston Safe Deposit and Trust Company ("Boston Safe"), an indirect
wholly owned subsidiary of Mellon Bank Corporation, has agreed to serve as
custodian and furnish the services provided for in the SERP and the related
Custody Agreement. Boston Safe will charge individuals adopting a SERP an
application fee as well as certain additional fees for its services under the
Custody Agreement.
For information required for adopting a SERP, including information on
fees, obtain the form of SERP and Custody Agreement available from the Fund.
Because application of particular tax provisions will vary depending on each
individual's situation, consultation with a financial adviser regarding a SERP
is recommended.
IRAs. A prototype individual retirement account ("IRA") is available,
-----
which has been approved as to form by the Internal Revenue Service ("IRS").
Contributions to an IRA made available by the Fund may be invested in shares of
the Fund and/or certain other mutual funds managed by SBAM.
Boston Safe has agreed to serve as custodian of the IRA and furnish the
services provided for in the Custodial Agreement. Boston Safe will charge each
IRA an application fee as well as
25
<PAGE>
certain additional fees for its services under the Custodial Agreement. In
accordance with IRS regulations, an individual may revoke an IRA within seven
calendar days after it is established.
Contributions in excess of the allowable limits, premature distributions
to an individual who is not disabled before age 59-1/2 or insufficient
distributions after age 70-1/2 will generally result in substantial adverse tax
consequences.
For information required for adopting an IRA, including information on
fees, obtain the form of Custodial Agreement and related materials, including
disclosure materials, available from the Fund. Consultation with a financial
adviser regarding an IRA is recommended.
CAPITAL STOCK
The shares of the Fund have non-cumulative voting rights. This means
that the holders of more than 50% of the shares voting for the election of
directors can elect 100% of the directors, if they choose to do so. In such
event, the holders of the remaining less than 50% of the shares voting for such
election will not be able to elect any person or persons to the Board of
Directors. See "Capital Stock" in the Prospectus for additional information
concerning the Fund's capital stock.
CUSTODIAN AND TRANSFER AGENT
Investors Bank, which is located at 89 South Street, Boston, Massachusetts
02111, serves as custodian for the Fund. As the Fund's custodian, Investors
Bank, among other things, maintains a custody account or accounts in the name of
the Fund; receives and delivers all assets for the Fund upon purchase and upon
sale or maturity; collects and receives all income and other payments and
distributions on account of the assets of the Fund; and makes disbursements on
behalf of the Fund. The custodian does not determine the investment policies of
the Fund, nor decide which securities the Fund will buy or sell.
FDISG, which is located at One Exchange Place, Boston, Massachusetts 02109,
serves as transfer agent for the Fund. As the Fund's transfer agent, FDISG
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.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP serves as the independent accountants for the Fund.
Price Waterhouse LLP provides audit services, tax return preparation and
assistance and consultation in connection with review of SEC filings. Price
Waterhouse LLP's address is 1177 Avenue of the Americas, New York, New York
10036.
26
<PAGE>
EXPERTS
The financial highlights included in the Prospectus and the financial
statements included in this Statement of Additional Information have been
included in reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of that firm as experts in auditing and
accounting.
27
<PAGE>
FINANCIAL STATEMENTS
28
<PAGE>
S A L O M O N B R O T H E R S C A P I T A L F U N D I N C
Statement of Net Assets December 31, 1995
Common Stocks -- 89.1% of Net Assets
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Value
Shares Cost (Note 1a)
- --------------------------------------------------------------------------------
<C> <S> <C> <C>
Basic Industries -- 5.1%
25,000 Allegheny Ludlum ......................... $ 426,500 $ 462,500
25,000 Hercules ................................. 1,169,906 1,409,375
20,000 Hanna (M.A.) ............................. 533,710 560,000
30,000 OM Group ................................. 918,661 993,750
30,000 Praxair .................................. 691,980 1,008,750
30,000 Sonoco Products .......................... 808,670 787,500
----------- ------------
4,549,427 5,221,875
----------- ------------
Capital Goods -- 6.0%
60,000 Browning-Ferris Industries ............... 2,016,120 1,770,000
25,000 Deere .................................... 693,854 881,250
40,000 Raytheon ................................. 1,287,429 1,890,000
46,000 Tyco International ....................... 1,082,070 1,638,750
----------- ------------
5,079,473 6,180,000
----------- ------------
Consumer Cyclicals -- 19.5%
130,000 Big Flower Press Holdings* ............... 2,048,026 2,015,000
35,000 Gadzooks* ................................ 615,000 883,750
30,000 Exide .................................... 1,382,425 1,376,250
60,000 Federated Department Stores* ............. 1,312,617 1,650,000
150,000 Hollinger ................................ 1,136,000 1,087,500
125,000 MascoTech ................................ 1,531,529 1,359,375
60,000 Omnicom Group ............................ 1,768,020 2,235,000
130,000 Price\Costco* ............................ 2,282,435 1,982,500
45,000 Proffitts* ............................... 1,161,359 1,181,250
100,000 Sears, Roebuck ........................... 3,178,280 3,900,000
40,000 Sherwin-Williams ......................... 1,396,315 1,630,000
20,000 Times Mirror, Class A .................... 601,200 677,500
----------- ------------
18,413,206 19,978,125
----------- ------------
Consumer Staples -- 15.3%
45,000 Albertson's .............................. 1,361,636 1,479,375
70,000 ConAgra .................................. 2,315,459 2,887,500
15,000 Estee Lauder Companies, Class A .......... 390,000 523,125
80,000 Kroger* .................................. 2,123,840 3,000,000
23,300 Penn Traffic* ............................ 369,153 349,500
60,000 Riviana Foods ............................ 754,522 795,000
160,000 Stop & Shop Companies* ................... 3,105,918 3,700,000
35,000 Sysco .................................... 993,475 1,137,500
77,300 Whitman .................................. 1,654,688 1,797,225
----------- ------------
13,068,691 15,669,225
----------- ------------
Energy -- 17.4%
30,000 Amoco .................................... 1,893,920 2,156,250
35,000 Ashland .................................. 1,083,355 1,229,375
40,000 Chevron .................................. 1,931,150 2,100,000
75,000 Diamond Shamrock ......................... 1,876,590 1,940,625
20,000 Mobil .................................... 2,142,450 2,240,000
50,000 Noble Affiliates ......................... 1,302,375 1,493,750
20,000 Texaco ................................... 1,548,075 1,570,000
10,000 Tejas Gas* ............................... 480,250 528,750
70,000 Unocal ................................... 1,827,950 2,038,750
100,000 Union Pacific Resources Group ............ 2,188,999 2,537,500
----------- ------------
16,275,114 17,835,000
----------- ------------
</TABLE>
1
<PAGE>
S A L O M O N B R O T H E R S C A P I T A L F U N D I N C
Statement of Net Assets December 31, 1995 (continued)
Common Stocks (continued)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Value
Shares Cost (Note 1a)
- --------------------------------------------------------------------------------
<C> <S> <C> <C>
Financial Services -- 8.3%
70,000 Bank of New York ......................... $ 2,588,120 $ 3,412,500
15,000 NationsBank .............................. 1,081,525 1,044,375
65,000 Prudential Reinsurance Holdings .......... 1,246,597 1,519,375
10,000 St. Paul Companies ....................... 553,037 556,250
35,000 Trenwick Group ........................... 1,762,413 1,968,750
----------- ------------
7,231,692 8,501,250
Health Care -- 7.4%
60,000 Columbia/HCA Healthcare .................. 2,544,558 3,045,000
60,000 SmithKline Beecham -- ADR ................ 2,933,140 3,330,000
25,000 U.S. HealthCare .......................... 1,025,720 1,162,500
----------- ------------
6,503,418 7,537,500
Technology -- 3.5%
75,000 Plantronics* ............................. 2,170,918 2,709,375
40,000 Spectrian* ............................... 961,255 890,000
----------- ------------
3,132,173 3,599,375
Transportation -- 3.6%
140,000 Canadian National Railway ................ 2,033,637 2,100,000
50,000 Pittston Services Group .................. 1,240,283 1,568,750
----------- ------------
3,273,920 3,668,750
Telecommunications & Utilities -- 3.0%
47,500 Midcom Communications* ................... 663,562 866,875
50,000 Williams Companies ....................... 1,928,000 2,193,750
----------- ------------
2,591,562 3,060,625
----------- ------------
Total Common Stocks ...................... 80,118,676 91,251,725
----------- ------------
Preferred Stocks -- 2.3%
- --------------------------------------------------------------------------------
Shares
- --------------------------------------------------------------------------------
Capital Goods -- 1.5%
30,000 Elsag Bailey, 5.50% Convertible .......... 1,516,250 1,511,250
----------- ------------
Consumer Staples-- 0.8%
37,000 James River Depository Shares, 9% ........ 841,414 864,875
----------- ------------
Total Preferred Stocks ................... 2,357,664 2,376,125
----------- ------------
</TABLE>
2
<PAGE>
S A L O M O N B R O T H E R S C A P I T A L F U N D I N C
Statement of Net Assets December 31, 1995 (continued)
Purchased Options -- 0.0%
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Premium Value
Contracts Paid (Note 1a)
- --------------------------------------------------------------------------------------------
<S> <C> <C>
100 S&P Midcap 400 Index Puts
(expiring January 1996, exercise price $195) $ 9,575 $ 1,562
50 S&P Midcap 400 Index Puts
(expiring January 1996, exercise price $200) 2,600 1,250
50 S&P Midcap 400 Index Puts
(expiring February 1996, exercise price $200) 5,150 3,594
----------- ------------
Total purchased options 17,325 6,406
----------- ------------
Total Investments -- 91.4% ........................... $82,493,665 93,634,256
=========== ------------
Repurchase Agreements -- 9.3%
- --------------------------------------------------------------------------------------------
Principal
Amount
(thousands)
- --------------------------------------------------------------------------------------------
$4,750 J.P. Morgan Securities, 5.75%, cost $4,750,000
dated 12/29/95, $4,753,035 due 1/2/96,
collateralized by $3,819,000 U.S. Treasury Bonds,
8.125%, valued at $4,845,356 due 2/15/21 ........ 4,750,000
4,750 Merrill Lynch, 5.60%, cost $4,750,000,
dated 12/29/95, $4,752,956 due 1/2/96,
collateralized by $4,770,000 U.S. Treasury Notes,
5.625%, valued at $4,847,513 due 10/31/97 ....... 4,750,000
------------
Total Repurchase Agreements ...................... 9,500,000
------------
Cash and Receivables -- 3.3% ..................... $33,364,953
Liabilities -- (4.0)% ............................ (4,070,582) (705,629)
----------- ------------
Net Assets -- equivalent to $18.67, offering and
redemption price per share on 5,484,823 shares of
$1.00 par value capital stock outstanding;
25,000,000 shares authorized .................... $102,428,627
============
Net Assets Consist of:
Capital stock .................................... $ 5,484,823
Additional paid-in capital ....................... 80,484,396
Undistributed net investment income .............. 4,470
Undistributed net realized gain .................. 5,314,347
Net unrealized appreciation ...................... 11,140,591
------------
Net Assets ....................................... $102,428,627
============
</TABLE>
- ----------
*Non-income producing security.
See accompanying notes to financial statements.
3
<PAGE>
S A L O M O N B R O T H E R S C A P I T A L F U N D I N C
Statement of Operations year ended December 31, 1995
Investment Income
<TABLE>
<CAPTION>
<S> <C> <C>
Income
Dividends (net of foreign withholding taxes of $16,179) .......... $ 1,378,300
Interest ......................................................... 624,141
------------
2,002,441
Expenses
Management fee ...................................... $ 957,755
Directors' fees and expenses ........................ 64,780
Legal ............................................... 61,275
Audit and tax return preparation fees ............... 57,750
Shareholder services ................................ 50,150
Custodian ........................................... 39,735
Printing ............................................ 30,850
Other ............................................... 37,150 1,299,445
------------ ------------
Net investment income ............................................ 702,996
------------
Net Realized and Unrealized Gain on Investments
Realized gain on investments and options ......................... 20,581,764
Net Unrealized Appreciation of Investments
Beginning of year ................................... 3,724,714
End of year ......................................... 11,140,591
------------
Increase in net unrealized appreciation .......................... 7,415,877
------------
Net realized gain and increase in net unrealized appreciation .... 27,997,641
------------
Net increase in net assets from operations ....................... $ 28,700,637
============
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
S A L O M O N B R O T H E R S C A P I T A L F U N D I N C
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994
- ----------------------------------------------------------------------------------------------------------
Operations
<S> <C> <C>
Net investment income ........................................... $ 702,996 $ 129,318
Net realized gain on investments and options .................... 20,581,764 2,885,474
Change in net unrealized appreciation ........................... 7,415,877 (19,541,271)
------------ -----------
Net change in net assets from operations ........................ 28,700,637 (16,526,479)
------------ -----------
Distributions to Shareholders from
Net investment income ........................................... (698,526) (148,595)
Net realized gain on investments ................................ (11,082,177) (8,197,412)
Distributions in excess of net realized gains ................... -- (4,185,240)
------------ -----------
(11,780,703) (12,531,247)
------------ -----------
Capital Share Transactions
Proceeds from sales of 1,609,281 and 1,403,122 shares,
respectively .................................................. 29,031,088 26,086,673
Net asset value of 600,042 and 677,223 shares, respectively,
issued in reinvestment of net investment income and net
realized gain distributions ................................... 11,026,944 11,471,834
Payment for redemption of 2,277,011 and 2,003,136 shares,
respectively .................................................. (41,253,697) (35,701,771)
------------ -----------
Change in net assets resulting from capital share
transactions, representing net decrease of 67,688 and
net increase of 77,209 shares, respectively ................... (1,195,665) 1,856,736
------------ -----------
Total change in net assets ...................................... 15,724,269 (27,200,990)
------------ -----------
Net Assets
Beginning of year ............................................... 86,704,358 113,905,348
------------ -----------
End of year (includes undistributed net investment income
of $4,470 for 1995) .......................................... $102,428,627 $86,704,358
============ ===========
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
PAGE>
S A L O M O N B R O T H E R S C A P I T A L F U N D I N C
Notes to Financial Statements
1. Significant Accounting Policies
The Fund is registered as a non-diversified, open-end, management investment
company under the Investment Company Act of 1940, as amended. The Fund's
investment objective is capital appreciation through investments primarily in
common stocks or securities convertible into common stocks which are believed to
have above-average price appreciation potential and which may also involve
above-average risk. The following is a summary of significant accounting
policies consistently followed by the Fund in the preparation of its financial
statements. The policies are in conformity with generally accepted accounting
principles ("GAAP"). The preparation of financial statements in accordance with
GAAP requires management to make estimates of certain reported amounts in the
financial statements. Actual amounts could differ from those estimates.
(a) Securities Valuation. Portfolio securities listed or traded on
national securities exchanges, or reported by the NASDAQ national market
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. If no quotations are readily
available (as may be the case for securities of limited marketability), such
portfolio securities are valued at a fair value determined pursuant to
procedures established by the Board of Directors.
(b) Option Contracts. When the Fund writes or purchases a call option or
a put option, an amount equal to the premium received or paid is recorded as
a liability or asset, the value of which is marked-to-market daily to
reflect the current market value of the option. When the option expires, the
Fund realizes a gain or loss equal to the amount of the premium received or
paid. When the Fund enters into a closing transaction by purchasing or
selling an offsetting option, it realizes a gain or loss without regard to
any unrealized gain or loss on the underlying security. When a written call
option is exercised, the Fund realizes a gain or loss from the sale of the
underlying security and the proceeds from such sale are increased by the
premium originally received. When a written put option is exercised, the
amount of the premium received reduces the cost of the security that the
Fund purchased upon exercise.
(c) Federal Income Taxes. The Fund has complied and intends to continue
to comply with the requirements of the Internal Revenue Code of 1986, as
amended, applicable to regulated investment companies, and to distribute all
of its taxable income to its shareholders. Therefore, no Federal income tax
or excise tax provision is required.
(d) Repurchase Agreements. When entering into repurchase agreements, it
is the Fund's policy to take possession, through its custodian, of the
underlying collateral and to monitor its value at the time the arrangement
is entered into and at all times during the term of the repurchase agreement
to ensure that it always equals or exceeds the repurchase price. In the
event of default of the obligation to repurchase, the Fund has the right to
liquidate the collateral and apply the proceeds in satisfaction of the
obligation. Under certain circumstances, in the event of default or
bankruptcy by the other party to the agreement, realization and/or retention
of the collateral may be subject to legal proceedings.
6
<PAGE>
S A L O M O N B R O T H E R S C A P I T A L F U N D I N C
Notes to Financial Statements (continued)
(e) Dividends and Distributions. Dividends and distributions to
shareholders are recorded on the ex-dividend date, and determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles due primarily to deferral of wash sales.
(f) Other. Securities transactions are recorded as of the trade date.
Dividend income is recorded on the ex-dividend date. Gains or losses on
sales of securities are calculated for financial accounting and Federal tax
purposes on the identified cost basis. Interest is recognized as interest
income when earned.
2. Capital Stock
Payable for Fund shares redeemed at December 31, 1995 amounted to
$1,872,782.
3. Management Fee and Other Transactions
The Fund retains Salomon Brothers Asset Management Inc ("SBAM"), an
indirect, wholly-owned subsidiary of Salomon Inc, to act as investment manager
of the Fund subject to supervision by the Board of Directors of the Fund. SBAM
furnishes the Fund with office space and pays the compensation of its officers.
The management fee for these services is payable monthly and is based on the
following annual percentages of the Fund's average daily net assets: first $100
million--1%; next $100 million--.75%; next $200 million--.625%; excess over $400
million--.50%. The management fee payable at December 31, 1995 was $85,026.
Brokerage commissions of $57,993 were paid to Salomon Brothers Inc, the
Fund's distributor and an indirect wholly-owned subsidiary of Salomon Inc, for
transactions executed on behalf of the Fund during the year ended December 31,
1995.
If in any fiscal year the total expenses of the Fund, excluding taxes,
interest, brokerage and extraordinary expenses, but including the management
fee, exceed the most stringent expense limitation imposed by state securities
regulations applicable to the Fund, SBAM will pay or reimburse the Fund for the
excess. Currently, this limitation on an annual basis is 2.5% of the first $30
million of average daily net assets, 2.0% of the next $70 million of average
daily net assets and 1.5% of average daily net assets in excess of $100 million.
For the year ended December 31, 1995, there was no such reimbursement.
7
<PAGE>
S A L O M O N B R O T H E R S C A P I T A L F U N D I N C
Notes to Financial Statements (continued)
4. Portfolio Activity
The cost of securities purchased and proceeds from securities sold (other
than short-term investments) during the year ended December 31, 1995 aggregated
$193,714,152 and $210,691,117, respectively. Amounts payable for securities
purchased at December 31, 1995 aggregated $1,325,453.
Cost of securities held (excluding short-term investments and written
options) on December 31, 1995 for Federal income tax purposes was substantially
the same as for book purposes. As of December 31, 1995, total unrealized
appreciation and depreciation, based on the cost for Federal income tax
purposes, was approximately $12,101,000 and $960,000, respectively, resulting in
net unrealized appreciation of approximately $11,141,000.
Transactions in options written during the year ended December 31, 1995 were
as follows:
<TABLE>
<CAPTION>
Number of Premiums
Contracts Received
--------- --------
<S> <C> <C>
Options outstanding at December 31, 1994 ........... (1,550) $(441,761)
Options written .................................... (779) (135,739)
Options terminated in closing purchase transactions. 2,100 563,231
Options expired .................................... 29 1,211
Options exercised .................................. 200 13,058
----- ---------
Options outstanding at December 31, 1995 ........... -- --
===== =========
</TABLE>
During the year ended December 31, 1995 net realized loss from written
option transactions amounted to $507,368. During the year ended December 31,
1995 net realized loss from purchased option transactions amounted to $347,275,
for a net realized loss on all option transactions of $854,643.
The risk in writing a covered call option is that the Fund may forego the
opportunity of profit if the market price of the underlying security increases
and the option is exercised. The risk in writing a put option is that the Fund
may incur a loss if the market price of the underlying security decreases and
the option is exercised. In addition, there is the risk that the Fund may not be
able to enter a closing transaction because of an illiquid secondary market.
8
<PAGE>
S A L O M O N B R O T H E R S C A P I T A L F U N D I N C
Financial Highlights
Selected data per share of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990+ 1989 1988 1987 1986
- ------------------------------------------------------------------------------------------------------------------------------------
Per Share Operating Performance:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year .. $15.62 $20.80 $19.64 $19.06 $14.86 $16.75 $15.58 $16.58 $17.87 $19.75
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net investment income ............... .14 .03 .028 .10 .33 .20 .05 .01P. .04 .13
Net gains (losses) on securities
(both realized and unrealized) .... 5.27 (2.87) 3.242 .80 4.56 (1.715) 6.25 (.775) .355* 2.275
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment operations .. 5.41 (2.84) 3.27 .90 4.89 (1.515) 6.30 (.765) .395 2.405
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Less dividends and distributions:
Divdends from net investment income . (.14) (.03) (.035) (.105) (.325) (.285) -- -- (.13) (.25)
Distributions from net realized gain
on investments .................... (2.22) (1.51) (2.075) (.215) (.365) (.09) (5.13) (.235) (1.555) (4.035)
Distributions in excess of net
realized gains .................... -- (.80) -- -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total dividends and distributions (2.36) (2.34) (2.11) (.32) (.69) (.375) (5.13) (.235) (1.685) (4.285)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end of year ........ $18.67 $15.62 $20.80 $19.64 $19.06 $14.86 $16.75 $15.58 $16.58 $17.87
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Total investment return based on net
asset value per share ............. +34.9% -14.2% +17.2% +4.7% +33.4% -9.1% +39.7% -4.6% +1.7% +13.7%
Ratios/Supplemental Data:
Net assets end of year
(thousands) ....................... $102,429 $86,704 $113,905 $103,356 $89,829 $75,815 $72,621 $64,267 $91,313 $105,215
Ratio of expenses to average net
assets++ .......................... 1.36% 1.30% 1.31% 1.34% 1.48% 1.44% 1.48% 1.27% 1.17%* 1.13%
Ratio of net investment income to
average net assets ................ .74% 0.12% 0.13% 0.58% 1.87% 1.59% 0.33% 0.03% 0.19% 0.65%
Portfolio turnover rate ............. 217% 152% 104% 41% 94% 156% 362% 270% 395% 279%
<FN>
- ----------
* Net of provision for income taxes of $.057 per share. Expense ratio including provision would be 1.45%.
P. Calculated using average shares outstanding.
++ Net of reimbursement for years 1986 through 1988.
+ Since May 1, 1990, the Fund has been managed by SBAM. Prior thereto, the Lehman Management Co. division of Shearson
Lehman Brothers Inc. served as the Fund's investment manager.
</FN>
</TABLE>
9
<PAGE>
S A L O M O N B R O T H E R S C A P I T A L F U N D I N C
Report of Independent Accountants
To the Board of Directors and Shareholders of
Salomon Brothers Capital Fund Inc
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Salomon Brothers Capital Fund Inc (the "Fund") at December 31, 1995, the results
of its operations for the year then ended, the changes in its net assets for
each of the two years in the period then ended, and the financial highlights for
each of the ten years in the period then ended, in conformity with generally
accepted accounting principles. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 1995 by
correspondence with the custodian and brokers and the application of alternative
auditing procedures where confirmations from brokers were not received, provide
a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
New York, New York
February 16, 1996
10
<PAGE>
SALOMON BROTHERS CAPITAL FUND INC
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits
---------------------------------
(a) Financial Statements:
Included in Part A:
Financial Highlights
Included in Part B:
Statement of Net Assets at December 31, 1995
Statement of Operations for the year ended
December 31, 1995
Statement of Changes in Net Assets for the
years ended December 31, 1995 and
December 31, 1994
Notes to Financial Statements
Report of Independent Accountants
(b) Exhibits:
Description
-----------
1(a) Registrant's Articles of Incorporation are
incorporated by reference to Exhibit 1 of the
Registration Statement on Form S-5.
1(b) Registrant's Articles of Incorporation, as
amended, are incorporated by reference to
Exhibit 1(1) of Amendment No. 1 to the
Registration Statement on Form S-5.
1(c) Registrant's Articles of Incorporation, as
amended, are incorporated by reference to its
Registration Statement on Form N-1A, filed for
the quarter ended September 30, 1978.
1(d) Registrant's Articles of Incorporation, as
amended, are incorporated by reference to
Exhibit 1(d) of Post-Effective Amendment No. 7
to the Registration Statement on Form N-1.
<PAGE>
1(e) Registrant's Articles of Incorporation, as
amended on April 24, l989, are incorporated by
reference to Exhibit 1(e) of Post-Effective
Amendment No. 13, to the Registration Statement
on Form N-1A.
1(f) Registrant's Articles of Incorporation, as
amended on April 30, l990, are incorporated by
reference to Exhibit l(f) of Post Effective
Amendment No. 15 to the Registration Statement
on Form N-lA.
2 Registrant's By-Laws, as amended, are
incorporated by reference to Exhibit 2 of Post-
Effective Amendment No. 8 to the Registration
Statement on Form N-1A.
3 Not applicable.
4 Specimen Certificate of Capital Stock is
incorporated by reference to Exhibit 1(4)(a) of
Amendment No. 1 to the Registration Statement on
Form S-5.
5 Management Contract between Registrant and
Salomon Brothers Asset Management Inc is
incorporated by reference to Exhibit 5(b) to
Amendment No. 14 to the Registration Statement
on Form N-lA.
6 Distribution Agreement between Registrant and
Salomon Brothers Inc is incorporated by
reference to Exhibit 6(a) of Post-Effective
Amendment No. 15 to the Registration Statement
on Form N-1A.
7 Not applicable.
8 Custodian Agreement between Registrant and
Boston Safe Deposit and Trust Company is
incorporated by reference to Exhibit 8 of Post-
Effective Amendment No. 17 to the Registration
Statement on Form N-1A.
9 Transfer Agency Agreement between Registrant and
Boston Safe Deposit and Trust Company dated May
3, 1985 is incorporated by reference to Exhibit
9 of Post-Effective Amendment No. 10 to the
Registration Statement on Form N-1A.
10 Opinion of Counsel as to the Legality of
Securities Being Registered is filed herein.
11 Consent of Price Waterhouse LLP, Independent
Accountants, is filed herein.
<PAGE>
12 Not applicable.
13 Share Purchase Agreement between Registrant and
Lehman Brothers Kuhn Loeb Incorporated is
incorporated by reference to Exhibit 1(3) of
Amendment No. 3 to the Registration Statement on
Form N-1.
14(a) Prototype Profit Sharing and Money Purchase
Pension Plan are incorporated by reference to
Exhibit 14(a) of Amendment No. 5 to the
Registration Statement on Form N-1.
14(b) Prototype Individual Retirement Account Plan is
incorporated by reference to Exhibit 14(b) of
Amendment No. 5 to the Registration Statement on
Form N-1.
15 Not applicable.
16 Performance Calculations incorporated by
reference to Exhibit l6 of Amendment No. 12 to
the Registration Statement on Form N-lA.
17 Financial Data Schedule is filed herein.
Item 25. Persons Controlled by or under Common Control with Registrant
-------------------------------------------------------------
Not applicable.
Item 26. Number of Holders of Securities
-------------------------------
Number of Record Holders
Title of Class at April 17, 1996
-----------------------------------------------------------
Shares of Salomon Brothers
Capital Fund Inc
par value $1.00 per share...... 1,935
Item 27. Indemnification
---------------
Reference is made to Article Eighth of Registrant's Article of Incorporation,
Article IV of Registrant's By-Laws and Section 4 of the Distribution Agreement.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 (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
<PAGE>
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 28. Business and Other Connections
of Investment Adviser
------------------------------
Salomon Brothers Asset Management Inc ("SBAM"), an indirect wholly owned
subsidiary of Salomon Inc, is an investment adviser registered under the
Investment Advisers Act of 1940 (the "Advisers Act") and renders investment
advice to a wide variety of individual, institutional and investment advisory
clients.
The list required by this Item 28 of officers and directors of SBAM, 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 FORM ADV filed
by SBAM pursuant to the Advisers Act (SEC File No. 801-32046).
Item 29. Principal Underwriter
---------------------
(a) Salomon Brothers Inc ("Salomon Brothers") currently acts as
distributor for, in addition to the Fund, Salomon Brothers Investors Fund Inc,
Salomon Brothers Opportunity Fund Inc, Salomon Brothers Series Funds Inc, and
Salomon Brothers Institutional Series Funds Inc.
(b) The information required by this Item 29 with respect to each
director, officer or partner of Salomon Brothers is incorporated by reference to
Schedule A of FORM BD filed by Salomon Brothers pursuant to the Securities
Exchange Act of 1934 (SEC File No. 8-26920).
(c) Not applicable.
Item 30. Location of Accounts and Records
--------------------------------
(1) Salomon Brothers Capital Fund Inc
7 World Trade Center
New York, New York l0048
(2) Boston Safe Deposit and Trust Company
One Boston Place
Boston, Massachusetts 02108
<PAGE>
(3) First Data Investor Services Group, Inc.
53 State Street
Boston, Massachusetts 02109
(records relating to its function as administrator and transfer
agent)
(4) Salomon Brothers Inc
One New York Plaza
New York, New York l0004
Item 31. Management Services
-------------------
Not applicable.
Item 32. Undertakings
------------
(a) Not applicable
(b) Not applicable
(c) The Registrant hereby undertakes to furnish each person to whom a
Prospectus is delivered with a copy of the Registrant's latest
Annual Report to shareholders upon request and without charge.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, as amended, the Registrant certifies
that it meets all of the requirements for effectiveness of this Registration
Statement pursuant to Rule 485(b) under the Securities Act of 1933, as amended,
and the Registrant has duly caused this Post-Effective Amendment No. 22 to its
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of New York, State of New York, on this 29th day of
April, 1996.
SALOMON BROTHERS CAPITAL FUND INC
(Registrant)
By /s/ Michael S. Hyland
------------------------------
Michael S. Hyland, Chairman
of the Board and President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Post-Effective Amendment to this Registration Statement has been signed
below by the following persons in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Michael S. Hyland Chairman of the April 26, 1996
- --------------------- Board, President and
Michael S. Hyland Director (principal
executive officer)
/s/ Alan Mandel Treasurer April 26, 1996
- ---------------------
Alan Mandel
/s/ Charles F. Barber Director April 26, 1996
- ---------------------
Charles F. Barber
<PAGE>
/s/ Andrew L. Breech Director April 26, 1996
- -----------------------------
Andrew L. Breech
/s/ Thomas W. Brock Director April 26, 1996
- -----------------------------
Thomas W. Brock
/s/ Carol L. Colman Director April 26, 1996
- -----------------------------
Carol L. Colman
/s/ William R. Dill Director April 26, 1996
- -----------------------------
William R. Dill
/s/ Clifford M. Kirtland, Jr. Director April 26, 1996
- -----------------------------
Clifford M. Kirtland, Jr.
/s/ Robert W. Lawless Director April 26, 1996
- -----------------------------
Robert W. Lawless
/s/ Louis P. Mattis Director April 26, 1996
- -----------------------------
Louis P. Mattis
/s/ Thomas F. Schlafly Director April 26, 1996
- -----------------------------
Thomas F. Schlafly
<PAGE>
EXHIBIT INDEX
Exhibit Number Description Page
- -------------- ----------- ----
10 Opinion of Counsel as to the Legality
of Securities Being Registered.
11 Consent of Price Waterhouse LLP,
Independent Accountants.
17 Financial Data Schedule.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 82,493,665
<INVESTMENTS-AT-VALUE> 93,634,256
<RECEIVABLES> 3,317,815
<ASSETS-OTHER> 9,547,138
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 106,499,209
<PAYABLE-FOR-SECURITIES> 1,325,453
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,745,129
<TOTAL-LIABILITIES> 4,070,582
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 85,969,219
<SHARES-COMMON-STOCK> 5,484,823
<SHARES-COMMON-PRIOR> 5,552,511
<ACCUMULATED-NII-CURRENT> 4,470
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 5,314,347
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 11,140,591
<NET-ASSETS> 102,428,627
<DIVIDEND-INCOME> 1,378,300
<INTEREST-INCOME> 624,141
<OTHER-INCOME> 0
<EXPENSES-NET> 1,299,445
<NET-INVESTMENT-INCOME> 702,996
<REALIZED-GAINS-CURRENT> 20,581,764
<APPREC-INCREASE-CURRENT> 7,415,877
<NET-CHANGE-FROM-OPS> 28,700,637
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 698,526
<DISTRIBUTIONS-OF-GAINS> 11,082,177
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,609,281
<NUMBER-OF-SHARES-REDEEMED> 2,277,011
<SHARES-REINVESTED> 600,042
<NET-CHANGE-IN-ASSETS> 15,724,269
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 4,185,240
<GROSS-ADVISORY-FEES> 957,755
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 341,690
<AVERAGE-NET-ASSETS> 95,365,571
<PER-SHARE-NAV-BEGIN> 15.62
<PER-SHARE-NII> .14
<PER-SHARE-GAIN-APPREC> 5.27
<PER-SHARE-DIVIDEND> .14
<PER-SHARE-DISTRIBUTIONS> 2.22
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 18.67
<EXPENSE-RATIO> 1.36
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<PAGE>
EXHIBIT 99.10
PIPER & MARBURY
L.L.P.
CHARLES CENTER SOUTH WASHINGTON
36 SOUTH CHARLES STREET NEW YORK
Baltimore, Maryland 21201-3018 PHILADELPHIA
410-539-2530 EASTON
FAX: 410-539-0489 LONDON
April 24, 1996
Salomon Brothers Capital Fund Inc
Seven World Trade Center
New York, New York 10048
Registration Statement on Form N-1A
(Registration Nos. 2-57073 and 811-2667)
----------------------------------------
Ladies and Gentlemen:
We understand that Salomon Brothers Capital Fund Inc, a Maryland
corporation (the "Fund"), intends to register 682,602 shares of its capital
stock, par value $1.00 per share (the "Shares"), pursuant to Post-Effective
Amendment No. 22 to the Fund's Registration Statement under the Securities Act
of 1933, as amended (the "Securities Act"), and in reliance upon Rule 24e-2
under the Investment Company Act of 1940, as amended (the "1940 Act").
In response to the Fund's request, we have examined the Fund's Charter and
By-Laws, the Prospectus and Statement of Additional Information included in its
Registration Statement on Form N-1A, as amended (the "Prospectus"), and such
statutes, regulations, corporate records, and documents that we deemed necessary
or advisable for purposes of this opinion. We have also examined a certificate
of the Secretary and Treasurer of the Fund dated April 24, 1996 (the
"Certificate") as to certain factual matters. In rendering our opinion, we are
relying on the Certificate and have made no independent investigation or
inquiries as to the matters set forth therein.
We have assumed, without independent verification, the genuineness of
signatures, the authenticity of all documents submitted to us as originals, and
the conformity with originals of all documents submitted to us as copies.
<PAGE>
Piper & Marbury
L.L.P.
Salomon Brothers Capital Fund Inc
April 24, 1996
Page 2
Based upon the foregoing, we are of the opinion that when issued and paid
for in accordance with the terms of the Prospectus, the Shares will be validly
issued, fully paid, and non-assessable under the laws of the State of Maryland.
This opinion is limited to the law of the State of Maryland governing the
authorization and issuance of capital stock. We express no opinion as to the
securities or "Blue Sky" laws of the State of Maryland or as to Federal
securities laws.
We consent to the filing of this opinion as part of Post-Effective
Amendment No. 22 to the Fund's Registration Statement. This opinion may not be
relied upon by any other person or for any other purpose without our written
consent.
Very truly yours,
/s/ Piper & Marbury L.L.P.
<PAGE>
EXHIBIT 99.11
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 22 to the registration
statement on Form N-1A (the "Registration Statement") of our report dated
February 16, 1996, relating to the financial statements and financial highlights
of the Salomon Brothers Capital Fund Inc, which appears in such Statement of
Additional Information, and to the incorporation by reference of our report into
the prospectus which constitutes part of this Registration Statement. We also
consent to the references to us under the headings "Independent Accountants" and
"Experts" in such Statement of Additional Information and to the reference to us
under the heading "Financial Highlights" in such Prospectus.
/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York, 10036
April 24, 1996
