<PAGE>
SALOMON BROTHERS INSTITUTIONAL MONEY MARKET FUND
January 24, 2000
Dear Shareholders:
We are pleased to present the annual report for the Salomon Brothers
Institutional Money Market Fund ('Fund') for the year ended December 31, 1999.
Included are market commentary, financial statements and other important Fund
information. We hope you find this report to be useful and informative.
MARKET REVIEW & PERFORMANCE
As of December 31, 1999, the Fund's 7-day yield was 6.01% and the Fund's 7-day
effective yield -- which reflects compounding -- was 6.20%.
Please note that an investment in the Fund is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government agency. Although
the Fund seeks to preserve the value of your investment at $1.00 per share, it
is possible to lose money by investing in the Fund.
Market pundits began the year with the expectation that the meltdown in the
global markets would trickle down to a slowing of the U.S. economy, enhancing
the performance of fixed income investments. This was not to be the case, as
continued growth coupled with rising inflation fears created uncertainty for
bond market investors.
Stronger indicators of consumer demand and manufacturing production prompted the
Federal Reserve Board ('Fed') to shift its bias from one of neutral on interest
rates to one of raising rates. The Fed opted to raise rates three times during
1999, bringing the effective funds rate back to 5.5%, erasing all of the easing
moves done in 1998.
Financial markets began the fourth quarter of 1999 under concerns surrounding
the Y2K computer issue. Most commercial paper issuers began to issue debt
'across the millennium turn'; paper due to mature in mid-January. Issuers were
forced to pay premium yields for this strategy, which translated into higher
yields for money market funds that bought the paper. To alleviate financing
strains, the Fed announced in October a plan to sell repurchase agreement
options to primary dealers, enabling the dealers to borrow funds for financing
inventories around year-end. Late December saw rates in the commercial paper
market fall dramatically. Intraday Fed repurchase agreements, which add cash to
the system, combined with lower overall commercial paper supply, as a result of
issuers closing their books for the year, resulted in many buyers chasing a
dearth of supply.
OUTLOOK
The Federal Open Market Committee meeting on December 21, 1999 was somewhat
ambiguous. The target rate on federal funds was left unchanged and a neutral
bias on rates was maintained, but the Fed's accompanying statement focused on
the fact that 'the committee remains concerned with the possibility that over
time increases in demand will continue to exceed the growth in potential
supply.' This leaves the door open for additional rate hikes.1 Our strategy is
to continue to invest the Fund's assets in securities that are among the highest
quality available to money market portfolios and to lengthen when the
opportunity represents relative value, as the 'over the
- ---------
1 Please note that as of February 2, 2000, after this letter was written, the
Fed raised interest rates 0.25% to 5.75%.
<PAGE>
SALOMON BROTHERS INSTITUTIONAL MONEY MARKET FUND
millennium' strategy did in the second half of 1999. The Fund holds positions in
short-term variable rate demand notes in order to garner incremental yields. As
of December 31, 1999, the Fund's holdings consisted of 62% in variable rate
demand notes, 21% in commercial paper, 8% in certificates of deposit, 3% in
Treasuries and 6% in high-quality asset-backed issues. The Fund maintained a
34-day average maturity at the end of December.
Thank you for your investment in the Salomon Brothers Institutional Money Market
Fund. We look forward to serving you in the years ahead.
Cordially,
HEATH B. MClENDON
Heath B. McLendon
Chairman of the Board
February 1, 2000
<PAGE>
SALOMON BROTHERS INSTITUTIONAL MONEY MARKET FUND
SCHEDULE OF INVESTMENTS
December 31, 1999
<TABLE>
<CAPTION>
YIELD TO
MATURITY
FACE ON DATE OF MATURITY
AMOUNT DESCRIPTION PURCHASE* DATE VALUE
- ------------------------------------------------------------------------------------------------------------
ASSET-BACKED SECURITIES -- 6.0%
<S> <C> <C> <C> <C>
FINANCIAL SERVICES -- 6.0%
$1,972,385 Ford Credit Auto........................................ 5.35% 7/17/00 $ 1,972,385
579,427 Green Tree Financial Services........................... 4.94 6/1/00 579,427
4,637,000 SMM Trust............................................... 6.29 9/13/00 4,637,000
------------
TOTAL ASSET-BACKED SECURITIES (Cost -- $7,188,812) 7,188,812
------------
CERTIFICATES OF DEPOSIT -- 8.4%
BANKS -- 8.4%
5,000,000 Commerze AG Bank........................................ 5.07 2/11/00 4,999,986
5,000,000 Landesbank Hessen-Thurin Bank........................... 5.21 2/29/00 4,999,183
------------
TOTAL CERTIFICATES OF DEPOSIT (Cost -- $9,999,169).... 9,999,169
------------
COMMERCIAL PAPER -- 21.4%
AUTO & TRANSPORTATION -- 6.7%
5,000,000 DaimlerChrysler Holdings Co............................. 5.84 3/27/00 4,930,245
2,000,000 General Motors Acceptance Corp.......................... 5.50 2/8/00 1,988,389
1,000,000 TRW Inc................................................. 6.47 2/2/00 994,249
------------
7,912,883
------------
CONSUMER PRODUCTS -- 1.7%
1,000,000 Earthgrains Co.......................................... 6.40 2/11/00 992,711
1,000,000 Guardian Industries..................................... 5.90 1/13/00 998,033
------------
1,990,744
------------
ENERGY -- 0.8%
1,000,000 Consolidated Coal....................................... 6.48 1/28/00 995,140
------------
FINANCIAL SERVICES -- 0.8%
1,000,000 Houston Industrial Finance.............................. 6.45 2/11/00 992,655
------------
HOSPITALS -- 1.3%
1,537,000 Mount Sinai Medical Center.............................. 6.83 1/14/00 1,533,209
------------
MUNICIPAL -- 10.1%
1,000,000 El Paso Natural Gas..................................... 6.90 1/18/00 996,742
4,000,000 Emory University, Georgia............................... 6.25 2/7/00 4,000,000
2,000,000 Lower Colorado River Authority.......................... 6.26 2/9/00 2,000,000
5,000,000 New York City, New York GO.............................. 6.15 3/7/00 5,000,000
------------
11,996,742
------------
TOTAL COMMERCIAL PAPER (Cost -- $25,421,373).......... 25,421,373
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
PAGE 3
<PAGE>
SALOMON BROTHERS INSTITUTIONAL MONEY MARKET FUND
SCHEDULE OF INVESTMENTS (continued)
December 31, 1999
<TABLE>
<CAPTION>
YIELD TO
MATURITY ON
FACE DATE OF MATURITY
AMOUNT DESCRIPTION PURCHASE* DATE VALUE
- ------------------------------------------------------------------------------------------------------------
FLOATING RATE NOTES -- 61.7%
<S> <C> <C> <C> <C>
CALIFORNIA -- 7.2%
$3,500,000 California PCR Authority Environmental VR............... 6.48% 1/5/00 $ 3,500,000
5,000,000 Sacramento County, California VR........................ 5.85 1/5/00 5,000,000
------------
8,500,000
------------
FLORIDA -- 6.9%
3,085,000 Baptist Health Systems VR MBIA.......................... 6.40 1/5/00 3,085,000
600,000 Baptist Health Systems VR MBIA.......................... 6.40 1/5/00 600,000
4,545,000 Dade County, Florida Expressway Authority VR FGIC....... 6.25 1/6/00 4,545,000
------------
8,230,000
------------
ILLINOIS -- 14.3%
3,010,000 Barton Healthcare VR.................................... 6.60 1/5/00 3,010,000
5,000,000 Edwards Hospital Group VR............................... 6.50 1/5/00 5,000,000
4,950,000 North Kite Rubloff VR................................... 5.90 1/6/00 4,950,000
2,000,000 Illinois Student Assistant Commission VR................ 6.50 1/5/00 2,000,000
2,000,000 Illinois Student Assistant Commission VR................ 6.50 1/5/00 2,000,000
------------
16,960,000
------------
INDIANA -- 4.2%
5,000,000 Indiana State Finance Authority VR...................... 6.50 1/5/00 5,000,000
------------
KENTUCKY -- 2.1%
2,500,000 Lexington-Fayette, Kentucky Urban County Airport VR..... 7.00 1/5/00 2,500,000
------------
MINNESOTA -- 5.1%
4,900,000 Catholic Health Initiatives VR.......................... 7.00 1/5/00 4,900,000
1,200,000 Fairview Hospital & Healthcare.......................... 6.50 1/6/00 1,200,000
------------
6,100,000
------------
NEW YORK -- 11.7%
2,465,000 Clinton County, New York Industrial Development Agency
VR..................................................... 6.00 1/6/00 2,465,000
1,800,000 Clinton County, New York Industrial Development Agency
VR..................................................... 6.00 1/6/00 1,800,000
5,100,000 New York City, New York Housing Development Corp. VR.... 7.25 1/5/00 5,100,000
2,000,000 New York State Housing Finance Agency VR................ 6.50 1/5/00 2,000,000
2,500,000 New York State Housing Finance Agency VR................ 6.49 1/5/00 2,500,000
------------
13,865,000
------------
NORTH CAROLINA -- 1.8%
2,150,000 Community Health Systems VR............................. 6.05 1/5/00 2,150,000
------------
PENNSYLVANIA -- 3.1%
1,055,000 Moon, Pennsylvania Industrial Development Authority
VR..................................................... 5.90 1/6/00 1,055,000
2,600,000 Union County, Pennsylvania Hospital Authority VR........ 6.50 1/6/00 2,600,000
------------
3,655,000
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
PAGE 4
<PAGE>
SALOMON BROTHERS INSTITUTIONAL MONEY MARKET FUND
SCHEDULE OF INVESTMENTS (continued)
December 31, 1999
<TABLE>
<CAPTION>
YIELD TO
MATURITY ON
FACE DATE OF MATURITY
AMOUNT DESCRIPTION PURCHASE* DATE VALUE
- ------------------------------------------------------------------------------------------------------------
FLOATING RATE NOTES -- 61.7% (CONTINUED)
<S> <C> <C> <C> <C>
SOUTH CAROLINA -- 1.2%
$1,400,000 Edgefield County, South Carolina Industrial Development
Agency VR.............................................. 6.00% 1/6/00 $ 1,400,000
------------
TEXAS -- 4.1%
4,900,000 Texas State VR.......................................... 6.50 1/5/00 4,900,000
------------
TOTAL FLOATING RATE NOTES (Cost -- $73,260,000)....... 73,260,000
------------
REPURCHASE AGREEMENT -- 2.5%
2,916,249 State Street Bank & Trust Co., 3.00% due 1/3/00;
Proceeds at maturity -- $2,916,978; (Fully
collateralized by U.S. Treasury Bonds, 8.75% due
5/15/17; Market value -- $2,979,438)
(Cost -- $2,916,249)................................. 2,916,249
------------
TOTAL INVESTMENTS -- 100% (Cost -- $118,785,603**).. $118,785,603
------------
------------
</TABLE>
- ---------
* Yield to maturity on date of purchase, except in the case of Variable Rate
Demand Notes ('VR'), whose yields are determined on date of last interest
rate change. For Variable Rate Demand Notes, maturity date shown is the date
of next interest rate change.
** Aggregate cost for Federal income tax purposes is substantially the same.
Abbreviations used in this statement:
FGIC -- Insured as to principal and interest by the Financial Guaranty
Insurance Corporation.
GO -- General Obligation.
MBIA -- Insured as to principal and interest by the MBIA Insurance
Corporation.
PCR -- Pollution Control Revenue.
SEE NOTES TO FINANCIAL STATEMENTS.
PAGE 5
<PAGE>
SALOMON BROTHERS INSTITUTIONAL MONEY MARKET FUND
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1999
<TABLE>
<S> <C>
ASSETS:
Investments, at amortized cost........................... $118,785,603
Interest receivable...................................... 922,119
Receivable for securities sold........................... 100,000
Other assets............................................. 29,691
------------
TOTAL ASSETS............................................. 119,837,413
------------
LIABILITIES:
Dividend payable......................................... 537,770
Administration fees payable.............................. 4,529
Accrued expenses......................................... 64,139
------------
TOTAL LIABILITIES........................................ 606,438
------------
TOTAL NET ASSETS............................................ $119,230,975
------------
------------
NET ASSETS:
Par value of capital shares.............................. $ 119,232
Capital paid in excess of par value...................... 119,112,896
Undistributed net investment income...................... 881
Accumulated net realized loss on investments............. (2,034)
------------
TOTAL NET ASSETS (equivalent to $1.00 per share on
119,232,128 shares of $.001 par value capital stock
outstanding)............................................... $119,230,975
------------
------------
</TABLE>
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1999
<TABLE>
<S> <C>
INCOME:
Interest........................................................... $ 6,544,437
------------
EXPENSES:
Management fees (Note 2)........................................... 251,358
Administration fees (Note 2)....................................... 62,839
Audit and legal.................................................... 53,313
Shareholders communications........................................ 37,272
Registration and filing fees....................................... 24,038
Custody............................................................ 17,261
Shareholder and system servicing fees.............................. 4,374
Directors' fees.................................................... 924
Other.............................................................. 8,412
------------
TOTAL EXPENSES..................................................... 459,791
Less: Management fee waiver........................................ (251,358)
------------
NET EXPENSES....................................................... 208,433
------------
NET INVESTMENT INCOME................................................. 6,336,004
NET REALIZED GAIN ON SECURITIES SOLD.................................. 663
------------
NET INCREASE IN NET ASSETS FROM OPERATIONS............................ $ 6,336,667
------------
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
PAGE 6
<PAGE>
SALOMON BROTHERS INSTITUTIONAL MONEY MARKET FUND
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Years Ended December 31,
1999 1998
<S> <C> <C>
- -----------------------------------------------------------------------------------------
OPERATIONS:
Net investment income.................................... $ 6,336,004 $ 8,711,182
Net realized gain (loss) on securities sold.............. 663 (106)
------------ ------------
INCREASE IN NET ASSETS FROM OPERATIONS................... 6,336,667 8,711,076
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income.................................... (6,336,004) (8,711,182)
------------ ------------
DECREASE IN NET ASSETS FROM DISTRIBUTIONS TO
SHAREHOLDERS............................................ (6,336,004) (8,711,182)
------------ ------------
FUND SHARE TRANSACTIONS:
Proceeds from sales of shares............................ 44,681,156 435,316,143
Net asset value of shares issued for reinvestment of
dividends............................................... 4,291,711 6,853,617
Cost of shares reacquired................................ (68,683,659) (436,240,480)
------------ ------------
NET INCREASE (DECREASE) IN NET ASSETS FROM FUND SHARE
TRANSACTIONS............................................ (19,710,792) 5,929,280
------------ ------------
NET INCREASE (DECREASE) IN NET ASSETS....................... (19,710,129) 5,929,174
NET ASSETS:
Beginning of year........................................ 138,941,104 133,011,930
------------ ------------
END OF YEAR.............................................. $119,230,975 $138,941,104
------------ ------------
------------ ------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
PAGE 7
<PAGE>
SALOMON BROTHERS INSTITUTIONAL MONEY MARKET FUND
NOTES TO FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Salomon Brothers Series Funds Inc ('Company') was incorporated in Maryland on
April 17, 1990 as an open-end management investment company, and currently
operates as a series company comprised of twelve portfolios. Only information
with respect to Salomon Brothers Institutional Money Market Fund ('Fund') is
included in this report. The other portfolios of the Company are reported in
separate shareholder reports. The Fund's objective is to seek as high a level of
current income as is consistent with liquidity and the stability of principal.
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 are valued using the amortized
cost method, which involves initially valuing an investment at its cost and
thereafter assuming a constant amortization to maturity of any premium or
discount. This method results in a value approximating market value and does not
include recognition of any unrealized gains or losses.
(B) FEDERAL INCOME TAXES. The Fund has complied and intends to continue to
comply with the requirements of the Internal Revenue Code applicable to
regulated investment companies, including the distribution requirements of the
Tax Reform Act of 1986, and to distribute all of its income, including any net
realized gains, to shareholders. Therefore, no Federal income tax or excise tax
provision is required.
(C) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends on the shares of the
Fund are declared each business day to shareholders of record at twelve noon
(New York time) on that day, and paid on the last business day of the month.
Distributions of net realized gains to shareholders, if any, are declared
annually and recorded on the ex-dividend date. Dividends and distributions are
determined in accordance with income tax regulations, which may differ from
GAAP.
(D) EXPENSES. Direct expenses are charged to the Fund, and general expenses of
the Company are allocated to the Fund based on relative average net assets for
the period in which the expense was incurred.
(E) OTHER. Investment transactions are recorded as of the trade date. Interest
income, including the accretion of discounts or the amortization of premiums, is
recognized when earned. Gains or losses on sales of securities are calculated on
the identified cost basis.
PAGE 8
<PAGE>
SALOMON BROTHERS INSTITUTIONAL MONEY MARKET FUND
NOTES TO FINANCIAL STATEMENTS (continued)
NOTE 2. MANAGEMENT FEE AND OTHER AGREEMENTS
The Company retains Salomon Brothers Asset Management Inc ('SBAM'), a wholly-
owned subsidiary of Salomon Smith Barney Holdings Inc. ('SSBH'), to act as
investment manager of the Fund, subject to the supervision by the Board of
Directors of the Company. The management fee to SBAM is based on an annual rate
of 0.20% of the Fund's average daily net assets. This fee is calculated daily
and paid monthly.
Under a voluntary agreement between SBAM and the Fund, SBAM has agreed to reduce
or otherwise limit the expenses of the Fund (exclusive of taxes, interest, and
extraordinary expenses such as litigation and indemnification expenses), on an
annualized basis to 0.18% of the Fund's average daily net assets. For the year
ended December 31, 1999, SBAM voluntarily waived all of its management fees of
$251,358.
SSB Citi Fund Management LLC ('SSBC'), formerly known as SSBC Fund Management
Inc., an affiliate of SBAM, acts as administrator for the Fund. The
administration fee to SSBC is based on an annual rate of 0.05% of the Fund's
average daily net assets. This fee is calculated daily and paid monthly.
The Fund has an agreement with CFBDS, Inc. to distribute its shares.
NOTE 3. CAPITAL STOCK
At December 31, 1999, the Company had 10,000,000,000 shares of authorized
capital stock, par value $0.001 per share.
Because the Fund has maintained a $1.00 net asset value per share from
inception, the number of shares sold, shares issued in reinvestment of dividends
declared, and shares repurchased, are equal to the dollar amount shown in the
Statement of Changes in Net Assets for the corresponding capital share
transactions.
NOTE 4. PORTFOLIO ACTIVITY
The Fund invests in money market instruments maturing in thirteen months or less
whose credit ratings are within the two highest ratings categories of two
nationally recognized statistical rating organizations ('NRSROs') or, if rated
by only one NRSRO, that NRSRO, or, if not rated, are believed by the investment
manager to be of comparable quality.
At December 31, 1999, the Fund had net capital loss carry-forwards available to
offset future capital gains of $2,034, of which $286 expires on December 31,
2005, and $1,748 expires on December 31, 2006.
PAGE 9
<PAGE>
SALOMON BROTHERS INSTITUTIONAL MONEY MARKET FUND
FINANCIAL HIGHLIGHTS
SELECTED DATA PER SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR ENDED
DECEMBER 31:
<TABLE>
<CAPTION>
1999 1998 1997 1996(1) 1995
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year...................... $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
-------- -------- -------- -------- --------
Net investment income................................... 0.051 0.054 0.055 0.050 0.049
Dividends from net investment income.................... (0.051) (0.054) (0.055) (0.050) (0.049)
-------- -------- -------- -------- --------
Net asset value, end of year............................ $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Net assets, end of year (thousands)..................... $119,231 $138,941 $133,012 $159,651 $ 11,425
Total return............................................ +5.2% +5.6% +5.6% +5.1% +5.0%
Ratios to average net assets:
Expenses............................................. 0.17% 0.18% 0.18% 0.20% 0.65%
Net investment income................................ 5.04% 5.45% 5.48% 5.29% 4.89%
Before waiver of management and adminstration fees and
expenses absorbed by Salomon Brothers Asset Managment
Inc, net investment income per share and expense ratio
would have been:
Net investment income per share...................... $ 0.048 $ 0.053 $ 0.052 $ 0.048 $ 0.049
Expense ratio(2)..................................... 0.37% 0.37% 0.41% 0.46% 0.70%
</TABLE>
(1) The Fund changed its name and objective on April 29, 1996.
(2) The ratio of expenses to average net assets will not exceed 0.18%, as a
result of a voluntary expense limitation which went into effect in 1997.
PAGE 10
<PAGE>
SALOMON BROTHERS INSTITUTIONAL MONEY MARKET FUND
- ---------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Salomon Brothers Institutional Money Market Fund
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Salomon Brothers Institutional
Money Market Fund (one of the portfolios constituting Salomon Brothers Series
Funds Inc, hereafter referred to as the 'Fund') at December 31, 1999, 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 five years in the period then ended, in conformity with
accounting principles generally accepted in the United States. These financial
statements and financial highlights (hereafter referred to as 'financial
statements') are the responsibility of the Fund's management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with auditing
standards generally accepted in the United States, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
December 31, 1999 by correspondence with the custodian, provide a reasonable
basis for the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
February 22, 2000
PAGE 11
<PAGE>
SALOMON BROTHERS INSTITUTIONAL MONEY MARKET FUND
- --------
DIRECTORS
CHARLES F. BARBER
Consultant; formerly Chairman,
ASARCO Incorporated
CAROL L. COLMAN
Consultant, Colman Consulting
DANIEL P. CRONIN
Vice President -- General Counsel,
Pfizer International Inc.
HEATH B. MCLENDON
Chairman and President,
Managing Director, Salomon Smith Barney Inc.; President and Director, SSB
Citi Fund Management LLC and Travelers Investment Adviser, Inc.
- -------
OFFICERS
HEATH B. MCLENDON
Chairman and President
LEWIS E. DAIDONE
Executive Vice President and Treasurer
PETER J. WILBY
Executive Vice President
NANCY A. NOYES
Vice President
IRVING P. DAVID
Controller
CHRISTINA T. SYDOR
Secretary
- --------------------------------------------------------------------------------
<PAGE>
SALOMON BROTHERS INSTITUTIONAL MONEY MARKET FUND
- ----------------------------------------
SALOMON BROTHERS INSTITUTIONAL MONEY MARKET FUND
7 World Trade Center
New York, New York 10048
1-800-347-6028
INVESTMENT MANAGER
Salomon Brothers Asset Management Inc
7 World Trade Center
New York, New York 10048
DISTRIBUTOR
CFBDS, Inc.
21 Milk Street
Boston, Massachusetts 02109-5408
CUSTODIAN
PNC Bank, N.A.
200 Stevens Drive
Suite 440
Lester, Pennsylvania 19113
DIVIDEND DISBURSING AND TRANSFER AGENT
PFPC Global Fund Services
P.O. Box 9699
Providence, Rhode Island 02940-9699
LEGAL COUNSEL
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
- ----------------------------------------
THE SALOMON BROTHERS INSTITUTIONAL INVESTMENT SERIES*
SALOMON BROTHERS INSTITUTIONAL
HIGH YIELD BOND FUND
The High Yield Bond Fund's investment objective is to maximize total return. The
Fund seeks to achieve its objective by investing primarily in a portfolio of
high yield fixed-income securities that offer a yield above that generally
available on debt securities in the four highest rating categories of the
recognized rating services and which generally entail increased credit and
market risks.
SALOMON BROTHERS INSTITUTIONAL
EMERGING MARKETS DEBT FUND
The Emerging Market Debt Fund's objective is to maximize total return. The Fund
seeks to achieve its objective by investing at least 65% of its total assets in
debt securities of government, government-related and corporate issuers in
emerging market countries.
- --------------------------------------------------------------------------------
* For more complete information about Salomon Brothers Institutional Investment
Series, you may obtain a Prospectus by calling 1-800-347-6028.
This report is submitted for the general information of the shareholders of
Salomon Brothers Institutional Investment Series. It is not authorized for
distribution to prospective investors unless accompanied or preceded by an
effective Prospectus, which contains information concerning the Fund's
investment policies and expenses as well as other pertinent information.
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK.]
<PAGE>
First Data Investor Services Group, Inc.
53 State Street
Boston, MA 02109-2873
- ---------------------
FIRST-CLASS
U. S. POSTAGE
PAID
NORTH READING, MA
PERMIT NO
105
- ---------------------
SALOMON BROTHERS
INSTITUTIONAL
MONEY MARKET FUND
SEMI-ANNUAL REPORT
JUNE 30, 1999
- --------------------------------------
SALOMON BROTHERS ASSET MANAGEMENT
-------------------------------------
<PAGE>
ANNUAL REPORT
December 31, 1999
[PHOTO]
[PHOTO]
[PHOTO]
SALOMON BROTHERS ASSET MANAGEMENT
[_] NEW YORK MUNICIPAL
SALOMON BROTHERS MONEY MARKET FUND
- ----------------------------------------------------
[_] CASH MANAGEMENT FUND
<PAGE>
For almost a century, Salomon Brothers has provided serious investors with
advice and resources to help them reach their financial goals.
Salomon Brothers offers...
Quality Service
Scope of Choice
An Information Advantage
We offer cutting-edge solutions and investment programs delivered through
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We wish to extend our sincere thanks for investing with us. Technology, new
innovations and business opportunities have changed the financial world over the
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needs.
BRIDGING WALL STREET OPPORTUNITIES TO YOUR FINANCIAL FUTURE
RICH TRADITION
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<PAGE>
Table of Contents
A MESSAGE FROM THE CHAIRMAN ........................................... 2
THE SALOMON BROTHERS INVESTMENT SERIES
NEW YORK MUNICIPAL MONEY MARKET FUND ................................ 3
CASH MANAGEMENT FUND ................................................ 5
SCHEDULES OF INVESTMENTS .............................................. 7
STATEMENTS OF ASSETS AND LIABILITIES .................................. 12
STATEMENTS OF OPERATIONS .............................................. 13
STATEMENTS OF CHANGES IN NET ASSETS ................................... 14
NOTES TO FINANCIAL STATEMENTS ......................................... 16
FINANCIAL HIGHLIGHTS .................................................. 20
REPORT OF INDEPENDENT ACCOUNTANTS ..................................... 24
DIRECTORS AND OFFICERS OF
THE SALOMON BROTHERS INVESTMENT SERIES .............................. IBC
<PAGE>
[PHOTO]
Heath B. McLendon
Chairman
SALOMON BROTHERS INVESTMENT SERIES
A Message From the Chairman
DEAR SHAREHOLDER:
We are pleased to provide the annual report for The Salomon Brothers Investment
Series -- New York Municipal Money Market Fund and Cash Management Fund
("Funds") for the year ended December 31, 1999. We hope you find this report to
be useful and informative.
MARKET COMMENTARY
Many of the world's financial markets fell a year ago, following Russia's
unexpected debt defaults, a major hedge fund crisis and a currency devaluation
in Brazil. Meanwhile, economic upheavals in Asia were also causing serious
repercussions internationally. Yet, by the end of the period, many global stock
and bond markets experienced a dramatic reversal of fortune.
Perhaps the most striking aspect about the stock market's double-digit returns
in 1999 was that they were achieved while interest rates increased. The Federal
Reserve Board ("Fed") raised interest rates three times in 1999 as an
inflationary precaution. Rising interest rates generally lead to a decline in
stock prices. However, most stock investors remained optimistic that the U.S.
economy would continue its remarkable growth and stock prices continued to
advance. Fueling this optimism were strong corporate profits, rising personal
incomes and record consumer and investor confidence.
Bond investors did not react positively to the actions of the Fed and the bond
market experienced its worst year since 1994. The overall bond market recorded
losses in 1999 in response to the Fed's interest rate hikes and concerns
regarding inflation. Bond market losses increased with the length of maturities.
The yield on the bellwether 30-year government bond increased 1.39 percentage
points in 1999 to 6.48%. At the end of 1998, the 30-year bond yielded 5.09%.
On behalf of everyone here at Salomon Brothers Asset Management, we would like
to thank you for your continued confidence in the Salomon Brothers Investments
Series. We look forward to helping you pursue your financial goals in the new
century.
Sincerely,
/s/ Heath B. McLendon
Heath B. McLendon
Chairman and President
January 24, 2000
2
<PAGE>
[GRAPHIC]
THE FUND MANAGERS
[PHOTO]
Charles K. Bardes,
Vice President and Co-Portfolio Manager at Salomon Brothers Asset Management
Inc, has 13 years of investment industry experience. Mr. Bardes shares
responsibility for day-to-day Fund management.
[PHOTO]
Thomas A. Croak,
Vice President and Co-Portfolio Manager at Salomon Brothers Asset Management
Inc, has 16 years of investment industry experience in the municipal securities
market. Mr. Croak shares responsibility for day-to-day Fund management.
SALOMON BROTHERS
New York Municipal Money Market Fund
PERFORMANCE UPDATE
As of December 31, 1999, the New York Municipal Money Market Fund's seven-day
current yield was 4.48%. The Fund's seven-day effective yield - which reflects
compounding - was 4.57%.
INVESTMENT STRATEGY
The Fund invests primarily in high-quality, short-term "New York municipal
securities," which are debt obligations issued by the State of New York and its
political subdivisions, agencies and public authorities (or certain other
governmental issuers such as Puerto Rico, the Virgin Islands and Guam).
The Fund invests primarily in securities rated in the two highest short-term
rating categories, or if unrated, of equivalent quality. The Fund invests in
securities having remaining maturities of 397 days or less. The Fund maintains a
dollar-weighted average portfolio maturity of 90 days or less.
We select securities primarily by identifying undervalued sectors and individual
securities, while also selecting securities that it believes will benefit from
changes in market conditions. In selecting individual securities, the manager:
. Uses fundamental credit analysis to estimate the relative value and
attractiveness of various opportunities in the New York municipal bond
market.
. Identifies eligible issuers with the most desirable credit quality.
. Trades between general obligations and revenue bonds and among various revenue
bond sectors such as housing, hospital and industrial development, based on
their apparent relative values.
. Considers a security's maturity in light of the outlook for the issuer and
its sector and interest rates.
MUNICIPAL BOND MARKET REVIEW
There is no assurance that the Fund will be able to maintain a stable net asset
value of $1.00 per share. The Fund is not diversified, which means that it can
invest a higher percentage of its assets in any one issuer than a diversified
fund. However, the Fund complies with the Securities and Exchange Commission's
rule for money market funds, including the diversification requirement of that
rule.1 Please note that your investment in the Fund is not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other government agency.
Although the Fund seeks to preserve the value of your investment at $1.00 per
share it is possible to lose money by investing in the Fund.
In our view, decreased supply, generous yields at the beginning of the year and
an improvement in fundamental credit quality provided support for municipal
bonds during 1999.
- ----------
1 The Securities and Exchange Commission (Rule 2A7) mandates that all New
York Municipal Money Market funds meet the following diversification
requirements: all issues held in excess of 5% of the fund's total
investments together cannot exceed 75% of the fund's total investments;
those first tier (i.e. highest rating) guarantors held in excess of 10% of
the fund's total investments together cannot exceed 75% of the fund's total
investments; and each individual holding of second tier guarantors cannot
exceed 5% of the fund's total investments.
3
<PAGE>
The bond markets encountered a wild swing in investor sentiment during 1999 as
healthy optimism drove confidence at the onset, yet monetary policy tightening
concerns overshadowed bonds as the year progressed. The end result was a
difficult year for many bond investors as rising interest rates eroded the value
of their investments. One notable exception was money market funds, which posted
positive returns during the year.
Heightened concerns over Y2K proved to have a major impact on money market funds
especially during the latter part of 1999. As year-end approached, many
investors sought out money funds as a safe harbor due to fears of illiquidity
and market volatility surrounding Y2K. Based on that demand, many broker-dealers
pushed rates lower on money fund eligible products such as tax exempt commercial
paper, short-term revenue notes, and daily and weekly Variable Rate Demand Notes
("VRDNs"). (Variable Rate Demand Notes are floating rate notes whose yields are
pegged to short-term interest rates and may be sold back at par to the
dealer/remarketing agent.) However, an aggressive effort by the Federal Reserve
Board ("Fed") to ensure year-end liquidity in the financial markets restored
investor confidence. As a result, with investors' need for short-term
instruments abated, thus leaving broker-dealers fearful of holding too much
unsold inventory across year-end.
Specifically, yields on VRDNs rose dramatically during the last two weeks of
December. The Salomon Brothers New York Municipal Money Market Fund was able to
take advantage of this aberration due to its overweighting in VRDNs. The Fund
also maintained this overweighting throughout the year, which helped it sustain
an attractive yield in a rising interest rate environment.
OUTLOOK
In the near term, volatility is expected to continue in the fixed-income
markets. While we will look for opportunities to extend a portion of the
Portfolio into notes and short-term bonds, the possibility of further tightening
by the Fed dictates that we remain overweight in VRDNs.
NEW YORK ECONOMIC HIGHLIGHTS
The Empire State is moving aggressively to create a top-rate business climate,
and it is clearly having a positive impact on the State's economy. This
turnaround comes as New York continues to reduce taxes, eliminates red tape and
other bureaucratic obstacles and changes state government programs that may have
previously held back New York's economic growth.
New York State is home to the 10th largest economy in the world. With a Gross
State Product of roughly $593 billion, New York accounts for nearly 8% of the
nation's Gross Domestic Product. New York is home to 65 Fortune 500 companies -
more than any other U.S. state. More than $1 trillion in financial transactions
take place at the New York Stock Exchange on a typical trading day, making New
York City the undisputed financial capital of the world. (Source: Fitch IBCA, an
internationally recognized rating agency.)
New York has a diverse economy with concentrations of employment in many
industries. Also, New York's economic strength has been supported by its highly
educated workforce, extensive infrastructure and world-class universities and
colleges. Taxes have been cut 31 times in three years. Every year since 1995,
New York has cut taxes more than any other state, and in 1996 taxes were cut
more than the other 49 states combined. In addition, workers' compensation rates
have been reduced by 30% since 1995, and other business costs have been lowered
as well.
4
<PAGE>
[GRAPHIC]
THE FUND MANAGER
[PHOTO]
Nancy A. Noyes,
Director and Portfolio Manager at Salomon Brothers Asset Management Inc, has 17
years of investment industry experience. Ms. Noyes is primarily responsible for
day-to-day Fund management.
SALOMON BROTHERS
Cash Management Fund
PERFORMANCE UPDATE
As of December 31, 1999, the Cash Management Fund's seven-day current yield was
5.52% (Class A shares). The Fund's seven-day effective yield -- which reflects
compounding - was 5.67% (Class A shares).
INVESTMENT STRATEGY
The Fund seeks as high a level of current income as is consistent with liquidity
and stability of principal. The Fund invests in high-quality, U.S.
dollar-denominated short-term debt securities. The Fund may invest in all types
of money market instruments including U.S. government securities, short-term
debt securities, commercial paper, variable rate demand notes, obligations,
mortgage-backed and asset-backed securities and repurchase agreements.
While the Fund invests primarily in securities of U.S. issuers, the Fund may
also invest in U.S. dollar-denominated obligations of foreign governmental and
corporate issuers. The debt instruments in which the Fund invests may have fixed
or variable rates of interest. The Fund normally maintains at least 25% of its
assets in bank obligations.
The Fund invests primarily in securities rated in the highest short-term rating
category, or if unrated, of equivalent quality. The Fund invests in securities
having, or are deemed to have, remaining maturities of 397 days or less. The
fund maintains a dollar-weighted average portfolio maturity of 90 days or less.
In selecting investments for the Funds, the manager looks for:
. Eligible issuers with the most desirable credit quality
. The best relative values based on an analysis of yield, price, interest rate
sensitivity and credit quality
. Maturities consistent with the manager's outlook for interest rates
Although the Fund seeks to preserve the value of an investment at $1 per share,
it is possible to lose money by investing in the Fund, or the Fund could
under-perform other short-term debt instruments or money market funds if any of
the following occurs:
. Interest rates rise sharply
. An issuer or guarantor of the Fund's securities defaults, or has its credit
rating downgraded.
. The manager's judgement about the relative value or credit quality of a
particular security proves to be incorrect.
. The value of the Fund's foreign securities go down because of unfavorable
government actions or political instability.
5
<PAGE>
Please note that your investment in the Fund is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government agency.
Although the Fund seeks to preserve the value of your investment at $1.00 per
share, it is possible to lose money by investing in the Fund.
Over time, a money market fund is likely to underperform other fixed income or
equity investment options.
Market pundits began the year with the expectation that the meltdown in the
global markets would trickle down to a slowing of the U.S. economy, enhancing
the performance of fixed income investments. This was not to be the case, as
continued growth coupled with rising inflation fears created uncertainty for
bond market investors.
Stronger indicators of consumer demand and manufacturing production prompted the
Fed to shift their bias from one of neutral on interest rates to one of raising
rates. The Fed opted to raise rates three times during 1999, bringing the
effective funds rate back to 5.5%, erasing all of the easing moves done in 1998.
Financial markets began the fourth quarter of 1999 under concerns surrounding
the space Y2K computer issue. Most commercial paper issuers began to issue debt
"across the millennium turn"; paper due to mature in mid-January. Issuers were
forced to pay premium yields for this strategy, which translated into higher
yields for money market funds that bought the paper. To alleviate financing
strains, the Fed announced in October a plan to sell repurchase agreement
options to primary dealers, enabling the dealers to borrow funds for financing
inventories around year-end. Late December saw rates in the commercial paper
market fall dramatically. Intraday Fed repurchase agreements, which add cash to
the system, combined with lower overall commercial paper supply, as a result of
issuers closing their books for the year, resulted in many buyers chasing a
dearth of supply.
OUTLOOK
The Federal Open Market Committee meeting on December 21, 1999 was somewhat
ambiguous. The target rate on federal funds was left unchanged and a neutral
bias on rates was maintained, but the accompanying Fed statement focused on the
fact that "the committee remains concerned with the possibility that over time
increases in demand will continue to exceed the growth in potential supply."
This leaves the door open for additional rate hikes1. Our strategy is to
continue to invest the Fund's assets in securities that are among the highest
quality available to money market portfolios and to lengthen when the
opportunity represents relative value, as the "over the millennium" strategy did
in the second half of 1999. The Fund holds positions in short-term variable rate
demand notes in order to garner incremental yield.
- ---------
1 Please note that on February 2, 2000, after this letter was written, the Fed
raised interest rates 0.25% to 5.75%.
6
<PAGE>
Schedules of Investments
December 31, 1999
Salomon Brothers New York Municipal Money Market Fund
<TABLE>
- -------------------------------------------------------------------------------
<CAPTION>
Yield to
Face Maturity on Date Maturity
Amount Security of Purchase+ Date Value
<C> <S> <C> <C> <C>
- -------------------------------------------------------------------------------
MUNICIPAL SECURITIES -- 100%
New York -- 99.9%
$ 515,000 Albany County, NY
Industrial Development
Agency VR................ 5.55% 1/6/00 $ 515,000
2,120,000 Albany County, NY
Industrial Development
Agency VR................ 3.50 7/1/00 2,120,000
1,550,000 Auburn, NY Industrial
Development Agency VR.... 5.85 1/5/00 1,550,000
2,100,000 Babylon, NY Industrial
Development Agency VR.... 4.20 1/7/00 2,100,000
725,000 Broome County, NY
Industrial Development
Agency VR................ 5.55 1/6/00 725,000
1,330,000 Cattaraugus County, NY
Industrial Development
Agency VR................ 5.70 1/6/00 1,330,000
900,000 Cattaraugus County, NY
Industrial Development
Agency VR................ 5.70 1/6/00 900,000
1,300,000 Chautauqua County, NY
Industrial Development
Agency VR................ 5.85 1/5/00 1,300,000
1,700,000 Chemung County, NY
Industrial Development
Agency VR................ 5.55 1/6/00 1,700,000
4,100,000 Chenango County, NY
Industrial Development
Agency VR................ 5.70 1/6/00 4,100,000
645,000 Colonie, NY Housing
Development Corporation
VR....................... 3.85 1/5/00 645,000
350,000 Colonie, NY Industrial
Development Agency VR.... 5.55 1/6/00 350,000
775,000 Dutchess County, NY
Industrial Development
Agency VR................ 5.55 1/6/00 775,000
400,000 Erie County, NY Industrial
Development Agency VR.... 5.55 1/6/00 400,000
530,000 Erie County, NY Industrial
Development Agency VR.... 5.55 1/6/00 530,000
2,125,000 Erie County, NY Industrial
Development Agency VR.... 5.55 1/6/00 2,125,000
1,680,000 Islip, NY Industrial
Development Authority
VR....................... 5.55 1/6/00 1,680,000
4,400,000 Long Island, NY Power
Authority VR............. 5.75 1/5/00 4,400,000
1,500,000 Metropolitan Transit
Authority, NY PR......... 7.87 7/1/00 1,555,409
1,300,000 Monroe County, NY
Industrial Development
Agency PUT............... 4.00 6/1/00 1,300,000
6,500,000 Monroe County, NY
Industrial Development
Agency VR................ 5.75 1/5/00 6,500,000
660,000 Monroe County, NY
Industrial Development
Agency VR................ 5.70 1/6/00 660,000
2,525,000 Monroe County, NY
Industrial Development
Agency VR................ 5.55 1/6/00 2,525,000
2,370,000 Monroe County, NY
Industrial Development
Agency VR................ 5.50 1/6/00 2,370,000
705,000 Monroe County, NY
Industrial Development
Agency VR................ 5.60 1/6/00 705,000
1,370,000 Monroe County, NY
Industrial Development
Agency VR................ 5.70 1/6/00 1,370,000
2,925,000 Monroe County, NY
Industrial Development
Agency VR................ 5.60 1/6/00 2,925,000
700,000 Monroe County, NY
Industrial Development
Agency VR................ 5.60 1/6/00 700,000
700,000 Nassau County, NY
Industrial Development
Agency VR................ 4.75 1/3/00 700,000
600,000 Nassau County, NY
Industrial Development
Agency VR................ 5.55 1/6/00 600,000
1,000,000 New York City, NY VR...... 5.45 1/5/00 1,000,000
2,530,000 New York City, NY VR...... 5.45 1/5/00 2,530,000
4,545,000 New York City, NY VR...... 5.45 1/5/00 4,545,000
2,000,000 New York City, NY VR...... 5.70 1/5/00 2,000,000
1,870,000 New York City, NY Housing
Development Corp. VR..... 5.40 1/5/00 1,870,000
2,500,000 New York City, NY Housing
Development Corp. VR..... 5.60 1/5/00 2,500,000
1,500,000 New York City, NY Housing
Development Corp. VR..... 5.60 1/5/00 1,500,000
2,800,000 New York City, NY Housing
Development Corp. VR..... 5.20 1/5/00 2,800,000
1,800,000 New York City, NY Housing
Development Corp. VR..... 5.60 1/5/00 1,800,000
1,500,000 New York City, NY Housing
Development Corp. VR..... 5.50 1/5/00 1,500,000
2,200,000 New York City, NY Housing
Development Corp. VR..... 5.50 1/5/00 2,200,000
900,000 New York City, NY Housing
Development Corp. VR..... 5.50 1/5/00 900,000
2,800,000 New York City, NY Housing
Development Corp. VR..... 5.50 1/5/00 2,800,000
1,300,000 New York City, NY Housing
Development Corp. VR..... 5.50 1/5/00 1,300,000
100,000 New York City, NY
Industrial Development
Agency VR................ 5.75 1/6/00 100,000
200,000 New York City, NY
Industrial Development
Agency VR................ 5.70 1/6/00 200,000
2,500,000 New York City, NY
Municipal Water and Sewer
Agency PR................ 7.25 6/15/00 2,581,214
3,000,000 New York City, NY
Transitional Finance
Authority VR............. 5.45 1/5/00 3,000,000
2,300,000 New York City, NY
Transitional Finance
Authority VR............. 4.75 1/3/00 2,300,000
1,200,000 New York City, NY
Transitional Finance
Authority VR............. 4.75 1/3/00 1,200,000
</TABLE>
See Notes to Financial Statements.
7
<PAGE>
Schedules of Investments
(continued)
Salomon Brothers New York Municipal Money Market Fund
<TABLE>
- -------------------------------------------------------------------------------
<CAPTION>
Yield to
Face Maturity on Date Maturity
Amount Security of Purchase+ Date Value
<C> <S> <C> <C> <C>
- -------------------------------------------------------------------------------
New York -- 99.9% (continued)
$5,000,000 New York State, Dormitory
Authority VR............. 4.65% 1/5/00 $ 5,000,000
3,000,000 New York State, Dormitory
Authority PR............. 4.30 1/5/00 3,000,000
7,155,000 New York State, Dormitory
Authority PR............. 7.25 5/15/00 7,401,162
2,175,000 New York State, Dormitory
Authority VR............. 5.35 1/5/00 2,175,000
1,475,000 New York State, Energy
Research and Development
Corp. VR................. 5.45 1/5/00 1,475,000
4,410,000 New York State, Energy
Research and Development
Corp. VR................. 4.40 1/5/00 4,410,000
500,000 New York State,
Environmental Facilities
Corp..................... 3.90 2/15/00 500,542
1,000,000 New York State, Housing
Finance Agency VR........ 5.60 1/5/00 1,000,000
5,200,000 New York State, Housing
Finance Agency VR........ 5.50 1/5/00 5,200,000
1,710,000 New York State, Housing
Finance Agency VR........ 5.20 1/5/00 1,710,000
130,000 New York State, Job
Development Authority
VR....................... 3.75 1/3/00 130,000
450,000 New York State, Job
Development Authority
VR....................... 3.90 1/3/00 450,000
1,490,000 New York State, Job
Development Authority
VR....................... 3.90 1/3/00 1,490,000
165,000 New York State, Job
Development Authority
VR....................... 4.55 1/5/00 165,000
115,000 New York State, Job
Development Authority
VR....................... 3.75 1/3/00 115,000
1,770,000 New York State, Local
Government Assistance
Corporation VR........... 5.40 1/5/00 1,770,000
5,105,000 New York State, Local
Government Assistance
Corporation VR........... 5.20 1/5/00 5,105,000
615,000 Niagara County, NY
Industrial Development
Agency VR................ 5.70 1/6/00 615,000
1,000,000 Niagara County, NY
Industrial Development
Agency VR................ 5.65 1/5/00 1,000,000
400,000 Niagara County, NY
Industrial Development
Agency VR................ 5.50 1/5/00 400,000
4,750,000 Oneida County, NY
Industrial Development
Agency VR................ 5.70 1/6/00 4,750,000
4,100,000 Onondaga County, NY
Industrial Development
Agency VR................ 5.55 1/5/00 4,100,000
1,400,000 Onondaga County, NY
Industrial Development
Agency VR................ 5.55 1/5/00 1,400,000
4,600,000 Ontario County, NY
Industrial Development
Agency VR................ 4.35 1/5/00 4,600,000
2,680,000 Otsego County, NY
Industrial Development
Agency VR................ 5.45 1/6/00 2,680,000
2,600,000 Port Authority of NY and
NJ Obligation Revenue
VR....................... 4.45 1/5/00 2,600,000
2,800,000 Port Authority of NY and
NJ Obligation Revenue
VR....................... 4.45 1/5/00 2,800,000
900,000 Rockland County, NY
Industrial Development
Agency VR................ 5.70 1/6/00 900,000
4,270,000 Suffolk County, NY
Industrial Development
Agency VR................ 5.55 1/6/00 4,270,000
3,800,000 Syracuse, NY Industrial
Development Agency VR.... 5.80 1/5/00 3,800,000
4,235,000 Ulster County, NY
Industrial Development
Agency VR................ 5.60 1/5/00 4,235,000
1,960,000 Warren & Washington
Counties, NY Industrial
Development Agency VR.... 5.55 1/6/00 1,960,000
300,000 Wyoming County, NY
Industrial Development
Agency VR................ 5.55 1/6/00 300,000
5,010,000 Wyoming County, NY
Industrial Development
Agency VR................ 5.70 1/6/00 5,010,000
------------
174,298,327
------------
Puerto Rico -- 0.1%
100,000 Commonwealth of Puerto
Rico, Public Improvement
MBIA PR.................. 7.30 7/1/00 103,712
------------
TOTAL INVESTMENTS -- 100%
(Cost -- $174,402,039*)... $174,402,039
============
</TABLE>
- ------
+ Yield to maturity on date of purchase, except in the case of Variable Rate
Demand Notes (VR) and Put Bonds, whose yields are determined on date of the
last interest rate change. For Variable Rate Demand Notes and Put Bonds, ma-
turity date shown is the date of next interest rate change.
* Aggregate cost for Federal income tax purposes is substantially the same.
Abbreviations used in this schedule:
MBIA-- Insured as to principal and interest by the MBIA Insurance Corpora-
tion.
PR-- Pre-refunded.
PUT -- Optional or mandatory put. Maturity date shown is the put date as well
as the date of the next interest rate change.
See Notes to Financial Statements.
8
<PAGE>
Schedules of Investments
(continued)
Salomon Brothers Cash Management Fund
<TABLE>
- -------------------------------------------------------------------------------
<CAPTION>
Yield to
Face Maturity on Date Maturity
Amount Security of Purchase+ Date Value
<C> <S> <C> <C> <C>
- -------------------------------------------------------------------------------
ASSET-BACKED SECURITIES -- 7.2%
Financial Services -- 7.2%
$ 493,096 Ford Credit Auto........... 5.35% 7/17/00 $ 493,096
1,600,000 Ford Motor Credit Co....... 5.95 1/26/00 1,593,389
144,857 Green Tree Financial
Services.................. 4.94 6/1/00 144,857
1,500,000 SMM Trust.................. 6.29 9/13/00 1,500,000
-----------
TOTAL ASSET-BACKED
SECURITIES
(Cost -- $3,731,342)....... 3,731,342
-----------
CERTIFICATES OF DEPOSIT -- 6.7%
Banks -- 6.7%
1,000,000 Commerze AG Bank........... 5.07 2/11/00 999,997
1,000,000 Commerze AG Bank........... 5.20 3/15/00 997,926
1,500,000 Landesbank Hessen-Thurin
Bank...................... 5.21 2/29/00 1,499,755
-----------
TOTAL CERTIFICATES OF
DEPOSIT
(Cost -- $3,497,678)....... 3,497,678
-----------
COMMERCIAL PAPER -- 52.3%
Aerospace/Defense -- 3.8%
2,000,000 United Technologies Corp... 5.95 2/24/00 1,982,150
-----------
Auto and Transportation -- 6.5%
2,000,000 Bil North America Inc. .... 6.00 2/1/00 1,989,667
1,400,000 Volkswagen of America...... 6.00 1/19/00 1,395,800
-----------
3,385,467
-----------
Banks -- 3.7%
1,926,000 Nordbanken NA Inc. ........ 6.00 2/7/00 1,914,123
-----------
Consumer Products -- 10.5%
2,000,000 Guardian Industries........ 5.90 1/13/00 1,996,066
2,000,000 Jostens Co. ............... 5.92 2/10/00 1,986,845
1,500,000 Swiss Re Financial
Products.................. 6.50 1/18/00 1,495,395
-----------
5,478,306
-----------
Electric -- 3.8%
2,000,000 Sharp Electric Corp. ...... 6.00 2/18/00 1,984,000
-----------
Financial Services -- 5.5%
1,100,000 First Data Corp. .......... 6.00 1/25/00 1,095,600
987,000 KFW International Finance
Authority................. 5.85 1/19/00 984,113
800,000 Transamerica Finance
Corp. .................... 6.00 1/28/00 796,401
-----------
2,876,114
-----------
Hospitals -- 3.6%
1,899,000 Mount Sinai Medical
Center.................... 6.83 1/14/00 1,894,316
-----------
Municipal -- 11.1%
2,000,000 Emory University, Georgia.. 6.25 2/7/00 2,000,000
1,000,000 Lower Colorado River
Authority................. 6.26 2/9/00 1,000,000
1,795,000 New York City, New York
GO........................ 6.15 3/7/00 1,795,000
1,000,000 Tennessee State School
Board..................... 6.15 2/11/00 1,000,000
-----------
5,795,000
-----------
</TABLE>
See Notes to Financial Statements.
9
<PAGE>
Schedules of Investments
(continued)
Salomon Brothers Cash Management Fund
<TABLE>
- -------------------------------------------------------------------------------
<CAPTION>
Yield to
Face Maturity on Date Maturity
Amount Security of Purchase+ Date Value
<C> <S> <C> <C> <C>
- -------------------------------------------------------------------------------
Utility -- 3.8%
$2,000,000 National Rural Utility..... 5.88% 3/13/00 $ 1,976,480
-----------
TOTAL COMMERCIAL PAPER
(Cost -- $27,285,956)...... 27,285,956
-----------
FLOATING RATE NOTES -- 24.2%
California -- 1.5%
800,000 Sacramento County,
California VR............. 5.85 1/5/00 800,000
-----------
Florida -- 1.7%
865,000 Dade County, Florida
Expressway Authority VR
FGIC-Insured.............. 6.25 1/6/00 865,000
-----------
Illinois -- 2.3%
295,000 Aurora Kane & Dupage
County, IL Industrial
Development Authority VR.. 5.90 1/6/00 295,000
900,000 Illinois Student Assistance
Commission VR............. 6.50 1/5/00 900,000
-----------
1,195,000
-----------
Indiana -- 2.5%
1,300,000 Indiana State Development
Finance Authority VR...... 6.50 1/5/00 1,300,000
-----------
Maryland -- 2.2%
400,000 Maryland Development
Finance Authority VR...... 6.60 1/5/00 400,000
765,000 Maryland Stadium Authority
VR........................ 6.55 1/5/00 765,000
-----------
1,165,000
-----------
New Jersey -- 0.4%
235,000 New Jersey Economic
Development Authority VR.. 6.80 1/3/00 235,000
-----------
New York -- 4.5%
1,855,000 Clinton County, New York
Industrial Development
Agency VR................. 6.00 1/6/00 1,855,000
500,000 New York State Housing
Finance Agency VR......... 6.05 1/5/00 500,000
-----------
2,355,000
-----------
North Carolina -- 0.8%
400,000 Community Health Systems
VR........................ 6.05 1/5/00 400,000
-----------
Pennsylvania -- 2.5%
390,000 Moon, Pennsylvania
Industrial Development
Authority VR.............. 5.90 1/6/00 390,000
925,000 Pennsylvania Economic
Development Authority VR.. 6.50 1/6/00 925,000
-----------
1,315,000
-----------
Texas -- 5.8%
1,000,000 Gulf Coast Texas Solid
Waste Disposal VR......... 5.60 1/5/00 1,000,000
2,000,000 Texas State VR............. 6.50 1/5/00 2,000,000
-----------
3,000,000
-----------
TOTAL FLOATING RATE NOTES
(Cost -- $12,630,000)...... 12,630,000
-----------
</TABLE>
See Notes to Financial Statements.
10
<PAGE>
Schedules of Investments
(continued)
Salomon Brothers Cash Management Fund
<TABLE>
- -------------------------------------------------------------------------------
<CAPTION>
Face
Amount Security Value
<C> <S> <C> <C> <C>
- -------------------------------------------------------------------------------
REPURCHASE AGREEMENT -- 9.6%
$5,024,512 State Street Bank & Trust Co., 3.00% due
1/3/00; Proceeds at maturity -- $5,025,769;
(Fully collateralized by U.S. Treasury Bonds,
8.88% due 8/15/17; Market value --
$5,131,713)
(Cost -- $5,024,512)......................... $ 5,024,512
-----------
TOTAL INVESTMENTS -- 100%
(Cost -- $52,169,488*)....................... $52,169,488
===========
</TABLE>
- ------
+ Yield to maturity on date of purchase, except in the case of Variable Rate
Demand Notes (VR) and Put Bonds, whose yields are determined on date of the
last interest rate change. For Variable Rate Demand Notes and Put Bonds, ma-
turity date shown is the date of next interest rate change.
*Aggregate cost for Federal income tax purposes is substantially the same.
Abbreviations used in this schedule:
FGIC -- Insured as to principal and interest by the Financial Guaranty In-
surance Corporation.
GO -- General Obligation.
See Notes to Financial Statements.
11
<PAGE>
Statements of Assets and Liabilities
December 31, 1999
<TABLE>
<CAPTION>
New York Cash
Municipal Management
Money Fund Fund
- -------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Investments, at amortized cost..................... $174,402,039 $52,169,488
Cash............................................... 732,714 --
Interest receivable................................ 640,017 385,235
------------ -----------
Total Assets....................................... 175,774,770 52,554,723
------------ -----------
LIABILITIES:
Dividends payable.................................. 511,160 227,565
Payable for Fund shares purchased.................. 330,000 140,729
Management fees payable............................ 29,040 8,973
Administration fees payable........................ 7,284 2,243
Accrued expenses................................... 94,883 30,787
------------ -----------
Total Liabilities.................................. 972,367 410,297
------------ -----------
Total Net Assets.................................... 174,802,403 $52,144,426
============ ===========
NET ASSETS:
Par value of shares of capital stock............... $ 175,038 $ 52,148
Capital paid in excess of par value................ 174,801,016 52,094,465
Accumulated net realized loss on security
transactions...................................... (173,651) (2,187)
------------ -----------
Total Net Assets................................... $174,802,403 $52,144,426
============ ===========
Shares Outstanding:
Class A............................................. 5,818,342 20,702,969
============ ===========
Class B............................................. 258,551 20,477,014
============ ===========
Class 2............................................. 33,000 1,932,524
============ ===========
Class O............................................. 168,927,964 9,035,000
============ ===========
Net Asset Value:
Class A............................................. $ 1.00 $ 1.00
============ ===========
Class B............................................. $ 1.00 $ 1.00
============ ===========
Class 2............................................. $ 1.00 $ 1.00
============ ===========
Class O............................................. $ 1.00 $ 1.00
============ ===========
</TABLE>
See Notes to Financial Statements.
12
<PAGE>
Statements of Operations
For the Year Ended December 31, 1999
<TABLE>
<CAPTION>
New York Cash
Municipal Management
Money Fund Fund
- --------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME:
Interest................................................ $5,842,945 $2,633,347
---------- ----------
EXPENSES:
Management fees (Note 2)................................ 358,215 101,230
Shareholder and system servicing fees................... 104,296 63,045
Administration fees (Note 2)............................ 89,554 25,308
Audit and legal......................................... 74,973 11,543
Shareholder communications.............................. 36,500 2,129
Registration fees....................................... 26,299 31,815
Custody................................................. 23,869 12,713
Directors' fees......................................... 2,896 2,794
Other................................................... 23,985 16,302
---------- ----------
Total Expenses.......................................... 740,587 266,879
---------- ----------
Net Investment Income.................................... 5,102,358 2,366,468
---------- ----------
Net Realized Gain (Loss)................................ 47 (349)
---------- ----------
Increase in Net Assets From Operations................... $5,102,405 $2,366,119
========== ==========
</TABLE>
See Notes to Financial Statements.
13
<PAGE>
Statements of Changes in Net Assets
For the Year Ended December 31, 1999
<TABLE>
<CAPTION>
New York Cash
Municipal Management
Money Fund Fund
- -------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Net investment income........................... $ 5,102,358 $ 2,366,468
Net realized gain (loss)........................ 47 (349)
------------- -------------
Increase in Net Assets From Operations.......... 5,102,405 2,366,119
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income........................... (5,102,358) (2,366,468)
------------- -------------
Decrease in Net Assets From Distributions to
Shareholders................................... (5,102,358) (2,366,468)
------------- -------------
FUND SHARE TRANSACTIONS (NOTE 5):
Net proceeds from sale of shares................ 105,246,111 489,787,924
Net asset value of shares issued for
reinvestment of dividends...................... 5,036,010 637,113
Cost of shares reacquired....................... (136,613,603) (493,253,551)
------------- -------------
Decrease in Net Assets From Fund Share
Transactions................................... (26,331,482) (2,828,514)
------------- -------------
Decrease in Net Assets........................... (26,331,435) (2,828,863)
NET ASSETS:
Beginning of year............................... 201,133,838 54,973,289
------------- -------------
End of year..................................... $ 174,802,403 $ 52,144,426
============= =============
</TABLE>
See Notes to Financial Statements.
14
<PAGE>
Statements of Changes in Net Assets
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
New York Cash
Municipal Management
Money Fund Fund
- -------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Net investment income........................... $ 7,872,626 $ 2,091,496
Net realized gain (loss)........................ 3,684 (532)
------------- -------------
Increase in Net Assets From Operations.......... 7,876,310 2,090,964
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income........................... (7,872,626) (2,091,496)
------------- -------------
Decrease in Net Assets From Distributions to
Shareholders................................... (7,872,626) (2,091,496)
------------- -------------
FUND SHARE TRANSACTIONS (NOTE 5):
Net proceeds from sale of shares................ 164,421,373 368,516,371
Net asset value of shares issued for
reinvestment of dividends...................... 7,632,777 625,177
Cost of shares reacquired....................... (280,200,849) (358,243,415)
------------- -------------
Increase (Decrease) in Net Assets From Fund
Share Transactions............................. (108,146,699) 10,898,133
------------- -------------
Increase (Decrease) in Net Assets................ (108,143,015) 10,897,601
NET ASSETS:
Beginning of Year............................... 309,276,853 44,075,688
------------- -------------
End of Year..................................... $ 201,133,838 $ 54,973,289
============= =============
</TABLE>
See Notes to Financial Statements.
15
<PAGE>
Notes to Financial Statements
1. Organization and Significant Accounting Policies
The Salomon Brothers Investment Series ("Investment Series") consists of cer-
tain portfolios of the Salomon Brothers Series Funds Inc ("Series Fund"), the
Salomon Brothers Investors Value Fund Inc, formerly known as Salomon Brothers
Investors Fund Inc., and the Salomon Brothers Capital Fund Inc.
Salomon Brothers New York Municipal Money Market Fund ("New York Municipal
Money Fund") and Salomon Brothers Cash Management Fund ("Cash Management
Fund"), are separate investment portfolios of the Series Fund, an open-end man-
agement investment company, incorporated in Maryland on April 17, 1990. The Se-
ries Fund consists of these portfolios and ten other separate investment port-
folios: Salomon Brothers Asia Growth Fund, Salomon Brothers International Eq-
uity Fund, Salomon Brothers Small Cap Growth Fund, Salomon Brothers Large Cap
Growth Fund, Salomon Brothers Balanced Fund, formerly known as Salomon Brothers
Total Return Fund, Salomon Brothers High Yield Bond Fund, Salomon Brothers
Strategic Bond Fund, Salomon Brothers National Intermediate Municipal Fund,
Salomon Brothers U.S. Government Income Fund and Salomon Brothers Institutional
Money Market Fund. The financial statements and financial highlights for the
other portfolios are presented in separate shareholder reports.
The Investment Series operates under a multiple class pricing structure, with
each portfolio of the Investment Series (individually a "Fund") offering Class
A, Class B, Class 2 and Class O shares, each with their own expense structure.
Each Fund has a specific investment objective:
<TABLE>
<CAPTION>
Fund: Objective:
<C> <S>
New York Municipal Money Fund.. To seek a high level of current income exempt
from Federal income taxes, New York State and
New York City personal income taxes consistent
with liquidity and the stability of principal.
Cash Management Fund........... To seek as high a level of current income as
is consistent with liquidity and the stability
of principal.
</TABLE>
The following is a summary of significant accounting policies followed by the
Investment Series 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) Investment Valuation. Portfolio securities are valued using the amortized
cost method, which involves initially valuing an investment at its cost and
thereafter assuming a constant amortization to maturity of any premium or
discount. This method results in a value approximating market value and does
not include unrealized gains or losses.
(b) Repurchase Agreements. When entering into repurchase agreements, it is
each Fund's policy that the Fund take possession, through its custodian, of the
underlying collateral and monitor the collateral's value at the time the
agreement is entered into and on a daily basis during the term of the
repurchase agreement to ensure that it equals or exceeds the repurchase price.
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.
(c) Federal Income Taxes. Each Fund has complied with the requirements of the
Internal Revenue Code applicable to regulated investment companies and
distributed all of its income, including any net realized gains, to
shareholders. Therefore, no Federal income tax or excise tax provision is
required for such Funds.
(d) Dividends and Distributions to Shareholders. Dividends from net investment
income on the shares of each of the Funds are declared each business day to
shareholders of record that day, and are paid on the last business day of the
month. Distributions of net realized gains to shareholders of each Fund, if
any, are declared at least annually. Dividends and distributions to
shareholders of each Fund are recorded on the ex-dividend date and are
determined in accordance with income tax regulations which may differ from
generally accepted accounting principles.
(e) Class Accounting. Investment income, common expenses and gain (loss) on
investments are allocated to the various classes of a Fund on the basis of
daily net assets of each class. Each class currently has the same expense
structure.
16
<PAGE>
Notes to Financial Statements
(continued)
(f) Expenses. Direct expenses are charged to the Fund that incurred them, and
general expenses of the Investment Series are allocated to the Funds based on
each Fund's relative net assets.
(g) Other. Investment transactions are recorded as of the trade date. Interest
income, including the accretion of discounts or amortization of premiums, is
recognized when earned. Gains or losses on sales of securities are calculated
for financial accounting and Federal income tax purposes on the identified cost
basis. Net investment income and realized gains or losses are allocated daily
to each class of shares based upon the relative proportion of each class's net
assets to the Fund's total net assets.
2. Management Fee and Other Agreements
Each Fund retains Salomon Brothers Asset Management ("SBAM"), a wholly owned
subsidiary of Salomon Brothers Holding Co., Inc., which in turn is wholly owned
by Salomon Smith Barney Holdings, Inc. ("SSBH"), to act as investment manager
of each Fund, subject to the supervision by the Board of Directors of each
Fund. SBAM furnishes the Investment Series with office space and certain serv-
ices and facilities required for conducting the business of the Investment Se-
ries and pays the compensation of its officers. The management fee for these
services for each Fund is payable monthly and is calculated at an annual rate
of 0.20% of each Fund's average daily net assets.
SBAM also acts as administrator for each of the Funds. SBAM has delegated its
responsibilities as administrator to SSB Citi Fund Management LLC ("SSBC"),
formerly known as SSBC Fund Management Inc. ("SSBC"), an affiliate of SBAM,
pursuant to a Sub-Administration Agreement between SBAM and SSBC.
Each Fund has an agreement with CFBDS, Inc. to distribute its shares pursuant
to a multiple pricing system. The Funds are not subject to a front-end sales
charge or service and distribution plan fees.
3. Portfolio Investment Risks
The New York Municipal Money Fund and Cash Management Fund invest in money
market instruments maturing in thirteen months or less whose short-term credit
ratings are within the highest rating categories of two nationally recognized
statistical rating organizations ("NRSROs") or if rated by only one NRSRO, that
NRSRO, or, if not rated, are believed by the investment manager to be of
comparable quality. The New York Municipal Money Fund pursues its investment
objective by investing at least 80% of its net assets in obligations that are
exempt from Federal income taxes and at least 65% of its net assets in
obligations that are exempt from personal income taxes of the State and City of
New York. Because the New York Municipal Money Fund invests primarily in
obligations of the State and City of New York, it is more susceptible to
factors adversely affecting issuers of such obligations than a fund that is
more diversified.
17
<PAGE>
Notes to Financial Statements
(continued)
4. Tax Information
At December 31, 1999, New York Municipal Money Fund and Cash Management Fund
had net capital loss carry-forwards available to offset future capital gains as
follows:
<TABLE>
<CAPTION>
New York Cash
Year of Municipal Management
Expiration Money Fund Fund
- --------------------------------------------------------------------------------
<S> <C> <C>
2000...................................................... $ 94,778 $ 396
2001...................................................... -- 409
2002...................................................... 65,321 415
2004...................................................... -- 10
2005...................................................... 13,552 42
2006...................................................... -- 566
2007...................................................... -- 349
-------- ------
$173,651 $2,187
======== ======
</TABLE>
5. Capital Stock
At December 31, 1999, the Series Fund had 10,000,000,000 shares of authorized
capital stock, par value $0.001 per share. Transactions in Fund shares for the
periods indicated were as follows:
<TABLE>
<CAPTION>
Class A Shares
--------------------------------------------------------
Year Ended Year Ended
December 31, 1999 December 31, 1998
--------------------------- ---------------------------
Shares Amount Shares Amount
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
New York Municipal Money
Fund
Shares sold............ 3,635,035 $ 3,635,035 2,564,333 $ 2,564,333
Shares issued on
reinvestment.......... 144,095 144,095 157,513 157,513
Shares reacquired...... (3,332,584) (3,332,584) (1,158,084) (1,158,084)
------------ ------------- ------------ -------------
Net increase .......... 446,546 $ 446,546 1,563,762 $ 1,563,762
============ ============= ============ =============
Cash Management Fund
Shares sold............ 405,754,940 $ 405,754,940 281,743,858 $ 281,743,858
Shares issued on
reinvestment.......... 257,814 257,814 170,004 170,004
Shares reacquired...... (412,102,761) (412,102,761) (273,367,264) (273,367,264)
------------ ------------- ------------ -------------
Net increase
(decrease)............ (6,090,007) $ (6,090,007) 8,546,598 $ 8,546,598
============ ============= ============ =============
<CAPTION>
Class B Shares
--------------------------------------------------------
Year Ended Year Ended
December 31, 1999 December 31, 1998
--------------------------- ---------------------------
Shares Amount Shares Amount
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
New York Municipal Money
Fund
Shares sold............ 269,414 $ 269,414 17,300 $ 17,300
Shares issued on
reinvestment.......... 4,468 4,468 -- --
Shares reacquired...... (40,331) (40,331) (17,300) (17,300)
------------ ------------- ------------ -------------
Net increase .......... 233,551 $ 233,551 -- $ --
============ ============= ============ =============
Cash Management Fund
Shares sold............ 25,772,175 $ 25,772,175 27,061,219 $ 27,061,219
Shares issued on
reinvestment.......... 184,493 184,493 87,138 87,138
Shares reacquired...... (22,853,280) (22,853,280) (13,926,068) (13,926,068)
------------ ------------- ------------ -------------
Net increase .......... 3,103,388 $ 3,103,388 13,222,289 $ 13,222,289
============ ============= ============ =============
</TABLE>
18
<PAGE>
Notes to Financial Statements
(continued)
<TABLE>
<CAPTION>
Class 2 Shares*
-------------------------------------------------------
Year Ended Year Ended
December 31, 1999 December 31, 1998
-------------------------- ---------------------------
Shares Amount Shares Amount
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
New York Municipal Money
Fund
Shares sold............ 39,204 $ 39,204 127,765 $ 127,765
Shares issued on
reinvestment.......... 42 42 45 45
Shares reacquired...... (159,056) (159,056) -- --
------------ ------------ ------------ -------------
Net increase
(decrease)............ (119,810) $ (119,810) 127,810 $ 127,810
============ ============ ============ =============
Cash Management Fund
Shares sold............ 13,158,778 $ 13,158,778 24,803,143 $ 24,803,143
Shares issued on
reinvestment.......... 26,636 26,636 28,384 28,384
Shares reacquired...... (13,993,462) (13,993,462) (23,897,132) (23,897,132)
------------ ------------ ------------ -------------
Net increase
(decrease)............ (808,048) $ (808,048) 934,395 $ 934,395
============ ============ ============ =============
<CAPTION>
Class O Shares
-------------------------------------------------------
Year Ended Year Ended
December 31, 1999 December 31, 1998
-------------------------- ---------------------------
Shares Amount Shares Amount
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
New York Municipal Money
Fund
Shares sold............ 101,302,458 $101,302,458 161,711,975 $ 161,711,975
Shares issued on
reinvestment.......... 4,887,405 4,887,405 7,475,219 475,219
Shares reacquired...... (133,081,632) (133,081,632) (279,025,465) (279,025,465)
------------ ------------ ------------ -------------
Net decrease........... (26,891,769) $(26,891,769) (109,838,271) $(109,838,271)
============ ============ ============ =============
Cash Management Fund
Shares sold............ 45,102,031 $ 45,102,031 34,908,151 $ 34,908,151
Shares issued on
reinvestment.......... 168,170 168,170 339,651 339,651
Shares reacquired...... (44,304,048) (44,304,048) (47,052,951) (47,052,951)
------------ ------------ ------------ -------------
Net increase
(decrease)............ 966,153 $ 966,153 (11,805,149) $(11, 805,149)
============ ============ ============ =============
</TABLE>
* Effective September 14, 1998, Class C shares of each Fund were redesignated
as Class 2 shares.
19
<PAGE>
Financial Highlights
For a share of each class of capital stock outstanding throughout each year
ended December 31, except where noted:
New York Municipal Money Fund
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
Class A Shares
----------------------------------
1999 1998 1997 1996(1)
----------------------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year.. $ 1.000 $ 1.000 $ 1.000 $ 1.000
------- ------- ------- -------
Net investment income.............. 0.029 0.031 0.034 0.006
Dividends from net investment
income............................ (0.029) (0.031) (0.034) (0.006)
------- ------- ------- -------
Net Asset Value, End of Year........ $ 1.000 $ 1.000 $ 1.000 $ 1.000
======= ======= ======= =======
Total Return(2)..................... 2.9% 3.2% 3.5% 0.6%++
Net Assets, End of Year (000s)...... $5,810 $5,372 $3,808 $360
Ratios to Average Net Assets:
Expenses........................... 0.41% 0.41% 0.50% 0.38%+
Net investment income.............. 2.85% 3.15% 3.39% 3.56%+
management fee, expenses absorbed by
SBAM and credits earned on custodian
cash balances, net investment income
per share and expense ratios would
have been:
Net investment income per share.... -- -- -- $ 0.006
Expense ratio...................... -- -- -- 0.39%+
New York Municipal Money Fund
- ------------------------------------------------------------------------
<CAPTION>
Class B Shares
----------------------------------
1999 1998 1997 1996(1)
----------------------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year.. $ 1.000 $ 1.000 $ 1.000 $ 1.000
------- ------- ------- -------
Net investment income.............. 0.029 0.031 0.034 0.006
Dividends from net investment
income............................ (0.029) (0.031) (0.034) (0.006)
------- ------- ------- -------
Net Asset Value, End of Year........ $ 1.000 $ 1.000 $ 1.000 $ 1.000
======= ======= ======= =======
Total Return(2)..................... 2.9% 3.2% 3.5% 0.6%++
Net Assets, End of Year (000s)...... $258 $25 $25 $25
Ratios to Average Net Assets:
Expenses........................... 0.42% 0.42% 0.43% 0.40%+
Net investment income.............. 2.99% 3.21% 3.32% 3.40%+
Before applicable waiver of
management fee, expenses absorbed by
SBAM and credits earned on custodian
cash balances, net investment income
per share and expense ratios would
have been:
Net investment income per share.... -- -- -- $ 0.006
Expense ratio...................... -- -- -- 0.41%+
</TABLE>
- ------
(1) For the period from November 1, 1996 (inception date) to December 31, 1996.
(2) Total return is calculated assuming a $1,000 investment on the first day of
each period reported, reinvestment of all dividends at the net asset value
on the payable date, and a sale at net asset value on the last day of each
period. Initial sales charge or contingent deferred sales charge is not re-
flected in the calculation of total return.
++ Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized.
20
<PAGE>
Financial Highlights
(continued)
For a share of each class of capital stock outstanding throughout each year
ended December 31, except where noted:
New York Municipal Money Fund
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
Class 2 Shares
--------------------------------------
1999 1998(1) 1997 1996(2)
--------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value,
Beginning of Year...... $ 1.000 $ 1.000 $ 1.000 $ 1.000
-------- -------- -------- --------
Net investment income.. 0.029 0.031 0.034 0.006
Dividends from net
investment income..... (0.029) (0.031) (0.034) (0.006)
-------- -------- -------- --------
Net Asset Value, End of
Year................... $ 1.000 $ 1.000 $ 1.000 $ 1.000
======== ======== ======== ========
Total Return(3)......... 2.9% 3.2% 3.5% 0.6%++
Net Assets, End of Year
(000s)................. $33 $153 $25 $25
Ratios to Average Net
Assets:
Expenses............... 0.40% 0.34% 0.47% 0.40%+
Net investment income.. 2.78% 3.13% 3.40% 3.40%+
Before applicable waiver
of management fee,
expenses absorbed by
SBAM and credits earned
on custodian cash
balances, net investment
income per share and
expense ratios would
have been:
Net investment income
per share............. -- -- -- $ 0.006
Expense ratio.......... -- -- -- 0.41%+
New York Municipal Money Fund
- ----------------------------------------------------------------------------
<CAPTION>
Class O Shares
--------------------------------------------------
1999 1998 1997 1996 1995
--------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Year...... $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
-------- -------- -------- -------- --------
Net investment income.. 0.029 0.031 0.034 0.032 0.037
Dividends from net
investment income..... (0.029) (0.031) (0.034) (0.032) (0.037)
-------- -------- -------- -------- --------
Net Asset Value, End of
Year................... $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
======== ======== ======== ======== ========
Total Return(3)......... 2.9% 3.2% 3.5% 3.3% 3.7%
Net Assets, End of Year
(000s)................. $168,701 $195,584 $305,419 $273,734 $226,549
Ratios to Average Net
Assets:
Expenses............... 0.41% 0.43% 0.47% 0.53% 0.43%
Net investment income.. 2.85% 3.14% 3.39% 3.25% 3.67%
Before applicable waiver
of management fee,
expenses absorbed by
SBAM and credits earned
on custodian cash
balances, net investment
income per share and
expense ratios would
have been:
Net investment income
per share............. -- -- -- $ 0.032 $ 0.037
Expense ratio.......... -- -- -- 0.53% 0.45%
</TABLE>
- ------
(1) On September 14, 1998, Class C shares were renamed Class 2 shares.
(2) For the period from November 1, 1996 (inception date) to December 31, 1996.
(3) Total return is calculated assuming a $1,000 investment on the first day of
each period reported, reinvestment of all dividends at the net asset value
on the payable date, and a sale at net asset value on the last day of each
period. Initial sales charge or contingent deferred sales charge is not re-
flected in the calculation of total return.
++ Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized.
21
<PAGE>
Financial Highlights
(continued)
For a share of each class of capital stock outstanding throughout each year
ended December 31, except where noted:
Cash Management Fund
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Class A Shares
-------------------------------------------
1999 1998 1997 1996 1995(1)
-------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Year.......................... $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
------- ------- ------- ------- -------
Net investment income......... 0.047 0.050 0.051 0.050 0.044
Dividends from net investment
income....................... (0.047) (0.050) (0.051) (0.050) (0.044)
------- ------- ------- ------- -------
Net Asset Value, End of Year... $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
======= ======= ======= ======= =======
Total Return(2)................ 4.8% 5.2% 5.2% 5.1% 4.5%++
Net Assets, End of Year
(000s)........................ $20,702 $26,793 $18,246 $ 8,175 $ 1,756
Ratios to Average Net Assets:
Expenses...................... 0.53% 0.55% 0.55% 0.55% 0.55%+
Net investment income......... 4.65% 5.02% 5.11% 4.95% 5.42%+
Before applicable waiver of
management fee, expenses
absorbed by SBAM and credits
earned on custodian cash
balances, net investment income
per share and expense ratios
would have been:
Net investment income per
share........................ -- $ 0.049 $ 0.049 $ 0.047 $ 0.037
Expense ratio................. -- 0.67% 0.70% 0.82% 1.35%+
<CAPTION>
Class B Shares
-------------------------------------------
1999 1998 1997 1996 1995(1)
-------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Year.......................... $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
------- ------- ------- ------- -------
Net investment income......... 0.047 0.050 0.051 0.050 0.043
Dividends from net investment
income....................... (0.047) (0.050) (0.051) (0.050) (0.043)
------- ------- ------- ------- -------
Net Asset Value, End of Year... $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
======= ======= ======= ======= =======
Total Return(2)................ 4.8% 5.2% 5.2% 5.1% 4.4%++
Net Assets, End of Year
(000s)........................ $20,476 $17,374 $ 4,151 $ 3,920 $ 2,238
Ratios to Average Net Assets:
Expenses...................... 0.53% 0.55% 0.55% 0.55% 0.55%+
Net investment income......... 4.72% 4.95% 5.10% 4.95% 5.38%+
Before applicable waiver of
management fee, expenses
absorbed by SBAM and credits
earned on custodian cash
balances, net investment income
per share and expense ratios
would have been:
Net investment income per
share........................ -- $ 0.049 $ 0.049 $ 0.047 $ 0.037
Expense ratio................. -- 0.67% 0.70% 0.82% 1.34%+
</TABLE>
Cash Management Fund
- ------
(1) For the period ended January 3, 1995 (inception date) to December 31, 1995.
(2) Total return is calculated assuming a $1,000 investment on the first day of
each period reported, reinvestment of all dividends at the net asset value
on the payable date, and a sale at net asset value on the last day of each
period. Initial sales charge or contingent deferred sales charge is not re-
flected in the calculation of total return.
++ Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized.
22
<PAGE>
Financial Highlights
(continued)
For a share of each class of capital stock outstanding throughout each year
ended December 31, except where noted:
Cash Management Fund
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Class 2 Shares
-------------------------------------------
1999 1998(1) 1997 1996 1995(2)
-------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Year.......................... $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
------- ------- ------- ------- -------
Net investment income......... 0.047 0.050 0.051 0.050 0.043
Dividends from net investment
income....................... (0.047) (0.050) (0.051) (0.050) (0.043)
------- ------- ------- ------- -------
Net Asset Value, End of Year... $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
======= ======= ======= ======= =======
Total Return(3)................ 4.8% 5.2% 5.2% 5.1% 4.4%++
Net Assets, End of Year
(000s)........................ $ 1,932 $ 2,741 $ 1,806 $ 435 $ 183
Ratios to Average Net Assets:
Expenses...................... 0.53% 0.55% 0.55% 0.55% 0.55%+
Net investment income......... 4.67% 4.98% 5.16% 4.95% 5.40%+
Before applicable waiver of
management fee, expenses
absorbed by SBAM and credits
earned on custodian cash
balances, net investment income
per share and expense ratios
would have been:
Net investment income per
share........................ -- $ 0.049 $ 0.049 $ 0.047 $ 0.036
Expense ratio................. -- 0.67% 0.70% 0.82% 1.34%+
<CAPTION>
Class O Shares
-------------------------------------------
1999 1998 1997 1996 1995
-------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Year.......................... $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
------- ------- ------- ------- -------
Net investment income......... 0.047 0.050 0.051 0.050 0.055
Dividends from net investment
income....................... (0.047) (0.050) (0.051) (0.050) (0.055)
------- ------- ------- ------- -------
Net Asset Value, End of Year... $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
======= ======= ======= ======= =======
Total Return(3)................ 4.8% 5.2% 5.2% 5.1% 5.6%
Net Assets, End of Year
(000s)........................ $ 9,034 $ 8,066 $19,872 $14,225 $ 6,684
Ratios to Average Net Assets:
Expenses...................... 0.53% 0.55% 0.55% 0.55% 0.55%
Net investment income......... 4.67% 5.08% 5.10% 4.95% 5.46%
Before applicable waiver of
management fee, expenses
absorbed by SBAM and credits
earned on custodian cash
balances, net investment income
per share and expense ratios
would have been:
Net investment income per
share........................ -- $ 0.049 $ 0.049 $ 0.047 $ 0.047
Expense ratio................. -- 0.67% 0.70% 0.82% 1.34%
</TABLE>
Cash Management Fund
- ------
(1) On September 14, 1998, Class C Shares were renamed Class 2 Shares.
(2) For the period ended January 3, 1995 (inception date) to December 31, 1995.
(3) Total return is calculated assuming a $1,000 investment on the first day of
each period reported, reinvestment of all dividends at the net asset value
on the payable date, and a sale at net asset value on the last day of each
period. Initial sales charge or contingent deferred sales charge is not re-
flected in the calculation of total return.
++ Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized.
23
<PAGE>
Report of Independent Accountants
Tax Information
(unaudited)
To the Board of Directors and Shareholders of
Salomon Brothers New York Municipal Money Market Fund
Salomon Brothers Cash Management Fund
In our opinion, the accompanying statements of assets and liabilities, includ-
ing the schedules of investments, and the related statements of operations and
of changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Salomon Brothers New York Munici-
pal Money Market Fund and Salomon Brothers Cash Management Fund (two of the
portfolios constituting Salomon Brothers Series Funds Inc, hereafter referred
to as the "Funds") at December 31, 1999, the results of each of their opera-
tions for the year then ended, the changes in each of their net assets for each
of the two years in the period then ended and the financial highlights for each
of the periods indicated, in conformity with accounting principles generally
accepted in the United States. These financial statements and financial high-
lights (hereafter referred to as "financial statements") are the responsibility
of the Funds' management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these fi-
nancial statements in accordance with auditing standards generally accepted in
the United States which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of mate-
rial misstatement. An audit includes examining, on a test basis, evidence sup-
porting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 1999 by cor-
respondence with the custodian, provide a reasonable basis for the opinion ex-
pressed above.
PricewaterhouseCoopers LLP
New York, New York
February 22, 2000
- --------------------------------------------------------------------------------
For Federal tax purposes the New York Municipal Money Fund hereby designates
for fiscal year ended December 31, 1999:
. 100.00% of dividends paid by the Fund from net investment income as tax-
exempt for regular Federal income tax purposes.
24
<PAGE>
Salomon Brothers Investment Series
INVESTMENT MANAGER
Salomon Brothers Asset Management Inc
7 World Trade Center
New York, New York 10048
CUSTODIAN
PNC Bank, National Association
200 Stevens Drive
Suite 440
Lester, Pennsylvania 19113
DIVIDEND DISBURSING AND TRANSFER AGENT
PFPC Global Fund Services
53 State Street
Boston, Massachusetts 02109-2873
LEGAL COUNSEL
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
Directors
CHARLES F. BARBER
Consultant; formerly Chairman; ASARCO Inc.
CAROL L. COLMAN
Consultant, Colman Consulting Co., Inc.
DANIEL P. CRONIN
Vice President-General Counsel,
Pfizer International Inc.
HEATH B. MCLENDON
Chairman and President, Managing Director,
Salomon Smith Barney Inc.; President and Director,
SSB Citi Fund Management LLC and Travelers
Investment Adviser, Inc.
Officers
HEATH B. MCLENDON
Chairman and President
LEWIS E. DAIDONE
Executive Vice President and Treasurer
ROBERT E. AMODEO
Executive Vice President
JAMES E. CRAIGE
Executive Vice President
THOMAS K. FLANAGAN
Executive Vice President
ROGER LAVAN
Executive Vice President
ROSS S. MARGOLIES
Executive Vice President
MAUREEN O'CALLAGHAN
Executive Vice President
DAVID J. SCOTT
Executive Vice President
BETH A. SEMMEL
Executive Vice President
PETER J. WILBY
Executive Vice President
GEORGE J. WILLIAMSON
Executive Vice President
THOMAS A. CROAK
Vice President
NANCY A. NOYES
Vice President
ANTHONY PACE
Controller
CHRISTINA T. SYDOR
Secretary
<PAGE>
[LOGO OF SALOMON BROTHERS]
SEVEN WORLD TRADE CENTER . NEW YORK, NEW YORK 10048
SBSMMANN 12/99
<PAGE>
ANNUAL
REPORT
December 31, 1999
[PHOTO]
[PHOTO]
[PHOTO]
SALOMON BROTHERS ASSET MANAGEMENT
[_] HIGH YIELD BOND FUND
[_] STRATEGIC BOND FUND
SALOMON BROTHERS
- ------------------------------------------------ [_] NATIONAL INTERMEDIATE
MUNICIPAL FUND
[_] U.S. GOVERNMENT INCOME FUND
<PAGE>
For almost a century, Salomon Brothers has provided serious investors with
advice and resources to help them reach their financial goals.
Salomon Brothers offers...
Quality Service
Scope of Choice
An Information Advantage
We offer cutting-edge solutions and investment programs delivered through
financial advisors. Our rich tradition and unparalleled expertise provides
access to innovative ideas and extensive resources.
We wish to extend our sincere thanks for investing with us. Technology, new
innovations and business opportunities have changed the financial world over the
years--but one constant remains: our commitment to serve your investment needs.
BRIDGING WALL STREET OPPORTUNITIES
- --------------------------------------------------------------------------------
TO YOUR FINANCIAL FUTURE
RICH TRADITION
- --------------
Bold initiative, determination and market foresight have defined the Salomon
Brothers name for nearly a century.
GLOBAL RESOURCES
- ----------------
We have access to one of the world's largest financial institutions, creating a
global web of resources comprised of 170,000 employees in over 100 countries.
INVESTMENT EXPERTISE
- --------------------
Averaging over 16 years of professional industry experience, our seasoned
portfolio management team consistently demonstrates a disciplined institutional
approach to money management.
PERFORMANCE
- -----------
We believe that a true measure of performance extends beyond short-term time
frames to long-term outcomes, quality of management, quality of relationship and
quality of thought.
INFORMATION ADVANTAGE
- ---------------------
We offer a global information advantage to investors and their advisors --
providing the benefits of a world of rapid knowledge acquisition.
<PAGE>
Table of Contents
A MESSAGE FROM THE CHAIRMAN .............................................. 2
THE SALOMON BROTHERS INVESTMENT SERIES
HIGH YIELD BOND FUND .................................................. 5
STRATEGIC BOND FUND ................................................... 11
NATIONAL INTERMEDIATE MUNICIPAL FUND .................................. 16
U.S. GOVERNMENT INCOME FUND ........................................... 23
SCHEDULES OF INVESTMENTS ................................................. 30
STATEMENTS OF ASSETS AND LIABILITIES ..................................... 48
STATEMENTS OF OPERATIONS ................................................. 49
STATEMENTS OF CHANGES IN NET ASSETS ...................................... 50
STATEMENTS OF CASH FLOWS ................................................. 52
NOTES TO FINANCIAL STATEMENTS ............................................ 53
FINANCIAL HIGHLIGHTS ..................................................... 63
REPORT OF INDEPENDENT ACCOUNTANTS ........................................ 71
TAX INFORMATION .......................................................... 72
DIRECTORS AND OFFICERS OF
THE SALOMON BROTHERS INVESTMENT SERIES ................................ IBC
<PAGE>
[PHOTO]
Heath B. McLendon
Chairman
SALOMON BROTHERS INVESTMENT SERIES
A Message From the Chairman
DEAR SHAREHOLDER:
We are pleased to provide the annual report for The Salomon Brothers Investment
Series -- High Yield Bond Fund, Strategic Bond Fund, National Intermediate
Municipal Fund and U.S. Government Income Fund ("Funds") for the year ended
December 31, 1999. Interviews with the various Fund managers appear after each
market commentary. We hope you find this report useful and informative.
Below is a chart showing each Fund's Class A share return for the year ended
December 31, 1999 with and without sales charges.
THE PERFORMANCE OF THE FUNDS/1/
Class A Shares Total Return for the Year Ended December 31, 1999:
WITHOUT WITH
SALES CHARGES/2/ SALES CHARGES/3/
----------------- -----------------
High Yield Bond Fund 7.03% 1.98%
Strategic Bond Fund 4.96 (0.04)
National Intermediate
Municipal Fund 0.18 (4.58)
U.S. Government Income Fund 1.52 (3.28)
MARKET COMMENTARY
Many of the world's financial markets fell a year ago, following Russia's
unexpected debt defaults, a major hedge fund crisis and a currency devaluation
in Brazil. Meanwhile, economic upheavals in Asia were also causing serious
repercussions internationally. Yet, by the end of the period, many global stock
and bond markets experienced a dramatic reversal of fortune.
- ----------
1 Please note that the returns for the Strategic Bond Fund, the National
Intermediate Municipal Fund and the U.S. Government Income Fund include the
effects of fee waivers. Had these fee waiver policies not been in effect,
the returns for these Funds would have been lower. It is Salomon Brothers
Asset Management's intention to continue this policy. However, there can be
no assurance that the fee waiver will remain in effect.
2 These total return figures assume reinvestment of all dividends and do not
reflect the deduction of a sales charge for each Fund's Class A shares.
3 These total return figures assume reinvestment of all dividends and reflect
the deduction of the maximum front-end sales charge for each Fund's Class A
shares up to 4.75%.
In addition, both columns of data represent past performance, which is not
indicative of future results. The investment return and principal value of an
investment will fluctuate so that an investor's shares, when redeemed, may be
worth more or less than their original cost. This shareholder report has been
prepared for the information of shareholders of the Funds and is not authorized
for use unless preceded or accompanied by a current prospectus. The prospectus
contains information regarding each Fund's sales charges, expenses, objectives,
policies, management and performance. Please read it carefully before you invest
or send money. Call your financial advisor or 1-800-725-6666 to obtain a copy of
the prospectus.
2
<PAGE>
Perhaps the most striking aspect about the stock market's double-digit returns
in 1999 was that they were achieved while interest rates increased. The Federal
Reserve Board ("Fed") raised interest rates three times in 1999 as an
inflationary precaution.3 Rising interest rates generally lead to a decline in
stock prices. However, most stock investors remained optimistic that the U.S.
economy would continue its remarkable growth and stock prices continued to
advance. Fueling this optimism was strong corporate profits, rising personal
incomes and record consumer and investor confidence.
Bond investors did not react positively to the actions of the Fed and the bond
market experienced its worst year since 1994. The overall bond market recorded
losses in 1999 in response to the Fed's interest rate hikes and concerns
regarding inflation. Bond market losses increased with the length of maturities.
The yield on the bellwether 30-year government bond increased 1.39 percentage
points in 1999 to 6.48%. At the end of 1998, the 30-year bond yielded 5.09%.
Recently released economic data from the U.S. Commerce Department provided the
first concrete evidence that the U.S. economy may have been structurally
transformed in an extremely positive way during the period. In fact, recent data
suggests to us that the economy has actually been growing more strongly than
previously thought. The term "new economic era" may explain to a large extent
the changes in stock market valuations that have occurred over the past several
years. While short-term market fluctuations may be expected as a result of
future Fed monetary policy decisions, we are guardedly optimistic about our
economic future.
In other parts of the world, growth picked up in Europe and Asia, where a great
deal of corporate restructuring is taking place. Europe's new economy has
contributed to the consolidation of businesses and the creation of even stronger
and more competitive European companies. We continue to see the amazing
resilience of the economies of Southeast Asia, as the region returns to economic
stability and growth -- albeit at a slower, yet more sustainable, rate.
The globalization of financial markets has also continued as the New York Stock
Exchange and NASDAQ add more foreign stocks for trading. Investors today have
more investment options than ever before as trading hours expand, allowing for
broader investor participation and pursuit of investment opportunities.
- -----------
3 On February 2, 2000, after this letter was written, the Fed raised interest
rates 0.25% to 5.25%.
3
<PAGE>
SALOMON BROTHERS ASSET MANAGEMENT UPDATE
We at Salomon Brothers Asset Management are pleased to announce the launch of
two new mutual funds during the period. Effective November 22, 1999, the
International Equity Fund and the Large Cap Growth Fund were introduced into the
Salomon Brothers Investment Series family. We believe that both of these new
products bring investment opportunities to today's discriminating investors and
round out our menu of offerings.
Here is a brief list of some other noteworthy events that took place at Salomon
Brothers Asset Management this past year:
. A Warm Welcome to Phillip Meserve -- Former President of Pilgrim Baxter &
Associates, Phil Meserve has recently joined Salomon Brothers as Managing
Director and Head of Non-Proprietary Distribution. Mr. Meserve is well
known in the industry for helping to establish and build a more
client-focused financial intermediary network in the early to mid-1990s.
. A Unique Investment Style-- Looking for a fund that has identified and
owned some of the best-performing stocks out there? Salomon Brothers
Capital Fund taps into a variety of market capitalizations, in search of
the best stock opportunities. The Fund's managers are widely recognized for
the Fund's unique investment style. Barron's, a leading business weekly,
recently profiled the Fund's portfolio managers, Ross Margolies and Robert
Donahue, describing them as "true bottom-up investors focusing on
individual companies," while Morningstar, Inc. refers to manager Ross
Margolies as "one of the smartest fund managers around."4
On behalf of everyone here at Salomon Brothers Asset Management, we would like
to thank you for your continued confidence in the Salomon Brothers Investment
Series. We look forward to helping you pursue your financial goals in the new
century.
Sincerely,
/s/ Heath B. McLendon
Heath B. McLendon
Chairman and President
January 24, 2000
- -------------
4 Source: Barron's, "Nonconformists," 11/13/99. Source: Morningstar, "The
Pick of the Mid-Blend Category," 10/12/99. Past performance is not
indicative of future results. The principal value and investment returns
will fluctuate, an investors' shares, when redeemed, may be worth more or
less than their original cost. Please read each Fund's prospectus carefully
before you invest or send money.
4
<PAGE>
[GRAPHIC]
INVESTMENT OBJECTIVE AND STRATEGY
The Salomon Brothers High Yield Bond Fund seeks to maximize current income by
investing primarily in a diversified portfolio of high-yield bonds rated below
investment grade. As a secondary objective, the Fund seeks capital appreciation.
Under normal market conditions, the Fund invests at least 65% of its assets in
securities rated Baa or lower by Moody's Investors Services, Inc., or BBB or
lower by Standard & Poor's. (Moody's and Standard & Poor's are two major credit
reporting and bond rating agencies.) A key component of the Fund's overall
strategy is to determine the optimal asset allocation between domestic
high-yield bonds and international U.S. dollar-denominated Brady bonds and
lower-rated sovereign debt.
THE FUND MANAGER
[PHOTO]
Peter J. Wilby, CFA, Managing Director and Senior Portfolio Manager at Salomon
Brothers Asset Management Inc, has 17 years of investment industry experience
principally in the high-yield and emerging debt markets. Mr. Wilby is primarily
responsible for the day-to-day management of the High Yield Bond Fund.
SALOMON BROTHERS
High Yield Bond Fund
PERFORMANCE UPDATE
During the 12 months ended December 31, 1999, the Salomon Brothers High Yield
Bond Fund's Class A shares, without sales charges, posted a return of 7.03%. In
comparison, the Salomon Smith Barney High-Yield Market Index returned 1.73% and
the JP Morgan Emerging Bond Market Index Plus ("EMBI+") returned 25.99% for the
same time period. (The Salomon Smith Barney High Yield Market Index covers a
significant portion of the below-investment-Grade U.S. corporate bond market.
The EMBI+ is a total return index that tracks the traded market for U.S.
dollar-denominated Brady and other similar sovereign restructured bonds traded
in the emerging markets.)
MARKET REVIEW AND PORTFOLIO HIGHLIGHTS
While benefiting from a strong economy, the high-yield market suffered from the
following:
1. a back-up in Treasuries due to concern about rising inflation;
2. mutual fund outflows;
3. a heavy new-issue calendar;
4. a reduction in broker/dealer liquidity;
5. a volatile equity market; and
6. a rise in default rates, especially among marginal commodity
producers.
The period began with concerns that a weak recovery in Asia and recession in
Latin America would trigger a slowdown in the U.S. economy. However, economic
growth in the U.S. was stronger than anticipated and the high-yield market
rallied in the first four months of the year. However, in the second quarter,
continued strong U.S. economic growth led to concerns about rising inflation.
Heightened credit concerns also developed as default rates increased,
particularly in commodities issuers exposed to global competition and pricing
volatility, and in more speculative telecommunications issuers whose access to
alternative capital markets was limited. The aforementioned factors rattled
individual investors, resulting in prolonged mutual fund outflows, which
occurred for as long as nine consecutive weeks through the end of October and
totaled $422 million for the year. Finally, tightening broker-dealer liquidity
and a heavy new issue calendar in the second and third quarters further
constrained liquidity in the high-yield market. As a result, high-yield market
returns were negative for the period from May through October.
As the period progressed, the high-yield market, driven by technical, credit and
liquidity concerns, became increasingly selective in the new issue and secondary
market -- (i) preferring larger, more liquid issues from higher quality issuers,
(ii) punishing underperformers and negative news and (iii) demanding tighter
covenant packages and higher yields from new issues, which effectively re-priced
the secondary market to lower levels.
5
<PAGE>
However, new issue volume declined to relatively low levels late in the year
while in November and December, mutual fund outflows moderated and
Collateralized Bond Obligation ("CBO") buying activity picked up dramatically,
alleviating some of the pressure on liquidity in the high-yield market and
enabling the market to recover modestly and post a positive return for the year.
For the period, the high-yield market's top performers included commodities
industries such as metals/mining, energy and paper & forest products, which
benefited from material improvement in commodities prices; telecommunications,
due to explosive industry growth, mergers & acquisitions activity and private
equity investment; gaming, which benefited from investors' preference for
defensive credits; and cable & media, which benefited from mergers and
acquisitions activity. The financial sector also outperformed as a result of
savings & loans benefiting from: (i) strong new home mortgage volume and (ii)
their use of adjustable rate mortgages, a natural hedge against rising interest
rates. The worst performers included health care, due to the industry's troubles
with the recently imposed Medicare reimbursement system; textiles, which is
suffering from cheaper imports; and consumer products, supermarkets/drugstores,
automotive and services/other, which were all adversely affected by credit
concerns at certain issuers. The capital goods sector also underperformed due to
the market's preference for more defensive, higher-growth industry sectors. In
terms of credit quality, investors favored the higher quality credit tiers, such
as BB issues, as they shunned CCC and lower quality single-B issues due to
heightened credit concerns; BB, B and CCC issues showed returns of 2.34%, 1.02%
and (8.43)%, respectively.
The Fund's performance was helped by overweightings in metals/mining, gaming and
financial and underweightings in health care and supermarkets/drugstores. The
Fund's performance was adversely impacted by overweightings in consumer
products, services and capital goods and underweightings in paper & forest
products and telecommunications. During 1999, the Fund responded to market
conditions by increasing its exposure to metals/mining, gaming, paper & forest
products and financial and decreasing its exposure to health care,
supermarkets/drugstores and services.
On December 31, 1999, the high-yield market yielded 11.41%, up from 10.28% at
year-end 1998. The excess yield over Treasuries was 5.00%, down from 5.66% at
1998 year-end. Yet, we believe that these levels still represent attractive
long-term value.
Going forward, we expect the high-yield market to moderately improve over the
next six months as expectations for continued robust economic growth and
improved technical factors, including: (i) mutual fund investors returning to
the market after selling in late 1999 for tax or Y2K reasons, (ii) continued
strong CBO demand and (iii) fund managers investing excess balance sheet cash
held over the New Year for Y2K reasons, are partially offset by continued
interest rate and credit concerns.
6
<PAGE>
HIGH YIELD BOND FUND
A Global Approach To High-Yield Bond Investing
For years, discerning investors have relied on high-yield bonds to help generate
current income. The investment managers of the Salomon Brothers High Yield Bond
Fund apply strict tactical evaluations to identify promising high-yield bond
opportunities throughout the world. In the following discussion, Portfolio
Manager Peter Wilby explains how his seasoned team strives to create a portfolio
responsive to changing markets, as well as to balance an expansive global
perspective with intense scrutiny of individual securities.
Q: Peter, the High Yield Bond Fund has produced relatively consistent income for
investors since its inception. What strategies have been used to help achieve
this relative consistency?
We expect to see more volatility in the financial markets over the next few
months. In order to succeed in the markets over time, we believe investors
should avoid taking a myopic approach to the markets and stay focused on the big
picture.
Our investment strategy is to manage the Fund consistently and proactively
through all types of market conditions. We try not to be distracted by
short-term market volatility. In our view, broad diversification can help
cushion those inevitable short-term price swings.
Q: Who should invest in the High Yield Bond Fund?
The Fund may be suitable for investors in search of high current income, growth
of capital and diversification. High-yield bonds have long been viewed as
attractive investments to investors in search of income. Historically, however,
they have offered benefits to a much broader range of investors. In fact, we
believe the risk-adjusted returns of high-yield bonds have often rivaled those
of common stocks and bonds while also serving as a powerful diversification
tool.
We believe the Fund may be best suited to sophisticated investors who seek high
income and who are willing to accept the higher risks associated with
lower-rated bonds. It may also be an attractive choice for investors seeking to
lessen exposure to stock market risk or looking to further diversify an
investment-grade bond portfolio. Finally, the High Yield Bond Fund may be of
particular interest to U.S. investors who recognize the potential of overseas
markets.
Q: What makes the Salomon Brothers High Yield Bond Fund unique?
While there are many high-yield bond funds out there, we believe ours is unique
in that it has access to the vast resources of Salomon Smith Barney. We believe
our affiliation not only allows our fund managers to access and analyze a wealth
of data, but also to search the globe for the widest possible array of
attractive investment opportunities.
7
<PAGE>
Also, the Fund offers access to greater investment opportunities than the
typical high-yield bond fund. While many funds emphasize only U.S. corporate
securities, our Fund expands its investment horizon to include overseas
corporate and sovereign debt securities.
Foreign debt and emerging market debt obligations involve risks not associated
with higher rated securities including, among others, overall greater risk of
timely and ultimate payment of interest and principal, greater market price
volatility and less liquid secondary market trading. (Please note that
international investing involves certain risks such as currency fluctation,
differing accounting and financial standards and the potential for adverse
political developments.)
Q: How does your global approach to high-yield bonds potentially benefit
investors?
By diversifying the portfolio globally, we believe we can achieve additional
benefits for our investors. We think that overseas markets offer major
opportunities, not only because the market is large -- with an estimated value
of over $1.1 trillion -- but because rising stability, improved standards of
living and better fiscal and monetary policy management are improving the credit
standing of many countries and companies.
The Fund's global approach seeks to allocate assets among three sectors of the
high-yield market: domestic high-yield, non-U.S. high-yield and emerging markets
debt securities. We seek to enhance yield and returns while managing credit risk
and helping to reduce volatility. (Please note that investments in high-yield
securities involves a substantial risk and loss. High-yield securities are
considered speculative and compared to investment grade securities, tend to have
more volatile prices and have more risks.)
Q: Let's tackle a popular topic these days in the high-yield bond market: the
rise of defaults and the drop in credit quality. Are they a threat or can you
avoid them?
Over the past few years, the strong economy has created an appetite for more
speculative credits. A frothy marketplace and aggressive underwriters have
brought many start-up firms into the high-yield bond market. These companies
will either survive in a highly competitive marketplace or default on their debt
payments. One example of the types of defaults we have seen recently are small
gas, oil and steel companies, which became insolvent due to the collapse in
commodities' prices. The health care sector has also seen its fair share of
bankruptcies.
Our philosophy tends to keep us away from the treacherous waters of
lower-quality, more speculative high-yield securities that are more likely to
default. In the U.S., we seek opportunities in industries that are benefiting
from productivity and efficiency improvements. We think our extensive
proprietary research enables us to identify sound businesses with consistent
cash flows.
8
<PAGE>
We closely evaluate a company's management and profitability, its prospects for
long-term growth, historical performance volatility and the market's current
expectations. Typically, we try not to stretch for the higher coupons offered by
the weaker credits. Our exhaustive search for promising opportunities also
frequently takes us to overseas markets, primarily emerging markets sovereign
debt, that in our view offer attractive risk and reward tradeoffs. We look to
invest in countries that show improving fundamentals and the financial strength
to service their outstanding debt. (Please note that high yield securities
involve a greater risk of loss due to default or declining credit quality.)
Q: The emerging debt markets have been one of the best-performing asset classes
in 1999. Has the Fund benefited from this trend?
Throughout the year, we have maintained approximately 25% to 35% of the Fund's
assets in emerging markets debt, which has provided a significant boost to its
returns relative to its peer group. Typically, the Fund's emerging markets debt
portion is highly diversified. Two of the Fund's largest country holdings in
this area are Venezuela and Brazil. Along with strong capital inflows, positive
developments in these countries have renewed investor confidence. Venezuela has
benefited from a rise in oil prices. In addition, Venezuela is the only Latin
American country to have reduced its debt and currently its total debt to GDP is
21%, half of Western European countries. Brazil reported favorable fiscal
results along with legislative progress. However, there is no guarantee that
this allocation to emerging market debt will enhance performance in the future.
Q: Peter, how do rising rates affect high-yield bonds and emerging markets debt?
As an asset class, credit-sensitive markets have a lower correlation to changes
in interest rates than other fixed income securities. As a general rule, a rise
in rates is caused by accelerating economic growth. This means that the economy
is doing well, which in turn helps companies to grow their businesses and
generate the necessary cash flows to pay off their debt. The coupons of
high-yield and emerging-markets debt are not tied to market rates, but rather
are based on the underlying issuer's creditworthiness. These bonds tend to offer
higher coupons to attract and compensate investors for the additional risk of
owning high-yield bonds versus traditional investment-grade bonds. Of course,
the risks to investors are greater as well.
Peter, thank you for spending some time with us today.
9
<PAGE>
The following graph depicts the performance of the High Yield Bond Fund versus
the Salomon Smith Barney High-Yield Market Index1. It is important to note that
the High Yield Bond Fund is a professionally managed mutual fund while the index
is not available for investment and is unmanaged. The comparison is shown for
illustrative purposes only.
- --------------------------------------------------------------------------------
HISTORICAL PERFORMANCE (unaudited)
HIGH YIELD BOND FUND -- CLASS A, B, 2 and O SHARES
Comparison of $10,000 Investment in the Fund with Salomon Smith Barney
High-Yield Market Index
- --------------------------------------------------------------------------------
[GRAPH]
SALOMON SMITH BARNEY
DATE CLASS A CLASS B CLASS 2 CLASS O HIGH YIELD MKT INDEX
2/22/95 9,525 10,000 9,900 10,000 10,000
12/95 11,101 11,573 11,461 11,676 11,421
12/96 13,535 14,023 13,874 14,248 12,710
12/97 15,298 15,731 15,565 16,157 14,386
12/98 14,219 14,215 14,356 15,042 14,903
12/99 15,219 15,228 15,301 16,145 15,161
Past performance is not predictive of future performance. Performance above
reflects returns after deduction of applicable maximum sales charge.
- --------------------------------------------------------------------------------
Portfolio Highlights#
- --------------------------------------------------------------------------------
Composition of portfolio as of December 31, 1999
[CHART]
Corporate Bonds 64%
Sovereign Bonds 25%
Loan Participations 4%
Convertible Bonds 2%
Other Assets 1%
- --------------------------------------------------------------------------------
Top Five Industries#
- --------------------------------------------------------------------------------
Media/Telecommunications
- --------------------------------------------------------------------------------
Consumer Non-Cyclicals
- --------------------------------------------------------------------------------
Basic Industries
- --------------------------------------------------------------------------------
Manufacturing
- --------------------------------------------------------------------------------
Consumer Cyclicals
================================================================================
Each of the sectors represents various industries. Media includes cable,
publishing and printing, and telecommunications. Consumer Non-Cyclicals:
consumer products, food products, bottling, gaming, healthcare,
supermarkets/drug stores, tobacco. Manufacturing: aerospace and defense,
automotive, capital goods, building products. Basic Industries: chemicals,
containers/packaging, paper and forest products, steel/metal. Consumer
Cyclicals: retail, property and discount products.
- --------------------------------------------------------------------------------
Average Annual Total Return for the Year Through December 31,1999
- --------------------------------------------------------------------------------
Class A Shares Without Sales Charges With Sales Charges*
- --------------------------------------------------------------------------------
Since Inception (2/22/95) 10.13% 9.03%
3 year 3.99% 2.30%
1 year 7.03% 1.98%
- --------------------------------------------------------------------------------
Class B Shares
- --------------------------------------------------------------------------------
Since Inception (2/22/95) 9.32% 9.04%
3 year 3.21% 2.43%
1 year 6.25% 1.45%
- --------------------------------------------------------------------------------
Class 2 Shares
- --------------------------------------------------------------------------------
Since Inception (2/22/95) 9.37% 9.15%
3 year 3.32% 2.96%
1 year 6.58% 4.56%
- --------------------------------------------------------------------------------
Class O Shares
- --------------------------------------------------------------------------------
Since Inception (2/22/95) 10.36% 10.36%
3 year 4.25% 4.25%
1 year 7.33% 7.33%
================================================================================
Portfolio holdings may vary. See page 28 for all footnotes.
10
<PAGE>
[PHOTO]
INVESTMENT OBJECTIVE AND STRATEGY
The Salomon Brothers Strategic Bond Fund seeks a high level of current income.
The Fund seeks to achieve its objective by investing in a globally diverse
portfolio of fixed-income securities. As a secondary objective, the Fund seeks
capital appreciation. Assets of the Fund may be deployed among various sectors
of the global bond markets, depending on portfolio managers' analysis of current
economic and market conditions and the relative risks and opportunities
presented in various market segments.
SALOMON BROTHERS
Strategic Bond Fund
PERFORMANCE UPDATE
For the year ended December 31, 1999, the Strategic Bond Fund's Class A shares
posted a 4.96% total return without sales charges. This compares favorably with
the negative 0.83% return for the Salomon Smith Barney Broad Investment-Grade
("BIG") Bond Index and the negative 0.82% return of the Lehman Brothers
Aggregate Bond Index. The Fund's outperformance relative to the BIG Index can be
attributed to its allocation to the high-yield and emerging market debt sectors,
which had a stellar year relative to investment-grade bonds. (The Salomon Smith
Barney BIG Bond Index includes institutionally traded U.S. Treasury Bonds,
government-sponsored bonds (U.S. Agency and supranational), mortgage-backed
securities and corporate securities. The Lehman Aggregate Bond Index is a broad
measure of the performance of taxable bonds in the U.S. market, with maturities
of at least one year.)
MARKET REVIEW AND PORTFOLIO HIGHLIGHTS
1999 proved to be a difficult year for the U.S. fixed-income markets. A strong
domestic economy, more than doubling of oil prices and a rebound in economic
activity overseas combined to force interest rates up and prices on
investment-grade bonds down across the U.S. yield curve. The Fed added to the
bond market malaise by adopting a tightening bias in May and then raising the
federal-funds rate by 75 basis points in three 25-basis-point increments to 5.5%
over the remaining seven months of the year. (The federal-funds rate is the
interest rate charged by Federal Reserve district banks with excess reserves to
banks needing overnight loans to meet reserve requirements.) Many thought that
Treasury bonds might act as a safe haven in the period leading up to Y2K;
however, this proved incorrect and the 30-year Treasury bond posted its worst
one-year return ever -- declining by 14.89%.
THE FUND MANAGERS
[PICTURE]
Peter J.Wilby, CFA, Managing Director and Senior Portfolio Manager at Salomon
Brothers Asset Management Inc, has 17 years of investment industry experience
principally in the high-yield and emerging debt markets. Mr.Wilby is primarily
responsible for day-to-day fund management of the U.S.high-yield and foreign
sovereign bond portions of the Fund.
[PICTURE]
David J.Scott, Director and Portfolio Manager at Salomon Brothers Asset
Management LTD, has 17 years of investment industry experience. SBAM LTD
provides certain advisory services to Salomon Brothers Asset Management Inc
relating to currency transactions and investments in non-dollar-denominated
securities.
[PICTURE]
Roger Lavan, Director and Portfolio Manager at Salomon Brothers Asset Management
Inc, has 15 years of investment industry experience in fixed-income
markets. Mr. Lavan is primarily responsible for day-to-day management of the
investment-grade debt portion of the Fund.
11
<PAGE>
Financial markets began 1999 under the shadow of the 1998 financial crisis.
Caution prevailed among fixed-income investors who remained overweighted in
high-quality bonds such as U.S. Treasuries. Investor fears proved to be well
founded by mid-January, when Brazil devalued its currency, the real, and saw its
interest rates rise sharply. Rather than Brazil serving as the catalyst for
another vicious round of contagion, financial markets seemed to shrug it off. In
effect, the episode became a bottoming-out event that boosted the confidence of
investors to venture out of U.S. Treasuries into higher-yielding bonds. The
Strategic Bond Fund was well positioned for the markets "flight to risk" with
average allocations during 1999 of approximately 30% and 20% to U.S. high-yield
and the emerging market debt sectors, respectively.
Rebounding from a tough 1998, emerging markets debt ("EMD") was far and away the
best-performing bond market, posting a total return of 25.99% for the year as
measured by the JP Morgan Emerging Markets Bond Index Plus ("EMBI+"). (The EMBI+
is a total return index that tracks the traded market for U.S.
dollar-denominated Brady and other sovereign restructured bonds traded in
emerging markets.) EMD benefited from an increase in global economic activity,
improving fundamentals in a number of key countries, and rising oil prices. The
improved outlook for world economic growth encouraged investors, throughout the
year, to increase commitments to emerging markets debt. The strength of the
economic recovery in Asia, an important market for Latin American exports, had a
positive effect on emerging markets debt. Evidence of cyclical recoveries in
Argentina, Brazil and Venezuela also improved the outlook for investors. Oil
price strength over the past three months (up approximately 4%) and especially
over the full year (up over 100%) continued to drive many emerging economies.
Russia, Algeria, Venezuela, Mexico and Colombia all benefit from rising oil
prices.
The high-yield market, while not nearly as strong as emerging markets debt, also
performed well relative to U.S. investment-grade bonds. High-yield bonds, as
measured by the Salomon Smith Barney High Yield Index, returned 1.73%,
outperforming investment-grade bonds by 2.56% for the year.
MARKET OUTLOOK
Our forecast for 2000 is for the Fed to tighten 75 basis points, bringing the
funds rate to 6.25%. This tightening will likely do more to flatten the yield
curve than move the overall bond market to significantly higher levels. If the
Fed is successful in offsetting rising inflation, then long-term interest rates
should start to fall toward the end of 2000 and going into 2001. We remain
optimistic on the outlook for emerging market debt and high-yield paper. EMD
should perform well as the strength in the global economy keeps commodity prices
well supported in 2000. We expect high-yield bonds to benefit from declining
default rates, strong merger and acquisition activity, wide spreads, and solid
growth coupled with low to moderate inflation in the U.S.
12
<PAGE>
STRATEGIC BOND FUND
A Strategic Approach to Identifying Bond Opportunities
The flexibility to strategically shift assets within various bond sectors helps
the Salomon Brothers Strategic Bond Fund to take advantage of changing market
conditions. Portfolio Manager Roger Lavan discusses the four main components of
the Fund as well as the benefits of a multisector approach to global bond
investing.
Q: Roger, why was the Salomon Brothers Strategic Bond Fund introduced?
We wanted to launch a portfolio that we hoped could outperform the Lehman
Brothers Aggregate Bond Index1 or the Salomon Smith Barney Broad
Investment-grade Index2, two major indices that are basically the S&P 500 of the
bond market. In managing the Portfolio, we try to achieve solid performance
versus these benchmarks with potentially less volatility.
Q: How would you characterize your investment process?
Our investment process begins when we allocate assets to four major sectors of
the bond market: U.S. investment-grade bonds, U.S. high-yield bonds, U.S. dollar
denominated emerging market debt and non-dollar government bonds.
Because these types of bonds generally do not perform in tandem, the Fund can
achieve diversification benefits from owning these different bond sectors. We
can aggressively invest in emerging market debt and high-yield bonds for their
return potential and help temper volatility by owning less risky bonds. Of
course, diversification does not mean the value of the Fund's shares will not
decrease.
Q: With the bull market in U.S. stocks still going strong, why should investors
consider bonds?
We believe most investors should have a portion of their portfolio allocated to
bonds, especially as they near retirement, when they will need income and are
less willing to risk their principal. We created the Strategic Bond Fund to be a
core bond holding for investors seeking income and a cushion to stock market
volatility.
- -------------
1 The Lehman Brothers Aggregate Bond Index ("Index") is a broad measure of
the performance of taxable bonds in the U.S. market, with maturities of at
least one year. The Index is comprised of U.S. Treasury bonds, government
agency bonds, mortgage-backed securities and corporate bonds.
2 The Salomon Smith Barney Broad Investment-grade Bond Index covers a
significant portion of the investment-grade U.S. corporate bond market.
13
<PAGE>
Q: Two final questions, Roger. How has the recent volatility in the bond market
affected your strategy? Where do you see the most compelling bond values going
forward?
We currently like emerging market debt, because we believe this market should
continue to perform well as the global economic recovery continues. Also, an
increase in commodity prices should help the economies of many emerging markets
countries.
We also think that select high-yield bonds, which have lagged in 1999 versus
many other types of investments, should do well in the future as the U.S.
economy continues to grow and Y2K concerns become a thing of the past.
Roger, thank you for speaking with us today.
14
<PAGE>
The following graph depicts the performance of the Strategic Bond Fund versus
the Salomon Smith Barney Broad Investment-Grade Bond Index2.It is important to
note that the Strategic Bond Fund is a professionally managed mutual fund while
the index is not available for investment and is unmanaged.The comparison is
shown for illustrative purposes only.
- --------------------------------------------------------------------------------
HISTORICAL PERFORMANCE (unaudited)
STRATEGIC BOND FUND -- CLASS A,B,2,and O SHARES
Comparison of $10,000 Investment in the Fund with Salomon Smith Barney Broad
Investment-Graden Bond Index
- --------------------------------------------------------------------------------
[GRAPH]
SALOMON SMITH BARNEY
BROAD INVESTMENT GRADE
DATE CLASS A CLASS B CLASS 2 CLASS O BOND INDEX
2/22/95 9,525 10,000 9,900 10,000 10,000
12/95 11,125 11,614 11,492 11,704 11,350
12/96 12,688 13,119 12,995 13,367 11,760
12/97 14,113 14,482 14,357 14,902 12,892
12/98 14,261 14,221 14,382 15,098 14,017
12/99 14,969 14,934 15,029 15,893 13,900
Past performance is not predictive of future performance. Performance above
reflects returns after deduction of applicable maximum sales charge.
- --------------------------------------------------------------------------------
PORTFOLIO HIGHLIGHTS#
- --------------------------------------------------------------------------------
Composition of portfolio as of December 31,1999
[PIE CHART]
Corporate Bonds 37%
Sovereign Bonds 22%
U.S. Government Agencies & Obligations 15%
Short-Term Obligations 12%
Collateralized Mortgage Obligations 10%
Loan Participations 4%
Portfolio holdings may vary.
- --------------------------------------------------------------------------------
Average Annual Total Returns for the Year Through December 31, 1999
- --------------------------------------------------------------------------------
Class A Shares Without Sales Charge With Sales Charges*
- --------------------------------------------------------------------------------
Since Inception (2/22/95) 9.76% 8.66%
3 Year 5.66% 3.96%
1 Year 4.96% (0.04)%
- --------------------------------------------------------------------------------
Class B Shares
- --------------------------------------------------------------------------------
Since Inception (2/22/95) 8.90% 8.61%
3 Year 4.87% 4.04%
1 Year 4.19% (0.63)%
- --------------------------------------------------------------------------------
Class 2 Shares
- --------------------------------------------------------------------------------
Since Inception (2/22/95) 8.97% 8.75%
3 Year 4.97% 4.61%
1 Year 4.49% 2.52%
- --------------------------------------------------------------------------------
Class O Shares
- --------------------------------------------------------------------------------
Since Inception (2/22/95) 10.01% 10.01%
3 Year 5.94% 5.94%
1 Year 5.26% 5.26%
================================================================================
See page 28 for all footnotes.
15
<PAGE>
[GRAPHIC]
INVESTMENT OBJECTIVE AND STRATEGY
The Salomon Brothers National Intermediate Municipal Fund seeks a high level of
current income which is exempt from regular federal income taxes. Under normal
circumstances, at least 80% of the Fund's net assets will be invested in
municipal obligations, the interest on which is exempt from regular federal
income tax. Please note that all or a portion of the Fund's income may be
subject to the federal alternative minimum tax.
- --------------------------------------------------------------------------------
THE FUND MANAGERS
- --------------------------------------------------------------------------------
[PICTURE]
Robert E. Amodeo,
CFA Director and Co-Portfolio Manager at Salomon Brothers Asset Management Inc,
has 13 years of investment industry experience. Mr. Amodeo shares responsibility
for day-to-day Fund management.
[PICTURE]
Thomas A.Croak,
Vice President and Co-Portfolio Manager at Salomon Brothers Asset Management
Inc, has 16 years of investment industry experience. Mr. Croak shares
responsibility for day-to-day Fund management.
SALOMON BROTHERS
National Intermediate
PERFORMANCE UPDATE
For the year ended December 31, 1999, the National Intermediate Municipal Fund's
Class A shares, without sales charges, had a total return of 0.18%. In
comparison, the Lehman Brothers 1-10 year Municipal Bond Index returned 0.57%
for the same time period. (The Lehman Brothers 1-10 Year Municipal Bond Index is
a broad-based, total-return index comprised of bonds which are all
investment-grade, fixed-rate securities with maturities between one and ten
years. The Index is unmanaged and is not subject to the same management and
trading expenses of a mutual fund.)
MARKET REVIEW AND PORTFOLIO HIGHLIGHTS
The bond markets encountered a wild swing in investor sentiment during the past
year as healthy optimism drove confidence at the onset, yet monetary policy
tightening concerns overshadowed bonds as the year progressed. Despite posting
negative returns, municipal bonds performed better than U.S. Treasuries during
the period. In our view, decreased supply, generous yield ratios at the
beginning of the year and an improvement in fundamental credit quality provided
support for municipal bonds.
State and local governments issued approximately $226 billion of debt during
1999 representing a 21% decline versus 1998's pace of $286 billion. The
reduction in the supply of municipal bonds was due to a precipitous drop in
refunding activity. Refunding issues eased almost 55% (year over year) while new
project funding remained virtually unchanged.
16
<PAGE>
The amount of debt outstanding in the municipal market currently exceeds $1.5
trillion, according to data published by the Federal Reserve Board of Governors.
From 1997 through 1999, the ten most populous U.S. states accounted for almost
60% of new municipal debt. Data from the U.S. Bureau of the Census indicated
that the top ten states represent about 52% of the nation's population. We think
concentrated issuance of municipal securities is likely to continue in the near
term.
Demand for municipal bonds traditionally comes from three types of investors:
retail, mutual funds and property & casualty insurance companies. Strong demand
from retail investors absorbed most of last year's supply while property and
casualty insurance companies and mutual funds generally kept a low profile.
Generous municipal yields at the beginning of the year did not attract
institutions but were enough to meet the needs of retail investors. During the
past year municipal bond yields were more correlated with taxable spread yields
but less so than with U.S. Treasury yields. In our opinion, correlation between
municipal bonds and taxable spread products may develop into a long-term trend
if U.S. Treasury supply continues to decline.
A strong national economy improved the fundamental quality of many municipal
debt issuers. Credit upgrades outpaced weakening issues by a ratio of
approximately 4 to 1, according to Standard & Poor's, a major credit reporting
agency. Impressive participation by secondary insurance providers supported
relatively narrow municipal quality spreads. Insured securities represented
almost 50% of new municipal bond issuance during the past few years.
Our philosophy of focusing on long-term fundamentals, rigorous credit analysis
and sector selection remains the foundation for how we manage the National
Intermediate Municipal Fund. We have remained short to neutral versus our
benchmark in terms of our maturity structure. As of December 31, 1999, the
Fund's long-term holdings consisted of 37 issues throughout 17 different states.
Moreover, the credit quality of the Portfolio remains high with an average
credit quality of AA, Aa according to Standard & Poor's Ratings Group and
Moody's Investors Services Inc., respectively.
In response to the relatively tight risk premium levels of lower-quality bonds,
we plan to continue investing in higher-quality municipal bonds. One sector that
did not improve fundamentally during the period was the not-for-profit health
care sector. Health care providers continued to struggle with the effects from
the Balanced Budget Act of 1997. Accordingly, yield spreads for this sector
widened appreciably during 1999.
17
<PAGE>
MARKET OUTLOOK
Looking ahead, the demands of a growing economy will call for a steady supply of
municipal debt. We expect the supply of municipal bonds to range between $200
and $250 billion during 2000.
Some municipalities are concerned about a possible reduction in sales tax
receipts due to the explosive growth of e-commerce. Many state and local
governments rely on sales tax revenue to help pay for essential services
including public safety, fire, health, education, roads and bridges. Consumers
are supposed to pay sales taxes voluntarily on items purchased from out-of-state
merchants via the Internet, but few do. Early estimates of sales tax shortfalls
from e-commerce are wide ranging. As a comparison, state officials believe that
$5 billion in taxes goes uncollected annually from mail order catalogue sales.
Internet commerce does not pose an immediate threat to either state or local
revenue bases. In the near term, surging income tax receipts generated by a
vibrant U.S. economy should take the edge off any sales tax shortfalls.
Moreover, some municipal authorities used recent surplus tax receipts to fund
reserve (i.e., "rainy day") accounts. Capital deposited into these accounts can
help mitigate future revenue shortfalls. In April 2000, a 19-member Advisory
Commission on Electronic Commerce will report to the U.S. Congress about
Internet tax issues, with the taxing of Internet commerce as the main topic of
their report. Other state and local organizations have also recently been
proactive in identifying other taxation alternatives.
The U.S. economy should remain stable this year as low unemployment and strong
consumer confidence will likely support demand for goods. Furthermore, we
believe the Fed will engineer a good balance between strong economic growth and
an acceptable rate of inflation.
18
<PAGE>
NATIONAL INTERMEDIATE MUNICIPAL FUND
The Case for Tax-Free Income
Historically, investors in higher federal tax brackets have benefited by owning
tax-exempt municipal bonds. The Salomon Brothers National Intermediate Municipal
Fund ("Fund") may be appropriate for investors seeking income exempt from
regular federal income taxes. Intermediate duration municipal mutual funds can
offer relatively less principal risk than long-term municipal bond funds while
having the potential to receive most of the income and total return of long-term
municipal bond funds. Portfolio Managers Robert Amodeo and Thomas Croak recently
talked about their investment strategy.
Q: Rob and Tom, please describe your investment process.
Our investment process begins with the Investment Policy Committee, which is
comprised of senior Salomon Brothers Asset Management ("SaBAM") portfolio
managers across various asset classes and sectors. (Robert Amodeo represents
municipal fixed income as a member of the Investment Policy Committee.)
The Investment Policy Committee's outlook for interest rate movements and the
domestic economy are the main drivers of the National Intermediate Municipal
Fund's top-down investment decisions. (Top-down refers to an investing style
that begins with an assessment of trends in the general economy, followed by
selecting those investments that will most likely benefit from those trends.)
We then employ a bottom-up approach that combines our proprietary evaluation
tools with experienced human judgement to identify relative value among various
municipal securities. (Bottom-up investing is an investing style that focuses on
the fundamental strength of individual companies and municipalities.)
Q: How do you manage the tradeoff between yield and total return in the Fund?
We seek to strike a balance between yield and total return. For example, we
might combine higher-yielding municipal securities such as student loans and
housing bonds, which have more yield potential, with municipals that we believe
possess better total return potential, such as transportation, water & sewer and
general obligation bonds.
Our portfolio management style of balancing capital appreciation with tax-exempt
income is done using a three-pronged approach focusing on duration, sector
diversification and security selection. First, we determine an appropriate
duration for the portfolio consistent with the Fund's investment objectives and
the Investment Policy Committee's economic outlook.
19
<PAGE>
We use duration to measure the relative interest rate risk for both individual
securities and the total portfolio. (Duration is the percentage change in the
price of a bond for a given change in its yield.)
We then determine an optimal mix of various sectors (i.e., transportation,
education, etc.). During this step, our experienced team of analysts identifies
trends, both demographic and economic, and recommends geographic regions and
industry sectors that they believe should provide the best value over time.
Lastly, we thoroughly evaluate the merits of all of the individual securities
under consideration.
We believe that broad diversification is a critical aspect of successful
portfolio management. We broaden our investments across sectors, geographic
regions and specific issuers. In our view, a combination of both intensive
macro- and microeconomic analysis is a prudent way to manage risk versus reward
and to tap into municipal bond investment opportunities with potentially less
risk.
For an individual investor seeking tax-exempt income, we believe owning a
municipal bond fund is the best way to go. Individual investors are often
subject to a large bid/offer spread when either buying or selling municipal
bonds whereas professional managers can own larger block sizes and can take
advantage of more efficient institutional execution. Additionally, purchasing
one bond does not give an investor the benefits of diversification that a mutual
fund can offer.
Again, maintaining broad diversification is key. A professionally managed
municipal bond fund attempts to minimize risk through diversification and also
has experienced management capable of monitoring interest rate risk and
conducting extensive credit analysis. Because the municipal bond market can be
inefficient, we think professional, active management through a diversified fund
makes sense for many investors seeking tax-exempt income. Of course,
diversification does not ensure against market loss.
Q: How has the recent volatility in bond markets affected municipal bonds?
In our opinion, 1999 was perhaps the most difficult year to manage bond
portfolios -- even more so than 1994. We began the year knowing that U.S.
Treasuries had priced in a "flight to quality" premium stemming from
international concerns and a major hedge fund setback. To us, yields were too
low and U.S. Treasuries were selling at what we believed were overinflated
premiums.
Back in September 1998, select municipal bonds were trading at 100% of U.S.
Treasuries. During 1999, municipal bonds traded in a narrow range of 92%-100% of
Treasuries, still relatively attractive versus historical averages.
20
<PAGE>
Q: How has the municipal bond market changed in recent years?
Heavy new issuance of municipal bonds in recent years combined with modest
demand for tax-exempt income are the main reasons why municipal bonds are
relatively attractive currently versus other bond asset classes. Generally,
property and casualty insurance companies and mutual funds have kept a low
profile recently and, despite their recent re-emergence, many individual
investors have remained focused on the staggering returns generated by the stock
market.
Q: Why have municipal bonds remained relatively stable despite recent bond
market turbulence?
The events in the fourth quarter of 1998 caused the entire taxable bond market
in the U.S. to virtually shut down. The exact opposite occurred in municipal
bonds, with our market experiencing the second largest year ever of tax-free new
issuance. State and local governments took advantage of low interest rates,
which produced a wave of municipal refunding activity. Investors readily absorb
the debt due to the attractiveness of tax-exempt bonds versus U.S. Treasuries.
In 1999, municipal bonds outperformed Treasuries as new issue supply declined.
Municipals also enjoyed stable to improving fundamentals. During the past five
years, improving credits outpaced weakening issues, according to Standard &
Poor's, a major credit rating agency.
Q: How do municipal bonds differ from other types of bonds?
One key difference between the municipal bond market and other bond markets is
the geographic spread, meaning that a municipal bond investor is generally much
more exposed to the economy of a particular region. Take Hawaii, a state almost
entirely dependent on tourism, mostly from Asia. The Asian crisis had a major
negative impact on the Hawaiian tourism market. While no guarantees can be made,
experienced managers can help municipal bond investors avoid undue risk and
potentially damaging overexposure from one specific region or state.
Rob and Tom, thank you for discussing your investment approach with us today.
21
<PAGE>
The following graph depicts the performance of the National Intermediate
Municipal Fund versus the Lehman Brothers 1-10 Year Municipal Bond Index.3 It is
important to note that the National Intermediate Municipal Fund is a
professionally managed mutual fund while the index is not available for
investment and is unmanaged. The comparison is shown for illustrative purposes
only.
- --------------------------------------------------------------------------------
HISTORICAL PERFORMANCE (unaudited)
NATIONAL INTERMEDIATE MUNICIPAL FUND-- CLASS A,B,2 and O SHARES
Comparison of $10,000 Investment in the Fund with Lehman Brothers Muni 1-10 Year
(Mkt Wtd) Index
- --------------------------------------------------------------------------------
[GRAPH]
LEHMAN BROTHERS MUNI
1-10 YR. MKT.
DATE CLASS A CLASS B CLASS 2 CLASS O WEIGHT INDEX
2/22/95 9,525 10,000 9,900 10,000 10,000
12/95 10,388 10,797 10,690 10,896 10,913
12/96 10,822 11,159 11,049 11,367 11,392
12/97 11,635 11,907 11,789 12,250 12,218
12/98 12,162 12,051 12,229 12,833 12,944
12/99 12,184 12,088 12,190 12,898 13,017
Past performance is not predictive of future performance. Performance above
reflects returns after deduction of applicable maximum sales charge.
- --------------------------------------------------------------------------------
Portfoilio Highlights#
- --------------------------------------------------------------------------------
Credit Quality Breakdown as of December 31,1999
[CHART]
AAA 55%
AA 12%
A 18%
BBB 12%
Cash equivalents represent 3% of the Fund's total investments.
- --------------------------------------------------------------------------------
Composition of portfolio as of December 31, 1999#
- --------------------------------------------------------------------------------
New York 25%
...........................
Indiana 11%
...........................
Illinois 11%
...........................
Pennsylvania 10%
...........................
South Carolina 7%
...........................
Texas 4%
...........................
California 4%
...........................
District of Columbia 4%
...........................
Virginia 3%
...........................
New Jersey 3%
...........................
Ohio 3%
...........................
Massachusetts 3%
...........................
Michigan 3%
...........................
Louisiana 3%
...........................
Mississippi 2%
...........................
Hawaii 2%
...........................
Florida 1%
...........................
North Carolina 1%
===========================
Portfolio holdings may vary.
- --------------------------------------------------------------------------------
Average Annual Total Returns for the Year Through December 31, 1999
- --------------------------------------------------------------------------------
Class A Shares Without Sales Charges With Sales Charge*
................................................................................
Since Inception (2/22/95) 5.20% 4.15%
3 year 4.03% 2.34%
1 year 0.18% (4.58)%
................................................................................
Class B Shares
................................................................................
Since Inception (2/22/95) 4.33% 3.98%
3 year 3.26% 2.34%
1 year (0.51)% (5.29)%
................................................................................
Class 2 Shares
................................................................................
Since Inception (2/22/95) 4.38% 4.16%
3 year 3.33% 3.00%
1 year (0.32)% (2.29)%
................................................................................
Class O Shares
................................................................................
Since Inception (2/22/95) 5.38% 5.38%
3 year 4.30% 4.30%
1 year 0.51% 0.51%
================================================================================
See page 28 for all footnotes.
22
<PAGE>
[GRAPHIC]
INVESTMENT OBJECTIVE AND STRATEGY
The Salomon Brothers U.S. Government Income Fund seeks to obtain a high level of
current income. Under normal conditions the Fund invests 100% of its net assets
in debt obligations and mortgage-backed securities issued by or guaranteed by
the U.S. government, its agencies or instrumentalities. The Fund expects to
maintain an average duration of two to four years. (Duration is a rough measure
of a Fund's sensitivity to interest rates.)
- --------------------------------------------------------------------------------
THE FUND MANAGER
- --------------------------------------------------------------------------------
[PICTURE]
Roger Lavan, Director and Portfolio Manager at Salomon Brothers Asset Management
Inc, has 15 years of investment industry experience in the fixed-income
markets. Mr. Lavan is responsible for day-to-day Fund management.
SALOMON BROTHERS
U.S. Government Income Fund
PERFORMANCE UPDATE
The U.S. Government Income Fund's Class A shares, without sales charges,
returned 1.52% for the year ended December 31, 1999. In comparison, the Salomon
Smith Barney 1-5 Year Treasury Bond Index returned 1.99% for the same time
period. The Fund's performance was due primarily to a shift in investment
strategy to shorten duration and overweight high-yielding agency mortgage
securities during the second half of 1999. (The Salomon Smith Barney 1-5 Year
Treasury Bond Index is a broad measure of the performance of short-term U.S.
Treasury securities.)
MARKET REVIEW
1999 proved to be a difficult year for the U.S. fixed-income markets. A strong
domestic economy, a more than doubling of oil prices and a rebound in economic
activity overseas combined to force interest rates up and prices on bonds down
across the U.S. yield curve. The Federal Reserve Board ("Fed") added to the bond
market malaise by adopting a tightening bias in May and then raising the
federal-funds rate by 75 basis points in three 25-basis-point increments to 5.5%
over the remaining seven months of the year. (The federal funds rate is the
interest rate charged by Federal Reserve district banks with excess reserves to
banks needing overnight loans.) Many thought that Treasury bonds might act as a
safe haven in the period leading up to Y2K; however, this proved incorrect and
the 30-year Treasury bond posted its worst one-year return ever -- declining by
14.89%.
23
<PAGE>
Financial markets began 1999 under the shadow of the 1998 financial crisis.
Caution prevailed among fixed-income investors who remained overweighted in
high-quality bonds such as U.S. Treasuries. Investor fears proved to be well
founded as by mid-January, when Brazil devalued its currency, the real, and saw
its interest rates rise sharply. Rather than Brazil serving as the catalyst for
another vicious round of contagion, financial markets seemed to shrug it off. In
effect, the episode became a bottoming event that boosted the confidence of
investors to venture out of U.S. Treasuries into higher-yielding bonds.
We began 1999 with the expectation that U.S. interest rates would remain
relatively steady, as economic growth outside the U.S. was anemic. We positioned
the fund according to this view and relative performance suffered slightly
during the first half of 1999. However, we switched strategies during the second
half of 1999. The portfolio's duration was shortened to 2.5 years from 3.5 years
and the yield was boosted significantly. This protected the fund from rising
interest rates and enable it to post a positive (albeit very modest) return for
the year.
MARKET OUTLOOK
Our forecast for 2000 is for the Fed to tighten 75 basis points, bringing the
funds rate to 6.25%. This tightening will likely do more to flatten the yield
curve than move the overall bond market to significantly higher levels. If the
Fed is successful in offsetting rising inflation, long-term interest rates
should start to fall toward the end of 2000 and going into 2001. We expect bond
market returns to improve considerably over the next year to 18 months.
- ----------------
2 Lipper rankings show a fund's one, three, five and ten-year annualized
returns (at NAV) as of a particular reporting period. Lipper also compares
a Fund's returns to the average of its peer group. The rankings are subject
to change every month. Past performance is not a guarantee of future
results. The U.S. Government Income Fund's inception date is February 22,
1995, therefore five and ten-year rankings are not available. For the one
and three-year period, there were 91 and funds in the short and
intermediate-term U.S. Government Funds.
24
<PAGE>
U.S.GOVERNMENT INCOME FUND
In Search of High Current Income
For investors seeking a more conservative fund with potentially low volatility,
the Salomon Brothers U.S. Government Income Fund's investment team employs a
disciplined, well-defined approach in managing bonds. Portfolio Manager Roger
Lavan recently shared his investment philosophy.
Q: Roger, how would you characterize the Fund's investment approach?
Our investment approach is simple: We allocate assets among U.S. government
securities. We carefully track short-term interest rates and seek to generate
low portfolio volatility. Despite three short-term interest rate increases this
year from the Fed and widespread turmoil in the bond market, the U.S. Government
Income Fund has posted positive total returns. We are pleased by the Fund's
results considering recent bond market turbulence. However, there are no
guarantees that the Fund will continue to report positive returns.
Q: How do you determine the right allocation between U.S. Treasuries and
government agency securities?
We invest more heavily in U.S. Treasuries when we expect the bond market to
rally or interest rates to go down. We increase our allocation in
mortgage-backed securities when we expect interest rate volatility to be low.
That is because mortgage-backed securities perform well when rates don't move
that much. When rates rally, people can refinance their homes, and that results
in mortgage prepayments and puts these bond prices under greater pressure.
Q: Why are U.S. government securities considered to be safe?
U.S. Treasury debt is the best credit in the world. Government securities entail
no credit risk, whereas credit problems can be quite extensive when you invest
in corporate bonds. (Credit risk is the risk that an issuer of debt securities
or a borrower may default on his obligations, or that the payment may not be
made on a negotiable instrument.) We've seen cases recently where corporate
bonds have gone down significantly because of accounting irregularities.
However, keep in mind that even though there are lower credit risks, the value
of the Fund's assets and hence the value of the Fund's shares can go down.
Mortgage-backed securities can also be considered relatively safe because they
do not involve credit risk. They are government agency securities guaranteed to
pay principal and interest should homeowners default on their mortgages.
25
<PAGE>
Q: What kind of investors should consider the Fund?
The U.S. Government Fund is designed for investors looking to help shelter their
stock market gains, new investors to the financial markets who are looking for a
little more return than a bank CD3, or investors seeking more liquidity.
Q: What strategies do you employ to add value to the Fund?
We believe we can add value by aggressively allocating assets between Treasuries
and mortgage-backed securities. Other ways we can add value are by altering the
Fund's duration or having access to inexpensive securities in what we believe
are attractive sectors that many investors might not own.
Q: Roger, as you know, mortgage-backed securities can be confusing for many
investors. How do you define mortgage-backed securities?
Mortgage-backed securities represent an ownership interest in mortgage loans
made by financial institutions. Mortgage-backed securities are created when
these loans are "pooled" by issuers or servicers for sale to investors. The
investors receive payments of interest and principal as the loans are paid off.
In selecting which securities to purchase, we employ extensive historical
quantitative analysis to anticipate prepayment patterns to identify those
securities which will pay a higher yield. This higher yield is only earned when
a homeowner does not prepay his or her mortgage. We think that our extensive
quantitative analysis is what sets us apart from many of our competitors.
Roger, thank you for speaking with us today.
- --------------
3 A CD or certificate of deposit is a document issued by a bank that
indicates a specified sum of money has been deposited. The certificate
bears a maturity date and a specified interest rate, and can be issued in
any denomination.
26
<PAGE>
The following graph depicts the performance of the U.S. Government Income Fund
versus the Salomon Smith Barney 1-5 Year Treasury Bond Index.4 It is important
to note that the U.S. Government Income Fund is a professionally managed mutual
fund while the index is not available for investment and is unmanaged. The
comparison is shown for illustrative purposes only.
- --------------------------------------------------------------------------------
HISTORICAL PERFORMANCE (unaudited)
U.S.GOVERNMENT INCOME FUND -- CLASS A,B,2 and O SHARES
Comparison of $10,000 Investment in the Fund with Salomon Smith Barney 1-5 Year
Treasury Bond Index
- --------------------------------------------------------------------------------
[GRAPH]
SALOMON SMITH BARNEY
1-5 YEAR TREASURY
DATE CLASS A CLASS B CLASS 2 CLASS O BOND INDEX
2/22/95 9,525 10,000 9,900 10,000 10,000
12/95 10,427 10,879 10,771 10,971 10,912
12/96 10,801 11,172 11,061 11,381 11,412
12/97 11,651 11,970 11,840 12,305 12,225
12/98 12,539 12,499 12,660 13,300 13,172
12/99 12,730 12,695 12,778 13,535 13,435
Past performance is not predictive of future performance. Performance above
reflects returns after deduction of applicable maximum sales charge.
- --------------------------------------------------------------------------------
Portfolio Highlights#
- --------------------------------------------------------------------------------
Composition of portfolio as of December 31,1999
[CHART]
Agency Pass Throughts 79%
Treasury & Agency Debentures 11%
Short-Term Obligations 10%
Portfolio holdings may vary.
- --------------------------------------------------------------------------------
Average Annual Total Returns for the Year Through December 31, 1999
- --------------------------------------------------------------------------------
Class A Shares Without Sales Charges With Sales Charges*
- --------------------------------------------------------------------------------
Since Inception (2/22/95) 6.16% 5.09%
3 year 5.63% 3.94%
1 year 1.52% (3.28)%
- --------------------------------------------------------------------------------
Class B Shares
- --------------------------------------------------------------------------------
Since Inception (2/22/95) 5.37% 5.04%
3 year 4.89% 3.99%
1 year 0.73% (4.05)%
- --------------------------------------------------------------------------------
Class 2 Shares
- --------------------------------------------------------------------------------
Since Inception (2/22/95) 5.39% 5.18%
3 year 4.93% 4.58%
1 year 0.93% (0.99)%
- --------------------------------------------------------------------------------
Class O Shares
- --------------------------------------------------------------------------------
Since Inception (2/22/95) 6.43% 6.43%
3 year 5.95% 5.95%
1 year 1.76% 1.76%
================================================================================
See page 28 for all footnotes.
27
<PAGE>
FOOTNOTES
1 The Salomon Smith Barney High-Yield Market Index is valued at month end
only. As a result, while the Fund's total return calculations used in this
comparison are for the period February 22, 1995 through December 31, 1999,
the Index returns are for the period March 1, 1995 through December 31,
1999.
2 The Salomon Smith Barney Broad Investment-Grade Bond Index is valued at
month end only. As a result, while the Fund's total return calculations
used in this comparison are for the period February 22, 1995 through
December 31, 1999, the Index returns are for the period March 1, 1995
through December 31, 1999.
3 The Lehman Brothers 1-10 Year Municipal Bond Index is valued at month end
only. As a result, while the Fund's total return calculations used in this
comparison are for the period February 22, 1995 through December 31, 1999,
the Index returns are for the period March 1, 1995 through December 31,
1999.
4 The Salomon Smith Barney 1-5 Year Treasury Bond Index is valued at month
end only. As a result, while the Fund's total return calculations used in
this comparison are for the period February 22, 1995 through December 31,
1999, the Index returns are for the period March 1, 1995 through December
31, 1999.
* Class A and 2 shares reflect the deduction of the maximum 4.75% and 1.00%
sales charges respectively. Class B and 2 shares reflect the maximum
contingent deferred sales charge of 5.00% and 1.00%, respectively. Class O
shares have no initial or contingent deferred sales charge.
** Return does not reflect the deduction of sales charges.
# As a % of total investments.
N/A Not available.
28
<PAGE>
GENERAL PERFORMANCE AND RANKING NOTES
Average annual total returns are based on changes in net asset value and assume
the reinvestment of all dividends, and/or capital gains distributions in
additional shares with and without the effect of the maximum sales charge (Class
A and 2) and the contingent deferred sales charge (Class B and 2). Class O
shares are only available to existing Class O shareholders. Past performance
does not guarantee future results. Investment return and principal value
fluctuate so that an investor's shares, when redeemed, may be worth more or less
than their original cost. Returns for certain Funds reflect a voluntary expense
cap imposed by Salomon Brothers Asset Management Inc to limit total Fund
operating expenses. Absent this expense cap, Fund returns would be lower.
Expense caps may be revised or terminated at any time.
29
<PAGE>
Schedules of Investments
December 31, 1999
Salomon Brothers High Yield Bond Fund
<TABLE>
- -------------------------------------------------------------------------------
<CAPTION>
Face
Amount Security Value
<C> <S> <C>
- -------------------------------------------------------------------------------
CORPORATE BONDS -- 63.8%
Basic Industries -- 8.9%
AEI Resources Holdings Inc., 10.500% due 12/15/05
$ 1,500,000 (a)................................................ $ 1,065,000
Asia Pulp & Paper International Finance, 11.750%
500,000 due 10/1/05........................................ 420,000
3,000,000 Asia Pulp & Paper, 12.000% due 12/29/49 (b)........ 1,980,000
Berry Plastics Corp.:
1,500,000 12.250% due 4/15/04................................ 1,537,500
1,750,000 12.250% due 4/15/04 (a)............................ 1,793,750
Doman Industries Ltd.:
2,375,000 8.750% due 3/15/04................................. 2,042,500
1,000,000 12.000% due 7/1/04................................. 1,042,500
1,500,000 Georgia Gulf Corp., 10.375% due 11/1/07 (a)........ 1,571,250
2,000,000 Glencore Nickel Property Ltd., 9.000% due 12/1/14.. 1,732,500
2,000,000 Huntsman Packaging Corp., 9.125% due 10/1/07....... 1,940,000
5,000,000 Indesco International Inc., 9.750% due 4/15/08..... 2,250,000
3,500,000 LTV Corp., 11.750% due 11/15/09 (a)................ 3,657,500
Lyondell Chemical Co.:
2,000,000 9.875% due 5/1/07.................................. 2,075,000
1,500,000 10.875% due 5/1/09................................. 1,560,000
Murrin Murrin Holdings Property, 9.375% due
3,000,000 8/31/07............................................ 2,715,000
3,750,000 P&L Coal Holdings Corp., 9.625% due 5/15/08........ 3,656,250
PCI Chemicals & Pharmaceuticals Inc., 9.250% due
4,000,000 10/15/07........................................... 3,090,000
3,000,000 Pindo Deli Fin Mauritius, 10.750% due 10/1/07...... 2,190,000
PT Polytama International Finance, 11.250% due
2,043,754 6/15/07 (c)........................................ 347,438
3,750,000 Radnor Holdings Inc., 10.000% due 12/1/03.......... 3,759,375
4,000,000 Republic Technology Corp., 13.750% due 7/15/09..... 2,800,000
Tjiwi Kimia International Finance Co. B.V., 10.000%
5,000,000 due 8/1/04......................................... 3,700,000
------------
46,925,563
------------
Consumer Cyclicals -- 6.5%
2,500,000 Amerking Inc., 10.750% due 12/1/06................. 2,325,000
Cole National Group:
3,300,000 9.875% due 12/31/06................................ 2,508,000
1,000,000 8.625% due 8/15/07................................. 760,000
Collins & Aikman Flooring Inc., 10.000% due
5,000,000 1/15/07............................................ 4,912,500
3,500,000 Finlay Fine Jewelery Corp., 8.375% due 5/1/08...... 3,220,000
5,000,000 HMH Properties Inc., 8.450% due 12/1/08............ 4,650,000
2,500,000 Leslie's Poolmart Inc., 10.375% due 7/15/04........ 2,237,500
3,500,000 Mattress Discounters Co., 12.625% due 7/15/07...... 3,421,250
2,000,000 Maxim Group Inc., 9.250% due 10/15/07.............. 1,800,000
5,000,000 Musicland Group, 9.875% due 3/15/08................ 4,575,000
2,000,000 Pillowtex Corp., 9.000% due 12/15/07............... 860,000
3,000,000 Prime Hospitality Corp., 9.750% due 4/1/07......... 2,925,000
------------
34,194,250
------------
Consumer Non-Cyclicals -- 10.3%
1,300,000 ALARIS Medical Systems Inc., 9.750% due 12/1/06.... 1,155,375
3,125,000 Anchor Advanced Products Inc., 11.750% due 4/1/04.. 2,687,500
5,000,000 Aztar Corp., 8.875% due 5/15/07.................... 4,850,000
3,250,000 B&G Foods Inc., 9.625% due 8/1/07.................. 2,900,625
1,298,000 Hines Horticulture Inc., 11.750% due 10/15/05...... 1,343,430
2,500,000 Horseshoe Gaming LLC., 9.375% due 6/15/07.......... 2,493,750
4,000,000 Imperial Holly Corp., 9.750% due 12/15/07.......... 2,900,000
</TABLE>
See Notes to Financial Statements.
30
<PAGE>
Schedules of Investments
(continued)
Salomon Brothers High Yield Bond Fund
<TABLE>
- -------------------------------------------------------------------------------
<CAPTION>
Face
Amount Security Value
<C> <S> <C>
- -------------------------------------------------------------------------------
Consumer Non-Cyclicals -- 10.3% (continued)
$ 2,000,000 Iowa Select Farms L.P., 10.750% due 12/1/05 (a).... $ 1,000,000
1,750,000 Isle of Capri Casions Inc., 8.750% due 4/15/09..... 1,618,750
Jafra Cosmetics International, Inc., 11.750% due
3,500,000 5/1/08............................................. 3,395,000
Nebco Evans Holdings Corp. (Zero coupon until
7,000,000 7/15/02, 12.375% thereafter), due 7/15/07.......... 910,000
4,000,000 North Atlantic Trading Co., 11.000% due 6/15/04.... 3,660,000
Park Place Entertainment Inc., 7.875% due
2,500,000 12/15/05........................................... 2,400,000
Premier International Foods Corp., 12.000% due
4,250,000 9/1/09 (a)......................................... 4,250,000
2,000,000 Pueblo Xtra International Inc., 9.500% due 8/1/03.. 1,220,000
725,000 Revlon Consumer Products Inc., 8.625% due 2/1/08... 369,750
2,500,000 Sealy Mattress Co., 9.875% due 12/15/07............ 2,475,000
Sun International Hotels Ltd., 8.625% due
2,500,000 12/15/07........................................... 2,412,500
Triarc Consumer Products Group, 10.250% due 2/15/09
5,000,000 (a)................................................ 4,787,500
Universal Hospital Services Inc., 10.250% due
3,000,000 3/1/08............................................. 2,085,000
2,929,000 Waterford Gaming LLC., 9.500% due 3/15/10 (a)...... 2,885,065
3,000,000 Winsloew Furniture Inc., 12.750% due 8/15/07 (a)... 2,715,000
------------
54,514,245
------------
Data Technology/Information Services -- 1.2%
Jordan Telecommunications Products (Zero coupon
6,000,000 until 8/1/00, 11.750% thereafter), due 4/1/09 (a).. 6,352,500
------------
Energy -- 3.6%
3,000,000 Bellwether Exploration, 10.875% due 4/1/07......... 2,752,500
3,000,000 Benton Oil & Gas Co., 11.625% due 5/1/03........... 2,100,000
1,500,000 Clark Refining & Marketing, 8.875% due 11/15/07.... 907,500
Companhia Energetica De Sao Paulo, 9.125% due
3,000,000 6/26/07 (b)........................................ 2,835,000
5,000,000 Costilla Energy Inc., 10.250% due 10/1/06.......... 1,475,000
1,000,000 Grey Wolf Inc., 8.875% due 7/1/07.................. 910,000
5,000,000 Lomak Petroleum Inc., 8.750% due 1/15/07........... 4,562,500
2,000,000 Northern Offshore Asia, 10.000% due 5/15/05........ 1,165,000
3,500,000 United Refining Co., 10.750% due 6/15/07........... 2,275,000
------------
18,982,500
------------
Financial Services -- 4.2%
3,250,000 Airplanes Pass-Through Trust, 10.875% due 3/15/19.. 2,813,233
3,750,000 Avis Rent A Car, 11.000% due 5/1/09................ 3,965,625
Contifinancial Corp.:
2,250,000 7.500% due 3/15/02................................. 270,000
2,000,000 8.375% due 8/15/03................................. 240,000
3,750,000 8.125% due 4/1/08.................................. 450,000
1,500,000 DVI Inc., 9.875% due 2/1/04........................ 1,475,625
Imperial Credit Industries Inc., 9.875% due
1,000,000 1/15/07............................................ 801,250
2,000,000 Intertek Finance, 10.250% due 11/1/06.............. 1,870,000
4,500,000 Metris Companies Inc., 10.125% due 7/15/06......... 4,201,875
Morgan Stanley Aircraft Finance, Series 1A, Class
3,000,000 D1, 8.700% due 3/15/23............................. 2,580,000
1,250,000 Nationwide Credit Inc., 10.250% due 1/15/08........ 762,500
3,000,000 Williams Scotsman Inc., 9.875% due 6/1/07.......... 2,910,000
------------
22,340,108
------------
Housing Related -- 0.1%
American Architecture Products Corp., 11.750% due
1,000,000 12/1/07............................................ 287,500
------------
</TABLE>
See Notes to Financial Statements.
31
<PAGE>
Schedules of Investments
(continued)
Salomon Brothers High Yield Bond Fund
<TABLE>
- -------------------------------------------------------------------------------
<CAPTION>
Face
Amount Security Value
<C> <S> <C>
- -------------------------------------------------------------------------------
Manufacturing -- 8.1%
$ 2,500,000 Advance Stores Co. Inc., 10.250% due 4/15/08....... $ 2,175,000
1,000,000 Alvey Systems Inc., 11.375% due 1/31/03............ 1,035,000
American Axle & Manufacturing Holdings, Inc.,
3,000,000 9.750% due 3/1/09.................................. 3,030,000
Axiohm Transaction Solutions Inc., 9.750% due
5,000,000 10/1/07 (d)(e)..................................... 1,150,000
Breed Technologies Inc., 9.250% due 4/15/08
4,000,000 (d)(e)............................................. 120,000
5,000,000 Blount Inc., 13.000% due 8/1/09 (a)................ 5,275,000
3,250,000 Foamex International L.P., 9.875% due 6/15/07...... 2,738,125
4,000,000 Gentek Inc., 11.000% due 8/1/09 (a)................ 4,160,000
Hayes Lemmerz International Inc., 8.250% due
2,500,000 12/15/08........................................... 2,300,000
High Voltage Engineering Corp., 10.500% due
3,750,000 8/15/04............................................ 3,318,750
International Utility Structures Inc., 10.750% due
875,000 2/1/08............................................. 730,625
3,750,000 JH Heafner Co. Inc., 10.000% due 5/15/08........... 3,431,250
Jordan Industries, Inc. (Zero coupon until 4/1/02,
2,010,483 11.750% thereafter), due 4/1/09.................... 1,367,128
1,000,000 Oxford Automotive Inc., 10.125% due 6/15/07........ 945,000
2,000,000 Packard Bioscience Co., 9.375% due 3/1/07.......... 1,745,000
3,500,000 Stellex Industries Inc., 9.500% due 11/1/07........ 2,524,375
4,000,000 Tenneco Automotive Inc., 11.625% due 10/15/09 (a).. 4,095,000
ZSC Specialty Chemicals PLC, 11.000% due 7/1/99
2,500,000 (a)................................................ 2,600,000
------------
42,740,253
------------
Media & Telecommunications -- 13.6%
Adelphia Communications Corp.:
2,000,000 10.500% due 7/15/04................................ 2,092,500
1,750,000 9.875% due 3/1/07.................................. 1,795,937
2,250,000 Advanstar Communications Inc., 9.250% due 5/1/08... 2,109,375
Avalon Cable Holdings (Zero coupon until 12/1/03,
5,000,000 11.875% thereafter), due 12/1/08................... 3,287,500
2,250,000 Centennial Cellular Corp., 10.750% due 12/15/08.... 2,424,375
1,500,000 Chancellor Media Corp., 9.375% due 10/1/04......... 1,550,625
Charter Communications Holdings, LLC., (Zero coupon
5,000,000 until 4/1/04, 9.920% thereafter) due 4/1/11........ 2,950,000
Citadel Broadcasting:
2,000,000 10.250% due 7/1/07................................. 2,120,000
1,000,000 9.250% due 11/15/08................................ 1,012,500
5,000,000 CSC Holdings Inc., 10.500% due 5/15/16............. 5,575,000
Diamond Cable Communications (Zero coupon until
2,000,000 12/15/00, 11.750% thereafter), due 12/15/05........ 1,900,000
Hollinger International Publishing Inc.:
1,000,000 9.250% due 2/1/06.................................. 992,500
4,000,000 9.250% due 3/15/07................................. 3,970,000
ICG Holdings Inc.:
Zero Coupon until 9/15/00 13.500% thereafter due
2,250,000 5/1/01............................................. 1,710,000
Zero Coupon until 9/15/00 13.500% thereafter due
2,500,000 9/15/05............................................ 2,175,000
Intermedia Communications of Florida (Zero coupon
3,000,000 until 5/15/01, 12.500% thereafter), due 9/15/05.... 2,670,000
Lin Holdings Co., (Zero coupon until 3/1/03,
5,000,000 10.000% thereafter), due 3/1/08.................... 3,412,500
Nextel Communications Inc., (Zero coupon until
11,000,000 10/31/02, 9.750% thereafter) due 10/31/07.......... 7,892,500
NTL Inc.(Zero coupon until 2/1/01, 11.500%
3,000,000 thereafter) due 2/1/06............................. 2,715,000
2,500,000 Orange PLC., 9.000% due 6/1/09..................... 2,656,250
Price Communications Wireless, Inc., 9.125% due
2,500,000 12/15/06........................................... 2,562,500
1,949,000 Sun Media Corp., 9.500% due 2/15/07................ 1,939,255
Telewest Communications PLC:
Zero coupon until 10/1/00, 11.000% thereafter due
3,250,000 10/1/07............................................ 3,038,750
Zero Coupon until 4/15/04, 9.250% thereafter due
1,875,000 4/15/09 (a)........................................ 1,192,969
1,000,000 Transwestern Publishing Co., 9.625% due 11/15/07... 1,000,000
</TABLE>
See Notes to Financial Statements.
32
<PAGE>
Schedules of Investments
(continued)
Salomon Brothers High Yield Bond Fund
<TABLE>
- -------------------------------------------------------------------------------
<CAPTION>
Face
Amount Security Value
<C> <S> <C>
- -------------------------------------------------------------------------------
Media & Telecommunications -- 13.6% (continued)
United International Holdings (Zero coupon until
$ 6,000,000 2/15/03, 10.750% thereafter) due 2/15/08........... $ 3,840,000
3,250,000 World Access Inc., 13.250% due 1/15/08............. 2,941,250
------------
71,526,286
------------
Services & Other -- 4.9%
Allied Waste North America Inc., 10.000% due 8/1/09
3,250,000 (a)................................................ 2,908,750
2,500,000 COMFORCE Operating Inc., 12.000% due 12/1/07....... 1,650,000
3,200,000 Dyncorp Inc., 9.500% due 3/1/07.................... 2,864,000
3,000,000 Employee Solutions Inc., 10.000% due 10/15/04...... 1,815,000
3,250,000 Federal Data Corp., 10.125% due 8/1/05............. 2,340,000
1,000,000 Iron Mountain Inc., 10.125% due 10/1/06............ 1,025,000
3,000,000 Loomis Fargo & Co., 10.000% due 1/15/04............ 2,955,000
4,000,000 Pierce Leahy Corp., 11.125% due 7/15/06............ 4,280,000
4,500,000 Protection One, Inc., 8.125% due 1/15/09 (a)....... 2,171,250
4,000,000 Safety-Kleen Corp., 9.250% due 6/1/08.............. 3,970,000
------------
25,979,000
------------
Transportation -- 2.4%
Atlantic Express Transportation, 10.750% due
2,000,000 2/1/04............................................. 1,950,000
2,500,000 Holt Group, 9.750% due 1/15/06..................... 1,687,500
1,000,000 Teekay Shipping, 8.320% due 2/1/08................. 900,000
TFM S.A. de C.V. (Zero coupon until 6/15/02,
6,500,000 11.750% thereafter) due 6/15/09.................... 4,176,250
4,500,180 Viacao Aerea Riograndens, 9.600% due 2/10/05....... 3,735,149
------------
12,448,899
------------
TOTAL CORPORATE BONDS
(Cost -- $394,140,162)............................. 336,291,104
------------
CONVERTIBLE BONDS -- 1.7%
5,000,000 Quantum Corp., 7.000% due 8/1/04................... 3,800,000
32,500,000 Sunbeam Corp., zero coupon due 3/25/18 (a)......... 5,037,500
------------
TOTAL CONVERTIBLE BONDS
(Cost -- $12,624,061).............................. 8,837,500
------------
SOVEREIGN BONDS -- 29.8%
Argentina -- 4.8%
Republic of Argentina,
22,450,000 FRB, 6.8125% due 3/31/05 (b)....................... 2,616,900
2,860,000 11.750% due 4/7/09................................. 22,618,375
------------
25,235,275
------------
Brazil -- 5.8%
Federal Republic of Brazil:
7,562,212 C Bond, 8.000% due 4/15/14 (c)..................... 5,690,565
7,687,000 14.500% due 10/15/09............................... 8,536,413
12,000,000 FLIRB, Series L, 5.000% due 4/15/09 (b)............ 8,940,000
1,500,000 NMB, Series L, 7.000% due 4/15/09 (b).............. 1,222,500
7,947,591 MYDFA, 6.8125% due 9/15/07 (b)..................... 6,377,942
------------
30,767,420
------------
Bulgaria -- 2.2%
Republic of Bulgaria, FLIRB, Series A, Bearer,
15,750,000 2.750% due 7/28/12 (b)............................. 11,379,375
------------
</TABLE>
See Notes to Financial Statements.
33
<PAGE>
Schedules of Investments
(continued)
Salomon Brothers High Yield Bond Fund
<TABLE>
- -------------------------------------------------------------------------------
<CAPTION>
Face
Amount Security Value
<C> <S> <C>
- -------------------------------------------------------------------------------
Colombia -- 1.8%
Republic of Colombia:
$ 2,500,000 7.270% due 6/15/03 (a)(b).......................... $ 2,275,000
7,400,000 11.422% due 8/13/05 (b)............................ 7,159,500
------------
9,434,500
------------
Croatia -- 0.8%
Republic of Croatia, Series B, 6.456% due 7/31/06
4,759,923 (b)................................................ 4,391,030
------------
Ecuador -- 0.3%
Republic of Ecuador, Bearer, Par Bond, 4.000%,
5,600,000 2/28/25 (b) (d) (e)................................ 1,789,034
------------
Ivory Coast -- 1.0%
Republic of Ivory Coast, FLIRB, 2.000% due 3/29/18
28,350,000 (b)................................................ 5,244,750
------------
Mexico -- 1.5%
6,850,000 United Mexican States, 11.375% due 9/15/16......... 7,749,063
------------
Peru -- 1.6%
12,200,000 Republic of Peru, PDI, 4.500%, 3/7/17 (b).......... 8,372,250
------------
Russia -- 4.7%
Russia, Federation:
30,510,000 11.750% due 6/10/03................................ 23,416,425
1,725,000 11.750% due 6/10/03 (a)............................ 1,323,937
------------
24,740,362
------------
Venezuela -- 5.3%
Republic of Venezuela:
15,234,000 13.625% due 8/15/18................................ 13,634,430
1,367,000 9.250% due 9/15/27................................. 909,055
13,749,890 FLIRB, Series A, 6.875% due 3/31/07 (b)............ 10,862,413
3,392,830 FLIRB, Series B, 6.875% due 3/31/07 (b)............ 2,680,336
------------
28,086,234
------------
TOTAL SOVEREIGN BONDS
(Cost -- $143,555,669)............................. 157,189,293
------------
LOAN PARTICIPATIONS (f) -- 3.7%
Jamaica, Tranche B, 6.875% due 11/15/04 (Chase
1,125,000 Manhattan Bank) (b)................................ 956,250
4,105,356 Kingdom of Morocco, Tranche A, 6.8435% due 1/1/09
(J.P. Morgan Securities, Lehman Brothers &
Bank of Boston) (b)............................... 3,746,138
The People's Democratic Republic of Algeria:
Tranche A, 7.5000% due 3/4/00 (Chase Manhattan
1,979,546 Bank) (b).......................................... 1,959,750
Tranche 1, 6.8125% due 9/4/06 (Chase Manhattan
6,902,273 Bank) (b).......................................... 5,332,006
Tranche 3, 6.8125% due 3/4/10 (Chase Manhattan Bank
10,000,000 & J.P. Morgan Securities) (b)...................... 7,175,000
------------
TOTAL LOAN PARTICIPATIONS
(Cost -- $18,788,018).............................. 19,169,144
------------
<CAPTION>
Shares
------
<C> <S> <C>
COMMON STOCK (d) -- 0.0%
10,212 World Access Inc. (Cost -- $181,931)............... 196,581
------------
</TABLE>
See Notes to Financial Statements.
34
<PAGE>
Schedules of Investments
(continued)
Salomon Brothers High Yield Bond Fund
<TABLE>
- -------------------------------------------------------------------------------
<CAPTION>
Shares Security Value
<C> <S> <C>
- -------------------------------------------------------------------------------
PREFERRED STOCK -- 0.3%
California Federal Capital, Series A,
80,000 9.125%....................................... $ 1,805,000
TCR Holding Corp:
9,787 Class B (d).................................. 98
5,383 Class C (d).................................. 54
14,191 Class D (d).................................. 142
29,362 Class E (d).................................. 294
------------
TOTAL PREFERRED STOCK
(Cost -- $2,003,490)......................... 1,805,588
------------
<CAPTION>
Warrants
--------
<C> <S> <C>
WARRANTS (d) -- 0.6%
4,000 Glasstech, expires 6/30/04................... 2,000
900 In Flight Phone, expires 8/31/02............. --
31,611 United Mexican States, expires 2/18/00....... 3,161,100
2,000 rights Terex Stock Appreciation, expires 5/15/02.... 40,000
3,000 Winsloew Furniture Corp., expires 1/1/01..... 157,500
750 Wireless One, expires 10/19/00............... 187
------------
TOTAL WARRANTS
(Cost -- $1,468,948)......................... 3,360,787
------------
<CAPTION>
Contracts
---------
<C> <S> <C>
PURCHASED PUT OPTIONS (d) -- 0.0%
Hong Kong Dollar, Exercise price $7.8025 HKD,
660,000 expires 1/20/00 (Cost -- $511,800)........... 39,600
------------
SUB-TOTAL INVESTMENTS
(Cost--$573,274,079)......................... 526,889,597
------------
<CAPTION>
Face
Amount
------
<C> <S> <C>
REPURCHASE AGREEMENTS -- 0.1%
$ 366,000 State Street Bank, 3.000% due 1/3/00;
Proceeds at maturity -- $366,092; (Fully
collateralized by U.S. Treasury Strip,
12.750% due 11/1/00; Market value --
$378,813) (Cost -- $366,000)................ 366,000
------------
TOTAL INVESTMENTS -- 100%
(Cost -- $573,640,079*)...................... $527,255,597
============
</TABLE>
- ------
(a) Security is exempt from registration under Rule 144A of the Securities Act
of 1933. This security may be resold in transactions that are exempt from
registration, normally to qualified institutional buyers.
(b) Interest rate shown reflects current rate on instrument with variable rate
or step coupon rate.
(c) Payment-in-kind security for which all or part of the interest earned may
be paid in additional bonds.
(d) Non-income producing security.
(e) Security is currently in default.
(f) Participation interest was aquired through the financial institutions indi-
cated parenthetically.
* Aggregate cost for Federal income tax purposes is substantially the same.
Abbreviations used in this schedule:
C Bond -- Capitalization Bond
FLIRB-- Front-Loaded Interest Reduction Bonds.
FRB-- Floating Rate Bond.
NMB-- New Money Bond.
PDI-- Past Due Interest.
See Notes to Financial Statements.
35
<PAGE>
Schedules of Investments
(continued)
Salomon Brothers Strategic Bond Fund
<TABLE>
- -------------------------------------------------------------------------------
<CAPTION>
Face
Amount(a) Security Value
<C> <S> <C>
- -------------------------------------------------------------------------------
CORPORATE BONDS -- 36.5%
Basic Industries -- 5.6%
250,000 Algoma Steel Corp., 12.375%, due 7/15/05.......... $ 236,250
250,000 Berry Plastics Corp., 12.250% due 4/15/04......... 256,250
250,000 Doman Industries LTD., 8.750% due 3/15/04......... 215,000
250,000 Huntsman Corp., 9.500% due 7/1/07 (g)............. 238,750
250,000 Huntsman Packaging Corp., 9.125% due 10/1/07...... 242,500
1,000,000 Hylsa S.A de C.V., 9.250% due 9/15/07............. 892,368
250,000 Indesco International Inc., 9.750% due 4/15/08.... 112,500
250,000 LTV Corp., 11.750% due 11/15/09 (g)............... 261,250
250,000 Lyondell Chemicals Co., 10.875% due 5/1/09........ 260,000
250,000 Millar Western Forest, 9.875% due 5/15/08......... 250,000
250,000 Murrin Murrin Holdings Property, 9.375% due
8/31/07.......................................... 226,250
500,000 Octel Development PLC, 10.000% due 5/1/06......... 515,000
225,000 P & L Coal Holdings Corp., 9.625% due 5/15/08..... 219,375
250,000 Phillip Brothers Chemical, 9.875% due 6/1/08...... 220,313
250,000 Radnor Holdings Inc., 10.000% due 12/1/03......... 250,625
300,000 Raytheon Co., 6.150% due 11/1/08.................. 265,500
500,000 Repap New Brunswick, 10.625% due 4/15/05.......... 462,500
500,000 Republic Technology Corp., 13.750% due 7/15/09.... 350,000
500,000 United Industries Corp., 9.875% due 4/1/09........ 457,500
500,000 ZSC Speciality, 11.000% due 7/1/09 (g)............ 520,000
------------
6,451,931
------------
Consumer Cyclicals -- 4.9%
500,000 Advance Stores Co. Inc., 10.250% due 4/15/08...... 435,000
500,000 Ameriking Inc., 10.750% due 12/1/06............... 465,000
400,000 Archibald Candy Corp., 10.250% due 7/1/04......... 389,000
375,000 Avis Rent A Car, 11.000% due 5/1/09............... 396,563
250,000 Cole National Group, 8.625% due 8/15/07........... 190,000
250,000 Collins & Aikman Flooring Inc., 10.000% due
1/15/07.......................................... 245,625
350,000 HMH Properties Inc., 7.875% due 8/1/08............ 313,250
500,000 Mattress Discounters Co., 12.625% due 7/15/07..... 488,750
500,000 Maxim Group Inc., 9.250% due 10/15/07............. 450,000
500,000 Musicland Group, 9.875% due 3/15/08............... 457,500
375,000 Pillowtex Corp., 9.000% due 12/15/07.............. 161,250
250,000 Prime Hospitality Corp., 9.750% due 4/1/07........ 243,750
250,000 Simmons Co., 10.250% due 3/15/09.................. 242,500
550,000 Staples Inc., 7.125% due 8/15/07.................. 528,000
300,000 Sun International Hotel, 8.625% due 12/15/07...... 282,000
500,000 Worldtex Inc., 9.625% due 12/15/07................ 407,500
------------
5,695,688
------------
Consumer Non-Cyclicals -- 4.5%
250,000 Ameriserve Foods, 10.125% due 7/15/07............. 90,000
250,000 Delta Beverage Group, 9.750% due 12/15/03......... 247,500
250,000 French Fragrances, Inc., 10.375% due 5/15/07...... 242,500
350,000 Harrahs Operating, 7.875% due 12/15/05............ 337,750
375,000 Home Interiors, 10.125% due 6/1/08................ 320,625
375,000 Horseshoe Gaming LLC, 9.375% due 6/15/07.......... 374,063
375,000 Imperial Holly Corp., 9.750% due 12/15/07......... 271,875
500,000 Iowa Select Farms, L.P., 10.750% due 12/1/05 (g).. 250,000
250,000 Mail-Well Corp., 8.750% due 12/15/08.............. 237,500
</TABLE>
See Notes to Financial Statements.
36
<PAGE>
Schedules of Investments
(continued)
Salomon Brothers Strategic Bond Fund
<TABLE>
- -------------------------------------------------------------------------------
<CAPTION>
Face
Amount(a) Security Value
<C> <S> <C>
- -------------------------------------------------------------------------------
Consumer Non-Cyclicals -- 4.5% (continued)
250,000 Majestic Star, 10.875% due 7/1/06.............. $ 243,750
150,000 Mohegan Tribal Gaming, 8.750% due 1/1/09....... 149,625
375,000 Nebco Evans Holdings Corp., (Zero coupon until
7/15/02, 12.375% thereafter) due 7/15/07...... 48,750
250,000 North Atlantic Trading, 11.000% due 6/15/04.... 228,750
250,000 Orange PLC, 9.000% due 6/1/09.................. 265,625
250,000 Park Place Entertainment Inc., 7.875% due
12/15/05...................................... 240,000
500,000 Premier International Foods Corp., 12.000% due
9/1/09 (g).................................... 500,000
190,000 Pueblo Xtra International Inc., 9.500% due
8/1/03........................................ 115,900
50,000 Revlon Consumer Products Inc., 8.625% due
2/1/08........................................ 25,500
375,000 Universal Hospital Services Inc., 10.250% due
3/1/08........................................ 260,625
345,000 Waterford Gaming LLC, 9.500% due 3/15/10 (g)... 339,825
500,000 Winsloew Furniture Inc., 12.750% due 8/15/07
(g)........................................... 452,500
------------
5,242,663
------------
Energy -- 1.3%
200,000 Benton Oil & Gas Co., 11.625% due 5/1/03....... 140,000
250,000 Clark USA, 10.875% due 12/1/05................. 112,500
500,000 Continental Resources Inc., 10.250% due
8/1/08........................................ 437,500
500,000 Costilla Energy Inc., 10.250% due 10/1/06
(d)(f)........................................ 147,500
250,000 Frontier Oil Corp., 9.125% due 2/15/06......... 226,250
250,000 Plains Resources, 10.250% due 3/15/06.......... 243,750
250,000 Plains Resources, 10.250% due 3/15/06 (g)...... 243,750
------------
1,551,250
------------
Financial Services -- 4.0%
500,000 Airplanes Pass-Through Trust, 10.875% due
3/15/19....................................... 432,805
450,000 Bank of America Corp., 6.625% due 6/15/04...... 439,875
Contifinancial Corp.:
250,000 7.500% due 3/15/02............................. 30,000
500,000 8.375% due 8/15/03............................. 60,000
125,000 8.125% due 4/1/08.............................. 15,000
600,000 Countrywide Home Loan Corp., 6.250% due
4/15/09....................................... 539,250
637,000 CAD Credit Suisse FB Finance Guernsey, Zero coupon
due 2/1/00.................................... 437,949
500,000 DVI Inc., 9.875% due 2/1/04.................... 491,875
600,000 PLN European Investment Bank, 10.500% due 1/25/01.. 137,101
KFW International Finance Corp.:
1,400,000 PLN 16.300% due 6/24/03............................ 366,908
40,000,000 JPY 2.050% due 9/21/09............................. 402,496
210,000 Merrill Lynch & Co., Inc., 6.000% due
11/15/04...................................... 198,975
500,000 Metris Companies Inc., 10.125% due 7/15/06..... 466,875
190,000 PLN Nordic Investment Bank, 17.750% due 4/15/02.... 48,853
400,000 Paine Webber Group, 7.750% due 9/1/02.......... 402,000
200,000 Spieker Properties Inc., 7.250% due 5/1/09..... 186,250
------------
4,656,212
------------
Housing Related -- 0.7%
250,000 CB Richard Ellis Inc., 8.875% due 6/1/06....... 226,250
250,000 Forest City Enterprises Inc., 8.500% due
3/15/08....................................... 234,688
375,000 Panolam Industries International, 11.500% due
2/15/09 (g)................................... 385,313
------------
846,251
------------
</TABLE>
See Notes to Financial Statements.
37
<PAGE>
Schedules of Investments
(continued)
Salomon Brothers Strategic Bond Fund
<TABLE>
- -------------------------------------------------------------------------------
<CAPTION>
Face
Amount(a) Security Value
<C> <S> <C>
- -------------------------------------------------------------------------------
Manufacturing -- 4.9%
250,000 Alvey Systems Inc., 11.375% due 1/31/03........... $ 258,750
375,000 American Axle & Manufacturing Holdings Inc.,
9.750% due 3/1/09................................ 378,750
300,000 Axiohm Transaction Solution Inc., 9.750% due
10/1/07 (d)(f)................................... 69,000
500,000 Blount Inc., 13.000% due 8/1/09 (g)............... 527,500
500,000 Breed Technologies Inc., 9.250% due 4/15/08
(d)(f)........................................... 15,000
250,000 Cabot Safety Corp., 12.500% due 7/15/05........... 258,750
500,000 Foamex L.P., 9.875% due 6/15/07................... 421,250
500,000 Gentek Inc., 11.000% due 8/1/09 (g)............... 520,000
250,000 Hexcel Corp., 9.750% due 1/15/09.................. 210,000
500,000 J.L. French, 11.500% due 6/1/09................... 505,000
Jordan Industries Inc.:
125,000 10.375% due 8/1/07................................ 125,625
402,096 Zero coupon until 4/1/02, (11.750% thereafter) due
4/1/09........................................... 273,426
250,000 Key Plastics Inc., 10.250% due 3/15/07............ 117,500
335,000 Motors & Gears Inc., 10.750% due 11/15/06......... 322,019
250,000 Neenah Corp., 11.125% due 5/1/07.................. 232,500
250,000 Packard Bioscience Inc., 9.375% due 3/1/07........ 218,125
125,000 Polymer Group, Inc., 8.750% due 3/1/08............ 121,250
250,000 Stellex Industries Inc., 9.500% due 11/1/07....... 180,313
500,000 Tenneco Inc., 11.625% due 10/15/09 (g)............ 511,875
400,000 TRW Inc., 6.450% due 6/15/01...................... 395,000
------------
5,661,633
------------
Media & Telecommunications -- 6.2%
Adelphia Communications Corp.:
17,091 9.500% due 2/15/04 (b)............................ 16,835
150,000 10.500% due 7/15/04............................... 156,938
250,000 7.875% due 5/1/09................................. 225,625
750,000 Avalon Cable Holdings (Zero coupon until 12/1/03,
11.875% thereafter) due 12/1/08.................. 493,125
500,000 Capstar Broadcasting Corp., 9.250% due 7/1/07..... 506,875
Century Communications:
500,000 8.375% due 12/15/07............................... 475,000
500,000 Zero coupon bond due 1/15/08...................... 222,500
750,000 Charter Communications Holdings LLC (Zero coupon
until 4/1/04, 9.920% thereafter) due 4/1/11...... 442,500
250,000 Diamond Cable Communications (Zero coupon until
12/15/00, 11.750% thereafter) due 12/15/05....... 237,500
500,000 Energis PLC, 9.750% due 6/15/09................... 520,000
375,000 Falcon Holding Group Inc., 8.375% due 4/15/10..... 378,750
275,000 Hollinger International Publishing Inc., 9.250%
due 2/1/06....................................... 272,938
350,000 ICG Holdings Group Inc., (Zero coupon until
9/15/00, 13.500% thereafter) due 9/15/05......... 304,500
250,000 Intermedia Communications Inc., 8.600% due
6/1/08........................................... 231,250
500,000 Jordan Telecommunications Products Inc., 9.875%
due 8/1/07....................................... 540,000
500,000 Lin Holdings Co. (Zero coupon until 3/1/03,
10.000% thereafter) due 3/1/08................... 341,250
600,000 Nextel Communications Inc., (Zero coupon until
2/15/03, 9.950% thereafter) due 2/15/08.......... 424,500
325,000 NTL Inc., (Zero coupon until 2/1/01, 11.500%
thereafter) due 4/15/05.......................... 294,125
300,000 Sprint Capital Corp., 6.500% due 11/15/01......... 297,375
450,000 Telewest Communication PLC (Zero coupon until
10/1/00, 11.000% thereafter) due 10/1/07......... 420,750
525,000 United International Holdings (Zero coupon until
2/15/03, 10.750% thereafter) due 2/15/08......... 336,000
------------
7,138,336
------------
</TABLE>
See Notes to Financial Statements.
38
<PAGE>
Schedules of Investments
(continued)
Salomon Brothers Strategic Bond Fund
<TABLE>
- -------------------------------------------------------------------------------
<CAPTION>
Face
Amount(a) Security Value
<C> <S> <C>
- -------------------------------------------------------------------------------
Services & Other -- 3.3%
375,000 Allied Waste North America Inc., 7.875% due
1/1/09........................................... $ 332,813
325,000 Comdisco, Inc., 6.000% due 1/30/02................ 314,438
250,000 Dyncorp Inc., 9.500% due 3/1/07................... 223,750
375,000 Integrated Electric Services, 9.375% due 2/1/09... 372,188
Iron Mountain Inc.:
250,000 10.125% due 10/1/06............................... 256,250
125,000 8.750% due 9/30/09................................ 120,938
500,000 Loomis Fargo & Co., 10.000% due 1/15/04........... 492,500
250,000 Marsulex Inc., 9.625% due 7/1/08.................. 240,000
300,000 Pierce Leahy Corp., 8.125% due 5/15/08............ 277,500
250,000 Primark, Corp., 9.250% due 12/15/08............... 234,063
350,000 Protection One Inc., 8.625% due 1/15/09 (g)....... 168,875
500,000 Safety-Kleen, Corp., 9.250% due 5/15/09........... 477,500
450,000 Service Corp. International, 6.000% due 12/15/05.. 340,875
------------
3,851,690
------------
Utilties -- 0.2%
250,000 GTE Corp., 6.940% due 4/15/28..................... 225,938
------------
Transportation -- 0.9%
250,000 Enterprise Shipholding Inc., 8.875% due 5/1/08.... 150,000
500,000 Holt Group, 9.750% due 1/15/06.................... 337,500
400,000 TFM S.A. de C.V. (Zero Coupon until 6/15/02,
11.750% thereafter) due 6/15/09.................. 257,000
375,015 Viacao Aerea Riograndens, 9.600% due 2/10/05...... 311,263
------------
1,055,763
------------
TOTAL CORPORATE BONDS
(Cost -- $47,943,069)............................. 42,377,355
------------
CONVERTIBLE CORPORATE BONDS -- 0.3%
Media & Telecommunications -- 0.3%
500,000 Quantum Corp., 7.000% due 8/1/04 (Cost --
$406,188)....................................... 380,000
------------
SOVEREIGN BONDS -- 21.8%
Argentina -- 2.4%
Republic of Argentina:
500,000 11.000% due 12/4/05............................... 493,750
2,300,000 11.375 due 1/30/17................................ 2,292,525
------------
2,786,275
------------
Brazil -- 4.5%
Federal Republic of Brazil:
1,269,738 C Bond, 8.000% due 4/15/14 (b).................... 955,479
470,000 EI Bond, 6.9375% due 4/15/06 (j).................. 413,600
569,000 14.500% due 10/15/09.............................. 631,875
4,000,000 NMB, 7.000% due 4/15/09 (j)....................... 3,260,000
------------
5,260,954
------------
Bulgaria -- 1.0%
1,400,000 Republic of Bulgaria, IAB, 6.500% due 7/28/11
(j).............................................. 1,109,500
------------
Ecuador -- 0.2%
800,000 Republic of Ecuador, Par Bond, 4.000% due 2/28/25
(f)(j)........................................... 255,577
------------
</TABLE>
See Notes to Financial Statements.
39
<PAGE>
Schedules of Investments
(continued)
Salomon Brothers Strategic Bond Fund
<TABLE>
- -------------------------------------------------------------------------------
<CAPTION>
Face
Amount(a) Security Value
<C> <S> <C>
- -------------------------------------------------------------------------------
Germany -- 1.2%
290,000 EUR Bundesrepublic Deutschland, 5.625% due 1/4/28.. $ 277,740
850,000 EUR Bundesobligation, 5.875% due 5/15/00........... 863,653
170,000 EUR Bundschatzanweisungen, 4.000% due 6/16/00...... 171,663
------------
1,313,056
------------
Greece -- 0.9%
Hellenic Republic:
102,000,000 GRD 11.000% due 2/25/00............................ 312,276
121,500,000 GRD 8.900% due 4/1/03.............................. 396,839
117,000,000 GRD 6.600% due 1/15/04............................. 359,885
------------
1,069,000
------------
Italy -- 0.1%
170,000 EUR Buoni Polienna Del Tes, 5.250% due 11/1/29..... 152,759
------------
Ivory Coast -- 2.1%
13,400,000 Republic of Ivory Coast, FLIRB, 2.000% due
3/29/18 (j)................................... 2,479,000
------------
Norway -- 0.2%
2,000,000 NOK Norweigian Treasury Bill, 5.250% due 3/15/00... 249,488
------------
Peru -- 2.0%
Republic of Peru:
2,700,000 FLIRB, 3.750% due 3/7/17 (j)................... 1,660,500
1,000,000 PDI, 4.500% due 3/7/17 (j)..................... 686,250
------------
2,346,750
------------
Russia -- 4.6%
Russia, Ministry of Finance:
3,300,000 11.750% due 6/10/03............................ 2,532,750
4,500,000 8.750% due 7/24/05 (g)......................... 2,823,750
------------
5,356,500
------------
Spain -- 0.1%
80,000 EUR Kingdom of Spain, 6.150% due 1/31/13........... 83,587
------------
Venezuela -- 2.5%
3,200,000 Republic of Venezuela, 13.625% due 8/15/18..... 2,864,000
------------
TOTAL SOVEREIGN BONDS
(Cost -- $24,403,238).......................... 25,326,446
------------
LOAN PARTICIPATIONS (e) -- 3.6%
805,236 Kingdom of Morocco, Tranche A, 6.84375% due
1/1/09 (J.P. Morgan)(j)....................... 734,779
The People's Democratic Republic of Algeria:
1,100,000 Tranche 1, 6.8125% due 9/4/06 (Chase Manhattan
Bank)(j)...................................... 849,750
3,600,000 Tranche 3, 6.8125% due 3/4/10 (Chase Manhattan
Bank)(j)...................................... 2,583,000
------------
TOTAL LOAN PARTICIPATIONS
(Cost -- $3,600,765)........................... 4,167,529
------------
</TABLE>
See Notes to Financial Statements.
40
<PAGE>
Schedules of Investments
(continued)
Salomon Brothers Strategic Bond Fund
<TABLE>
- -------------------------------------------------------------------------------
<CAPTION>
Face
Amount(a) Security Value
<C> <S> <C>
- -------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCIES & OBLIGATIONS -- 15.6%
Federal Home Loan Mortgage Corporation:
101,621 10.000% due 5/15/20............................... $ 108,575
1,802 1,156.500% due 6/15/21 -- Interest Only........... 46,844
10,726 Gold, 6.000% due 10/1/10.......................... 10,197
296,041 Gold, 7.000% due 7/1/11........................... 292,986
Federal National Mortgage Association:
5,450,000 6.500%, 30 year (TBA) (h)......................... 5,134,881
1,000,000 6.000%, 30 year (TBA) (h)......................... 915,000
607,473 7.3935% due 8/17/03 (j)........................... 607,663
10,655 13.000% due 11/15/15.............................. 12,397
45,757 10.400% due 4/25/19............................... 47,630
3,411,793 0.5797% due 3/17/20 -- Interest Only (j).......... 78,038
6,771,921 8.000% due 11/17/22 -- Interest Only.............. 1,187,203
68,956 6.500% due 2/1/26................................. 65,014
737,937 6.500% due 3/1/26................................. 695,735
9,058,682 7.500% due 3/18/27 -- Interest Only (c)........... 2,060,850
8,969,499 8.000% due 7/18/27 -- Interest Only............... 1,597,692
20,000,000 8.000% due 8/18/27 -- Interest Only (c)........... 4,075,000
5,425,047 1.6705% due 2/25/35 -- Interest Only (c)(j)....... 380,904
8,419,143 0.5305% due 10/17/36 -- Interest Only (j)......... 211,287
11,346,932 1.0414% due 6/25/38 -- Interest Only (j).......... 637,959
------------
TOTAL U.S. GOVERNMENT AGENCIES & OBLIGATIONS
(Cost -- $17,710,217)............................. 18,165,855
------------
COLLATERALIZED MORTGAGE OBLIGATIONS -- 9.6%
2,000,000 Commercial Mortgage Asset Trust, Series 1999-C1,
Class C, 7.350% due 8/17/13...................... 1,830,000
1,000,000 Contimortgage Home Equity Loan Trust, Series 1999-
3, Class B, 7.000% due 7/25/30................... 746,563
DLJ Commercial Mortgage Corp.:
10,861,446 Series 1998-CF2, Class S, 0.8477% due 11/12/31 --
Interest Only................................... 532,890
11,695,723 Series 1998-CG1, Class S, 0.7026% due 5/10/23 --
Interest Only................................... 467,829
292,896 First Union Residential Securitization, Series
1998-A, Class B2, 7.000% due 8/25/28............. 255,827
1,291,247 GE Capital Mortgage Services Inc., Series 1998-15,
Class B1, 6.750% due 11/25/28.................... 1,156,070
1,033,095 Green Tree Financial, Series 1997-6, Class A8,
7.070% due 1/15/29............................... 989,835
1,250,000 LB Commercial Conduit Mortgage Trust, Series 1999-
C1, Class A2, 6.780% due 4/15/09................. 1,192,594
1,266,777 Mid-State Trust, Series 6, Class A1, 7.340% due
7/1/35........................................... 1,231,143
PNC Mortgage Securities:
393,436 Series 1998-4, Class 3B3, 6.750% due 5/25/28...... 330,856
564,968 Series 1998-4, Class CB3, 6.8412% due 5/25/28..... 472,985
942,497 Series 1998-5, Class CB2, 6.772% due 3/25/29...... 829,987
513,920 Series 1998-5, Class CB3, 6.735% due 7/25/28...... 432,818
741,955 Series 1998-5, Class DB3, 6.9053% due 4/25/29..... 616,983
------------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS
(Cost -- $12,038,855)............................. 11,086,380
------------
<CAPTION>
Shares
------
<C> <S> <C>
PREFERRED STOCK (d) -- 0.0%
Financial/Leasing -- 0.0%
841 TCR Holding, Series B............................. 7
462 TCR Holding, Series C............................. 5
1,218 TCR Holding, Series D............................. 12
2,521 TCR Holding, Series E............................. 25
------------
TOTAL PREFERRED STOCKS
(Cost -- $300).................................... 49
------------
</TABLE>
See Notes to Financial Statements.
41
<PAGE>
Schedules of Investments
(continued)
Salomon Brothers Strategic Bond Fund
<TABLE>
- -------------------------------------------------------------------------------
<CAPTION>
Warrants Security Value
<C> <S> <C>
- -------------------------------------------------------------------------------
WARRANTS (d) -- 0.1%
400 In Flight Phone (Exercise price of $.01 per share
expiring 8/31/02, each warrant exercisable for one
share of common stock)............................ $ 0
500 Winsloew Furniture Corp. (expires 1/1/01).......... 26,250
848 United Mexican States (Exchangeable into Mexican
Global Bonds, expiring on 2/18/00)................ 84,800
------------
TOTAL WARRANTS
(Cost -- $85,831).................................. 111,050
------------
<CAPTION>
Contracts
---------
<C> <S> <C>
PURCHASED PUT OPTIONS (d) -- 0.0%
10,000 Hong Kong Dollar, Exercise price 7.8025 HKD,
expires 1/20/00 (Cost -- $72,700)................. 6,000
------------
<CAPTION>
Face
Amount
------
<C> <S> <C>
COMMERCIAL PAPER -- 2.6%
$ 3,000,000 Tyco International Group, yield 6.520% due 1/19/00
(Cost -- $2,990,220).............................. 2,990,220
------------
SUB-TOTAL INVESTMENTS
(Cost -- $109,251,383)............................. 104,610,884
------------
REPURCHASE AGREEMENTS (c) -- 9.9%
6,000,000 J.P. Morgan Securities, 2.900% due 1/3/00; Proceeds
at maturity -- $6,001,450 (Fully collateralized by
U.S. Treasury Notes, 9.000% due 11/15/18; Market
value -- $6,119,981).............................. 6,000,000
5,469,000 State Street Bank & Trust Co., 3.000% due 1/3/00;
Proceeds at maturity -- $5,470,367 (Fully
collateralized by U.S. Treasury Notes, 6.125% due
8/15/07; Market value -- $5,583,013).............. 5,469,000
------------
TOTAL REPURCHASE AGREEMENTS
(Cost -- $11,469,000).............................. 11,469,000
------------
TOTAL INVESTMENTS -- 100.0%
(Cost -- $120,720,383*)............................ $116,079,884
============
</TABLE>
- ------
(a) Principal denominated in local currency unless otherwise undicated.
(b) Payment-in-kind security for which all or part of the interest earned may
be paid in additional bonds.
(c) All or part of the security is segregated as collateral for mortgage dollar
rolls.
(d) Non-income producing security.
(e) Participation interests were acquired through the financial institutions
indicated.
(f) Security is currently in default.
(g) Security is exempt from registration under Rule 144A of the Securities Act
of 1933. This security may be resold in transactions that are exempt from
registration, normally to qualified institutional buyers.
(h) Mortgage dollar roll.
(j) Interest rate shown reflects current rate on instrument with variable rate
or step coupon rates.
* Aggregate cost for Federal income tax purposes is substantially the same.
Abbreviations used in this schedule:
CAD -- Canadian Dollar.
C Bond -- Capitalization Bond.
EI -- Eligible Interest.
EUR -- Euro.
FLIRB -- Floating Rate Interest Reduction Bond.
GRD -- Greek Drachma.
IAB -- Interest in Arrears Bond.
JPY -- Japanese Yen.
NMB -- New Money Bond.
NOK -- Norwegian Krone.
PDI -- Past Due Interest.
PLN -- Poland Zloty.
TBA -- To be announced.
See Notes to Financial Statements.
42
<PAGE>
Schedules of Investments
(continued)
Salomon Brothers National Intermediate Municipal Fund
<TABLE>
- -------------------------------------------------------------------------------
<CAPTION>
Face
Amount Security Value
<C> <S> <C>
- -------------------------------------------------------------------------------
LONG-TERM INVESTMENTS -- 97.2%
California -- 3.9%
$285,000 Los Angeles, CA Harbor Department Revenue, Series B,
AMBAC-Insured, 6.000% due 8/1/03...................... $ 296,408
250,000 Oakland, CA Port Revenue, Series G, MBIA-Insured,
6.000% due 11/1/05.................................... 264,048
-----------
560,456
-----------
District of Columbia -- 3.5%
District of Columbia GO, Series A, MBIA-Insured:
325,000 5.000% due 6/1/06...................................... 321,861
175,000 5.000% ETM 6/1/06...................................... 175,431
-----------
497,292
-----------
Florida -- 1.2%
175,000 Florida Housing Finance Agency Refunding, Single-Family
Mortgage, Series A, 6.150% due 7/1/06................. 176,911
-----------
Hawaii -- 1.8%
250,000 Hawaii State Department of Budget and Finance, Special
Purpose Revenue, 5.600% due 7/1/06.................... 251,758
-----------
Illinios -- 10.6%
250,000 Chicago, IL O'Hare International Airport Revenue,
Series B, AMBAC-Insured, 5.000% due 1/1/02............ 251,558
300,000 Chicago, IL Water Reclamation District Refunding, GO,
5.900% due 12/1/06.................................... 315,645
400,000 Illinois Student Assistance Commission Student Loan
Revenue, Series M, 6.400% due 3/1/04.................. 418,832
500,000 Springfield, IL Electric Revenue Refunding, MBIA-
Insured, 6.000% due 3/1/06............................ 525,320
-----------
1,511,355
-----------
Indiana -- 10.4%
500,000 Indiana Health Facilities Financing Authority Hospital
Revenue Refunding (Hancock Memorial Hospital Health
Services), 5.800% due 8/15/06......................... 497,795
300,000 Indiana Secondary Market for Educational Loans Revenue,
Series C, AMBAC-Insured, 5.550% due 12/1/05........... 304,512
650,000 Indiana Transportation Finance Authority Airport
Facilities Lease Revenue, Series A, 6.250% due
11/1/03............................................... 676,592
-----------
1,478,899
-----------
Louisiana -- 2.6%
350,000 Louisiana Public Facilities Authority Student Loan
Revenue, Series A-2, 6.750% due 9/1/06................ 365,999
-----------
Massachusetts -- 3.0%
400,000 Massachusetts State Health and Educational Facilities
Authority Revenue (Dana Farber Cancer Project), Series
G-1, 6.500% due 12/1/05............................... 422,836
-----------
Michigan -- 1.9%
250,000 Detroit, MI Water Supply Systems, Series A, MBIA-
Insured, 6.000% due 7/1/07............................ 264,995
-----------
Mississippi -- 2.2%
305,000 Mississippi Higher Education, Series C, 6.050% due
9/1/07................................................ 306,159
-----------
New Jersey -- 3.3%
450,000 Passaic Valley, NJ Sewer Systems, Series D, AMBAC-
Insured, 5.750% due 12/1/07........................... 462,361
-----------
New York -- 25.1%
250,000 Municipal Assistance Corp. for the City of New York,
NY, Series J, 5.500% due 7/1/02....................... 255,198
New York City, NY GO, Series D:
320,000 6.500% due 2/1/02...................................... 330,537
130,000 6.500% ETM 2/1/02...................................... 134,802
</TABLE>
See Notes to Financial Statements.
43
<PAGE>
Schedules of Investments
(continued)
Salomon Brothers National Intermediate Municipal Fund
<TABLE>
- -------------------------------------------------------------------------------
<CAPTION>
Face
Amount Security Value
<C> <S> <C>
- -------------------------------------------------------------------------------
New York -- 25.1% (continued)
New York State Dormitory Authority Revenue:
$700,000 College and University Educational Loan, MBIA-Insured,
5.600% due 7/1/06..................................... $ 712,957
500,000 Department of Health, 6.000% due 7/1/06................ 518,200
400,000 State University of New York, Series X, 6.625% ETM
7/1/04................................................ 429,732
500,000 New York State Mortgage Agency Revenue Homeowner
Mortgage, Series 46, 5.900% due 10/1/06............... 512,430
400,000 New York State Thruway Authority Service Contract
Revenue (Local Highway and Bridge), Series A, MBIA-
Insured, 6.000% due 1/1/04............................ 417,136
250,000 Niagara, NY Frontier Authority Airport Revenue (Buffalo
Niagara International Airport), Series A, MBIA-
Insured, 5.500% due 4/1/09............................ 253,925
-----------
3,564,917
-----------
Ohio -- 3.1%
250,000 Cleveland, OH Airport Systems Revenue, Series A, FSA-
Insured, 5.500% due 1/1/08............................ 253,552
190,000 Miami County, OH Hospital Facilities Refunding and
Improvement (Upper Valley Medical Center),
5.600% due 5/15/02.................................... 190,826
-----------
444,378
-----------
Pennsylvania -- 10.0%
500,000 Allegheny County, PA Airport Revenue Refunding
(Pittsburgh International Airport), MBIA-Insured,
5.500% due 1/1/03..................................... 508,975
400,000 Geisinger Authority, PA Health System, Series A, 6.000%
ETM 7/1/01............................................ 406,580
250,000 Pennsylvania Housing Finance Agency, Single-Family
Mortgage, Series 62A, 4.850% due 10/1/07.............. 246,177
250,000 Philadelphia, PA School District Refunding, Series D,
MBIA-Insured, 5.625% due 3/1/10....................... 256,657
-----------
1,418,389
-----------
South Carolina -- 7.5%
250,000 Piedmont Municipal Power Agency, SC Electric Revenue
Refunding, Series B, FGIC-Insured, 6.000% due 1/1/07.. 261,760
750,000 South Carolina State Public Service Authority Revenue
Refunding, Series B, FGIC-Insured, 6.500% due 1/1/05.. 802,305
-----------
1,064,065
-----------
Texas -- 3.8%
500,000 Austin, TX Airport System Revenue, Series A, MBIA-
Insured, 6.500% due 11/15/05.......................... 535,100
-----------
Virginia -- 3.3%
500,000 Pocahontas Parkway Association, VA Toll Road Revenue,
Series A, 5.000% due 8/15/06.......................... 472,970
-----------
TOTAL LONG-TERM INVESTMENTS
(Cost -- $13,679,837).................................. 13,798,840
-----------
</TABLE>
See Notes to Financial Statements.
44
<PAGE>
Schedules of Investments
(continued)
Salomon Brothers National Intermediate Municipal Fund
<TABLE>
- -------------------------------------------------------------------------------
<CAPTION>
Face
Amount Security Value
<C> <S> <C>
- -------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS -- 2.8%
Indiana -- 0.7%
$100,000 Jasper County, IN PCR (Northern Indiana Public
Service), Series C, VRDD, 4.800% due 4/1/19........... $ 100,000
-----------
Michigan -- 0.7%
100,000 University of Michigan, University Revenue Refunding
Hospital, Series A-2, VRDD, 4.800% due 12/1/24........ 100,000
-----------
North Carolina -- 0.7%
100,000 Halifax County, NC Industrial Facilities and Pollution
Control Financing Authority Revenue, VRDD,
4.900% due 6/1/21..................................... 100,000
-----------
Texas -- 0.7%
100,000 Sabine River Authority, TX PCR (Texas Utilities
Electric Company), VRDD, 4.900% due 4/1/30............ 100,000
-----------
TOTAL SHORT-TERM INVESTMENTS
(Cost -- $400,000)..................................... 400,000
-----------
TOTAL INVESTMENTS -- 100%
(Cost -- $14,079,837*)................................. $14,198,840
===========
</TABLE>
- ------
* Aggregate cost for Federal income tax purposes is substantially the same.
Abbreviations used in this schedule:
AMBAC -- Insured as to principal and interest by the American Municipal Bond
Assurance Corporation.
ETM -- Escrowed to maturity.
FGIC -- Insured as to principal and interest by the Financial Guaranty Insur-
ance Corporation.
FSA -- Insured as to principal and interest by the Financial Security Assur-
ance Corporation.
GO -- General Obligation.
MBIA -- Insured as to principal and interest by the MBIA Insurance Corpora-
tion.
PCR -- Pollution Control Revenue.
VRDD -- Variable Rate Demand Note. Date shown is maturity date.
See Notes to Financial Statements.
45
<PAGE>
Schedules of Investments
(continued)
Salomon Brothers U.S. Government Income Fund
<TABLE>
- --------------------------------------------------------------------------------
<CAPTION>
Face
Amount Security Value
<C> <S> <C>
- --------------------------------------------------------------------------------
U.S. TREASURY NOTES -- 10.8%
U.S. Treasury Notes:
$1,500,000 5.500% due 5/15/09.................................... $ 1,398,855
2,000,000 6.000% due 8/15/09.................................... 1,938,840
-----------
TOTAL U.S. TREASURY NOTES
(Cost -- $3,463,745).................................. 3,337,695
-----------
U.S. GOVERNMENT AGENCIES -- 78.9%
Federal Home Loan Bank:
100,000 5.940% due 6/13/00.................................... 99,826
500,000 5.800% due 9/2/08..................................... 460,845
Federal Home Loan Mortgage Corporation:
9,842 11.750% due 1/1/11.................................... 11,100
79 11.750% due 6/1/14.................................... 89
3,553 11.750% due 12/1/14................................... 4,007
25,015 11.750% due 7/1/15.................................... 28,212
456,474 8.000% due 7/1/20..................................... 465,603
464,616 10.000% due 9/1/20.................................... 501,636
162,786 7.000% due 4/15/21.................................... 162,175
750,000 8.500% due 3/15/24.................................... 776,250
188,621 Gold, 7.500% due 5/1/07............................... 190,153
18,655 Gold, 6.000% due 7/1/10............................... 17,734
100,134 Gold, 7.000% due 5/1/11............................... 99,100
267,343 Gold, 7.000% due 7/1/11............................... 264,584
419,759 Gold, 7.000% due 7/1/11............................... 415,427
173,067 Gold, 7.000% due 8/1/11............................... 171,281
94,322 Gold, 8.250% due 4/1/17............................... 96,120
158,187 Gold, 8.000% due 12/1/19.............................. 159,818
3,321,849 Gold, 6.000% due 10/1/28.............................. 3,044,674
499,999 Gold, 6.000% due 7/1/29............................... 458,279
Federal National Mortgage Association:
565,151 6.784% due 1/17/03(a)................................. 564,906
116,476 6.500% due 12/1/03.................................... 114,729
15,267 14.500% due 11/15/14.................................. 17,748
43,827 12.500% due 9/20/15................................... 50,018
42,622 13.000% due 11/15/15.................................. 49,588
254,638 12.000% due 1/1/16.................................... 288,457
16,650 12.000% due 1/15/16................................... 18,731
171,138 12.500% due 1/15/16................................... 194,669
13,245 11.500% due 9/1/19.................................... 14,603
103,973 10.500% due 8/1/20.................................... 113,557
675,000 6.247% due 3/17/21(a)................................. 641,672
171,453 8.500% due 11/1/23.................................... 175,845
77,315 9.000% due 8/1/26..................................... 80,529
1,999,999 7.500% due 3/18/27 -- Interest Only................... 455,000
3,000,000 8.000% due 7/18/27 -- Interest Only................... 534,375
6,414,515 8.000% due 8/18/27 -- Interest Only................... 1,306,983
576,323 6.654% due 12/28/28(a)................................ 536,702
500,000 6.000% due 2/1/29..................................... 457,810
417,677 6.000% due 3/1/29..................................... 382,433
491,797 6.500% due 4/1/29..................................... 463,671
290,028 6.500% due 4/1/29..................................... 273,441
146,504 6.000% due 6/1/29..................................... 134,142
</TABLE>
See Notes to Financial Statements.
46
<PAGE>
Schedules of Investments
(continued)
Salomon Brothers U.S. Government Income Fund
<TABLE>
- -------------------------------------------------------------------------------
<CAPTION>
Face
Amount Security Value
<C> <S> <C>
- -------------------------------------------------------------------------------
Federal National Mortgage Association (continued):
$ 37,341 6.000% due 6/1/29.................................... $ 34,190
816,060 6.000% due 6/1/29.................................... 747,202
536,876 6.000% due 6/1/29.................................... 491,574
45,458 6.000% due 6/1/29.................................... 41,623
334,314 6.500% due 6/1/29.................................... 315,195
98,212 6.500% due 7/1/29.................................... 92,595
25,332 6.500% due 8/1/29.................................... 23,883
871,027 6.500% due 8/1/29.................................... 821,213
103,690 6.500% due 8/1/29.................................... 97,760
25,298 6.500% due 10/1/29................................... 23,851
25,791 6.500% due 11/1/29................................... 24,313
1,186,067 6.500% due 11/1/29................................... 1,118,236
25,257 6.500% due 11/1/29................................... 23,812
333,614 6.500% due 11/1/29................................... 314,534
1,281,445 6.500% due 12/1/29................................... 1,208,159
499,950 6.500% due 12/1/29................................... 471,357
3,000,297 7.000% due 12/1/29................................... 2,901,829
800,000 6.527% due 5/25/30................................... 748,700
500,000 6.000% due 9/1/30 (TBA)(b)........................... 457,500
112,631 Government National Mortgage Association, 8.500% due
1/15/18............................................. 115,906
-----------
TOTAL U.S. GOVERNMENT AGENCIES
(Cost -- $24,838,218)................................ 24,369,954
-----------
SUB-TOTAL INVESTMENTS
(Cost -- $28,301,963)................................ 27,707,649
-----------
REPURCHASE AGREEMENT (c) -- 10.3%
3,184,000 State Street Bank & Trust Co., 3.000% due 1/3/00;
Proceeds at maturity -- $3,184,796; (Fully
collateralized by U.S. Treasury Strips, 12.750% due
11/1/10; Market value -- $3,252,563) (Cost --
$3,184,000)........................................ 3,184,000
-----------
TOTAL INVESTMENTS -- 100%
(Cost -- $31,485,963*)............................... $30,891,649
===========
</TABLE>
- ------
(a) Interest rate shown reflects current rate on instrument with variable rate
or step coupon rate.
(b) Mortgage dollar roll.
(c) All or part of the security is segregated as collateral for mortgage dollar
rolls.
* Aggregate cost for Federal income tax purposes is substantially the same.
Abbreviation used in this schedule:
TBA--To be announced.
See Notes to Financial Statements.
47
<PAGE>
Statements of Assets and Liabilities
December 31, 1999
<TABLE>
<CAPTION>
National U.S.
High Yield Strategic Intermediate Government
Bond Fund Bond Fund Municipal Fund Income Fund
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS:
Investments, at cost... $573,274,079 $109,251,383 $14,079,837 $28,301,963
============ ============ =========== ===========
Investments, at value.. $526,889,597 $104,610,884 $14,198,840 $27,707,649
Repurchase agreements,
at value and cost..... 366,000 11,469,000 -- 3,184,000
Cash................... 5,249 302 80,530 608
Interest receivable.... 14,590,031 2,625,632 271,545 298,579
Receivable for Fund
shares sold........... 1,443,765 117,702 6,336 79,636
Deferred organization
costs (Note 1)........ 4,270 4,293 3,391 3,514
Receivable for open
forward foreign
currency contracts
(Note 1).............. -- 61,488 -- --
Receivable for
securities sold....... -- -- -- 1,006,875
Receivable from manager
(Note 2).............. -- 14,409 46,257 64,087
Other assets........... 2,792 1,618 866 1,085
------------ ------------ ----------- -----------
Total Assets........... 543,301,704 118,905,328 14,607,765 32,346,033
------------ ------------ ----------- -----------
LIABILITIES:
Dividends payable...... 4,658,201 737,984 54,049 134,523
Payable for Fund shares
purchased............. 1,992,085 426,450 1,252,215 160,736
Service and
distribution fees
payable (Note 2)...... 346,663 77,780 5,777 18,079
Management fees payable
(Note 2).............. 342,796 -- -- --
Administration fees
payable (Note 2)...... 214,362 43,878 5,802 11,635
Payable for open
forward foreign
currency contracts
(Note 1).............. -- 80,095 -- --
Foreign currency
payable to bank+...... -- 3,099 -- --
Payable for securities
purchased............. -- 6,165,588 -- 1,471,188
Accrued expenses....... 283,358 59,002 15,443 24,727
------------ ------------ ----------- -----------
Total Liabilities...... 7,837,465 7,593,876 1,333,286 1,820,888
------------ ------------ ----------- -----------
Total Net Assets........ $535,464,239 $111,311,452 $13,274,479 $30,525,145
============ ============ =========== ===========
NET ASSETS:
Par value of shares of
capital stock......... $ 56,455 $ 11,344 $ 1,310 $ 3,099
Capital paid in excess
of par value.......... 659,431,301 122,091,827 13,253,301 31,597,660
Overdistributed net
investment income..... (3,044,863) (701,425) (54,031) (106,195)
Accumulated net
realized loss on
security
transactions.......... (74,594,172) (5,425,039) (45,104) (375,105)
Net unrealized
appreciation
(depreciation) on
investments and
foreign currencies ... (46,384,482) (4,665,255) 119,003 (594,314)
------------ ------------ ----------- -----------
Total Net Assets....... $535,464,239 $111,311,452 $13,274,479 $30,525,145
============ ============ =========== ===========
Shares Outstanding:
Class A................. 13,244,504 1,893,584 439,258 586,478
============ ============ =========== ===========
Class B................. 32,882,811 7,065,838 404,341 1,635,618
============ ============ =========== ===========
Class 2................. 8,900,778 2,323,604 215,526 542,643
============ ============ =========== ===========
Class O................. 1,427,280 60,629 250,634 334,629
============ ============ =========== ===========
Net Asset Value:
Class A Shares
Net Asset Value*....... $ 9.48 $ 9.81 $ 10.15 $ 9.84
============ ============ =========== ===========
Maximum offering price
per share (based on
maximum sales charge
of 4.75%)............. $ 9.95 $ 10.30 $ 10.66 $ 10.33
============ ============ =========== ===========
Class B Shares
Net asset value and
offering price per
share*................ $ 9.48 $ 9.81 $ 10.11 $ 9.85
============ ============ =========== ===========
Class 2 Shares
Net asset value*....... $ 9.50 $ 9.84 $ 10.13 $ 9.86
============ ============ =========== ===========
Maximum offering price
per share (based on
maximum sales charge
of 1.00%)............. $ 9.60 $ 9.94 $ 10.23 $ 9.96
============ ============ =========== ===========
Class O Shares
Net asset value,
offering price and
redemption price per
share................. $ 9.48 $ 9.80 $ 10.15 $ 9.85
============ ============ =========== ===========
</TABLE>
+ Foreign currency at cost for Strategic Bond Fund is $3,160.
* Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
See Notes to Financial Statements.
48
<PAGE>
Statements of Operations
For the Year Ended December 31, 1999
<TABLE>
<CAPTION>
National U.S.
High Yield Strategic Intermediate Government
Bond Fund Bond Fund Municipal Fund Income Fund
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Interest............... $ 65,978,076 $11,910,091 $ 790,193 $ 1,960,940
Dividends.............. 235,250 -- -- --
------------ ----------- --------- -----------
Total Investment
Income................ 66,213,326 11,910,091 790,193 1,960,940
------------ ----------- --------- -----------
EXPENSES:
Service and
distribution fees
(Note 2) ............. 4,269,463 946,470 64,657 213,467
Management fees (Note
2).................... 4,225,238 876,952 77,615 185,197
Shareholder and system
servicing fees........ 608,068 146,455 61,048 57,669
Shareholder
communications........ 309,435 77,345 16,811 36,304
Administration fees
(Note 2).............. 281,673 58,464 7,761 15,432
Audit and legal........ 140,865 58,466 30,263 37,674
Registration fees...... 94,235 65,824 51,750 56,961
Custody................ 93,228 45,871 4,854 11,834
Amortization of
deferred organization
costs (Note 1) ....... 29,448 29,550 23,349 24,170
Directors' fees and
expenses ............. 9,920 3,220 1,571 1,820
Other.................. 37,430 28,271 8,205 12,353
------------ ----------- --------- -----------
Total Expenses......... 10,099,003 2,336,888 347,884 652,881
Less: Management fee
waiver and expense
reimbursement (Note
2).................... (70,864) (232,842) (223,503) (254,210)
------------ ----------- --------- -----------
Net Expenses........... 10,028,139 2,104,046 124,381 398,671
------------ ----------- --------- -----------
Net Investment Income... 56,185,187 9,806,045 665,812 1,562,269
------------ ----------- --------- -----------
REALIZED AND UNREALIZED
GAIN (LOSS) ON
INVESTMENTS AND FOREIGN
CURRENCIES
(NOTES 1 AND 3):
Realized Loss From:
Security transactions
(excluding short-term
securities)........... (39,684,862) (3,329,901) (8,467) (331,384)
Foreign currency
transactions.......... -- 182,499 -- --
------------ ----------- --------- -----------
Net Realized Loss...... (39,684,862) (3,147,402) (8,467) (331,384)
------------ ----------- --------- -----------
Change in Net
Unrealized Appreciation
(Depreciation) on
Investments and Foreign
Currencies:
Beginning of year...... (65,018,558) (2,843,208) 777,460 336,443
End of year............ (46,384,482) (4,665,255) 119,003 (594,314)
------------ ----------- --------- -----------
Change in Unrealized
Appreciation
(Depreciation)........ 18,634,076 (1,822,047) (658,457) (930,757)
------------ ----------- --------- -----------
Net Loss on Investments
and Foreign
Currencies............. (21,050,786) (4,969,449) (666,924) (1,262,141)
------------ ----------- --------- -----------
Increase (Decrease) in
Net Assets From
Operations............. $ 35,134,401 $ 4,836,596 $ (1,112) $ 300,128
============ =========== ========= ===========
</TABLE>
See Notes to Financial Statements.
49
<PAGE>
Statements of Changes in Net Assets
For the Year Ended December 31, 1999
<TABLE>
<CAPTION>
National U.S.
High Yield Strategic Intermediate Government
Bond Fund Bond Fund Municipal Fund Income Fund
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income.. $ 56,185,187 $ 9,806,045 $ 665,812 $ 1,562,269
Net realized loss...... (39,684,862) (3,147,402) (8,467) (331,384)
Change in net
unrealized
appreciation
(depreciation)........ 18,634,076 (1,822,047) (658,457) (930,757)
------------ ------------ ----------- -----------
Increase (Decrease) in
Net Assets From
Operations............ 35,134,401 4,836,596 (1,112) 300,128
------------ ------------ ----------- -----------
DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income.. (58,416,164) (9,316,441) (688,412) (1,660,133)
------------ ------------ ----------- -----------
Decrease in Net Assets
From Distributions to
Shareholders.......... (58,416,164) (9,316,441) (688,412) (1,660,133)
------------ ------------ ----------- -----------
FUND SHARE TRANSACTIONS
(NOTE 6):
Net proceeds from sale
of shares............. 166,676,663 29,422,232 6,446,621 17,986,689
Net asset value of
shares issued for
reinvestment of
dividends............. 22,079,579 4,198,990 334,848 856,868
Cost of shares
reacquired............ (198,934,208) (35,577,531) (8,626,054) (17,062,095)
------------ ------------ ----------- -----------
Increase (Decrease) in
Net Assets From Fund
Share Transactions.... (10,177,966) (1,956,309) (1,844,585) 1,781,462
------------ ------------ ----------- -----------
Increase (Decrease) in
Net Assets............. (33,459,729) (6,436,154) (2,534,109) 421,457
NET ASSETS:
Beginning of year...... 568,923,968 117,747,606 15,808,588 30,103,688
------------ ------------ ----------- -----------
End of year*........... $535,464,239 $111,311,452 $13,274,479 $30,525,145
============ ============ =========== ===========
* Includes
overdistributed net
investment income of:.. $(3,044,863) $(701,425) $(54,031) $(106,195)
============ ============ =========== ===========
</TABLE>
See Notes to Financial Statements.
50
<PAGE>
Statements of Changes in Net Assets
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
National U.S.
High Yield Strategic Intermediate Government
Bond Fund Bond Fund Municipal Fund Income Fund
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income.. $ 55,484,781 $ 6,793,836 $ 661,427 $ 951,556
Net realized gain
(loss)................ (35,163,319) (2,517,889) (34,108) 333,975
Change in net
unrealized
appreciation
(depreciation)........ (73,233,409) (4,180,390) 59,675 106,877
------------- ------------ ----------- ------------
Increase (Decrease) in
Net Assets From
Operations............ (52,911,947) 95,557 686,994 1,392,408
------------- ------------ ----------- ------------
DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income.. (55,923,361) (7,692,789) (692,858) (1,022,452)
Net realized gain...... -- (152,674) -- (310,665)
------------- ------------ ----------- ------------
Decrease in Net Assets
From Distributions to
Shareholders.......... (55,923,361) (7,845,463) (692,858) (1,333,117)
------------- ------------ ----------- ------------
FUND SHARE TRANSACTIONS
(NOTE 6):
Net proceeds from sale
of shares............. 235,074,449 62,532,821 6,901,659 29,828,778
Net asset value of
shares issued for
reinvestment of
dividends............. 24,078,652 4,084,584 173,630 556,947
Cost of shares
reacquired............ (159,214,216) (27,059,919) (5,419,124) (14,496,193)
------------- ------------ ----------- ------------
Increase in Net Assets
From Fund Share
Transactions.......... 99,938,885 39,557,486 1,656,165 15,889,532
------------- ------------ ----------- ------------
Increase (Decrease) in
Net Assets............. (8,896,423) 31,807,580 1,650,301 15,948,823
NET ASSETS:
Beginning of Year...... 577,820,391 85,940,026 14,158,287 14,154,865
------------- ------------ ----------- ------------
End of Year*........... $ 568,923,968 $117,747,606 $15,808,588 $ 30,103,688
============= ============ =========== ============
* Includes
overdistributed net
investment income of:.. $(813,886) $(925,830) $(31,431) $(50,677)
============= ============ =========== ============
</TABLE>
See Notes to Financial Statements.
51
<PAGE>
Statements of Cash Flows
For the Year Ended December 31, 1999
<TABLE>
<CAPTION>
U.S.
Strategic Government
Bond Fund Income Fund
- -------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows Provided by Operating Activities:
Net sales of short-term portfolio investments.... $ 13,984,773 $ 2,820,000
Purchases of long-term portfolio investments..... (142,919,607) (32,701,284)
Proceeds from disposition of long-term portfolio
investments and principal paydowns.............. 132,644,394 28,432,233
------------- ------------
3,709,560 (1,449,051)
Net investment income............................ 9,806,045 1,562,269
Net amortization of premium/discount on
investments..................................... (1,668,119) 14,466
Capitalized income on payment in kind
securities...................................... (135,487) --
Amortization of organization expenses............ 29,550 24,170
Net change is receivables/payables related to
operations...................................... (556,941) (29,845)
------------- ------------
Net Cash Flows Provided By Operating Activities.. 11,184,608 122,009
------------- ------------
Cash Flows Used by Financing Activities:
Decrease in dollar roll transactions............. (1,028,841) (406,641)
Proceeds from shares sold........................ 30,102,333 18,043,738
Proceeds from reinvestment of dividends.......... 4,198,990 856,868
Payments on shares redeemed...................... (35,529,341) (17,032,639)
Cash dividends paid.............................. (8,930,401) (1,583,014)
------------- ------------
Net Cash Flows Used by Financing Activities...... (11,187,260) (121,688)
------------- ------------
Net Increase (Decrease) in Cash................... (2,652) 321
Cash, Beginning of Year........................... (152) 287
------------- ------------
Cash, End of Year................................. $ (2,804) $ 608
============= ============
</TABLE>
See Notes to Financial Statements.
52
<PAGE>
Notes to Financial Statements
1. Organization and Significant Accounting Policies
The Salomon Brothers Investment Series ("Investment Series") consists of cer-
tain portfolios of the Salomon Brothers Series Funds Inc ("Series Fund"), the
Salomon Brothers Investors Value Fund Inc, formerly known as Salomon Brothers
Investors Fund Inc., and the Salomon Brothers Capital Fund Inc.
Salomon Brothers High Yield Bond Fund ("High Yield Bond Fund), Salomon Brothers
Strategic Bond Fund ("Strategic Bond Fund"), Salomon Brothers National Interme-
diate Municipal Fund ("National Intermediate Municipal Fund"), and Salomon
Brothers U.S. Government Income Fund ("U.S. Government Income Fund"), are sepa-
rate investment portfolios of the Series Fund, an open-end management invest-
ment company, incorporated in Maryland on April 17, 1990. The Series Fund con-
sists of these portfolios and eight other separate investment portfolios: Salo-
mon Brothers Asia Growth Fund, Salomon Brothers International Equity Fund, Sal-
omon Brothers Small Cap Growth Fund, Salomon Brothers Large Cap Growth Fund,
Salomon Brothers Balanced Fund, formerly known as Salomon Brothers Total Return
Fund, Salomon Brothers New York Municipal Money Market Fund, Salomon Brothers
Cash Management Fund, and Salomon Brothers Institutional Money Market Fund. The
financial statements and financial highlights for the other portfolios are pre-
sented in separate shareholder reports.
The Investment Series operates under a multiple class pricing structure, with
each portfolio of the Investment Series (individually a "Fund") offering Class
A, Class B, Class 2 and Class O shares, each with their own expense structure.
Each Fund has a specific investment objective:
<TABLE>
<CAPTION>
Fund: Objective:
<S> <C>
High Yield Bond Fund....... To maximize current income.
Strategic Bond Fund........ To seek a high level of current income.
National Intermediate To seek a high level of current income
Municipal Fund............ which is exempt from regular Federal income taxes.
U.S. Government Income
Fund...................... To seek a high level of current income.
</TABLE>
Certain costs incurred in connection with each Fund's organization, which were
payable to Salomon Brothers Asset Management Inc ("SBAM"), have been deferred
and are being amortized by the Funds over a 60 month period from the date each
Fund commenced investment operations. A summary of those expenditures that
remain as of December 31, 1999 for each Fund is as follows:
<TABLE>
<CAPTION>
Fund Expiration of Amortization Amount
- -------------------------------------------------------------------------------
<S> <C> <C>
High Yield Bond Fund......................... February 2000 $4,270
Strategic Bond Fund.......................... February 2000 4,293
National Intermediate Municipal Fund......... February 2000 3,391
U.S. Government Income Fund.................. February 2000 3,514
</TABLE>
The following is a summary of significant accounting policies followed by the
Investment Series 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) Investment Valuation. Portfolio securities listed or traded on national
securities exchanges, or reported on 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 asked price which represents the current value
of the security. Over-the-counter securities are valued at the mean of the
current bid and asked price. Debt securities are valued by using either market
quotations or independent pricing services which use prices provided by market-
makers or estimates of market values obtained from yield data relating to
instruments or securities with similar characteristics. Publicly traded
sovereign bonds are typically traded internationally on the over-the-counter
market and are valued at the mean of the last current bid and asked price as of
the close of business of
53
<PAGE>
Notes to Financial Statements
(continued)
that market. Short-term securities with less than 60 days remaining to maturity
when acquired by a Fund are valued at amortized cost which approximates market
value. If a Fund acquires such securities with more than 60 days remaining to
maturity, they are valued at current market value, until the 60th day prior to
maturity, and are then valued on an amortized cost basis.
Foreign securities quoted in a foreign currency are translated into U.S.
dollars using exchange rates at approximately 2:30 p.m. Eastern time, or at
such other rates as SBAM may determine to be appropriate in computing net asset
value.
Securities for which reliable quotations or prices from pricing services are
not readily available (as may be the case for securities of limited
marketability) and all other assets are valued at their respective fair value
as determined in good faith by, or under procedures established by, the Board
of Directors.
(b) Futures Contracts. The High Yield Bond Fund, Strategic Bond Fund, and
National Intermediate Municipal Fund may enter into futures contracts, which
involves paying or receiving variation margin, which will be recorded as
unrealized gain or loss until the contract is closed. When the contract is
closed, a realized gain or loss is recognized. Outstanding contracts may
involve elements of market risk in excess of amounts reported in the financial
statements.
(c) Option Contracts. When a Fund writes or purchases a call or a put option,
an amount equal to the premium received or paid by the Fund 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 of the option.
(d) Mortgage Rolls. The Strategic Bond Fund and U.S. Government Income Fund
may enter into mortgage "dollar rolls" in which a Fund sells mortgage-backed
securities for delivery in the current month and simultaneously contracts to
repurchase substantially similar (same type, coupon and maturity) securities on
a specified future date. The Fund is compensated by a fee paid by the
counterparty. Dollar rolls are accounted for as financing arrangements; the fee
is accrued into interest income ratably over the term of the dollar roll and
any gain or loss on the roll is deferred until disposition of the rolled
security. The average monthly balance of dollar rolls outstanding during the
year ended December 31, 1999 was approximately $15,459,464, and $7,828,707 for
the Strategic Bond Fund and U.S. Government Income Fund, respectively.
(e) Repurchase Agreements. When entering into repurchase agreements, it is
each Fund's policy that the Fund take possession, through its custodian, of the
underlying collateral and monitor the collateral's value at the time the
agreement is entered into and on a daily basis during the term of the
repurchase agreement to ensure that it equals or exceeds the repurchase price.
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.
(f) Reverse Repurchase Agreements. Certain Funds may enter into reverse
repurchase agreements in which a Fund sells portfolio securities and agrees to
repurchase them from the buyer at a particular date and price. Whenever a Fund
enters into a reverse repurchase agreement, the custodian delivers liquid
assets in an amount at least equal to the repurchase price marked-to-market
daily (including accrued interest), and subsequently monitors the account to
ensure that such equivalent value is maintained. A Fund pays interest on
amounts obtained pursuant to reverse repurchase agreements. Reverse repurchase
agreements are considered to be borrowings by a Fund. Transactions in reverse
repurchase agreements for the Funds during the year ended December 31, 1999
were as follows:
<TABLE>
<CAPTION>
Average Weighted Maximum
Daily Average Amount
Fund Balance Interest Rate Outstanding
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Strategic Bond Fund.......................... $ 88,000 3.56% $2,007,500
U.S. Government Income Fund.................. 644,163 2.18 4,515,000
</TABLE>
54
<PAGE>
Notes to Financial Statements
(continued)
Interest rates on reverse repurchase agreements ranged from 2.25% to 4.00% and
0.25% to 5.30%, during the period for Strategic Bond Fund and U.S. Government
Income Fund, respectively. Interest expense on reverse repurchase agreements
totaled $3,179 and $14,220 for Strategic Bond Fund and U.S. Government Income
Fund, respectively. The Funds had no open reverse repurchase agreements at De-
cember 31, 1999.
(g) Foreign Currency Translation. The accounting records of each Fund are
maintained in U.S. dollars. Investment securities and other assets and
liabilities of the High Yield Bond Fund and Strategic Bond Fund denominated in
a foreign currency are translated into U.S. dollars at the prevailing rates of
exchange each day. Purchases and sales of securities, income receipts and
expense payments are translated into U.S. dollars at the prevailing exchange
rate on the respective dates of the transactions. Net realized gains and losses
on foreign currency transactions represent net gains and losses from sales and
maturities of forward currency contracts, disposition of foreign currencies,
currency gains and losses realized between the trade and settlement dates on
securities transactions and the difference between the amount of net investment
income accrued and the U.S. dollar amount actually received. The effect of
changes in foreign currency exchange rates on investments in securities are not
segregated in the Statements of Operations from the effects of changes in
market prices of those securities, but are included with the net realized and
unrealized gain or loss on investments.
(h) Forward Foreign Currency Contracts. The High Yield Bond Fund and Strategic
Bond Fund may enter into forward foreign currency contracts. A forward foreign
currency contract is an agreement between two parties to buy and sell a
currency at a set price on a future date. The contract is marked-to-market
daily and the change in value is recorded by the Fund as an unrealized gain or
loss. When a forward foreign currency contract is extinguished, through either
delivery or offset by entering into another forward foreign currency contract,
the Fund records a realized gain or loss equal to the difference between the
value of the contract at the time it was opened and the value of the contract
at the time it was extinguished or offset.
At December 31, 1999, the Strategic Bond Fund had open forward currency con-
tracts as described below:
<TABLE>
<CAPTION>
Strategic Bond Settlement Local Market Unrealized
Fund Date Currency Value Gain (Loss)
- ---------------- ---------- ----------- --------- -----------
To Buy:
<S> <C> <C> <C> <C>
British Pound 1/18/00 176,963 $ 285,698 $(4,357)
British Pound 1/28/00 168,312 271,744 (5,267)
Canadian Dollar 1/28/00 182,969 126,345 1,652
Euro 1/28/00 81,268 82,051 (4,564)
Euro 1/28/00 1,069,999 1,080,316 (63,139)
-------
(75,675)
-------
To Sell:
British Pound 1/28/00 321,541 519,136 12,804
Euro 1/18/00 886,499 894,365 5,635
Euro 1/28/00 87,884 88,731 3,956
Euro 1/28/00 157,729 159,250 4,262
Greek Drachma 1/28/00 209,977,000 639,918 27,587
Japanese Yen 1/28/00 40,605,944 397,960 (2,768)
-------
51,476
-------
</TABLE>
55
<PAGE>
Notes to Financial Statements
(continued)
Cross Currency Forwards*
<TABLE>
<CAPTION>
Market Value
Settlement --------------------------- Unrealized
Date Euro Greek Drachma Gain (loss)
---------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
To Buy:
Euro vs. Greek Drachma 1/28/00 $191,832 $191,813 $ 19
<CAPTION>
Greek Drachma Euro
------------- -------------
<S> <C> <C> <C> <C>
Greek Drachma vs. Euro 1/28/00 $364,190 $363,471 719
<CAPTION>
Japanese Yen Euro
------------ -------------
<S> <C> <C> <C> <C>
Japanese Yen vs. Euro 1/28/00 $307,746 $302,892 4,854
--------
5,592
--------
Net Unrealized Loss on Open Forward
Foreign & Cross Currency Contracts $(18,607)
========
* Local Currency on Cross Currency Forwards
<CAPTION>
Buy Sell
------------- -------------
<S> <C> <C> <C> <C>
Buy Euro vs. Greek Drachma 190,000 62,939,400
Buy Greek Drachma vs. Euro 119,502,000 360,000
Buy Japanese Yen vs. Euro 31,401,000 360,000
</TABLE>
(i) Loan Participations. The High Yield Bond Fund and Strategic Bond Fund may
invest in fixed and floating rate loans arranged through private negotiations
between a foreign sovereign entity and one or more financial institutions
("lender"). The market values of the High Yield Bond Fund and the Strategic
Bond Fund's loan participations at December 31, 1999 were $19,169,144 and
$4,167,529, respectively.
(j) Federal Income Taxes. Each Fund has complied with the requirements of the
Internal Revenue Code applicable to regulated investment companies and
distributed all of its income, including any net realized gains, to
shareholders. Therefore, no Federal income tax or excise tax provision is
required for such Funds.
(k) Dividends and Distributions to Shareholders. Dividends from net investment
income on the shares of each of the Funds are declared each business day to
shareholders of record that day, and are paid on the last business day of the
month.
Distributions of net realized gains to shareholders of each Fund, if any, are
declared at least annually. Dividends and distributions to shareholders of each
Fund are recorded on the ex-dividend date and are determined in accordance with
income tax regulations which may differ from GAAP due primarily to differences
in the treatment of foreign currency gains/losses, deferral of wash sales, and
post-October losses incurred by each Fund. Permanent book/tax differences are
reclassified within the capital accounts based on their federal income tax
basis treatment; temporary differences do not require reclassifications.
(l) Class Accounting. Investment income, common expenses and gain (loss) on
investments are allocated to the various classes of a Fund on the basis of
daily net assets of each class. Distribution and shareholder servicing fees
relating to a specific class are charged directly to that class. No class has
preferential dividend rights; differences in per share dividend rates are
generally due to differences in separate class expenses.
(m) Expenses. Direct expenses are charged to the Fund that incurred them, and
general expenses of the Investment Series are allocated to the Funds based on
each Fund's relative net assets.
(n) Other. Investment transactions are recorded as of the trade date. Dividend
income is recorded on the ex-dividend date. Interest income, including the
accretion of discounts or amortization of premiums, is recognized when earned.
Gains or losses on sales of securities are calculated for financial accounting
and Federal income tax purposes on the identified cost basis. Net investment
income (other than distribution fees), unrealized and realized gains or losses
are allocated daily to each class of shares based upon the relative proportion
of each class's net assets to the Fund's total net assets.
56
<PAGE>
Notes to Financial Statements
(continued)
(o) Cash Flow Information. Statement of Financial Accounting Standards Number
102 generally exempts entities such as the Funds from reporting a Statement of
Cash Flows. However, the amount and nature of certain activities entered into
by the Strategic Bond Fund and U.S. Government Income Fund may be considered
financing arrangements, which may require the presentation of a Statement of
Cash Flows. General investing and operating activities of the Funds are
reported in the Statement of Changes in Net Assets and additional information
on cash receipts and cash payments are presented in the Statement of Cash
Flows. Accounting practices that do not affect reporting activities on a cash
basis include carrying investments at value and amortizing discounts or
premiums on debt obligations.
2. Management Fee and Other Agreements
Each Fund retains SBAM, a wholly owned subsidiary of Salomon Brothers Holding
Co., Inc., which in turn is wholly owned by Salomon Smith Barney Holdings, Inc.
("SSBH"), to act as investment manager of each Fund, subject to the supervision
by the Board of Directors of each Fund. SBAM furnishes the Investment Series
with office space and certain services and facilities required for conducting
the business of the Investment Series and pays the compensation of its offi-
cers. The management fee for these services for each Fund is payable monthly
and is based on the following annual percentages of each Fund's average daily
net assets: 0.75% for the High Yield Bond Fund and Strategic Bond Fund, 0.50%
for the National Intermediate Municipal Fund and 0.60% for the U.S. Government
Income Fund. SBAM Ltd., an affiliate of SBAM, provides certain advisory serv-
ices to SBAM for the benefit of the Strategic Bond Fund. SBAM Ltd. is compen-
sated by SBAM at no additional expense to the Strategic Bond Fund.
For the year ended December 31, 1999, SBAM waived management fees of $70,864,
$232,842, $77,615 and $185,197 for the High Yield Bond Fund, Strategic Bond
Fund, National Intermediate Municipal Fund and U.S. Government Income Fund, re-
spectively, and voluntarily absorbed expenses of $145,888 and $69,013 for the
National Intermediate Municipal Fund and U.S. Government Income Fund, respec-
tively.
SBAM also acts as administrator for each of the Funds. SBAM has delegated its
responsibilities as administrator to SSB Citi Fund Management LLC ("SSBC"),
formerly known as SSBC Fund Management Inc., an affiliate of SBAM, pursuant to
a Sub- Administration Agreement between SBAM and SSBC.
Each Fund has an agreement with CFBDS, Inc. to distribute its shares pursuant
to a multiple pricing system. Each class (except for Class O) of each Fund is
authorized pursuant to a services and distribution plan applicable to that
class of shares ("Class A Plan," the "Class B Plan," and the "Class 2 Plan,"
collectively, the "Plans") adopted pursuant to Rule 12b-1 under the Investment
Company Act of 1940, as amended ("1940 Act"), to pay the distributor an annual
service fee with respect to Class A, Class B, and Class 2 shares of the appli-
cable Funds at a rate of 0.25% of the value of the average daily net assets of
the respective class. The distributor is paid an annual distribution fee with
respect to Class B shares of each Fund at a rate of 0.75% of the value of the
average daily net assets of the respective class. The distributor is also paid
an annual distribution fee with respect to Class 2 shares of each Fund at a
rate of 0.50% of the value of the average daily net assets of the respective
class. Class O shares are not subject to a service or distribution plan fee.
For the year ended December 31, 1999, total service and distribution plan fees
were as follows:
<TABLE>
<CAPTION>
Class A Class B Class 2
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
High Yield Bond Fund.............................. $346,964 $3,240,241 $682,258
Strategic Bond Fund............................... 53,329 698,248 194,893
National Intermediate Municipal Fund.............. 11,096 34,377 19,184
U.S. Government Income Fund....................... 16,778 158,190 38,499
</TABLE>
SSB received $109,346 as its portion of the sales charge on sales of Class A
and Class 2 shares of the Funds during the year ended December 31, 1999. In ad-
dition, contingent deferred sales charges of $2,241,542 were paid to SSB in
connection with redemptions of certain Class B and Class 2 shares of the Funds
during the year ended December 31, 1999.
57
<PAGE>
Notes to Financial Statements
(continued)
3. Investments
During the year ended December 31, 1999, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding short-
term securities) were as follows:
<TABLE>
<CAPTION>
Purchases Sales
------------ ------------
<S> <C> <C>
High Yield Bond Fund................................. $354,469,143 $370,470,684
============ ============
Strategic Bond Fund:
U.S. Government Securities.......................... $ 17,414,556 $ 10,813,706
Other Investments................................... 125,432,351 118,559,327
------------ ------------
$142,846,907 $129,373,033
============ ============
National Intermediate Municipal Fund................. $ 513,360 $ 619,915
============ ============
U.S. Government Income Fund.......................... $ 32,701,284 $ 26,006,546
============ ============
</TABLE>
At December 31, 1999, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were substantially
as follows:
<TABLE>
<CAPTION>
Net
Gross Gross Unrealized
Unrealized Unrealized Appreciation
Appreciation Depreciation (Depreciation)
------------ ------------ --------------
<S> <C> <C> <C>
High Yield Bond Fund................ $23,533,792 $(69,918,274) $(46,384,482)
Strategic Bond Fund................. 4,168,845 (8,809,344) (4,640,499)
National Intermediate Municipal
Fund............................... 182,146 (63,143) 119,003
U.S. Government Income Fund......... 244,106 (838,420) (594,314)
</TABLE>
4. Portfolio Investment Risks
Credit and Market Risk. Funds that invest in high yield and emerging market
instruments are subject to certain credit and market risks. The yields of high
yield and emerging market debt obligations reflect, among other things,
perceived credit risk. The Funds' investment in securities rated below
investment grade typically involve risks not associated with higher rated
securities including, among others, greater risk of timely and ultimate payment
of interest and principal, greater market price volatility and less liquid
secondary market trading. The consequences of political, social, economic or
diplomatic changes may have disruptive effects on the market prices of
investments held by the Funds. The Funds' investment in non-dollar denominated
securities may also result in foreign currency losses caused by devaluations
and exchange rate fluctuations.
Financial Instruments with Off-Balance Sheet Risk. Certain Funds enter into
forward foreign currency contracts ("forward contracts") to facilitate
settlement of foreign currency denominated portfolio transactions or to manage
foreign currency exposure associated with foreign currency denominated
securities. Forward contracts involve elements of market risk in excess of the
amounts reflected in the Statements of Assets and Liabilities. The Funds bear
the risk of an unfavorable change in the foreign exchange rate underlying the
forward contract. Risks may also arise upon entering into these contracts from
the potential inability of the counterparties to meet the terms of their
contracts.
Foreign security and currency transactions may involve certain considerations
and risks not typically associated with those of U.S. dollar denominated
transactions as a result of, among other factors, the possibility of lower
levels of governmental supervision and regulation of foreign securities markets
and the possibility of political or economic instability.
58
<PAGE>
Notes to Financial Statements
(continued)
Funds that enter into mortgage dollar rolls are subject to the risk that the
market value of the securities the Fund is obligated to repurchase under the
agreement may decline below the repurchase price. In the event the buyer of
securities under a mortgage dollar roll files for bankruptcy or becomes
insolvent, the Fund's use of proceeds of the dollar roll may be restricted
pending a determination by the other party, or its trustee or receiver, whether
to enforce the Fund's obligation to repurchase the securities.
Consistent with their objective to seek high current income, certain Funds may
invest in instruments whose values and interest rates may be linked to foreign
currencies, interest rates, indices or some other financial indicator. The
value at maturity or interest rates for these instruments will increase or
decrease according to the change in the indicator to which it is indexed. These
securities are generally more volatile in nature and the risk of loss of
principal is greater.
A risk in writing a 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 into a closing transaction because of an illiquid secondary market.
In connection with purchasing loan participations, the Fund generally will have
no right to enforce compliance by the borrower, and the Fund may not benefit
directly from any collateral supporting the loan in which it has purchased the
participation. As a result, the Fund will assume the credit risk of both the
borrower and the lender that is selling the participation. In the event of the
insolvency of the lender selling the participation, the Fund may be treated as
a general creditor of the lender and may not benefit from any set-off between
the lender and the borrower.
5. Tax Information
At December 31, 1999, the High Yield Bond Fund, Strategic Bond Fund, National
Intermediate Municipal Fund and U.S. Government Income Fund had net capital
loss carry-forwards available to offset future capital gains as follows:
<TABLE>
<CAPTION>
High National U.S.
Yield Strategic Intermediate Government
Year of Bond Bond Municipal Income
Expiration Fund Fund Fund Fund
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
2005........................... -- -- $ 3,000 --
2006........................... $20,063,000 $ 97,000 34,000 --
2007........................... 52,009,000 5,093,000 7,000 $ 30,000
----------- ---------- ---------- ----------
$72,072,000 $5,190,000 $ 44,000 $ 30,000
=========== ========== ========== ==========
</TABLE>
The character of income and gains to be distributed are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles. At December 31, 1999, reclassifications were made to the
capital accounts of the Strategic Bond Fund and the U.S. Government Income Fund
to reflect permanent book/tax differences and income and gains available for
distributions under income tax regulations. Net investment income, net realized
gains and net assets were not affected by this change.
59
<PAGE>
Notes to Financial Statements
(continued)
6. Capital Stock
At December 31, 1999, the Series Funds had 10,000,000,000 shares of authorized
capital stock, par value $0.001 per share.
At December 31, 1999, total paid-in-capital amounted to the following for each
Fund:
<TABLE>
<CAPTION>
Class A Class B Class 2 Class 0
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
High Yield Bond Fund....... $158,827,581 $382,331,448 $104,382,120 $13,946,607
Strategic Bond Fund........ 20,024,129 75,859,537 25,552,586 666,919
National Intermediate
Municipal Fund............ 4,632,618 4,204,482 2,272,271 2,145,240
U.S. Government Income
Fund...................... 6,074,874 16,820,093 5,571,288 3,134,504
</TABLE>
Transactions in Fund shares for the periods indicated were as follows:
<TABLE>
<CAPTION>
Class A Shares Class B Shares
-------------------------------------------------- --------------------------------------------------
Year Ended Year Ended Year Ended Year Ended
December 31, 1999 December 31, 1998 December 31, 1999 December 31, 1998
------------------------ ------------------------ ------------------------ ------------------------
Shares Amount Shares Amount Shares Amount Shares Amount
---------- ------------ ---------- ------------ ---------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
High Yield Bond
Fund
Shares sold...... 7,527,657 $ 71,597,250 5,453,828 $ 60,936,254 6,383,699 $ 61,553,859 10,284,730 $114,127,638
Shares issued on
reinvestment.... 660,164 6,350,433 734,112 7,956,369 1,107,772 10,650,217 1,090,461 11,729,053
Shares
reacquired...... (9,682,595) (91,932,314) (5,901,066) (62,641,457) (7,821,057) (74,869,479) (6,318,633) (66,455,739)
---------- ------------ ---------- ------------ ---------- ------------ ---------- ------------
Net increase
(decrease)...... (1,494,774) $(13,984,631) 286,874 $ 6,251,166 (329,586) $ (2,665,403) 5,056,558 $ 59,400,952
========== ============ ========== ============ ========== ============ ========== ============
Strategic Bond
Fund
Shares sold...... 717,729 $ 7,102,019 1,594,029 $ 17,125,194 1,805,183 $ 17,789,421 2,937,984 $ 31,093,340
Shares issued on
reinvestment.... 107,171 1,048,568 98,183 1,033,922 211,962 2,073,291 176,786 1,857,031
Shares
reacquired...... (1,090,797) (10,667,368) (1,099,747) (11,775,361) (1,626,669) (15,902,964) (823,217) (8,600,276)
---------- ------------ ---------- ------------ ---------- ------------ ---------- ------------
Net increase
(decrease)...... (265,897) $ (2,516,781) 592,465 $ 6,383,755 390,476 $ 3,959,748 2,291,553 $ 24,350,095
========== ============ ========== ============ ========== ============ ========== ============
National
Intermediate
Municipal Fund
Shares sold...... 268,058 $ 2,836,778 188,013 $ 1,990,996 208,229 $ 2,158,130 195,942 $ 2,067,496
Shares issued on
reinvestment.... 14,368 149,190 4,426 46,941 4,874 50,347 2,464 26,046
Shares
reacquired...... (83,003) (857,848) (52,697) (556,574) (70,117) (727,565) (59,428) (626,418)
---------- ------------ ---------- ------------ ---------- ------------ ---------- ------------
Net increase
(decrease)...... 199,423 $ 2,128,120 139,742 $ 1,481,363 142,986 $ 1,480,912 138,978 $ 1,467,124
========== ============ ========== ============ ========== ============ ========== ============
U.S. Government
Income Fund
Shares sold...... 514,105 $ 5,148,415 673,099 $ 6,949,956 912,987 $ 9,173,186 1,646,527 $ 17,017,347
Shares issued on
reinvestment.... 22,541 225,335 19,256 198,504 45,912 458,194 25,167 259,639
Shares
reacquired...... (606,035) (6,029,123) (165,930) (1,717,967) (812,174) (8,149,980) (431,004) (4,448,196)
---------- ------------ ---------- ------------ ---------- ------------ ---------- ------------
Net increase
(decrease)...... (69,389) $ (655,373) 526,425 $ 5,430,493 146,725 $ 1,481,400 1,240,690 $ 12,828,790
========== ============ ========== ============ ========== ============ ========== ============
</TABLE>
** Effective September 14, 1998, Class C shares of each Fund were redesignated
as Class 2 shares.
60
<PAGE>
<TABLE>
<CAPTION>
Class 2 Shares** Class O Shares
- --------------------------------------------------- --------------------------------------------
Year Ended Year Ended Year Ended Year Ended
December 31, 1999 December 31, 1998 December 31, 1999 December 31, 1998
- ------------------------- ------------------------ --------------------- ---------------------
Shares Amount Shares Amount Shares Amount Shares Amount
- ---------- ------------ ---------- ------------ -------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
2,538,622 $ 24,581,029 4,546,686 $ 50,429,921 931,913 $ 8,944,525 934,122 $ 9,580,636
395,710 3,803,346 370,671 3,977,004 132,553 1,275,583 40,734 416,226
(2,815,036) (26,986,592) (2,632,675) (27,403,631) (540,329) (5,145,823) (274,809) (2,713,389)
- ---------- ------------ ---------- ------------ -------- ----------- -------- -----------
119,296 $ 1,397,783 2,284,682 $ 27,003,294 524,137 $ 5,074,285 700,047 $ 7,283,473
========== ============ ========== ============ ======== =========== ======== ===========
449,804 $ 4,437,717 1,340,214 $ 14,176,621 9,791 $ 93,075 13,223 $ 137,666
106,879 1,043,564 110,406 1,160,601 3,437 33,567 3,136 33,030
(917,115) (8,992,399) (615,411) (6,389,606) (1,544) (14,800) (26,791) (294,676)
- ---------- ------------ ---------- ------------ -------- ----------- -------- -----------
(360,432) $ (3,511,118) 835,209 $ 8,947,616 11,684 $ 111,842 (10,432) $ (123,980)
========== ============ ========== ============ ======== =========== ======== ===========
129,309 $ 1,347,114 253,512 $ 2,680,859 9,954 $ 104,599 15,321 $ 162,308
7,041 72,907 3,398 35,947 6,001 62,404 6,105 64,696
(137,489) (1,416,831) (88,826) (940,562) (539,679) (5,623,810) (310,943) (3,295,570)
- ---------- ------------ ---------- ------------ -------- ----------- -------- -----------
(1,139) $ 3,190 168,084 $ 1,776,244 (523,724) $(5,456,807) (289,517) $(3,068,566)
========== ============ ========== ============ ======== =========== ======== ===========
349,784 $ 3,530,709 543,986 $ 5,615,027 13,145 $ 134,379 23,812 $ 246,448
15,794 157,640 8,609 88,646 1,572 15,699 986 10,158
(281,660) (2,844,702) (167,603) (1,723,364) (3,828) (38,290) (638,311) (6,606,666)
- ---------- ------------ ---------- ------------ -------- ----------- -------- -----------
83,918 $ 843,647 384,992 $ 3,980,309 10,889 $ 111,788 (613,513) $(6,350,060)
========== ============ ========== ============ ======== =========== ======== ===========
</TABLE>
61
<PAGE>
Notes to Financial Statements
(continued)
At December 31, 1999, Salomon Brothers Holding Co. Inc. owned approximately the
following percentages of total shares outstanding of the following Funds:
<TABLE>
<S> <C>
National Intermediate Municipal Fund........................................ 15%
U.S. Government Income Fund................................................. 10%
</TABLE>
62
<PAGE>
Financial Highlights
For a share of each class of capital stock outstanding throughout each year
ended December 31, except where noted:
High Yield Bond Fund
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Class A Shares
-----------------------------------------------
1999 1998 1997 1996 1995(1)
-----------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Year................... $9.89 $11.74 $11.54 $10.53 $10.00
-------- -------- -------- -------- -------
Income (Loss) From
Operations:
Net investment income .... 1.01* 1.05 1.06 1.10 0.92
Net realized and
unrealized gain (loss)... (0.36) (1.84) 0.38 1.11 0.67
-------- -------- -------- -------- -------
Total Income (Loss) From
Operations................ 0.65 (0.79) 1.44 2.21 1.59
-------- -------- -------- -------- -------
Less Distributions From:
Net investment income..... (1.06) (1.06) (1.05) (1.10) (0.91)
Net realized gains........ -- -- (0.19) (0.10) (0.15)
-------- -------- -------- -------- -------
Total Distributions........ (1.06) (1.06) (1.24) (1.20) (1.06)
-------- -------- -------- -------- -------
Net Asset Value, End of
Year...................... $9.48 $9.89 $11.74 $11.54 $10.53
======== ======== ======== ======== =======
Total Return(2)............ 7.0% -7.1% 13.0% 21.9% 16.6%++
Net Assets, End of Year
(000s).................... $125,568 $145,730 $169,721 $ 65,935 $10,789
Ratios to Average Net
Assets:
Expenses.................. 1.27% 1.24% 1.24% 1.24% 1.24%+
Net investment income..... 10.46% 9.58% 8.66% 9.38% 10.58%+
Portfolio Turnover Rate.... 65% 66% 79% 85% 109%
Before applicable waiver of
management fee, expenses
absorbed by SBAM and
credits earned on custodian
cash balances, net
investment income per share
and expense ratios would
have been:
Net investment income per
share.................... $1.01* $1.04 $1.04 $1.09 $0.87
Expense ratio............. 1.29% 1.32% 1.34% 1.50% 1.80%+
<CAPTION>
Class B Shares
-----------------------------------------------
1999 1998 1997 1996 1995(1)
-----------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Year................... $9.87 $11.71 $11.53 $10.53 $10.00
-------- -------- -------- -------- -------
Income (Loss) From
Operations:
Net investment income .... 0.94* 0.97 0.98 1.02 0.85
Net realized and
unrealized gain (loss)... (0.36) (1.84) 0.37 1.11 0.68
-------- -------- -------- -------- -------
Total Income (Loss) From
Operations................ 0.58 (0.87) 1.35 2.13 1.53
-------- -------- -------- -------- -------
Less Distributions From:
Net investment income..... (0.97) (0.97) (0.98) (1.03) (0.85)
Net realized gains........ -- -- (0.19) (0.10) (0.15)
-------- -------- -------- -------- -------
Total Distributions........ (0.97) (0.97) (1.17) (1.13) (1.00)
-------- -------- -------- -------- -------
Net Asset Value, End of
Year...................... $9.48 $9.87 $11.71 $11.53 $10.53
======== ======== ======== ======== =======
Total Return(2)............ 6.3% -7.8% 12.2% 21.2% 15.7%++
Net Assets, End of Year
(000s).................... $311,832 $327,661 $329,672 $106,797 $10,108
Ratios to Average Net
Assets:
Expenses.................. 2.02% 1.99% 1.99% 1.99% 1.96%+
Net investment income..... 9.74% 8.87% 7.90% 8.49% 9.53%+
Portfolio Turnover Rate.... 65% 66% 79% 85% 109%
Before applicable waiver of
management fee, expenses
absorbed by SBAM and
credits earned on custodian
cash balances, net
investment income per share
and expense ratios would
have been:
Net investment income per
share.................... $0.94* $0.96 $0.97 $1.01 $0.80
Expense ratio............. 2.03% 2.07% 2.09% 2.24% 2.51%+
</TABLE>
High Yield Bond Fund
- ------
(1) For the period from February 22, 1995 (inception date) to December 31,
1995.
(2) Total return is calculated assuming a $1,000 investment of the first day of
each period reported, reinvestment of all dividends at the net asset value
on the ex-dividend date, and a sale at net asset value on the last day of
each period. Initial sales charge or contingent deferred sales charge is
not reflected in the calculation of total return.
* Per share amounts have been calculated using average shares method.
++ Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized.
63
<PAGE>
Financial Highlights
(continued)
For a share of each class of capital stock outstanding throughout each year
ended December 31, except where noted:
High Yield Bond Fund
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Class 2 Shares
------------------------------------------
1999 1998(1) 1997 1996 1995(2)
------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Year........................... $9.86 $11.70 $11.52 $10.53 $10.00
------- ------- ------- ------- ------
Income (Loss) From Operations:
Net investment income ......... 0.96* 0.97 0.99 1.02 0.85
Net realized and unrealized
gain (loss)................... (0.35) (1.84) 0.36 1.10 0.68
------- ------- ------- ------- ------
Total Income (Loss) From
Operations..................... 0.61 (0.87) 1.35 2.12 1.53
------- ------- ------- ------- ------
Less Distributions From:
Net investment income.......... (0.97) (0.97) (0.98) (1.03) (0.85)
Net realized gains............. -- -- (0.19) (0.10) (0.15)
------- ------- ------- ------- ------
Total Distributions............. (0.97) (0.97) (1.17) (1.13) (1.00)
------- ------- ------- ------- ------
Net Asset Value, End of Year.... $9.50 $9.86 $11.70 $11.52 $10.53
======= ======= ======= ======= ======
Total Return(3)................. 6.6% -7.8% 12.2% 21.1% 15.8%++
Net Assets, End of Year (000s).. $84,527 $86,596 $76,042 $13,773 $1,274
Ratios to Average Net Assets:
Expenses....................... 1.79% 1.99% 1.99% 1.99% 1.98%+
Net investment income.......... 9.95% 8.89% 7.87% 8.43% 9.61%+
Portfolio Turnover Rate......... 65% 66% 79% 85% 109%
Before applicable waiver of
management fee, expenses
absorbed by SBAM and credits
earned on custodian cash
balances, net investment income
per share and expense ratios
would have been:
Net investment income per
share......................... $0.96* $0.96 $0.98 $1.01 $0.80
Expense ratio.................. 1.81% 2.07% 2.08% 2.24% 2.54%+
<CAPTION>
Class O Shares
------------------------------------------
1999 1998 1997 1996 1995(2)
------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Year........................... $9.89 $11.75 $11.53 $10.54 $10.00
------- ------- ------- ------- ------
Income (Loss) From Operations:
Net investment income ......... 1.04* 1.09 1.08 1.16 0.95
Net realized and unrealized
gain (loss)................... (0.36) (1.86) 0.40 1.05 0.67
------- ------- ------- ------- ------
Total Income (Loss) From
Operations..................... 0.68 (0.77) 1.48 2.21 1.62
------- ------- ------- ------- ------
Less Distributions From:
Net investment income.......... (1.09) (1.09) (1.07) (1.12) (0.93)
Net realized gains............. -- -- (0.19) (0.10) (0.15)
------- ------- ------- ------- ------
Total Distributions............. (1.09) (1.09) (1.26) (1.22) (1.08)
------- ------- ------- ------- ------
Net Asset Value, End of Year.... $9.48 $9.89 $11.75 $11.53 $10.54
======= ======= ======= ======= ======
Total Return(3)................. 7.3% -6.9% 13.4% 22.0% 16.8%++
Net Assets, End of Year (000s).. $13,537 $ 8,936 $ 2,386 $ 393 $7,854
Ratios to Average Net Assets:
Expenses....................... 1.02% 1.01% 0.99% 0.99% 1.00%+
Net investment income.......... 10.76% 10.85% 8.93% 10.64% 10.59%+
Portfolio Turnover Rate......... 65% 66% 79% 85% 109%
Before applicable waiver of
management fee, expenses
absorbed by SBAM and credits
earned on custodian cash
balances, net investment income
per share and expense ratios
would have been:
Net investment income per
share......................... $1.04* $1.08 $1.07 $1.13 $0.90
Expense ratio.................. 1.03% 1.09% 1.09% 1.24% 1.55%+
</TABLE>
High Yield Bond Fund
- ------
(1) On September 14, 1998, Class C shares were renamed Class 2 shares.
(2) For the period from February 22, 1995 (inception date) to December 31,
1995.
(3) Total return is calculated assuming a $1,000 investment of the first day of
each period reported, reinvestment of all dividends at the net asset value
on the ex-dividend date, and a sale at net asset value on the last day of
each period. Initial sales charge or contingent deferred sales charge is
not reflected in the calculation of total return.
* Per share amounts have been calculated using average shares method.
++ Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized.
64
<PAGE>
Financial Highlights
(continued)
For a share of each class of capital stock outstanding throughout each year
ended December 31, except where noted:
Strategic Bond Fund
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Class A Shares
------------------------------------------
1999 1998 1997 1996 1995(1)
------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Year........................... $10.19 $10.94 $10.83 $10.53 $10.00
------- ------- ------- ------- ------
Income (Loss) From Operations:
Net investment income.......... 0.88* 0.76 0.76* 0.87* 0.84
Net realized and unrealized
gain (loss)................... (0.41) (0.65) 0.41 0.55 0.78
------- ------- ------- ------- ------
Total Income (Loss) From
Operations..................... 0.47 0.11 1.17 1.42 1.62
------- ------- ------- ------- ------
Less Distributions From:
Net investment income.......... (0.85) (0.85) (0.89) (0.94) (0.85)
In excess of net investment
income........................ -- -- -- (0.01) --
Net realized gains............. -- (0.01) (0.17) (0.17) (0.24)
------- ------- ------- ------- ------
Total Distributions............. (0.85) (0.86) (1.06) (1.12) (1.09)
------- ------- ------- ------- ------
Net Asset Value, End of Year.... $9.81 $10.19 $10.94 $10.83 $10.53
======= ======= ======= ======= ======
Total Return(2)................. 5.0% 1.1% 11.2% 14.1% 16.8%++
Net Assets, End of Year (000s).. $18,571 $21,995 $17,150 $8,345 $513
Ratios to Average Net Assets:
Expenses....................... 1.24% 1.24% 1.24% 1.24% 1.23%+
Net investment income.......... 8.94% 7.11% 6.99% 8.09% 9.51%+
Portfolio Turnover Rate......... 114% 109% 184% 122% 161%
Before applicable waiver of
management fee, expenses
absorbed by SBAM and credits
earned on custodian cash
balances, net investment income
per share and expense ratios
would have been:
Net investment income per
share......................... $0.86* $0.74 $0.73* $0.79* $0.76
Expense ratio.................. 1.44% 3.79% 3.81% 5.50% 2.11%+
<CAPTION>
Class B Shares
------------------------------------------
1999 1998 1997 1996 1995(1)
------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Year........................... $10.18 $10.93 $10.82 $10.53 $10.00
------- ------- ------- ------- ------
Income (Loss) From Operations:
Net investment income.......... 0.81* 0.69 0.67* 0.79* 0.76
Net realized and unrealized
gain (loss)................... (0.41) (0.66) 0.41 0.53 0.79
------- ------- ------- ------- ------
Total Income (Loss) From
Operations..................... 0.40 0.03 1.08 1.32 1.55
------- ------- ------- ------- ------
Less Distributions From:
Net investment income.......... (0.77) (0.77) (0.80) (0.85) (0.78)
In excess of net investment
income........................ -- -- -- (0.01) --
Net realized gains............. -- (0.01) (0.17) (0.17) (0.24)
------- ------- ------- ------- ------
Total Distributions............. (0.77) (0.78) (0.97) (1.03) (1.02)
------- ------- ------- ------- ------
Net Asset Value, End of Year.... $9.81 $10.18 $10.93 $10.82 $10.53
======= ======= ======= ======= ======
Total Return(2)................. 4.2% 0.3% 10.4% 13.0% 16.1%++
Net Assets, End of Year (000s).. $69,289 $67,928 $47,921 $14,291 $1,879
Ratios to Average Net Assets:
Expenses....................... 1.99% 1.99% 1.99% 1.98% 1.97%+
Net investment income.......... 8.20% 6.37% 6.12% 7.34% 8.75%+
Portfolio Turnover Rate......... 114% 109% 184% 122% 161%
Before applicable waiver of
management fee, expenses
absorbed by SBAM and credits
earned on custodian cash
balances, net investment income
per share and expense ratios
would have been:
Net investment income per
share......................... $0.79* $0.67 $0.64* $0.71* $0.69
Expense ratio.................. 2.19% 2.18% 2.28% 2.73% 2.85%+
</TABLE>
Strategic Bond Fund
- ------
(1) For the period from February 22, 1995 (inception date) to December 31,
1995.
(2) Total return is calculated assuming a $1,000 investment on the first day of
each period reported, reinvestment of all dividends at the net asset value
on the payable date, and a sale at net asset value on the last day of each
period. Initial sales charge or contingent deferred sales charge is not re-
flected in the calculation of total return.
* Per share amounts have been calculated using the average shares method.
++ Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized.
65
<PAGE>
Financial Highlights
(continued)
For a share of each class of capital stock outstanding throughout each year
ended December 31, except where noted:
Strategic Bond Fund
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Class 2 Shares
-----------------------------------------
1999 1998(1) 1997 1996 1995(2)
<S> <C> <C> <C> <C> <C>
-----------------------------------------
Net Asset Value, Beginning of
Year............................ $10.18 $10.94 $10.82 $10.53 $10.00
------- ------- ------- ------ ------
Income (Loss) From Operations:
Net investment income........... 0.83* 0.69 0.66* 0.78* 0.77
Net realized and unrealized gain
(loss)......................... (0.40) (0.67) 0.43 0.54 0.78
------- ------- ------- ------ ------
Total Income From Operations..... 0.43 0.02 1.09 1.32 1.55
------- ------- ------- ------ ------
Less Distributions From:
Net investment income........... (0.77) (0.77) (0.80) (0.85) (0.78)
In excess of net investment
income......................... -- -- -- (0.01) --
Net realized gains.............. -- (0.01) (0.17) (0.17) (0.24)
------- ------- ------- ------ ------
Total Distributions.............. (0.77) (0.78) (0.97) (1.03) (1.02)
------- ------- ------- ------ ------
Net Asset Value, End of Year..... $9.84 $10.18 $10.94 $10.82 $10.53
======= ======= ======= ====== ======
Total Return(3).................. 4.5% 0.2% 10.5% 13.1% 16.1%++
Net Assets, End of Year (000s)... $22,857 $27,327 $20,220 $4,575 $411
Ratios to Average Net Assets:
Expenses........................ 1.76% 1.99% 1.99% 1.98% 1.99%+
Net investment income........... 8.43% 6.37% 6.09% 7.26% 8.77%+
Portfolio Turnover Rate.......... 114% 109% 184% 122% 161%
Before applicable waiver of
management fee, expenses absorbed
by SBAM and credits earned on
custodian cash balances, net
investment income per share and
expense ratios would have been:
Net investment income per
share.......................... $0.81* $0.67 $0.63* $0.70* $0.70
Expense ratio................... 1.96% 2.18% 2.28% 2.72% 2.87%+
<CAPTION>
Class O Shares
-----------------------------------------
1999 1998 1997 1996 1995(2)
<S> <C> <C> <C> <C> <C>
-----------------------------------------
Net Asset Value, Beginning of
Year............................ $10.18 $10.93 $10.82 $10.53 $10.00
------- ------- ------- ------ ------
Income (Loss) From Operations:
Net investment income........... 0.91* 0.77 0.78* 0.92* 0.87
Net realized and unrealized gain
(loss)......................... (0.41) (0.63) 0.41 0.51 0.77
------- ------- ------- ------ ------
Total Income From Operations..... 0.50 0.14 1.19 1.43 1.64
------- ------- ------- ------ ------
Less Distributions From:
Net investment income........... (0.88) (0.88) (0.91) (0.96) (0.87)
In excess of net investment
income......................... -- -- -- (0.01) --
Net realized gains.............. -- (0.01) (0.17) (0.17) (0.24)
------- ------- ------- ------ ------
Total Distributions.............. (0.88) (0.89) (1.08) (1.14) (1.11)
------- ------- ------- ------ ------
Net Asset Value, End of Year..... $9.80 $10.18 $10.93 $10.82 $10.53
======= ======= ======= ====== ======
Total Return(3).................. 5.3% 1.3% 11.5% 14.2% 17.0%++
Net Assets, End of Year (000s)... $594 $498 $649 $3,817 $9,763
Ratios to Average Net Assets:
Expenses........................ 0.99% 0.99% 0.96% 1.00% 0.99%+
Net investment income........... 9.30% 7.37% 7.22% 8.65% 9.74%+
Portfolio Turnover Rate.......... 114% 109% 184% 122% 161%
Before applicable waiver of
management fee, expenses absorbed
by SBAM and credits earned on
custodian cash balances, net
investment income per share and
expense ratios would have been:
Net investment income per
share.......................... $0.89* $0.75 $0.75* $0.84* $0.79
Expense ratio................... 1.19% 1.18% 1.25% 1.74% 1.87%+
</TABLE>
Strategic Bond Fund
- --------------------------------------------------------------------------------
(1) On September 14, 1998, Class C shares were renamed Class 2 shares.
(2) For the period from February 22, 1995 (inception date) to December 31,
1995.
(3) Total return is calculated assuming a $1,000 investment on the first day of
each period reported, reinvestment of all dividends at the net asset value
on the payable date, and a sale at net asset value on the last day of each
period. Initial sales charge or contingent deferred sales charge is not re-
flected in the calculation of total return.
* Per share amounts have been calculated using the average shares method.
++Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized.
66
<PAGE>
Financial Highlights
(continued)
For a share of each class of capital stock outstanding throughout each year
ended December 31, except where noted:
National Intermediate Municipal Fund
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Class A Shares
--------------------------------------
1999 1998 1997 1996 1995(1)
--------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year.. $10.61 $10.62 $10.35 $10.43 $10.00
------ ------ ------ ------ ------
Income (Loss) From Operations:
Net investment income.............. 0.48* 0.47 0.48 0.48 0.40
Net realized and unrealized gain
(loss)............................ (0.46) -- 0.28 (0.06) 0.46
------ ------ ------ ------ ------
Total Income From Operations........ 0.02 0.47 0.76 0.42 0.86
------ ------ ------ ------ ------
Less Distributions From:
Net investment income.............. (0.48) (0.48) (0.48) (0.48) (0.40)
Net realized gains................. -- -- (0.01) (0.02) (0.03)
------ ------ ------ ------ ------
Total Distributions................. (0.48) (0.48) (0.49) (0.50) (0.43)
------ ------ ------ ------ ------
Net Asset Value, End of Year........ $10.15 $10.61 $10.62 $10.35 $10.43
====== ====== ====== ====== ======
Total Return(2)..................... 0.2% 4.5% 7.5% 4.2% 8.7%++
Net Assets, End of Year (000s)...... $4,460 $2,545 $1,063 $696 $569
Ratios to Average Net Assets:
Expenses........................... 0.63% 0.75% 0.75% 0.75% 0.75%+
Net investment income.............. 4.44% 4.28% 4.53% 4.62% 4.63%+
Portfolio Turnover Rate ............ 4% 8% 1% 19% 29%
Before applicable waiver of
management fee, expenses absorbed by
SBAM and credits earned on custodian
cash balances, net investment income
per share and expense ratios would
have been:
Net investment income per share ... $0.33* $0.37 $0.36 $0.35 $0.32
Expense ratio...................... 2.06% 1.67% 1.82% 2.02% 1.71%+
National Intermediate Municipal Fund
- -------------------------------------------------------------------------------
<CAPTION>
Class B Shares
--------------------------------------
1999 1998 1997 1996 1995(1)
--------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year.. $10.57 $10.59 $10.33 $10.42 $10.00
------ ------ ------ ------ ------
Income (Loss) From Operations:
Net investment income.............. 0.38* 0.39 0.40 0.40 0.34
Net realized and unrealized gain
(loss)............................ (0.43) -- 0.28 (0.06) 0.45
------ ------ ------ ------ ------
Total Income (Loss) From
Operations......................... (0.05) 0.39 0.68 0.34 0.79
------ ------ ------ ------ ------
Less Distributions From:
Net investment income.............. (0.41) (0.41) (0.40) (0.41) (0.34)
In excess of net investment
income............................ -- -- (0.01) -- --
Net realized gains................. -- -- (0.01) (0.02) (0.03)
------ ------ ------ ------ ------
Total Distributions................. (0.41) (0.41) (0.42) (0.43) (0.37)
------ ------ ------ ------ ------
Net Asset Value, End of Year........ $10.11 $10.57 $10.59 $10.33 $10.42
====== ====== ====== ====== ======
Total Return(2)..................... (0.5)% 3.7% 6.7% 3.4% 8.0%++
Net Assets, End of Year (000s)...... $4,087 $2,763 $1,295 $702 $432
Ratios to Average Net Assets:
Expenses........................... 1.35% 1.50% 1.50% 1.50% 1.50%+
Net investment income.............. 3.70% 3.54% 3.75% 3.88% 3.85%+
Portfolio Turnover Rate............. 4% 8% 1% 19% 29%
Before applicable waiver of
management fee, expenses absorbed by
SBAM and credits earned on custodian
cash balances, net investment income
per share and expense ratios would
have been:
Net investment income per share.... $0.23* $0.29 $0.28 $0.27 $0.25
Expense ratio...................... 2.78% 2.42% 2.57% 2.77% 2.45%+
</TABLE>
- ------
(1) For the period from February 22, 1995 (inception date) to December 31,
1995.
(2) Total return is calculated assuming a $1,000 investment on the first day of
each period reported, reinvestment of all dividends at the net asset value
on the payable date, and a sale at net asset value on the last day of each
period. Initial sales charge or contingent deferred sales charge is not re-
flected in the calculation of total return.
* Per share amounts have been calculated using the average shares method.
++ Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized.
67
<PAGE>
Financial Highlights
(continued)
For a share of each class of capital stock outstanding throughout each year
ended December 31, except where noted:
National Intermediate Municipal Fund
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Class 2 Shares
-----------------------------------------
1999 1998(1) 1997 1996 1995(2)
-----------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Year............................ $10.57 $10.59 $ 10.33 $10.42 $10.00
------ ------ ------- ------ ------
Income (Loss) From Operations:
Net investment income........... 0.41* 0.39 0.40 0.40 0.34
Net realized and unrealized gain
(loss)......................... (0.44) -- 0.28 (0.06) 0.45
------ ------ ------- ------ ------
Total Income (Loss) From
Operations...................... (0.03) 0.39 0.68 0.34 0.79
------ ------ ------- ------ ------
Less Distributions From:
Net investment income........... (0.41) (0.41) (0.40) (0.41) (0.34)
In excess of net investment
income......................... -- -- (0.01) -- --
Net realized gains.............. -- -- (0.01) (0.02) (0.03)
------ ------ ------- ------ ------
Total Distributions.............. (0.41) (0.41) (0.42) (0.43) (0.37)
------ ------ ------- ------ ------
Net Asset Value, End of Year..... $10.13 $10.57 $ 10.59 $10.33 $10.42
====== ====== ======= ====== ======
Total Return(3).................. (0.3)% 3.7% 6.7% 3.4% 8.0%++
Net Assets, End of Year (000s)... $2,183 $2,291 $514 $468 $271
Ratios to Average Net Assets:
Expenses........................ 1.16% 1.50% 1.50% 1.50% 1.50%+
Net investment income........... 3.91% 3.51% 3.81% 3.88% 3.85%+
Portfolio Turnover Rate.......... 4% 8% 1% 19% 29%
Before applicable waiver of
management fee, expenses absorbed
by SBAM and credits earned on
custodian cash balances, net
investment income per share and
expense ratios would have been:
Net investment income per
share.......................... $0.26* $0.29 $0.28 $0.27 $0.25
Expense ratio................... 2.60% 2.42% 2.57% 2.77% 2.46%+
- -------------------------------------------------------------------------------
<CAPTION>
Class O Shares
-----------------------------------------
1999 1998 1997 1996 1995(2)
-----------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Year............................ $10.60 $10.61 $ 10.34 $10.43 $10.00
------ ------ ------- ------ ------
Income (Loss) From Operations:
Net investment income........... 0.49* 0.48 0.50 0.50 0.42
Net realized and unrealized gain
(loss)......................... (0.44) 0.01 0.28 (0.07) 0.46
------ ------ ------- ------ ------
Total Income From Operations..... 0.05 0.49 0.78 0.43 0.88
------ ------ ------- ------ ------
Less Distributions From:
Net investment income........... (0.50) (0.50) (0.50) (0.50) (0.42)
Net realized gains.............. -- -- (0.01) (0.02) (0.03)
------ ------ ------- ------ ------
Total Distributions.............. (0.50) (0.50) (0.51) (0.52) (0.45)
------ ------ ------- ------ ------
Net Asset Value, End of Year..... $10.15 $10.60 $ 10.61 $10.34 $10.43
====== ====== ======= ====== ======
Total Return(3).................. 0.5% 4.8% 7.8% 4.3% 9.0%++
Net Assets, End of Year (000s)... $2,544 $8,211 $11,286 $9,786 $9,675
Ratios to Average Net Assets:
Expenses........................ 0.41% 0.50% 0.50% 0.50% 0.50%+
Net investment income........... 4.75% 4.58% 4.79% 4.88% 4.86%+
Portfolio Turnover Rate.......... 4% 8% 1% 19% 29%
Before applicable waiver of
management fee, expenses absorbed
by SBAM and credits earned on
custodian cash balances, net
investment income per share and
expense ratios would have been:
Net investment income per
share.......................... $0.34* $0.38 $0.39 $0.37 $0.34
Expense ratio................... 1.86% 1.42% 1.57% 1.77% 1.46%+
</TABLE>
National Intermediate Municipal Fund
- ------
(1) On September 14, 1998, Class C Shares were renamed Class 2 Shares.
(2) For the period from February 22, 1995 (inception date) to December 31,
1995.
(3) Total return is calculated assuming a $1,000 investment on the first day of
each period reported, reinvestment of all dividends at the net asset value
on the payable date, and a sale at net asset value on the last day of each
period. Initial sales charge or contingent deferred sales charge is not re-
flected in the calculation of total return.
* Per share amounts have been calculated using the average shares method.
++ Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized.
68
<PAGE>
Financial Highlights
(continued)
For a share of each class of capital stock outstanding throughout each year
ended December 31, except where noted:
U.S. Government Income Fund
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Class A Shares
----------------------------------------
1999 1998 1997 1996 1995(1)
----------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Year............................. $10.28 $10.20 $10.07 $10.32 $10.00
------- ------- ------ ------ ------
Income (Loss) From Operations:
Net investment income............ 0.54* 0.55 0.58 0.54 0.49
Net realized and unrealized gain
(loss).......................... (0.39) 0.21 0.19 (0.19) 0.43
------- ------- ------ ------ ------
Total Income From Operations...... 0.15 0.76 0.77 0.35 0.92
------- ------- ------ ------ ------
Less Distributions From:
Net investment income............ (0.59) (0.57) (0.54) (0.54) (0.49)
In excess of net investment
income.......................... -- (0.11) (0.10) (0.06) (0.10)
Net realized gains............... -- -- -- -- (0.01)
------- ------- ------ ------ ------
Total Distributions............... (0.59) (0.68) (0.64) (0.60) (0.60)
------- ------- ------ ------ ------
Net Asset Value, End of Year...... $ 9.84 $10.28 $10.20 $10.07 $10.32
======= ======= ====== ====== ======
Total Return(2)................... 1.5% 7.6% 7.9% 3.6% 9.5%++
Net Assets, End of Year (000s).... $5,771 $6,744 $1,320 $1,188 $278
Ratios to Average Net Assets:
Expenses......................... 0.85% 0.85% 0.85% 0.84% 0.85%+
Net investment income............ 5.34% 4.98% 5.77% 5.22% 5.67%+
Portfolio Turnover Rate........... 96% 173% 261% 365% 230%
Before applicable waiver of
management fee, expenses absorbed
by SBAM and credits earned on
custodian cash balances, net
investment income per share and
expense ratios would have been:
Net investment income per share.. $0.45* $0.47 $0.47 $0.38 $0.40
Expense ratio.................... 1.67% 1.63% 2.02% 2.21% 1.90%+
U.S. Government Income Fund
<CAPTION>
Class B Shares
----------------------------------------
1999 1998 1997 1996 1995(1)
----------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Year............................. $ 10.29 $ 10.20 $10.06 $10.32 $10.00
------- ------- ------ ------ ------
Income (Loss) From Operations:
Net investment income............ 0.49* 0.48 0.51 0.46 0.43
Net realized and unrealized gain
(loss).......................... (0.42) 0.21 0.19 (0.20) 0.43
------- ------- ------ ------ ------
Total Income From Operations...... 0.07 0.69 0.70 0.26 0.86
------- ------- ------ ------ ------
Less Distributions From:
Net investment income............ (0.51) (0.49) (0.46) (0.46) (0.43)
In excess of net investment
income.......................... -- (0.11) (0.10) (0.06) (0.10)
Net realized gains............... -- -- -- -- (0.01)
------- ------- ------ ------ ------
Total Distributions............... (0.51) (0.60) (0.56) (0.52) (0.54)
------- ------- ------ ------ ------
Net Asset Value, End of Year...... $ 9.85 $ 10.29 $10.20 $10.06 $10.32
======= ======= ====== ====== ======
Total Return(2)................... 0.7% 6.9% 7.2% 2.7% 8.8%++
Net Assets, End of Year (000s).... $16,109 $15,315 $2,531 $1,266 $572
Ratios to Average Net Assets:
Expenses......................... 1.60% 1.60% 1.60% 1.59% 1.60%+
Net investment income............ 4.85% 4.20% 4.96% 4.51% 4.85%+
Portfolio Turnover Rate........... 96% 173% 261% 365% 230%
Before applicable waiver of
management fee, expenses absorbed
by SBAM and credits earned on
custodian cash balances, net
investment income per share and
expense ratios would have been:
Net investment income per share.. $0.40* $0.39 $0.39 $0.30 $0.34
Expense ratio.................... 2.42% 2.39% 2.77% 2.96% 2.64%+
</TABLE>
- ------
(1) For the period from February 22, 1995 (inception date) to December 31,
1995.
(2) Total return is calculated assuming a $1,000 investment on the first day of
each period reported, reinvestment of all dividends at the net asset value
on the payable date, and a sale at net asset value on the last day of each
period. Initial sales charge or contingent deferred sales charge is not re-
flected in the calculation of total return.
* Per share amounts have been calculated using the average shares method.
++ Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized.
69
<PAGE>
Financial Highlights
(continued)
For a share of each class of capital stock outstanding throughout each year
ended December 31, except where noted:
U.S. Government Income Fund
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Class 2 Shares
---------------------------------------
1999 1998(1) 1997 1996 1995(2)
---------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Year.............................. $10.28 $10.19 $10.05 $10.32 $10.00
------ ------ ------ ------ ------
Income (Loss) From Operations:
Net investment income............. 0.49* 0.48 0.51 0.46 0.43
Net realized and unrealized gain
(loss)........................... (0.40) 0.21 0.19 (0.21) 0.43
------ ------ ------ ------ ------
Total Income From Operations....... 0.09 0.69 0.70 0.25 0.86
------ ------ ------ ------ ------
Less Distributions From:
Net investment income............. (0.51) (0.49) (0.46) (0.46) (0.43)
In excess of net investment
income........................... -- (0.11) (0.10) (0.06) (0.10)
Net realized gains................ -- -- -- -- (0.01)
------ ------ ------ ------ ------
Total Distributions................ (0.51) (0.60) (0.56) (0.52) (0.54)
------ ------ ------ ------ ------
Net Asset Value, End of Year....... $ 9.86 $10.28 $10.19 $10.05 $10.32
====== ====== ====== ====== ======
Total Return(3).................... 0.9% 6.9% 7.0% 2.7% 8.8%++
Net Assets, End of Year (000s)..... $5,351 $4,715 $751 $422 $273
Ratios to Average Net Assets:
Expenses.......................... 1.37% 1.60% 1.59% 1.60% 1.60%+
Net investment income............. 4.91% 4.25% 4.94% 4.51% 4.92%+
Portfolio Turnover Rate............ 96% 173% 261% 365% 230%
Before applicable waiver of
management fee, expenses absorbed
by SBAM and credits earned on
custodian cash balances, net
investment income per share and
expense ratios would have been:
Net investment income per share... $0.40* $0.39 $0.39 $0.31 $0.34
Expense ratio..................... 2.20% 2.39% 2.76% 2.97% 2.64%+
U.S. Government Income Fund
<CAPTION>
Class O Shares
---------------------------------------
1999 1998 1997 1996 1995(2)
---------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Year.............................. $10.29 $10.19 $10.06 $10.32 $10.00
------ ------ ------ ------ ------
Income (Loss) From Operations:
Net investment income............. 0.57* 0.57* 0.61 0.56 0.52
Net realized and unrealized gain
(loss)........................... (0.40) 0.23 0.18 (0.20) 0.42
------ ------ ------ ------ ------
Total Income From Operations....... 0.17 0.80 0.79 0.36 0.94
------ ------ ------ ------ ------
Less Distributions From:
Net investment income............. (0.61) (0.59) (0.56) (0.56) (0.52)
In excess of net investment
income........................... -- (0.11) (0.10) (0.06) (0.10)
Net realized gains................ -- -- -- -- --
------ ------ ------ ------ ------
Total Distributions................ (0.61) (0.70) (0.66) (0.62) (0.62)
------ ------ ------ ------ ------
Net Asset Value, End of Year....... $ 9.85 $10.29 $10.19 $10.06 $10.32
====== ====== ====== ====== ======
Total Return(3).................... 1.8% 8.1% 8.1% 3.7% 9.7%++
Net Assets, End of Year (000s)..... $3,294 $3,330 $9,553 $9,375 $9,552
Ratios to Average Net Assets:
Expenses.......................... 0.60% 0.60% 0.60% 0.60% 0.60%+
Net investment income............. 5.65% 5.52% 6.01% 5.53% 5.92%+
Portfolio Turnover Rate............ 96% 173% 261% 365% 230%
Before applicable waiver of
management fee, expenses absorbed
by SBAM and credits earned on
custodian cash balances, net
investment income per share and
expense ratios would have been:
Net investment income per share... $0.48* $0.44* $0.49 $0.41 $0.42
Expense ratio..................... 1.42% 1.38% 1.77% 1.97% 1.64%+
</TABLE>
- ------
(1) On September 14, 1998, Class C Shares were renamed Class 2 Shares.
(2) For the period from February 22, 1995 (inception date) to December 31,
1995.
(3) Total return is calculated assuming a $1,000 investment on the first day of
each period reported, reinvestment of all dividends at the net asset value
on the payable date, and a sale at net asset value on the last day of each
period. Initial sales charge or contingent deferred sales charge is not re-
flected in the calculation of total return.
* Per share amounts have been calculated using the average shares method.
++ Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized.
70
<PAGE>
Report of Independent Accountants
To the Board of Directors and Shareholders of
Salomon Brothers National Intermediate Municipal Fund
Salomon Brothers U.S. Government Income Fund
Salomon Brothers High Yield Bond Fund
Salomon Brothers Strategic Bond Fund
In our opinion, the accompanying statements of assets and liabilities, includ-
ing the portfolios of investments, and the related statements of operations, of
changes in net assets and of cash flows (for Salomon Brothers U.S. Government
Income Fund and Salomon Brothers Strategic Bond Fund) and the financial high-
lights present fairly, in all material respects, the financial position of Sal-
omon Brothers National Intermediate Municipal Fund, Salomon Brothers U.S. Gov-
ernment Income Fund, Salomon Brothers High Yield Bond Fund and Salomon Brothers
Strategic Bond Fund (four of the portfolios constituting Salomon Brothers Se-
ries Funds Inc, hereafter referred to as the "Funds") at December 31, 1999, the
results of each of their operations and the cash flows (for Salomon Brothers
U.S. Government Income Fund and Salomon Brothers Strategic Bond Fund) for the
year then ended, the changes in each of their net assets for each of the two
years in the period then ended and the financial highlights for each of the
four years in the period then ended and for the period February 22, 1995 (com-
mencement of operations) through December 31, 1995, in conformity with account-
ing principles generally accepted in the United States. These financial state-
ments and financial highlights (hereafter referred to as "financial state-
ments") are the responsibility of the Funds' management; our responsibility is
to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with auditing
standards generally accepted in the United States which require that we plan
and perform the audit to obtain reasonable assurance about whether the finan-
cial statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the finan-
cial statements, assessing the accounting principles used and significant esti-
mates made by management, and evaluating the overall financial statement pre-
sentation. We believe that our audits, which included confirmation of securi-
ties at December 31, 1999 by correspondence with the custodian and brokers,
provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
February 22, 2000
71
<PAGE>
Tax Information
(unaudited)
For Federal tax purposes the Fund hereby designates for fiscal year ended De-
cember 31, 1999:
Percentages of dividends paid by the Fund from net investment income as tax-
exempt for regular Federal income tax purposes:
<TABLE>
<S> <C>
National Intermediate Municipal Fund............................... 100.00%
</TABLE>
Percentages of ordinary income dividends paid from net investment income de-
rived from federal obligations which may be exempt from taxation at the state
level:
<TABLE>
<S> <C>
Strategic Bond Fund................................................. 1.46%
U.S. Government Income Fund......................................... 18.06%
</TABLE>
72
<PAGE>
Salomon Brothers Investment Series
INVESTMENT MANAGER
Salomon Brothers Asset Management Inc
7 World Trade Center
New York, New York 10048
CUSTODIANS
PNC Bank, National Association
200 Stevens Drive
Suite 440
Lester, Pennsylvania 19113
Chase Manhattan Bank, N.A.
4 Chase Metro Tech Center
18th Floor
Brooklyn, New York 11245
DIVIDEND DISBURSING AND TRANSFER AGENT
PF PC Global Fund Services
53 State Street
Boston, Massachusetts 02109-2873
LEGAL COUNSEL
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
Directors
CHARLES F. BARBER
Consultant; formerly Chairman; ASARCO Inc.
CAROL L. COLMAN
Consultant, Colman Consulting
DANIEL P. CRONIN
Vice President-General Counsel,
Pfizer International Inc.
HEATH B. MCLENDON
Chairman and President, Managing Director,
Salomon Smith Barney Inc.; President and Director,
SSB Citi Fund Management LLC
Investment Adviser, Inc.
Officers
HEATH B. MCLENDON
Chairman and President
LEWIS E. DAIDONE
Executive Vice President
and Treasurer
ROBERT E. AMODEO
Executive Vice President
JAMES E. CRAIGE
Executive Vice President
THOMAS K. FLANAGAN
Executive Vice President
ROGER LAVAN
Executive Vice President
ROSS S. MARGOLIES
Executive Vice President
MAUREEN O'CALLAGHAN
Executive Vice President
DAVID J. SCOTT
Executive Vice President
BETH A. SEMMEL
Executive Vice President
PETER J. WILBY
Executive Vice President
GEORGE J. WILLIAMSON
Executive Vice President
THOMAS A. CROAK
Vice President
NANCY A. NOYES
Vice President
ANTHONY PACE
Controller
CHRISTINA T. SYDOR
Secretary
<PAGE>
[LOGO OF SALOMON BROTHERS ASSET MANAGEMENT]
SEVEN WORLD TRADE CENTER . NEW YORK, NEW YORK 10048
<PAGE>
ANNUAL REPORT
December 31, 1999
[PHOTO]
[PHOTO]
SALOMON BROTHERS
- --------------------- [PHOTO]
ASSET MANAGEMENT
[_] ASIA GROWTH FUND
[_] INTERNATIONAL EQUITY FUND
[_] SMALL CAP GROWTH FUND
SALOMON BROTHERS
- --------------------------------------------- [_] LARGE CAP GROWTH FUND
[_] CAPITAL FUND
[_] INVESTORS VALUE FUND
[_] BALANCED FUND
<PAGE>
For almost a century, Salmon Brothers has provided serious investors with advice
and resources help them reach their financial goals.
Salomon Brothers offers...
Quality Service
Scope of Choice
An Information Advantage
We offer cutting-edge solutions and investment programs delivered through
financial advisors. Our rich tradition and unparalleled expertise provides
access to innovative ideas and extensive resources.
We wish to extend our sincere thanks for investing with us. Technology, new
innovations and business opportunities have changed the financial world over the
years -- but one constant remains: our commitment to serve your investment
needs.
BRIDGING WALL STREET OPPORTUNITIES TO YOUR FINANCIAL FUTURE
RICH TRADITION
Bold initiative, determination and market foresight have defined the Salomon
Brothers name for nearly a century.
GLOBAL RESOURCES
We have access to one of the world's largest financial institutions, creating a
global web of resources comprised of 170,000 employees in over 100 countries.
INVESTMENT EXPERTISE
Averaging over 16 years of professional industry experience, our seasoned
portfolio management team consistently demonstrates a disciplined institutional
approach to money management.
PERFORMANCE
We believe that a true measure of performance extends beyond short-term time
frames to long-term outcomes, quality of management, quality of relationship and
quality of thought.
INFORMATION ADVANTAGE
We offer a global information advantage to investors and their advisors --
providing the benefits of a world of rapid knowledge acquisition.
<PAGE>
Table of Contents
A MESSAGE FROM THE CHAIRMAN .......................................... 2
SALOMON BROTHERS INVESTMENT SERIES
ASIA GROWTH FUND ................................................... 7
INTERNATIONAL EQUITY FUND .......................................... 14
SMALL CAP GROWTH FUND .............................................. 17
LARGE CAP GROWTH FUND .............................................. 22
CAPITAL FUND ....................................................... 26
INVESTORS VALUE FUND ............................................... 32
BALANCED FUND ...................................................... 38
SCHEDULES OF INVESTMENTS ............................................. 43
STATEMENTS OF ASSETS AND LIABILITIES ................................. 68
STATEMENTS OF OPERATIONS ............................................. 70
STATEMENTS OF CHANGES IN NET ASSETS .................................. 72
NOTES TO FINANCIAL STATEMENTS ........................................ 75
FINANCIAL HIGHLIGHTS ................................................. 89
REPORT OF INDEPENDENT ACCOUNTANTS .................................... 100
TAX INFORMATION ...................................................... 101
DIRECTORS AND OFFICERS OF
SALOMON BROTHERS INVESTMENT SERIES ................................. IBC
1
<PAGE>
[PICTURE]
Heath B. McLendon
Chairman
SALOMON BROTHERS INVESTMENT SERIES
A Message From the Chairman
DEAR SHAREHOLDER:
We are pleased to provide the annual report for the Salomon Brothers Investment
Series -- Asia Growth Fund, International Equity Fund, Small Cap Growth Fund,
Large Cap Growth Fund, Capital Fund, Investors Value Fund and Balanced Fund
("Funds") for the year ended December 31, 1999. Interviews with the various Fund
managers appear after each market commentary. We hope you find this report
useful and informative.
Below is a chart showing each Fund's Class A shares return for the year ended
December 31, 1999 with and without sales charges.
THE PERFORMANCE OF THE FUNDS1
Class A Shares Total Return for the Year Ended December 31, 1999:
WITHOUT WITH
SALES CHARGES2 SALES CHARGES3
-------------- --------------
Asia Growth Fund 94.92% 83.62%
International Equity Fund
(since inception 10/25/99) 24.90 17.72
Small Cap Growth Fund 57.52 48.43
Large Cap Growth Fund
(since inception 10/25/99) 11.80 5.37
Capital Fund 23.11 16.03
Investors Value Fund 11.47 5.08
Balanced Fund 3.21 (2.72)
- ----------
1 Please note that the returns for the Asia Growth Fund, International Equity
Fund, Small Cap Growth Fund, Large Cap Growth Fund and Balanced Fund
include the effects of fee waivers. Had these fee waiver policies not been
in effect, the returns for these Funds would have been lower. It is Salomon
Brothers Asset Management's intention to continue this policy. However,
there can be no assurance that these fee waivers will remain in effect.
2 These total return figures assume reinvestment of all dividends and do not
reflect the deduction of sales charges for each Fund's Class A shares.
3 These total return figures assume reinvestment of all dividends and reflect
the deduction of the maximum front-end sales charge for each Fund's Class A
shares of 5.75%.
Both columns of data represent past performance, which is not indicative of
future results. The investment return and principal value of an investment will
fluctuate so that an investor's shares, when redeemed, may be worth more or less
than their original cost. This shareholder report has been prepared for the
information of shareholders of the Funds and is not authorized for use unless
preceded or accompanied by a current prospectus. The prospectus contains
information regarding each Fund's sales charges, expenses, objectives, policies,
risks, management and performance. To obtain a copy of the prospectus, please
call your Financial Advisor directly or call 1-800-725-6666. Please read it
carefully before you invest or send money.
2
<PAGE>
MARKET COMMENTARY
Many of the world's financial markets fell a year ago, following Russia's
unexpected debt defaults, a major hedge fund crisis and a currency devaluation
in Brazil. Meanwhile, economic upheavals in Asia were also causing serious
international repercussions. Yet, by the end of the period, many global stock
and bond markets experienced a dramatic reversal of fortune.
Recently released economic data from the U.S. Commerce Department provided the
first concrete evidence that the U.S. economy may have been structurally
transformed in an extremely positive way during the period. In fact, recent data
suggests to us that the economy has actually been growing stronger than had been
previously thought. The term "new economic era" may explain to a large extent
the changes in stock market valuations that have occurred over the past several
years. While short-term market fluctuations may be expected as a result of
future Federal Reserve Board ("Fed") monetary policy decisions, we are guardedly
optimistic about our economic future.
In other parts of the world, growth picked up in Europe and Asia, where a great
deal of corporate restructuring is taking place. Europe's new economy has
contributed to the consolidation of businesses and the creation of even stronger
and more competitive European companies. We continue to see the amazing
resilience of the economies of Southeast Asia, as the region returns to economic
stability and growth -- albeit at a slower, yet more sustainable, rate.
The globalization of financial markets has also continued as the New York Stock
Exchange and NASDAQ add more foreign stocks for trading. Investors today have
more investment options than ever before as trading hours expand, allowing for
broader investor participation and pursuit of investment opportunities.
In addition, the combination of stronger economic growth abroad and the
potential for double-digit earnings gains in overseas stock markets make a
compelling case for buying international stocks today. During the past two years
in particular the United States has been the driver for global market growth,
reaping the benefits of a robust economy, low interest rates and benign
inflation. Today, other regions in the world are poised to benefit from
similarly positive economic conditions. Indeed, despite still-anemic conditions
in Japan, other countries in Asia, Europe and Latin America are taking up the
mantle, employing preemptive monetary policies and keeping inflation for the
most part well contained.
3
<PAGE>
The fundamentals that typically drive the stock markets are changes in interest
rates and changes in earnings. Given that global interest rates are likely to
trend slightly higher during the coming year -- or at best might move sideways
- -- stock markets are not likely to receive any meaningful boost from positive
moves in interest rates. We believe that in the face of accelerating economic
growth rates around the world, low inflation and U.S. dollar weakness, this
valuation gap is likely to narrow, with international stocks possibly doing
better than their U.S. counterparts in the coming year.
We have become increasingly selective within the technology sector. We believe
that the recent surge in this sector has been driven more by momentum than by
fundamentals. With a stronger global economy, demand for technology should
remain robust, but we are emphasizing better-quality companies with clear
earnings visibility, reasonably priced companies and special situations.
SALOMON BROTHERS ASSET MANAGEMENT UPDATE
We at Salomon Brothers Asset Management are pleased to announce the launch of
two new mutual funds during the period. Effective October 25, 1999, the
International Equity Fund and Large Cap Growth Fund were introduced into the
Salomon Brothers Investment Series Family. We believe that both of these new
products bring outstanding investment opportunities to today's discriminating
investors and round out our menu of offerings.
Also, two Funds in the Salomon Brothers Investment Series changed their names
during the reporting period. The Salomon Brothers Total Return Fund was renamed
the Salomon Brothers Balanced Fund and the Salomon Brothers Investors Fund was
renamed the Salomon Brothers Investors Value Fund. Effective September 1, 1999,
the Board of Directors approved changing the names to more clearly identify the
Funds' specified objectives. Please note that these name changes in no way
reflect a shift in either objective or strategy. The name changes were made to
make it easier for investors to understand each Fund's investment style.
Here is a brief list of some other noteworthy events that took place at Salomon
Brothers Asset Management the past year.
.A Warm Welcome to Phillip Meserve -- Former President of Pilgrim Baxter &
Associates, Phil Meserve has recently joined Salomon Brothers as Managing
Director and Head of Non-Proprietary Distribution. Mr. Meserve is well
known in the industry for helping to establish and build a more
client-focused financial intermediary network in the early to mid-1990s.
4
<PAGE>
.A Unique Investment Style -- Looking for a fund that has identified and
owned some of the best performing stocks out there? Salomon Brothers
Capital Fund taps into a variety of market capitalizations, in search of
the best stock opportunities. The Fund's managers are widely recognized for
the Fund's unique investment style. Barron's, a leading business weekly,
recently profiled the Fund's portfolio managers, Ross Margolies and Robert
Donahue, describing them as "true bottom-up investors focusing on
individual companies," while Morningstar, Inc. refers to manager Ross
Margolies as "one of the smartest fund managers around."4
On behalf of everyone here at Salomon Brothers Asset Management, we would like
to thank you for your continued confidence in the Salomon Brothers Investment
Series. We look forward to helping you pursue your financial goals in the new
century.
Sincerely,
/s/ Heath B. McLendon
Heath B. McLendon
Chairman and President
January 24, 2000
- ------------
4 Source: Barron's, "Nonconformists," 11/13/99. Source: Morningstar, "The
Pick of the Mid-Blend Category," 10/12/99. Past performance is not
indicative of future results. The principal value and investment returns
will fluctuate, and investors' shares, when redeemed, may be worth more or
less than their original cost. Please read each fund's prospectus carefully
before you invest or send money.
5
<PAGE>
THE INTERNET AGE: RESHAPING GLOBAL OPPORTUNITIES
The Internet revolution continues to affect a wide range of businesses around
the world. The Internet has created numerous new online services and products
while altering the business plans of many leading industrial and consumer
service companies.
Much of the recent strength in technology- and communications-related stocks has
been derived from glowing prospects for the future growth of the Internet. The
Internet has driven these sectors to such a degree that if the Internet did not
exist, these areas would not be as highly valued. The future potential for
weakness in the current narrow leadership of large-cap growth stocks may come
through the new Internet.
We think that the power of many Internet stocks has come from their seeming
ability to raise almost unlimited capital at a relatively reasonable cost for
possibly infinite growth opportunities. Higher interest rates would likely alter
the cost of and access to capital and, consequently, produce a setback for
Internet stock prices. Such a setback might be thought of as a correction of
high valuation rather than as a significant change in the future growth
potential of the Internet.
A recent technology conference raised compelling arguments why the technology
and communications industries may continue to be great performers in the years
ahead. Although near-term challenges persist, we continue to believe that the
Internet will remain a powerful driver of stock share prices. The Internet is
gaining 2.5 million users per month, and many of these people will become active
online consumers. Moreover, Dell, a global computer systems company, estimates
that 15% of all U.S. Gross Domestic Product ("GDP") could soon come from
Internet electronic commerce. And there are no shortage of companies willing to
provide the systems and services necessary to facilitate online transactions.
Yet, if long-term rates move meaningfully higher in 2000, we believe a
significant correction of the divergent stock market is likely to occur. The
broader market may, in the process of this correction, show some degree of
relative strength, because many of these stocks have already been in a two-year
bear market.
6
<PAGE>
[PICTURE]
INVESTMENT OBJECTIVE AND STRATEGY
The Salomon Brothers Asia Growth Fund seeks long-term capital appreciation. The
Fund invests at least 65% of total assets in the equity and equity-related
securities of Asian companies. Areas considered for investments include, but are
not limited to, China, Hong Kong, Indonesia, Korea, Philippines, Singapore,
Taiwan, Malaysia, Thailand and the Indian sub-continent. In seeking to achieve
its objective, the Fund will allocate its assets among countries and industries
believed by the portfolio managers to be most likely to benefit from positive
regional economic trends.
THE FUND MANAGERS
Managed by an investment team out of the Hong Kong office.
SALOMON BROTHERS
Asia Growth Fund
PERFORMANCE UPDATE
The Asia Growth Fund's ("Fund") Class A shares without sales charge returned
94.92% for the year ended December 31, 1999. This compares very favorably to the
Morgan Stanley Capital International All Country Asia Free Ex-Japan Index's
("MSCI Ex-Japan Index") total return of 61.95% for the same period. (The MSCI
Ex-Japan Index consists of the equity total returns for Europe and Southeast
Asia.)
MARKET REVIEW AND PORTFOLIO HIGHLIGHTS
Asian markets roared back in 1999 after struggling to find their footing the
prior year. With evidence of economic recovery surpassing most estimates,
foreign capital returned to the various economies and financial markets in Asia.
Along with appreciating currencies and lower interest rates, these strong money
flows helped support the cyclical upturn of Asia-Pacific region and boosted
their stock markets in the process.
In our view, the Asian market rallies were driven mainly by two factors:
liquidity and growth. A significant improvement in liquidity conditions during
the year boosted share prices as renewed confidence among local investors led to
a shift of money out of savings accounts and into their local stock markets.
Foreign investors were not far behind, allocating funds from the U.S. and Europe
to the Asia-Pacific region. Along with improved liquidity, growth in the region
was also one of the principal drivers of the market. At the beginning of the
year, most analysts had forecasted a slowdown in the global economies, but
economic indicators continued to surprise on the upside, proving their forecasts
to be too pessimistic. All of this led to further upgrades in GDP and corporate
earnings estimates. As a result, Asia's markets, which were initially thought to
be expensive, became more attractive as earnings revisions were adjusted
upwards.
Many other positive developments in Asia also emerged in the past year. Asia
offset recent high-profile concerns like the Daewoo debt problem and the saber
rattling in China over the Taiwan Straits. Despite the debt problems at Daewoo,
which suggested to us that Korea has a long way to go in getting its financial
house in order, the country did make significant strides in getting rid of debt
and progress in restructuring the chaebols. (Chaebol is an economic system
whereby the central government selects a few companies to grow and prosper by
granting them preferential treatment.)
As a result, select Korean companies continued to show huge improvements in
earnings. In Indonesia, the free, peaceful and credible outcome of elections
resulted in easing political tensions. Moreover, the success of the U.S.-China
trade relations, which ensures China's entry into the World Trade Organization
("WTO"), also improved investor sentiment and led to buying in northern Asian
stocks. Perhaps most important, Japan finally started to show signs of emerging
from a decade of economic stagnation.
7
<PAGE>
The Fund's emphasis on stock selection was the main contributor for its strong
performance against its benchmark. In particular, the Fund exhibited
exceptionally strong performance in the fourth quarter of 1999. (Of course, past
performance is not indicative of future results.) This was attributable to
factors such as:
.A major asset allocation call in late September/early October to overweight
Hong Kong and South Korea markets;
.The decision to overweight the telecommunication sector in the region;
.Selective stock picks in Hong Kong, Singapore, South Korea and India.
The accumulation of blue-chip companies such as HSBC Holdings, Hutchison Whampoa
Ltd. and SHK Properties in late September as the Hang Seng Index consolidated to
a more attractive level, also contributed to Fund performance. Not only was it
well timed, it confirmed our view that both Hutchison and HSBC should be core
holdings in the Hong Kong portfolio due to their global presence and
diversification.
China Telecom remained the largest holding in Hong Kong. The Fund's managers
believed and continue to believe that its growth, particularly from acquisitions
in new provinces, should prove to be positive over time. The Fund remained
overweight in South Korea for most of the year given the benefits from the
country's emergence from recession. A widening current account surplus,
continued inflow of foreign direct investment and net buying from portfolio
investors, resulted in the Korean Stock Market ("KOSPI") being the best
performing regional market year-to-date (in local currency terms).
The Fund concentrated on telecommunication shares in Korea, such as SK Telecom
and Korea Telecom given their inexpensive valuations versus their regional peers
and the competitive brand names of the two. Additionally, the Fund held onto the
good quality banks like Shinhan Bank and Housing & Commercial Bank due to their
limited exposure to the Daewoo Group of companies. Samsung Electronics was also
a significant holding within the Fund toward the second half of 1999, as the
managers held onto the positive view of the semiconductor cycle. The Fund was
exposed to Daewoo Securities at the beginning of the year, as it was the most
inexpensive in the sector. This holding was later sold due to the continuous
worries of the Daewoo group's debt situation.
In Singapore, the Fund remained overweighted in banks and contract manufacturers
throughout the year. The Fund owned Overseas Union Bank since the fourth quarter
of 1998, benefiting from the its cheaper valuation relative to its peers. In
addition, given the sector's consolidation trend, the bank was also a possible
merger and acquisition target. The Fund also gained with Development Bank of
Singapore ("DBS") as it emerged as Singapore's strongest and largest financial
institution. DBS Bank's continuous regional expansion plans generated the
highest return on equity among its peers.
8
<PAGE>
India was one of the Fund's best performers in 1999. This was mainly
attributable to stock selection, particularly in the software sector. Satyam
Computers, a software manufacturer, was consistently in the top 10 and the
Fund's largest position in India. The latest set of the company's results
remained positive and strong export growth prospects are expected to continue.
The company also unlocked value through its 60.5% stake in Satyam Infoway, which
made its debut on NASDAQ in October. By holding Satyam Infoway, the Fund has
gained over 800% since its IPO debut on this position alone.
During most of the year, the Fund took the view of underweighting most Southeast
Asian markets including Indonesia, the Philippines and Thailand as well as
having an underweight stance in Taiwan. To date, this strategy proved to be
prudent as the north Asian counterparts (except Taiwan due to the specific
earthquake situation), Korea, Singapore and India outperformed the smaller
markets.
MARKET OUTLOOK
U.S. interest rates and U.S. market direction was the region's focus for most of
1999. In 2000 the Fund's investment team believes that there will be a possible
de-coupling of Asian markets with the U.S. and a shift of focus to Japan.
Signals of a bottom in the Japanese economic slump are particularly encouraging.
A recovery in Japan seems to confirm Asia's economic revival. On the trade
front, the move away from dependence on the U.S. and Europe toward a more
self-sustained trade (intraregionally) dynamic has further positive implications
on the sustainability of regional growth. Furthermore, there is some evidence of
a return of the Asian consumer suggesting that the domestic engine may
contribute to the broadening of growth. As such, the region's macro economic
landscape, with Japan as the cornerstone, should continue to support stock
markets.
Restructuring, sustainable growth and the ability to create value for company
shareholders will remain the Fund's major investment themes going into 2000.
Stronger companies emerging from the past downturn through successful
restructuring should see the return of pricing power, improved margins and
greater profitability. The new technology evolution (including e-commerce and
outsourcing) will also be a key Fund emphasis. This will include new ways of
doing business through Internet-related activities, especially within the
telecommunications industry. Overall, the positive opinion on the region's stock
markets remains. With the help of a Japanese recovery and the return of economic
growth to the region, Asian financial assets should continue to perform well.
(Of course, past performance is not indicative of future results.)
9
<PAGE>
ASIA GROWTH FUND --
Fundamental Analysis and Broad-Based Quantitative Techniques
Salomon Brothers Asia Growth Fund has been focusing on companies based primarily
in China, Hong Kong, Indonesia, South Korea, the Philippines, Singapore, Taiwan
and Thailand. The Fund's management team believes that the recent changes in the
Asian economy provide excellent long-term capital appreciation opportunities.
Crystal Chan, a member of the management team, explains how they strive to
create a portfolio responsive to the changes taking place throughout Asia.
Q: Although you do not invest in Japan, it seems to influence the performance of
the Fund. Please explain how the recent rebound in the Japanese market has
affected the Fund and how it may influence the long-term success of the
Asia/Pacific region.
The recent rally in Japanese stocks suggests to us that, at the very least, the
Japanese economy may have bottomed out. Should this be the case, and there is
increasing evidence to support economic recovery, the impact on the region is
clearly positive. First, the timing of a recovery of Japan, after a long period
of stagnation, could not be better for neighboring economies that are finally
recovering from the 1997 crisis and are still highly dependent on exports to the
U.S. and Europe. If the U.S. economy moderates as a result of the interest rate
increases, a stronger Japan should provide the region with a support to exports
that may have otherwise slowed.
Recent data suggests that intraregional trade among Asian countries has picked
up substantially. Japan is the largest regional trading partner for most Asian
countries and any economic revival in Japan will have positive repercussions on
the region. In addition, the Japanese stock market rally should have a positive
impact on investor sentiment, particularly Japanese investor sentiment. Outside
observers have long lamented the inertia among Japanese consumers and have
argued that it will take a pickup in domestic demand to get the Japanese economy
on the path to sustained recovery. The renewed confidence resulting from the
material increase in stock prices may be just the boost that will get local
Japanese consumers to spend more.
Q: How will the recent trade agreement between the U.S. and China impact the
Asia/Pacific region?
The true significance of the U.S.-China trade agreement lies mostly in the fact
that China may finally be part of the WTO and as such should enjoy increased
trade flows to and from countries within the organization. China has long
struggled to get on an even trade playing field with the rest of the developed
countries and having this status calls for increased transparency and more
stringent rules which should benefit China's external trade balances.
Furthermore, having a financial infrastructure that the rest of the world is
comfortable with should also coax foreign direct investors ("FDIs") back into
the country. Lastly, increased trade and increased FDI flows should be a support
in what has been a faltering economy and as such, reduce the risk of local
currency devaluation. With the specter of a devalued yuan (China's currency),
the region and its markets have a better chance at continued economic recovery.
10
<PAGE>
Q: The Asia Growth Fund's investment team monitors overall risk by evaluating
how the Fund responds to changes in economic conditions, and emphasizes
individual security risk through careful scrutiny of each company's management
and financials. Please describe your stock selection process.
The stock selection process of the Salomon Brothers Asset Management team in
Asian stocks combines both fundamental analysis with broad-based quantitative
techniques within a risk management framework. The process begins with a
systematic screening processes that seeks undervalued companies on a
pan-regional basis. Companies are screened by market capitalization, management
quality, transparency, earnings/dividend history over a full business cycle and
their respective competitive positions.
Evaluation of input from regular meetings with the management of over 100
companies annually forms the basis of our fundamental analysis. Cash flow
dynamics (i.e., emphasis on cash flow return on investment) is of particular
importance in our fundamental analysis process. Lastly, valuations of companies
the Fund may potentially invest in are tested by their price-to-earnings (P/E)
ratio (the price of a stock divided by its earnings per share), price-to-book
(P/B) ratio (the price of a stock divided by the net asset value of a company's
securities), yield (return on an investor's capital investment), price-to-cash
flow (P/CF) ratio, P/E-to-growth ratio, etc. Quantitative analysis includes the
timing of buying and selling a security by identifying their overbought/oversold
signals, the scoring of companies according to their earnings/price momentums as
well as focusing on risk management to help minimize volatility. A portfolio is
then built, supplemented by systematic portfolio monitoring with a strict
quantitative overlay.
Q: The past few years have been a difficult time for many international money
managers because of higher global market volatility. How do you manage money in
these kinds of challenging markets?
Discipline and risk controls are very important to us in managing money during
volatile times. The Asia Growth Fund maintained its focus on stock selection by
owning securities we believed were attractive on a pan-regional and sector
basis. This involves a bottom-up approach within the nonbench-mark stocks. We
conducted continuous visits with management for corporate updates and earnings
expectations. Stocks were also closely monitored for price movements affecting
our valuation targets. A risk management discipline is also implemented for
rapid price movements, especially during volatile times.
11
<PAGE>
Q: How will the changing role of Asia in the global economy influence your
investment decisions in the Fund?
The Asian financial crisis of 1997 and its subsequent spread to other parts of
the world only served to highlight Asia's increasing impact on the global
economy. More recently, evidence that global economies have become more
inextricably linked to Asian markets has been underscored by the listing of
Asian technology stocks on NASDAQ.
From an investment standpoint, China's entry into the WTO also underscores the
importance of both developed and emerging markets. Overall, we think that the
worst of the economic downturn is over and Asian companies' aggressive
participation in the recovery can only bode well for the region's long-term
prospects.
In 2000, we believe that there will be a greater focus on the Japanese stock
market. Given the backdrop of a Japanese recovery, the return of growth to the
region and the closer alignment of many Asian corporations with global
companies, we remain bullish on select Asian stocks.
Crystal, thank you for speaking with us today.
12
<PAGE>
The following graph depicts the performance of the Asia Growth Fund versus the
Morgan Stanley Capital International All Country Asia Free Ex-Japan Index. It is
important to note that the Asia Growth Fund is a professionally managed mutual
fund while the index is not available for investment and is unmanaged. The
comparison is shown for illustrative purposes only.
- --------------------------------------------------------------------------------
HISTORICAL PERFORMANCE (unaudited)
ASIA GROWTH FUND -- CLASS A, B, 2 and O SHARES
Comparison of $10,000 Investment in the Fund with MSCI AC Asia Free Ex-Japan
Index
- --------------------------------------------------------------------------------
[GRAPH]
[PLOT POINTS TO COME]
Past performance is not predictive of future performance. Performance above
reflects returns after deduction of applicable maximum sales charge.
- --------------------------------------------------------------------------------
Portfolio Highlights#
- --------------------------------------------------------------------------------
Composition of portfolio as of December 31, 1999
[PIE CHART]
[PLOT POINTS TO COME]
- --------------------------------------------------------------------------------
Average Annual Total Returns for Period Through December 31, 1999
- --------------------------------------------------------------------------------
Class A Shares Without Sales Charges With Sales Charges*
................................................................................
Since Inception (5/6/96) 8.03% 6.30%
3 year 8.04% 5.93%
1 year 94.92% 83.62%
................................................................................
Class B Shares
................................................................................
Since Inception (5/6/96) 7.24% 6.55%
3 year 7.25% 6.37%
1 year 93.30% 88.30%
................................................................................
Class 2 Shares
................................................................................
Since Inception (5/6/96) 7.27% 6.98%
3 year 7.29% 6.95%
1 year 93.30% 90.51%
................................................................................
Class O Shares
................................................................................
Since Inception (5/6/96) 8.29% 8.29%
3 year 8.30% 8.30%
1 year 95.11% 95.11%
================================================================================
- --------------------------------------------------------------------------------
Breakdown By Country#
- --------------------------------------------------------------------------------
Hong Kong 29.1%
South Korea 22.5%
Taiwan 16.1%
Singapore 13.6%
India 10.9%
Malaysia 2.7%
Thailand 2.7%
Indonesia 1.6%
China 0.8%
================================================================================
Portfolio holdings may vary.
See page 42 for all footnotes.
13
<PAGE>
INVESTMENT OBJECTIVE AND STRATEGY
The International Equity Fund seeks long-term capital growth by investing in
equity securities of non-U.S. issuers throughout the world. Moreover, the Fund
seeks to achieve its investment objective by investing primarily in equity
securities and equity-related companies that participate in growth industries
and can deliver sustainable above-average growth in earnings over a two to
three-year time horizon.
Under normal market conditions, the Fund is generally diversified among a number
of different countries by investing at least 65% of its total assets in at least
three countries. Our primary focus is on sustainable growth companies. The
companies in which the Fund invests show strong earnings growth visibility;
however, we try to seek out those companies that are not selling at an excessive
premium to the market.
- --------------------------------------------------------------------------------
THE FUND MANAGERS
- --------------------------------------------------------------------------------
The Fund is managed by Citibank,N.A., through its Citibank Global Asset
Management ("CGAM") division.
SALOMON BROTHERS
International Equity Fund
MARKET REVIEW AND PORTFOLIO HIGHLIGHTS
Since its inception on October 25, 1999, the International Equity Fund's
("Fund") Class A shares without sales charges returned 24.90%.
We tend not to have stock favorites, but rather maintain an equally weighted
portfolio concentrated in approximately 41 stocks. Moreover, we expect the Fund
to have relatively low portfolio turnover of about 15% to 20% per year.
If we had to cite one outstanding performer in our portfolio, it would be
Finnish cellular phone maker Nokia. This company fits our criteria of
sustainable growth (or unit volume growth) irrespective of economic conditions.
Five years ago, there were 26 million cellular handsets around the world. Today,
that figure has leaped to 275 million, and is estimated to reach an astounding 1
billion by 2002. Given that Nokia is the leading producer of cellular handsets
in the world, we think the company is strategically positioned to capitalize on
this growing trend.
MARKET OUTLOOK
The U.S. stock market has outperformed its overseas counterparts since 1995,
posting enviable returns of roughly 20% per year through 1999 as measured by the
Standard & Poor's 500 Index ("S&P 500"). (The S&P 500 is a market
capitalization-weighted measure of 500 common stocks.) During the past two
years, in particular, the U.S. has been the economic driver for global markets,
reaping the benefits of robust economic growth, low interest rates and benign
inflation. Today, other regions in the world are poised to benefit from
similarly positive economic conditions. We believe that this pickup in economic
growth need not be accompanied by a pickup in inflation. Indeed, central banks
and financial institutions in Japan, Asia, Europe and Latin America have been
employing preemptive monetary policies and keeping inflation well contained. In
our view, this positive backdrop for global stocks should continue into 2000.
Moreover, the global economy should enjoy a healthy start in the new millennium.
Growth is likely to rise above the long-term average in 2000 and 2001, after
monetary stimulus helped overcome the financial crisis of 1997-1998 without a
serious threat of a resurgence in global inflation. The outlook for global
growth has improved, reflecting evidence that increased capacity in the U.S.
should spread elsewhere in the industrialized world.
We believe that the Fund is well-positioned to take advantage of the growth of
the markets. Large capitalization growth stocks, in our opinion, should continue
to perform well in the year to come. We believe that our focus on industry
leaders in high-growth industries such as telecommunications, technology, health
care and retailing should benefit the Fund over the long term.
14
<PAGE>
INTERNATIONAL EQUITY FUND --
Looking to Participate in the Success of Global Markets
The financial world has evolved into a global marketplace in which buyers and
sellers of investments readily trade beyond their national boundaries. In fact,
foreign markets represent over half of the world's capitalization and are driven
by widely varying economies and growth rates. Henry de Vismes, a member of the
Fund's investment team, shares his insights on the wealth of opportunities
offered by global companies in some of the world's most dynamic markets.
Q: Henry, most mutual funds today take a value approach to investing in
international stocks, whereas your team has adopted a growth strategy. Please
explain why you have taken this approach.
The primary focus of the International Equity Fund is to identify and own
sustainable growth companies. We think the Fund's recent solid returns are
primarily due to investors who have been willing to pay a premium for visibility
of earnings growth. We think the companies we own demonstrate that strong
earnings growth visibility. However, we generally tend to seek out those
companies that are not selling at a premium. We usually do not have stock
favorites, but rather maintain an equally weighted portfolio concentrated in
approximately 41 stocks. In addition, we expect the Fund to have relatively low
portfolio turnover of about 15%-20% per year.
Q: Why do you think investors own international stocks?
We believe one of the most important benefits of owning international stocks is
diversification, which benefits investors by spreading out holdings over a wide
variety of regions, industries and companies. Although this does not ensure
against market loss, this strategy can help reduce the risks inherent in owning
any one single investment.
In fact, according to the Investment Company Institute (June 30, 1999), the
mutual fund trade organization, the average U.S. investor has less than 10%
exposure to international markets.
Q: Henry, please describe your investment strategy.
We primarily identify those companies we wish to invest in through bottom-up
evaluation. (Bottom-up investing is an asset management style that de-emphasizes
the significance of economic and market cycles, focusing instead on the analysis
of individual stocks.) Secondly, we employ a disciplined investment approach,
investing in solid names and established growth sectors. Lastly, we seek to
maintain a relatively low turnover of approximately 20% in the Fund's portfolio.
This benefits tax-conscious investors looking for tax efficiency and can be a
significant long-term advantage.
Henry, thank you for spending some time with us today.
15
<PAGE>
- --------------------------------------------------------------------------------
Portfolio Highlights#
- --------------------------------------------------------------------------------
Composition of portfolio as of December 31,1999
[PIE CHART]
Common Stock 10%
- --------------------------------------------------------------------------------
Breakdown By Country#
- --------------------------------------------------------------------------------
Japan 34.5%
.............................
United Kingdom 22.3%
.............................
Netherlands 10.5%
.............................
Spain 7.0%
.............................
Finland 6.4%
.............................
Italy 5.0%
.............................
Ireland 4.1%
.............................
Canada 3.2%
.............................
Switzerland 2.6%
.............................
Germany 2.3%
.............................
France 2.1%
=============================
Portfolio holdings may vary.
- --------------------------------------------------------------------------------
INTERNATIONAL EQUITY FUND
Cumulative Total Returns for Period Through December 31, 1999
- --------------------------------------------------------------------------------
Class A Shares Without Sales Charges With Sales Charges*
................................................................................
Since Inception (10/25/99) 24.90% 17.72%
................................................................................
Class B Shares
................................................................................
Since Inception (10/25/99) 24.70% 19.70%
................................................................................
Class 2 Shares
................................................................................
Since Inception (10/25/99) 24.60% 22.37%
................................................................................
Class O Shares
................................................................................
Since Inception (10/25/99) 24.90% 24.90%
================================================================================
See page 42 for all footnotes.
16
<PAGE>
INVESTMENT OBJECTIVE AND STRATEGY
The Small Cap Growth Fund seeks long-term growth of capital. The Fund invests
primarily in equity securities of companies with market capitalizations at the
time of purchase similar to that of the companies included in the Russell 2000
Index ("small cap companies"). The Russell 2000 Index includes companies with
market capitalizations below the top 1,000 of stocks of the equity market. Under
normal conditions, the Fund will invest at least 65% of its total assets in
equity securities of small cap companies. This revised investment strategy
became effective as of February 25, 1999.
- --------------------------------------------------------------------------------
THE FUND MANAGERS
- --------------------------------------------------------------------------------
The Fund is managed by an experienced team of portfolio managers.
SALOMON BROTHERS
Small Cap Growth Fund
PERFORMANCE UPDATE
The Small Cap Growth Fund's ("Fund") Class A shares without sales charges
returned 57.52% for the year ended December 31, 1999. In comparison, the Russell
2000 Index returned 21.26% for the same time period. (The Russell 2000 Index
measures the performance of the 2,000 smallest companies in the Russell 3000
Index, which represents approximately 8% of the total market capitalization of
the Russell 3000 Index.)
MARKET OVERVIEW & PORTFOLIO HIGHLIGHTS
As previously noted, small-cap stocks, as measured by the Russell 2000 Index,
returned 21.62% and did slightly better than large-cap stocks, as measured by
the Standard & Poor's 500 Index ("S&P 500") which returned 21.03% for the year
ended December 31, 1999. (The S&P 500 is a market capitalization-weighted
measure of common stocks.) The performance of the small-cap sector was driven by
the technology and communications sectors, which posted exceptional returns in
1999.
The Fund uses a bottom-up approach to identifying what the managers believe are
high-quality companies expected to deliver sustainable revenue and earnings
growth. (Bottom-up investing is an asset management style that de-emphasizes the
significance of economic and market cycles, focusing instead on the analysis of
individual stocks.) Ideally, companies should be in the early stages of
sustainable high growth driven by new products, technology or consolidation
within an industry. The Fund continues to look for such opportunities in the
technology, communications and consumer sectors and has recently begun to
increase weightings in the health care sector.
The Fund's outperformance relative to its benchmark in 1999 was due in large
part to stock selection in the technology, telecom and consumer sectors. One key
contributor to performance was Oak Industries (subsequently acquired by Corning
in early 2000), a leading vendor of optical components used in
telecommunications networking equipment. As a critical element of the Internet's
physical infrastructure, we believe the optical components market should
continue to grow well in excess of 100% per year due to high demand from
Internet and data service providers for higher bandwidth, optic-based equipment.
We maintain positions in several companies poised to benefit from the continued
rapid growth of the Internet's overall infrastructure.
MARKET OUTLOOK
We believe that the small-cap growth market may broaden somewhat beyond the
narrow focus on technology and telecommunications stocks in 2000. However, in
our opinion, these two sectors should continue to provide market leadership. We
are maintaining the Fund's strategy of focusing on quality, high-growth
companies with powerful franchises and strong market positions. We firmly
believe that our investment style can offer investors the potential for
significant long-term price appreciation. (Of course, past performance is not
indicative of future results.)
17
<PAGE>
SMALL CAP GROWTH FUND -- A Bottom-Up Team Approach
The small-cap stock sector is fast, dynamic and complex. Salomon Brothers Asset
Management has developed an approach to help meet these challenges -- exploiting
the knowledge of a team of seasoned specialists, rather than concentrating
investment decisions with one portfolio manager. As experts in their respective
industries, the Fund's team chooses, monitors and sells securities. Matthew
Ziehl, a member of the investment team, explains the advantages of this team
approach and why he believes small-cap stocks deserve a place in many
portfolios.
Q: Matt, please explain why Salomon Brothers Asset Management ("SBAM") has
adopted a team approach and how that has affected your investment strategy.
We believe that placing full decision-making authority with a proven team of
experienced sector analysts can result in better performance. Each of our sector
allocations are managed as individual portfolios, with each sector specialist
having complete control. We believe our team is made up of sector experts with
extensive knowledge of industry fundamentals, who understand competitive
positioning of both small and large companies within a sector, and who are
better able to identify and manage the risks that often accompany owning these
types of aggressive growth opportunities.
The team approach for the Small Cap Growth Fund is consistent with Salomon
Brothers Asset Management's overall stock investing philosophy. We give our top
sector managers a greater amount of latitude and that is what we believe sets us
apart from many of our competitors.
Q: How would you characterize your investment philosophy?
In our view, solid expertise, extensive resources and hard work can help create
an information advantage through fundamental analysis. This is especially true
in the small cap stock arena, where meaningful information can be spotty and
delivery is often inefficient. In the small cap universe, we focus on emerging
growth stocks, as these companies have the opportunity to become tomorrow's
large companies. Our approach in understanding the business and industry gives
us a unique advantage in what is often an inefficiently priced market.
18
<PAGE>
Q: Describe how you pick stocks.
We employ a bottom-up fundamental research to identify high-quality,
small-growth companies that in our view, are expected to deliver sustainable
revenue and earnings growth. (Bottom-up investing is an asset management style
that de-emphasizes the significance of economic and market cycles, focusing
instead on the analysis of individual stocks.) The Small Cap Growth Fund targets
overall earnings growth at least equal to that of the Russell 2000 Growth
Index.1 We allow for flexibility in that we don't think it's necessary to impose
rigid boundaries in terms of sector weightings versus our benchmark.
We tend to focus on companies with strong, or significantly improving,
financials: rising revenues and margins, return on equity, strong balance sheets
and the ability to internally fund their growth plans through operating cash
flow. However, we do consider exceptions where we find outstanding growth
opportunities and expect solid future profits, particularly in exciting emerging
technologies such as the Internet.
As growth investors, we are willing to "pay up" for the right fundamentals, but
generally we try to buy a company's stock at a price-to-earning (P/E) ratio at
or below its earnings growth rate. (P/E ratio shows the multiple of earnings at
which a stock sells, determined by dividing current stock price by current
earnings per share.) We will sell on any material deterioration in fundamentals,
or in those cases where stock appreciation causes an extreme overvaluation.
Q: How do you find the companies that can survive in a highly competitive global
marketplace?
We seek to identify winning small cap companies based on three key criteria: the
business, the financials and the management. Here are some of the types of
questions we ask in our investment process:
. Business: Does this company have a competitive advantage? Is it a first
mover, and does it have a key patent or a sustainably better product or
service, customer contracts or other barrier(s) to stop a competitive
entry? What is the company's market share? How concentrated or fragmented
is the industry, and is the industry economically sensitive?
. Financials: Does the company have a strong balance sheet and business model
that can support that growth?
. Management: This consideration is critically important in small caps. Does
senior management have the vision and experience to succeed, and a
significant personal ownership stake to keep them highly motivated?
- ---------------
1 The Russell 2000 Growth Index is a capitalization-weighted index composed
of the stocks of the Russell 2000 Index with higher price-to-book ratios
and higher forecasted growth values relative to the Russell 2000 as a
whole.
19
<PAGE>
Q: Matt, what type of guidance can you offer today's investors, specifically as
it relates to small cap stock investing?
Investing in small cap stocks should be viewed as a long-term process. It may
often be difficult to determine when is the best time to invest in these types
of securities. Yet, in our view, current market conditions are quite positive
for owning small cap stocks over time. Though some high-growth sectors such as
Internet-related technology stocks have achieved lofty valuations, many cap
stocks remain attractively valued despite generally delivering on earnings
expectations. Relative to large caps, most small cap valuations are still close
to their 20-year lows. (Please note that investing in small-cap companies
involves a substantial risk of loss. Growth securities typically are sensitive
to market movements because their market prices tend to reflect future
expectations. When it appears those expectations will not be met, the prices of
growth securities typically fall.)
Since small cap stocks are not highly correlated to the S&P 500 Index, they
enable investors to achieve broader portfolio diversification which may lessen
risk when large cap stocks perform poorly.
Within the small cap universe, we believe that emerging growth stocks generally
provide better opportunities for long-term appreciation than value stocks
because these emerging growth companies exhibit faster-than-average gains in
sales and earnings with the potential to sustain or accelerate this growth going
forward. Emerging growth companies tend to be the innovators and pioneers,
challenging incumbent giants or driving the growth of new markets and new
products.
Matt, thank you for discussing small cap stock opportunities with us.
20
<PAGE>
The following graph depicts the performance of the Small Cap Growth Fund versus
the Russell 2000 Index. It is important to note that the Small Cap Growth Fund
is a professionally managed mutual fund while the index is not available for
investment and is unmanaged. The comparison is shown for illustrative purposes
only.
- --------------------------------------------------------------------------------
Portfolio Highlights#
- --------------------------------------------------------------------------------
Composition of portfolio as of December 31, 1999
[GRAPH]
[PLOT POINTS TO COME]
- -----------------------------
Top Holdings
- -----------------------------
Siebel Systems,Inc.
- -----------------------------
Network Appliance,Inc.
- -----------------------------
Oak Industries Inc.
- -----------------------------
Legato Systems,Inc.
- -----------------------------
Insight Enterprises,Inc.
- -----------------------------
Newport Corp.
- -----------------------------
Sawtek Inc.
- -----------------------------
Commerce One, Inc.
- -----------------------------
Digital Microwave Corp.
- -----------------------------
QRS Corp.
=============================
Portfolio holdings may vary.
- --------------------------------------------------------------------------------
HISTORICAL PERFORMANCE (unaudited)
SMALL CAP GROWTH FUND -- CLASS A,B,2 and O SHARES
Comparison of $10,000 Investment in the Fund with Russell 2000 Index
- --------------------------------------------------------------------------------
[GRAPH]
Russell 2000
Date Class A Class B Class 2 Class 0 Index
7/1/98 9,425 10,000 9,800 10,000 10,000
Dec-98 10,924 11,050 11,346 11,600 9,288
Jun-99 12,705 12,870 13,157 13,510 10,150
Dec-99 17,207 17,635 17,887 18,317 11,261
Past performance is not predictive of future performance. Performance above
reflects returns after deduction of applicable maximum sales charge.
- --------------------------------------------------------------------------------
Average Annual Total Returns for Period Through December 31, 1999
- --------------------------------------------------------------------------------
Class A Shares Without Sales Charges With Sales Charges*
- --------------------------------------------------------------------------------
Since Inception (7/1/98) 49.32% 43.55%
1 year 57.52% 48.43%
- --------------------------------------------------------------------------------
Class B Shares
- --------------------------------------------------------------------------------
Since Inception (7/1/98) 48.11% 45.92%
1 year 56.15% 51.15%
- --------------------------------------------------------------------------------
Class 2 Shares
- --------------------------------------------------------------------------------
Since Inception (7/1/98) 48.28% 47.30%
1 year 56.28% 53.67%
- --------------------------------------------------------------------------------
Class O Shares
- --------------------------------------------------------------------------------
Since Inception (7/1/98) 49.65% 49.65%
1 year 57.90% 57.90%
================================================================================
See page 42 for all footnotes.
21
<PAGE>
PERFORMANCE OBJECTIVE AND STRATEGY
The Large Cap Growth Fund seeks long-term growth of capital by investing in the
equity securities of U.S. large cap issuers that, at the time of purchase, have
market capitalizations within the top 1,000 stocks of publicly traded companies
listed in the United States stock markets.
The Fund's equity securities consist primarily of common stocks. The Fund may
also invest in preferred stocks, warrants and securities convertible into common
stocks. The Fund may also invest up to 15% of its assets in securities of
foreign issuers.
THE FUND MANAGERS
The Fund is managed by Citibank,N.A., through its Citibank Global Asset
Management (CGAM) division.
SALOMON BROTHERS
Large Cap Growth Fund
PERFORMANCE UPDATE
Since its inception on October 25, 1999, the Large Cap Growth Fund's ("Fund")
Class A shares without sales charges returned 11.80%.
MARKET REVIEW & PORTFOLIO HIGHLIGHTS
In the fourth quarter of 1999, the large cap growth market, as represented by
the Standard & Poor's 500 Index ("S&P 500"), rallied following a weak third
quarter. (The S&P 500 is a market capitalization-weighted measure of 500 common
stocks.) The growth stock sector continued to dominate the performance of the
overall markets, outperforming the value sector, as represented by the S&P/Barra
Value Index. (The growth sector consists of those stocks of corporations that
are exhibiting or are expected to exhibit faster-than-average growth within
their industry. The value sector consists of securities of companies that are
believed to be undervalued in the market. The S&P/Barra Value Index is a
capitalization-weighted index composed of stocks of the S&P 500 with higher
book-to-price ratios relative to the S&P 500 as a whole.)
Our primary strategy is to focus on those companies with the best relative
revenue and earnings growth. Since the inception of the Fund, we favored
companies in sectors we believed would benefit from the global economic
recovery. In the energy services sector, we added Transocean Sedco Forex, in the
commercial services sector we added Omnicom and Interpublic Group and in the
producer manufacturing sector, we added Danaher. Although no guarantees can be
made, we are confident these companies should positively contribute to the
performance of the Fund.
In addition, we have maintained an overweight position in technology stocks such
as Sun Microsystems, Microsoft and Maxim. In our opinion, these companies are
market leaders with favorable prospects that should provide capital appreciation
potential.
MARKET OUTLOOK
We believe rising corporate profitability coupled with technology-driven
business opportunities and low inflation should benefit both the U.S. and the
global economy. However, we do expect that the Federal Reserve Board ("Fed")
will raise interest rates in 2000 to insure that inflation remains contained.1
We believe that our focus on fundamental analysis of individual companies in an
effort to uncover opportunities that are making profits today should benefit the
Fund in the long term.
- -------------------
1 On February 2, 2000, the Fed raised interest rates 0.25% to 5.75% after
this commentary was written.
22
<PAGE>
LARGE CAP GROWTH FUND --
Keying In on Earnings Consistency, Profitability and Balance Sheet Strength
Major U.S. companies have dominated the world's economic landscape for a decade
in a global marketplace that has promoted free trade. Domestic firms with
competitive products, first-rate managements and established brands have
penetrated new foreign markets and increased their market share. As a result,
many of these companies have experienced consistent growth for years. In the
following interview, Brian O'Toole explains how the new Salomon Brothers Large
Cap Growth Fund has looked to capitalize on these large cap opportunities.
Q: Brian, the Large Cap Growth Fund was introduced on October 25, 1999. How have
you managed the Fund since it began?
Our investment emphasis has been on companies whose earnings and sales growth
rates have exceeded that of the S&P 500 over the last five years. We look for
such quality indicators as earnings consistency, profitability and balance sheet
strength. Once we identify this core universe of stocks, we then focus on those
companies whose sales and earnings rates are either improving or increasing at a
relatively faster rate than the S&P 500.
Q: Where do you see the best opportunities in large cap growth stocks going
forward?
Despite the outstanding returns this past year, we believe a wealth of
opportunity still exists in technology. We have overweighted this sector versus
our benchmark. We think that many U.S. companies may be well-positioned to take
advantage of the ongoing global economic recovery.
For example, the strong growth in demand for cellular phones has accelerated
demand for component parts of wireless phones. We expect improved sales and
earnings growth rates for our holdings in this industry. We also own several
companies that make analog semiconductors for wireless communication equipment,
and we believe they are well-positioned to benefit from growing cellular phone
use in the future.
Q: Many economists have called the growing U.S. economy a 'bubble' waiting to
burst. Have large cap growth stocks seen their peak?
We continue to see strong U.S. economic growth, albeit under the influence of
opposing market forces. Growth in earnings for the S&P 500 is estimated to be a
solid 13% for 1999. However this positive development is countered by the
potentially detrimental effects of rising rates. We believe that the outstanding
performance by many large-cap stocks over the past several years may in fact
prove to be sustainable. The caveat for investors: we expect market returns for
large caps to be close to or slightly below their historical averages.
23
<PAGE>
Q: Brian, how has the recent global economic recovery affected your investment
strategy?
In our view, sustainable recoveries in many global economies have benefited
companies both inside and outside the U.S. Global economic recovery has been
further supported by strong demand for Internet applications, servers, and data
storage and communications equipment. We believe this recovery could act as a
catalyst for a rebound in industrial large-cap stocks, for which we have already
begun to see some encouraging signs.
Brian, thank you for your time.
24
<PAGE>
- --------------------------------------------------------------------------------
Portfolio Highlights#
- --------------------------------------------------------------------------------
Composition of portfolio as of December 31,1999
[CHART]
[PLOT POINTS TO COME]
- --------------------------------------------------------------------------------
Top Holdings
- --------------------------------------------------------------------------------
General Electric Co.
- --------------------------------------------------------------------------------
Microsoft Corp.
- --------------------------------------------------------------------------------
Cisco Systems,Inc.
- --------------------------------------------------------------------------------
Wal-Mart Stores,Inc.
- --------------------------------------------------------------------------------
Exxon Mobil Corp.
- --------------------------------------------------------------------------------
International Business
Machines Corp.
- --------------------------------------------------------------------------------
Lucent Technologies Inc.
- --------------------------------------------------------------------------------
American International
Group, Inc.
- --------------------------------------------------------------------------------
SBC Communications
Inc.
- --------------------------------------------------------------------------------
Intel Corp.
================================================================================
Portfolio holdings may vary.
- --------------------------------------------------------------------------------
SMALL CAP GROWTH FUND
Cumulative Total Returns for Period Through December 31, 1999
- --------------------------------------------------------------------------------
Class A Shares Without Sales Charges With Sales Charges*
- --------------------------------------------------------------------------------
Since Inception (10/25/99) 11.80% 5.37%
- --------------------------------------------------------------------------------
Class B Shares
- --------------------------------------------------------------------------------
Since Inception (10/25/99) 11.70% 6.70%
- --------------------------------------------------------------------------------
Class 2 Shares
- --------------------------------------------------------------------------------
Since Inception (10/25/99) 11.60% 9.50%
- --------------------------------------------------------------------------------
Class O Shares
- --------------------------------------------------------------------------------
Since Inception (10/26/99) 11.80% 11.80%
================================================================================
See page 42 for all footnotes.
25
<PAGE>
INVESTMENT OBJECTIVE AND STRATEGY
The Capital Fund seeks capital appreciation through investments primarily in
common stocks or securities convertible into common stocks that are believed to
have above-average capital appreciation potential. Such investments may also
involve above-average risk. The Fund may invest in seasoned, established
companies, relatively small new companies as well as new issues.
THE FUND MANAGERS
[PHOTO]
Ross S. Margolies,
Managing Director and Portfolio Manager at Salomon Brothers Asset Management
Inc, has 19 years of investment industry experience in the equity, convertible
and high yield markets. Mr. Margolies is primarily responsible for day-to-day
Fund management.
[PHOTO]
Robert M. Donahue, Jr.,
Director and Co-Portfolio Manager at Salomon Brothers Asset Management Inc, has
7 years of investment industry experience. Mr. Donahue assists in the day-to-day
management of the Fund.
SALOMON BROTHERS
Capital Fund
PERFORMANCE UPDATE
The Capital Fund's ("Fund") Class A shares returned 23.11% without sales charges
for the year ended December 31, 1999. In comparison, the Russell 3000 Index
returned 20.90% and the Standard & Poor's 500 Index ("S&P 500") returned 21.03%
for the same time period. (The Russell 3000 Index measures the performance of
the 3,000 largest U.S. companies based on total market capitalization, which
represents approximately 98% of the investable U.S. equity market. The S&P 500
is a market capitalization-weighted measure of 500 common stocks.)
The Fund seeks capital appreciation through investment in securities that the
manager believes have above-average capital appreciation potential. The Fund
invests primarily in equity securities of U.S. companies. These companies may
range in size from established large capitalization companies (over $5 billion
in market capitalization) to small capitalization companies (less than $1
billion in market capitalization) at the beginning of their life cycles.
We are proud to report that the Fund's Class A shares recently received a
four-star (out of a possible five stars) rating from Morningstar Inc.1 for the
one-year period ended December 31, 1999. In addition, the Fund's Class O shares
received a four-star rating for the one-year period, a four-star rating for the
three-year period, a five-star rating for the five-year period and a three-star
rating for the ten-year period ended December 31, 1999.
PERFORMANCE OVERVIEW & INVESTMENT STRATEGY
The Fund's investment strategy is known as a broad market strategy. We attempt
to find the best opportunities across the market, wherever they may be. It is an
"all cap" or "multicap" strategy in that we invest in large-, small- and mid-
size companies. It is also known as a "style neutral" or "blend" portfolio in
that we purchase both growth and value stocks. In fact, one of our primary goals
is to find out of favor value stocks that blossom into growth stocks. These
include some of our biggest winners because we buy them when they are
inexpensive and hold them through the entire period of appreciation as the
market recognizes their true potential. We believe two of the key advantages of
our investment strategy is that because we own some stocks from most categories,
we can have winners under most market conditions and this strategy creates a
unique, diversified portfolio of stocks that few other mutual funds will own. Of
course, this diversification does not ensure against market loss.
- -----------------
1 Morningstar, Inc. proprietary ratings reflect historical risk adjusted
performance as of December 31, 1999. Ratings are loan-adjusted, updated
monthly and subject to change. Morningstar ratings are calculated from each
fund's three, five and ten-year average annual returns (if applicable) in
excess of 90-day Treasury bill returns with appropriate fee adjustment and
a risk factor that reflect fund performance below 90-day T-bill returns.
Other share classes may vary. The highest Morningstar rating is five stars;
the lowest is one star. The top 10% of the funds in a broad asset class
receive five stars; the next 22.5% receives four stars, the next 35%
receives three stars, the next 22.5% receives two stars and the next 10%
receive one star. For the one- three- five- and ten-year periods, there
were 254, 158, 115 and 48 funds, respectively, in the Mid-Cap Blend class.
26
<PAGE>
Our core investment style is a bottom-up stock picking strategy. We focus on
understanding a company's business, its strategy, its competitive position and
its industry. We also determine if management is credible and has the right team
to lead the company. Our financial analysis focuses on the company's resources
to meet its goals, the consistency of the numbers to determine their quality
(for instance, are receivables growing much faster than sales, a sign that
current sales may overstate the long-term trend) and is used as a framework for
valuation and risk assessment. These and other factors are totaled up to make a
judgement -- considering all factors is the risk and reward trade-off favorable
enough for us to make an investment.
As portfolio managers, we have a role in addition to stock picking; we need to
put all the individual security selections into a portfolio that meets a set of
investment objectives. We use tools such as diversification and position
weighting to determine exactly how much of each security to own in the
portfolio. For instance, in the Fund our best ideas generally get very high
weightings, as much as 5% of the portfolio on occasion. This strategy, known as
high position concentration, can generate above-market returns when executed
properly. (Of course, past performance is not indicative of future results.) At
the same time we try to factor in excess risk. A good idea that has a very high
risk profile will get lower weighting, such as 1% of the portfolio, in order to
diversify risk and dampen portfolio volatility. And while no guarantees can be
made, in this way we can take individual risks on behalf of our shareholders
without creating an overly risky portfolio.
MARKET OVERVIEW AND OUTLOOK
The 1999 stock market will go down in history as one of the most unusual markets
of all time. After recovering from the effects of the 1998 Asian economic
crisis, the stock market soared to new heights and featured increased
volatility. During the beginning of the year, the stock market was very narrow
with only a small group of blue-chip growth stocks appreciating. In mid April,
we experienced a violent rotation into undervalued broad market stocks. By the
end of the year, while the market broadening continued to help some stocks, most
of the market's focus had shifted to the NASDAQ-listed technology companies.
During 1999, market indices such as the S&P 500, and the Russell 3000 were up
over 20%; the NASDAQ increased by roughly 85% led by both blue-chip and
speculative technology issues.
The most fundamental change in the market that we observed in 1999 was that all
of the historical rules of security analysis were discarded. Particularly in the
Internet sector, the market rewarded concepts over profits. In many cases, the
market focused on issues such as potential customers instead of profitable sales
to actual customers. We believe that while the market seems to think that
profitability and cash flow are no longer important, the strategy of "buying
sales" (i.e., losing money on sales in order to establish a market share
position) is as old as commerce itself. The only difference this time is that
the market is ignoring the fact that in the end companies need to generate cash
flow and profits in order to thrive.
How does one invest in this environment? The biggest adjustment to our process
in 1999 has been to increase our focus on the Internet. The development of the
Internet is one of those events that will change the way we live and work
forever. It is as fundamental a change as the development of telephones or the
harnessing of electricity. This happens regularly throughout history and we are
living through one of those times right now.
27
<PAGE>
When you look closely at the Fund's portfolio you will see that little of your
money is invested in traditional Internet companies (the so-called "dot.coms").
We find the long-term risk and reward proposition in most of these companies to
be very unattractive. In our opinion, most of them do not have sustainable
business models (i.e., they will always lose money) while others have valuations
that assume they will be the only survivors in the eventual shakeout. You will
see a lot of the portfolio invested in companies that can benefit from or build
the Internet such as Seagate (disk drives and software for storage as well as
indirect exposure with partial ownership of companies such as Veritas),
Federated Department Stores (a leader in the "clicks and mortar" e-commerce
strategy and owner of several valuable Internet businesses) and GTE (merging
with Bell Atlantic, the combined company is expected to be the leading U.S.
wireless company also offering telecom services such as local, long distance and
high-speed Internet access).
It is our strong belief that going forward the leading established companies
that embrace today's new technologies should emerge as the dominant and most
profitable companies in the economy. Their stocks should recognize this over
time. On the other hand, we believe the stock market will eventually lose
patience with those traditional Internet companies that cannot transform
themselves into growth companies with enough profits to support their stock
price.
Going forward, we expect many companies to reap the benefits of their current
investments in technology. We also expect many technology companies to continue
to grow as they innovate. There will also be a maturing in the technology
sector, as it has become a bigger part of the market and economy than the energy
sector was in 1980. We believe that during the next decade the technology sector
will not go the way of the energy sector. However, the two share a common
factor. The early 1980s expectations of oil prices soaring to $100 per barrel
led to extreme valuations for these companies and a gold rush effect of too much
capital being put into the sector. Eventually the laws of large numbers and
diminishing returns caught up to the sector. The cost of energy became too large
of an input into the economy and people figured out ways to utilize it more
efficiently at the same time that capacity was expanding rapidly. With
technology companies representing about 30% of the S&P 500, similar long-term
risks exist in the technology sector. This is partly offset by the fact that
technology investments improve productivity while higher energy prices are
merely increased costs. We keep these factors in mind even when we are only
forecasting out a year, as stock prices discount the long-term prospects of
companies.
During 1999, our broad market strategy yielded attractive results despite it not
being in favor. We attribute this to a combination of owning stocks in most
categories (we participated in the major trends and market rotations) and our
valuation discipline (reducing losses when we made mistakes). We believe our
overweighting of our strongest ideas historically has been a big contributor.
This year however, this strategy generated mixed results with top investments
such as Rogers Cantel doing well while our tobacco stocks (which we have
virtually eliminated) did poorly.
Expect the Fund to consistently apply its investment strategy in the future. We
will invest in both users and manufacturers of technology when we believe their
risk reward/ratios are favorable. Most of all, we will look for the best
opportunities that we can find, regardless of the part of the market they are
in.
28
<PAGE>
CAPITAL FUND--
The Advantages of a Broad Market Strategy
Strong growth potential and investment style flexibility are two aspects of
broad market investing. The Salomon Brothers Capital Fund's managers believe the
best places to invest will probably change over time. Lead portfolio manager
Ross Margolies explains how his team explores the entire stock market in their
search for outstanding growth opportunities.
Q: Ross, please describe your investment process.
A: Our investment process focuses on a bottom-up stock selection process that
takes advantage of our sector specialists' proprietary fundamental research. We
look for attractive risk and reward situations, overweighting the ones that we
deem are most attractive and where we have very high confidence in their
outlooks. We are also willing to give management time to execute their strategy.
From a portfolio point of view, we avoid strategies such as market timing or
sector rotation and generally keep cash levels in the Fund between 0% to 10%.
Q: How do you manage the tradeoff between income and appreciation?
A: While the Fund can generate a small amount of income, it is incidental to its
main investment objective. We focus strictly on managing for total return and
helping to manage risk in the portfolio, generally downplaying the Fund's income
potential.
Q: How have you positioned the Fund to perform if the current bull market in
stocks ends?
A: While the Capital Fund has performed well in the bull market, it has done so
with large concentrations of holdings in out-of-favor sectors. Generally our
holdings in these sectors have had positive fundamentals and attractive
valuations. On the other hand, the current bull market has favored a narrow
group of growth and momentum stocks, generally not the type of stocks we own. If
the market goes down for these stocks we think the Fund should be very well
positioned. If all stocks decline, our holdings will as well. However, our
valuation and fundamental disciplines should help provide us with some support
in this type of environment.
Q: What type of guidance can you offer today's investors in light of the recent
relative underperformance of bonds?
Over the long term, stocks have outperformed bonds such as U.S. Treasuries. When
bonds underperform as dramatically as they have over the past 15 months, there
is usually a catch-up period where they outperform stocks for a period of time.
This comes from stocks going down or bonds going up. (Please keep in mind that
investments in stocks carry additional risks, particularly compared to U.S.
Treasuries which are backed by the full faith and credit of the U.S.
government.)
29
<PAGE>
Q: Why do you think the Capital Fund is an appropriate choice for investors who
have just started building up the stock side of their portfolio?
The Capital Fund offers broad market exposure, and that can be a benefit to new
investors to the stock market. That is because the Fund offers the convenience
of one-stop shopping for growth and value styles and large-cap and small-cap
stocks. Additionally, compared to most funds that have performed well over the
past five years, the Capital Fund tends to own a different group of stocks that
we believe have above-average capital appreciation potential.
Q: How would you define yourself as an investment manager - growth, value or
contrarian?
As managers, we defy the usual categorizations. Our strategy is to look for the
very best opportunities in the market, wherever they may be found. Our focus is
on identifying attractive risk and reward situations and then weighing them in
the portfolio so that overall risk is minimized through diversification. The
portfolio holds a mixture of growth and value stocks, large-cap and small-cap
names. There is a contrarian element to the strategy, but it is generally with
the goal of finding things like value stocks that have the potential to become
strong growth companies. We're trying to run a flexible, all-market fund.
Another one of our goals in the Fund is to meet or beat the broad market indices
such as the Russell 3000/1/ or Wilshire 5000/2/ on an annual basis. Over longer
periods of time, we hope to also beat the S&P 500, which performs similarly to
the broad market indices over time. Of course, there is no guarantee that we
will always be successful with that strategy.
Q: What do you see as a significant investment "theme" going forward?
We are bottom-up investors focused on individual companies. While we do not
invest in themes, it is clear that the impact of the Internet must be considered
in each and every individual investment. When selecting stocks we require our
companies to not be adversely affected by the Internet (i.e., not in front of a
freight train) and hopefully benefit (i.e., using the Internet to facilitate
incremental sales or cost savings.) Often our holdings, while rarely the
"dot.coms," are builders, suppliers or users of the Internet.
Ross, thank you for speaking with us today.
--------
1 Russell 3000(R) Index measures the performance of the 3,000 largest U.S.
companies based on total market capitalization, which represents
approximately 98% of the investable U.S. equity market.
2 The Wilshire 5000 Total Market Index measures the performance of all U.S.
headquartered equity securities with readily available price data. It is
widely considered the best measure of the entire U.S. stock market.
30
<PAGE>
HISTORICAL PERFORMANCE (unaudited) CAPITAL FUND -- CLASS A,B and 2 SHARES
Comparison of $10,000 Investment in the Fund with Russell 3000 Index
[GRAPH]
Russell 3000
Date Class A Class B Class 2 Index
11/1/96 9,425 10,000 9,900 10,000
Dec-96 10,154 10,763 10,660 10,576
Dec-97 12,836 13,519 13,389 13,938
Dec-98 15,876 16,273 16,415 17,303
Dec-99 19,546 19,957 20,051 20,919
Past performance is not predictive of future performance. Performance above
reflects returns after deduction of applicable maximum sales charge.
HISTORICAL PERFORMANCE (unaudited) CAPITAL FUND -- CLASS O SHARES Comparison of
$10,000 Investment in the Fund with Russell 3000 Index
[GRAPH]
Class 0 Russell 3000 Index
Dec-89 10,000 10,000
Dec-90 9,094 9,494
Dec-91 12,134 12,690
Dec-92 12,706 13,918
Dec-93 14,887 15,431
Dec-94 12,780 15,459
Dec-95 17,238 21,149
Dec-96 22,984 25,764
Dec-97 29,134 33,954
Dec-98 36,078 42,151
Dec-99 44,535 50,960
Past performance is not predictive of future performance.
The graphs above depict the performance of the Capital Fund and the Russell 3000
Index.It is important to note that the Capital Fund is a professionally managed
mutual fund while the index is not available for investment and is unmanaged.
The comparisons are shown for illustrative purposes only.
- --------------------------------------------------------------------------------
Portfolio Hilights#
- --------------------------------------------------------------------------------
Composition of portfolio as of December 31,1999
[CHART]
[ILLEGIBLE]
- --------------------------------------------------------------------------------
Top Stock Holdings
- --------------------------------------------------------------------------------
Seagate Technology,Inc.
Federated Department
Stores,Inc.
Nabisco Group Holdings
Corp.
Hormel Foods Corp.
Costco Wholesale Corp.
Safeway,Inc.
Devon Energy Co.
Rogers Cantel Mobile
Communications Inc.
Delhaize America,Inc.
Bell Atlantic Corp.
Portfolio holdings may vary.
- --------------------------------------------------------------------------------
Average Annual Total Returns for Period Through December 31, 1999
- --------------------------------------------------------------------------------
Class A Shares Without Sales Charges With Sales Charges*
Since Inception (11/1/96) 25.92% 23.59%
3 year 24.40% 21.97%
1 year 23.11% 16.03%
Class B Shares
Since Inception (11/1/96) 24.99% 24.40%
3 year 23.47% 22.81%
1 year 22.22% 17.22%
Class 2 Shares
Since Inception (11/1/96) 24.98% 24.59%
3 year 23.43% 23.02%
1 year 22.15% 19.92%
Class O Shares
10 year 16.11% 16.11%
5 year 28.36% 28.36%
3 year 24.67% 24.67%
1 year 23.44% 23.44%
See page 42 for all footnotes.
<PAGE>
[GRAPHIC]
INVESTMENT OBJECTIVE AND STRATEGY
The Salomon Brothers Investors Value Fund's primary investment objective is to
seek long-term growth of capital. Current income is a secondary objective. The
Fund invests primarily in common stocks of large-capitalization stocks
representing well-known companies which the manager believes have good growth
potential at reasonable prices.
THE FUND MANAGERS
John B. Cunningham,
Director and Portfolio Manager at Salomon Brothers Asset Management Inc, has 11
years of financial industry experience. Mr.Cunningham is responsible for the
day-to-day management of the Fund.
Ross S.Margolies,
Managing Director and Portfolio Manager at Salomon Brothers Asset Management
Inc,has 19 years of investment industry experience in the equity, convertible
and high yield markets. Mr.Margolies plays a back-up role in the day-to-day Fund
management.
SALOMON BROTHERS
Investors Value Fund
PERFORMANCE UPDATE
The Investors Value Fund's ("Fund") Class A shares returned 11.47% without sales
charges for the year ended December 31, 1999. In comparison, the Standard &
Poor's 500 Index ("S&P 500") returned 21.03% for the same time period. (The S&P
500 is a market capitalization-weighted measure of 500 common stocks.)
MARKET REVIEW AND PORTFOLIO HIGHLIGHTS
The U.S. stock market finished its fifth consecutive year of returns in excess
of 20% with the S&P 500 returning 21.03%. Once again, large-cap growth stocks,
particularly in the technology sector, dominated the market's performance. The
major market indices performed quite well despite increasing interest rates
throughout the year. At the beginning of 1999, the 30-year U.S. Treasury Bond
yielded 5.1%; by year-end, the yield had increased to 6.5%.
During the second quarter of 1999, higher interest rates in the U.S. caused
investors to take profits in the technology sector and look beyond the narrow
group of stocks that had driven the market's performance. Investors shifted into
cyclical stocks as a result of improving worldwide economic growth. This
rotation into value stocks proved fleeting, however, as growth stocks returned
to the forefront again in the third quarter. As interest rates continued to
increase, investors sought companies exhibiting strong unit growth, particularly
technology stocks. Market breadth narrowed once again. The focus on technology
stocks gained considerable momentum during the fourth quarter. As a result of
the tech sector's strong performance throughout the year, technology stocks now
account for 30% of the S&P 500, up from 19% a year ago.
Market returns in 1999 were narrowly distributed. In fact, only half the stocks
in the S&P 500 had a positive return for the year. Just seven stocks accounted
for half of the S&P 500's performance; these stocks included Microsoft, Cisco,
GE, Wal-Mart, Oracle, Nortel and Qualcomm. Large-cap growth stocks, driven by
the technology sector, significantly outperformed their large-cap value peers.
Morningstar's large-cap growth category returned 36.0% versus 5.9% for the
large-cap value category. The Fund comfortably outperformed its large-cap value
peers, returning 11.7% for Class O shares, but lagged the broad market.
In 1999, the S&P 500's performance was predominately led by technology; the
consumer staples, health care, transportation and utility sectors had negative
returns for the year. The Fund benefited from its technology holdings, but our
underweight position penalized our relative performance. Within technology,
3Com, Corning, Hewlett-Packard, Alcatel and Texas
32
<PAGE>
Instruments led the Fund's performance. Other significant contributors included
Liberty Media, Hughes Electronics and Morgan Stanley Dean Witter. The Fund's
tobacco holdings, which have subsequently been reduced, held back performance
during the period.
In 2000, we expect the U.S. economy to begin to slow as a result of recent and
anticipated interest rate increases by the Federal Reserve Board. With interest
rates and commodity prices going up and corporate profits and Gross Domestic
Product growth expected to slow, stock market returns may not be as buoyant as
in recent years. Given the significant weighting of the technology sector in the
S&P 500, the performance of technology stocks should have an important impact on
the market's overall performance. We do expect market breadth to improve this
year, which we are already beginning to see. In a broader market, careful stock
selection will become more important than sector momentum. Given our strong team
of analysts, we believe the Investors Value Fund can benefit from this
anticipated increased market breadth. (Of course, no guarantees can be made that
the Fund will perform well in the future.)
33
<PAGE>
INVESTORS VALUE FUND --
Seeking High-Quality Companies with Strong Management
The Salomon Brothers Investors Value Fund builds on the principles of value
investing that were formulated by notable value investing pioneers such as
Benjamin Graham and David Dodd. Almost seven decades ago, these forefathers of
value investing taught the importance of evaluating a company based on its
fundamental worth and the belief that the market will eventually recognize true
value. Portfolio manager Jack Cunningham discusses his value investing style.
Q: Jack, how would you characterize your investment philosophy?
We use a bottom-up approach with respect to stock selection. (Bottom-up
investing is an investing style that focuses on the fundamental strength of
individual securities.) In particular, we look for high-quality companies with
good managements, attractive valuations and catalysts for stock price
appreciation. We support our extensive fundamental analysis with proprietary
quantitative risk management tools to help us manage risk.
Q: Please describe your stock selection process.
Our stock selection process relies heavily on our own internal team of analysts
for stock recommendations. We have more than a dozen analysts who focus on
specific sectors of the market. When an analyst recommends a stock, the team
then carefully reviews the company's operating characteristics, financial
stability, management quality and valuation. Based on the strength of the
fundamentals, a decision is then made whether to invest in a particular stock.
Q: Your investment process also emphasizes growth at a reasonable price
("GARP"). How does this GARP strategy work to help you achieve the Fund's
objectives?
We seek to position the Fund to have a comparable growth rate with the S&P 500
while looking to identify those companies with solid growth potential at
reasonable values. We seek to achieve this relationship by paying particular
attention to the price of new stock purchases. By identifying favorable entry
points, we believe we can maintain our value focus while still finding stocks
with attractive growth characteristics. That said, we also try to ensure that
the Fund remains firmly in the large-cap value universe.
Q: As manager, you try to find beaten-down companies whose earnings have staying
power over time. How do you select the companies best positioned to survive in a
highly competitive global marketplace?
We seek to identify high-quality companies with strong management teams. Every
now and then, stocks of high-quality companies may be temporarily oversold.
These are situations that we try to take advantage of. We rely on our team of
analysts to help us determine whether a stock has been
34
<PAGE>
temporarily oversold or whether the company has longer-term problems. When we
carefully review a stock with our analysts, we focus on the company's operating
characteristics and how that company is positioned versus its competitors over
both the short term and long term.
Q: The Fund's name recently changed from "Investors Fund" to "Investors Value
Fund." Has that affected your investment approach?
The name change from "Investors Fund" to "Investors Value Fund" has not affected
our investment approach. The team and style remain in place. The word "Value"
was added simply to more clearly identify the Fund's investment style as that of
a value fund.
Q: How has recent higher market volatility and the outstanding performance of
select large cap growth stocks affected your strategy?
Higher market volatility often presents us with more opportunities to buy stocks
at more favorable prices. We constantly have a number of stocks on our radar
screen. If a stock falls down to an attractive price level and the company's
fundamentals are still intact, we will generally take advantage of that buying
opportunity.
As far as the market's recent focus on large-cap growth stocks, we remain
committed to our value discipline. The major market indices performed quite well
again in 1999, but market breadth was quite narrow. In looking beyond the narrow
group of market leaders, we continue to find attractively valued stocks. We do
expect market breadth to improve in 2000, signs of which we are already
beginning to see. (Of course, no guarantees can be given that this will
continue.) In a broader market, stock selection should become more important
than sector momentum.
Q: How have you positioned the Fund to perform if the bull market in stocks
ends?
By focusing on the valuation aspect of stocks within the portfolio, the
Investors Value Fund should be well-positioned relative to the broad market in
the event that we see a downturn in the market. If the bull market ends,
individual stock selection should become even more crucial.
Q: With the worst seemingly over in Asia, and the U.S. economy continuing to
show strength, where do you see the most compelling value opportunities in 2000?
Currently, we are overweight in consumer staples, financials and energy.
Recently, we have added to consumer staples names like Safeway, a major
35
<PAGE>
grocery retailer, and Ralston Purina, one of the world's largest producers of
pet foods and batteries. We have also modestly increased our financials
weighting due to attractive valuations. If we see a correction in select
technology names, we will look to increase our weighting in that sector as well.
Q: What type of guidance can you offer today's investors, specifically regarding
value stocks as investment opportunities?
Value stocks offer an important diversification benefit for any investor's
portfolio. Given the current valuations of many leading growth stocks, we
believe that now may be an opportune time for investors to increase their
allocation to value funds.
Value stocks offer exposure to a class of stocks that may outperform the broad
market at certain times or under certain market conditions. Given the difficulty
of timing the market, we believe that value stocks can contribute to a
well-diversified portfolio's performance over the long run.
Jack, thank you for spending some time with us today.
36
<PAGE>
HISTORICAL PERFORMANCE (unaudited)
INVESTORS VALUE FUND -- CLASS A, B and 2 SHARES
Comparison of $10,000 Investment in the Fund with S&P 500 Index
Date Class A Class B Class 2 S&P 500 Index
1/3/95 9,425 10,000 9,900 10,000
Dec-95 12,756 13,450 13,316 13,753
Dec-96 16,620 17,381 17,211 16,910
Dec-97 20,972 21,774 21,549 22,550
Dec-98 24,156 24,576 24,624 28,999
Dec-97 26,926 27,306 27,252 35,098
Past performance is not predictive of future performance. Performance above
reflects returns after deduction of applicable maximum sales charge.
HISTORICAL PERFORMANCE (unaudited)
INVESTORS VALUE FUND -- CLASS O SHARES
Comparison of $10,000 Investment in the Fund with S&P 500 Index
Date Class O S&P 500 Index
Dec-89 10,000 10,000
Dec-90 9,351 9,689
Dec-91 12,092 12,634
Dec-92 12,989 13,596
Dec-93 14,961 14,964
Dec-94 14,773 15,160
Dec-95 20,001 20,849
Dec-96 26,113 25,634
Dec-97 33,026 34,183
Dec-98 38,125 43,959
Dec-99 42,596 53,204
Past performance is not predictive of future performance.
The graphs above depict the performance of the Investors Value Fund versus the
S&P 500 Index.It is important to note that the Investors Value Fund is a
professionally managed mutual fund while the index is not available for
investment and is unmanaged. The comparisons are shown for illustrative purposes
only.
Portfolio Highlights#
Composition of portfolio as of December 31,1999
[CHART]
Average Annual Total Returns for Period Through December 31, 1999
Class A Shares Without Sales Charges With Sales Charges*
- -------------------------------------------------------------------------------
Since Inception (1/3/95) 23.39% 21.93%
3 year 17.45% 15.16%
1 year 11.47% 5.08%
- -------------------------------------------------------------------------------
Class B Shares
- -------------------------------------------------------------------------------
Since Inception (1/3/95) 22.46% 22.28%
3 year 16.53% 15.79%
1 year 10.57% 5.90%
- -------------------------------------------------------------------------------
Class 2 Shares
- -------------------------------------------------------------------------------
Since Inception (1/3/95) 22.48% 22.23%
3 year 16.56% 16.17%
1 year 10.67% 8.64%
- -------------------------------------------------------------------------------
Class O Shares
- -------------------------------------------------------------------------------
10 year 15.59% 15.59%
5 year 23.59% 23.59%
3 year 17.72% 17.72%
1 year 11.73% 11.73%
- -------------------------------------------------------------------------------
See page 42 for all footnotes.
Top Stock Holdings
- ----------------------------
Morgan Stanley Dean
Witter & Co.
- ----------------------------
The News Corp. Ltd. ADR
- ----------------------------
The Bank of New York
Co., Inc.
- ----------------------------
Alcatel SA ADR
- ----------------------------
Hewlett-Packard Co.
- ----------------------------
Safeway Inc.
- ----------------------------
Seagate Technology, Inc.
- ----------------------------
International Business
Machines Corp.
- ----------------------------
Bell Atlantic Corp.
- ----------------------------
International Paper Co.
- ----------------------------
Portfolio holdings may vary.
37
<PAGE>
[GRAPHIC]
INVESTMENT OBJECTIVE AND STRATEGY
The Balanced Fund, formerly known as the Total Return Fund, seeks to obtain
above average income (compared to a portfolio invested in equity securities).
The Fund's secondary objective is to take advantage of opportunities for growth
of capital and income. The Fund invests in a broad range of equity and
fixed-income securities of both U.S. and foreign issuers. The Fund varies its
allocations between equity and fixed income securities depending on the
manager's view of economic and market conditions, fiscal and monetary policy,
and security values. However, under normal market conditions at least 40% of the
Fund's assets are allocated to equity securities.
The Fund's equity investments have been in large-capitalization stocks that are
paying dividends greater than the S&P 500 Index average. With assets allocated
to investment-grade, high-yield and convertible securities, the bond portion of
the Fund's portfolio is distributed across a broader range of fixed income
instruments than most balanced funds. The Fund's strategic approach in the bond
market tends to raise its income potential and the variety of its bond holdings
also provides diversification benefits that the portfolio manager believes could
help to limit its volatility.
THE FUND MANAGER
George J. Williamson,
Director and Portfolio Manager at Salomon Brothers Asset Management Inc, has 41
years of investment industry experience in the equity markets. Mr. Williamson is
primarily responsible for day-to-day Fund management.
SALOMON BROTHERS
Balanced Fund
PERFORMANCE UPDATE
For the year ended December 31, 1999, the Balanced Fund's ("Fund") Class A
shares, without sales charges, returned 3.21%. In comparison, the Standard &
Poor's 500 Index ("S&P 500") returned 21.03% for the same time period. (The S&P
500 is a market capitalization-weighted measure of 500 widely held common
stocks.)
MARKET REVIEW AND HIGHLIGHTS
During 1999, the common stock segment of the Fund's portfolio was gradually
repositioned toward an increased emphasis on high-quality, large growth
companies and a significant number of the cyclical holdings were sold.
Holdings either added or increased to the Fund's portfolio include: Coca-Cola,
Merck, Pfizer, and IBM. These holdings have benefited the Fund's performance and
we believe these companies should continue to perform well. We eliminated the
Fund's holdings in Vulcan Materials, Alcoa, International Paper, and Weyheuser.
The stock and bond ratio was being maintained at approximately 50/50. The bond
sector is comprised of approximately 12% convertible issues, 17% high-yield
bonds and 19% U.S. Treasury and investment-grade bonds. The yield of the overall
portfolio is currently 5.1%.
Economic conditions were bolstered by the monetary ease applied by the Federal
Reserve Board in 1998. Then there was a Fed shift toward higher rates in 1999.
Stock market performance was dominated by very high priced multiple technology
stocks. Going forward, we look for moderate growth in the U.S. and a gradual
improvement overseas along with a trend toward moderately higher interest rates.
During the current year we believe that conditions will tend to favor
high-quality growth companies which will participate in the expected worldwide
economic improvement. The largest stock holdings in order of size are: Bell
Canada Enterprises (owns 40% of Nortel Networks), Suncor Energy, IBM, Exxon
Mobil, Union Pacific, CIGNA, Bell Atlantic, SBC Communications, Avon Products
and Marsh & McLennan.
38
<PAGE>
BALANCED FUND --
Bringing Stock & Bond Opportunities Together
Historically, a balanced approach has helped investors enjoy stock market growth
potential, generate potential income, manage risk and cushion stock market
declines. The Salomon Brothers Balanced Fund utilizes a strategic combination of
stocks and bonds that do not perform in sync -- offering investors the benefits
of diversification. While investing in a mix of stocks and bonds can bring added
benefits, it may also involve above-average risks, including limited
marketability of portfolio securities. Please note that this diversification
does not ensure against market loss. Portfolio Manager George Williamson
discusses how his balanced strategy creates a portfolio that may be appropriate
for investors seeking a more stable approach to growth.
Q: George, how would you characterize your investment philosophy?
Our investment philosophy can be characterized by the growth at a reasonable
price ("GARP") approach. We seek long-term, high-quality growth stocks at prices
that we think make sense.
Q: Describe your stock and bond selection process.
Our selection process consists of continuous review of a large number of
companies that fit the criteria of a strong company in a growth industry. We
attempt to bring together Salomon Brothers' renowned bond market expertise in
the context of a large cap stock strategy.
Q: Please discuss the Fund's name change. Will it affect your investment
approach?
While the Fund's name changed from "Total Return Fund" to "Balanced Fund," it
has not affected our investment approach. The team and the style orientation
remain in place. A more appropriate name for the Fund might be the Balanced
Income Fund. We own some income-producing stocks and seek to maintain a 50%
stock to 50% bond ratio.
Q: Describe what you mean by a "balanced" approach to investing.
Through the Balanced Fund, investors gain exposure to a variety of asset classes
including large capitalization stocks, high-yield bonds and convertible
securities. Our balanced approach to investing can provide individuals with the
potential to receive both income and growth with less volatility than a
portfolio comprised only of stocks.
Our stock and bond research teams combine their insights across disciplines,
creating what we think is "the right mix." Intensive research led us to conclude
that we could potentially enhance the Fund by exploring unique investments such
as high-yield bonds and convertible securities. These types of securities can
help diversify the Fund, while increasing the potential for both higher returns
and income.
39
<PAGE>
Q: How do you manage the tradeoff between income and performance?
While this is one of the most difficult aspects of portfolio management, it is
attainable as long as our investors understand the process. Our yield restricts
performance to some extent but fits a big niche. We're more conservative
investors, but we still like to own solid growth companies.
In addition, we diversify across asset classes in an attempt to increase the
Fund's income potential as well as to help limit downside risk. Most bonds are
income-producing securities, and, therefore, provide the Fund with a consistent
income stream. We seek to create additional income by investing in stocks that
have strong potential for sustained dividend growth as well.
Q: We have noticed an increased appearance of "well-known names" in the Fund's
portfolio. What do you find compelling about these brand name companies?
Well-known companies tend to be dominant companies in growth industries.
Customers know and are comfortable with these businesses and they tend to lead
the market over time. (Past performance is not indicative of future results.)
Q: What role does a balanced fund play in a well-diversified portfolio?
The Salomon Brothers Balanced Fund may be an excellent alternative for investors
who want income and who want to own some great growth companies. Also, the
convertible bond portion of the Fund offers investors the opportunity for both
capital appreciation and income.
George, thank you for your insights.
40
<PAGE>
The following graph depicts the performance of the Balanced Fund versus the
Salomon Smith Barney Broad Investment-Grade Bond Index1,the Standard & Poor's
500 Stock Index and 50% Salomon Smith Barney Broad Investment-Grade Bond Index
and 50% Standard & Poor's 500 Stock Index. It is important to note that the Fund
is a professionally managed mutual fund while the indexes are not available for
investment and are unmanaged. The comparison is shown for illustrative purposes
only.
- --------------------------------------------------------------------------------
Portfolio Highlights#
- --------------------------------------------------------------------------------
Composition of portfolio as of December 31,1999
[CHART]
[ILLEGIBLE]
- --------------------------------------------------------------------------------
Top Stock Holdings
- --------------------------------------------------------------------------------
BCE Inc.
................................................................................
Suncor Energy,Inc.
................................................................................
International Business
Machines Corp.
................................................................................
Exxon Mobil Corp.
................................................................................
Union Pacific Corp.
................................................................................
Bell Atlantic Corp.
................................................................................
SBC Communications Inc.
................................................................................
CIGNA Corp.
................................................................................
Avon Products,Inc.
................................................................................
Marsh & McLennan
Cos.Inc.
- ----------------------------
Portfolio holdings may vary.
- --------------------------------------------------------------------------------
HISTORICAL PERFORMANCE (unaudited)
BALANCED FUND -- CLASS A,B,2 and O SHARES
Comparison of $10,000 Investment in the Fund with Salomon Smith Barney Broad
Investment-Grade Bond Index ("BIG"),Standard & Poor's 500 Stock Index and 50%
Salomon Smith Barney Broad Investment-Grade Bond and 50% Standard & Poor's 500
Stock Index
- --------------------------------------------------------------------------------
[GRAPH]
S&P 500 S&P Big
Date Class A Class B Class 2 Class 0 Index Index Blend
9/13/95 9,425 10,000 9,900 10,000 10,000 10,000 10,000
Dec-95 10,052 10,644 10,548 10,689 10,602 10,434 10,518
Dec-96 11,894 12,498 12,389 12,724 13,035 10,811 11,923
Dec-97 14,159 14,766 14,633 15,181 17,383 11,852 14,618
Dec-98 15,059 15,276 15,433 16,178 22,355 12,886 17,620
Dec-97 15,546 15,755 15,807 16,734 27,056 12,779 19,918
Past performance is not predictive of future performance. Performance above
reflects returns after deduction of applicable maximum sales charge.
- --------------------------------------------------------------------------------
Average Annual Total Returns for Period Through December 31, 1999
- --------------------------------------------------------------------------------
Class A Shares Without Sales Charges With Sales Charges*
................................................................................
Since Inception (9/11/95) 12.32% 10.79%
3 year 9.33% 7.20%
1 year 3.21% -2.72%
................................................................................
Class B Shares
................................................................................
Since Inception (9/11/95) 11.46% 11.13%
3 year 8.48% 7.62%
1 year 2.42% -2.46%
................................................................................
Class 2 Shares
................................................................................
Since Inception (9/11/95) 11.47% 11.22%
3 year 8.46% 8.09%
1 year 2.41% 0.44%
................................................................................
Class O Shares
................................................................................
Since Inception (9/11/95) 12.70% 12.70%
3 year 9.56% 9.56%
1 year 3.42% 3.42%
- --------------------------------------------------------------------------------
See page 42 for all footnotes.
41
<PAGE>
FOOTNOTES
1 The Salomon Smith Barney Broad Investment-Grade Bond Index is valued at
month end only. As a result, while the Fund's total return calculations
used in this comparison are for the period September 11, 1995 through
December 31, 1998, the combined Index returns are for the period October 1,
1995 through December 31, 1999.
* Class A and 2 shares reflect the deduction of the maximum 5.75% and 1.00%
sales charges respectively. Class B and 2 shares reflect the maximum
contingent deferred sales charge of 5.00% and 1.00%, respectively. Class O
shares have no initial or contingent deferred sales charge.
# As a % of total investments.
N/A Not Available.
GENERAL PERFORMANCE AND RANKING NOTES
Average annual total returns are based on changes in net asset value and assume
the reinvestment of all dividends, and/or capital gains distributions in
additional shares with and without the effect of the maximum sales charge (Class
A and 2) and the contingent deferred sales charge (Class B and 2). Class O
shares are only available to existing Class O shareholders. Past performance
does not guarantee future results. Investment return and principal value
fluctuate so that an investor's shares, when redeemed, may be worth more or less
than their original cost. Returns for certain Funds reflect a voluntary expense
cap imposed by Salomon Brothers Asset Management Inc to limit total Fund
operating expenses. Absent this expense cap, Fund returns would be lower.
Expense caps may be revised or terminated at any time.
42
<PAGE>
Schedules of Investments
December 31, 1999
Salomon Brothers Asia Growth Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Security Value
<C> <S> <C>
- --------------------------------------------------------------------------------
COMMON STOCK -- 93.3%
China -- 0.8%
1,850,000 Guangzhou Pharmaceutical Co. Ltd., Class H Shares..... $ 192,770
-----------
Hong Kong -- 29.1%
130,000 Cable & Wireless HKT Ltd.............................. 375,442
34,000 Cheung Kong (Holdings) Ltd. .......................... 431,916
314,000 China Merchants Holdings International Co. Ltd. ...... 258,519
270,000 China Resources Enterprise Ltd. ...................... 432,430
124,000 China Telecom (Hong Kong) Ltd. (a).................... 775,249
671,000 First Pacific Co. Ltd. ............................... 517,913
290,000 Giordano International Ltd............................ 298,449
250,000 Global Tech (Holdings) Ltd. .......................... 289,444
114,000 Guoco Group Ltd. ..................................... 347,565
553,600 HKR International Ltd................................. 388,128
39,200 HSBC Holdings PLC..................................... 549,662
36,000 Hutchison Whampoa Ltd................................. 523,316
1,100,000 Kin Yat Holdings Ltd.................................. 162,732
180,000 Li & Fung Ltd......................................... 451,534
62,000 Television Broadcasts Ltd. ........................... 422,718
68,000 Wing Hang Bank Ltd.................................... 232,687
1,100,000 Yanzhou Coal Mining Co. Ltd., Class H Shares.......... 304,238
-----------
6,761,942
-----------
India -- 7.3%
22,000 Bajaj Auto Ltd. GDR................................... 209,000
19,000 Reliance Industries Ltd. GDR (a)...................... 266,000
3,000 Satyam Infoway Ltd. ADR (a)........................... 465,000
18,000 State Bank of India GDR............................... 222,300
29,500 Tata Engineering and Locomotive Co. Ltd. GDR.......... 154,875
15,000 Videsh Sanchar Nigam Ltd. GDR......................... 372,000
-----------
1,689,175
-----------
Indonesia -- 1.2%
113,000 PT Hanjaya Mandala Sampoerna Tbk...................... 282,897
-----------
Malaysia -- 2.7%
122,000 AMMB Holdings Berhad ................................. 292,196
146,000 Gamuda Berhad......................................... 324,700
-----------
616,896
-----------
Singapore -- 11.4%
56,000 City Developments Ltd................................. 327,731
72,000 Datacraft Asia Ltd.................................... 597,600
42,000 DBS Group Holdings Ltd................................ 688,235
226,000 MediaRing.com Ltd. (a)................................ 244,177
85,000 NatSteel Electronics Ltd.............................. 448,979
32,000 Singapore Airlines Ltd................................ 363,025
-----------
2,669,747
-----------
</TABLE>
See Notes to Financial Statements.
43
<PAGE>
Schedules of Investments
(continued)
Salomon Brothers Asia Growth Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Security Value
<C> <S> <C>
- -----------------------------------------------------
South Korea -- 22.0%
6,200 Dongwon Securities Co...... $ 133,479
14,100 H&CB....................... 446,045
23,909 Hyundai Electronics
Industries Co............. 506,332
4,200 Hyundai Motor Co. Ltd...... 66,432
27,818 Hyundai Motor Co. Ltd. GDR
(a)....................... 299,043
2,500 Korea Telecom Corp......... 393,233
4,800 Korea Telecom Corp. ADR.... 358,800
4,000 Korea Thrunet Co., Ltd.,
Class A Shares............ 271,500
8,000 L.G. Chemical Ltd.......... 252,372
3,428 Pohang Iron & Steel Co.,
Ltd. (b).................. 409,484
3,800 Samsung Electronics........ 888,224
2,200 Serome Technology Inc.
(a)....................... 467,838
59,500 Shinhan Bank............... 643,101
-----------
5,135,883
-----------
Taiwan -- 16.1%
130,000 Acer Peripherals Inc....... 538,422
82,000 Advanced Semiconductor
Engineering Inc. (a)...... 292,595
106,600 Cathay Life Insurance Co.,
Ltd....................... 256,413
368,000 Chinatrust Commercial
Bank...................... 427,934
133,208 Compal Electronics Inc..... 447,734
60,000 Hon Hai Precision Industry
Co., Ltd. (a)............. 447,304
81,444 President Chain Store
Corp...................... 359,372
118,670 Taiwan Semiconductor
Manufacturing Co. (a)..... 631,384
94,000 United Microelectronics
Corp., Ltd................ 335,414
-----------
3,736,572
-----------
Thailand -- 2.7%
28,000 Advanced Info Service
Public Co. Ltd. (b)....... 469,826
380,000 National Finance Public Co.
Ltd. (b).................. 168,989
-----------
638,815
-----------
TOTAL COMMON STOCK
(Cost -- $15,524,086)...... 21,724,697
-----------
<CAPTION>
Face
Amount
----------
<C> <S> <C>
EQUITY-LINKED NOTES -- 5.8%
India -- 3.6%
$ 8,000 Satyam Computer Services
Ltd., Series B, Equity-
Linked Note, due 3/31/02
(d)....................... 828,000
-----------
Singapore -- 2.2%
188,385 Overseas Union Bank,
Equity-Linked Note, due
1/6/02 (c)................... 523,151
-----------
TOTAL EQUITY-LINKED NOTES
(Cost -- $392,188)............ 1,351,151
-----------
</TABLE>
See Notes to Financial Statements.
44
<PAGE>
Schedules of Investments
(continued)
Salomon Brothers Asia Growth Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Warrants Security Value
<C> <S> <C>
- -----------------------------------------------------
WARRANTS -- 0.4%
Indonesia -- 0.4%
3,202,896 PT Bank Panin Indonesia,
Expires 6/26/00 (a)
(Cost -- $79,518)............$ 83,483
-----------
<CAPTION>
Rights
----------
<C> <S> <C>
RIGHTS -- 0.5%
South Korea -- 0.5%
792 Serome Technology Inc.,
Subscription Rights (a)(e)
(Cost -- $0)................. 114,206
-----------
TOTAL INVESTMENTS -- 100%
(Cost -- $15,995,792*)........$23,273,537
===========
</TABLE>
- ------
(a) Non-income producing security.
(b) Foreign shares.
(c) The current principal amount of these notes is equivalent to 152,600 shares
of Overseas Union Bank. Redemption proceeds will be determined at the date
of redemption based on change in (1) the value of the shares of Overseas
Union Bank and (2) the exchange rate between the U.S. Dollar and Singapore
Dollar. Interest on the note is equal to the amount of dividends paid on
the underlying shares of Overseas Union Bank.
(d) The current principal amount of these notes is equivalent to 314,960 shares
of Satyam Computer. Redemption proceeds will be determined at the date of
redemption based on change in the value of the shares of Satyam Computer.
Interest on the notes is equal to the amount of dividends paid on the un-
derlying shares of Satyam Computer.
(e) Subscription rights issued on December 31, 1999 at terms of 36 rights for
every 100 shares of Serome Technology common stock held. The rights are ex-
ercisable for 1 ordinary share each at a subscription price of 77,900KRW.
* Aggregate cost for Federal income tax purposes is substantially the same.
Abbreviations used in this schedule:
ADR -- American Depository Receipt.
GDR -- Global Depository Receipt.
KRW -- South Korean Won.
See Notes to Financial Statements.
45
<PAGE>
Schedules of Investments
(continued)
Salomon Brothers International Equity Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Security Value
<C> <S> <C>
- --------------------------------------------------------------------------------
COMMON STOCK -- 100%
Canada -- 3.2%
6,200 CGI Group Inc., Class A Shares......................... $ 265,438
----------
Finland -- 6.4%
1,200 Nokia Corp., Sponsored ADR............................. 228,000
4,500 Sonera Group........................................... 308,520
----------
536,520
----------
France -- 2.1%
2,500 Axa, Sponsored ADR..................................... 177,500
----------
Germany -- 2.3%
2,500 Adidas - Salomon AG.................................... 187,646
----------
Ireland -- 4.1%
7,100 Allied Irish Banks PLC, Sponsored ADR.................. 149,987
6,400 Elan Corp. PLC, Sponsored ADR.......................... 188,800
----------
338,787
----------
Italy -- 5.0%
9,800 Luxottica Group S.p.A., Sponsored ADR.................. 172,112
22,200 Telecom Italia Mobile S.p.A. .......................... 248,043
----------
420,155
----------
Japan -- 34.5%
6,000 Canon, Inc............................................. 237,589
13 DDI Corp............................................... 177,509
500 Fast Retailing Co. .................................... 202,867
5,000 Fujitsu Ltd............................................ 227,251
500 Fujitsu Support and Services Inc. ..................... 244,319
11 Nippon Telegraph and Telephone Corp.................... 187,750
9 NTT Data Corp.......................................... 206,281
800 Ryohin Keikaku Co...................................... 160,031
900 Secom Co., Ltd., Unsponsored ADR....................... 197,503
1,000 Seven-Eleven Japan Co., Ltd. .......................... 158,003
480 Shohkoh Fund & Co., Ltd. .............................. 189,369
1,000 Sony Corp.............................................. 295,523
1,000 TDK Corp............................................... 137,618
1,000 Trend Micro Inc........................................ 251,634
----------
2,873,247
----------
Netherlands -- 10.5%
1,800 ASM Lithography Holding N.V............................ 204,750
3,200 ING Groep N.V., Sponsored ADR.......................... 195,200
8,300 Koninklijke Ahold N.V., Sponsored ADR.................. 248,481
1,500 STMicroelectronics N.V., NY Shares..................... 227,156
----------
875,587
----------
Spain -- 7.0%
16,900 Banco Santander Central Hispano SA..................... 191,380
2,650 Telefonica SA, Sponsored ADR........................... 208,853
42,300 Telepizza SA........................................... 178,992
----------
579,225
----------
Switzerland -- 2.6%
1,800 ABB Ltd................................................ 220,029
----------
</TABLE>
See Notes to Financial Statements.
46
<PAGE>
Schedules of Investments
(continued)
Salomon Brothers International Equity Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Security Value
<C> <S> <C>
- --------------------------------------------------------------------------------
United Kingdom -- 22.3%
64,400 Ashtead Group PLC...................................... $ 176,215
15,100 Cobham PLC............................................. 188,915
39,400 Invensys PLC........................................... 213,073
16,500 Johnson Matthey PLC.................................... 173,801
14,700 Lloyds TSB Group PLC................................... 183,436
15,300 Misys PLC.............................................. 232,911
15,900 Provident Financial PLC................................ 174,539
47,400 Rentokil Initial PLC................................... 172,549
15,700 Shire Pharmaceuticals Group PLC........................ 156,757
3,700 Vodafone AirTouch PLC, Sponsored ADR................... 183,150
----------
1,855,346
----------
TOTAL INVESTMENTS -- 100%
(Cost -- $6,667,641*).................................. $8,329,480
==========
</TABLE>
- ------
* Aggregate cost for Federal income tax purposes is substantially the same.
Abbreviation used in this schedule:
ADR -- American Depository Receipt.
See Notes to Financial Statements.
47
<PAGE>
Schedules of Investments
(continued)
Salomon Brothers Small Cap Growth Fund
<TABLE>
- -------------------------------------------------------------------------------
<CAPTION>
Shares Security Value
<C> <S> <C>
- -------------------------------------------------------------------------------
COMMON STOCK -- 86.7%
Basic Industries -- 3.3%
100,000 The Geon Co. ...................................... $ 3,250,000
125,000 OM Group, Inc...................................... 4,304,687
175,000 Steel Dynamics, Inc. (a) .......................... 2,789,063
------------
10,343,750
------------
Communications -- 10.3%
36,500 Cox Radio, Inc., Class A Shares (a)................ 3,640,875
95,000 Electric Lightwave, Inc., Class A Shares (a)....... 1,781,250
70,000 Entercom Communications Corp. (a).................. 4,620,000
147,000 GST Telecommunications, Inc. (a)................... 1,332,187
132,000 ICG Communications, Inc. (a)....................... 2,475,000
50,000 Intermedia Communications, Inc. (a)................ 1,940,625
Metromedia Fiber Network, Inc., Class A Shares
100,000 (a)................................................ 4,793,750
50,000 Pac-West Telecomm, Inc. (a)........................ 1,325,000
40,000 Pegasus Communications Corp. (a)................... 3,910,000
Rogers Cantel Mobile Communications Inc., Class B
77,800 Shares (a)......................................... 2,829,975
46,500 WinStar Communications, Inc. (a)................... 3,481,688
------------
32,130,350
------------
Consumer -- 14.7%
100,000 Abercrombie & Fitch Co., Class A Shares (a)........ 2,668,750
50,000 Charles River Associates Inc. (a).................. 1,675,000
25,000 Coca-Cola Bottling Consolidated.................... 1,184,375
125,000 Cost Plus, Inc. (a)................................ 4,453,125
35,000 Cutter & Buck Inc. (a)............................. 529,375
160,000 DeVry, Inc. (a).................................... 2,980,000
35,000 Dura Automotive Systems, Inc. (a).................. 610,312
60,000 eCollege.com (a)................................... 656,250
40,000 FactSet Research Systems Inc....................... 3,185,000
165,000 Fossil, Inc. (a)................................... 3,815,625
40,000 Maximus, Inc. (a).................................. 1,357,500
150,000 Michael Foods, Inc................................. 3,693,750
50,000 On Assignment, Inc. (a)............................ 1,493,750
160,000 The Profit Recovery Group International, Inc. (a).. 4,250,000
55,000 QRS Corp. (a)...................................... 5,737,188
Sinclair Broadcast Group, Inc., Class A Shares
122,000 (a)................................................ 1,488,781
95,000 Station Casinos, Inc. (a).......................... 2,131,563
60,000 Trex Co., Inc. (a)................................. 1,605,000
50,000 Williams-Sonoma, Inc. (a).......................... 2,300,000
------------
45,815,344
------------
Energy -- 3.6%
150,000 Newfield Exploration Co. (a)....................... 4,012,500
5,000 Paradigm Geophysical Ltd. (a)...................... 24,531
200,000 Pogo Producing Co.................................. 4,100,000
50,000 Rowan Cos. Inc. (a)................................ 1,084,375
38,000 SEACOR SMIT Inc. (a)............................... 1,966,500
------------
11,187,906
------------
Financial Services -- 4.6%
65,000 Banknorth Group, Inc. ............................. 1,738,750
75,000 Commerce Bancorp, Inc. ............................ 3,032,812
</TABLE>
See Notes to Financial Statements.
48
<PAGE>
Schedules of Investments
(continued)
Salomon Brothers Small Cap Growth Fund
<TABLE>
- -------------------------------------------------------------------------------
<CAPTION>
Shares Security Value
<C> <S> <C>
- -------------------------------------------------------------------------------
Financial Services -- 4.6% (continued)
100,000 Legg Mason, Inc.................................... $ 3,625,000
110,000 Protective Life Corp............................... 3,499,375
90,000 Westamerica Bancorporation......................... 2,514,375
------------
14,410,312
------------
Health Care -- 3.8%
110,000 Alpharma Inc., Class A Shares (a).................. 3,382,500
31,900 COR Therapeutics, Inc. (a)......................... 857,312
Health Management Associates, Inc., Class A Shares
100,000 (a)................................................ 1,337,500
26,000 IDEC Pharmaceuticals Corp. (a)..................... 2,554,500
135,000 MedQuist Inc. (a).................................. 3,484,688
5,000 Vertex Pharmaceuticals Inc. (a).................... 175,000
------------
11,791,500
------------
Real Estate -- 0.8%
40,000 Cousins Properties, Inc. .......................... 1,357,500
41,800 PS Business Parks, Inc. ........................... 950,950
------------
2,308,450
------------
Technology -- 45.6%
43,500 Applied Micro Circuit Corp. (a).................... 5,535,375
147,000 ASM International N.V. (a)......................... 3,381,000
200,000 Brooktrout Inc. (a)................................ 3,712,500
30,000 Commerce One, Inc. (a)............................. 5,895,000
108,000 Concord Communications, Inc. (a)................... 4,792,500
245,000 Digital Microwave Corp. (a)........................ 5,742,188
22,000 Drugstore.com, Inc. (a)............................ 796,125
60,100 Engage Technologies, Inc. (a)...................... 3,606,000
75,000 Exar Corp. (a)..................................... 4,415,625
60,000 Inet Technologies, Inc. (a)........................ 4,192,500
195,000 Insight Enterprises, Inc. (a)...................... 7,921,875
150,000 Keane, Inc. (a).................................... 4,762,500
24,900 The Knot, Inc. (a)................................. 210,094
120,000 Legato Systems, Inc. (a)........................... 8,257,500
75,000 Micro Linear Corp. (a)............................. 642,187
300,000 Micron Electronics, Inc. (a)....................... 3,337,500
25,000 MTI Technology Corp. (a)........................... 921,875
140,000 Network Appliance, Inc. (a)........................ 11,628,750
154,800 Newport Corp. ..................................... 7,082,100
100,000 Oak Industries Inc. (a)............................ 10,612,500
42,000 Ortel Corp. (a).................................... 5,040,000
225,000 PairGain Technologies, Inc. (a).................... 3,192,188
13,200 PlanetRx.com, Inc. (a)............................. 191,400
70,000 Polycom, Inc. (a).................................. 4,458,125
229,000 S3 Inc. (a)........................................ 2,647,813
100,000 Sawtek Inc. (a).................................... 6,656,250
160,000 Siebel Systems, Inc. (a)........................... 13,440,000
90,000 Technology Solutions Co. (a)....................... 2,947,500
18,500 TranSwitch Corp. (a)............................... 1,342,405
60,500 Visual Networks, Inc. (a).......................... 4,794,625
------------
142,156,000
------------
TOTAL COMMON STOCK
(Cost -- $166,852,156)............................. 270,143,612
------------
</TABLE>
See Notes to Financial Statements.
49
<PAGE>
Schedules of Investments
(continued)
Salomon Brothers Small Cap Growth Fund
<TABLE>
- -------------------------------------------------------------------------------
<CAPTION>
Contracts Security Value
<C> <S> <C>
- -------------------------------------------------------------------------------
PURCHASED PUT OPTIONS (a) -- 0.1%
Cost Plus Inc.:
100 Expires 2/19/00, exercise price $30................ $ 6,875
150 Expires 2/19/00, exercise price $35................ 44,062
IDEC Pharmaceuticals, Expires 1/22/00, exercise
400 price $55.......................................... 5,000
Metromedia Fiber Network, Inc.:
350 Expires 1/22/00, exercise price $22.50............. 4,375
1,150 Expires 1/22/00, exercise price $25................ 14,375
Williams-Sonoma, Inc., Expires 1/22/00, exercise
500 price $50.......................................... 268,750
------------
TOTAL PURCHASED PUT OPTIONS
(Cost -- $965,288)................................. 343,437
------------
SUB-TOTAL INVESTMENTS
(Cost -- $167,817,444)............................. 270,487,049
------------
<CAPTION>
Face
Amount
-----------
<C> <S> <C>
REPURCHASE AGREEMENT -- 13.2%
$41,277,000 State Street Bank & Trust Co., 3.000% due 1/3/00;
Proceeds at maturity -- $41,287,319; (Fully
collateralized by U.S. Treasury Notes, 8.500% due
2/15/20; Market value -- $42,105,825) (Cost --
$41,277,000)..................................... 41,277,000
------------
TOTAL INVESTMENTS -- 100%
(Cost -- $209,094,444*)............................ $311,764,049
============
</TABLE>
- ------
(a) Non-income producing security.
* Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
50
<PAGE>
Schedules of Investments
(continued)
Salomon Brothers Large Cap Growth Fund
<TABLE>
- --------------------------------------------------------------------------------
<CAPTION>
Shares Security Value
<C> <S> <C>
- --------------------------------------------------------------------------------
COMMON STOCK -- 100%
Broadcasting & Publishing -- 1.2%
1,650 Gannett Co., Inc. ....................................... $ 134,578
-----------
Business Services -- 3.1%
4,250 Automatic Data Processing, Inc........................... 228,969
1,255 Lexmark International Group, Inc. (a).................... 113,577
-----------
342,546
-----------
Commercial Services -- 3.0%
3,800 The Interpublic Group of Cos., Inc....................... 219,212
1,110 Omnicom Group Inc........................................ 111,000
-----------
330,212
-----------
Communications -- 3.0%
2,770 Bell Atlantic Corp....................................... 170,528
3,430 BellSouth Corp. ......................................... 160,567
-----------
331,095
-----------
Computers -- 8.5%
3,220 Dell Computer Corp. (a).................................. 164,220
650 EMC Corp. (a)............................................ 71,013
3,030 Intel Corp............................................... 249,407
3,310 International Business Machines Corp. ................... 357,480
1,110 Sun Microsystems, Inc. (a)............................... 85,956
-----------
928,076
-----------
Consumer Non-Cyclicals -- 3.8%
3,310 The Coca-Cola Co. ....................................... 192,808
1,990 The Procter & Gamble Co. ................................ 218,029
-----------
410,837
-----------
Drugs & Health Care -- 12.0%
1,390 Amgen Inc. (a)........................................... 83,487
3,570 Bristol-Myers Squibb Co.................................. 229,149
910 Eli Lilly & Co. ......................................... 60,515
2,400 Johnson & Johnson........................................ 223,500
1,170 Medtronic, Inc. ......................................... 42,632
3,680 Merck & Co., Inc. ....................................... 246,790
3,990 Pfizer Inc. ............................................. 129,426
3,900 Schering-Plough Corp. ................................... 164,531
1,620 Warner-Lambert Co. ...................................... 132,739
-----------
1,312,769
-----------
Electronics -- 1.3%
2,360 Emerson Electric Co. .................................... 135,405
-----------
Entertainment -- 0.5%
1,140 Carnival Corp. .......................................... 54,506
-----------
Finance -- 7.9%
1,090 American Express Co. .................................... 181,213
2,760 Associates First Capital Corp............................ 75,728
2,430 The Bank of New York Co., Inc. .......................... 97,200
1,960 The Chase Manhattan Corp. ............................... 152,267
</TABLE>
See Notes to Financial Statements.
51
<PAGE>
Schedules of Investments
(continued)
Salomon Brothers Large Cap Growth Fund
<TABLE>
- --------------------------------------------------------------------------------
<CAPTION>
Shares Security Value
<C> <S> <C>
- --------------------------------------------------------------------------------
Finance -- 7.9% (continued)
2,430 Concord EFS, Inc. (a).................................... $ 62,573
1,400 Fannie Mae............................................... 87,412
1,400 Golden West Financial Corp. ............................. 46,900
5,810 MBNA Corp. .............................................. 158,322
-----------
861,615
-----------
Industrial Manufacturing & Processing -- 13.1%
2,150 Danaher Corp............................................. 103,738
4,500 General Electric Co...................................... 696,375
1,380 Illinois Tool Works Inc.................................. 93,236
2,440 Johnson Controls, Inc. .................................. 138,775
2,400 Solectron Corp. (a)...................................... 228,300
4,460 Tyco International Ltd................................... 173,382
-----------
1,433,806
-----------
Insurance -- 3.8%
2,640 American International Group, Inc........................ 285,450
1,315 Marsh & McLennan Cos., Inc. ............................. 125,829
-----------
411,279
-----------
Oil & Gas -- 6.2%
4,510 Exxon Mobil Corp......................................... 363,337
6,500 Global Marine Inc. (a)................................... 108,062
1,670 Schlumberger Ltd......................................... 93,937
3,443 Transocean Sedco Forex Inc............................... 115,997
-----------
681,333
-----------
Retail -- 8.2%
2,700 Bed Bath & Beyond Inc. (a)............................... 93,825
3,180 The Home Depot, Inc...................................... 218,029
840 Kohl's Corp. (a)......................................... 60,637
530 Lowe's Cos., Inc......................................... 31,668
2,350 Ross Stores, Inc......................................... 42,153
5,760 Wal-Mart Stores, Inc..................................... 398,160
1,710 Walgreen Co.............................................. 50,017
-----------
894,489
-----------
Software -- 8.1%
380 BMC Software, Inc. (a)................................... 30,376
5,740 Microsoft Corp. (a)...................................... 670,145
1,340 Oracle Corp. (a)......................................... 150,164
1,450 PeopleSoft, Inc. (a)..................................... 30,903
-----------
881,588
-----------
Technology -- 11.4%
850 Altera Corp. (a)......................................... 42,128
1,910 America Online, Inc. (a)................................. 144,086
4,800 Cisco Systems, Inc. (a).................................. 514,200
800 Linear Technology Corp................................... 57,250
4,390 Lucent Technologies Inc.................................. 328,427
1,600 Maxim Integrated Products, Inc. (a)...................... 75,500
400 Microchip Technology Inc. (a)............................ 27,375
890 Tellabs, Inc. (a)........................................ 57,127
-----------
1,246,093
-----------
</TABLE>
See Notes to Financial Statements.
52
<PAGE>
Schedules of Investments
(continued)
Salomon Brothers Large Cap Growth Fund
<TABLE>
- --------------------------------------------------------------------------------
<CAPTION>
Shares Security Value
<C> <S> <C>
- --------------------------------------------------------------------------------
Telecommunications -- 4.9%
3,220 AT&T Corp................................................ $ 163,415
1,530 GTE Corp................................................. 107,961
5,330 SBC Communications Inc................................... 259,838
-----------
531,214
-----------
TOTAL INVESTMENTS -- 100%
(Cost -- $10,122,746*)................................... $10,921,441
===========
</TABLE>
- ------
(a) Non-income producing security.
* Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
53
<PAGE>
Schedules of Investments
(continued)
Salomon Brothers Capital Fund
<TABLE>
- -------------------------------------------------------------------------------
<CAPTION>
Shares Security Value
<C> <S> <C>
- -------------------------------------------------------------------------------
COMMON STOCK -- 90.0%
Basic Industries -- 8.7%
250,000 AK Steel Holding Corp.............................. $ 4,718,750
250,000 Crown Cork & Seal Co., Inc. ....................... 5,593,750
175,000 The Geon Co. ...................................... 5,687,500
90,000 International Paper Co............................. 5,079,375
500,000 LTV Corp. ......................................... 2,062,500
100,000 Olin Corp. ........................................ 1,981,250
150,000 OM Group, Inc...................................... 5,165,625
------------
30,288,750
------------
Capital Goods -- 1.1%
1,000,000 Harnischfeger Industries, Inc...................... 406,250
60,000 Ingersoll-Rand Co.................................. 3,303,750
------------
3,710,000
------------
Communications -- 8.8%
100,000 Bell Atlantic Corp. ............................... 6,156,250
70,000 GTE Corp. ......................................... 4,939,375
67,500 MCI WorldCom, Inc. (a)............................. 3,581,719
40,000 NTL Inc. (a)....................................... 4,990,000
Rogers Cantel Mobile Communications Inc., Class B
200,000 Shares (a)......................................... 7,275,000
75,000 SBC Communications Inc............................. 3,656,250
------------
30,598,594
------------
Consumer Cyclicals -- 8.6%
100,000 Costco Wholesale Corp. (a)......................... 9,125,000
225,000 Federated Department Stores, Inc. (a).............. 11,376,563
466,286 Fine Host Corp. (a)(b)............................. 4,373,074
300,000 Primedia Inc. (a).................................. 4,950,000
------------
29,824,637
------------
Consumer Non-Cyclicals -- 23.9%
100,000 AT&T Corp. - Liberty Media, Class A Shares (a)..... 5,675,000
50,000 Delhaize America, Inc., Class A Shares............. 1,015,625
300,000 Delhaize America, Inc., Class B Shares............. 6,262,500
75,000 Hannaford Bros. Co. ............................... 5,198,438
175,000 Hearst-Argyle Television, Inc. (a)................. 4,659,375
250,000 Hormel Foods Corp.................................. 10,156,250
250,000 John B. Sanfilippo & Son, Inc. (a)................. 1,000,000
250,000 Michael Foods, Inc................................. 6,156,250
1,050,000 Nabisco Group Holdings Corp. ...................... 11,156,250
150,000 The News Corp. Ltd. ADR............................ 5,015,625
350,000 The Pepsi Bottling Group, Inc. .................... 5,796,875
125,000 Philip Morris Cos., Inc. .......................... 2,898,438
255,000 Safeway, Inc. (a).................................. 9,068,438
Sinclair Broadcast Group, Inc., Class A Shares
300,000 (a)................................................ 3,660,938
350,000 Tyson Foods, Inc., Class A Shares.................. 5,687,500
------------
83,407,502
------------
Energy -- 10.5%
150,000 Conoco Inc. ....................................... 3,731,250
275,000 Devon Energy Co. .................................. 9,040,625
275,000 Paradigm Geophysical Ltd. (a)...................... 1,349,219
</TABLE>
See Notes to Financial Statements.
54
<PAGE>
Schedules of Investments
(continued)
Salomon Brothers Capital Fund
<TABLE>
- --------------------------------------------------------------------------------
<CAPTION>
Shares Security Value
<C> <S> <C>
- --------------------------------------------------------------------------------
Energy -- 10.5% (continued)
375,000 R&B Falcon Corp. (a)................................ $ 4,968,750
100,000 Suncor Energy, Inc.................................. 4,175,000
475,000 Tesoro Petroleum Corp. (a).......................... 5,492,188
150,000 Tosco Corp. ........................................ 4,078,125
200,000 Valero Energy Corp. ................................ 3,975,000
------------
36,810,157
------------
Financial Services -- 8.6%
150,000 The Bank of New York Co., Inc....................... 6,000,000
100,000 Comerica, Inc....................................... 4,668,750
100,000 FleetBoston Financial Group, Inc.................... 3,481,250
50,000 Goldman Sachs Group, Inc............................ 4,709,375
100,000 Mercantile Bankshares Corp.......................... 3,193,750
216,000 Peoples Heritage Financial Group, Inc. ............. 3,253,500
150,000 Protective Life Corp................................ 4,771,875
------------
30,078,500
------------
Health Care -- 1.6%
125,000 Pharmacia & Upjohn, Inc............................. 5,625,000
------------
Technology -- 17.2%
100,000 3Com Corp. (a)...................................... 4,700,000
175,000 Advanced Micro Devices, Inc. (a).................... 5,064,063
100,000 Amdocs Ltd. (a)..................................... 3,450,000
25,000 Comverse Technology, Inc. (a)....................... 3,618,750
125,000 Cypress Semiconductor Corp. (a)..................... 4,046,875
200,000 Digital Microwave Corp. (a)......................... 4,687,500
30,000 International Business Machines Corp................ 3,240,000
175,000 Newbridge Networks Corp. (a)........................ 3,948,438
60,000 Plantronics, Inc. (a)............................... 4,293,750
450,000 S3 Inc. (a)......................................... 5,203,125
270,000 Seagate Technology, Inc. (a)........................ 12,571,870
325,000 SpeedFam-IPEC, Inc. (a)............................. 4,204,688
25,000 Technology Solutions Co. (a)........................ 818,750
------------
59,847,809
------------
Transportation/Service -- 1.0%
50,000 United Parcel Service, Inc.......................... 3,450,000
------------
TOTAL COMMON STOCK
(Cost -- $259,716,280).............................. 313,640,949
------------
<CAPTION>
Face
Amount
-----------
<C> <S> <C>
CONVERTIBLE CORPORATE BONDS -- 1.3%
Consumer Cyclicals -- 1.3%
Sunbeam Corp.:
$25,000,000 Zero coupon due 3/25/18 (c)......................... 3,875,000
5,000,000 Zero coupon due 3/25/18............................. 775,000
------------
TOTAL CONVERTIBLE CORPORATE BONDS
(Cost -- $6,094,204)................................ 4,650,000
------------
</TABLE>
See Notes to Financial Statements.
55
<PAGE>
Schedules of Investments
(continued)
Salomon Brothers Capital Fund
<TABLE>
- -------------------------------------------------------------------------------
<CAPTION>
Face
Amount Security Value
<C> <S> <C>
- -------------------------------------------------------------------------------
CORPORATE BONDS -- 1.6%
Basic Industries -- 0.0%
Breed Technologies Inc., 9.250% due 4/15/08
$2,500,000 (a)(d)............................................. $ 75,000
------------
Capital Goods -- 1.5%
Harnischfeger Industries, Inc.:
9,000,000 8.700% due 6/15/22 (a)(d).......................... 3,690,000
3,500,000 7.250% due 12/15/25 (a)(d)......................... 1,435,000
------------
5,125,000
------------
Financial Services -- 0.1%
ContiFinancial Corp.:
875,000 7.500% due 3/15/02................................. 105,000
2,625,000 8.125% due 8/15/03................................. 315,000
------------
420,000
------------
TOTAL CORPORATE BONDS
(Cost -- $6,437,609)............................... 5,620,000
------------
<CAPTION>
Contracts
-----------
<C> <S> <C>
PURCHASED PUT OPTIONS -- 0.1%
Amazon.com, Inc., Expires 1/22/00, exercise price
10,000 $80................................................ 90,000
Rite Aid Corp., Expires 1/22/00, exercise price
50,000 $10................................................ 20,313
S&P 500 Index Option, Expires 1/22/00, exercise
25,000 price $1,425....................................... 356,250
------------
TOTAL PURCHASED PUT OPTIONS
(Cost -- $542,550)................................. 466,563
------------
SUB-TOTAL INVESTMENTS
(Cost -- $272,790,643)............................. 324,377,512
------------
<CAPTION>
Face
Amount
-----------
<C> <S> <C>
REPURCHASE AGREEMENT -- 7.0%
$24,359,000 State Street Bank & Trust Co., 3.000% due 1/3/00;
Proceeds at maturity -- $24,365,088; (Fully
collateralized by U.S. Treasury Notes, 9.125% due
5/15/18; Market value -- $24,849,825) (Cost --
$24,359,000)..................................... 24,359,000
------------
TOTAL INVESTMENTS -- 100%
(Cost -- $297,149,643*)............................ $348,736,512
============
</TABLE>
- ------
(a) Non-income producing security.
(b) Security valued in accordance with fair valuation procedures.
(c) Security is exempt from registration under Rule 144A of the Securities Act
of 1933. This security may be resold in transactions that are exempt from
registration, normally to qualified institutional buyers.
(d) Security is currently in default.
* Aggregate cost for Federal income tax purposes is substantially the same.
Abbreviation used in this schedule:
ADR -- American Depository Receipt.
See Notes to Financial Statements.
56
<PAGE>
Schedules of Investments
(continued)
Salomon Brothers Investors Value Fund
<TABLE>
- --------------------------------------------------------------------------------
<CAPTION>
Shares Security Value
<C> <S> <C>
- --------------------------------------------------------------------------------
COMMON STOCK -- 92.3%
Basic Industries -- 3.7%
160,000 Alcoa, Inc.......................................... $ 13,280,000
280,000 International Paper Co.............................. 15,802,500
------------
29,082,500
------------
Capital Goods -- 4.3%
230,000 Honeywell International Inc......................... 13,268,125
200,000 Ingersoll-Rand Co................................... 11,012,500
260,000 Tyco International Ltd.............................. 10,107,500
------------
34,388,125
------------
Communication Services -- 8.0%
258,000 Bell Atlantic Corp.................................. 15,883,125
48,000 General Motors Corp., Class H Shares................ 4,608,000
215,000 GTE Corp............................................ 15,170,937
247,500 MCI WorldCom, Inc. (a).............................. 13,132,969
295,000 SBC Communications Inc.............................. 14,381,250
------------
63,176,281
------------
Consumer Cyclicals -- 4.8%
130,000 Costco Wholesale Corp. (a).......................... 11,862,500
170,000 Dayton Hudson Corp.................................. 12,484,375
275,000 Federated Department Stores, Inc. (a)............... 13,904,688
------------
38,251,563
------------
Consumer Non-Cyclicals -- 17.1%
250,000 AT&T Corp. - Liberty Media, Class A Shares.......... 14,187,500
325,000 Coca-Cola Enterprises Inc........................... 6,540,625
208,000 Delhaize America, Inc., Class A Shares.............. 4,225,000
122,000 Delhaize America, Inc., Class B Shares.............. 2,546,750
1,125,000 Nabisco Group Holdings Corp......................... 11,953,125
584,900 The News Corp. Ltd. ADR............................. 19,557,594
830,000 The Pepsi Bottling Group, Inc....................... 13,746,875
405,000 Philip Morris Cos. Inc.............................. 9,390,938
216,700 R.J. Reynolds Tobacco Holdings, Inc................. 3,819,338
520,000 Ralston Purina Group................................ 14,495,000
470,000 Safeway Inc. (a).................................... 16,714,375
643,500 Tyson Foods, Inc., Class A Shares................... 10,456,875
135,000 Viacom Inc., Class B Shares (a)..................... 8,159,063
------------
135,793,058
------------
Energy -- 9.2%
150,000 Amerada Hess Corp................................... 8,512,500
110,000 Atlantic Richfield Co............................... 9,515,000
252,000 Burlington Resources Inc............................ 8,331,750
486,300 Conoco Inc., Class A Shares......................... 12,035,925
205,000 Royal Dutch Petroleum Co. ADR....................... 12,389,688
220,000 Total Fina SA ADR................................... 15,235,000
290,000 USX - Marathon Group................................ 7,159,375
------------
73,179,238
------------
</TABLE>
See Notes to Financial Statements.
57
<PAGE>
Schedules of Investments
(continued)
Salomon Brothers Investors Value Fund
<TABLE>
- --------------------------------------------------------------------------------
<CAPTION>
Shares Security Value
<C> <S> <C>
- --------------------------------------------------------------------------------
Financial Services -- 18.4%
85,600 American Express Co.................................. $ 14,231,000
115,000 American General Corp................................ 8,725,625
251,600 Associates First Capital Corp........................ 6,903,275
465,000 The Bank of New York Co., Inc........................ 18,600,000
190,000 The Chase Manhattan Corp............................. 14,760,625
275,000 Comerica Inc......................................... 12,839,063
332,367 FleetBoston Financial Corp........................... 11,570,526
185,000 Freddie Mac.......................................... 8,706,562
125,000 The Goldman Sachs Group, Inc......................... 11,773,438
275,000 Household International, Inc......................... 10,243,750
148,000 Morgan Stanley Dean Witter & Co...................... 21,127,000
198,750 UnumProvident Corp................................... 6,372,422
------------
145,853,286
------------
Health Care -- 7.5%
220,000 Abbott Laboratories.................................. 7,988,750
185,000 American Home Products Corp.......................... 7,295,938
240,000 Becton, Dickinson and Co............................. 6,420,000
200,000 Eli Lilly and Co..................................... 13,300,000
175,000 Merck & Co., Inc..................................... 11,735,937
289,000 Pharmacia & Upjohn, Inc.............................. 13,005,000
------------
59,745,625
------------
Technology -- 15.5%
235,000 3Com Corp. (a)....................................... 11,045,000
405,000 Alcatel SA ADR....................................... 18,225,000
275,000 Compuware Corp. (a).................................. 10,243,750
100,000 Corning Inc.......................................... 12,893,750
150,000 Hewlett-Packard Co................................... 17,090,625
134,000 Intel Corp........................................... 11,029,875
148,000 International Business Machines Corp................. 15,984,000
350,000 Seagate Technology, Inc. (a)......................... 16,296,875
110,000 Texas Instruments Inc................................ 10,656,250
------------
123,465,125
------------
Transportation -- 2.4%
280,000 Canadian National Railway Co......................... 7,367,500
270,000 Canadian Pacific Ltd................................. 5,821,875
86,000 Union Pacific Corp................................... 3,751,750
28,800 United Parcel Service, Inc., Class B Shares.......... 1,987,200
------------
18,928,325
------------
Utilities -- 1.4%
125,100 The Coastal Corp..................................... 4,433,232
206,400 The Williams Cos., Inc............................... 6,308,100
------------
10,741,332
------------
TOTAL COMMON STOCK
(Cost -- $541,596,352)............................... 732,604,458
------------
</TABLE>
See Notes to Financial Statements.
58
<PAGE>
Schedules of Investments
(continued)
Salomon Brothers Investors Value Fund
<TABLE>
- -------------------------------------------------------------------------------
<CAPTION>
Face
Amount Security Value
<C> <S> <C>
- -------------------------------------------------------------------------------
CONVERTIBLE CORPORATE BONDS -- 1.1%
Telecommunications & Utilities -- 1.1%
NTL Inc., Sub. Notes:
$ 1,750,000 7.000% due 12/15/08................................ $ 4,628,750
3,950,000 5.750% due 12/15/09 (b)............................ 4,266,000
------------
TOTAL CONVERTIBLE CORPORATE BONDS
(Cost -- $5,700,000)............................... 8,894,750
------------
<CAPTION>
Contracts
-----------
<C> <S> <C>
PURCHASED PUT OPTIONS -- 0.1%
85,600 American Express Co., Expires 1/22/00, exercise
price $150........................................ 123,050
160,000 Texas Instruments Inc., Expires 1/22/00, exercise
price $57.50...................................... 14,880
Tyco International Ltd.:
172,800 Expires 1/22/00, exercise price $40.00............. 518,400
87,200 Expires 1/22/00, exercise price $42.50............. 408,750
------------
TOTAL PURCHASED PUT OPTIONS
(Cost -- $2,133,457)............................... 1,065,080
------------
SUB-TOTAL INVESTMENTS
(Cost -- $549,429,809)............................. 742,564,288
------------
<CAPTION>
Face Amount
-----------
<C> <S> <C>
REPURCHASE AGREEMENT -- 6.5%
$51,867,000 State Street Bank & Trust Co., 3.000% due 1/3/00;
Proceeds at maturity -- $51,867,000; (Fully
collateralized by U.S. Treasury Bonds, 8.875% due
2/15/19; Market value -- $52,909,106) (Cost --
$51,867,000)..................................... 51,867,000
------------
TOTAL INVESTMENTS -- 100%
(Cost -- $601,296,809*)............................ $794,431,288
============
</TABLE>
- ------
(a) Non-income producing security.
(b) Security is exempt from registration under Rule 144A of the Securities Act
of 1933. This security may be resold in transactions that are exempt from
registration, normally to qualified institutional buyers.
* Aggregate cost for Federal income tax purposes is substantially the same.
Abbreviation used in this schedule:
ADR -- American Depository Receipt.
See Notes to Financial Statements.
59
<PAGE>
Schedules of Investments
(continued)
Salomon Brothers Balanced Fund
<TABLE>
- --------------------------------------------------------------------------------
<CAPTION>
Shares Security Value
<C> <S> <C>
- --------------------------------------------------------------------------------
COMMON STOCK -- 50.6%
Basic Industries -- 0.9%
218,600 USEC Inc............................................. $ 1,530,200
------------
Capital Goods -- 2.0%
20,726 Cooper Industries, Inc. (a).......................... 838,108
36,000 Pitney Bowes Inc..................................... 1,739,250
37,000 Stone & Webster, Inc................................. 622,062
------------
3,199,420
------------
Communications -- 9.2%
20,000 AT&T Corp. .......................................... 1,015,000
80,000 BCE Inc. (a)......................................... 7,215,000
40,000 Bell Atlantic Corp. (a).............................. 2,462,500
28,000 GTE Corp. ........................................... 1,975,750
50,000 SBC Communications Inc............................... 2,437,500
------------
15,105,750
------------
Consumer Cyclicals -- 3.1%
8,705 DaimlerChrysler AG................................... 681,166
19,500 Eastman Kodak Co..................................... 1,291,875
27,428 Fine Host Corp. (b)+................................. 257,234
20,240 Hollinger International Inc., Class A Shares......... 261,855
6,000 J.C. Penney Co., Inc................................. 119,625
33,150 The May Department Stores Co......................... 1,069,087
48,000 Sears, Roebuck & Co.................................. 1,461,000
------------
5,141,842
------------
Consumer Non-Cyclicals -- 4.7%
70,000 Avon Products, Inc. (a).............................. 2,310,000
13,000 The Coca-Cola Co..................................... 757,250
50,000 Delhaize America, Inc., Class B Shares............... 1,043,750
10,000 H.J. Heinz Co. ...................................... 398,125
20,000 Hormel Foods Corp.................................... 812,500
6,000 McDonald's Corp. .................................... 241,875
8,000 PepsiCo, Inc......................................... 282,000
10,000 Philip Morris Cos. Inc. ............................. 231,875
45,000 Ralston Purina Group................................. 1,254,375
40,000 Rite Aid Corp........................................ 447,500
------------
7,779,250
------------
Energy -- 9.4%
25,000 Amerada Hess Corp. (a)............................... 1,418,750
30,436 BP Amoco PLC......................................... 1,805,235
41,482 Exxon Mobil Corp. ................................... 3,341,894
50,000 Halliburton Co. ..................................... 2,012,500
16,000 Royal Dutch Petroleum Co. ADR........................ 967,000
20,000 Schlumberger Ltd. ................................... 1,125,000
95,000 Suncor Energy, Inc................................... 3,966,250
12,000 Texaco Inc........................................... 651,750
3,872 Transocean Sedco Forex Inc........................... 130,438
------------
15,418,817
------------
Financial Services -- 5.4%
30,000 The Allstate Corp.................................... 720,000
1,945 American International Group, Inc.................... 210,303
9,000 Bank of America Corp................................. 451,688
</TABLE>
See Notes to Financial Statements.
60
<PAGE>
Schedules of Investments
(continued)
Salomon Brothers Balanced Fund
<TABLE>
- -------------------------------------------------------------------------------
<CAPTION>
Shares Security Value
<C> <S> <C>
- -------------------------------------------------------------------------------
Financial Services -- 5.4% (continued)
18,000 The Chubb Corp. .................................... $ 1,013,625
30,000 CIGNA Corp. ........................................ 2,416,875
20,000 First Union Corp.................................... 656,250
30,000 Fleet Financial Group, Inc.......................... 1,044,375
23,000 Marsh & McLennan Cos., Inc. ........................ 2,200,813
5,700 Nationwide Financial Services, Inc., Class A
Shares............................................. 159,244
------------
8,873,173
------------
Health Care -- 3.7%
42,000 American Home Products Corp. ....................... 1,656,375
26,000 Bausch & Lomb Inc. ................................. 1,779,375
4,000 Johnson & Johnson................................... 372,500
8,000 Merck & Co., Inc.................................... 536,500
10,000 Monsanto Co......................................... 356,250
30,000 Pfizer Inc. ........................................ 973,125
10,000 Pharmacia & Upjohn, Inc............................. 450,000
------------
6,124,125
------------
Real Estate Investment Trust -- 5.8%
67,500 Arden Realty, Inc................................... 1,354,219
35,000 Bedford Property Investors, Inc..................... 597,188
55,000 Brandywine Realty Trust............................. 900,625
45,000 Duke-Weeks Realty Corp. ............................ 877,500
65,000 Glenborough Realty Trust Inc. ...................... 869,375
46,950 JDN Realty Corp..................................... 757,069
75,000 Mid-Atlantic Realty Trust........................... 754,688
84,000 New Plan Excel Realty Trust......................... 1,328,250
18,000 Prentiss Properties Trust........................... 378,000
35,000 Reckson Associates Realty Corp...................... 717,500
30,000 Sun Communities, Inc................................ 965,625
------------
9,500,039
------------
Technology -- 2.3%
31,000 International Business Machines Corp. .............. 3,348,000
15,000 Xerox Corp. ........................................ 340,312
------------
3,688,312
------------
Transportation -- 2.8%
60,000 Canadian National Railway Co. ...................... 1,578,750
60,000 Union Pacific Corp.................................. 2,617,500
6,200 United Parcel Service, Inc., Class B Shares......... 427,800
------------
4,624,050
------------
Utilities -- 1.3%
40,000 Edison International................................ 1,047,500
45,000 Reliant Energy, Inc................................. 1,029,375
------------
2,076,875
------------
TOTAL COMMON STOCK
(Cost -- $75,095,620)............................... 83,061,853
------------
CONVERTIBLE PREFERRED STOCK -- 4.4%
Basic Industries -- 0.6%
30,000 Crown Cork & Seal, 4.500%........................... 622,500
7,000 International Paper Capital Trust, 5.250%........... 381,500
------------
1,004,000
------------
</TABLE>
See Notes to Financial Statements.
61
<PAGE>
Schedules of Investments
(continued)
Salomon Brothers Balanced Fund
<TABLE>
- -------------------------------------------------------------------------------
<CAPTION>
Shares Security Value
<C> <S> <C>
- -------------------------------------------------------------------------------
Communications -- 1.1%
20,000 MCI WorldCom, Inc., $2.25........................... $ 1,026,250
5,000 Sprint Corp., 8.250%................................ 371,250
7,500 UnitedGlobalCom, Series D, 7.000%................... 468,750
------------
1,866,250
------------
Consumer Cyclicals -- 0.4%
12,500 Wendy's Financing Series, 5.000%.................... 598,438
------------
Consumer Non-Cyclicals -- 0.1%
5,000 Ralston Purina Co., 7.000%.......................... 182,813
------------
Energy -- 1.4%
30,000 Kerr-McGee Corp., 5.500%............................ 990,000
15,000 Pogo Trust I, 6.500%................................ 738,750
20,000 Tesoro Petroleum Corp., 7.250%...................... 240,000
7,500 Tosco Financing Trust, 5.750%....................... 357,186
------------
2,325,936
------------
Technology -- 0.3%
15,000 Amdocs (TRACES) Trust Automatic Common Exchange
Securities, 6.750% due 9/11/02..................... 481,875
------------
Transportation -- 0.3%
12,000 Canadian National Railway Co., 5.250%............... 504,000
TCR Holding (b):
321 Class B Shares...................................... 3
177 Class C Shares...................................... 2
466 Class D Shares...................................... 5
964 Class E Shares...................................... 9
------------
504,019
------------
Utilities -- 0.2%
6,000 El Paso Energy Capital Trust I, 4.750%.............. 302,250
------------
TOTAL CONVERTIBLE PREFERRED STOCK
(Cost -- $6,715,482)................................ 7,265,581
------------
<CAPTION>
Rights
----------
<C> <S> <C>
RIGHTS -- 0.0%
Real Estate Investment Trust -- 0.0%
70,000 Excel Realty Trust, Inc., Expires 5/1/08............ 0
65,000 Glenborough Realty Trust Inc., Expires 7/20/08...... 0
------------
TOTAL RIGHTS
(Cost -- $0)........................................ 0
------------
<CAPTION>
Face
Amount
----------
<C> <S> <C>
CORPORATE BONDS -- 17.5%
Basic Industries -- 2.0%
$ 200,000 Berry Plastics Corp., 12.250% due 4/15/04........... 205,000
125,000 Breed Technologies Inc., 9.250% due 4/15/08 (b)(e).. 3,750
250,000 Federal-Mogal Co., 7.500% due 1/15/09............... 226,563
125,000 Hexcel Corp., 9.750% due 1/15/09.................... 105,000
125,000 Huntsman Corp., 9.500% due 7/1/07 (c)............... 119,375
125,000 Indesco International Inc., 9.750% due 4/15/08...... 56,250
250,000 Millar Western Forest Products, 9.875% due 5/15/08.. 250,000
250,000 P&L Coal Holdings Corp., 9.625% due 5/15/08......... 243,750
1,100,000 Praxair Inc., 6.150% due 4/15/03.................... 1,051,875
</TABLE>
See Notes to Financial Statements.
62
<PAGE>
Schedules of Investments
(continued)
Salomon Brothers Balanced Fund
<TABLE>
- -------------------------------------------------------------------------------
<CAPTION>
Face
Amount Security Value
<C> <S> <C>
- -------------------------------------------------------------------------------
Basic Industries -- 2.0% (continued)
$ 200,000 Radnor Holdings Inc., 10.000% due 12/1/03........... $ 200,500
1,000,000 Raytheon Co., 6.150% due 11/1/08.................... 885,000
------------
3,347,063
------------
Capital Goods -- 0.1%
125,000 Jordan Industries Inc., 10.375% due 8/1/07.......... 123,750
------------
Consumer Cyclicals -- 1.2%
250,000 Cole National Group Inc., 8.625% due 8/15/07........ 190,000
100,000 Collins & Airman Floor Coverings Inc., 10.000% due
1/15/07............................................ 98,250
250,000 HMH Properties, 7.875% due 8/1/08................... 223,750
250,000 Musicland Group Inc., 9.875% due 3/15/08............ 228,750
250,000 Prime Hospitality Corp., 9.750% due 4/1/07.......... 243,750
50,000 Revlon Consumer Products, 8.625% due 2/1/08......... 25,500
1,000,000 Staples Inc., 7.125% due 8/15/07.................... 960,000
------------
1,970,000
------------
Consumer Non-Cyclicals -- 3.1%
350,000 American Safety Razor Co., 9.875% due 8/1/05........ 344,750
250,000 Ameriserve Food Distributors Inc., 10.125% due
7/15/07............................................ 90,000
500,000 Aristar Inc., 7.250% due 6/15/06.................... 488,125
250,000 B&G Foods Inc., 9.625% due 8/1/07................... 223,125
250,000 Delta Beverage Group Inc., 9.750% due 12/15/03...... 247,500
1,500,000 Fremont General Corp., 7.700% due 3/17/04........... 1,453,125
125,000 French Fragrances Inc., 10.375% due 5/15/07......... 121,250
250,000 Harrahs Operating Co., Inc., 7.875% due 12/15/05.... 241,250
130,000 Hines Horticulture, Inc., 11.750% due 10/15/05...... 134,550
250,000 Home Interiors & Gifts Inc., 10.125% due 6/1/08..... 213,750
250,000 North Atlantic Trading Co., 11.000% due 6/15/04..... 228,750
250,000 Park Place Entertainment Corp., 7.875% due
12/15/05........................................... 240,000
125,000 Simmons Co., Series B, 10.250% due 3/15/09.......... 121,250
1,000,000 Spieker Properties, Inc., 7.250% due 5/1/09......... 931,250
------------
5,078,675
------------
Energy -- 0.3%
250,000 Bellwether Exploration, Co., 10.875% due 4/1/07..... 229,375
200,000 Benton Oil & Gas Co., 11.625% due 5/1/03............ 140,000
150,000 Clark R&M Inc., 8.875% due 11/15/07................. 90,750
------------
460,125
------------
Financial/Leasing -- 3.8%
ContiFinancial Corp.:
125,000 7.500% due 3/15/02.................................. 15,000
125,000 8.125% due 4/1/08................................... 15,000
1,000,000 Countrywide Home Loan, 6.250% due 4/15/09........... 898,750
325,000 DVI Inc., 9.875% due 2/1/04......................... 319,719
1,300,000 Ford Motor Credit Corp., 7.375% due 10/28/09........ 1,287,000
780,000 Merrill Lynch & Co., 6.000% due 11/15/04............ 739,050
250,000 Motors & Gears Inc., 10.750% due 11/15/06........... 240,312
1,250,000 Paine Webber Group Inc., 7.625% due 12/1/09......... 1,217,187
1,250,000 Sears Roebuck Acceptance Corp., 7.000% due 6/15/07.. 1,182,813
250,000 Williams Scotsman, 9.875% due 6/1/07................ 242,500
------------
6,157,331
------------
Health Care -- 0.1%
1,000 Fresenius Medical Care Capital Trust I, 9.000% due
12/1/06............................................ 96,250
------------
</TABLE>
See Notes to Financial Statements.
63
<PAGE>
Schedules of Investments
(continued)
Salomon Brothers Balanced Fund
<TABLE>
- -------------------------------------------------------------------------------
<CAPTION>
Face
Amount Security Value
<C> <S> <C>
- -------------------------------------------------------------------------------
Housing Related -- 0.1%
$ 250,000 CB Richard Ellis Services, 8.875% due 6/1/06........ $ 226,250
------------
Manufacturing -- 0.8%
125,000 Alvey Systems Inc., 11.375% due 1/31/03............. 129,375
250,000 Axiohm Transaction Solution, Inc., 9.750% due
10/1/07 (b)(e)..................................... 57,500
250,000 Hayes Lemmerz International Inc., 8.250% due
12/15/08........................................... 230,000
250,000 High Voltage Engineering Inc., 10.500% due 8/15/04.. 221,250
250,000 Navistar International, 8.000% due 2/1/08........... 240,625
200,000 Packard BioScience Co., 9.375% due 3/1/07........... 174,500
250,000 Polymer Group, Inc., 9.000% due 7/1/07.............. 245,000
------------
1,298,250
------------
Media -- 3.4%
1,725,000 A.H. Belo Corp., 7.250% due 9/15/27................. 1,515,844
200,000 Adelphia Communications, 10.500% due 7/15/04........ 209,250
250,000 Centennial Cellular Corp., 10.750% due 12/15/08..... 269,375
150,000 Century Communications, zero coupon due 1/15/08..... 66,750
200,000 CSC Holdings, Inc., 10.500% due 5/15/16............. 223,000
250,000 Diamond Cable Communications PLC, (Zero coupon until
12/15/00, 11.750% thereafter) due 12/15/05......... 237,500
250,000 Falcon Holding Group L.P., 8.375% due 4/15/10....... 252,500
250,000 FrontierVision Holdings, 11.000% due 10/15/06....... 265,625
250,000 Granite Broadcasting Corp., 8.875% due 5/15/08...... 243,125
850,000 GTE Corp., 6.940% due 4/15/28....................... 768,188
250,000 Hollinger International Publishing, 9.250% due
3/15/07............................................ 248,125
125,000 ICG Holdings Inc., (Zero coupon until 9/15/00,
13.500% thereafter) due 9/15/05.................... 108,750
175,000 Intermedia Communication Inc., 8.600% due 6/1/08.... 161,875
375,000 LIN Holdings Corp., (Zero coupon until 3/1/03,
10.000% thereafter) due 3/1/08..................... 255,937
300,000 Metronet Communications, (Zero coupon until 6/15/03,
9.950% thereafter) due 6/15/08..................... 236,250
400,000 NTL Inc., 5.750% due 12/15/09....................... 362,000
250,000 Rogers Communications, Inc., 8.875% due 7/15/07..... 254,063
------------
5,678,157
------------
Services & Other -- 2.1%
250,000 Allied Waste Industries, Inc., 7.875% due 1/1/09.... 221,875
1,350,000 Comdisco, Inc., 6.000% due 1/30/02.................. 1,306,125
250,000 Iron Mountain Inc., 10.125% due 10/1/06............. 256,250
250,000 Loomis Fargo & Co., 10.000% due 1/15/04............. 246,250
250,000 Pierce Leahy Corp., 11.125% due 7/15/06............. 267,500
225,000 Protection One, Inc., 8.125% due 1/15/09 (c)........ 108,562
125,000 Safety-Kleen Corp., 9.250% due 6/1/08............... 124,063
1,200,000 Service Corp. International, 6.000% due 12/15/05.... 909,000
------------
3,439,625
------------
Telecommunication & Utilities -- 0.1%
250,000 Calpine Corp., 8.750% due 7/15/07................... 251,563
------------
Transportation -- 0.4%
250,000 Enterprises Shipholding, 8.875% due 5/1/08.......... 150,000
200,000 Holt Group, 9.750% due 1/15/06...................... 135,000
150,000 Teekay Shipping Corp., 8.320% due 2/1/08............ 135,000
400,000 TFM, (Zero coupon until 6/15/02, 11.750% thereafter)
due 6/15/09........................................ 257,000
------------
677,000
------------
TOTAL CORPORATE BONDS
(Cost -- $31,755,595)............................... 28,804,039
------------
</TABLE>
See Notes to Financial Statements.
64
<PAGE>
Schedules of Investments
(continued)
Salomon Brothers Balanced Fund
<TABLE>
- -------------------------------------------------------------------------------
<CAPTION>
Face
Amount Security Value
<C> <S> <C>
- -------------------------------------------------------------------------------
CONVERTIBLE CORPORATE BONDS -- 8.4%
Communications -- 0.1%
$ 100,000 Rogers Communication Inc., 2.000% due 11/26/05...... $ 87,000
------------
Consumer Cyclicals -- 0.6%
900,000 Costco Wholesale Corp., zero coupon due 8/19/17..... 958,500
------------
Consumer Non-Cyclicals -- 0.6%
400,000 Interpublic Group Co. Inc., 1.870% due 6/1/06 (c)... 454,500
1,500,000 Network Associates Inc., zero coupon due 2/13/18.... 566,250
------------
1,020,750
------------
Data Technology/Information Services -- 3.2%
750,000 Advanced Micro Devices, 6.000% due 5/15/05.......... 719,063
1,500,000 Aspect Communications Corp., zero coupon due 8/10/18
(c)................................................ 600,000
250,000 Exodus Communications, Inc., 4.750% due 7/15/08
(c)................................................ 346,562
750,000 Integrated Process Equipment, 6.250% due 9/15/04.... 540,938
500,000 Micron Technology Inc., 7.000% due 7/1/04........... 645,625
1,250,000 Quantum Corp., 7.000% due 8/1/04.................... 950,000
400,000 S3 Inc., 5.750% due 10/1/03......................... 373,500
1,000,000 Solectron Corp., zero coupon due 1/27/19 (c)........ 756,250
250,000 Wind River System Inc., 5.000% due 8/1/02........... 316,875
------------
5,248,813
------------
Energy -- 0.9%
500,000 Diamond Offshore Drill, 3.750% due 2/15/07.......... 507,500
1,000,000 Friede Goldman Halter, 4.500% due 9/15/04........... 620,000
400,000 Kerr-McGee Corp., 7.500% due 5/15/14................ 371,500
------------
1,499,000
------------
Financial Services -- 0.7%
500,000 Bell Atlantic Financial Services, 5.750% due 4/1/03
(c)................................................ 526,250
750,000 Credit Suisse First Boston Corp., 1.000% due
4/7/05............................................. 571,875
------------
1,098,125
------------
Health Care -- 0.9%
400,000 Alpharma Inc., 3.000% due 6/1/06 (c)................ 431,000
250,000 Centocor, Inc., 4.750% due 2/15/05 (c).............. 334,062
HEALTHSOUTH Corp.:
150,000 3.250% due 4/1/03................................... 116,437
350,000 3.250% due 4/1/03 (c)............................... 271,688
750,000 Roche Holdings Inc., zero coupon due 5/6/12 (c)..... 378,750
------------
1,531,937
------------
Manufacturing -- 0.2%
500,000 Mark IV Industries, 4.750% due 11/1/04.............. 408,126
------------
Media & Telecommunications -- 1.2%
250,000 Commscope Inc., 4.000% due 12/15/06 (c)............. 271,562
750,000 DSC Communications Corp., 7.000% due 8/1/04......... 787,500
800,000 NTL Inc., 5.750% due 12/15/09 (c)................... 864,000
------------
1,923,062
------------
TOTAL CONVERTIBLE CORPORATE BONDS
(Cost -- $12,957,790)............................... 13,775,313
------------
</TABLE>
See Notes to Financial Statements.
65
<PAGE>
Schedules of Investments
(continued)
Salomon Brothers Balanced Fund
<TABLE>
- -------------------------------------------------------------------------------
<CAPTION>
Face
Amount Security Value
<C> <S> <C>
- -------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCIES & OBLIGATIONS -- 14.2%
U.S. Treasury Notes:
$1,200,000 5.750% due 8/15/03.................................. $ 1,175,820
1,500,000 6.125% due 8/15/07.................................. 1,463,850
2,215,000 6.000% due 8/15/09.................................. 2,147,265
2,100,000 6.625% due 2/15/27 (a).............................. 2,082,801
Federal Home Loan Mortgage Corporation (FHLMC):
2,000,000 6.250% due 7/15/04.................................. 1,955,000
672,593 8.000% due 7/1/20................................... 686,045
220,489 6.500% due 3/1/26................................... 208,087
2,500,000 6.500% due 8/13/27 (d)(f)........................... 2,357,800
208,950 Gold, 6.500% due 3/1/26............................. 197,197
291,469 Gold, 6.500% due 5/1/26............................. 275,074
Federal National Mortgage Corporation (FNMA):
25,662 6.500% due 10/1/10.................................. 24,917
161,661 6.500% due 10/1/11.................................. 156,962
402,143 6.500% due 4/1/13................................... 390,453
266,657 6.500% due 5/1/13................................... 258,906
445,390 6.500% due 7/1/13................................... 432,443
765,209 9.000% due 1/1/24................................... 797,012
59,083 7.000% due 9/1/25................................... 57,144
133,487 6.500% due 12/1/25.................................. 125,853
205,721 7.000% due 3/1/26................................... 198,970
379,066 6.500% due 6/1/26................................... 357,388
285,069 7.000% due 3/1/27................................... 275,714
647,718 7.000% due 11/1/28.................................. 626,460
1,760,000 6.500% due 11/15/28 (d)(f).......................... 1,658,237
568,818 7.000% due 2/1/29................................... 550,151
44,653 7.000% due 3/1/29................................... 43,188
931,452 7.000% due 4/1/29................................... 900,882
1,460,000 6.000% due 9/1/30 (d)(f)............................ 1,335,900
2,475,000 8.000% due 11/1/30 (d)(f)........................... 2,493,563
------------
TOTAL U.S. GOVERNMENT AGENCIES & OBLIGATIONS
(Cost -- $24,128,576)............................... 23,233,082
------------
ASSET-BACKED SECURITIES -- 4.9%
Financial/Leasing -- 4.9%
2,500,000 Contimortgage Home Equity Loan Trust, Series 1998-2,
Class A3, 6.130% due 3/15/13....................... 2,481,250
2,275,000 Ford Credit Auto Owner Trust, Series 1999-B, Class
A4, 5.800% due 6/15/02............................. 2,245,852
751,341 Green Tree Financial Corp., Series 1997-6, Class A8,
7.070% due 1/15/29................................. 719,879
1,500,000 LB Commercial Conduit Mortgage Trust, Series 1998-
C1, Class A2, 6.780% due 4/15/09................... 1,431,113
1,100,000 NationsBank Credit Card Master Trust, Series 1995-I,
Class A, 6.450% due 4/15/03........................ 1,101,496
------------
TOTAL ASSET-BACKED SECURITIES
(Cost -- $8,086,094)................................ 7,979,590
------------
TOTAL INVESTMENTS -- 100%
(Cost -- $158,739,157*)............................. $164,119,458
============
</TABLE>
- ------
(a) All or part of the security is segregated as collateral for mortgage dollar
rolls/TBAs.
(b) Non-income producing security.
(c) Security is exempt from registration under Rule 144A of the Securities Act
of 1933. This security may be resold in transactions that are exempt from
registration, normally to qualified institutional buyers.
(d) Mortgage dollar roll.
(e) Security is currently in default.
(f) Security is issued on a to-be-announced ("TBA") basis.
+ Security valued in accordance with fair valuation procedures.
* Aggregate cost for Federal income tax purposes is substantially the same.
Abbreviation used in this schedule:
ADR -- American Depository Receipt.
See Notes to Financial Statements.
66
<PAGE>
[This page intentionally left blank]
67
<PAGE>
Statements of Assets and Liabilities
December 31, 1999
<TABLE>
<CAPTION>
Asia International
Growth Equity
Fund Fund
- -------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Investments, at cost (excluding repurchase
agreements) ...................................... $15,995,792 $ 6,667,641
=========== ===========
Investments, at value ............................. $23,273,537 $ 8,329,480
Repurchase agreements, at value and cost........... -- --
Foreign currency, at value++....................... 21,382 --
Cash............................................... 172,276 1,625,529
Receivable for securities and options sold......... -- --
Receivable for Fund shares sold.................... 45,794 166,300
Dividends and interest receivable.................. -- 3,703
Receivable from manager............................ -- 21,629
Deferred organization costs........................ 30,260 --
Other assets....................................... 658 --
----------- -----------
Total Assets....................................... 23,543,907 10,146,641
----------- -----------
LIABILITIES:
Payable for open forward foreign currency
contracts......................................... 82,567 --
Payable for Fund shares purchased.................. 72,609 --
Service and distribution fees payable.............. 13,234 4,787
Administration fees payable........................ 6,564 639
Management fees payable............................ -- --
Payable for securities and options purchased....... -- --
Options written (Note 4)........................... -- --
Payable to bank.................................... -- --
Dividends payable.................................. -- --
Payable for foreign currency, at value++........... -- 152
Accrued expenses................................... 29,610 37,084
Other liabilities.................................. 3,148 --
----------- -----------
Total Liabilities.................................. 207,732 42,662
----------- -----------
Total Net Assets.................................... $23,336,175 $10,103,979
=========== ===========
NET ASSETS:
Par value of shares of capital stock............... $ 1,866 $ 810
Capital paid in excess of par value................ 20,857,387 8,506,814
Undistributed net investment income................ -- --
Accumulated net realized gain (loss) on security
transactions and options.......................... (4,718,355) (65,459)
Net unrealized appreciation of investments,
options, and foreign currencies................... 7,195,277 1,661,814
----------- -----------
Total Net Assets................................... $23,336,175 $10,103,979
=========== ===========
Shares Outstanding:
Class A............................................. 561,134 203,157
=========== ===========
Class B............................................. 858,781 309,770
=========== ===========
Class 2............................................. 340,744 195,862
=========== ===========
Class O............................................. 105,260 101,012
=========== ===========
Net Asset Value:
Class A Shares
Net asset value*................................... $12.67 $12.49
=========== ===========
Maximum offering price per share (based on maximum
sales charge of 5.75%)............................ $13.44 $13.25
=========== ===========
Class B Shares
Net asset value and offering price per share*...... $12.41 $12.47
=========== ===========
Class 2 Shares
Net asset value*................................... $12.41 $12.46
=========== ===========
Maximum offering price per share (based on maximum
sales charge of 1.00%)............................ $12.54 $12.59
=========== ===========
Class O Shares
Net asset value, offering price and redemption
price per share................................... $12.76 $12.49
=========== ===========
</TABLE>
++Foreign currency at cost for the Asia Growth and International Equity Funds
is $21,282 and $154, respectively.
* Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charges.
See Notes to Financial Statements.
68
<PAGE>
<TABLE>
<CAPTION>
Small Cap Large Cap Investors
Growth Growth Capital Value Balanced
Fund Fund Fund Fund Fund
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$167,817,444 $10,122,746 $272,790,643 $549,429,809 $158,739,157
============ =========== ============ ============ ============
$270,487,049 $10,921,441 $324,377,512 $742,564,288 $164,119,458
41,277,000 -- 24,359,000 51,867,000 --
-- -- -- -- --
440 139,759 673 387 --
-- -- 1,258,833 3,029,589 9,054,581
377,449 413,423 836,093 1,692,363 39,686
14,535 8,770 348,872 1,201,014 1,354,786
-- 24,621 -- -- --
-- -- -- -- 13,313
-- -- 5,025 3,081 1,864
- ------------ ----------- ------------ ------------ ------------
312,156,473 11,508,014 351,186,008 800,357,722 174,583,688
- ------------ ----------- ------------ ------------ ------------
-- -- -- -- --
652,688 1,069 607,524 630,230 968,430
144,941 4,931 88,808 91,300 112,045
59,536 679 -- -- 68,326
197,867 -- 220,168 866,901 39,459
3,009,371 -- 520,011 152,665 11,564,674
1,446,375 -- -- 3,088,400 --
-- -- -- -- 6,108,406
-- -- 41,822 684,888 81,411
-- -- -- -- --
79,308 36,911 77,244 135,946 103,153
373,676 -- -- -- 5,603
- ------------ ----------- ------------ ------------ ------------
5,963,762 43,590 1,555,577 5,650,330 19,051,507
- ------------ ----------- ------------ ------------ ------------
$306,192,711 $11,464,424 $349,630,431 $794,707,392 $155,532,181
============ =========== ============ ============ ============
$ 17,872 $ 1,026 $ 13,847 $ 38,474,293 $ 12,171
161,989,362 10,639,703 272,081,818 529,589,001 147,515,846
-- -- -- 1,480,261 179,672
42,543,211 25,000 25,947,897 32,684,369 2,444,191
101,642,266 798,695 51,586,869 192,479,468 5,380,301
- ------------ ----------- ------------ ------------ ------------
$306,192,711 $11,464,424 $349,630,431 $794,707,392 $155,532,181
============ =========== ============ ============ ============
9,708,079 185,205 1,178,932 1,585,682 2,762,723
============ =========== ============ ============ ============
7,321,521 559,048 3,204,717 4,001,350 7,651,075
============ =========== ============ ============ ============
838,267 110,603 997,207 873,876 1,643,858
============ =========== ============ ============ ============
3,844 171,394 8,466,373 32,013,385 113,393
============ =========== ============ ============ ============
$17.23 $11.18 $25.29 $20.70 $12.81
============ =========== ============ ============ ============
$18.28 $11.86 $26.83 $21.96 $13.59
============ =========== ============ ============ ============
$17.01 $11.17 $24.86 $20.43 $12.76
============ =========== ============ ============ ============
$17.04 $11.16 $24.90 $20.46 $12.79
============ =========== ============ ============ ============
$17.21 $11.27 $25.15 $20.67 $12.92
============ =========== ============ ============ ============
$17.29 $11.18 $25.43 $20.69 $12.88
============ =========== ============ ============ ============
</TABLE>
See Notes to Financial Statements.
69
<PAGE>
Statements of Operations
For the Year Ended December 31, 1999
<TABLE>
<CAPTION>
Asia International
Growth Equity
Fund Fund(a)
- --------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME:
Dividends.......................................... $ 212,165 $ 5,082
Interest........................................... 5,042 --
Less: Foreign withholding tax...................... (15,213) (514)
----------- ----------
Total Investment Income............................ 201,994 4,568
----------- ----------
EXPENSES:
Management fees (Note 2)........................... 130,437 11,496
Distribution and service fees (Note 2)............. 111,573 8,455
Shareholder and system servicing fees.............. 87,226 4,400
Registration fees.................................. 51,157 9,050
Custody............................................ 44,166 1,200
Amortization of deferred organization costs........ 22,495 --
Audit and legal.................................... 21,105 17,000
Administration fees (Note 2)....................... 11,201 639
Shareholder communications......................... 6,960 8,000
Directors' fees.................................... 2,920 150
Other.............................................. 9,420 350
----------- ----------
Total Expenses..................................... 498,660 60,740
Less: Management fee waiver and expense
reimbursement (Note 2)............................ (225,641) (33,125)
----------- ----------
Net Expenses....................................... 273,019 27,615
----------- ----------
Net Investment Income (Loss)........................ (71,025) (23,047)
----------- ----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS,
OPTIONS,
FOREIGN CURRENCIES AND FUTURES CONTRACTS (NOTES 1
AND 4):
Realized Gain (Loss) From:
Security transactions ............................. 5,104,294 (46,077)
Options written.................................... 106,575 --
Options purchased.................................. 213,986 --
Futures contracts.................................. 8,161 --
Foreign currency transactions...................... (305,371) (6,488)
----------- ----------
Net Realized Gain (Loss)........................... 5,127,645 (52,565)
----------- ----------
Change in Unrealized Appreciation of (Note 7):
Security transactions.............................. 6,505,900 1,661,839
Options............................................ 8 --
Foreign currency transactions...................... (21,067) (25)
----------- ----------
Net Change in Unrealized Appreciation.............. 6,484,841 1,661,814
----------- ----------
Net Gain (Loss) on Investments, Options, Foreign
Currencies and Futures Contracts................... 11,612,486 1,609,249
----------- ----------
Increase in Net Assets From Operations.............. $11,541,461 $1,586,202
=========== ==========
</TABLE>
- ------
(a) For the period from October 25, 1999 (commencement of operations) to Decem-
ber 31, 1999.
See Notes to Financial Statements.
70
<PAGE>
<TABLE>
<CAPTION>
Small Cap Large Cap Investors
Growth Growth Capital Value Balanced
Fund Fund(a) Fund Fund Fund
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 229,359 $ 9,616 $ 3,364,001 $ 11,763,650 $ 3,048,924
828,178 4,822 1,958,480 2,944,375 5,748,314
-- -- (11,686) (220,310) (41,455)
- ----------- -------- ----------- ------------ -----------
1,057,537 14,438 5,310,795 14,487,715 8,755,783
- ----------- -------- ----------- ------------ -----------
974,700 10,193 2,249,402 4,071,946 1,016,948
722,781 7,986 661,255 1,092,093 1,516,096
193,354 3,850 194,137 467,783 272,750
46,348 7,900 74,165 69,593 62,025
6,640 3,100 32,698 36,500 22,987
-- -- -- -- 19,122
50,884 17,000 93,375 111,325 71,315
60,919 679 -- -- 92,450
63,502 8,000 62,075 157,827 100,200
2,972 150 72,790 80,550 4,185
7,492 250 47,065 66,810 39,216
- ----------- -------- ----------- ------------ -----------
2,129,592 59,108 3,486,962 6,154,427 3,217,294
(41,511) (34,814) -- -- (406,903)
- ----------- -------- ----------- ------------ -----------
2,088,081 24,294 3,486,962 6,154,427 2,810,391
- ----------- -------- ----------- ------------ -----------
(1,030,544) (9,856) 1,823,833 8,333,288 5,945,392
- ----------- -------- ----------- ------------ -----------
66,192,141 31,908 56,244,230 116,227,028 5,686,848
(3,477,360) -- 747,507 (610,460) --
(2,896,823) -- (4,321,494) 977,053 --
-- -- -- -- --
-- -- -- -- --
- ----------- -------- ----------- ------------ -----------
59,817,958 31,908 52,670,243 116,593,621 5,686,848
- ----------- -------- ----------- ------------ -----------
12,298,599 798,695 5,860,636 (35,787,177) (6,394,670)
(1,027,339) -- -- (655,011) --
-- -- -- -- --
- ----------- -------- ----------- ------------ -----------
11,271,260 798,695 5,860,636 (36,442,188) (6,394,670)
- ----------- -------- ----------- ------------ -----------
71,089,218 830,603 58,530,879 80,151,433 (707,822)
- ----------- -------- ----------- ------------ -----------
$70,058,674 $820,747 $60,354,712 $ 88,484,721 $ 5,237,570
=========== ======== =========== ============ ===========
</TABLE>
See Notes to Financial Statements.
71
<PAGE>
Statements of Changes in Net Assets
For the Year Ended December 31, 1999
<TABLE>
<CAPTION>
Asia International
Growth Equity
Fund Fund(a)
- --------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Net investment income (loss)....................... $ (71,025) $ (23,047)
Net realized gain (loss)........................... 5,127,645 (52,565)
Increase (decrease) in net unrealized
appreciation...................................... 6,484,841 1,661,814
----------- -----------
Increase in Net Assets From Operations............. 11,541,461 1,586,202
----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS FROM (NOTE 1):
Net investment income.............................. -- --
Net realized gains................................. -- --
----------- -----------
Decrease in Net Assets From Distributions to
Shareholders...................................... -- --
----------- -----------
FUND SHARE TRANSACTIONS (NOTE 3):
Net proceeds from sale of shares................... 10,011,999 8,572,752
Net asset value of shares issued in connection with
the transfer of the
Smith Barney Special Equities Fund's net assets
(Note 7).......................................... -- --
Net asset value of shares issued for reinvestment
of dividends...................................... -- --
Cost of shares reacquired.......................... (11,502,640) (54,975)
----------- -----------
Increase (Decrease) in Net Assets From Fund Share
Transactions...................................... (1,490,641) 8,517,777
----------- -----------
Increase (Decrease) in Net Assets................... 10,050,820 10,103,979
NET ASSETS:
Beginning of year.................................. 13,285,355 --
----------- -----------
End of year*....................................... $23,336,175 $10,103,979
=========== ===========
* Includes undistributed net investment income of:.. -- --
=========== ===========
</TABLE>
- ------
(a) For the period from October 25, 1999 (commencement of operations) to Decem-
ber 31, 1999.
See Notes to Financial Statements.
72
<PAGE>
<TABLE>
<CAPTION>
Small Cap Large Cap Investors
Growth Growth Capital Value Balanced
Fund Fund(a) Fund Fund Fund
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ (1,030,544) $ (9,856) $ 1,823,833 $ 8,333,288 $ 5,945,392
59,817,958 31,908 52,670,243 116,593,621 5,686,848
11,271,260 798,695 5,860,636 (36,442,188) (6,394,670)
- ------------ ----------- ------------- ------------- ------------
70,058,674 820,747 60,354,712 88,484,721 5,237,570
- ------------ ----------- ------------- ------------- ------------
-- -- (1,849,337) (6,828,571) (5,885,312)
(15,769,257) -- (31,567,292) (130,292,981) (3,078,669)
- ------------ ----------- ------------- ------------- ------------
(15,769,257) -- (33,416,629) (137,121,552) (8,963,981)
- ------------ ----------- ------------- ------------- ------------
60,948,260 10,678,278 160,442,564 165,971,086 22,079,863
240,911,211 -- -- -- --
14,807,084 -- 30,557,033 107,998,294 7,468,826
(73,356,791) (34,601) (103,368,446) (225,363,002) (73,529,930)
- ------------ ----------- ------------- ------------- ------------
243,309,764 10,643,677 87,631,151 48,606,378 (43,981,241)
- ------------ ----------- ------------- ------------- ------------
297,599,181 11,464,424 114,569,234 (30,453) (47,707,652)
8,593,530 -- 235,061,197 794,737,845 203,239,833
- ------------ ----------- ------------- ------------- ------------
$306,192,711 $11,464,424 $ 349,630,431 $ 794,707,392 $155,532,181
============ =========== ============= ============= ============
-- -- -- $1,480,261 $179,672
============ =========== ============= ============= ============
</TABLE>
See Notes to Financial Statements.
73
<PAGE>
Statements of Changes in Net Assets
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Small Cap Investors
Asia Growth Capital Value Balanced
Growth Fund Fund(a) Fund Fund Fund
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income
(loss)................ $ 169,293 $ (27,601) $ 1,882,174 $ 7,859,877 $ 7,144,769
Net realized gain
(loss)................ (6,576,500) (319,961) 23,114,686 96,281,183 3,663,439
Change in net
unrealized
appreciation
(depreciation)........ 2,818,104 1,581,980 19,906,306 2,173,574 (1,563,026)
----------- ---------- ------------ ------------- -------------
Increase (Decrease) in
Net Assets From
Operations............ (3,589,103) 1,234,418 44,903,166 106,314,634 9,245,182
----------- ---------- ------------ ------------- -------------
DISTRIBUTIONS TO
SHAREHOLDERS FROM (NOTE
1):
Net investment income.. -- -- (2,235,195) (6,966,393) (7,141,006)
Net realized gain...... -- -- (26,331,355) (68,615,411) (4,430,359)
----------- ---------- ------------ ------------- -------------
Decrease in Net Assets
From Distributions to
Shareholders.......... -- -- (28,566,550) (75,581,804) (11,571,365)
----------- ---------- ------------ ------------- -------------
FUND SHARE TRANSACTIONS
(NOTE 3):
Net proceeds from sale
of shares............. 12,424,912 8,329,212 77,386,504 132,178,850 81,251,618
Net asset value of
shares issued for
reinvestment of
dividends............. -- -- 27,162,873 60,303,086 9,838,523
Cost of shares
reacquired............ (9,833,339) (970,100) (73,088,593) (155,469,772) (48,409,828)
----------- ---------- ------------ ------------- -------------
Increase in Net Assets
From
Fund Share
Transactions.......... 2,591,573 7,359,112 31,460,784 37,012,164 42,680,313
----------- ---------- ------------ ------------- -------------
Increase (Decrease) in
Net Assets............. (997,530) 8,593,530 47,797,400 67,744,994 40,354,130
NET ASSETS:
Beginning of year...... 14,282,885 -- 187,263,797 726,992,851 162,885,703
----------- ---------- ------------ ------------- -------------
End of year*........... $13,285,355 $8,593,530 $235,061,197 $ 794,737,845 $ 203,239,833
=========== ========== ============ ============= =============
* Includes undistributed
(overdistributed) net
investment income of:.. $(48,614) -- $25,504 $122,469 $150,615
=========== ========== ============ ============= =============
</TABLE>
- ------
(a) For the period from July 1, 1998 (commencement of operations) to December
31, 1998.
See Notes to Financial Statements.
74
<PAGE>
Notes to Financial Statements
1. Organization and Significant Accounting Policies
The Salomon Brothers Investment Series ("Investment Series") consists of cer-
tain portfolios of the Salomon Brothers Series Funds Inc ("Series Fund"), the
Salomon Brothers Investors Value Fund Inc ("Investors Value Fund"), formerly
known as Salomon Brothers Investors Fund Inc, and the Salomon Brothers Capital
Fund Inc ("Capital Fund").
Salomon Brothers Asia Growth Fund ("Asia Growth Fund"), Salomon Brothers Inter-
national Equity Fund ("International Equity Fund"), Salomon Brothers Small Cap
Growth Fund ("Small Cap Growth Fund"), Salomon Brothers Large Cap Growth Fund
("Large Cap Growth Fund") and Salomon Brothers Balanced Fund ("Balanced Fund"),
formerly known as Salomon Brothers Total Return Fund, are separate investment
portfolios of the Series Fund, an open-end management investment company, in-
corporated in Maryland on April 17, 1990. The Series Funds consist of these
portfolios and seven other separate investment portfolios: Salomon Brothers
High Yield Bond Fund, Salomon Brothers Strategic Bond Fund, Salomon Brothers
National Intermediate Municipal Fund, Salomon Brothers U.S. Government Income
Fund, Salomon Brothers New York Municipal Money Market Fund, Salomon Brothers
Cash Management Fund and Salomon Brothers Institutional Money Market Fund. The
financial statements and financial highlights for the other portfolios are pre-
sented in separate shareholder reports.
The Investors Value Fund is a diversified open-end management investment com-
pany incorporated in Maryland on April 2, 1958 and the Capital Fund is a non-
diversified open-end management investment company incorporated in Maryland on
August 23, 1976.
The Investment Series operates under a multiple class pricing structure, with
each portfolio of the Investment Series (individually a "Fund") offering Class
A, Class B, Class 2 and Class O shares, each with their own expense structure.
Each Fund has a specific investment objective:
<TABLE>
<CAPTION>
Fund: Objective
<S> <C>
Asia Growth Fund........ To seek long-term capital appreciation.
International Equity To seek long-term capital growth.
Fund...................
Small Cap Growth Fund... To obtain long-term growth of capital.
Large Cap Growth Fund... To seek long-term growth of capital.
Capital Fund............ To seek capital appreciation through investments primarily
in common stock or securities convertible into common stocks,
which are believed to have above average price appreciation potential.
Investors Value Fund.... To seek long-term growth of capital. Secondarily to seek current income.
Balanced Fund........... To obtain above average income (compared to a portfolio entirely
invested in equity securities). Secondarily to take advantage of
opportunities for growth of capital and income.
</TABLE>
Costs incurred in connection with certain Fund's organization, which were
payable to Salomon Brothers Asset Management Inc ("SBAM"), have been deferred
and are being amortized by such Funds over a 60 month period from the date the
Fund commenced investment operations. A summary of those expenditures that
remain as of December 31, 1999 for each Fund is as follows:
<TABLE>
<CAPTION>
Fund Expiration of Amortization Amount
- --------------------------------------------------------------------------------
<S> <C> <C>
Asia Growth Fund............................. May 2001 $30,260
Balanced Fund................................ September 2000 $13,313
</TABLE>
The following is a summary of significant accounting policies followed by the
Funds 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.
75
<PAGE>
Notes to Financial Statements
(continued)
(a) Investment Valuation. Portfolio securities listed or traded on national
securities exchanges, or reported on 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 asked price which represents the current value
of the security. Over-the-counter securities are valued at the mean of the
current bid and asked price. Debt securities are valued by using either market
quotations or independent pricing services which use prices provided by market-
makers or estimates of market values obtained from yield data relating to
instruments or securities with similar characteristics. Publicly traded
sovereign bonds are typically traded internationally on the over-the-counter
market and are valued at the mean of the last current bid and asked price as of
the close of business of that market. Short-term securities with less than 60
days remaining to maturity when acquired by a Fund are valued at amortized cost
which approximates market value. If a Fund acquires such securities with more
than 60 days remaining to maturity, they are valued at current market value,
until the 60th day prior to maturity, and are then valued on an amortized cost
basis.
Prior governmental approval for foreign investments may be required under
certain circumstances in some emerging market countries, and the extent of
foreign investment in domestic companies may be subject to limitation in other
emerging market countries. Foreign ownership limitations also may be imposed by
the charters of individual companies in emerging market countries to prevent,
among other things, violation of foreign investment limitations. As a result,
an additional class of shares (identified as "Foreign Shares" in the portfolio
of Investments) may be created and offered for investment by such companies.
The "local" and "foreign" shares' market values may differ.
Foreign securities quoted in a foreign currency are translated into U.S.
dollars using exchange rates at approximately 2:30 p.m. Eastern time (and at
approximately 12:30 p.m. for the Asia Growth Fund), or at such other rates as
SBAM may determine to be appropriate in computing net asset value.
Securities for which reliable quotations or prices from pricing services are
not readily available (as may be the case for securities of limited
marketability) and all other assets are valued at their respective fair value
as determined in good faith by, or under procedures established by, the Board
of Directors.
(b) Futures Contracts. Certain Funds may enter into futures contracts, which
involves paying or receiving variation margin, which will be recorded as
unrealized gain or loss until the contract is closed. When the contract is
closed, a realized gain or loss is recognized. Outstanding contracts may
involve elements of market risk in excess of amounts reported in the financial
statements.
(c) Option Contracts. When a Fund writes or purchases a call or a put option,
an amount equal to the premium received or paid by the Fund 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 of the option.
(d) Mortgage Rolls. The Balanced Fund may enter into mortgage "dollar rolls"
in which the Fund sells mortgage-backed securities for delivery in the current
month and simultaneously contracts to repurchase substantially similar (same
type, coupon and maturity) securities on a specified future date. The Fund is
compensated by a fee paid by the counterparty. Dollar rolls are accounted for
as financing arrangements; the fee is accrued into interest income ratably over
the term of the dollar roll and any gain or loss on the roll is deferred until
disposition of the rolled security. The average monthly balance of dollar rolls
outstanding during the year ended December 31, 1999 was approximately
$6,146,000, for the Balanced Fund.
76
<PAGE>
Notes to Financial Statements
(continued)
(e) Repurchase Agreements. When entering into repurchase agreements, it is
each Fund's policy that the Fund take possession, through its custodian, of the
underlying collateral and monitor the collateral's value at the time the
agreement is entered into and on a daily basis during the term of the
repurchase agreement to ensure that it equals or exceeds the repurchase price.
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.
(f) Reverse Repurchase Agreements. Certain Funds may enter into reverse
repurchase agreements in which a Fund sells portfolio securities and agrees to
repurchase them from the buyer at a particular date and price. Whenever a Fund
enters into a reverse repurchase agreement, the custodian delivers liquid
assets in an amount at least equal to the repurchase price marked-to-market
daily (including accrued interest), and subsequently monitors the account to
ensure that such equivalent value is maintained. A Fund pays interest on
amounts obtained pursuant to reverse repurchase agreements. Reverse repurchase
agreements are considered to be borrowings by a Fund. The Funds did not enter
into any transactions in reverse repurchase agreements during the year ended
December 31, 1999.
(g) Foreign Currency Translation. The accounting records of each Fund are
maintained in U.S. dollars. Investment securities and other assets and
liabilities denominated in a foreign currency are translated into U.S. dollars
at the prevailing rates of exchange each day. Purchases and sales of
securities, income receipts and expense payments are translated into U.S.
dollars at the prevailing exchange rate on the respective dates of the
transactions. Net realized gains and losses on foreign currency transactions
represent net gains and losses from sales and maturities of forward currency
contracts, disposition of foreign currencies, currency gains and losses
realized between the trade and settlement dates on securities transactions and
the difference between the amount of net investment income accrued and the U.S.
dollar amount actually received. The effect of changes in foreign currency
exchange rates on investments in securities are not segregated in the
Statements of Operations from the effects of changes in market prices of those
securities, but are included with the net realized and unrealized gain or loss
on investments.
(h) Forward Foreign Currency Contracts. Certain Funds may enter into forward
foreign currency contracts. A forward foreign currency contract is an agreement
between two parties to buy and sell a currency at a set price on a future date.
The contract is marked-to-market daily and the change in value is recorded by
the Fund as an unrealized gain or loss. When a forward foreign currency
contract is extinguished, through either delivery or offset by entering into
another forward foreign currency contract, the Fund records a realized gain or
loss equal to the difference between the value of the contract at the time it
was opened and the value of the contract at the time it was extinguished or
offset.
At December 31, 1999, the Asia Growth Fund had the following open forward cur-
rency contracts:
<TABLE>
<CAPTION>
Settlement Local Market Unrealized
Asia Growth Fund Date Currency Value Loss
- ------------------ ---------- ------------- ----------- ----------
To Sell:
<S> <C> <C> <C> <C>
Hong Kong Dollar 1/12/00 13,279,040 $ 1,708,157 $ (8,157)
Hong Kong Dollar 4/26/00 20,028,750 2,575,416 (4,727)
New Taiwan Dollar 1/31/00 32,603,350 1,038,721 (9,737)
Singapore Dollar 1/31/00 1,607,485 966,695 (3,840)
South Korean Won 1/31/00 2,137,980,000 1,879,543 (56,106)
--------
$(82,567)
========
</TABLE>
(i) Loan Participations. The Balanced Fund may invest in fixed and floating
rate loans arranged through private negotiations between a foreign sovereign
entity and one or more financial institutions ("lender").
In connection with purchasing loan participations, the Fund generally will
have no right to enforce compliance by the borrower with the terms of the loan
agreement relating to the loan, nor any rights of set-off against the borrower,
and the Fund may not benefit directly from any collateral supporting the loan
in which it has purchased the participation. As a result, the Fund will assume
the credit risk of both the borrower and the lender that is selling the partic-
ipation. In the event of the insolvency of the lender selling the participa-
tion, the Fund may be treated as a general creditor of the lender and may not
benefit from any set-off between the lender and the borrower.
77
<PAGE>
Notes to Financial Statements
(continued)
(j) Federal Income Taxes. Each Fund has complied with the requirements of the
Internal Revenue Code applicable to regulated investment companies and
distributed all of its income, including any net realized gains, to
shareholders. Therefore, no Federal income tax or excise tax provision is
required for such Funds.
(k) Dividends and Distributions to Shareholders. Dividends from net investment
income for the Balanced Fund are declared each business day to shareholders of
record that day, and are paid on the last business day of the month. Dividends
from net investment income for the Asia Growth Fund, Small Cap Growth Fund and
the Capital Fund are declared on an annual basis. Dividends from net investment
income for the Investors Value Fund are declared on a quarterly basis.
Distributions of net realized gains to shareholders of each Fund, if any, are
declared at least annually. Dividends and distributions to shareholders of each
Fund are recorded on the ex-dividend date and are determined in accordance with
income tax regulations which may differ from generally accepted accounting
principles due primarily to differences in the treatment of foreign currency
gains/losses, deferral of wash sales, and post-October losses incurred by each
Fund. Permanent book/tax differences are reclassified within the capital
accounts based on their federal income tax basis treatment; temporary
differences do not require reclassifications.
(l) Class Accounting. Investment income, common expenses and gain (loss) on
investments are allocated to the various classes of a Fund on the basis of
daily net assets of each class. Distribution and shareholder servicing fees
relating to a specific class are charged directly to that class. No class has
preferential dividend rights; differences in per share dividend rates are
generally due to differences in separate class expenses.
(m) Expenses. Direct expenses are charged to the Funds that incurred them, and
general expenses of the Investment Series are allocated to the Funds based on
each Fund's relative net assets.
(n) Other. Investment transactions are recorded as of the trade date. Dividend
income is recorded on the ex-dividend date (except for the Asia Growth Fund,
where certain dividends may be recorded as soon as the Fund is informed of such
dividends). Interest income, including the accretion of discounts or
amortization of premiums, is recognized when earned. Gains or losses on sales
of securities are calculated for financial accounting and Federal income tax
purposes on the identified cost basis. Net investment income (other than
service and distribution fees), unrealized and realized gains or losses are
allocated daily to each class of shares based upon the relative proportion of
each class's net assets to the Fund's total net assets.
2. Management Fee and Other Agreements
Each Fund retains SBAM, a wholly owned subsidiary of Salomon Brothers Holding
Co., Inc., which, in turn, is wholly owned by Salomon Smith Barney Holdings,
Inc. ("SSBH"), to act as investment manager of each Fund, subject to the super-
vision by the Board of Directors of each Fund. SBAM furnishes the Investment
Series with office space and certain services and facilities required for con-
ducting the business of the Investment Series and pays the compensation of its
officers. The management fee for these services for each Fund (except the Capi-
tal Fund and Investors Value Fund) is payable monthly and is based on the fol-
lowing annual percentages of each Fund's average daily net assets: 0.90% for
the International Equity Fund, 0.80% for the Asia Growth Fund and Small Cap
Growth Fund, 0.55% for the Balanced Fund and 0.75% for the Large Cap Growth
Fund. The management fee for the Capital Fund 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-0.75%; next $200 million-0.625%; ex-
cess over $400 million-0.50%. SBAM Ltd., an affiliate of SBAM, provides certain
advisory and administrative services for the benefit of Asia Growth Fund. SBAM
Ltd. is compensated by SBAM at no additional expense to the Asia Growth Fund.
SBAM has retained Salomon Brothers Asia Pacific Ltd. ("SBAM AP"), an affiliate
of SBAM, to act as sub-advisor to the Asia Growth Fund. SBAM AP is compensated
by SBAM at no additional expense to the Asia Growth Fund. SBAM has retained
Citibank, N.A., ("Citibank") as sub-adviser to the International Equity Fund
and the Large Cap Growth Fund.
78
<PAGE>
Notes to Financial Statements
(continued)
The Investors Value Fund pays SBAM a base fee subject to an increase or de-
crease depending on the extent, if any, to which the investment performance of
the Investors Value Fund exceeds or is exceeded by the investment record of the
Standard & Poor's 500 Index of Composite Stocks ("S&P 500 Index"). The base fee
is paid quarterly based on the following annual rates:
<TABLE>
<CAPTION>
Average Daily Net Assets Annual Fee Rate
- -------------------------------------------------------------------------------
<S> <C>
First $350 million............................................. 0.650%
Next $150 million.............................................. 0.550%
Next $250 million.............................................. 0.525%
Next $250 million.............................................. 0.500%
Over $1 billion................................................ 0.450%
</TABLE>
The performance adjustment is paid quarterly based on a rolling one year peri-
od. A performance adjustment will only be made after the investment performance
of the Investors Value Fund exceeds or is exceeded by the investment record of
the S&P 500 Index by at least one percentage point. For each percentage point
by which the investment performance of the Investors Value Fund exceeds or is
exceeded by the investment record of the S&P 500 Index, the base fee will be
adjusted upward or downward by 0.01% (annualized). The maximum annual adjust-
ment is 0.10% which would occur if the Investors Value Fund's performance ex-
ceeds or is exceeded by the S&P 500 Index by ten or more percentage points. For
the rolling one year periods ended March 31, June 30, September 30 and December
31, 1999, the S&P 500 Index exceeded the Investors Value Fund's performance by
approximately 14.84%, 5.37%, 7.37% and 10.35%, respectively. As a result, base
management fees were decreased, in aggregate, by $648,058 for the year ended
December 31, 1999.
For the year ended December 31, 1999, SBAM waived management fees of $130,437,
$11,496, $41,511, $10,193 and $406,903, for the Asia Growth Fund, International
Equity Fund, Small Cap Growth Fund, Large Cap Growth Fund and Balanced Fund,
respectively, and voluntarily absorbed expenses of $95,204, $21,629 and $24,621
for the Asia Growth Fund, International Equity Fund and Large Cap Growth Fund,
respectively.
SBAM also acts as administrator for each of the Funds. SBAM has delegated its
responsibilities as administrator to SSB Citi Fund Management LLC ("SSBC"),
formerly known as SSBC Fund Management Inc., an affiliate of SBAM, pursuant to
a Sub-Administration Agreement between SBAM and SSBC.
Each Fund has an agreement with CFBDS, Inc. to distribute its shares pursuant
to a multiple pricing system. Each class (except for Class O) of each Fund is
authorized pursuant to a services and distribution plan applicable to that
class of shares ("Class A Plan," the "Class B Plan," and the "Class 2 Plan,"
collectively, the "Plans") adopted pursuant to Rule 12b-1 under the Investment
Company Act of 1940, as amended ("1940 Act"), to pay the distributor an annual
service fee with respect to Class A, Class B, and Class 2 shares of the appli-
cable Funds at the rate of 0.25% of the value of the average daily net assets
of the respective class. The distributor is paid an annual distribution fee
with respect to Class B and Class 2 shares of each Fund at a rate of 0.75% of
the value of the average net assets of the respective class. Class O shares are
not subject to a service and distribution plan fee.
79
<PAGE>
Notes to Financial Statements
(continued)
For the year ended December 31, 1999, total service and distribution plan fees
were as follows:
<TABLE>
<CAPTION>
Class A Class B Class 2
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Asia Growth Fund.................................. $ 12,894 $ 69,355 $ 29,324
International Equity Fund......................... 767 4,400 3,288
Small Cap Growth Fund............................. 165,083 492,167 65,531
Large Cap Growth Fund............................. 782 5,439 1,765
Capital Fund...................................... 48,646 474,046 138,563
Investors Value Fund.............................. 104,048 809,731 178,314
Balanced Fund..................................... 105,860 1,146,250 263,986
</TABLE>
SSB received $160,006 as its portion of the front-end sales charge on sales of
Class A and Class 2 shares of the Funds during the year ended December 31,
1999. In addition, contingent deferred sales charges of $1,676,341 were paid to
SSB in connection with redemptions of certain Class B and Class 2 shares of the
Funds during the year ended December 31, 1999.
Brokerage commissions of $390, $48, $12,018, $31,716 and $2,400 were paid by
the Small Cap Growth Fund, Large Cap Growth Fund, Capital Fund, Investors Value
Fund and Balanced Fund, respectively, to SSB.
3. Capital Stock
At December 31, 1999, the Series Funds had 10,000,000,000 shares of authorized
capital stock, par value $0.001 per share. The Investors Value Fund had
50,000,000 shares of authorized capital stock, par value $1.00 per share. The
Capital Fund had 25,000,000 shares of authorized capital stock, par value
$0.001 per share.
At December 31, 1999, total paid-in capital amounted to the following for each
class:
<TABLE>
<CAPTION>
Class A Class B Class 2 Class O
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Asia Growth Fund.............. $ 7,507,327 $ 9,288,325 $ 3,233,215 $ 830,386
International Equity Fund..... 2,151,789 3,310,872 2,035,155 1,009,808
Small Cap Growth Fund......... 79,809,800 68,808,701 13,340,568 48,165
Large Cap Growth Fund......... 1,881,341 5,911,056 1,134,047 1,714,285
Capital Fund.................. 27,754,403 75,225,497 23,549,024 145,566,741
Investors Value Fund.......... 30,278,054 84,064,070 18,221,531 435,499,639
Balanced Fund................. 31,092,576 94,679,250 21,036,208 719,983
</TABLE>
80
<PAGE>
[This page intentionally left blank]
81
<PAGE>
Notes to Financial Statements
(continued)
Transactions in Fund shares for the periods indicated were as follows:
<TABLE>
<CAPTION>
Class A Shares Class B Shares
--------------------------------------------------- --------------------------------------------------
Year Ended Year Ended Year Ended Year Ended
December 31, 1999 December 31, 1998 December 31, 1999 December 31, 1998
------------------------- ------------------------ ------------------------ ------------------------
Shares Amount Shares Amount Shares Amount Shares Amount
---------- ------------- ---------- ------------ ---------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Asia Growth Fund
Shares sold..... 820,575 $ 6,496,399 644,747 $ 4,589,532 248,887 $ 2,263,544 551,800 $ 3,774,829
Shares issued as
reinvestment... -- -- -- -- -- -- -- --
Shares
reacquired..... (933,537) (7,350,231) (838,184) (5,281,391) (208,794) (1,808,793) (504,342) (2,733,147)
---------- ------------- ---------- ------------ ---------- ------------ ---------- ------------
Net increase
(decrease)..... (112,962) $ (853,832) (193,437) $ (691,859) 40,093 $ 454,751 47,458 $ 1,041,682
========== ============= ========== ============ ========== ============ ========== ============
International
Equity Fund++
Shares sold..... 206,248 $ 2,188,694 -- -- 311,181 $ 3,331,375 -- --
Shares issued as
reinvestment... -- -- -- -- -- -- -- --
Shares
reacquired..... (3,091) (34,984) -- -- (1,411) (16,452) -- --
---------- ------------- ---------- ------------ ---------- ------------ ---------- ------------
Net increase.... 203,157 $ 2,153,710 -- -- 309,770 $ 3,314,923 -- --
========== ============= ========== ============ ========== ============ ========== ============
Small Cap Growth
Fund+
Shares sold..... 3,555,893 $ 51,019,503 329,207 $ 3,219,491 524,385 $ 7,351,719 362,365 $ 3,593,593
Shares issued as
reinvestment... 526,908 8,114,385 -- -- 393,936 5,995,706 -- --
Shares
reacquired..... (4,086,563) (59,269,935) (52,616) (492,123) (903,160) (12,735,817) (29,018) (260,138)
---------- ------------- ---------- ------------ ---------- ------------ ---------- ------------
Net increase
(decrease)..... (3,762) $ (136,047) 276,591 $ 2,727,368 15,161 $ 611,608 333,347 $ 3,333,455
========== ============= ========== ============ ========== ============ ========== ============
Large Cap Growth
Fund**
Shares sold..... 185,594 $ 1,886,240 -- -- 559,621 $ 5,918,430 -- --
Shares issued as
reinvestment... -- -- -- -- -- -- -- --
Shares
reacquired..... (389) (4,223) -- -- (573) (6,199) -- --
---------- ------------- ---------- ------------ ---------- ------------ ---------- ------------
Net increase.... 185,205 $ 1,882,017 -- -- 559,048 $ 5,912,231 -- --
========== ============= ========== ============ ========== ============ ========== ============
Capital Fund
Shares sold..... 2,967,781 $ 72,928,143 1,503,276 $ 33,851,010 2,285,827 $ 54,969,564 793,021 $ 17,537,460
Shares issued as
reinvestment... 94,159 2,307,965 52,857 1,157,551 234,097 5,627,409 73,532 1,587,598
Shares
reacquired..... (2,381,429) (58,529,687) (1,321,984) (29,738,105) (300,374) (7,193,379) (63,204) (1,368,847)
---------- ------------- ---------- ------------ ---------- ------------ ---------- ------------
Net increase
(decrease)..... 680,511 $ 16,706,421 234,149 $ 5,270,456 2,219,550 $ 53,403,594 803,349 $ 17,756,211
========== ============= ========== ============ ========== ============ ========== ============
Investors Value
Fund
Shares sold..... 5,354,430 $ 123,724,267 3,918,021 $ 86,842,842 1,026,823 $ 22,981,206 1,420,194 $ 31,363,902
Shares issued as
reinvestment... 224,846 4,752,407 221,667 4,765,235 563,323 11,763,229 257,589 5,451,926
Shares
reacquired..... (6,305,947) (145,389,814) (4,532,732) (99,576,589) (1,026,065) (22,477,257) (611,446) (12,896,539)
---------- ------------- ---------- ------------ ---------- ------------ ---------- ------------
Net increase
(decrease)..... (726,671) $ (16,913,140) (393,044) $ (7,968,512) 564,081 $ 12,267,178 1,066,337 $ 23,919,289
========== ============= ========== ============ ========== ============ ========== ============
Balanced Fund
Shares sold..... 399,441 $ 5,355,740 1,507,893 $ 20,207,179 953,569 $ 12,729,518 3,408,556 $ 45,832,192
Shares issued as
reinvestment... 143,632 1,891,102 220,181 2,903,310 342,656 4,494,019 415,586 5,451,096
Shares
reacquired..... (1,705,708) (22,625,269) (1,840,113) (24,371,605) (2,884,560) (37,918,767) (1,259,486) (16,619,670)
---------- ------------- ---------- ------------ ---------- ------------ ---------- ------------
Net increase
(decrease)..... (1,162,635) $ (15,378,427) (112,039) $ (1,261,116) (1,588,335) $(20,695,230) 2,564,656 $ 34,663,618
========== ============= ========== ============ ========== ============ ========== ============
</TABLE>
* Effective September 14, 1998, Class C shares of each Fund were redesignated
as Class 2 shares.
++ Inception date for Class A, Class B, Class 2 and Class O shares is October
25, 1999.
+ Fund's commencement of operations was July 1, 1998.
** Inception date for Class A, Class B, and Class 2 shares is October 25, 1999.
Inception date for Class O shares is October 26, 1999.
82
<PAGE>
Notes to Financial Statements
(continued)
<TABLE>
<CAPTION>
Class 2 Shares* Class O Shares
- ---------------------------------------------- ------------------------------------------------
Year Ended Year Ended Year Ended Year Ended
December 31, 1999 December 31, 1998 December 31, 1999 December 31, 1998
- ---------------------- ---------------------- ----------------------- -----------------------
Shares Amount Shares Amount Shares Amount Shares Amount
- -------- ----------- --------- ----------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
147,895 $ 1,200,786 401,276 $ 2,652,216 5,260 $ 51,271 181,197 $ 1,408,335
-- -- -- -- -- -- -- --
(164,067) (1,326,680) (265,260) (1,639,540) (106,929) (1,016,937) (29,140) (179,261)
- -------- ----------- --------- ----------- ---------- ----------- ---------- -----------
(16,172) $ (125,894) 136,016 $ 1,012,676 (101,669) $ (965,666) 152,057 $ 1,229,074
======== =========== ========= =========== ========== =========== ========== ===========
196,159 $ 2,041,831 -- -- 101,012 $ 1,010,852 -- --
-- -- -- -- -- -- -- --
(297) (3,539) -- -- -- -- -- --
- -------- ----------- --------- ----------- ---------- ----------- ---------- -----------
195,862 $ 2,038,292 -- -- 101,012 $ 1,010,852 -- --
======== =========== ========= =========== ========== =========== ========== ===========
197,644 $ 2,531,764 148,804 $ 1,458,618 3,013 $ 45,274 5,754 $ 57,510
45,657 695,814 -- -- 76 1,179 -- --
(93,401) (1,289,080) (21,550) (217,839) (5,000) (61,959) -- --
- -------- ----------- --------- ----------- ---------- ----------- ---------- -----------
149,900 $ 1,938,498 127,254 $ 1,240,779 (1,911) $ (15,506) 5,754 $ 57,510
======== =========== ========= =========== ========== =========== ========== ===========
112,907 $ 1,158,608 -- -- 171,394 $ 1,715,000 -- --
-- -- -- -- -- -- -- --
(2,304) (24,179) -- -- -- -- -- --
- -------- ----------- --------- ----------- ---------- ----------- ---------- -----------
110,603 $ 1,134,429 -- -- 171,394 $ 1,715,000 -- --
======== =========== ========= =========== ========== =========== ========== ===========
730,331 $17,642,431 171,556 $ 3,829,304 610,678 $14,902,426 990,632 $22,168,730
73,155 1,761,747 24,764 534,936 845,836 20,859,912 1,080,852 23,882,788
(87,015) (2,073,040) (29,054) (630,707) (1,472,035) (35,572,340) (1,853,841) (41,350,934)
- -------- ----------- --------- ----------- ---------- ----------- ---------- -----------
716,471 $17,331,138 167,266 $ 3,733,533 (15,521) $ 189,998 217,643 $ 4,700,584
======== =========== ========= =========== ========== =========== ========== ===========
255,985 $ 5,813,731 330,038 $ 7,292,396 559,610 $13,451,882 307,780 $ 6,679,710
126,655 2,649,796 65,256 1,380,833 4,176,379 88,832,862 2,267,226 48,705,092
(316,659) (6,892,616) (144,455) (3,106,164) (2,240,548) (50,603,315) (1,843,864) (39,890,480)
- -------- ----------- --------- ----------- ---------- ----------- ---------- -----------
65,981 $ 1,570,911 250,839 $ 5,567,065 2,495,441 $51,681,429 731,142 $15,494,322
======== =========== ========= =========== ========== =========== ========== ===========
292,789 $ 3,937,309 1,074,705 $14,613,070 4,263 $ 57,296 43,871 $ 599,177
76,114 1,000,856 105,246 1,384,093 6,257 82,849 7,575 100,024
(971,905) (12,812,858) (536,707) (7,047,231) (12,693) (173,036) (28,787) (371,322)
- -------- ----------- --------- ----------- ---------- ----------- ---------- -----------
(603,002) $(7,874,693) 643,244 $ 8,949,932 (2,173) $ (32,891) 22,659 $ 327,879
======== =========== ========= =========== ========== =========== ========== ===========
</TABLE>
83
<PAGE>
Notes to Financial Statements
(continued)
At December 31, 1999, Salomon Brothers Holding Co., Inc. owned approximately
the following percentages of total shares outstanding of the following Funds:
<TABLE>
<S> <C>
International Equity Fund................................................... 12%
Large Cap Growth Fund....................................................... 17%
</TABLE>
4. Investments
During the year ended December 31, 1999, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding short-
term securities) were as follows:
<TABLE>
<CAPTION>
Purchases Sales
------------ ------------
<S> <C> <C>
Asia Growth Fund..................................... $ 38,773,460 $ 39,626,711
============ ============
International Equity Fund............................ $ 6,801,706 $ 87,988
============ ============
Small Cap Growth Fund................................ $168,091,776 $213,530,792
============ ============
Large Cap Growth Fund................................ $ 10,837,564 $ 746,726
============ ============
Capital Fund......................................... $377,096,680 $330,577,341
============ ============
Investors Value Fund................................. $504,543,296 $577,109,715
============ ============
Balanced Fund:
U.S. Government Securities.......................... $ 16,675,227 $ 25,889,825
Other Investments................................... 47,950,238 71,763,802
------------ ------------
$ 64,625,465 $ 97,653,627
============ ============
</TABLE>
At December 31, 1999, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were substantially
as follows:
<TABLE>
<CAPTION>
Gross Gross Net
Unrealized Unrealized Unrealized
Appreciation Depreciation Appreciation
------------ ------------ ------------
<S> <C> <C> <C>
Asia Growth Fund....................... $ 7,667,596 $ (389,851) $ 7,277,745
International Equity Fund.............. 1,793,706 (131,867) 1,661,839
Small Cap Growth Fund.................. 108,138,172 (5,468,567) 102,669,605
Large Cap Growth Fund.................. 987,808 (189,113) 798,695
Capital Fund........................... 68,363,305 (16,776,436) 51,586,869
Investors Value Fund................... 227,970,290 (34,835,811) 193,134,479
Balanced Fund.......................... 19,670,891 (14,290,590) 5,380,301
</TABLE>
Transactions in options written for the Asia Growth Fund during the year ended
December 31, 1999 were as follows:
<TABLE>
<CAPTION>
Number of Premiums
Contracts Received (Paid)
--------- ---------------
<S> <C> <C>
Options written,
outstanding at December
31, 1998............... 1 $ 746
Options written......... 135 556,299
Options terminated in
closing purchase
transactions........... (17) (449,485)
Options expired......... (119) (107,560)
---- --------
Options written,
outstanding at December
31, 1999............... 0 $ 0
==== ========
</TABLE>
84
<PAGE>
Notes to Financial Statements
(continued)
In addition, the written call option transactions for the Small Cap Growth Fund
which occurred during the year ended December 31, 1999 were as follows:
<TABLE>
<CAPTION>
Number of Premiums
Contracts Received (Paid)
--------- ---------------
<S> <C> <C>
Options written,
outstanding at December
31, 1998............... -- $ --
Options written......... 7,995 4,221,815
Options terminated in
closing purchase
transactions........... (5,135) (3,365,407)
Options expired......... (500) (79,747)
Options exercised....... (1,350) (357,625)
------ ----------
Options written,
outstanding at December
31, 1999............... 1,010 $ 419,036
====== ==========
</TABLE>
The following represents the written call options open at December 31, 1999:
<TABLE>
<CAPTION>
Number of Strike
Contracts Expiration Price Value
--------- ---------- ------ -----------
<C> <S> <C> <C> <C>
225 Cost Plus Inc..................... 2/19/00 $40.0 $ (33,750)
25 Cost Plus Inc..................... 2/19/00 45.0 (625)
260 IDEC Pharmaceutical............... 2/19/00 65.0 (880,750)
500 Metromedia Fiber Network, Inc..... 2/19/00 40.0 (531,250)
-----------
Total Call Options Written
(Premiums received -- $419,036)... $(1,446,375)
===========
</TABLE>
The following written put option transactions for the Small Cap Growth Fund
which occurred during the year ended December 31, 1999:
<TABLE>
<CAPTION>
Number of Premiums
Contracts Received (Paid)
--------- ---------------
<S> <C> <C>
Options written, outstanding at December 31, 1998.... 0 $ 0
Options written...................................... 225 201,818
Options expired...................................... (225) (201,818)
---- ---------
Options written, outstanding at December 31, 1999.... 0 $ 0
==== =========
</TABLE>
In addition, the written call option transactions for the Capital Fund which
occurred during the year ended December 31, 1999 were as follows:
<TABLE>
<CAPTION>
Number of Premiums
Contracts Received (Paid)
--------- ---------------
<S> <C> <C>
Options written,
outstanding at December
31, 1998............... 0 $ 0
Options written......... 3,957 1,080,744
Options expired......... (800) (170,014)
Options terminated in
closing purchase
transactions........... (3,157) (910,730)
------ ----------
Options written,
outstanding at December
31, 1999............... 0 $ 0
====== ==========
</TABLE>
85
<PAGE>
Notes to Financial Statements
(continued)
The following written put option transactions for the Capital Fund which oc-
curred during the year ended December 31, 1999:
<TABLE>
<CAPTION>
Number of Premiums
Contracts Received (Paid)
--------- ---------------
<S> <C> <C>
Options written,
outstanding at December
31, 1998............... 0 $ 0
Options written......... 3,397 655,027
Options expired......... (933) (140,496)
Options exercised....... (52) (26,068)
Options terminated in
closing purchase
transactions........... (2,412) (488,463)
------ -----------
Options written,
outstanding at December
31, 1999............... 0 $ 0
====== ===========
</TABLE>
In addition, the written call option transactions for the Investors Value Fund
which occurred during the year ended December 31, 1999 were as follows:
<TABLE>
<CAPTION>
Number of Premiums
Contracts Received (Paid)
--------- ---------------
<S> <C> <C>
Options written,
outstanding at December
31, 1998............... 0 $ 0
Options written......... 5,656 3,243,129
Options terminated in
closing purchase
transactions........... (1,100) (809,740)
------ -----------
Options written,
outstanding at December
31, 1999............... 4,556 $ 2,433,389
====== ===========
</TABLE>
The following represents the written call options open at December 31, 1999:
<TABLE>
<CAPTION>
Number of Strike
Contracts Expiration Price Value
--------- ---------- ------ -----------
<C> <S> <C> <C> <C>
856 American Express Co. ............. 1/22/00 $170.0 $ (379,850)
1,100 Texas Instruments Inc. ........... 1/22/00 75.0 (2,530,000)
1,728 Tyco International Ltd. .......... 1/22/00 45.0 (140,400)
872 Tyco International Ltd. .......... 1/22/00 47.5 (38,150)
-----------
Total Call Options Written (Premi-
ums received -- $2,433,389)...... $(3,088,400)
===========
</TABLE>
86
<PAGE>
Notes to Financial Statements
(continued)
5. Portfolio Investment Risks
Credit and Market Risk. Funds that invest in high yield and emerging market
instruments are subject to certain credit and market risks. The yields of high
yield and emerging market debt obligations reflect, among other things,
perceived credit risk. The Funds' investment in securities rated below
investment grade typically involve risks not associated with higher rated
securities including, among others, greater risk of timely and ultimate payment
of interest and principal, greater market price volatility and less liquid
secondary market trading. The consequences of political, social, economic or
diplomatic changes may have disruptive effects on the market prices of
investments held by the Funds. The Funds' investment in non-dollar denominated
securities may also result in foreign currency losses caused by devaluations
and exchange rate fluctuations.
Financial Instruments with Off-Balance Sheet Risk. Certain Funds enter into
forward foreign currency contracts ("forward contracts") to facilitate
settlement of foreign currency denominated portfolio transactions or to manage
foreign currency exposure associated with foreign currency denominated
securities. Forward contracts involve elements of market risk in excess of the
amounts reflected in the Statements of Assets and Liabilities. The Funds bear
the risk of an unfavorable change in the foreign exchange rate underlying the
forward contract. Risks may also arise upon entering into these contracts from
the potential inability of the counterparties to meet the terms of their
contracts.
Foreign security and currency transactions may involve certain considerations
and risks not typically associated with those of U.S. dollar denominated
transactions as a result of, among other factors, the possibility of lower
levels of governmental supervision and regulation of foreign securities markets
and the possibility of political or economic instability.
Funds that enter into mortgage dollar rolls are subject to the risk that the
market value of the securities the Fund is obligated to repurchase under the
agreement may decline below the repurchase price. In the event the buyer of
securities under a mortgage dollar roll files for bankruptcy or becomes
insolvent, the Fund's use of proceeds of the dollar roll may be restricted
pending a determination by the other party, or its trustee or receiver, whether
to enforce the Fund's obligation to repurchase the securities.
Consistent with their objective to seek high current income, certain Funds may
invest in instruments whose values and interest rates may be linked to foreign
currencies, interest rates, indices or some other financial indicator. The
value at maturity or interest rates for these instruments will increase or
decrease according to the change in the indicator to which it is indexed. These
securities are generally more volatile in nature and the risk of loss of
principal is greater.
A risk in writing a 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 into a closing transaction because of an illiquid secondary market.
In connection with purchasing participations, the Fund generally will have no
right to enforce compliance by the borrower, and the Fund may not benefit
directly from any collateral supporting the loan in which it has purchased the
participation. As a result, the Fund will assume the credit risk of both the
borrower and the lender that is selling the participation. In the event of the
insolvency of the lender selling the participation, the Fund may be treated as
a general creditor of the lender and may not benefit from any set-off between
the lender and the borrower.
87
<PAGE>
Notes to Financial Statements
(continued)
6. Tax Information
At December 31, 1999, the Asia Growth Fund had, for Federal income tax
purposes, a capital loss carry forward of approximately $4,701,000 available to
offset future capital gains through December 31, 2006. To the extent that these
carry forward losses are used to offset capital gains, it is probable that any
gains so offset will not be distributed.
The character of income and gains to be distributed are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles. At December 31, 1999, reclassifications were made to the
capital accounts of the Asia Growth Fund, International Equity Fund, Large Cap
Growth Fund, Investors Value Fund and Balanced Fund to reflect permanent
book/tax differences and income and gains available for distributions under
income tax regulations. A portion of overdistributed net investment income
amounting to $131,850 and $2,948 was reclassified to paid-in capital for the
Asia Growth Fund and Large Cap Growth Fund, respectively. In addition, a
portion of accumulated net investment loss and accumulated net realized gain
amounting to $10,153 and $154,985 was reclassified to paid-in capital for the
International Equity Fund and Small Cap Growth Fund, respectively. Net
investment income, net realized gains and net assets were not affected by these
changes.
7. Transfer of Net Assets
On July 16, 1999, the Small Cap Growth Fund acquired the assets and certain
liabilities of the Smith Barney Special Equities Fund Portfolio ("Special
Equities Fund") pursuant to a plan of reorganization approved by Special
Equities Fund shareholders on May 28, 1999. Total shares issued by the Small
Cap Growth Fund and the total net assets of the Special Equities Fund and Small
Cap Growth Fund on the date of the transfer were as follows.
<TABLE>
<CAPTION>
Shares Total Net Total Net
Issued by Assets of Assets of
the the Special the Small
Small Cap Equities Cap Growth
Acquired Fund Growth Fund Fund Fund
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Special Equities Fund.................... 16,980,004 $240,911,211 $13,358,236
</TABLE>
The total net assets of the Special Equities Fund before acquisition included
unrealized appreciation of $88,789,026. Total net assets of the Small Cap
Growth Fund immediately after the transfer were $254,269,447. The transaction
was structured to qualify as a tax-free reorganization under the Internal
Revenue Code of 1986, as amended.
88
<PAGE>
Financial Highlights
For a share of each class of capital stock outstanding throughout each year
ended December 31:
Asia Growth Fund
<TABLE>
- -------------------------------------------------------------------------------
<CAPTION>
Class A Shares
---------------------------------
1999 1998 1997 1996(1)
---------------------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year......... $6.50 $7.48 $10.32 $10.00
------- ------ ------ ------
Income (Loss) From Operations:
Net investment income (2)................. -- 0.10 0.03 0.05
Net realized and unrealized gain (loss)... 6.17 (1.08) (2.59) 0.47
------- ------ ------ ------
Total Income (Loss) From Operations........ 6.17 (0.98) (2.56) 0.52
------- ------ ------ ------
Less Distributions From:
Net investment income..................... -- -- (0.03) (0.05)
Net realized gains........................ -- -- (0.25) (0.15)
------- ------ ------ ------
Total Distributions........................ -- -- (0.28) (0.20)
------- ------ ------ ------
Net Asset Value, End of Year............... $12.67 $6.50 $7.48 $10.32
======= ====== ====== ======
Total Return (3)........................... 94.9% -13.1% -25.6% 5.2%++
Net Assets, End of Year (000s)............. $7,108 $4,385 $6,491 $3,693
Ratios to Average Net Assets:
Expenses.................................. 1.24% 1.24% 1.24% 1.24%+
Net investment income (loss).............. - 0.01% 1.48% 0.27% 0.90%+
Portfolio Turnover Rate.................... 248% 436% 294% 119%
Before applicable waiver of management fee,
expenses absorbed by SBAM and credits
earned on custodian cash balances, net
investment loss per share and expense
ratios would have been:
Net investment loss per share (2)......... $(0.12) $(0.07) $(0.23) $(0.18)
Expense ratio............................. 2.62% 3.79% 3.81% 5.50%+
Asia Growth Fund
- -------------------------------------------------------------------------------
<CAPTION>
Class B Shares
---------------------------------
1999 1998 1997 1996(1)
---------------------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year......... $6.42 $7.44 $10.31 $10.00
------- ------ ------ ------
Income (Loss) From Operations:
Net investment income (loss) (2).......... (0.06) 0.05 (0.05) 0.01
Net realized and unrealized gain (loss)... 6.05 (1.07) (2.57) 0.46
------- ------ ------ ------
Total Income (Loss) From Operations........ 5.99 (1.02) (2.62) 0.47
------- ------ ------ ------
Less Distributions From:
Net investment income..................... -- -- -- (0.01)
Net realized gains........................ -- -- (0.25) (0.15)
------- ------ ------ ------
Total Distributions........................ -- -- (0.25) (0.16)
------- ------ ------ ------
Net Asset Value, End of Year............... $12.41 $6.42 $7.44 $10.31
======= ====== ====== ======
Total Return (3)........................... 93.3% -13.7% -26.1% 4.7%++
Net Assets, End of Year (000s)............. $10,658 $5,256 $5,738 $3,163
Ratios to Average Net Assets:
Expenses.................................. 1.99% 1.99% 1.99% 1.99%+
Net investment income (loss).............. -0.74% 0.77% -0.48% 0.20%+
Portfolio Turnover Rate.................... 248% 436% 294% 119%
Before applicable waiver of management fee,
expenses absorbed by SBAM and credits
earned on custodian cash balances, net
investment loss per share and expense
ratios would have been:
Net investment loss per share (2)......... $(0.12) $(0.11) $(0.30) $(0.23)
Expense ratio............................. 3.39% 4.55% 4.56% 6.25%+
</TABLE>
- ------
(1) For the period from May 6, 1996 (inception date) to December 31, 1996.
(2) Per share amounts have been calculated using the average shares method.
(3) Total return is calculated assuming a $1,000 investment of the first day of
each period reported, reinvestment of all dividends at the net asset value
on the ex-dividend date, and a sale at net asset value on the last day of
each period. Initial sales charge or contingent deferred sales charge is
not reflected in the calculation of total return.
++Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized.
89
<PAGE>
Financial Highlights
(continued)
For a share of each class of capital stock outstanding throughout each year
ended December 31:
Asia Growth Fund
<TABLE>
- -------------------------------------------------------------------------------
<CAPTION>
Class 2 Shares
---------------------------------
1999 1998(1) 1997 1996(2)
---------------------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year......... $ 6.42 $ 7.44 $10.30 $10.00
------ ------ ------ ------
Income (Loss) From Operations:
Net investment income (loss) (3).......... (0.06) 0.05 (0.05) 0.01
Net realized and unrealized gain (loss)... 6.05 (1.07) (2.56) 0.45
------ ------ ------ ------
Total Income (Loss) From Operations........ 5.99 (1.02) (2.61) 0.46
------ ------ ------ ------
Less Distributions From:
Net investment income..................... -- -- -- (0.01)
Net realized gains........................ -- -- (0.25) (0.15)
------ ------ ------ ------
Total Distributions........................ -- -- (0.25) (0.16)
------ ------ ------ ------
Net Asset Value, End of Year............... $12.41 $ 6.42 $ 7.44 $10.30
====== ====== ====== ======
Total Return (4)........................... 93.3% -13.7% -26.0% 4.6%++
Net Assets, End of Year (000s)............. $4,227 $2,291 $1,643 $246
Ratios to Average Net Assets:
Expenses.................................. 1.99% 1.99% 1.99% 2.00%+
Net investment income (loss).............. -0.76% 0.80% -0.47% 0.08%+
Portfolio Turnover Rate.................... 248% 436% 294% 119%
Before applicable waiver of management fee,
expenses absorbed by SBAM and credits
earned on custodian cash balances, net
investment loss per share and expense
ratios would have been:
Net investment loss per share (3)......... $(0.11) $(0.11) $(0.30) $(0.20)
Expense ratio............................. 3.37% 4.55% 4.56% 6.26%+
Asia Growth Fund
- -------------------------------------------------------------------------------
<CAPTION>
Class O Shares
---------------------------------
1999 1998 1997 1996(2)
---------------------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year......... $ 6.54 $ 7.50 $10.32 $10.00
------ ------ ------ ------
Income (Loss) From Operations:
Net investment income (3)................. 0.02 0.12 0.05 0.07
Net realized and unrealized gain (loss)... 6.20 (1.08) (2.59) 0.46
------ ------ ------ ------
Total Income (Loss) From Operations........ 6.22 (0.96) (2.54) 0.53
------ ------ ------ ------
Less Distributions From:
Net investment income..................... -- -- (0.03) (0.06)
Net realized gains........................ -- -- (0.25) (0.15)
------ ------ ------ ------
Total Distributions........................ -- -- (0.28) (0.21)
------ ------ ------ ------
Net Asset Value, End of Year............... $12.76 $ 6.54 $ 7.50 $10.32
====== ====== ====== ======
Total Return (4)........................... 95.1% -12.8% -25.3% 5.3%++
Net Assets, End of Year (000s)............. $1,343 $1,354 $412 $124
Ratios to Average Net Assets:
Expenses.................................. 0.97% 0.99% 0.99% 0.99%+
Net investment income..................... 0.23% 1.90% 0.51% 1.21%+
Portfolio Turnover Rate.................... 248% 436% 294% 119%
Before applicable waiver of management fee,
expenses absorbed by SBAM and credits
earned on custodian cash balances, net
investment loss per share and expense
ratios would have been:
Net investment loss per share (3)......... $(0.11) $(0.04) $(0.20) $(0.18)
Expense ratio............................. 2.32% 3.55% 3.56% 5.25%+
</TABLE>
- ------
(1) On September 14, 1998, Class C shares were renamed Class 2 shares.
(2) For the period from May 6, 1996 (inception date) to December 31, 1996.
(3) Per share amounts have been calculated using the average shares method.
(4) Total return is calculated assuming a $1,000 investment of the first day of
each period reported, reinvestment of all dividends at the net asset value
on the ex-dividend date, and a sale at net asset value on the last day of
each period. Initial sales charge or contingent deferred sales charge is
not reflected in the calculation of total return.
++Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized.
90
<PAGE>
Financial Highlights
(continued)
For a share of each class of capital stock outstanding throughout the period
ended December 31:
International Equity Fund
<TABLE>
- ------------------------------------------------------------------------------
<CAPTION>
1999(1)
--------------------------------
Class A Class B Class 2 Class O
--------------------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period....... $10.00 $10.00 $10.00 $10.00
------ ------ ------ ------
Income (Loss) From Operations:
Net investment loss (2)................... (0.03) (0.04) (0.04) (0.02)
Net realized and unrealized gain.......... 2.52 2.51 2.50 2.51
------ ------ ------ ------
Total Income From Operations............... 2.49 2.47 2.46 2.49
------ ------ ------ ------
Less Distributions From:
Net investment loss....................... -- -- -- --
Net realized gains........................ -- -- -- --
------ ------ ------ ------
Total Distributions........................ -- -- -- --
------ ------ ------ ------
Net Asset Value, End of Period............. $12.49 $12.47 $12.46 $12.49
====== ====== ====== ======
Total Returns (3)++........................ 24.9% 24.7% 24.6% 24.9%
Net Assets, End of Period (000s)........... $2,538 $3,863 $2,441 $1,262
Ratios to Average Net Assets+:
Expenses.................................. 1.75% 2.50% 2.50% 1.50%
Net investment loss....................... -1.39% -2.30% -2.13% -0.83%
Portfolio Turnover Rate.................... 1% 1% 1% 1%
Before applicable waiver of management fee
and expenses absorbed by SBAM, net
investment loss per share and expense
ratios would have been:
Net investment loss per share (2)......... $(0.05) $(0.05) $(0.05) $(0.05)
Expense ratio+............................ 4.36% 5.11% 5.09% 4.05%
</TABLE>
- ------
(1) For the period from October 25, 1999 (inception date) to December 31, 1999.
(2) Per share amounts have been calculated using the average shares method.
(3) Total return is calculated assuming a $1,000 investment of the first day of
each period reported, reinvestment of all dividends at the net asset value
on the ex-dividend date, and a sale at net asset value on the last day of
each period. Initial sales charge or contingent deferred sales charge is
not reflected in the calculation of total return.
++Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized.
91
<PAGE>
Financial Highlights
(continued)
For a share of each class of capital stock outstanding throughout each year
ended December 31:
Small Cap Growth Fund
<TABLE>
- ------------------------------------------------------------------------------
<CAPTION>
Class A Shares Class B Shares
------------------------------------
1999 1998(1) 1999 1998(1)
------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of
Year............................. $ 11.59 $ 10.00 $ 11.55 $ 10.00
-------- ------- -------- -------
Income (Loss) From Operations:
Net investment loss (2).......... (0.07) (0.02) (0.17) (0.06)
Net realized and unrealized
gain............................ 6.63 1.61 6.55 1.61
-------- ------- -------- -------
Total Income From Operations...... 6.56 1.59 6.38 1.55
-------- ------- -------- -------
Less Distributions From:
Net investment income............ -- -- -- --
Net realized gains............... (0.92) -- (0.92) --
-------- ------- -------- -------
Total Distributions............... (0.92) -- (0.92) --
-------- ------- -------- -------
Net Asset Value, End of Year...... $ 17.23 $ 11.59 $ 17.01 $ 11.55
======== ======= ======== =======
Total Return (3).................. 57.5% 15.9%++ 56.2% 15.5%++
Net Assets, End of Year (000s).... $167,281 $3,205 $124,560 $3,850
Ratios to Average Net Assets:
Expenses......................... 1.37% 1.50%+ 2.12% 2.25%+
Net investment loss.............. -0.52% -0.51%+ -1.23% -1.21%+
Portfolio Turnover Rate........... 142% 96% 142% 96%
Before applicable waiver of
management fee, expenses absorbed
by SBAM and credits earned on
custodian cash balances, net
investment loss per share and
expense ratios would have been:
Net investment loss per share
(2)............................. $(0.08) $(0.06) $(0.17) $(0.10)
Expense ratio.................... 1.40% 2.30%+ 2.15% 3.05%+
Small Cap Growth Fund
- ------------------------------------------------------------------------------
<CAPTION>
Class 2 Shares Class O Shares
------------------------------------
1999 1998(1)(4) 1999 1998(1)
------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of
Year............................. $ 11.56 $ 10.00 $ 11.60 $ 10.00
-------- ------- -------- -------
Income (Loss) From Operations:
Net investment loss (2).......... (0.17) (0.06) (0.06) (0.01)
Net realized and unrealized
gain............................ 6.57 1.62 6.67 1.61
-------- ------- -------- -------
Total Income From Operations...... 6.40 1.56 6.61 1.60
-------- ------- -------- -------
Less Distributions From:
Net investment income............ -- -- -- --
Net realized gains............... (0.92) -- (0.92) --
-------- ------- -------- -------
Total Distributions............... (0.92) -- (0.92) --
-------- ------- -------- -------
Net Asset Value, End of Year...... $ 17.04 $ 11.56 $ 17.29 $ 11.60
======== ======= ======== =======
Total Return (3).................. 56.3% 15.6%++ 57.9% 16.0%++
Net Assets, End of Year (000s).... $14,285 $1,471 $67 $67
Ratios to Average Net Assets:
Expenses......................... 2.14% 2.25%+ 1.24% 1.25%+
Net investment loss.............. -1.22% -1.35%+ -0.49% -0.18%+
Portfolio Turnover Rate........... 142% 96% 142% 96%
Before applicable waiver of
management fee, expenses absorbed
by SBAM and credits earned on
custodian cash balances, net
investment loss per share and
expense ratios would have been:
Net investment loss per share
(2)............................. $(0.17) $(0.10) $(0.06) $(0.05)
Expense ratio.................... 2.18% 3.05%+ 1.27% 2.05%+
</TABLE>
- ------
(1) For the period from July 1, 1998 (inception date) to December 31, 1998.
(2) Per share amounts have been calculated using the average shares method.
(3) Total return is calculated assuming a $1,000 investment of the first day of
each period reported, reinvestment of all dividends at the net asset value
on the ex-dividend date, and a sale at net asset value on the last day of
each period. Initial sales charge or contingent deferred sales charge is
not reflected in the calculation of total return.
(4) On September 14, 1998, Class C shares were renamed Class 2 shares.
++Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized.
92
<PAGE>
Financial Highlights
(continued)
For a share of each class of capital stock outstanding throughout the period
ended December 31:
Large Cap Growth Fund
<TABLE>
- ------------------------------------------------------------------------------
<CAPTION>
1999
-------------------------------------
Class A(1) Class B(1) Class 2(1) Class O(2)
-------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period........................... $10.00 $10.00 $10.00 $10.00
------ ------ ------ ------
Income (Loss) From Operations:
Net investment loss (3).......... (0.01) (0.02) (0.02) 0.00*
Net realized and unrealized
gain............................ 1.19 1.19 1.18 1.18
------ ------ ------ ------
Total Income From Operations...... 1.18 1.17 1.16 1.18
------ ------ ------ ------
Less Distributions From:
Net investment loss.............. -- -- -- --
Net realized gains............... -- -- -- --
------ ------ ------ ------
Total Distributions............... -- -- -- --
------ ------ ------ ------
Net Asset Value, End of Period.... $11.18 $11.17 $11.16 $11.18
====== ====== ====== ======
Total Returns (4)++............... 11.8% 11.7% 11.6% 11.8%
Net Assets, End of Period
(000's).......................... $2,070 $6,243 $1,234 $1,917
Ratios to Average Net Assets+:
Expenses......................... 1.44% 2.21% 2.19% 1.21%
Net investment loss.............. -0.37% -1.17% -1.14% -0.11%
Portfolio Turnover Rate........... 10% 10% 10% 10%
Before applicable waiver of
management fee and expenses
absorbed by SBAM net investment
income per share and expense
ratios would have been:
Net investment income per share
(3)............................. $(0.07) $(0.08) $(0.08) $(0.07)
Expense ratio+................... 4.02% 4.73% 4.71% 3.88%
</TABLE>
- ------
(1) For the period from October 25, 1999 (inception date) to December 31, 1999.
(2) For the period from October 26, 1999 (inception date) to December 31, 1999.
(3) Per share amounts have been calculated using the average shares method.
(4) Total return is calculated assuming a $1,000 investment of the first day of
each period reported, reinvestment of all dividends at the net asset value
on the ex-dividend date, and a sale at net asset value on the last day of
each period. Initial sales charge or contingent deferred sales charge is
not reflected in the calculation of total return.
* Amount represents less than $0.01 per share.
++Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized.
93
<PAGE>
Financial Highlights
(continued)
For a share of each class of capital stock outstanding throughout each year
ended December 31:
Capital Fund
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Class A Shares
================================
1999 1998 1997 1996(1)
<S> <C> <C> <C> <C>
================================
Net Asset Value, Beginning of Year......... $ 22.92 $ 21.15 $19.88 $21.98
------- ------- ------ ------
Income From Operations:
Net investment income..................... 0.15* 0.14 -- 0.01*
Net realized and unrealized gain.......... 4.99 4.64 5.10 1.54
------- ------- ------ ------
Total Income From Operations............... 5.14 4.78 5.10 1.55
------- ------- ------ ------
Less Distributions From:
Net investment income..................... (0.18) (0.18) -- (0.15)
Net realized gains........................ (2.59) (2.83) (3.83) (3.50)
------- ------- ------ ------
Total Distributions........................ (2.77) (3.01) (3.83) (3.65)
------- ------- ------ ------
Net Asset Value, End of Year............... $ 25.29 $ 22.92 $21.15 $19.88
======= ======= ====== ======
Total Return (2)........................... 23.1% 23.7% 26.4% 7.7%++
Net Assets, End of Year (000s)............. $29,814 $11,425 $5,589 $344
Ratios to Average Net Assets:
Expenses.................................. 1.27% 1.34% 1.46% 1.88%+
Net investment income (loss).............. 0.61% 0.81% -0.10% 0.18%+
Portfolio Turnover Rate.................... 126% 141% 159% 191%
</TABLE>
Capital Fund
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Class B Shares
----------------------------------
1999 1998 1997 1996(1)
=================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year........ $ 22.63 $ 21.01 $19.90 $21.98
------- ------- ------ ------
Income (Loss) From Operations:
Net investment income (loss)............. (0.04)* 0.09 (0.07) (0.02)*
Net realized and unrealized gain......... 4.92 4.45 5.01 1.56
------- ------- ------ ------
Total Income From Operations.............. 4.88 4.54 4.94 1.54
------- ------- ------ ------
Less Distributions From:
Net investment income.................... (0.06) (0.09) -- (0.12)
Net realized gains....................... (2.59) (2.83) (3.83) (3.50)
------- ------- ------ ------
Total Distributions....................... (2.65) (2.92) (3.83) (3.62)
------- ------- ------ ------
Net Asset Value, End of Year.............. $ 24.86 $ 22.63 $21.01 $19.90
======= ======= ====== ======
Total Return (2).......................... 22.2% 22.6% 25.6% 7.6%++
Net Assets, End of Year (000s)............ $79,678 $22,294 $3,820 $219
Ratios to Average Net Assets:
Expenses................................. 2.02% 2.09% 2.20% 2.73%+
Net investment income (loss)............. -0.16% 0.17% -0.94% -0.66%+
Portfolio Turnover Rate................... 126% 141% 159% 191%
</TABLE>
- ------
(1) For the period from November 1, 1996 (inception date) to December 31, 1996.
(2) Total return is calculated assuming a $1,000 investment of the first day of
each period reported, reinvestment of all dividends at the net asset value
on the ex-dividend date, and a sale at net asset value on the last day of
each period. Initial sales charge or contingent deferred sales charge is
not reflected in the calculation of total return.
* Per share amounts have been calculated using the average shares method.
++Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized.
94
<PAGE>
Financial Highlights
(continued)
For a share of each class of capital stock outstanding throughout each year
ended December 31:
Capital Fund
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Class 2 Shares
=================================
1999 1998(1) 1997 1996(2)
=================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year........ $22.69 $21.02 $19.91 $21.98
------- ------ ------ ------
Income (Loss) From Operations:
Net investment income (loss)............. (0.04)* 0.07 (0.06) (0.02)*
Net realized and unrealized gain......... 4.91 4.47 5.00 1.57
------- ------ ------ ------
Total Income From Operations.............. 4.87 4.54 4.94 1.55
------- ------ ------ ------
Less Distributions From:
Net investment income.................... (0.07) (0.04) (3.83) (0.12)
Net realized gains....................... (2.59) (2.83) -- (3.50)
------- ------ ------ ------
Total Distributions....................... (2.66) (2.87) (3.83) (3.62)
------- ------ ------ ------
Net Asset Value, End of Year.............. $24.90 $22.69 $21.02 $19.91
======= ====== ====== ======
Total Return (3).......................... 22.2% 22.6% 25.6% 7.7%++
Net Assets, End of Year (000s)............ $24,830 $6,369 $2,385 $130
Ratios to Average Net Assets:
Expenses................................. 2.02% 2.09% 2.21% 2.45%+
Net investment income (loss)............. -0.18% 0.09% -0.91% -0.50%+
Portfolio Turnover Rate................... 126% 141% 159% 191%
</TABLE>
Capital Fund
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Class O Shares
================================================
1999 1998 1997 1996 1995
================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Year.................... $22.99 $21.23 $19.88 $18.67 $15.62
-------- -------- -------- -------- --------
Income From Operations:
Net investment income...... 0.22* 0.21 0.05 0.13* 0.14
Net realized and unrealized
gain ..................... 5.00 4.62 5.13 5.70 5.27
-------- -------- -------- -------- --------
Total Income From
Operations................. 5.22 4.83 5.18 5.83 5.41
-------- -------- -------- -------- --------
Less Distributions From:
Net investment income...... (0.19) (0.24) -- (0.15) (0.14)
Net realized gains......... (2.59) (2.83) (3.83) (4.47) (2.22)
In excess of net realized
gains..................... -- -- -- -- --
-------- -------- -------- -------- --------
Total Distributions......... (2.78) (3.07) (3.83) (4.62) (2.36)
-------- -------- -------- -------- --------
Net Asset Value, End of
Year....................... $25.43 $22.99 $21.23 $19.88 $18.67
======== ======== ======== ======== ========
Total Return (3)............ 23.4% 23.8% 26.8% 33.3% 34.9%
Net Assets, End of Year
(000s)..................... $215,308 $194,973 $175,470 $135,943 $102,429
Ratios to Average Net
Assets:
Expenses................... 1.01% 1.08% 1.22% 1.38% 1.36%
Net investment income...... 0.91% 0.96% 0.26% 0.67% 0.74%
Portfolio Turnover Rate..... 126% 141% 159% 191% 217%
</TABLE>
- ------
(1) On September 14, 1998, Class C shares were renamed Class 2 shares.
(2) For the period from November 1, 1996 (inception date) to December 31, 1996.
(3) Total return is calculated assuming a $1,000 investment of the first day of
each period reported, reinvestment of all dividends at the net asset value
on the ex-dividend date, and a sale at net asset value on the last day of
each period. Initial sales charge or contingent deferred sales charge is
not reflected in the calculation of total return.
* Per share amounts have been calculated using the average shares method.
++Total return is not annualized, as it may not be represntative of the total
return for the year.
+ Annualized.
95
<PAGE>
Financial Highlights
(continued)
For a share of each class of capital stock outstanding throughout each year
ended December 31:
Investors Value Fund
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Class A Shares
==========================================
1999 1998 1997 1996 1995(1)
==========================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Year........................... $22.04 $21.11 $18.89 $16.62 $13.61
------- ------- ------- ------- ------
Income From Operations:
Net investment income (2)...... 0.21 0.19 0.16 0.19 0.19
Net realized and unrealized
gain.......................... 2.29 2.91 4.64 4.63 4.55
------- ------- ------- ------- ------
Total Income From Operations.... 2.50 3.10 4.80 4.82 4.74
------- ------- ------- ------- ------
Less Distributions From:
Net investment income.......... (0.13) (0.17) (0.21) (0.22) (0.23)
Net realized gains............. (3.71) (2.00) (2.37) (2.33) (1.50)
------- ------- ------- ------- ------
Total Distributions............. (3.84) (2.17) (2.58) (2.55) (1.73)
------- ------- ------- ------- ------
Net Asset Value, End of Year.... $20.70 $22.04 $21.11 $18.89 $16.62
======= ======= ======= ======= ======
Total Return (3)................ 11.5% 15.2% 26.2% 30.3% 35.3%++
Net Assets, End of Year (000s).. $32,817 $50,953 $57,105 $10,905 $441
Ratios to Average Net Assets:
Expenses....................... 0.87% 0.88% 0.95% 1.06% 0.94%+
Net investment income ......... 0.90% 0.87% 0.86% 0.94% 1.41%+
Portfolio Turnover Rate......... 66% 74% 62% 58% 86%
Investors Value Fund
- -------------------------------------------------------------------------------
<CAPTION>
Class B Shares
==========================================
1999 1998 1997 1996 1995(1)
==========================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Year........................... $21.87 $21.00 $18.86 $16.61 $13.61
------- ------- ------- ------- ------
Income From Operations:
Net investment income (2)...... 0.04 0.05 0.04 0.08 0.10
Net realized and unrealized
gain.......................... 2.26 2.85 4.58 4.60 4.54
------- ------- ------- ------- ------
Total Income From Operations.... 2.30 2.90 4.62 4.68 4.64
------- ------- ------- ------- ------
Less Distributions From:
Net investment income.......... (0.03) (0.03) (0.11) (0.10) (0.14)
Net realized gains............. (3.71) (2.00) (2.37) (2.33) (1.50)
------- ------- ------- ------- ------
Total Distributions............. (3.74) (2.03) (2.48) (2.43) (1.64)
------- ------- ------- ------- ------
Net Asset Value, End of Year.... $20.43 $21.87 $21.00 $18.86 $16.61
======= ======= ======= ======= ======
Total Return (3)................ 10.6% 14.3% 25.3% 29.2% 34.5%++
Net Assets, End of Year (000s).. $81,759 $75,189 $49,786 $9,433 $716
Ratios to Average Net Assets:
Expenses....................... 1.61% 1.63% 1.70% 1.82% 1.71%+
Net investment income ......... 0.16% 0.18% 0.12% 0.21% 0.63%+
Portfolio Turnover Rate......... 66% 74% 62% 58% 86%
</TABLE>
- ------
(1) For the period from January 3, 1995 (inception date) to December 31, 1995.
(2) Per share amounts have been calculated using the average shares method.
(3) Total return is calculated assuming a $1,000 investment of the first day of
each period reported, reinvestment of all dividends at the net asset value
on the ex-dividend date, and a sale at net asset value on the last day of
each period. Initial sales charge or contingent deferred sales charge is
not reflected in the calculation of total return.
++Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized.
96
<PAGE>
Financial Highlights
(continued)
For a share of each class of capital stock outstanding throughout each year
ended December 31:
Investors Value Fund
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
Class 2 Shares
------------------------------------------------
1999 1998(1) 1997 1996 1995(2)
<S> <C> <C> <C> <C> <C>
------------------------------------------------
Net Asset Value,
Beginning of Year...... $21.88 $21.01 $18.86 $16.61 $13.61
-------- -------- -------- -------- --------
Income From Operations:
Net investment income.. 0.03* 0.05 0.04 0.07 0.09
Net realized and
unrealized gain....... 2.30 2.84 4.59 4.60 4.55
-------- -------- -------- -------- --------
Total Income From
Operations............. 2.33 2.89 4.63 4.67 4.64
-------- -------- -------- -------- --------
Less Distributions From:
Net investment income.. (0.04) (0.02) (0.11) (0.09) (0.14)
Net realized gains..... (3.71) (2.00) (2.37) (2.33) (1.50)
-------- -------- -------- -------- --------
Total Distributions..... (3.75) (2.02) (2.48) (2.42) (1.64)
-------- -------- -------- -------- --------
Net Asset Value, End of
Year................... $20.46 $21.88 $21.01 $18.86 $16.61
======== ======== ======== ======== ========
Total Return (3)........ 10.7% 14.3% 25.2% 29.3% 34.5%++
Net Assets, End of Year
(000s)................. $17,883 $17,680 $11,701 $1,959 $306
Ratios to Average Net
Assets:
Expenses............... 1.61% 1.63% 1.70% 1.80% 1.68%+
Net investment income.. 0.15% 0.18% 0.13% 0.23% 0.66%+
Portfolio Turnover
Rate................... 66% 74% 62% 58% 86%
<CAPTION>
Class O Shares
------------------------------------------------
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
------------------------------------------------
Net Asset Value,
Beginning of Year...... $22.05 $21.13 $18.90 $16.61 $13.63
-------- -------- -------- -------- --------
Income From Operations:
Net investment income.. 0.26* 0.25 0.24 0.25 0.27
Net realized and
unrealized gain....... 2.31 2.90 4.60 4.62 4.48
-------- -------- -------- -------- --------
Total Income From
Operations............. 2.57 3.15 4.84 4.87 4.75
-------- -------- -------- -------- --------
Less Distributions From:
Net investment income.. (0.22) (0.23) (0.24) (0.25) (0.27)
Net realized gains..... (3.71) (2.00) (2.37) (2.33) (1.50)
-------- -------- -------- -------- --------
Total Distributions..... (3.93) (2.23) (2.61) (2.58) (1.77)
-------- -------- -------- -------- --------
Net Asset Value, End of
Year................... $20.69 $22.05 $21.13 $18.90 $16.61
======== ======== ======== ======== ========
Total Return (3)........ 11.7% 15.4% 26.5% 30.6% 35.4%
Net Assets, End of Year
(000s)................. $662,248 $650,916 $608,401 $518,361 $428,950
Ratios to Average Net
Assets:
Expenses............... 0.63% 0.63% 0.69% 0.76% 0.69%
Net investment income.. 1.16% 1.15% 1.15% 1.36% 1.67%
Portfolio Turnover
Rate................... 66% 74% 62% 58% 86%
</TABLE>
Investors Value Fund
- ------
(1) On September 14, 1998, Class C shares were renamed Class 2 shares.
(2) For the period from January 3, 1995 (inception date) to December 31, 1995.
(3) Total return is calculated assuming a $1,000 investment of the first day of
each period reported, reinvestment of all dividends at the net asset value
on the ex-dividend date, and a sale at net asset value on the last day of
each period. Initial sales charge or contingent deferred sales charge is
not reflected in the calculation of total return.
* Per share amounts have been calculated using the average shares method.
++Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized.
97
<PAGE>
Financial Highlights
(continued)
For a share of each class of capital stock outstanding throughout each year
ended December 31:
Balanced Fund
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Class A Shares
-------------------------------------------
1999 1998 1997 1996 1995(1)
-------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Year.......................... $13.11 $13.13 $11.82 $10.55 $10.00
------- -------- ------- ------- ------
Income (Loss) From Operations:
Net investment income (2)..... 0.50 0.56 0.55 0.54 0.15
Net realized and unrealized
gain (loss).................. (0.08) 0.26 1.65 1.35 0.52
------- -------- ------- ------- ------
Total Income From Operations... 0.42 0.82 2.20 1.89 0.67
------- -------- ------- ------- ------
Less Distributions From:
Net investment income......... (0.50) (0.55) (0.53) (0.52) (0.11)
Net realized gains............ (0.22) (0.29) (0.36) (0.10) (0.01)
------- -------- ------- ------- ------
Total Distributions............ (0.72) (0.84) (0.89) (0.62) (0.12)
------- -------- ------- ------- ------
Net Asset Value, End of Year... $12.81 $13.11 $13.13 $11.82 $10.55
======= ======== ======= ======= ======
Total Return (3)............... 3.2% 6.4% 19.1% 18.3% 6.7%++
Net Assets, End of Year
(000s)........................ $35,386 $51,443 $53,024 $21,109 $3,658
Ratios to Average Net Assets:
Expenses...................... 0.95% 0.85% 0.77% 0.75% 0.74%+
Net investment income......... 3.79% 4.17% 4.29% 4.81% 4.82%+
Portfolio Turnover Rate........ 34% 63% 70% 76% 16%
Before applicable waiver of
management fee, expenses
absorbed by SBAM and credits
earned on custodian cash
balances, net investment income
per share and expense ratios
would have been:
Net investment income per
share (2).................... $0.47 $0.51 $0.49 $0.44 $0.13
Expense ratio................. 1.17% 1.17% 1.24% 1.61% 1.45%+
<CAPTION>
Class B Shares
-------------------------------------------
1999 1998 1997 1996 1995(1)
-------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Year.......................... $13.08 $13.12 $11.82 $10.54 $10.00
------- -------- ------- ------- ------
Income (Loss) From Operations:
Net investment income (2)..... 0.40 0.45 0.45 0.45 0.13
Net realized and unrealized
gain (loss).................. (0.08) 0.26 1.65 1.35 0.51
------- -------- ------- ------- ------
Total Income From Operations... 0.32 0.71 2.10 1.80 0.64
------- -------- ------- ------- ------
Less Distributions From:
Net investment income......... (0.42) (0.46) (0.44) (0.42) (0.09)
Net realized gains............ (0.22) (0.29) (0.36) (0.10) (0.01)
------- -------- ------- ------- ------
Total Distributions............ (0.64) (0.75) (0.80) (0.52) (0.10)
------- -------- ------- ------- ------
Net Asset Value, End of Year... $12.76 $13.08 $13.12 $11.82 $10.54
======= ======== ======= ======= ======
Total Return (3)............... 2.4% 5.5% 18.2% 17.4% 6.4%++
Net Assets, End of Year
(000s)........................ $97,656 $120,816 $87,549 $28,043 $5,378
Ratios to Average Net Assets:
Expenses...................... 1.70% 1.60% 1.52% 1.50% 1.49%+
Net investment income......... 3.03% 3.41% 3.54% 4.06% 4.06%+
Portfolio Turnover Rate........ 34% 63% 70% 76% 16%
Before applicable waiver of
management fee, expenses
absorbed by SBAM and credits
earned on custodian cash
balances, net investment income
per share and expense ratios
would have been:
Net investment income per
share (2).................... $0.37 $0.41 $0.39 $0.36 $0.11
Expense ratio................. 1.92% 1.92% 1.99% 2.36% 2.19%+
</TABLE>
Balanced Fund
- ------
(1) For the period from September 11, 1995 (inception date) to December 31,
1995.
(2) Per share amounts have been calculated using the average shares method.
(3) Total return is calculated assuming a $1,000 investment of the first day of
each period reported, reinvestment of all dividends at the net asset value
on the ex-dividend date, and a sale at net asset value on the last day of
each period. Initial sales charge or contingent deferred sales charge is
not reflected in the calculation of total return.
++Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized.
98
<PAGE>
Financial Highlights
(continued)
For a share of each class of capital stock outstanding throughout each year
ended December 31:
Balanced Fund
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Class 2 Shares
-----------------------------------------
1999 1998(1) 1997 1996 1995(2)
-----------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Year............................ $13.11 $13.15 $11.85 $10.56 $10.00
------- ------- ------- ------ ------
Income (Loss) From Operations:
Net investment income (3)....... 0.41 0.45 0.45 0.46 0.14
Net realized and unrealized gain
(loss)......................... (0.09) 0.26 1.65 1.35 0.51
------- ------- ------- ------ ------
Total Income From Operations..... 0.32 0.71 2.10 1.81 0.65
------- ------- ------- ------ ------
Less Distributions From:
Net investment income........... (0.42) (0.46) (0.44) (0.42) (0.08)
Net realized gains.............. (0.22) (0.29) (0.36) (0.10) (0.01)
------- ------- ------- ------ ------
Total Distributions.............. (0.64) (0.75) (0.80) (0.52) (0.09)
------- ------- ------- ------ ------
Net Asset Value, End of Year..... $12.79 $13.11 $13.15 $11.85 $10.56
======= ======= ======= ====== ======
Total Return (4)................. 2.4% 5.5% 18.1% 17.5% 6.5%++
Net Assets, End of Year (000s)... $21,030 $29,458 $21,085 $3,445 $445
Ratios to Average Net Assets:
Expenses........................ 1.70% 1.60% 1.52% 1.50% 1.51%+
Net investment income........... 3.04% 3.41% 3.52% 4.07% 4.26%+
Portfolio Turnover Rate.......... 34% 63% 70% 76% 16%
Before applicable waiver of
management fee, expenses absorbed
by SBAM and credits earned on
custodian cash balances, net
investment income per share and
expense ratios would have been:
Net investment income per share
(3)............................ $0.38 $0.41 $0.39 $0.36 $0.11
Expense ratio................... 1.92% 1.92% 1.99% 2.36% 2.22%+
Balanced Fund
<CAPTION>
Class O Shares
-----------------------------------------
1999 1998 1997 1996 1995(2)
-----------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Year............................ $13.18 $13.20 $11.88 $10.57 $10.00
------- ------- ------- ------ ------
Income (Loss) From Operations:
Net investment income (3) ...... 0.54 0.59 0.59 0.57 0.17
Net realized and unrealized gain
(loss)......................... (0.09) 0.26 1.65 1.39 0.52
------- ------- ------- ------ ------
Total Income From Operations..... 0.45 0.85 2.24 1.96 0.69
------- ------- ------- ------ ------
Less Distributions From:
Net investment income........... (0.53) (0.58) (0.56) (0.55) (0.11)
Net realized gains.............. (0.22) (0.29) (0.36) (0.10) (0.01)
------- ------- ------- ------ ------
Total Distributions.............. (0.75) (0.87) (0.92) (0.65) (0.12)
------- ------- ------- ------ ------
Net Asset Value, End of Year..... $12.88 $13.18 $13.20 $11.88 $10.57
======= ======= ======= ====== ======
Total Return (4)................. 3.4% 6.6% 19.3% 19.0% 6.9%++
Net Assets, End of Year (000s)... $1,460 $1,523 $1,227 $213 $4,494
Ratios to Average Net Assets:
Expenses........................ 0.70% 0.60% 0.52% 0.50% 0.51%+
Net investment income........... 4.00% 4.41% 4.60% 5.13% 5.30%+
Portfolio Turnover Rate.......... 34% 63% 70% 76% 16%
Before applicable waiver of
management fee, expenses absorbed
by SBAM and credits earned on
custodian cash balances, net
investment income per share and
expense ratios would have been:
Net investment income per share
(3)............................ $0.51 $0.55 $0.53 $0.47 $0.15
Expense ratio................... 0.92% 0.92% 1.00% 1.36% 1.22%+
</TABLE>
- ------
(1) On September 14, 1998, Class C shares were renamed Class 2 shares.
(2) For the period from September 11, 1995 (inception date) to December 31,
1995.
(3) Per share amounts have been calculated using the average shares method.
(4) Total return is calculated assuming a $1,000 investment of the first day of
each period reported, reinvestment of all dividends at the net asset value
on the ex-dividend date, and a sale at net asset value on the last day of
each period. Initial sales charge or contingent deferred sales charge is
not reflected in the calculation of total return.
++Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized.
99
<PAGE>
Report of Independent Accountants
To the Board of Directors and Shareholders of
Salomon Brothers Asia Growth Fund
Salomon Brothers International Equity Fund
Salomon Brothers Small Cap Growth Fund
Salomon Brothers Large Cap Growth Fund
Salomon Brothers Capital Fund
Salomon Brothers Investors Value Fund
Salomon Brothers Balanced Fund
In our opinion, the accompanying statements of assets and liabilities, includ-
ing the schedules of investments, and the related statements of operations and
of changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of the Salomon Brothers Asia Growth
Fund, Salomon Brothers International Equity Fund, Salomon Brothers Small Cap
Growth Fund, Salomon Brothers Large Cap Growth Fund, Salomon Brothers Balanced
Fund (five of the portfolios constituting Salomon Brothers Series Funds Inc),
Salomon Brothers Investors Value Fund and Salomon Brothers Capital Fund (here-
after referred to as the "Funds") at December 31, 1999, the results of each of
their operations for the year then ended, the changes in each of their net as-
sets for each of the two years in the period then ended and the financial high-
lights for each of the periods indicated, in conformity with accounting princi-
ples generally accepted in the United States. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Funds' management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our au-
dits of these financial statements in accordance with auditing standards gener-
ally accepted in the United States which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by man-
agement, and evaluating the overall financial statement presentation. We be-
lieve that our audits, which included confirmation of securities at December
31, 1999 by correspondence with the custodian and brokers, provide a reasonable
basis for the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
February 22, 2000
100
<PAGE>
Tax Information
(unaudited)
For Federal tax purposes, each Fund hereby designates for the fiscal year ended
December 31, 1999:
. Percentages of ordinary dividends paid as qualifying for the corporate
dividends received deduction:
<TABLE>
<S> <C>
Small Cap Growth Fund...................................... 1.13%
Capital Fund............................................... 9.29
Investors Value Fund....................................... 27.98
Balanced Fund.............................................. 25.17
. Total long-term capital gain distributions paid:
Small Cap Growth Fund...................................... $ 10,241,853
Capital Fund............................................... 2,971,755
Investors Value Fund....................................... 114,084,635
Balanced Fund.............................................. 2,254,704
</TABLE>
A total of 5.92% of the ordinary dividends paid by the Balanced Fund from net
investment income are derived from Federal obligations and may be exempt from
taxation at the state level.
101
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<PAGE>
Salomon Brothers Investment Series
INVESTMENT MANAGER
Salomon Brothers Asset Management Inc
7 World Trade Center
New York, New York 10048
CUSTODIANS
PNC Bank, National Association
200 Stevens Drive Suite 440
Lester, Pennsylvania 19113
Chase Manhattan Bank, N.A.
4 Chase Metro Tech Center
18th Floor
Brooklyn, New York 11245
DIVIDEND DISBURSING AND TRANSFER AGENT
PFPC Global Fund Services
53 State Street
Boston, Massachusetts 02109-2873
LEGAL COUNSEL
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
Directors
CHARLES F. BARBER
Consultant; formerly Chairman; ASARCO Inc.
ANDREW L. BREECH*,***
President, Dealer Operating Control Service Inc.
CAROL L. COLMAN
Consultant, Colman Consulting
DANIEL P. CRONIN**
Vice President-General Counsel,
Pfizer International Inc.
WILLIAM R. DILL*,***
Consultant; formerly President, Boston Architectural
Center; formerly President, Anna Maria College
HEATH B. MCLENDON
Chairman and President, Managing Director,
Salomon Smith Barney Inc.; President and Director,
SSB Citi Fund Management LLC and Travelers
Investment Adviser, Inc.
CLIFFORD M. KIRTLAND, JR.*,***
Member of the Advisory Committee, Nero-Moseley
Partners; formerly Director, Oxford Industries, Inc., Shaw
Industries Inc., Graphic Industries, Inc. and CSX Corp.;
formerly Chairman, Cox Communications, Inc.
ROBERT W. LAWLESS*,***
President and Chief Executive Officer, University of
Tulsa; formerly President and Chief Executive Officer,
Texas Tech University and Tech University Health
Sciences Center
LOUIS P. MATTIS*,***
Consultant; formerly Chairman and President, Sterling
Winthrop Inc.
THOMAS F. SCHLAFLY*,***
Of counsel to Blackwell Sanders Peper Martin LLP (law
firm), President, The Saint Louis Brewery, Inc.
Officers
HEATH B. MCLENDON
Chairman and President
LEWIS E. DAIDONE
Executive Vice President and Treasurer
ROBERT E. AMODEO**
Executive Vice President
JAMES E. CRAIGE**
Executive Vice President
JOHN B. CUNNINGHAM*
Executive Vice President
THOMAS K. FLANAGAN**
Executive Vice President
ROGER LAVAN**
Executive Vice President
ROSS S. MARGOLIES***
Executive Vice President
MAUREEN O'CALLAGHAN**
Executive Vice President
DAVID J. SCOTT**
Executive Vice President
BETH A. SEMMEL**
Executive Vice President
PETER J. WILBY**
Executive Vice President
GEORGE J. WILLIAMSON**
Executive Vice President
THOMAS A. CROAK**
Vice President
ROBERT DONAHUE***
Vice President
NANCY A. NOYES**
Vice President
ANTHONY PACE
Controller
CHRISTINA T. SYDOR
Secretary
- --------------------------------------------------------------------------------
* Salomon Brothers Investors Value Fund Inc only
** Salomon Brothers Series Funds Inc only
*** Salomon Brothers Capital Fund Inc only
<PAGE>
[LOGO OF SALOMON BROTHERS ASSET MANAGEMENT]
SEVEN WORLD TRADE CENTER . NEW YORK, NEW YORK 10048
SBSEQANN 12/99
