<PAGE>
<PAGE>
<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 29, 1997
REGISTRATION NOS. 2-57073
811-2667
________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [x]
PRE-EFFECTIVE AMENDMENT NO. [ ]
POST-EFFECTIVE AMENDMENT NO. 26 [x]
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [x]
AMENDMENT NO. 25 [x]
------------------------
SALOMON BROTHERS CAPITAL FUND INC
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
------------------------
7 WORLD TRADE CENTER, NEW YORK, NEW YORK 10048
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (800) 725-6666
------------------------
LAWRENCE H. KAPLAN, ESQ.
SALOMON BROTHERS ASSET MANAGEMENT INC
7 WORLD TRADE CENTER, NEW YORK, NEW YORK 10048
(NAME AND ADDRESS OF AGENT FOR SERVICE)
COPY TO:
GARY S. SCHPERO, ESQ.
SIMPSON THACHER & BARTLETT
425 LEXINGTON AVENUE
NEW YORK, NEW YORK 10017
------------------------
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after
this Registration Statement becomes
effective.
It is proposed that this filing will become effective:
[x] immediately upon filing pursuant to Rule 485(b)
[ ] on (date) pursuant to paragraph(b)
[ ] 60 days after filing pursuant to Rule 485(a)(1)
[ ] on (date) pursuant to paragraph(a)(1)
[ ] 75 days after filing pursuant to Rule 485(a)(2)
[ ] on (date) pursuant to paragraph(a)(2) of Rule 485
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for
a previously filed post-effective amendment.
------------------------
THE REGISTRANT HAS PREVIOUSLY REGISTERED AN INDEFINITE NUMBER OF ITS SHARES
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, PURSUANT TO RULE 24f-2 UNDER THE
INVESTMENT COMPANY ACT OF 1940, AS AMENDED. THE REGISTRANT FILED ITS RULE 24f-2
NOTICE FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 ON FEBRUARY 27, 1997.
________________________________________________________________________________
<PAGE>
<PAGE>
SALOMON BROTHERS CAPITAL FUND INC
REGISTRATION STATEMENT ON FORM N-1A
CROSS REFERENCE SHEET PURSUANT TO
RULE 495(a) UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
PART A PROSPECTUS CAPTION
- ------------------------------------------------------------------- ------------------------------------------
<C> <S> <C>
Item 1. Cover Page............................................... Cover Page
Item 2. Synopsis................................................. Summary; Expense Information
Item 3. Condensed Financial Information.......................... Financial Highlights; Performance
Information
Item 4. General Description of Registrant........................ Summary; Investment Objectives and
Policies; Additional Investment
Activities and Risk Factors; Investment
Limitations; Capital Stock
Item 5. Management of the Fund................................... Summary; Expense Information; Management;
Purchase of Shares; Back Cover
Item 5A. Management's Discussion of Performance................... Not Applicable
Item 6. Capital Stock and Other Securities....................... Multiple Pricing System; Dividends and
Distributions; Taxation; Account
Services; Capital Stock
Item 7. Purchase of Securities Being Offering.................... Multiple Pricing System; Determination of
Net Asset Value; Purchase of Shares;
Dividends and Distributions; Shareholder
Services
Item 8. Redemption or Repurchase................................. Multiple Pricing System; Redemption of
Shares; Determination of Net Asset
Value; Shareholder Services
Item 9. Pending Legal Proceedings................................ Not Applicable
<CAPTION>
STATEMENT OF ADDITIONAL
PART B INFORMATION CAPTION
- ------------------------------------------------------------------- ------------------------------------------
<C> <S> <C>
Item 10. Cover Page............................................... Cover Page
Item 11. Table of Contents........................................ Table of Contents
Item 12. General Information and History.......................... Not Applicable
Item 13. Investment Objectives and Policies....................... Additional Information on Portfolio
Instruments and Investment Policies;
Investment Limitations
Item 14. Management of the Fund................................... Management
Item 15. Control Persons and Principal Holders of Securities...... Management; Capital Stock
Item 16. Investment Advisory and Other Services................... Management; Custodian and Transfer Agent;
Independent Accountants
Item 17. Brokerage Allocation and Other Practices................. Portfolio Transactions
Item 18. Capital Stock and Other Securities....................... Capital Stock
Item 19. Purchase, Redemption and Pricing of Securities Being
Offered................................................ Management; Net Asset Value; Additional
Purchase Information; Additional
Redemption Information
Item 20. Tax Status............................................... Additional Information Concerning Taxes
Item 21. Underwriters............................................. Management; Additional Purchase
Information
Item 22. Calculation of Performance Data.......................... Performance Data
Item 23. Financial Statements..................................... Financial Statements
PART C
Information required to be included in Part C is set forth under the appropriate Item, so numbered, in Part C
of this Registration Statement.
</TABLE>
<PAGE>
<PAGE>
- ------------------------------------------------------------------------------
Salomon Brothers
Investment Series
7 WORLD TRADE CENTER 'b' NEW YORK, NEW YORK 10048 'b' (800) SALOMON OR (800)
725-6666
SALOMON BROTHERS INVESTMENT SERIES CONSISTS OF SALOMON BROTHERS CASH MANAGEMENT
FUND (THE 'CASH MANAGEMENT FUND'), SALOMON BROTHERS NEW YORK MUNICIPAL MONEY
MARKET FUND (THE 'NEW YORK MUNICIPAL MONEY MARKET FUND'), SALOMON BROTHERS
NATIONAL INTERMEDIATE MUNICIPAL FUND (THE 'NATIONAL INTERMEDIATE MUNICIPAL
FUND'), SALOMON BROTHERS U.S. GOVERNMENT INCOME FUND (THE 'U.S. GOVERNMENT
INCOME FUND'), SALOMON BROTHERS HIGH YIELD BOND FUND (THE 'HIGH YIELD BOND
FUND'), SALOMON BROTHERS STRATEGIC BOND FUND (THE 'STRATEGIC BOND FUND'),
SALOMON BROTHERS TOTAL RETURN FUND (THE 'TOTAL RETURN FUND'), SALOMON BROTHERS
ASIA GROWTH FUND
continued on next page
------------------------------------------------------------------
THERE CAN BE NO ASSURANCE THAT ANY FUND WILL ACHIEVE ITS INVESTMENT OBJECTIVE(S)
AND EACH OF THE FUNDS MAY EMPLOY CERTAIN INVESTMENT PRACTICES WHICH INVOLVE
SPECIAL RISK CONSIDERATIONS. CERTAIN FUNDS MAY INVEST IN CERTAIN SECURITIES,
COMMONLY REFERRED TO AS JUNK BONDS, WHICH PRESENT A HIGH DEGREE OF RISK. SUCH
LOWER-QUALITY SECURITIES INVOLVE COMPARATIVELY GREATER RISKS, INCLUDING PRICE
VOLATILITY AND THE RISK OF DEFAULT IN THE TIMELY PAYMENT OF INTEREST AND
PRINCIPAL, THAN HIGHER-QUALITY SECURITIES. THE HIGH YIELD BOND FUND AND THE
STRATEGIC BOND FUND ARE NOT LIMITED IN THE PERCENTAGE OF THEIR ASSETS WHICH MAY
BE INVESTED IN SUCH SECURITIES. EACH OF THE TOTAL RETURN FUND, THE ASIA GROWTH
FUND, THE INVESTORS FUND AND THE CAPITAL FUND MAY INVEST UP TO 20%, 10%, 5% AND
5%, RESPECTIVELY, OF ITS TOTAL ASSETS IN NON-CONVERTIBLE SECURITIES OF THIS TYPE
AND MAY INVEST WITHOUT LIMIT IN CONVERTIBLE SECURITIES OF THIS TYPE. SEE
'ADDITIONAL INVESTMENT ACTIVITIES AND RISK FACTORS.' BECAUSE THE NEW YORK
MUNICIPAL MONEY MARKET FUND HAS THE ABILITY, LIKE MANY OTHER SINGLE-STATE
TAX-FREE MONEY MARKET FUNDS, TO INVEST A SIGNIFICANT PERCENTAGE OF ITS ASSETS IN
THE SECURITIES OF A SINGLE ISSUER, AN INVESTMENT IN THE FUND MAY BE RISKIER THAN
AN INVESTMENT IN OTHER TYPES OF MONEY MARKET FUNDS.
SHARES OF THE CASH MANAGEMENT FUND AND THE NEW YORK MUNICIPAL MONEY MARKET FUND
ARE NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT. THERE CAN BE NO
ASSURANCE THAT THE CASH MANAGEMENT FUND OR THE NEW YORK MUNICIPAL MONEY MARKET
FUND WILL MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
This Prospectus sets forth concisely the information a prospective investor
should know before investing in any of the Funds and should be read and retained
for future reference. A Statement of Additional Information dated April 29,
1997, containing additional information about each Fund (the 'Statement of
Additional Information') has been filed with the Securities and Exchange
Commission (the 'SEC') and is incorporated herein by reference. It is available
without charge and can be obtained by writing to the Funds at the address, or by
calling the toll-free telephone number, listed above.
------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
SALOMON BROTHERS ASSET MANAGEMENT INC -- INVESTMENT MANAGER
SALOMON BROTHERS INC -- DISTRIBUTOR
APRIL 29, 1997
PAGE 1
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<PAGE>
continued from previous page
(THE 'ASIA GROWTH FUND'), SALOMON BROTHERS INVESTORS FUND INC (THE 'INVESTORS
FUND') AND SALOMON BROTHERS CAPITAL FUND INC (THE 'CAPITAL FUND') (EACH A 'FUND'
AND COLLECTIVELY, THE 'FUNDS'). EACH OF THE FUNDS, EXCEPT FOR THE INVESTORS FUND
AND THE CAPITAL FUND, IS AN INVESTMENT PORTFOLIO OF SALOMON BROTHERS SERIES
FUNDS INC, AN OPEN-END MANAGEMENT INVESTMENT COMPANY ('SERIES FUNDS'). THE
INVESTORS FUND AND CAPITAL FUND ARE OPEN-END MANAGEMENT INVESTMENT COMPANIES.
EACH OF THE FUNDS HAS A SPECIFIC INVESTMENT OBJECTIVE.
PAGE 2
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<PAGE>
- ------------------------------------------------------------------------------
Table of Contents
Summary 4
Expense Information 9
Financial Highlights 14
Investment Objectives and Policies 30
Additional Investment Activities and Risk
Factors 58
Multiple Pricing System 77
Investment Limitations 81
Management 86
Determination of Net Asset Value 93
Purchase of Shares 94
Redemption of Shares 100
Performance Information 105
Dividends and Distributions 107
Taxation 109
Shareholder Services 114
Account Services 117
Capital Stock 117
Appendix A A-1
Appendix B B-1
PAGE 3
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Summary
THE FUNDS
Each of the Funds, except for the Investors Fund and the Capital Fund, is an
investment portfolio of the Series Funds, an open-end investment company
incorporated in Maryland on April 17, 1990. The Investors Fund is an open-end
management investment company incorporated in Maryland on April 2, 1958. The
Capital Fund is an open-end management investment company incorporated in
Maryland on August 23, 1976.
Each of the Funds, except New York Municipal Money Market Fund, Asia Growth
Fund and Capital Fund, is classified as a diversified Fund under the Investment
Company Act of 1940, as amended (the '1940 Act').
THE FUNDS' OBJECTIVES AND POLICIES
CASH MANAGEMENT FUND. The objective of the Cash Management Fund is to seek as
high a level of current income as is consistent with liquidity and the stability
of principal. The Fund seeks to maintain a stable net asset value of $1.00 per
share. The Fund will seek to attain its objective by investing in a broad range
of high-quality, short-term U.S. dollar-denominated money market instruments
which are deemed to mature in thirteen months or less, including the following:
(1) securities issued or guaranteed as to principal and interest by the U.S.
government or by agencies or instrumentalities thereof, (2) obligations issued
or guaranteed by U.S. banks with total assets of at least $1 billion (including
obligations of foreign branches of such banks) and by the 75 largest foreign
commercial banks in terms of total assets, (3) high quality commercial paper and
other high-quality short-term debt obligations, and (4) obligations of the
International Bank for Reconstruction and Development, other supranational
organizations and foreign governments and their agencies and instrumentalities.
The Cash Management Fund may also enter into repurchase agreements with respect
to the obligations identified above.
NEW YORK MUNICIPAL MONEY MARKET FUND. The objective of the New York Municipal
Money Market Fund is to seek as high a level of current income exempt from
federal, New York State and New York City personal income taxes as is
consistent with liquidity and the stability of principal. The Fund seeks to
achieve its objective by investing primarily in high-quality, short-term
municipal obligations issued by or on behalf of the State of New York or by its
instrumentalities or political subdivisions, the interest on which is exempt
from federal, New York State and New York City personal income taxes. The Fund
seeks to maintain a stable net asset value of $1.00 per share.
NATIONAL INTERMEDIATE MUNICIPAL FUND. The objective of the National
Intermediate Municipal Fund is to achieve a high level of current income which
is exempt from regular federal income taxes. The Fund seeks to achieve its
objective by investing primarily in a portfolio of municipal obligations. The
Fund will not invest in municipal obligations that are rated below investment
grade at the time of purchase.
U.S. GOVERNMENT INCOME FUND. The objective of the U.S. Government Income Fund
is to seek a high level of current income. The Fund seeks to achieve its
objective by investing in securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities. From time to time, a significant
portion of the
PAGE 4
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SALOMON BROTHERS INVESTMENT SERIES
Fund's assets may be invested in mortgage-backed securities.
HIGH YIELD BOND FUND. The objective of the High Yield Bond Fund is to maximize
current income. As a secondary objective, the Fund seeks capital appreciation.
The Fund seeks to achieve its objectives by investing primarily in a
diversified portfolio of high yield fixed-income securities rated in medium or
lower rating categories or determined by the investment manager to be of
comparable quality.
STRATEGIC BOND FUND. The primary objective of the Strategic Bond Fund is to
seek a high level of current income. As a secondary objective, the Fund will
seek capital appreciation. The Fund seeks to achieve its objectives by
investing in a globally diverse portfolio of fixed-income investments and by
giving the investment manager broad discretion to deploy the Fund's assets
among certain segments of the fixed-income market that the investment manager
believes will best contribute to achievement of the Fund's investment
objectives. In pursuing its investment objectives, the Strategic Bond Fund
reserves the right to invest predominantly in securities rated in medium or
lower rating categories or as determined by the investment manager to be of
comparable quality. Although the investment manager has the ability to invest
up to 100% of the Strategic Bond Fund's assets in lower-rated securities, the
investment manager does not anticipate investing in excess of 75% of the assets
in such securities.
TOTAL RETURN FUND. The Total Return Fund seeks to obtain above-average income
(compared to a portfolio entirely invested in equity securities). As a
secondary objective, the Fund seeks to take advantage of opportunities for
growth of capital and income. The Fund seeks to achieve its objectives
primarily through investments in a broad variety of securities, including
equity securities, fixed-income securities and short-term obligations.
ASIA GROWTH FUND. The Asia Growth Fund's objective is long-term capital
appreciation. The Fund seeks to achieve its objective by investing at least 65%
of its total assets in equity and equity-related securities of Asian Companies
(as defined under 'Investment Objectives and Policies').
INVESTORS FUND. The Investors Fund's primary objective is long-term growth of
capital. Current income is a secondary objective. The Fund seeks to achieve its
objectives primarily through investments in common stocks of well-known
companies.
CAPITAL FUND. The objective of the Capital Fund is to seek capital appreciation
through investments primarily in common stock, or securites convertible into
common stocks, which are believed to have above-average price appreciation
potential and which may also involve above-average risk. Current income is an
incidental consideration.
There can be no assurance that any Fund will achieve its investment
objective(s). See 'Investment Objectives and Policies.'
INVESTMENT MANAGER
Salomon Brothers Asset Management Inc ('SBAM'), an affiliate of Salomon
Brothers Inc ('Salomon Brothers'), is the Funds' investment manager. SBAM also
serves as investment manager to other investment companies and numerous
individuals and institutions. See 'Management.'
With respect to the Strategic Bond Fund, SBAM has entered into a subsidiary
consulting agreement with its affiliate, Salomon Brothers Asset Management
Limited ('SBAM Limited') pursuant to which SBAM Limited provides certain
PAGE 5
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SALOMON BROTHERS INVESTMENT SERIES
advisory services to SBAM relating to currency transactions and investments in
non-dollar denominated debt securities for the benefit of the Fund. Subject to
the supervision of SBAM, Salomon Brothers Asia Pacific Limited ('SBAM AP')
serves as sub-adviser to the Asia Growth Fund. SBAM Limited and SBAM AP are
compensated by SBAM at no additional cost to the Funds. For a discussion of
these arrangements, see 'Management.'
RISK FACTORS
Prospective investors should consider certain risks associated with an
investment in each Fund. Certain Funds may use various investment practices
that involve special considerations, including investing in high yield and/or
illiquid securities, foreign securities (including emerging markets
securities), warrants, municipal obligations, zero coupon securities, loan
participations and assignments, entering into repurchase and reverse repurchase
agreements, entering into securities transactions on a firm commitment or when
issued basis, lending portfolio securities and high portfolio turnover rates.
Certain Funds may engage in derivatives which involve special risks. Because
the New York Municipal Money Market Fund significantly invests in New York
municipal obligations, such Fund is more susceptible to factors adversely
affecting issuers of such obligations than a comparable municipal securities
fund that is not so concentrated. See 'Investment Objectives and Policies' and
'Additional Investment Activities and Risk Factors.'
PURCHASE OF SHARES
Shares of each Fund may be purchased at their next determined net asset value
plus, in the case of Class A shares, a front end sales charge, from a selected
dealer or as otherwise set forth under 'Purchase of Shares.' The minimum initial
investment in any class of shares in any Fund is $500 and the minimum
subsequent investment is $50. However, for Individual Retirement Accounts
('IRAs') and Self-Employed Retirement Plans (formerly, Keogh Plans), the
minimum initial investment in any class of shares of any Fund is $50. In
addition, an account can be established with a minimum of $50 if the account
will be receiving periodic, regular investments through programs such as
Automatic Investment Plan, Automatic Dividend Diversification and Systematic
Investing. See 'Purchase of Shares' and 'Shareholder Services.'
REDEMPTION OF SHARES
Each Fund redeems shares at the applicable next determined net asset value,
less the applicable contingent deferred sales charge ('CDSC'), if any. The
value of shares at the time of redemption may be more or less than the
shareholder's cost. See 'Redemption of Shares.'
CLASSES OF SHARES
Each Fund offers three classes of shares ('Class A' shares, 'Class B' shares and
'Class C' shares) to the general public, with each class having different sales
charge structures and expense levels (the 'Multiple Pricing System'). In
addition, each Fund has Class O shares which are offered only to existing Class
O shareholders. Each class has distinct advantages and disadvantages for
different investors, and investors may choose the class that best suits their
circumstances and objectives. See 'Multiple Pricing System.'
CLASS A SHARES. Class A shares are offered for sale at net asset value per
share plus a front end sales charge of up to 4.75% (with the exception of Class
A shares of the Cash Management Fund and
PAGE 6
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SALOMON BROTHERS INVESTMENT SERIES
the New York Municipal Money Market Fund, which are offered without such a
charge). In addition, Class A shares are subject to an ongoing Rule 12b-1
service fee at an annual rate of .25% of their respective average daily net
assets (with the exception of Class A shares of the Cash Management Fund and
the New York Municipal Money Market Fund, which bear no such fees). Certain
purchases of Class A shares qualify for a waived or reduced front end sales
charge. Certain Class A shares for which the front end sales charge is waived
may be subject to a CDSC of 1% within one year after the date of purchase. See
'Purchase of Shares -- Class A Shares' and 'Redemption of Shares -- Class A
Share Purchases of $1 Million or More.'
CLASS B SHARES. Class B shares are offered for sale for purchases of less than
$250,000. Class B shares are sold at net asset value without a front end sales
charge but are subject to a CDSC of 5% of the dollar amount subject thereto
during the first and second year after purchase, and declining each year
thereafter to 0% after the sixth year (with the exception of Class B shares of
the Cash Management Fund and the New York Municipal Money Market Fund, which
are not subject to any CDSC upon redemption). The applicable percentage is
assessed on an amount equal to the lesser of the original purchase price or the
redemption price of the shares redeemed. Class B shares are also subject to an
ongoing Rule 12b-1 distribution fee at an annual rate of .75% of their
respective average daily net assets and an ongoing Rule 12b-1 service fee at an
annual rate of .25% of their respective average daily net assets (with the
exception of Class B shares of the Cash Management Fund and the New York
Municipal Money Market Fund, which bear no such fees). Class B shares (except
for shares of the Cash Management Fund and the New York Municipal Money Market
Fund) will automatically convert, based upon relative net asset value, to Class
A shares of the same Fund six years after purchase. Upon conversion, these
shares will no longer be subject to an annual distribution fee.
CLASS C SHARES. Class C shares are offered for sale for purchases of less than
$1,000,000, are offered at net asset value without a front end sales charge and
are subject to a CDSC of 1% of the dollar amount subject thereto on redemptions
made within one year of purchase (with the exception of Class C shares of the
Cash Management Fund and the New York Municipal Money Market Fund, which are
not subject to any CDSC upon redemption). The CDSC is assessed on an amount
equal to the lesser of the original purchase price or the redemption price of
the shares redeemed. Class C shares are subject to an ongoing Rule 12b-1
distribution fee at an annual rate of .75% of their respective average daily
net assets and an ongoing Rule 12b-1 service fee at an annual rate of .25% of
their respective average daily net assets (with the exception of Class C shares
of the Cash Management Fund and the New York Municipal Money Market Fund, which
bear no such fees). Class C shares (except for shares of the Cash Management
Fund and the New York Municipal Money Market Fund) will automatically convert,
based upon relative net asset value, to Class A shares of the same Fund ten
years after purchase. Upon conversion, these shares will no longer be subject
to an annual distribution fee.
CLASS O SHARES. Each Fund also offers Class O shares. However, only Class O
shareholders are permitted to purchase additional Class O shares. Class O shares
are not subject to any sales charges or Rule 12b-1 fees.
For a discussion of factors to consider in selecting the most beneficial class
of shares for a particular investor, see 'Multiple Pricing System -- Factors for
Consideration.'
PAGE 7
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<PAGE>
SALOMON BROTHERS INVESTMENT SERIES
DIVIDENDS AND DISTRIBUTIONS
Substantially all of the net investment income of the Cash Management Fund, the
New York Municipal Money Market Fund, the National Intermediate Municipal Fund,
the U.S. Government Income Fund, the High Yield Bond Fund, the Strategic Bond
Fund and the Total Return Fund will be declared as a daily dividend, and
shareholders will receive such dividends monthly. The Asia Growth Fund will
declare dividends from net investment income annually and pay them annually.
The Investors Fund will pay dividends from net investment income quarterly. The
Capital Fund will pay dividends from net investment income annually. Each Fund
will pay net realized long-term capital gains annually. It is anticipated that
the expenses incurred by each class of each Fund (other than the Cash
Management Fund and the New York Municipal Money Market Fund) will differ and,
accordingly, the dividends distributed by each such class will differ. See
'Dividends and Distributions.' Dividends and distributions are reinvested in
additional shares of the same class of a Fund unless a shareholder requests
otherwise. Shares acquired by dividend and distribution reinvestments will not
be subject to any sales charge or CDSC. Class B and Class C shares acquired
through dividend and distribution reinvestments will become eligible for
conversion to Class A shares on a pro rata basis. A portion of the dividends of
the New York Municipal Money Market Fund and the National Intermediate Municipal
Fund may be subject to the federal alternative minimum tax. See 'Multiple
Pricing System,' 'Dividends and Distributions' and 'Taxation.'
PAGE 8
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Expense Information
Each Fund offers multiple classes of shares. Each share of a Fund accrues
income in the same manner, but certain expenses differ based upon the class.
The following tables are intended to assist investors in understanding the
various costs and expenses borne by each class of shares of each Fund:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS O(d)
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES*
Maximum Sales Charge Imposed on
Purchases of Shares (as a percentage of
offering price)
All Funds except Cash Management Fund
and New York Municipal Money Market
Fund 4.75%(a) None None None
Cash Management Fund None None None None
New York Municipal Money Market Fund None None None None
Sales Charge Imposed on Reinvested
Dividends
All Funds None None None None
Contingent Deferred Sales Charge
(as a percentage of original purchase
price
or redemption price, whichever is lower)
All Funds except Cash Management Fund
and New York Municipal Money Market
Fund 1% during the 5% first year, 1% during None
first year for 5% second year, the first
purchases of 4% third year, year(c)
$1 million or 3% fourth year,
more(b) 2% fifth year,
1% sixth year, and
0% after sixth year(c)
Cash Management Fund None None None None
New York Municipal Money Market Fund None None None None
Redemption Fees
All Funds None None None None
Exchange Fee
All Funds None None None None
</TABLE>
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(a) Reduced for purchases of $50,000 and over, decreasing to 0% for purchases
of $1,000,000 and over. See 'Purchase of Shares -- Class A Shares.'
(b) See 'Purchase of Shares -- Class A Shares' and 'Redemption of
Shares -- Class A Shares.'
(c) See 'Purchase of Shares -- Class B Shares' and ' -- Class C Shares' and
'Redemption of Shares -- Class B Shares' and ' -- Class C Shares.'
(d) Only Class O shareholders are permitted to purchase additional Class O
shares.
* Under certain circumstances, certain broker/dealers may impose additional
transaction fees on the purchase and/or sale of shares. See 'Purchase of
Shares.'
PAGE 9
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SALOMON BROTHERS INVESTMENT SERIES
ANNUAL FUND OPERATING EXPENSES:
Information in the table below is given as a percentage of average daily net
assets after fee waivers and expense reimbursements in certain cases, as
indicated.
<TABLE>
<CAPTION>
FUND CLASS A CLASS B CLASS C CLASS O
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CASH MANAGEMENT
Management fees`D' .20% .20% .20% .20%
Rule 12b-1 fees -- -- -- --
Other expenses (after reimbursement)*`D' .35% .35% .35% .35%
--- --- --- ---
Total fund operating expenses (after reimbursement)`D' .55% .55% .55% .55%
NEW YORK MUNICIPAL MONEY MARKET
Management Fees`D' .20% .20% .20% .20%
Rule 12b-1 fees -- -- -- --
Other expenses*`D' .18% .20% .20% .33%
--- --- --- ---
Total fund operating expenses (after reimbursement)`D'`D' .38% .40% .40% .53%
NATIONAL INTERMEDIATE MUNICIPAL
Management fees`D' .50% .50% .50% .50%
Rule 12b-1 fees** .25% 1.00% 1.00% --
Other expenses (after reimbursement)*`D' -- -- -- --
--- --- --- ---
Total fund operating expenses (after reimbursement)`D' .75% 1.50% 1.50% .50%
U.S. GOVERNMENT INCOME
Management fees`D' .60% .60% .60% .60%
Rule 12b-1 fees** .25% 1.00% 1.00% --
Other expenses (after reimbursement)*`D' -- -- -- --
--- --- --- ---
Total fund operating expenses (after reimbursement)`D' .85% 1.60% 1.60% .60%
HIGH YIELD BOND
Management fees`D' .75% .75% .75% .75%
Rule 12b-1 fees** .25% 1.00% 1.00% --
Other expenses*`D' .24% .24% .24% .24%
--- --- --- ---
Total fund operating expenses (after reimbursement)`D' 1.24% 1.99% 1.99% .99%
STRATEGIC BOND
Management fees`D' .75% .75% .75% .75%
Rule 12b-1 fees** .25% 1.00% 1.00% --
Other expenses*`D' .24% .23% .23% .25%
--- --- --- ---
Total fund operating expenses (after reimbursement)`D' 1.24% 1.98% 1.98% 1.00%
TOTAL RETURN
Management fees`D'`D' .55% .55% .55% .55%
Rule 12b-1 fees** .25% 1.00% 1.00% --
Other expenses (after reimbursement)*`D'`D' .20% .20% .20% .20%
--- --- --- ---
Total fund operating expenses (after reimbursement)`D'`D' 1.00% 1.75% 1.75% .75%
ASIA GROWTH
Management fees `D' .80% .80% .80% .80%
Rule 12b-1 fees** .25% 1.00% 1.00% --
Other expenses (after reimbursement)*`D' .19% .19% .20% .19%
--- --- --- ---
Total fund operating expenses (after reimbursement)`D' 1.24% 1.99% 2.00% .99%
INVESTORS
Management fees*** .67% .67% .67% .67%
Rule 12b-1 fees** .25% 1.00% 1.00% --
Other expenses* .29% .30% .28% .24%
--- --- --- ---
Total fund operating expenses 1.21% 1.97% 1.95% .91%
CAPITAL
Management Fees .96% .96% .96% .96%
Rule 12b-1 fees** .25% 1.00% 1.00% --
Other expenses* .67% .77% .49% .42%
--- --- --- ---
Total fund operating expenses 1.88% 2.73% 2.45% 1.38%
</TABLE>
PAGE 10
<PAGE>
<PAGE>
SALOMON BROTHERS INVESTMENT SERIES
<TABLE>
<S> <C>
`D' Restated to reflect the voluntary agreement by SBAM to impose an expense cap for the fiscal
year ending December 31, 1997 on each Fund's total fund operating expenses (exclusive of taxes,
interest and extraordinary expenses such as litigation and indemnification expenses) at the
amounts shown for each Fund in the table above through reimbursement of expenses. For the
fiscal year ended December 31, 1996, SBAM waived all management fees payable by each such Fund,
except for the High Yield Bond Fund and the Strategic Bond Fund, with respect to which SBAM
earned .50% and .01%, respectively, for each Class of shares. Without such waiver, the ratio of
management fees to average daily net assets would have been at the amounts set forth in the
above for each such Fund. For the fiscal year ended December 31, 1996, the ratio of other
expenses to average daily net assets reflects the reimbursement of certain expenses, except
with respect to the High Yield Bond Fund and Strategic Bond Fund and was (i) .55% for each
Class of the Cash Management Fund, (ii) .18%, .20%, .20% and .33% for Class A, Class B, Class C
and Class O of the New York Municipal Money Market Fund, (iii) .50% for each Class of the
National Intermediate Municipal Fund, (iv) .59%, .59%, .60% and .60% for Class A, Class B,
Class C and Class O of the U.S. Government Income Fund, (v) .49% for each Class of the High
Yield Bond Fund, (vi) .98%, .97%, .97% and .99% for Class A, Class B, Class C and Class O of
the Strategic Bond Fund and (vii) .99%, .99%, 1.00% and .99% for Class A, Class B, Class C and
Class O of the Asia Growth Fund. Without such reimbursements, the ratio of other expenses to
average daily net assets would have been (i) .62% for each Class of the Cash Management Fund,
(ii) .19%, .21%, .21% and .33% for Class A, Class B, Class C and Class O of the New York
Municipal Money Market Fund, (iii) 1.27% for each Class of the National Intermediate Municipal
Fund, (iv) 1.36%, 1.36%, 1.37% and 1.37% for Class A, Class B, Class C and Class O of the U.S.
Government Income Fund and (v) 4.45%, 4.45%, 4.46% and 4.45% for Class A, Class B, Class C and
Class O of the Asia Growth Fund. For the fiscal year ended December 31, 1996, the ratio of
total fund operating expenses to average daily net assets reflects the waiver of management
fees and, except for the High Yield Bond Fund and Strategic Bond Fund, reimbursement of certain
expenses and was at the amounts shown in the table above. Without such waivers and
reimbursements, the ratio of total fund operating expenses to average daily net assets was (i)
.82% for each Class of the Cash Management Fund, (ii) .39%, .41%, .41% and .53% for Class A,
Class B, Class C and Class O of the New York Municipal Money Market Fund, (iii) 2.02%, 2.77%,
2.77% and 1.77% for Class A, Class B, Class C and Class O of the National Intermediate
Municipal Fund, (iv) 2.21%, 2.96%, 2.97% and 1.97% for Class A, Class B, Class C and Class O of
the U.S. Government Income Fund, (v) 1.50%, 2.24%, 2.24% and 1.24% for Class A, Class B, Class
C and Class O of the High Yield Bond, (vi) 1.98%, 2.73%, 2.72% and 1.74% for Class A, Class B,
Class C and Class O of Strategic Bond Fund and (vii) 5.50%, 6.25%, 6.26% and 5.25% for Class A,
Class B, Class C and Class O of the Asia Growth Fund.
* 'Other expenses' include fees for shareholder services, administrative fees, custodial fees,
legal and accounting fees, printing costs and registration fees.
** Upon conversion to Class A shares, Class B and Class C shares will no longer be subject to a
distribution fee. Salomon Brothers receives an annual Rule 12b-1 service fee of .25% of the
value of average daily net assets of Class A shares, and receives an annual Rule 12b-1 fee of
1.00% of the value of average daily net assets of Class B and Class C shares, consisting of a
.75% distribution fee and a .25% service fee. See 'Multiple Pricing System -- Conversion
Feature.'
`D'`D' Restated to reflect the voluntary agreement by SBAM to impose an expense cap for the fiscal
year ending December 31, 1997 on the Fund's total fund operating expenses (exclusive of taxes,
interest and extraordinary expenses such as litigation and indemnification expenses) at the
amounts shown in the table above through reimbursement of expenses. The amounts shown are
estimates and SBAM may impose an expense cap that yields lower total fund operating expenses
for the Fund than shown in the table, although there can be no assurance to that effect. For
the year ended December 31, 1996, SBAM waived all management fees payable by the Fund, which
would have been at the amount shown in the above. The ratio of other expenses to the average
daily net assets of each Class of the Fund's shares reflects the reimbursement of certain
expenses and was .50% for each Class (.81% without such reimbursement). The ratio of total fund
operating expenses to the average daily net assets of each Class of the Fund's shares reflects
the waiver of the management fee and the reimbursement of certain expenses and was .75% for
Class A, 1.50% for Class B, 1.50% for Class C and .50% for Class O (1.61%, 2.36%, 2.36% and
1.36% without such waiver and reimbursement).
*** Restated to reflect an increase in the base fee component of the management fee of .15% at each
breakpoint level, effective upon stockholder approval at a special meeting of shareholders held
on April 29, 1997. Without such increase, the management fee would have been .52% for each
Class. The Investors Fund pays a performance-based management fee. Management fees included in
the table above reflect the performance of the Fund through the year ended December 31, 1996.
See 'Management.'
</TABLE>
PAGE 11
<PAGE>
<PAGE>
SALOMON BROTHERS INVESTMENT SERIES
The fees and expenses listed under the caption 'Annual Fund Operating Expenses'
are described in this Prospectus under the captions 'Management' and 'Purchase
of Shares -- Distributor.'
For additional information with respect to the expenses identified in the table
above, see 'Management' in the Statement of Additional Information.
EXAMPLE:
The following table demonstrates the projected dollar amount of total cumulative
expenses that would be incurred over various periods with respect to a
hypothetical investment in each class of each Fund. The example assumes payment
by each Fund of operating expenses at the levels set forth in the preceding
table and are also based upon the following assumptions:
An investor would pay the following expenses on a $1,000 investment, assuming:
(1) 5% annual return; and (2) redemption at the end of each time period, with
the exception of the lines marked 'Class B No redemption,' in which case it is
assumed that no redemption is made at the end of each time period:
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CASH MANAGEMENT
Class A Shares $ 6 $ 18 $ 31 $ 69
Class B Shares $ 6 $ 18 $ 31 $ 69
Class C Shares $ 6 $ 18 $ 31 $ 69
Class O Shares $ 6 $ 18 $ 31 $ 69
NEW YORK MUNICIPAL MONEY MARKET
Class A Shares $ 4 $ 12 $ 21 $ 48
Class B Shares $ 4 $ 13 $ 22 $ 51
Class C Shares $ 4 $ 13 $ 22 $ 51
Class O Shares $ 5 $ 17 $ 30 $ 66
NATIONAL INTERMEDIATE MUNICIPAL
Class A Shares* $ 55 $ 70 $ 87 $136
Class B Shares** $ 65 $ 87 $ 102 $140***
Class B No redemption $ 15 $ 47 $ 82 $140***
Class C Shares** $ 25 $ 47 $ 82 $179
Class O Shares $ 5 $ 16 $ 28 $ 63
U.S. GOVERNMENT INCOME
Class A Shares* $ 56 $ 73 $ 92 $148
Class B Shares** $ 66 $ 90 $ 107 $161***
Class B No redemption $ 16 $ 50 $ 87 $151***
Class C Shares** $ 26 $ 50 $ 87 $190
Class O Shares $ 6 $ 19 $ 33 $ 75
HIGH YIELD BOND
Class A Shares* $ 60 $ 85 $ 112 $190
Class B Shares** $ 70 $ 102 $ 127 $195***
Class B No redemption $ 20 $ 62 $ 107 $195***
Class C Shares** $ 30 $ 62 $ 107 $232
Class O Shares $ 10 $ 32 $ 55 $121
</TABLE>
PAGE 12
<PAGE>
<PAGE>
SALOMON BROTHERS INVESTMENT SERIES
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
STRATEGIC BOND
Class A Shares* $ 59 $ 85 $ 112 $191
Class B Shares** $ 70 $ 102 $ 127 $194***
Class B No redemption $ 20 $ 62 $ 107 $194***
Class C Shares** $ 30 $ 62 $ 107 $231
Class O Shares $ 10 $ 32 $ 55 $122
TOTAL RETURN
Class A Shares* $ 57 $ 78 $ 100 $164
Class B Shares** $ 68 $ 95 $ 115 $168***
Class B No redemption $ 18 $ 55 $ 95 $168***
Class C Shares** $ 28 $ 55 $ 95 $206
Class O Shares $ 8 $ 24 $ 42 $ 93
ASIA GROWTH
Class A Shares* $ 60 $ 85 $ 112 $191
Class B Shares** $ 70 $ 102 $ 127 $195***
Class B No redemption $ 20 $ 62 $ 107 $195***
Class C Shares** $ 30 $ 63 $ 108 $233
Class O Shares $ 10 $ 32 $ 55 $121
INVESTORS
Class A Shares* $ 59 $ 84 $ 111 $187
Class B Shares** $ 70 $ 102 $ 126 $192***
Class B No redemption $ 20 $ 62 $ 106 $192***
Class C Shares** $ 30 $ 61 $ 105 $227
Class O Shares $ 9 $ 29 $ 50 $112
CAPITAL FUND
Class A Shares* $ 66 $ 104 $ 144 $257
Class B Shares** $ 78 $ 125 $ 164 $267***
Class B No redemption $ 28 $ 85 $ 144 $267***
Class C Shares** $ 35 $ 76 $ 131 $279
Class O Shares $ 14 $ 44 $ 76 $166
</TABLE>
* Assumes deduction at the time of purchase of the maximum 4.75% sales
charge.
** Assumes deduction at the time of redemption of the maximum CDSC applicable
for that time period.
*** Reflects the conversion to Class A shares six years after purchase, and
therefore years seven through ten reflect Class A expenses.
THIS EXAMPLE SHOULD NOT BE CONSIDERED AS REPRESENTATIVE OF PAST OR FUTURE
EXPENSES AND ACTUAL EXPENSES FOR ANY OF THE FUNDS MAY BE HIGHER OR LOWER THAN
THE AMOUNTS SHOWN. Moreover, while the example assumes a 5% annual return, each
Fund's performance will vary and may result in a return greater or less than 5%.
The information in the foregoing summary is qualified in its entirety by the
more detailed information appearing elsewhere
in this Prospectus and in the Statement of
Additional Information.
PAGE 13
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
The following data per share of capital stock outstanding throughout each
period and ratios should be read in conjunction with the financial statements
of the applicable Fund contained in the Statement of Additional Information.
The financial statements and financial highlights of the National Intermediate
Fund, the U.S. Government Income Fund, the High Yield Bond Fund, the Strategic
Bond Fund, the Total Return Fund and the Asia Growth Fund for the periods
indicated and the financial statements and financial highlights of the Cash
Management Fund, the New York Municipal Money Market Fund, the Investors Fund
and the Capital Fund for each of the five years in the period ended December
31, 1996, have been audited by Price Waterhouse LLP, whose unqualified report
thereon is included in the Statement of Additional Information. As of the close
of business on December 31, 1994, all existing shares of the Cash Management
Fund and the Investors Fund were reclassified as Class O shares. As of the
close of business on October 31, 1996, all existing shares of the New York
Municipal Money Market Fund and the Capital Fund were reclassified as Class O
shares.
PAGE 14
<PAGE>
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
PAGE 15
<PAGE>
<PAGE>
SALOMON BROTHERS INVESTMENT SERIES
CASH MANAGEMENT FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
-------------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------------------
1996 1995 1996 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $ 1.000 $ 1.000 $ 1.000 $ 1.000
------- ------- ------- -------
Net investment income 0.050 0.044 0.050 0.043
Dividends from net investment income (0.050) (0.044) (0.050) (0.043)
------- ------- ------- -------
Net asset value, end of period $ 1.000 $ 1.000 $ 1.000 $ 1.000
------- ------- ------- -------
------- ------- ------- -------
Net assets, end of period (thousands) $8,175 $1,756 $3,920 $2,238
Total return* +5.1 % +4.5% +5.1% +4.4%
Ratios to average net assets:
Expenses 0.55% 0.55% 0.55% 0.55%
Net investment income 4.95% 5.42% 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 $ 0.047 $ 0.037 $ 0.047 $ 0.037
Expense ratio 0.82% 1.35% 0.82% 1.34%
</TABLE>
------------------------------------------------------------------
<TABLE>
<S> <C>
(a) October 2, 1990, commencement of operations, through December 31, 1990.
* 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 reported. Initial sales charge or contingent deferred sales
charge is not reflected in the calculation of total return. Total return calculated for a period of
less than one year is not annualized.
** Annualized.
</TABLE>
PAGE 16
<PAGE>
<PAGE>
SALOMON BROTHERS INVESTMENT SERIES
<TABLE>
<CAPTION>
CLASS C CLASS O
- -----------------------------------------------------------------------------------------------------------------------------
PERIOD
YEAR ENDED DECEMBER 31, ENDED
- ------------------------------------------------------------------------------------------------------------ DECEMBER 31,
1996 1995 1996 1995 1994 1993 1992 1991 1990(a)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
-------- -------- -------- -------- -------- -------- -------- -------- --------
0.050 0.043 0.050 0.055 0.038 0.027 0.033 0.055 0.019
(0.050) (0.043) (0.050) (0.055) (0.038) (0.027) (0.033) (0.055) (0.019)
-------- -------- -------- -------- -------- -------- -------- -------- --------
$ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
-------- -------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- -------- --------
$435 $183 $ 14,225 $ 6,684 $ 19,127 $ 15,049 $ 11,613 $ 22,982 $ 10,293
+5.1 % +4.4 % +5.1 % +5.6 % +3.9 % +2.7 % +3.4 % +5.7 % +1.9 %
0.55% 0.55% 0.55% 0.55% 0.61% 0.65% 0.65% 0.65% 0.65 %**
4.95% 5.40% 4.95% 5.46% 3.79% 2.68% 3.41% 5.43% 7.46 %**
$ 0.047 $ 0.036 $ 0.047 $ 0.047 $ 0.036 $ 0.025 $ 0.030 $ 0.053 $ 0.018
0.82% 1.34% 0.82% 1.34% 0.81% 0.85% 0.85% 0.85% 0.97 %**
</TABLE>
PAGE 17
<PAGE>
<PAGE>
SALOMON BROTHERS INVESTMENT SERIES
NEW YORK MUNICIPAL MONEY MARKET FUND
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
---------------------------------
PERIOD ENDED DECEMBER 31, 1996(a)
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period $ 1.000 $ 1.000 $ 1.000
------- ------- -------
Net investment income 0.006 0.006 0.006
Dividends from net investment income (0.006) (0.006) (0.006)
------- ------- -------
Net asset value, end of period $ 1.000 $ 1.000 $ 1.000
------- ------- -------
------- ------- -------
Net assets end of period (thousands) $360 $25 $25
Total return* +0.6% +0.6% +0.6%
Ratios to average net assets:
Expenses 0.38%** 0.40%** 0.40%**
Net investment income 3.56%** 3.40%** 3.40%**
Before applicable waiver of management
fee 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 $ 0.006 $ 0.006
Expense ratio 0.39%** 0.41%** 0.41%**
</TABLE>
------------------------------------------------------------------
<TABLE>
<S> <C>
(a) November 1, 1996, commencement of investment operations, through December 31, 1996.
(b) October 2, 1990, commencement of investment operations, through December 31, 1990.
* 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 ex-dividend date, and a sale at net
asset value on the last day of each period reported. Initial sales charge or contingent deferred
sales charge is not reflected in the calculation of total return. Total return calculated for a
period of less than one year is not annualized.
** Annualized.
</TABLE>
PAGE 18
<PAGE>
<PAGE>
SALOMON BROTHERS INVESTMENT SERIES
<TABLE>
<CAPTION>
CLASS O
- -------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
- -------------------------------------------------------------------------------------------------------
PERIOD ENDED
1996 1995 1994 1993 1992 1991 DECEMBER 31, 1990(b)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
-------- -------- -------- -------- -------- -------- -------
0.032 0.037 0.027 0.023 0.031 0.047 0.014
(0.032) (0.037) (0.027) (0.023) (0.031) (0.047) (0.014)
-------- -------- -------- -------- -------- -------- -------
$ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
-------- -------- -------- -------- -------- -------- -------
-------- -------- -------- -------- -------- -------- -------
$273,734 $226,549 $269,788 $262,413 $263,685 $134,782 $ 34,529
+3.3 % +3.7 % +2.7 % +2.3 % +3.1 % +4.8 % +1.4 %
0.53% 0.43% 0.41% 0.41 % 0.42 % .30 % .64 %
3.25% 3.67% 2.63% 2.31 % 3.07 % 4.63 % 5.79 %
$ 0.032 $ 0.037 -- -- -- -- $ 0.012
0.53% 0.45% -- -- -- -- 1.23 %
</TABLE>
PAGE 19
<PAGE>
<PAGE>
SALOMON BROTHERS INVESTMENT SERIES
NATIONAL INTERMEDIATE MUNICIPAL FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
--------------------------------------------------------
PERIOD PERIOD
YEAR ENDED ENDED YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995(a) 1996 1995(a)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $10.43 $10.00 $10.42 $10.00
------ ------ ------ ------
Net investment income 0.48 0.40 0.40 0.34
Net gain (loss) on investments (both
realized and unrealized) (0.06) 0.46 (0.06) 0.45
------ ------ ------ ------
Total from investment operations 0.42 0.86 0.34 0.79
------ ------ ------ ------
Dividends from net investment income (0.48) (0.40) (0.41) (0.34)
Distributions from net realized gain on
investments (0.02) (0.03) (0.02) (0.03)
------ ------ ------ ------
Total dividends and distributions (0.50) (0.43) (0.43) (0.37)
------ ------ ------ ------
Net asset value, end of period $10.35 $10.43 $10.33 $10.42
------ ------ ------ ------
------ ------ ------ ------
Net assets, end of period (thousands) $ 696 $ 569 $ 702 $ 432
Total return* +4.2 % +8.7 % +3.4 % +8.0 %
Ratios to average net assets:
Expenses 0.75% 0.75%** 1.50% 1.50%**
Net investment income 4.62% 4.63%** 3.88% 3.85%**
Portfolio turnover rate 19 % 29 % 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 $0.35 $0.32 $0.27 $0.25
Expense ratio 2.02% 1.71%** 2.77% 2.45%**
</TABLE>
U.S. GOVERNMENT INCOME FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
------------------------------------------------------
PERIOD PERIOD
YEAR ENDED ENDED YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995(a) 1996 1995(a)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $10.32 $10.00 $10.32 $10.00
------ ------ ------ ------
Net investment income 0.54 0.49 0.46 0.43
Net gain (loss) on investments
(both realized and unrealized) (0.19) 0.43 (0.20) 0.43
------ ------ ------ ------
Total from investment operations 0.35 0.92 0.26 0.86
------ ------ ------ ------
Dividends from net investment income (0.54) (0.49) (0.46) (0.43)
Distributions from net realized gain on
investments (0.06) (0.10) (0.06) (0.10)
Distributions in excess of net realized gain
on investments -- (0.01) -- (0.01)
------ ------ ------ ------
Total dividends and distributions (0.60) (0.60) (0.52) (0.54)
------ ------ ------ ------
Net asset value, end of period $10.07 $10.32 $10.06 $10.32
------ ------ ------ ------
------ ------ ------ ------
Net assets, end of period (thousands) $1,188 $ 278 $1,266 $ 572
Total return* +3.6 % +9.5 % +2.7 % +8.8 %
Ratios to average net assets:
Expenses 0.84% 0.85%** 1.59% 1.60%**
Net investment income 5.22% 5.67%** 4.51% 4.85%**
Portfolio turnover rate 365 % 230 % 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 $0.38 $0.40 $0.30 $0.34
Expense ratio 2.21% 1.90%** 2.96% 2.64%**
</TABLE>
<TABLE>
<S> <C>
------------------------------------------------------------------
(a) February 22, 1995, commencement of investment operations, through December 31, 1995.
* 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 reported. Initial sales charge or contingent deferred sales
charge is not reflected in the calculation of total return. Total return calculated for a period of
less than one year is not annualized.
** Annualized.
</TABLE>
PAGE 20
<PAGE>
<PAGE>
SALOMON BROTHERS INVESTMENT SERIES
<TABLE>
<CAPTION>
CLASS C CLASS O
- ------------------------------------------------------------------------
PERIOD PERIOD
YEAR ENDED ENDED YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995(a) 1996 1995(a)
- ------------------------------------------------------------------------
<S> <C> <C> <C>
$10.42 $10.00 $10.43 $10.00
------ ------ ------ ------
0.40 0.34 0.50 0.42
(0.06) 0.45 (0.07) 0.46
------ ------ ------ ------
0.34 0.79 0.43 0.88
------ ------ ------ ------
(0.41) (0.34) (0.50) (0.42)
(0.02) (0.03) (0.02) (0.03)
------ ------ ------ ------
(0.43) (0.37) (0.52) (0.45)
------ ------ ------ ------
$10.33 $10.42 $10.34 $10.43
------ ------ ------ ------
------ ------ ------ ------
$ 468 $ 271 $9,786 $9,675
+3.4 % +8.0 % +4.3 % +9.0 %
1.50% 1.50%** 0.50% 0.50%**
3.88% 3.85%** 4.88% 4.86%**
19 % 29 % 19 % 29 %
$ 0.27 $ 0.25 $ 0.37 $ 0.34
2.77% 2.46%** 1.77% 1.46%**
</TABLE>
<TABLE>
<CAPTION>
CLASS C CLASS O
-----------------------------------------------------------------------
PERIOD PERIOD
YEAR ENDED ENDED YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995(a) 1996 1995(a)
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$10.32 $10.00 $10.32 $10.00
------ ------ ------ ------
0.46 0.43 0.56 0.52
(0.21) 0.43 (0.20) 0.42
------ ------ ------ ------
0.25 0.86 0.36 0.94
------ ------ ------ ------
(0.46) (0.43) (0.56) (0.52)
(0.06) (0.10) (0.06) (0.10)
-- (0.01) -- --
------ ------ ------ ------
(0.52) (0.54) (0.62) (0.62)
------ ------ ------ ------
$10.05 $10.32 $10.06 $10.32
------ ------ ------ ------
------ ------ ------ ------
$ 422 $ 273 $9,375 $9,552
+2.7 % +8.8 % +3.7 % +9.7 %
1.60% 1.60%** 0.60% 0.60%**
4.51% 4.92%** 5.53% 5.92%**
365 % 230 % 365 % 230 %
$ 0.31 $ 0.34 $ 0.41 $ 0.42
2.97% 2.64%** 1.97% 1.64%**
</TABLE>
PAGE 21
<PAGE>
<PAGE>
SALOMON BROTHERS INVESTMENT SERIES
HIGH YIELD BOND FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
------------------------------------------------------
YEAR PERIOD YEAR PERIOD
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995(a) 1996 1995(a)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $ 10.53 $ 10.00 $ 10.53 $ 10.00
-------- -------- -------- --------
Net investment income 1.10 0.92 1.02 0.85
Net gain on investments (both realized and
unrealized) 1.11 0.67 1.11 0.68
-------- -------- -------- --------
Total from investment operations 2.21 1.59 2.13 1.53
-------- -------- -------- --------
Dividends from net investment income (1.10) (0.91) (1.03) (0.85)
Distributions from net realized gain on
investments (0.10) (0.15) (0.10) (0.15)
-------- -------- -------- --------
Total dividends and distributions (1.20) (1.06) (1.13) (1.00)
-------- -------- -------- --------
Net asset value, end of period $ 11.54 $ 10.53 $ 11.53 $ 10.53
-------- -------- -------- --------
-------- -------- -------- --------
Net assets, end of period (thousands) $ 65,935 $ 10,789 $106,797 $10,108
Total return* +21.9 % +16.6 % +21.2 % +15.7 %
Ratios to average net assets:
Expenses 1.24% 1.24%** 1.99% 1.96%**
Net investment income 9.38% 10.58%** 8.49% 9.53%**
Portfolio turnover rate 85 % 109 % 85 % 109 %
Before waiver of management fee 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 $ 1.09 $ 0.87 $ 1.01 $ 0.80
Expense ratio 1.50% 1.80%** 2.24% 2.51%**
</TABLE>
STRATEGIC BOND FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
------------------------------------------------------
YEAR PERIOD YEAR PERIOD
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996'SS' 1995(a) 1996'SS' 1995(a)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $ 10.53 $ 10.00 $ 10.53 $ 10.00
-------- -------- -------- --------
Net investment income 0.87 0.84 0.79 0.76
Net gain on investments (both realized and
unrealized) 0.55 0.78 0.53 0.79
-------- -------- -------- --------
Total from investment operations 1.42 1.62 1.32 1.55
-------- -------- -------- --------
Dividends from net investment income (0.94) (0.85) (0.85) (0.78)
Dividends in excess of net investment income (0.01) -- (0.01) --
Distributions from net realized gain on
investments (0.17) (0.24) (0.17) (0.24)
-------- -------- -------- --------
Total dividends and distributions (1.12) (1.09) (1.03) (1.02)
-------- -------- -------- --------
Net asset value, end of period $ 10.83 $ 10.53 $ 10.82 $ 10.53
-------- -------- -------- --------
-------- -------- -------- --------
Net assets, end of period (thousands) $8,345 $ 513 $14,291 $1,879
Total return* +14.1 % +16.8 % +13.0 % +16.1 %
Ratios to average net assets:
Expenses 1.24% 1.23%** 1.98% 1.97%**
Net investment income 8.09% 9.51%** 7.34% 8.75%**
Portfolio turnover rate 122 % 161 % 122 % 161 %
Before 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 $ 0.76 $ 0.71 $ 0.69
Expense ratio 1.98% 2.11%** 2.73% 2.85%**
</TABLE>
------------------------------------------------------------------
(a) February 22, 1995, commencement of investment operations, through December
31, 1995.
'SS' Per share information calculated using the average shares outstanding
method, which more accurately represents amounts.
* 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 reported. Initial sales charge or contingent deferred sales
charge is not reflected in the calculation of total return. Total return
calculated for a period of less than one year is not annualized.
** Annualized.
PAGE 22
<PAGE>
<PAGE>
SALOMON BROTHERS INVESTMENT SERIES
<TABLE>
<CAPTION>
CLASS C CLASS O
- ------------------------------------------------------------------------
YEAR PERIOD YEAR PERIOD
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995(a) 1996'SS' 1995(a)
- ------------------------------------------------------------------------
<S> <C> <C> <C>
$ 10.53 $ 10.00 $ 10.54 $ 10.00
-------- -------- -------- --------
1.02 0.85 1.16 0.95
1.10 0.68 1.05 0.67
-------- -------- -------- --------
2.12 1.53 2.21 1.62
-------- -------- -------- --------
(1.03) (0.85) (1.12) (0.93)
(0.10) (0.15) (0.10) (0.15)
-------- -------- -------- --------
(1.13 ) (1.00) (1.22 ) (1.08)
-------- -------- -------- --------
$ 11.52 $ 10.53 $ 11.53 $ 10.54
-------- -------- -------- --------
-------- -------- -------- --------
$ 13,773 $ 1,274 $ 393 $ 7,854
+21.1 % +15.8 % +22.0 % +16.8 %
1.99% 1.98%** 0.99% 1.00%**
8.43% 9.61%** 10.64% 10.59%**
85 % 109 % 85 % 109 %
$ 1.01 $ 0.80 $ 1.13 $ 0.90
2.24% 2.54%** 1.24% 1.55%**
</TABLE>
<TABLE>
<CAPTION>
CLASS C CLASS O
- ------------------------------------------------------------------------
YEAR PERIOD YEAR PERIOD
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996'SS' 1995(a) 1996'SS' 1995(a)
- ------------------------------------------------------------------------
<S> <C> <C> <C>
$ 10.53 $ 10.00 $ 10.53 $ 10.00
-------- -------- -------- --------
0.78 0.77 0.92 0.87
0.54 0.78 0.51 0.77
-------- -------- -------- --------
1.32 1.55 1.43 1.64
-------- -------- -------- --------
(0.85) (0.78) (0.96) (0.87)
(0.01) -- (0.01) --
(0.17) (0.24) (0.17) (0.24)
-------- -------- -------- --------
(1.03) (1.02) (1.14) (1.11)
-------- -------- -------- --------
$ 10.82 $ 10.53 $ 10.82 $ 10.53
-------- -------- -------- --------
-------- -------- -------- --------
$ 4,575 $ 411 $ 3,817 $ 9,763
+13.1 % +16.1 % +14.2 % +17.0 %
1.98% 1.99%** 1.00% 0.99%**
7.26% 8.77%** 8.65% 9.74%**
122 % 161 % 122 % 161 %
$ 0.70 $ 0.70 $ 0.84 $ 0.79
2.72% 2.87%** 1.74% 1.87%**
</TABLE>
PAGE 23
<PAGE>
<PAGE>
SALOMON BROTHERS INVESTMENT SERIES
TOTAL RETURN FUND'SS'
<TABLE>
<CAPTION>
CLASS A CLASS B
------------------------------------------------------------
YEAR PERIOD YEAR PERIOD
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995(a) 1996 1995(a)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $10.55 $10.00 $10.54 $10.00
------ ------ ------ ------
Net investment income 0.54 0.15 0.45 0.13
Net gain on investments
(both realized and unrealized) 1.35 0.52 1.35 0.51
------ ------ ------ ------
Total from investment operations 1.89 0.67 1.80 0.64
------ ------ ------ ------
Dividends from net investment income (0.52) (0.11) (0.42) (0.09)
Distributions from net realized gain on
investments (0.10) (0.01) (0.10) (0.01)
------ ------ ------ ------
Total dividends and distributions (0.62) (0.12) (0.52) (0.10)
------ ------ ------ ------
Net asset value, end of period $11.82 $10.55 $11.82 $10.54
------ ------ ------ ------
------ ------ ------ ------
Net assets, end of period (thousands) $21,109 $3,658 $28,403 $5,378
Total return* +18.3 % +6.7 % +17.4 % +6.4 %
Ratios to average net assets:
Expenses 0.75% 0.74%** 1.50% 1.49%**
Net investment income 4.81% 4.82%** 4.06% 4.06%**
Portfolio turnover rate 76 % 16 % 76 % 16 %
Average broker commission rate $0.0534 N/A $0.0534 N/A
Before 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 $ 0.44 $ 0.13 $ 0.36 $ 0.11
Expense ratio 1.61% 1.45%** 2.36% 2.19%**
</TABLE>
INVESTORS FUND
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
--------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1996 1995 1996 1995 1996 1995
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $16.62 $13.61 $16.61 $13.61 $16.61 $13.61
------ ------ ------ ------ ------ ------
Net investment income 0.19 0.19 0.08 0.10 0.07 0.09
Net gain (loss) on investments (both realized
and unrealized) 4.63 4.55 4.60 4.54 4.60 4.55
------ ------ ------ ------ ------ ------
Total from investment operations 4.82 4.74 4.68 4.64 4.67 4.64
------ ------ ------ ------ ------ ------
Dividends from net investment income (0.22) (0.23) (0.10) (0.14) (0.09) (0.14)
Distributions from net realized gain on
investments (2.33) (1.50) (2.33) (1.50) (2.33) (1.50)
------ ------ ------ ------ ------ ------
Total dividends and distributions (2.55) (1.73) (2.43) (1.64) (2.42) (1.64)
------ ------ ------ ------ ------ ------
Net asset value, end of period $18.89 $16.62 $18.86 $16.61 $18.86 $16.61
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
Net assets, end of period (thousands) $10,905 $441 $9,433 $716 $1,959 $306
Total return* +30.3% +35.3% +29.2% +34.5% +29.3% +34.5%
Ratios to average net assets:
Expenses 1.06% 0.94% 1.82% 1.71% 1.80% 1.68%
Net investment income 0.94% 1.41% 0.21% 0.63% 0.23% 0.66%
Portfolio turnover rate 58% 86% 58% 86% 58% 86%
Average broker commission rate $0.0593 N/A $0.0593 N/A $0.0593 N/A
</TABLE>
------------------------------------------------------------------
(a) September 11, 1995, commencement of investment operations, through December
31, 1995.
'SS' Per share information calculated using the average shares outstanding
method, which more accurately represents amounts.
* 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 reported. Initial sales charge or contingent deferred sales charge
is not reflected in the calculation of total return. Total return
calculated for a period of less than one year is not annualized.
** Annualized.
`D' Since May 1, 1990, the Fund has been managed by SBAM. Prior thereto, the
Lehman Management Co. division of Shearson Lehman Brothers Inc. I served as
the Fund's investment manager.
PAGE 24
<PAGE>
<PAGE>
SALOMON BROTHERS INVESTMENT SERIES
<TABLE>
<CAPTION>
CLASS C CLASS O
- ------------------------------------------------------------------------
YEAR PERIOD YEAR PERIOD
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995(a) 1996 1995(a)
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$10.56 $10.00 $10.57 $10.00
------ ------ ------ ------
0.46 0.14 0.57 0.17
1.35 0.51 1.39 0.52
------ ------ ------ ------
1.81 0.65 1.96 0.69
------ ------ ------ ------
(0.42) (0.08) (0.55) (0.11)
(0.10) (0.01) (0.10) (0.01)
------ ------ ------ ------
(0.52) (0.09) (0.65) (0.12)
------ ------ ------ ------
$11.85 $10.56 $11.88 $10.57
------ ------ ------ ------
------ ------ ------ ------
$3,445 $ 445 $ 213 $4,494
+17.5% +6.5 % +19.0% +6.9 %
1.50% 1.51%** 0.50% 0.51%**
4.07% 4.26%** 5.13% 5.30%**
76% 16 % 76% 16 %
$0.0534 N/A $0.0534 N/A
$ 0.36 $ 0.11 $ 0.47 $ 0.15
2.36% 2.22%** 1.36% 1.22%**
</TABLE>
<TABLE>
<CAPTION>
CLASS O
- -----------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
- -----------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990'D' 1989 1988 1987
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$16.61 $13.63 $15.60 $16.10 $17.10 $14.54 $16.65 $15.55 $14.77 $17.37
------ ------ ------ ------ ------ ------ ------- ------ ------- ------
0.25 0.27 0.27 0.32 0.41 0.44 0.49 0.66*** 0.52 0.49
4.62 4.48 (0.48) 2.03 0.79 3.68 (1.555) 2.66 1.885 (.32)
------ ------ ------ ------ ------ ------ ------- ------ ------- ------
4.87 4.75 (0.21) 2.35 1.20 4.12 (1.065) 3.32 2.405 .17
------ ------ ------ ------ ------ ------ ------- ------ ------- ------
(0.25) (0.27) (0.27) (0.33) (0.41) (0.46) (0.55) (.63) (.525) (.51)
(2.33) (1.50) (1.49) (2.52) (1.79) (1.10) (0.495) (1.59) (1.10) (2.26)
------ ------ ------ ------ ------ ------ ------- ------ ------- ------
(2.58) (1.77) (1.76) (2.85) (2.20) (1.56) (1.045) (2.22) (1.625) (2.77)
------ ------ ------ ------ ------ ------ ------- ------ ------- ------
$18.90 $16.61 $13.63 $15.60 $16.10 $17.10 $14.54 $16.65 $15.55 $14.77
------ ------ ------ ------ ------ ------ ------- ------ ------- ------
------ ------ ------ ------ ------ ------ ------- ------ ------- ------
$518,361 $428,950 $348,214 $386,147 $370,350 $378,615 $330,814 $393,747 $362,742 $352,272
+30.6% +35.4% [6].13% +15.1% +7.4% +29.3% [6].65 % +21.8% +16.9% +0.7%
0.76% 0.69% 0.69% 0.68% 0.68% 0.70% 0.68% 0.63% 0.67% 0.58%
1.36% 1.67% 1.75% 1.90% 2.47% 2.67% 3.13% 3.76% 3.32% 2.37%
58% 86% 66% 79% 48% 44% 22% 36% 54% 80%
$0.0593 N/A N/A N/A N/A N/A
</TABLE>
PAGE 25
<PAGE>
<PAGE>
SALOMON BROTHERS INVESTMENT SERIES
ASIA GROWTH FUND
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS O
-----------------------------------------
PERIOD ENDED DECEMBER 31, 1996(a)'SS'
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period......................... $ 10.00 $ 10.00 $ 10.00 $ 10.00
------- ------- ------- -------
Net investment income........................................ 0.05 0.01 0.01 0.07
Net gain on investments
(both realized and unrealized)............................... 0.47 0.46 0.45 0.46
------- ------- ------- -------
Total from investment operations............................. 0.52 0.47 0.46 0.53
------- ------- ------- -------
Dividends from net investment income......................... (0.05) (0.01) (0.01) (0.06)
Distributions from net realized gain on investments.......... (0.15) (0.15) (0.15) (0.15)
------- ------- ------- -------
Total dividends and distributions............................ (0.20) (0.16) (0.16) (0.21)
------- ------- ------- -------
Net asset value, end of period............................... $ 10.32 $ 10.31 $ 10.30 $ 10.32
------- ------- ------- -------
------- ------- ------- -------
Net assets, end of period (thousands)........................ $ 3,693 $ 3,163 $ 246 $ 124
Total return*................................................ +5.2% +4.7% +4.6% +5.3%
Ratios to average net assets:
Expenses................................................... 1.24%** 1.99%** 2.00%** 0.99%**
Net investment income...................................... 0.90%** 0.20%** 0.08%** 1.21%**
Portfolio turnover rate...................................... 119% 119% 119% 119%
Average Broker Commission Rate............................... $0.0052 $0.0052 $0.0052 $0.0052
Before 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.............................. ($0.18) ($0.23) ($0.20) ($0.18)
Expense ratio................................................ 5.50%** 6.25%** 6.26%** 5.25%**
</TABLE>
--------------------------------------------------------------------
(a) May 6, 1996, commencement of investment operations, through December 31,
1996.
'SS' Per share information calculated using the average shares outstanding
method, which more accurately represent amounts.
* 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 ex-dividend date, and a sale at net asset value on the last day of
each period reported. Initial sales charge or contingent deferred sales
charge is not reflected in the calculation of total return. Total return
calculated for a period of less than one year is not annualized.
** Annualized.
PAGE 26
<PAGE>
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
PAGE 27
<PAGE>
<PAGE>
SALOMON BROTHERS INVESTMENT SERIES
CAPITAL FUND
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------------------------------------------
PERIOD ENDED DECEMBER 31, 1996(a)'SS'
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period $ 21.98 $ 21.98 $ 21.98
-------- -------- -------
Net investment income 0.01 (0.02) (0.02)
Net gains (or losses) on securities (both realized
and unrealized) 1.54 1.56 1.57
-------- -------- -------
Total from investment operations 1.55 1.54 1.55
-------- -------- -------
Dividends from net investment income (0.15) (0.12) (0.12)
Distributions from net realized gain on investments (3.50) (3.50) (3.50)
Distributions in excess of net realized gains -- -- --
-------- -------- -------
Total dividends and distributions (3.65) (3.62) (3.62)
-------- -------- -------
Net asset value, end period $ 19.88 $ 19.90 $ 19.91
-------- -------- -------
-------- -------- -------
Net assets end of year (thousands) $ 344 $ 219 $ 130
Total return* +7.7% +7.6% +7.7%
Ratios to average net assets:
Expenses 1.88%** 2.73%** 2.45%**
Net investment income 0.18%** -0.66%** -0.05%**
Portfolio turnover rate 191% 191% 191%
Average broker commission rate $0.0586 $0.0586 $0.0586
</TABLE>
------------------------------------------------------------------
(a) November 1, 1996, commencement of investment operations, through December
31, 1996.
'SS' Per share information calculated using the average shares outstanding
method, which more accurately represent amounts.
'P' Net of Provision for income taxes of $.057 per share. Expense ratio
including provision would be 1.45%.
* 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 reported. Initial sales charge or contingent deferred sales charge
is not reflected in the calculation of total return. Total return
calculated for a period of less than one year is not annualized.
** Annualized.
`D'`D' Net of reimbursement for the years 1987 through 1988.
`D' Since May 1, 1990, the Fund has been managed by SBAM. Prior thereto, the
Lehman Management Co. division of Shearson Lehman Brothers Inc. served as
the Fund's investment manager.
PAGE 28
<PAGE>
<PAGE>
SALOMON BROTHERS INVESTMENT SERIES
<TABLE>
<CAPTION>
CLASS O
-----------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------------------------------------
1996'SS' 1995 1994 1993 1992 1991 1990`D' 1989 1988 1987
-------- -------- ------- -------- -------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 18.67 $ 15.62 $ 20.80 $ 19.64 $ 19.06 $14.86 $16.75 $ 15.58 $16.58 $17.87
-------- -------- ------- -------- -------- ------- ------- ------- ------- -------
0.13 0.14 0.03 0.028 0.10 .33 .20 .05 .01SS .04
5.70 5.27 (2.87) 3.242 0.80 4.56 (1.715) 6.25 (.775) .355
-------- -------- ------- -------- -------- ------- ------- ------- ------- -------
5.83 5.41 (2.84) 3.27 0.90 4.89 (1.515) 6.30 (.765) .395
-------- -------- ------- -------- -------- ------- ------- ------- ------- -------
(0.15) (0.14) (0.03) (0.035) (0.105) (.325) (.285) -- -- (.13)
(4.47) (2.22) (1.51) (2.075) (0.215) (.365) (.09) (5.13) (.235) (1.555)
-- -- (0.80) -- -- -- -- -- -- --
-------- -------- ------- -------- -------- ------- ------- ------- ------- -------
(4.62) (2.36) (2.34) (2.11) (0.32) (.69) (.375) (5.13) (.235) (1.685)
-------- -------- ------- -------- -------- ------- ------- ------- ------- -------
$ 19.88 $ 18.67 $ 15.62 $ 20.80 $ 19.64 $19.06 $14.86 $ 16.75 $15.58 $16.58
-------- -------- ------- -------- -------- ------- ------- ------- ------- -------
-------- -------- ------- -------- -------- ------- ------- ------- ------- -------
$135,943 $102,429 $86,704 $113,905
+33.3% +34.9% -14.2% +17.2% +4.7% +33.4% -.91% +39.7% -.46% +1.7%
1.38% 1.36% 1.30% 1.31% 1.34% $89,829 $75,815 $72,621 $64,267 $91,313
0.67% 0.74% 0.12% 0.13% 0.58% 1.48% 1.44% 1.48% 1.27% 1.17%*
191% 217% 152% 104% 41% 1.87% 1.59% 0.33% 0.03% 0.19%
$0.0586 N/A N/A N/A N/A 94% 156% 362% 270% 395%
</TABLE>
PAGE 29
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
Investment Objectives
and Policies
The investment objective(s) of each Fund are deemed to be fundamental policies
and may not be changed without the affirmative vote of the holders of a
majority of its outstanding shares, as defined in the 1940 Act. There can be no
assurance that any Fund will achieve its investment objective(s).
CASH MANAGEMENT FUND
The investment objective of the Cash Management Fund is to seek as high a level
of current income as is consistent with liquidity and the stability of
principal. The Fund invests in high-quality, short-term U.S. dollar-denominated
money market instruments which are deemed to mature in thirteen months or less,
with average portfolio maturity (on a dollar-weighted basis) of not more than 90
days. The Fund is classified as a 'diversified' Fund within the meaning of the
1940 Act, and seeks to maintain a stable net asset value of $1.00 per share.
The types of obligations in which the Cash Management Fund may invest include:
(1) Securities issued or guaranteed by the U.S. government or by agencies or
instrumentalities thereof;
(2) Obligations issued or guaranteed by U.S. banks with total assets of at
least $1 billion (including obligations of foreign branches of such banks) and
by the 75 largest foreign commercial banks in terms of total assets;
(3) High-quality commercial paper and other high-quality short-term debt
obligations; and
(4) Obligations of the International Bank for Reconstruction and Development
(also known as the 'World Bank'), other supranational organizations and foreign
governments and their agencies and instrumentalities.
The Cash Management Fund may also enter into repurchase agreements with respect
to the obligations identified above. While the maturity of the underlying
securities in a repurchase agreement transaction may be more than thirteen
months, the term of the repurchase agreement will always be less than thirteen
months. For a description of repurchase agreements and their associated risks,
see 'Additional Investment Activities and Risk Factors -- Repurchase
Agreements.'
Securities issued or guaranteed by the U.S. government or by its agencies or
instrumentalities include obligations of several kinds. Such securities in
general include a wide variety of U.S. Treasury obligations consisting of
bills, notes and bonds, which principally differ only in their interest rates,
maturities and times of issuance. Securities issued or guaranteed by U.S.
government agencies and instrumentalities are debt securities issued by
agencies or instrumentalities established or sponsored by the U.S. government
and may be backed only by the credit of the issuing agency or instrumentality.
The Fund will invest in such obligations only where SBAM determines that the
credit risk with respect to the issuer is minimal. For a further description of
these securities, see the discussion of the investment objective of the U.S.
Government Income Fund.
The Cash Management Fund will, as a fundamental policy, invest at least 25% of
the current value of its total assets in bank obligations (including bank
obligations subject to repurchase agreements). However, if at some future date
adverse conditions prevail in the banking industry or in the market for bank
obligations, the
PAGE 30
<PAGE>
<PAGE>
SALOMON BROTHERS INVESTMENT SERIES
Fund, for temporary defensive purposes, may temporarily invest less than 25% of
its assets in bank obligations. Bank obligations that may be purchased by the
Fund consist of obligations issued or guaranteed by U.S. banks with total
assets of at least $1 billion (including obligations issued by foreign branches
of such banks) and by the 75 largest foreign commercial banks in terms of total
assets. Such obligations include certificates of deposit, commercial paper,
bankers' acceptances and fixed time deposits. Fixed time deposits are
obligations of branches of U.S. banks or foreign banks which are payable at a
stated maturity date and bear a fixed rate of interest. Although fixed time
deposits do not have a market, there are no contractual restrictions on the
right to transfer a beneficial interest in the deposit to a third party. For a
discussion of the risks associated with investing in bank obligations, see
'Additional Investment Activities and Risk Factors -- Bank Obligations.'
The commercial paper that may be purchased by the Cash Management Fund consists
of direct obligations of domestic issuers which are: (i) rated in the highest
short-term rating category by at least two nationally recognized statistical
rating organizations ('NRSROs') or by one NRSRO if only one NRSRO has rated the
security; or (ii) if not rated, deemed by SBAM to be of comparable quality to
commercial paper so rated.
The Cash Management Fund's investments in corporate debt securities will
consist of non-convertible corporate debt securities such as bonds and
debentures of domestic issuers that have thirteen months or less remaining to
maturity and are of an investment quality comparable to rated commercial paper
in which the Fund may invest.
Obligations of the World Bank and certain other supranational organizations are
supported by subscribed but unpaid commitments of member countries. There is no
assurance that these commitments will be undertaken or complied with in the
future. The Cash Management Fund limits its investments in obligations of
foreign governments and their agencies and instrumentalities to U.S.
dollar-denominated commercial paper and other short-term notes issued or
guaranteed by the governments or agencies and instrumentalities of Western
Europe, including the United Kingdom, Spain, Portugal, Greece, Austria, France,
West Germany, Belgium, the Netherlands, Italy, Switzerland, Denmark, Norway,
Sweden, Finland and Ireland, and of Australia, New Zealand, Japan and Canada.
The Fund will purchase these obligations only if such obligations, in the
opinion of SBAM based on guidelines established by the Fund's Board of
Directors, are of comparable quality to corporate obligations in which the Fund
may invest.
The Cash Management Fund may also invest in high quality, short-term municipal
obligations that carry yields that are competitive with those of other types of
money market instruments in which the Fund may invest. Dividends paid by the
Fund derived from interest on municipal obligations that may be purchased by it
will be taxable to shareholders for federal income tax purposes because the Fund
will not qualify as an entity that can pass through the tax-exempt character of
such interest.
The Cash Management Fund may invest in floating and variable rate obligations
with stated maturities in excess of thirteen months upon compliance with certain
conditions contained in Rule 2a-7 promulgated under the 1940 Act, in which case
such obligations will be treated, in accordance with Rule 2a-7, as having
maturities not exceeding thirteen months. For a further discussion of such
obligations, see 'Additional Investment Activities and Risk Factors -- Floating
and Variable Rate Instruments.'
The Cash Management Fund may also invest in variable amount master demand
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notes. A variable amount master demand note differs from ordinary commercial
paper in that it is issued pursuant to a written agreement between the issuer
and the holder, its amount may from time to time be increased by the holder
(subject to an agreed maximum) or decreased by the holder or the issuer, it is
payable on demand, the rate of interest payable on it varies with an agreed
formula and it is not typically rated by a rating agency.
The Cash Management Fund may also purchase asset-backed securities.
Asset-backed securities represent defined interests in an underlying pool of
assets. Such securities may be issued as pass-through certificates, which
represent undivided fractional interests in the underlying pool of assets.
Alternatively, asset-backed securities may be issued as interests, generally in
the form of debt securities, in a special purpose entity organized solely for
the purpose of owning the underlying assets and issuing such securities. In the
latter case, such securities are secured by and payable from a stream of
payments generated by the underlying assets. The assets underlying asset-backed
securities are often a pool of assets similar to one another, such as motor
vehicle receivables or credit card receivables. Alternatively, the underlying
assets may be particular types of securities, various contractual rights to
receive payments and/or other types of assets. Asset-backed securities
frequently carry credit protection in the form of extra collateral, subordinate
certificates, cash reserve accounts, letters of credit or other enhancements.
Any asset-backed securities held by the Fund must comply with its credit
quality requirements and be deemed to have a maturity of thirteen months or
less in accordance with applicable regulations. For a further discussion of
asset backed securities and the risks associated therewith, see 'Additional
Information on Portfolio Instruments and Investment Policies -- Asset-Backed
Securities' in the Statement of Additional Information.
Among the municipal obligations that the Cash Management Fund may invest in are
participation certificates in a lease, an installment purchase contract or a
conditional sales contract (hereinafter collectively called 'lease obligations')
entered into by a State or a political subdivision to finance the acquisition or
construction of equipment, land or facilities. For a further discussion of
municipal lease obligations, see 'Additional Investment Activities and Risk
Factors -- Municipal Lease Obligations.' Certain investments in lease
obligations may be illiquid. The Fund may not invest in illiquid lease
obligations if such investments, together with all other illiquid investments,
would exceed 10% of the Fund's net assets. The Fund may, however, invest
without regard to such limitation in lease obligations which SBAM, pursuant to
guidelines which have been adopted by the Board of Directors and subject to the
supervision of the Board, determines to be liquid.
The Cash Management Fund may purchase securities on a firm commitment basis,
including when-issued securities. See 'Additional Investment Activities and Risk
Factors -- Firm Commitments and When-Issued Securities' for a description of
such securities and their associated risks.
In view of the fundamental policy of the Cash Management Fund to invest at least
25% of its assets in bank obligations, except for temporary defensive purposes
as described above, an investment in the Cash Management Fund should be made
with an understanding of the characteristics of the banking industry and the
risks which such an investment may entail. See 'Additional Investment
Activities and Risk Factors -- Bank Obligations.'
The Cash Management Fund is not authorized to use any of the various
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investment strategies referred to under 'Additional Investment Activities and
Risk Factors -- Derivatives.'
Except with respect to investment by the Cash Management Fund of at least 25% of
its assets in bank obligations, as described above, the foregoing investment
policies and activities are not fundamental policies and may be changed by vote
of the Board of Directors of the Cash Management Fund without the approval of
shareholders.
NEW YORK MUNICIPAL MONEY MARKET FUND
The New York Municipal Money Market Fund's investment objective is to seek as
high a level of current income exempt from federal income tax and New York
State and New York City personal income taxes as is consistent with liquidity
and the stability of principal. The Fund invests primarily in a portfolio of
high-quality, short-term municipal obligations issued (i) by the State of New
York and its cities, municipalities and other public authorities, and (ii) by
territories and possessions of the United States and their respective
authorities, agencies, instrumentalities and political subdivisions, the
interest on which is exempt from federal income tax and from the personal
income taxes of New York State and New York City.
The New York Municipal Money Market Fund invests exclusively in high-quality,
United States dollar-denominated securities which are deemed to mature in
thirteen months or less with average maturity (on a dollar-weighted basis) of
not more than 90 days. The Fund seeks to maintain a stable net asset value of
$1.00 per share. The Fund's investment objective is a fundamental policy and may
not be changed without the affirmative vote of a majority of its outstanding
shares, as defined under 'Capital Stock' in the Statement of Additional
Information. Of course, achievement of this objective cannot be guaranteed. All
or a portion of the Fund's dividends paid in respect of its shares may be a
preference or an adjustment for purposes of the federal alternative minimum
tax. See 'Taxation.'
The types of obligations in which the New York Municipal Money Market Fund may
invest include (see 'Description of Ratings' in Appendix A):
(1) Municipal commercial paper that is rated 'P-1' or 'P-2' by Moody's Investors
Service, Inc. ('Moody's') or 'A-1' or 'A-2' by Standard & Poor's Ratings Group
('S&P') or, if not rated, is, in the opinion of SBAM based on guidelines
established by the Fund's Board of Directors, of comparable quality to rated
municipal commercial paper in which the Fund may invest (see 'Description of
Ratings' in Appendix A);
(2) Municipal notes that are rated 'MIG 1,' 'MIG 2' (or 'VMIG 1' or 'VMIG 2' in
the case of variable rate demand notes), 'P-1', 'P-2' or 'Aa' or better by
Moody's or 'SP-1', 'SP-2', 'A-1', 'A-2' or 'AA' or better by S&P or, if not
rated, are, in the opinion of the investment manager based on guidelines
established by the Series Funds' Board of Directors, of investment quality
comparable to rated municipal notes in which the Fund may invest; and
(3) Municipal bonds which are rated 'Aa' or better by Moody's or 'AA' or better
by S&P or, if not rated, are, in the opinion of SBAM based on guidelines
established by the Series Funds' Board of Directors, of comparable quality to
rated municipal bonds in which the Fund may invest.
Municipal bonds at the time of issuance are generally long-term securities with
maturities of as much as thirty years or more, but may have remaining maturities
of shorter duration at the time of purchase by the Fund.
Municipal commercial paper that may be purchased by the New York Municipal
Money Market Fund consists of short-term obligations of a municipality. Such
paper is likely to be issued to meet seasonal working capital needs of a
municipality or
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as interim construction financing. Municipal commercial paper, in many cases,
is backed by a letter of credit lending agreement, note repurchase agreement or
other credit facility agreement offered by banks and other institutions.
Municipal notes are issued to meet the short-term funding requirements of local,
regional and state governments. Municipal notes generally have maturities at
the time of issuance of three years or less. Municipal notes that may be
purchased by the Fund include, but are not limited to tax anticipation notes
('TANs'), bond anticipation notes ('BANs') and revenue anticipation notes
('RANs').
TANs are sold as interim financing in anticipation of collection of taxes. An
uncertainty in a municipal issuer's capacity to raise taxes as a result of such
things as a decline in its tax base or a rise in delinquencies could adversely
affect the issuer's ability to meet its obligations on outstanding TANs.
BANs are sold as interim financing in anticipation of a bond sale. The ability
of a municipal issuer to meet its obligations on its BANs is primarily
dependent on the issuer's adequate access to the longer term municipal bond
market and the likelihood that the proceeds of such bond sales will be used to
pay the principal of, and interest on, BANs.
RANs are sold as interim financing in anticipation of receipt of other
revenues. A decline in the receipt of certain revenues, such as anticipated
revenues from another level of government, could adversely affect an issuer's
ability to meet its obligations on outstanding RANs.
Municipal notes also include construction loan notes and project notes. TANs,
BANs and RANs are usually general obligations of the issuer. Project notes are
issued by local housing authorities to finance urban renewal and public housing
projects and are secured by the full faith and credit of the United States
Government.
Municipal obligations are debt obligations issued by or on behalf of states,
cities, municipalities and other public authorities. The two principal
classifications of municipal obligations that may be held by the New York
Municipal Money Market Fund are 'general obligation' securities and 'revenue'
securities. General obligation securities are secured by the issuer's pledge of
its full faith, credit and taxing power for the payment of principal and
interest. Revenue securities are payable only from the revenues derived from a
particular facility or class of facilities or, in some cases, from the proceeds
of a special excise tax or other specific revenue source such as the user of a
facility being financed. Revenue securities may include private activity bonds.
Such bonds may be issued by or on behalf of public authorities to finance
various privately operated facilities and are not payable from the unrestricted
revenues of the issuer. As a result, the credit quality of private activity
bonds is frequently related directly to the credit standing of private
corporations or other entities. In addition, the interest on private activity
bonds issued after August 7, 1986 is subject to the federal alternative minimum
tax. The Fund will not be restricted with respect to the proportion of its
assets that may be invested in such obligations. Accordingly, the Fund may not
be a suitable investment vehicle for individuals or corporations that are
subject to the federal alternative minimum tax.
The New York Municipal Money Market Fund's portfolio may also include 'moral
obligation' securities, which are normally issued by special purpose public
authorities. If the issuer of moral obligation securities is unable to meet its
debt service obligations from current revenues, it may draw on a reserve fund,
the restoration of which is a moral commitment but not a legal obligation of
the state or municipality that created the issuer.
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The New York Municipal Money Market Fund currently intends to invest
substantially all of its assets in obligations that are exempt from federal
income tax and from the personal income taxes of the State of New York and its
cities. See 'Taxation.' To the extent that the unavailability of suitable
obligations for investment by the Fund prevents it from investing substantially
all of its assets in such obligations, the Fund may purchase municipal
obligations issued by other states, their agencies and instrumentalities. Under
normal market conditions, however, the Fund will invest at least 65% of its
total assets in obligations that are exempt from federal income tax and from the
personal income taxes of the State of New York and its cities, as described
above. In addition, it is a fundamental policy of the Fund to invest, under
normal market conditions, at least 80% of its total assets in obligations that
are exempt from federal income tax. To the extent not so invested, the
remaining 20% of the Fund's assets may be invested in high quality, short-term
money market instruments, the income from which is subject to federal income
tax. Taxable money market instruments that may be purchased by the Fund include
securities issued or guaranteed as to principal and interest by the United
States government or by agencies or instrumentalities thereof; obligations
issued or guaranteed by United States banks with total assets of at least $1
billion (including obligations of foreign branches of such banks) and by the 75
largest foreign commercial banks in terms of total assets; high quality
commercial paper and other high quality short-term debt obligations; and
obligations of the World Bank, other supranational organizations and foreign
governments and their agencies and instrumentalities. For a discussion of the
U.S. government securities, bank obligations and World Bank and other
supranational and foreign government obligations in which the Fund may invest,
see the description of the investment objective and policies of the Cash
Management Fund. The commercial paper that may be purchased by the Fund
consists of direct obligations of domestic and foreign issuers which are (i)
rated 'P-1' or 'P-2' by Moody's or 'A-1' or 'A-2' by S&P or (ii) if not rated,
are issued or guaranteed as to principal and interest by issuers having an
extensive debt security rating of 'Aa' or better by Moody's or 'AA' or better
by S&P or are, in the opinion of SBAM, of comparable quality to rated
commercial paper in which the Fund may invest. The corporate debt securities in
which the Fund may invest will consist of non-convertible corporate debt
securities such as bonds and debentures which are rated 'Aa' or better by
Moody's or 'AA' or better by S&P or are, in the opinion of SBAM, of comparable
quality to rated debt securities in which the Fund may invest. The Fund may
also enter into repurchase agreements with respect to the taxable obligations
identified above. See 'Repurchase Agreements' under 'Additional Investment
Activities and Risk Factors.' Dividends paid by the Fund that are attributable
to interest derived from taxable money market instruments will be taxable to
investors.
If at some future date, in SBAM's opinion, adverse conditions prevail in the
market for obligations exempt from federal income tax and from the personal
income taxes of the State of New York and its cities, the New York Municipal
Money Market Fund may, for temporary defensive purposes, invest more than 35%
of its assets in municipal obligations issued by other states, their agencies or
instrumentalities or in taxable money market instruments. Moreover, if at some
future date, in the opinion of SBAM, adverse conditions in the market for
municipal securities generally should prevail, the Fund may temporarily invest
more than 20% of its assets in cash reserves or in taxable money market
instruments in order to maintain a defensive posture. To the extent that the
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Fund deviates from its investment policies as a result of the unavailability of
suitable obligations or for other temporary defensive purposes, its investment
objective of seeking income exempt from federal income tax and the personal
income taxes of New York State and its cities may not be achieved.
The New York Municipal Money Market Fund's classification as a 'non-diversified'
investment company means that the proportion of the Fund's assets that are
permitted to be invested in the securities of a single issuer is not limited by
the 1940 Act. However, as a fundamental investment limitation, the Fund has
limited its investments so that with regard to 50% of total assets, no more
than 5% of assets are invested in the securities of a single issuer, and with
respect to the remaining 50% of total assets, no more than 25% of total assets
are invested in the securities of a single issuer. Because the Fund has the
ability, like many other single-state tax-free money market funds, to invest a
significant percentage of its assets in the securities of a single issuer, an
investment in the Fund may be riskier than an investment in other types of
money market funds.
Because the New York Municipal Money Market Fund will invest primarily in
obligations issued (i) by the State of New York and its cities, municipalities
and other public authorities, and (ii) by territories and possessions of the
United States and their respective authorities, agencies, instrumentalities and
public subdivisions, the interest on which is exempt from federal income tax
and from the personal income taxes of New York State and New York City, it is
more susceptible to factors adversely affecting issuers of such obligations
than a comparable municipal securities fund that is not so concentrated. New
York State, New York City and other New York public bodies have recently
encountered and are encountering financial challenges. Although New York
State's financial operations improved during the most recent years, both the
State and the City continue to face increasing debt levels. The City and other
State localities have required and continue to require significant financial
assistance from the State. In recent years S&P has upgraded the State's outlook
to 'positive'; however, the rating of New York City dropped to 'BBB+' in July
of 1995. Both the State and the City face fiscal challenges, including
declining federal subsidization and a cyclical economic base. The City and
other State localities have required and continue to require significant
financial assistance from the State. In recent years, however, S&P changed the
outlook on the rating of the State to positive and upgraded the City's outlook
from negative to stable. If either New York State or any of its local
governmental entities is unable to meet its financial obligations, the income
derived by the Fund and its ability to preserve capital and liquidity could be
adversely affected. See 'Special Factors Affecting Investment in New York
Municipal Obligations' in the Statement of Additional Information for further
information.
In addition, from time to time the New York Municipal Money Market Fund may
invest 25% or more of its assets in municipal obligations that are related in
other ways such that an economic, business or political development or change
affecting one such obligation could also affect the other obligations; for
example, municipal obligations the interest on which is paid from revenues of
similar types of projects. In addition, from time to time, the Fund may invest
25% or more of its assets in industrial development bonds, which, although
issued by industrial development authorities, may be backed only by those
assets and revenues of non-governmental users.
Opinions relating to the validity of municipal obligations and to the exemption
of interest thereon from federal income tax and New York State and New York
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City personal income taxes are rendered by bond counsel to the respective
issuers at the time of issuance. Neither the Fund nor SBAM will review the
proceedings relating to the issuance of municipal obligations or the basis for
such opinions.
The New York Municipal Money Market Fund may invest without limitation in
obligations that are guaranteed or have other credit support provided by a
foreign bank. The Fund's ability to receive payment with respect to any such
guarantee or other credit support may involve certain risks, such as future
political, social and economic developments, less governmental supervision and
regulation, market liquidity differences, the possible establishment of laws or
restrictions that might adversely affect the payment of the bank's obligations
under the guarantee or other credit support and the difficulty of obtaining or
enforcing a judgment against the bank.
SBAM seeks to enhance the yield of the New York Municipal Money Market Fund by
taking advantage of yield disparities or other factors that occur in the
market. For example, market conditions frequently result in similar securities
trading at different prices. The Fund may dispose of any portfolio security
prior to its maturity if such disposition and reinvestment of the proceeds are
expected to enhance yield consistent with SBAM's judgment as to a desirable
portfolio maturity structure or if such disposition is believed to be advisable
due to other circumstances or considerations. Subsequent to its purchase, a
portfolio security may be assigned a lower rating or cease to be rated. Such an
event would not require the disposition of the instrument, but the investment
manager will consider such an event in determining whether the Fund should
continue to hold the security. The Fund's policy regarding dispositions of
portfolio securities and its policy of investing in securities deemed to have
maturities of 13 months or less will result in high portfolio turnover. A
higher rate of portfolio turnover results in increased transactions costs to
the Fund in the form of dealer spreads.
Certain of the obligations that the New York Municipal Money Market Fund may
purchase may have a floating or variable rate of interest. For a description of
these obligations, see 'Additional Investment Activities and Risk
Factors -- Floating and Variable Rate Instruments.'
The New York Municipal Money Market Fund may purchase participation
certificates issued by a bank, insurance company or other financial institution
in obligations that may otherwise be purchased by the Fund. For a further
discussion of participation certificates, see 'Additional Investment Activities
and Risk Factors -- Participation Certificates.'
The New York Municipal Money Market Fund may invest in municipal lease
obligations. See 'Additional Investment Activities and Risk Factors -- Municipal
Lease Obligations.' Certain investments in lease obligations may be illiquid.
The Fund may not invest in illiquid lease obligations if such investments,
together with all other illiquid investments, would exceed 10% of the Fund's
net assets. The Fund may, however, invest without regard to such limitation in
lease obligations which SBAM, pursuant to guidelines which have been adopted by
the Board of Directors and subject to the supervision of the Board, determines
to be liquid.
The New York Municipal Money Market Fund may purchase securities on a firm
commitment basis, including when-issued securities. See 'Additional Investment
Activities and Risk Factors -- Firm Commitments and When-Issued Securities' for
a description of such securities and their associated risks.
The New York Municipal Money Market Fund may enter into standby commitments
with respect to securities held in its portfolio. Such transactions entitle the
Fund to 'put' its securities at
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an agreed upon price within a specified period of time prior to their maturity
date. See the Statement of Additional Information for a further discussion of
standby commitments.
The New York Municipal Money Market Fund is not authorized to use the various
investment strategies referred to under 'Additional Investment Activities and
Risk Factors -- Derivatives.'
Except with respect to investment by the New York Municipal Money Market Fund
of at least 80% of its assets in tax-exempt obligations, as described above, the
foregoing investment policies and activities are not fundamental policies and
may be changed by vote of the Board of Directors without the approval of
shareholders.
NATIONAL INTERMEDIATE MUNICIPAL FUND
The National Intermediate Municipal Fund's investment objective is to achieve a
high level of current income which is exempt from regular federal income taxes.
The Fund seeks to achieve its objective by investing primarily in a portfolio of
municipal obligations. The Fund will invest under normal circumstances, at least
80% of its net assets in municipal obligations the interest on which is exempt
from regular federal income tax. All or a portion of the Fund's dividends paid
in respect of its shares may be subject to the federal alternative minimum tax.
See 'Taxation.'
The National Intermediate Municipal Fund will not invest in municipal
obligations that are rated below investment grade at the time of purchase.
However, the Fund may retain in its portfolio a municipal obligation whose
rating drops below 'Baa' or 'BBB' after its acquisition by the Fund, if in
SBAM's opinion, the retention of such obligation advisable. The Fund intends to
emphasize investments in municipal obligations with intermediate maturities and
expects to maintain a dollar-weighted average portfolio maturity of 3 to 10
years. The average portfolio maturity, however, may be shortened from time to
time depending on market conditions.
The types of obligations in which the National Intermediate Municipal Fund may
invest include municipal bonds, municipal notes, municipal obligations, 'moral
obligation' securities, resource recovery bonds, taxable high quality
short-term money market instruments and municipal commercial paper which are
described above under the investment objectives and policies of the New York
Municipal Money Market Fund. The Fund may also invest in municipal lease
obligations, floating and variable rate obligations, participation certificates,
variable rate auction securities and inverse floaters which are described under
'Additional Investment Activities and Risk Factors.' It is not presently
anticipated that the Fund will invest in variable rate auction securities or
inverse floaters to any significant degree.
The Fund may invest in municipal bonds that are rated at the time of purchase
within the four highest ratings assigned by Moody's, S&P or Fitch Investors
Service, Inc., or determined by SBAM to be of comparable quality to bonds so
rated. The four highest ratings currently assigned by Moody's to municipal
bonds are Aaa, Aa, A and Baa; the four highest ratings assigned by S&P and
Fitch to municipal bonds are AAA, AA, A and BBB. A description of the ratings
used by Moody's, S&P and Fitch is included in Appendix A to this Prospectus,
and the risks associated with municipal obligations rated in the fourth highest
rating category are described above under the investment objective and policies
of the New York Municipal Money Market Fund.
The National Intermediate Municipal Fund may invest in municipal notes rated at
the time of purchase MIG1, MIG2 (or VMIG-1 or VMIG-2, in the case of variable
rate demand notes), P-2 or better
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by Moody's, SP-2, A-2 or better by S&P, or F-2 or better by Fitch, or determined
by SBAM to be of comparable quality.
The National Intermediate Municipal Fund currently intends to invest
substantially all of its assets in obligations the interest on which is exempt
from regular federal income taxes. See 'Taxation.' However, in order to maintain
liquidity, the Fund may invest up to 20% of its assets in taxable obligations,
including taxable high-quality short-term money market instruments.
If at some future date, in SBAM's opinion, adverse conditions prevail in the
market for obligations exempt from regular federal income taxes, the National
Intermediate Municipal Fund may invest its assets without limit in taxable
high-quality short-term money market instruments, the types and characteristics
of which are set forth above in the discussion of the investment objective and
policies of the New York Municipal Bond Fund. Dividends paid by the Fund that
are attributable to interest derived from taxable money market instruments will
be taxable to investors.
Certain of the obligations that the National Intermediate Municipal Fund may
purchase may have a floating or variable rate of interest. For a description of
these obligations, see 'Additional Investment Activities and Risk
Factors -- Floating and Variable Rate Instruments.'
From time to time, the National Intermediate Municipal Fund may invest more
than 25% of its assets in obligations whose interest payments are from revenues
of similar projects (such as utilities or hospitals) or whose issuers share the
same geographic location. As a result, the Fund may be more susceptible to a
single economic, political or regulatory development than would a portfolio of
securities with a greater variety of issuers. These developments include
proposed legislation or pending court decisions affecting the financing of such
projects and market factors affecting the demand for their services or products.
Opinions relating to the validity of municipal obligations and to the exemption
of interest thereon from regular federal income tax are rendered by bond counsel
to the respective issuers at the time of issuance. Neither the National
Intermediate Municipal Fund nor SBAM will review the proceedings relating to the
issuance of municipal obligations or the basis for such opinions.
The National Intermediate Municipal Fund may purchase securities on a
when-issued or delayed delivery basis. See 'Additional Investment Activities
and Risk Factors -- Firm Commitments and When-Issued Securities' for a
description of such securities and their associated risks.
The National Intermediate Municipal Fund may purchase securities for which
there is a limited trading market or which are subject to restrictions on
resale to the public. The Fund will not invest more than 15% of the value of
its total assets in illiquid securities, such as 'restricted securities' which
are illiquid, and securities that are not readily marketable. For further
discussion of illiquid securities and their associated risks, see 'Additional
Investment Activities and Risk Factors -- Restricted Securities and Securities
with Limited Trading Markets.'
The National Intermediate Municipal Fund is currently authorized to use only
certain of the various investment strategies referred to under 'Additional
Investment Activities and Risk Factors -- Derivatives.' Specifically, the Fund
may purchase or sell futures contracts on (a) U.S. debt securities and (b)
municipal bond indices. Currently, at least one exchange trades futures
contracts on an index of long-term municipal bonds, and the Fund reserves the
right to conduct futures transactions based on an index which may be developed
in the future to correlate with price movements in municipal obligations.
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The Fund will only enter into futures contracts traded on recognized domestic
exchanges. The Fund does not intend to enter into futures contracts on a regular
basis, and will not do so if, as a result, the Fund will have more than 25% of
the value of its total assets committed to the completion of such contracts.
The Fund will not engage in futures transactions for leveraging purposes. The
Fund's ability to pursue these strategies may be limited by applicable
regulations of the SEC, the Commodity Futures Trading Commission (the 'CFTC')
and the federal income tax requirements applicable to regulated investment
companies. For a discussion of futures transactions, including certain risks
associated therewith, see 'Additional Investment Activities and Risk Factors --
Derivatives,' Appendix B to this Prospectus and the Statement of Additional
Information.
The foregoing policies, other than the National Intermediate Municipal Fund's
investment objective, are not fundamental policies and may be changed by vote of
the Fund's Board of Directors without the approval of shareholders.
U.S. GOVERNMENT INCOME FUND
The investment objective of the U.S. Government Income Fund is to obtain a high
level of current income. The Fund seeks to attain its objective by investing
under normal circumstances 100% of its assets in debt obligations and mortgage-
backed securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities. The securities in which the U.S. Government Income Fund may
invest are:
(1) U.S. Treasury obligations;
(2) obligations issued or guaranteed by agencies or instrumentalities of the
U.S. government which are backed by their own credit and may not be backed by
the full faith and credit of the U.S. government;
(3) mortgage-backed securities guaranteed by the Government National Mortgage
Association ('GNMA'), popularly known as 'Ginnie Maes,' that are supported by
the full faith and credit of the U.S. government. Such securities entitle the
holder to receive all interest and principal payments due whether or not
payments are actually made on the underlying mortgages;
(4) mortgage-backed securities guaranteed by agencies or instrumentalities of
the U.S. government which are supported by their own credit but not the full
faith and credit of the U.S. government, such as the Federal Home Loan Mortgage
Corporation ('FHLMC') and the Federal National Mortgage Association ('FNMA'),
commonly known as 'Fannie Maes;' and
(5) collateralized mortgage obligations issued by private issuers for which the
underlying mortgage-backed securities serving as collateral are backed: (i) by
the credit alone of the U.S. government agency or instrumentality which issues
or guarantees the mortgage-backed securities; or (ii) by the full faith and
credit of the U.S. government.
Any guarantee of the securities in which the U.S. Government Income Fund invests
runs only to principal and interest payments on the securities and not to the
market value of such securities or the principal and interest payments on the
underlying mortgages. In addition, the guarantee only runs to the portfolio
securities held by the U.S. Government Income Fund and not to the purchase of
shares of the Fund.
The U.S. Government Income Fund currently expects that it will maintain an
average portfolio effective duration of two to five years. Duration is an
approximate measure of the sensitivity of the value of a fixed income security
to changes in interest rates. In general, the percentage change in a fixed
income security's value in response to changes in interest rates is a function
of that security's duration
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multiplied by the percentage point change in interest rates. The Fund may,
however, invest in securities of any maturity or effective duration and
accordingly, the composition and weighted average maturity of the Fund's
portfolio will vary from time to time, based upon the investment manager's
determination of how best to achieve the Fund's investment objective. With
respect to mortgage-backed securities in which the Fund invests, average
maturity and duration are determined by using mathematical models that
incorporate prepayment assumptions and other factors that involve estimates of
future economic parameters. These estimates may vary from actual results,
particularly during periods of extreme market volatility. In addition, the
average maturity and duration of mortgage-backed derivative securities may not
accurately reflect the price volatility of such securities under certain market
conditions.
From time to time, a significant portion of the Fund's assets may be invested in
mortgage-backed securities. The mortgage-backed securities in which the U.S.
Government Income Fund invests represent participating interests in pools of
fixed rate and adjustable rate residential mortgage loans issued or guaranteed
by agencies or instrumentalities of the U.S. government. Mortgage-backed
securities are issued by lenders such as mortgage bankers, commercial banks,
and savings and loan associations. Mortgage-backed securities generally provide
monthly payments which are, in effect, a 'pass-through' of the monthly interest
and principal payments (including any prepayments) made by the individual
borrowers on the pooled mortgage loans. Principal prepayments result from the
sale of the underlying property or the refinancing or foreclosure of underlying
mortgages.
The yield of the mortgage securities is based on the prepayment rates
experienced over the life of the security. Prepayments tend to increase during
periods of falling interest rates, while during periods of rising interest rates
prepayments will most likely decline. Reinvestment by the U.S. Government
Income Fund of scheduled principal payments and unscheduled prepayments may
occur at higher or lower rates than the original investment, thus affecting the
yield of the Fund. Monthly interest payments received by the Fund have a
compounding effect which will increase the yield to shareholders as compared to
debt obligations that pay interest semiannually. For further discussion of
mortgage-backed securities and collateralized mortgage obligations and their
associated risks, see 'Additional Investment Activities and Risk Factors --
Mortgage-Backed Securities' and 'Additional Information on Portfolio
Instruments and Investment Policies -- Mortgage-Backed Securities' in the
Statement of Additional Information.
While the U.S. Government Income Fund seeks a high level of current income, it
cannot invest in instruments such as lower grade corporate obligations which
offer higher yields but are subject to greater credit risks. Shares of the Fund
are neither insured nor guaranteed by the U.S. government, its agencies or
instrumentalities. Neither the issuance by nor the guarantee of a U.S.
government agency for a security constitutes assurance that the security will
not significantly fluctuate in value or that the U.S. Government Income Fund
will receive the originally anticipated yield on the security.
The U.S. Government Income Fund may enter into repurchase agreements and
reverse repurchase agreements, may purchase securities on a firm commitment
basis, including when-issued securities and may lend portfolio securities. The
Fund does not currently intend to make loans of portfolio securities with a
value in excess of 33% of the value of its total assets. The Fund may also
enter into mortgage 'dollar rolls.' For a description of these
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SALOMON BROTHERS INVESTMENT SERIES
investment practices and the risks associated therewith, see 'Additional
Investment Activities and Risk Factors.'
The U.S. Government Income Fund may purchase securities for which there is a
limited trading market or which are subject to restrictions on resale to the
public. The Fund will not invest more than 15% of the value of its total assets
in illiquid securities, such as 'restricted securities' which are illiquid, and
securities that are not readily marketable. For further discussion of illiquid
securities and their associated risks, see 'Additional Investment Activities
and Risk Factors -- Restricted Securities and Securities with Limited Trading
Markets.'
The U.S. Government Income Fund is not currently authorized to use any of the
various investment strategies referred to under 'Additional Investment
Activities and Risk Factors -- Derivatives.' However, such strategies may be
used in the future by the Fund. The Fund's ability to pursue certain of these
strategies may be limited by applicable regulations of the SEC, the CFTC and
the federal income tax requirements applicable to regulated investment
companies. Appendix B to this Prospectus and the Statement of Additional
Information contain descriptions of these strategies and of certain risks
associated therewith.
The foregoing investment policies, other than the U.S. Government Income Fund's
investment objective, are not fundamental policies and may be changed by vote of
the Fund's Board of Directors without the approval of shareholders.
HIGH YIELD BOND FUND
The High Yield Bond Fund's investment objective is to maximize current income.
As a secondary objective, the High Yield Bond Fund will seek capital
appreciation. The Fund seeks to achieve its objective by investing primarily in
a diversified portfolio of high yield fixed-income securities rated in medium
or lower rating categories or determined by SBAM to be of comparable quality.
The High Yield Bond Fund intends to invest, under normal market conditions, at
least 65% of its assets in securities rated 'Baa' or lower by Moody's or 'BBB'
or lower by S&P, or in securities determined by SBAM to be of comparable
quality. The Fund may invest up to 35% of its total assets in foreign
fixed-income securities as more fully described below. Medium and low-rated and
comparable unrated securities offer yields that fluctuate over time, but
generally are superior to the yields offered by higher rated securities.
However, such securities also involve significantly greater risks, including
price volatility and risk of default in the payment of interest and principal,
than higher rated securities. Certain of the debt securities purchased by the
Fund may be rated as low as 'C' by Moody's or 'D' by S&P or may be comparable to
securities so rated. The lower-rated bonds in which the Fund may invest are
commonly referred to as 'junk bonds.'
An investment in the High Yield Bond Fund should not be considered as a
complete investment program. For further discussion of high yield securities
and the special risks associated therewith, see 'Additional Investment
Activities and Risk Factors -- High Yield Securities.'
In light of the risks associated with high yield debt securities, SBAM will take
various factors into consideration in evaluating the creditworthiness of an
issuer. For corporate debt securities, these will typically include the
issuer's financial resources, its sensitivity to economic conditions and
trends, the operating history of the issuer, and the experience and track
record of the issuer's management. For sovereign debt instruments, these will
typically include the economic and political conditions within the issuer's
country, the issuer's overall and external debt levels and debt service ratios,
the issuer's access to capital
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SALOMON BROTHERS INVESTMENT SERIES
markets and other sources of funding, and the issuer's debt service payment
history. The investment manager will also review the ratings, if any, assigned
to the security by any recognized rating agencies, although the investment
manager's judgment as to the quality of a debt security may differ from that
suggested by the rating published by a rating service. The High Yield Bond
Fund's ability to achieve its investment objectives may be more dependent on
SBAM's credit analysis than would be the case if it invested in higher quality
debt securities. A description of the ratings used by Moody's and S&P is set
forth in Appendix A to this Prospectus.
The investment manager will have discretion to select the range of maturities
of the fixed-income securities in which the High Yield Bond Fund may invest. The
investment manager anticipates that under current market conditions, the Fund
will have an average portfolio maturity of 10 to 15 years. However, the average
portfolio maturity may vary substantially from time to time depending on
economic and market conditions.
The High Yield Bond Fund may invest up to 35% of its total assets in foreign
fixed-income securities all or a portion of which may be non-U.S. dollar
denominated and which include: (a) debt obligations issued or guaranteed by
foreign national, provincial, state, municipal or other governments with taxing
authority or by their agencies or instrumentalities, including Brady Bonds; (b)
debt obligations of supranational entities; (c) debt obligations of the U.S.
government issued in non-dollar securities; (d) debt obligations and other
fixed-income securities of foreign corporate issuers (both dollar and
non-dollar denominated); and (e) U.S. corporate issuers (both Eurodollar and
non-dollar denominated). There is no minimum rating criteria for the Fund's
investments in such securities. A description of Brady Bonds is set forth in
the discussion of investment objectives and policies of the Strategic Bond
Fund. The risks associated with these investments are described under the
captions 'Additional Investment Activities and Risk Factors -- Foreign
Securities' and ' -- High Yield Debt Securities.' Moreover, substantial
investments in foreign securities may have adverse tax implications as described
under 'Taxation.'
The High Yield Bond Fund may also invest in zero coupon securities and
pay-in-kind bonds, which involve special risk considerations. See 'Additional
Investment Activities and Risk Factors -- Zero Coupon Securities, Pay-in-Kind
Bonds and Deferred Payment Securities.'
The High Yield Bond Fund may invest in fixed and floating rate loans ('Loans')
arranged through private negotiations between a corporate borrower or a foreign
sovereign entity and one or more financial institutions ('Lenders'). The Fund
may invest in such Loans in the form of participations in Loans
('Participations') and assignments of all or a portion of Loans from third
parties ('Assignments'). See 'Additional Investment Activities and Risk
Factors -- Loan Participations and Assignments.'
The High Yield Bond Fund may invest up to 20% of its assets in common stock,
convertible securities, warrants, preferred stock or other equity securities
when consistent with the Fund's objectives. The Fund will generally hold such
equity investments as a result of purchases of unit offerings of fixed-income
securities which include such securities or in connection with an actual or
proposed conversion or exchange of fixed-income securities, but may also
purchase equity securities not associated with fixed-income securities when, in
the opinion of the investment manager, such purchase is appropriate.
There may be times when, in SBAM's judgment, conditions in the securities
markets would make pursuing the Fund's
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basic investment strategy inconsistent with the best interests of the Fund's
shareholders. At such times, the Fund may employ alternative strategies,
including investment of a substantial portion of its assets in securities rated
higher than 'Baa' by Moody's or 'BBB' by S&P, or of comparable quality. In
addition, in order to maintain liquidity, the Fund may invest up to 35% of its
assets in high-quality short-term money market instruments. Such instruments
may include obligations of the U.S. government or its agencies or
instrumentalities; commercial paper of issuers rated, at the time of purchase,
A-2 or better by S&P or P-2 or better by Moody's or which, in SBAM's
determination, are of comparable quality; certificates of deposit, banker's
acceptances or time deposits of U.S. banks with total assets of at least $1
billion (including obligations of foreign branches of such banks) and of the 75
largest foreign commercial banks in terms of total assets (including domestic
branches of such banks), and repurchase agreements with respect to such
obligations.
If at some future date, in SBAM's opinion, adverse conditions prevail in the
securities markets which makes the High Yield Bond Fund's investment strategy
inconsistent with the best interests of the Fund's shareholders, the Fund may
invest its assets without limit in high-quality short-term money market
instruments.
The High Yield Bond Fund may enter into repurchase agreements and reverse
repurchase agreements, may purchase securities on a firm commitment basis,
including when-issued securities and may lend portfolio securities. For a
description of these investment practices and the risks associated therewith,
see 'Additional Investment Activities and Risk Factors.'
The High Yield Bond Fund may purchase securities for which there is a limited
trading market or which are subject to restrictions on resale to the public. The
Fund will not invest more than 15% of the value of its total assets in illiquid
securities, such as 'restricted securities' which are illiquid, and securities
that are not readily marketable. As more fully described in the Statement of
Additional Information, the Fund may purchase certain restricted securities
('Rule 144A securities') for which there is a secondary market of qualified
institutional buyers as contemplated by Rule 144A under the Securities Act of
1933, as amended (the '1933 Act'). The Fund's holdings of Rule 144A securities
which are liquid securities will not be subject to the 15% limitation on
investments in illiquid securities. For further discussion of illiquid
securities and their associated risks, see 'Additional Investment Activities
and Risk Factors -- Restricted Securities and Securities with Limited Trading
Markets.'
The High Yield Bond Fund is currently authorized to use all of the various
investment strategies referred to under 'Additional Investment Activities and
Risk Factors -- Derivatives.' It is not presently anticipated that any of these
strategies will be used to a significant degree by the Fund. The Fund's ability
to pursue certain of these strategies may be limited by applicable regulations
of the SEC, the CFTC and the federal income tax requirements applicable to
regulated investment companies. Appendix B to this Prospectus and the Statement
of Additional Information contain descriptions of these strategies and of
certain risks associated therewith.
The foregoing investment policies, other than the High Yield Bond Fund's
investment objectives, are not fundamental policies and may be changed by vote
of the Fund's Board of Directors without the approval of shareholders.
STRATEGIC BOND FUND
The primary investment objective of the Strategic Bond Fund is to seek a high
level of current income. As a secondary objective, the Fund seeks capital
appreciation. The Strategic Bond Fund
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SALOMON BROTHERS INVESTMENT SERIES
seeks to achieve its objectives by investing in a globally diverse portfolio of
fixed-income investments and by giving SBAM broad discretion to deploy the
Strategic Bond Fund's assets among certain segments of the fixed-income market
that SBAM believes will best contribute to the achievement of the Fund's
objectives. At any point in time, SBAM will deploy the Fund's assets based on
its analysis of current economic and market conditions and the relative risks
and opportunities present in the following market segments: U.S. government
obligations, investment grade domestic corporate debt, high yield domestic
corporate debt securities, mortgage-backed securities and investment grade and
high yield foreign corporate and sovereign debt securities. SBAM has entered
into a subadvisory consulting agreement with its London based affiliate, SBAM
Limited, pursuant to which SBAM Limited will provide certain advisory services
to SBAM relating to currency transactions and investments in non-dollar-
denominated debt securities for the benefit of the Fund.
SBAM will determine the amount of assets to be allocated to each type of
security in which it invests based on its assessment of the maximum level of
income and capital appreciation that can be achieved from a portfolio which is
invested in these securities. In making this determination, SBAM will rely in
part on quantitative analytical techniques that measure relative risks and
opportunities of each type of security based on current and historical
economic, market, political and technical data for each type of security, as
well as on its own assessment of economic and market conditions both on a
global and local (country) basis. In performing quantitative analysis, SBAM
will employ prepayment analysis and option adjusted spread technology to
evaluate mortgage securities, mean variance optimization models to evaluate
foreign debt securities, and total rate of return analysis to measure relative
risks and opportunities in other fixed-income markets. Economic factors
considered will include current and projected levels of growth and inflation,
balance of payment status and monetary policy. The allocation of assets to
foreign debt securities will further be influenced by current and expected
currency relationships and political and sovereign factors. SBAM will
continuously review this allocation of assets and make such adjustments as it
deems appropriate. The Fund does not plan to establish a minimum or a maximum
percentage of the assets which it will invest in any particular type of
fixed-income security.
In addition, SBAM will have discretion to select the range of maturities of the
various fixed-income securities in which the Strategic Bond Fund invests. SBAM
anticipates that under current market conditions, the Fund's portfolio
securities will have a weighted average life of 6 to 10 years. However, the
weighted average life of the portfolio securities may vary substantially from
time to time depending on economic and market conditions.
The investment grade corporate debt securities and the investment grade foreign
debt securities to be purchased by the Fund are domestic and foreign debt
securities rated within the four highest bond ratings of either Moody's or S&P,
or, if unrated, deemed by SBAM to be of equivalent quality. While debt
securities carrying the fourth highest quality rating ('Baa' by Moody's or
'BBB' by S&P) are considered investment grade and are viewed to have adequate
capacity for payment of principal and interest, investments in such securities
involve a higher degree of risk than that associated with investments in debt
securities in the higher rating categories and such debt securities lack
outstanding investment characteristics and in fact have speculative
characteristics as well. For example, changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and
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interest payments than is the case with higher grade debt securities.
The types and characteristics of the U.S. government obligations and mortgage
backed securities to be purchased by the Strategic Bond Fund are set forth
above in the discussion of the investment objective and policies for the U.S.
Government Income Fund. In addition, the Fund may purchase privately issued
mortgage securities which are not guaranteed by the U.S. government or its
agencies or instrumentalities and may purchase stripped mortgage securities,
including interest-only and principal-only securities. The Strategic Bond Fund
does not currently intend to invest more than 10% of its total assets in
interest-only and principal-only securities. Additional information with
respect to securities to be purchased by the Fund is set forth below in the
section entitled 'Additional Investment Activities and Risk Factors' and in the
section entitled 'Additional Information on Portfolio Instruments and
Investment Policies' in the Statement of Additional Information.
The Strategic Bond Fund may invest in debt obligations issued or guaranteed by a
foreign sovereign government or one of its agencies or political subdivisions
and debt obligations issued or guaranteed by supranational organizations.
Supranational entities include international organizations designated or
supported by governmental entities to promote economic reconstruction or
development and international banking institutions and related government
agencies. Examples include the World Bank, the European Coal and Steel
Community, the Asian Development Bank and the Inter-American Development Bank.
Such supranational issued instruments may be denominated in multi-national
currency units. The Strategic Bond Fund will not invest more than 10% of its
total assets in issuers located in any one country (other than issuers located
in the United States).
In pursuing the Strategic Bond Fund's investment objectives, the Fund reserves
the right to invest predominantly in medium or lower-rated securities, commonly
known as 'junk bonds.' Investments of this type involve significantly greater
risks, including price volatility and risk of default in the payment of
interest and principal, than higher-quality securities. Although the investment
manager does not anticipate investing in excess of 75% of the Strategic Bond
Fund's assets in domestic and developing country debt securities that are rated
below investment grade, the Strategic Bond Fund may invest a greater percentage
in such securities when, in SBAM's determination, the yield available from such
securities outweighs their additional risks. SBAM anticipates that under
current market conditions, a significant portion of the Fund's assets will be
invested in such securities. By investing a portion of the Strategic Bond Fund's
assets in securities rated below investment grade as well as through
investments in mortgage securities and foreign debt securities, the investment
manager expects to provide investors with a higher yield than a high-quality
domestic corporate bond fund. Certain of the debt securities in which the
Strategic Bond Fund may invest may be rated as low as 'C' by Moody's or 'D' by
S&P or may be considered comparable to securities having such ratings. See
'Additional Investment Activities and Risk Factors -- High Yield Securities.'
In light of the risks associated with high yield corporate and sovereign debt
securities, SBAM will take various factors into consideration in evaluating the
creditworthiness of an issuer. For corporate debt securities, these will
typically include the issuer's financial resources, its sensitivity to economic
conditions and trends, the operating history of the issuer, and the experience
and track record of the issuer's management. For sovereign debt
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instruments, these will typically include the economic and political conditions
within the issuer's country, the issuer's overall and external debt levels and
debt service ratios, the issuer's access to capital markets and other sources
of funding, and the issuer's debt service payment history. SBAM will also
review the ratings, if any, assigned to the security by any recognized rating
agencies, although the investment manager's judgment as to the quality of a
debt security may differ from that suggested by the rating published by a
rating service. The Strategic Bond Fund's ability to achieve its investment
objectives may be more dependent on SBAM's credit analysis than would be the
case if it invested in higher quality debt securities. A description of the
ratings used by Moody's and S&P is set forth in Appendix A to this Prospectus.
The high yield sovereign debt securities in which the Strategic Bond Fund may
invest are U.S. dollar-denominated and non-dollar-denominated debt securities,
including Brady Bonds, that are issued or guaranteed by governments or
governmental entities of developing and emerging market countries. SBAM expects
that these countries will consist primarily of those which have issued or have
announced plans to issue Brady Bonds, but the Fund is not limited to investing
in the debt of such countries. Brady Bonds are debt securities issued under the
framework of the Brady Plan, an initiative announced by former U.S. Treasury
Secretary Nicholas F. Brady in 1989 as a mechanism for debtor nations to
restructure their outstanding external indebtedness. For a description of Brady
Bonds, see 'Additional Investment Activities and Risk Factors -- High Yield
Securities' in this Prospectus and 'Additional Information on Portfolio
Instruments and Investment Policies -- Brady Bonds' in the Statement of
Additional Information. SBAM anticipates that the Fund's investments in
sovereign debt will be concentrated in Latin American countries, including
Central and South American and Caribbean countries. SBAM also expects to take
advantage of additional opportunities for investment in the debt of North
African countries, such as Nigeria and Morocco, Eastern European countries,
such as Poland and Hungary, and Southeast Asian countries, such as the
Philippines. Sovereign governments may include national, provincial, state,
municipal or other foreign governments with taxing authority. Governmental
entities may include the agencies and instrumentalities of such governments, as
well as state-owned enterprises. For a more detailed discussion of high yield
sovereign debt securities, see 'Additional Investment Activities and Risk
Factors -- High Yield Securities.'
The Strategic Bond Fund will be subject to special risks as a result of its
ability to invest up to 100% of its assets in foreign securities (including
emerging market securities). Such securities may be non-U.S. dollar denominated
and there is no limit on the percentage of the Fund's assets that can be
invested in non-dollar denominated securities. SBAM anticipates that under
current market conditions, a significant portion of the Fund's assets will be
invested in foreign securities. These risks are described under the captions
'Additional Investment Activities and Risk Factors -- Foreign Securities.'
Moreover, substantial investments in foreign securities may have adverse tax
implications as described under 'Taxation.' The ability to spread its
investments among the fixed-income markets in a number of different countries
may, however, reduce the overall level of market risk to the extent it may
reduce the Strategic Bond Fund's exposure to a single market.
The Strategic Bond Fund may invest in zero coupon securities, pay-in-kind bonds,
Loan Participations and Assignments. See 'Additional Investment Activities and
Risk Factors-Zero Coupon Securities, Pay-in-Kind Bonds and Deferred Payment
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Securities' and ' -- Loan Participations and Assignments.'
The Strategic Bond Fund may invest up to 20% of its assets in common stock,
convertible securities, warrants, preferred stock or other equity securities
when consistent with the Fund's objectives. The Fund will generally hold such
equity investments as a result of purchases of unit offerings of fixed-income
securities which include such securities or in connection with an actual or
proposed conversion or exchange of fixed-income securities, but may also
purchase equity securities not associated with fixed-income securities when, in
SBAM's opinion such purchase is appropriate.
The Strategic Bond Fund currently intends to invest substantially all of its
assets in fixed-income securities. In order to maintain liquidity, the
Strategic Bond Fund may invest up to 20% of its assets in high-quality
short-term money market instruments. If at some future date, in the opinion of
SBAM, adverse conditions prevail in the market for fixed-income securities, the
Strategic Bond Fund for temporary defensive purposes may invest its assets
without limit in high-quality short-term money market instruments. The types
and characteristics of the money market securities to be purchased by the Fund
are set forth in the discussion of the investment objectives and policies of the
Cash Management Fund.
The Strategic Bond Fund may enter into repurchase agreements and reverse
repurchase agreements, may purchase securities on a firm commitment basis,
including when-issued securities and may lend portfolio securities. The Fund
does not currently intend to make loans of portfolio securities with a value in
excess of 33% of the value of its total assets. The Fund may also enter into
mortgage 'dollar rolls.' For a description of these investment practices and
the risks associated therewith, see 'Additional Investment Activities and Risk
Factors.'
The Strategic Bond Fund may purchase securities for which there is a limited
trading market or which are subject to restrictions on resale to the public. The
Fund will not invest more than 15% of the value of its total assets in illiquid
securities, such as 'restricted securities' which are illiquid, and securities
that are not readily marketable. As more fully described in the Statement of
Additional Information, the Fund may purchase Rule 144A securities for which
there is a secondary market of qualified institutional buyers as contemplated
by Rule 144A under the 1933 Act. The Fund's holdings of Rule 144A securities
which are liquid securities will not be subject to the 15% limitation on
investments in illiquid securities. For further discussion of illiquid
securities and their associated risks, see 'Additional Investment Activities
and Risk Factors -- Restricted Securities and Securities with Limited Trading
Markets.'
The Strategic Bond Fund is currently authorized to use all of the various
investment strategies referred to under 'Additional Investment Activities and
Risk Factors -- Derivatives.' With the exception of currency transactions,
however, it is not presently anticipated that any of these strategies will be
used to a significant degree by the Fund. The Fund's ability to pursue certain
of these strategies may be limited by applicable regulations of the SEC, the
CFTC and the federal income tax requirements applicable to regulated investment
companies. Appendix B to this Prospectus and the Statement of Additional
Information contain descriptions of these strategies and of certain risks
associated therewith.
The foregoing investment policies, other than the Strategic Bond Fund's
investment objectives, are not fundamental policies and may be changed by vote
of the Fund's Board of Directors without the approval of shareholders.
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TOTAL RETURN FUND
The primary investment objective of the Total Return Fund is to obtain above
average income (compared to a portfolio entirely invested in equity
securities). The Fund's secondary objective is to take advantage of
opportunities for growth of capital and income. The policy of the Total Return
Fund is to invest in a broad variety of securities, including equity
securities, fixed-income securities and short-term obligations. The Fund may
vary the percentage of assets invested in any one type of security in
accordance with the investment manager's view of existing and anticipated
economic and market conditions, fiscal and monetary policy and underlying
security values. Under normal market conditions, it is anticipated that at
least 40% of the Fund's total assets will be invested in equity securities.
Equity securities include common and preferred stock (including convertible
preferred stock), bonds, notes and debentures convertible into common or
preferred stock, stock purchase warrants and rights, equity interests in trusts,
partnerships, joint ventures or similar enterprises and American, Global or
other types of Depositary Receipts. Most of the equity securities purchased by
the Fund are expected to be traded on a stock exchange or in an over-the-counter
market.
SBAM will have discretion to invest in the full range of maturities of
fixed-income securities. Generally, most of the Fund's long-term debt
investments will consist of 'investment grade' securities; that is, securities
rated Baa or better by Moody's or BBB or better by S&P or Fitch or determined
by SBAM to be of comparable quality to securities so rated. See Appendix A to
this Prospectus for a description of these ratings. Certain risks associated
with investment in debt securities carrying the fourth highest quality rating
('Baa' by Moody's or 'BBB' by S&P) are described above in the investment
objectives and policies for the Strategic Bond Fund.
Up to 20% of the Fund's net assets may be invested in nonconvertible fixed
income securities that are rated Ba or lower by Moody's or BB or lower by S&P
or Fitch or determined by SBAM to be of comparable quality. These securities are
commonly known as 'junk bonds.' There is no limit on the amount of the Total
Return Fund's assets that can be invested in convertible securities rated below
investment grade. For additional information on these lower rated, high yield
debt securities, which involve a high degree of risk, see the discussion above
under the investment objectives and policies for the High Yield Bond Fund and
'Additional Investment Activities and Risk Factors -- High Yield Securities.'
In addition to corporate debt securities, the Total Return Fund may invest in
U.S. Government securities and mortgage-backed securities, the types and
characteristics of which are set forth above in the discussion of the investment
objective and policies for the U.S. Government Income Fund. The Fund may also
purchase privately issued mortgage securities which are not guaranteed by the
U.S. government or its agencies or instrumentalities. For a description of
these securities and the risks associated therewith see 'Additional Investment
Activities and Risk Factors.' The Total Return Fund may invest in corporate
asset-backed securities, the characteristics and risks of which are described
above under the investment objective and policies of the Cash Management Fund.
Other fixed income securities in which the Total Return Fund may invest include
zero coupon bonds, deferred interest bonds and bonds on which the interest is
payable in kind ('PIK bonds'). For additional information on zero coupon bonds
and PIK bonds, see 'Additional Investment Activities and Risk Factors -- Zero
Coupon Securities, PIK Bonds and Deferred Payment Securities.' Deferred
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interest bonds are debt obligations which are issued or purchased at a
significant discount from face value and provide for a period of delay before
the regular payment of interest begins. The characteristics and related risks
of these bonds are similar to those of zero coupon bonds.
The Total Return Fund may invest up to 20% (and generally expects to invest
between 10% and 20%) of its total assets in foreign securities (including
American Depositary Receipts). For a discussion of the risks associated with
investment in foreign securities, see 'Additional Investment Activities and
Risk Factors -- Foreign Securities.'
The Total Return Fund may invest a portion of its assets in Loan Participations
and Assignments. For a discussion of Loan Participations and Assignments and
their associated risks, see 'Additional Investment Activities and Risk
Factors -- Loan Participation and Assignments.'
The Total Return Fund may enter into repurchase agreements and reverse
repurchase agreements, may purchase securities on a firm commitment basis,
including when-issued securities, and may lend portfolio securities. For a
description of these investment practices, see 'Additional Investment
Activities and Risk Factors.' The Fund will not invest more than 10% of its
assets in repurchase agreements maturing in more than seven days.
The Total Return Fund may purchase securities for which there is a limited
trading market or which are subject to restrictions on resale to the public. The
Fund will not invest more than 15% of the value of its total assets in illiquid
securities, such as 'restricted securities' which are illiquid, and securities
that are not readily marketable. As more fully described in the Statement of
Additional Information, the Fund may purchase Rule 144A securities for which
there is a secondary market of qualified institutional buyers as contemplated
by Rule 144A under the 1933 Act. The Fund's holdings of Rule 144A securities
which are liquid securities will not be subject to the 15% limitation on
investments in illiquid securities. For further discussion of illiquid
securities and their associated risks, see 'Additional Investment Activities
and Risk Factors -- Restricted Securities and Securities with Limited Trading
Market.'
The Total Return Fund is currently authorized to use all of the various
investment strategies referred to under 'Additional Investment Activities and
Risk Factors -- Derivatives.' With the exception of currency transactions,
however, it is not presently anticipated that any of these strategies will be
used to a significant degree by the Fund. The Fund's ability to pursue certain
of these strategies may be limited by applicable regulations of the SEC, the
CFTC and the federal income tax requirements applicable to regulated investment
companies. Appendix B to this Prospectus and the Statement of Additional
Information contain descriptions of these strategies and of certain risks
associated therewith.
The foregoing investment policies, other than the Total Return Fund's investment
objectives, are not fundamental policies and may be changed by vote of the Board
of Directors without the approval of shareholders.
ASIA GROWTH FUND
The Asia Growth Fund's objective is to achieve long-term capital appreciation.
The Fund seeks to achieve its objective by investing at least 65% of its total
assets in equity and equity-related securities of Asian Companies. Asian
Companies include companies that: (i) are organized under the laws of
Bangladesh, China, Hong Kong, India, Indonesia, Korea, Malaysia, Pakistan, the
Philippines, Singapore, Sri Lanka, Taiwan, Thailand or any other country in the
Asian region (other than Japan, Australia and New Zealand) that currently or in
the future
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permits foreign investment (collectively, 'Asian Countries'); or (ii)
regardless of where organized and as determined by SBAM AP, (a) derive at least
50% of their revenues from goods produced or sold, investments made, or
services performed in or with one or more of the Asian Countries, (b) maintain
at least 50% of their assets in one or more of the Asian Countries, or (c) have
securities which are traded principally on a stock exchange in an Asian
Country. The Fund is non-diversified within the meaning of the 1940 Act. See
'Additional Investment Activities and Risk Factors -- Non-
Diversification.'
Equity securities in which the Asia Growth Fund may invest include common and
preferred stocks (including convertible preferred stock), bonds, notes and
debentures convertible into common and preferred stock, stock purchase warrants
and rights, equity-linked debt securities, equity interests in trusts,
partnerships, joint ventures or similar enterprises, and American, Global or
other types of Depositary Receipts. Equity-linked debt securities are debt
instruments whose prices are indexed to the prices of equity securities or
securities indices. In other words, the value at maturity or coupon rate of
these equity-linked debt instruments is determined by reference to a specific
instrument or statistic. The performance of equity-linked debt instruments
depends to a great extent on the performance of the security or index to which
they are indexed, and may also be influenced by interest rate changes in the
United States and abroad. At the same time, these instruments are subject to the
credit risks associated with the issuer of the security, and their values may
decline substantially if the issuer's creditworthiness deteriorates. Indexed
instruments may be more volatile than the underlying instruments.
There are no prescribed limits on geographic asset distributions among Asian
Countries and from time to time, SBAM AP expects to invest a significant portion
of the Asia Growth Fund's assets in Hong Kong, Malaysia, Singapore and Thailand.
Investments in each of these countries may from time to time exceed 25% of the
Fund's total assets. In addition, more than 25% of the Fund's total assets may
be denominated or quoted in the currencies of any one or more of such
countries. In this connection, SBAM AP anticipates that up to 40% of the Fund's
total assets may be invested in Hong Kong. Under an agreement signed in 1984,
Britain will pass Hong Kong's sovereignty to China effective July 1, 1997. At
times, relations between Britain and China have been strained over differences
in political and legal issues related to Hong Kong's sovereignty. The
political, social and financial ramifications of China's assumption of
sovereignty over Hong Kong, and the impact on the financial markets in Hong
Kong, Asia or elsewhere, are uncertain.
Although SBAM AP expects that most of the equity securities purchased by the
Fund will be traded on a stock exchange or in an over-the-counter market, most
of the Asian securities markets have substantially less volume than U.S. or
other established markets and some of the stock exchanges in the Asian
Countries are in the early stages of their development. Concentration of the
Fund's assets in one or a few of the Asian countries and Asian currencies will
subject the Fund, to a greater extent than if the Fund's assets were less
geographically concentrated, to the risks of adverse changes in the securities
and foreign exchange markets of such countries and social, political or
economic events which may occur in those countries. For a more detailed
discussion of the special risks which the Fund is subject to by virtue of its
investment in foreign securities, see 'Additional Investment Activities and
Risk Factors -- Foreign Securities.' An investment in the Asia Growth Fund
should not be considered as a complete investment program.
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In pursuing the Asia Growth Fund's investment objective, SBAM AP will combine a
traditional fundamental approach towards evaluating industry sectors and
individual securities of Asian Companies with a risk management driven approach
seeking to keep the Fund's volatility of return in line with or lower than that
currently experienced in the Asian markets.
SBAM AP expects to focus on certain industry groups across Asian Countries in
an attempt to identify and capture the relative value of such groups on a
pan-regional basis. SBAM AP will research individual companies in an effort to
identify the investment opportunities within these industry groups which will
provide long-term capital appreciation. In addition, SBAM AP intends to meet the
management of individual companies on a periodic basis. As part of the Asia
Growth Fund's risk management objective, SBAM AP will also concentrate on
macroeconomic issues and other variables influencing the direction of monetary
policies followed by Asian Central Banks.
The investment process to be implemented by SBAM AP will consist of the three
following principal (and potentially overlapping) types of approaches.
PAN REGIONAL INDUSTRY GROUP DECISIONS. SBAM AP will seek to identify the
pan-regional industrial sectors which are likely to exhibit attractive returns
over the long-term. In selecting such industrial sectors, SBAM AP will focus on
industry cycles and competitiveness as well as the industrial characteristics
of the Asian economies. In addition, SBAM AP will review government
regulations, industrial policies, access to technology and industrial research
reports provided by industrial companies or associations and securities dealers
in Asian Countries. SBAM AP will focus on those industries which represent
meaningful weightings in the total market capitalization of the Asian Countries
including, but not limited to, telecommunications, consumer durables and
nondurables, food and beverage, electronics, hotels, power engineering and
generation, basic industries, public utilities, property and financial sectors.
SBAM AP believes that an investment process that places emphasis on industry
groups is appropriate given the current state of economic and financial
integration being achieved by the Asian Countries and the relatively
significant concentration of market capitalization in Asian Countries toward
certain industrial sectors.
FUNDAMENTAL ANALYSIS. In order to identify the most attractive investment
opportunities within industry groups, SBAM AP will employ extensive research to
select investments in Asian Countries that offer long-term growth potential for
investors. While the Asia Growth Fund generally seeks to invest in securities of
larger companies within the particular Asian market, it may also invest in the
securities of medium and smaller companies that, in the opinion of SBAM AP,
have potential for growth. In particular, SBAM AP will employ the following
three-step process to evaluate particular investment opportunities for the Fund.
SCREENING PROCESS. SBAM AP will implement a systematic screening process in an
effort to identify individual securities it believes likely to exhibit
attractive returns over the long term. SBAM AP will screen companies according
to factors such as the perceived quality of their management and business,
overall sustainable competitiveness, historical earnings, dividend records over
at least a full business cycle, liquidity, trading volumes and historical and
expected volatility.
FINANCIAL ANALYSIS PROCESS. The financial analysis of selected companies will
focus on evaluating the fundamental value of the enterprise. SBAM AP will use a
value-driven process which will emphasize quantitative analysis based on return
on equity ('ROE') and its components, such
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as operating margins, financial leverage, asset turnover and interest and tax
burdens. In addition, the company's cash flow generating capabilities and
return on assets will be considered. SBAM AP believes that ROE and cash flow
dynamics are appropriate variables when analyzing companies which operate in
high growth markets, such as Asia, as the ability of such companies to capture
this growth by using the right allocation of resources and asset financing is
of utmost importance.
VALUATION PROCESS AND VOLATILITY ANALYSIS. The valuation process will focus on
Price Earnings Ratio ('PER') calculations and comparisons with historical
relative PER bands and local market conditions. SBAM AP will use measures such
as PER/growth, and will evaluate whether the security enjoys accelerating
earnings growth momentum due to management changes or the introduction of new
products and/or services. In addition, where appropriate, SBAM AP will conduct
specific dividend discount model and discount cash flow analyses for specific
securities with predictable cash flows or dividend streams. Through the use of
this analysis, SBAM AP will attempt to identify companies with strong potential
for appreciation relative to their downside exposure. Lastly, SBAM AP will
conduct a volatility analysis on selected securities in an effort to forecast
the expected risk of such securities and compare the results of such risk
analysis with these securities' expected returns. Investments may be made in
companies that do not have extensive operating experience provided that SBAM AP
believes such companies nevertheless have significant growth potential.
RISK MANAGEMENT AND MACROECONOMIC/TOP-DOWN ANALYSIS. SBAM AP will also consider
macroeconomic variables, such as liquidity and capital flows, foreign equity and
industrial investments and the direction of monetary policies in the Asian
Countries in an effort to capture individual market movements as well as attain
an optimal asset allocation mix and to identify the appropriate risk management
parameters for the Asia Growth Fund. The macroeconomic data SBAM AP will
monitor and analyze includes, but is not limited to, gross domestic product
growth, balance of payments and current account balances, budget deficits or
surpluses, inflation and interest rates. SBAM AP intends to meet with central
bankers, regional economists and strategists on a regular basis to assess the
present and future direction of monetary policies and their likely impact on
the markets of the Asian Countries.
As part of the Fund's risk management approach and in an attempt to better
assess and control the Fund's overall risk level on an ongoing basis, SBAM AP
will employ a quantitative analysis at each stage of the investment process
which will consist of analyzing and forecasting volatilities of the Asian
markets and securities. SBAM AP will use a number of volatility-control
strategies, including derivative instruments (as discussed below), in an effort
to attain an optimal asset allocation mix, for hedging purposes in an attempt
to control the Fund's overall risk level and to obtain exposure to markets in
the Asian Countries which have restrictions on foreign investment.
The Asia Growth Fund from time to time may invest up to 10% of its total assets
in non-convertible debt securities, which may include securities rated below
investment grade by S&P and Moody's with no minimum rating required or
comparable unrated securities, commonly known as 'junk bonds.' There is no
limit on the amount of the Fund's assets that can be invested in convertible
securities rated below investment grade. For additional information on these
high yield debt securities, which may involve a high degree of risk, see
'Additional Investment Activities and Risk Factors -- High Yield Securities.'
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In order to maintain liquidity, the Asia Growth Fund may hold and/or invest up
to 35% of its total assets in debt securities denominated in U.S. dollars or in
another freely convertible currency including: (1) short-term (less than 12
months to maturity) and medium-term (not greater than five years to maturity)
obligations issued or guaranteed by (a) the U.S. government or the government
of an Asian Country, their agencies or instrumentalities or (b) international
organizations designated or supported by multiple foreign governmental entities
to promote economic reconstruction or development ('supranational entities');
(2) finance company obligations, corporate commercial paper and other short-term
commercial obligations, in each case rated, or issued by companies with similar
securities outstanding that are rated, 'Prime-1' or 'A' or better by Moody's or
'A-1' or 'A' or better by S&P or, if unrated, of comparable quality as
determined by SBAM AP; (3) obligations (including certificates of deposit, time
deposits, demand deposits and bankers' acceptances) of banks; and (4) repurchase
agreements (as described below under 'Additional Investment Activities and Risk
Factors -- Repurchase Agreements') with respect to securities in which the Fund
may invest. If at some future date, in the opinion of SBAM AP, adverse
conditions prevail in the securities markets which makes the Asia Growth Fund's
investment strategy inconsistent with the best interests of the Fund's
shareholders, the Fund may invest its assets without limit in such instruments.
The Asia Growth Fund may enter into repurchase agreements and reverse
repurchase agreements, may purchase securities on a firm commitment basis,
including when-issued securities and may lend portfolio securities. The Fund may
also invest in investment funds. For a description of these investment practices
and the risks associated therewith, see 'Additional Investment Activities and
Risk Factors.'
The Asia Growth Fund may purchase securities for which there is a limited
trading market or which are subject to restrictions on resale to the public. The
Fund will not invest more than 15% of the value of its total assets in illiquid
securities, such as 'restricted securities' which are illiquid, and securities
that are not readily marketable. For further discussion of illiquid securities
and their associated risks, see 'Additional Investment Activities and Risk
Factors -- Restricted Securities and Securities With Limited Trading Markets.'
As more fully described in the Statement of Additional Information, the Fund
may purchase Rule 144A securities. The Fund's holdings of Rule 144A securities
which are liquid securities will not be subject to the 15% limitation on
investments in illiquid securities.
The Asia Growth Fund is currently authorized and intends to use the various
investment strategies referred to under 'Additional Investment Activities and
Risk Factors -- Derivatives.' The Fund's ability to pursue certain of these
strategies may be limited by applicable regulations of the SEC, the CFTC and
the federal income tax requirements applicable to regulated investment
companies. Appendix B to this Prospectus and the Statement of Additional
Information contain descriptions of these strategies and of certain risks
associated therewith.
The foregoing investment policies and activities, other than the Asia Growth
Fund's investment objective, are not fundamental policies and may be changed by
vote of the Fund's Board of Directors without the approval of shareholders.
INVESTORS FUND
The primary investment objective of the Investors Fund is to seek long-term
growth of capital. Current income is a
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secondary objective. The Fund seeks to achieve its objectives primarily through
investments in common stocks of well-known companies.
The Investor Fund's policy is to retain flexibility in the management of its
portfolio, without restrictions as to the proportion of assets which may be
invested in any class of securities. It is anticipated that the Fund's
portfolio will generally consist of common and preferred stocks. The Fund may
purchase securities of companies located in foreign countries which SBAM deems
consistent with the investment objectives and policies of the Fund, but not if
upon such purchase more than 20% of the Fund's net assets would be so invested.
For a discussion of the risks associated with investment in foreign securities,
see 'Additional Investment Activities and Risk Factors -- Foreign Securities.'
Under normal conditions, the selection of common stock or securities convertible
into common stock, such as convertible preferred stock or convertible
debentures, with growth possibilities will be favored. Income-producing
securities are a secondary consideration in portfolio selection. To meet
operating expenses, to serve as collateral in connection with certain
investment techniques and to meet anticipated redemption requests, the
Investors Fund generally holds a portion of its assets in short-term
fixed-income securities (governmental obligations or investment grade debt
securities) or cash or cash equivalents. As described below, short-term
investments may include repurchase agreements with banks or broker/dealers.
When management deems it appropriate, consistent with the Investors Fund's
secondary objective of current income, or during temporary defensive periods
due to economic or market conditions, the Fund may invest without limitation in
fixed-income securities or hold assets in cash or cash equivalents. The types
and characteristics of investment grade corporate debt securities and
investment grade foreign debt securities which may be purchased by the Fund are
set forth above in the discussion of investment objectives and policies for the
Strategic Bond Fund. Investments in such investment grade fixed-income
securities may also be made for the purpose of capital appreciation, as in the
case of purchases of bonds traded at a substantial discount, or when interest
rates are expected to decline.
The Investors Fund from time to time may invest up to 5% of its net assets in
non-convertible debt securities rated below investment grade by S&P and Moody's
with no minimum rating required or comparable unrated securities. There is no
limit on the amount of Investors Fund's assets that can be invested in
convertible securities rated below investment grade. For additional information
on these high yield debt securities, which involve a high degree of risk, see
the description above of investment objectives and polices for the High Yield
Bond Fund and 'Additional Investment Activities and Risk Factors -- High Yield
Securities.'
The Investors Fund maintains a carefully selected portfolio of securities
diversified among industries and companies. The Fund may invest up to 25% of
its net assets in any one industry. The Fund generally purchases marketable
securities, primarily those traded on the New York Stock Exchange ('NYSE') or
other national securities exchanges, but also issues traded in the
over-the-counter market. The Fund will not invest more than 10% of the value of
its total assets in illiquid securities, such as 'restricted securities' which
are illiquid, and securities that are not readily marketable. As more fully
described in the Statement of Additional Information, the Fund may purchase
certain Rule 144A securities for which there is a secondary market of qualified
institutional buyers as contemplated by Rule 144A under the 1933 Act. The
Fund's holdings of Rule 144A securities which are liquid securities
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will not be subject to the 10% limitation on investments in illiquid
securities. For further discussion of illiquid securities and their associated
risks, see 'Additional Investment Activities and Risk Factors -- Restricted
Securities and Securities with Limited Trading Markets.'
From time to time, the Investors Fund may lend portfolio securities to brokers
or dealers or other financial institutions. Such loans will not exceed 33 1/3%
of the Fund's total assets, taken at value. For a discussion of the risks
associated with lending portfolio securities, see 'Additional Investment
Activities and Risk Factors -- Loans of Portfolio Securities.'
As indicated under 'Investment Limitations' below, the Investors Fund may
invest in repurchase agreements in an amount up to 25% of its total assets. For
a description of repurchase agreements and their associated risks, see
'Additional Investment Activities and Risk Factors -- Repurchase Agreements.'
In addition, in order to meet redemption requests or as a temporary measure,
the Fund may borrow up to an aggregate of 5% of its total assets taken at cost
or value, whichever is less. The Fund shall borrow only from banks.
As a hedge against either a decline in the value of securities included in the
Investors Fund's portfolio or against an increase in the price of securities
which it plans to purchase or in order to preserve or maintain a return or
spread on a particular investment or portion of its portfolio or to achieve a
particular return on cash balances, or in order to increase income or gain, the
Investors Fund may use all of the various investment strategies referred to
under 'Additional Investment Activities and Risk Factors -- Derivatives.' The
Fund's ability to pursue certain of these strategies may be limited by
applicable regulations of the SEC, the CFTC and the federal income tax
requirements applicable to regulated investment companies. Appendix B to this
Prospectus and the Statement of Additional Information contain descriptions of
these strategies and of certain risks associated therewith.
The foregoing investment policies, other than the Investors Fund's investment
objectives and the Fund's policies with respect to repurchase agreements,
borrowing of money and lending of portfolio securities, are not fundamental
policies and may be changed by vote of the Board of Directors without the
approval of shareholders.
CAPITAL FUND
The investment objective of the Capital Fund is to seek capital appreciation
through investments in securities which are believed to have above-average price
appreciation potential. Such investments may also involve above-average risk.
There can be no assurance that the Fund's objective will be achieved. Although
the Fund may receive current income from dividends, interest and other sources,
income is an incidental consideration to seeking capital appreciation. The Fund
is non-diversified within the meaning of the 1940 Act. See 'Additional
Investment Activities and Risk Factors -- Non-Diversification.'
In seeking capital appreciation, the Capital Fund may purchase securities of
seasoned issuers, relatively smaller and newer companies as well as in new
issues and may be subject to wide fluctuations in market value. Portfolio
securities may have limited marketability or may be widely and publicly traded.
The Fund will not concentrate its investments in any particular industry.
The Capital Fund anticipates that its investments generally will be in
securities of companies which it considers to reflect the following
characteristics:
(1) share prices which appear to undervalue the company's assets or which
appear not to take into account adequately factors such as prospective reversal
of an unfavorable industry trend, lack of investor
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recognition or disappointing earnings believed to be temporary;
(2) special situations such as existing or possible changes in management or
management policies, corporate structure or control, capitalization, regulatory
environment, or other circumstances which could be expected to favor earnings or
market price of such company's shares; or
(3) growth potential due to technological advances, new methods in marketing or
production, new or unique products or services, changes in demand for products
or services or other significant new developments.
The Capital Fund intends to invest primarily in common stocks, or securities
convertible into or exchangeable for common stocks, such as convertible
preferred stocks or convertible debentures. To meet operating expenses, to
serve as collateral in connection with certain investment techniques and to meet
anticipated redemption requests, the Fund generally holds a portion of its
assets in short-term fixed income securities (government obligations or
investment grade debt securities) or cash or cash equivalents. As described
below, short-term investments may include repurchase agreements with banks or
brokers-dealers. When management deems it appropriate, for temporary defensive
purposes, the Fund may invest without limitation in investment grade
fixed-income securities or hold assets in cash or cash equivalents. Investment
grade debt securities are debt securities rated BBB or better by S&P or Baa or
better by Moody's, or if rated by other rating agencies or if unrated,
securities deemed by SBAM to be of comparable quality. See 'Appendix A:
Description of Ratings.' Investments in such investment grade fixed-income
securities may also be made for the purpose of capital appreciation, as in the
case of purchases of bonds traded at a substantial discount or when SBAM
believes interest rates may decline.
The Capital Fund from time to time may invest up to 5% of its net assets in non-
convertible debt securities rated below investment grade by S&P and Moody's
with no minimum rating required or comparable unrated securities. There is no
limit on the amount of the Fund's assets that can be invested in convertible
securities rated below investment grade. For additional information on these
high yield debt securities, which may involve a high degree of risk, see the
description above of the investment objectives and policies for the High Yield
Bond Fund and 'Additional Investment Activities and Risk Factors -- High Yield
Securities.' The Fund may invest up to 20% of the value of the Fund's assets in
securities of foreign issuers. See 'Additional Investment Activities and Risk
Factors -- Foreign Securities.'
The Capital Fund may purchase securities for which there is a limited trading
market or which are subject to restrictions on resale to the public. The Fund
will not invest more than 10% of the value of its total assets in illiquid
securities, such as 'restricted securities' which are illiquid, and securities
that are not readily marketable. For further discussion of illiquid securities
and their associated risks, see 'Additional Investment Activities and Risk
Factors -- Restricted Securities and Securities With Limited Trading Markets.'
As more fully described in the Statement of Additional Information, the Fund
may purchase Rule 144A securities. The Fund's holding of Rule 144A securities
which are liquid securities will not be subject to the 10% limitation on
investments in illiquid securities.
As indicated below under 'Investment Limitations,' the Fund may from time to
time lend portfolio securities to selected members of the NYSE. Such loans will
not exceed 10% of the Fund's total assets taken at value. For a discussion of
the risks associated with lending portfolio securities, see 'Additional
Investment
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Activities and Risk Factors -- Loans of Portfolio Securities.'
As indicated below under 'Investment Limitations,' the Capital Fund may invest
in repurchase agreements in an amount up to 25% of its total assets. The Fund
enters into repurchase agreements with respect to securities in which it may
otherwise invest. For a description of repurchase agreements and their
associated risks, see 'Additional Investment Activities and Risk
Factors -- Repurchase Agreements.' In addition, in order to meet redemptions or
to take advantage of promising investment opportunities without disturbing an
established portfolio, the Fund may borrow up to an aggregate of 15% of the
value of its total assets taken at the time of borrowing. In addition, the Fund
may borrow as a temporary measure an aggregate amount which may not exceed 5%
of the value of its total assets at the time of borrowing. The Fund shall borrow
only from banks. Borrowings may be unsecured, or may be secured by not more
than 15% of the value of the Fund's total assets. As a matter of operating
policy, however, the Fund will not secure borrowings by more than 10% of the
value of the Fund's total assets. For a discussion of the risks associated with
borrowings, see 'Additional Investment Activities and Risk
Factors -- Borrowing.'
As a hedge against either a decline in the value of the securities included in
the Capital Fund's portfolio, or against an increase in the price of the
securities which it plans to purchase, or in order to preserve or maintain a
return or spread on a particular investment or portion of its portfolio or to
achieve a particular return on cash balances, or in order to increase income or
gain, the Capital Fund may use all of the investment strategies referred to
under 'Additional Investment Activities and Risk Factors -- Derivatives.' The
Fund's ability to pursue certain of these strategies may be limited by
applicable regulations of the SEC, the CFTC and the federal income tax
requirements applicable to regulated investment companies.
The foregoing investment policies (other than the policy of the Capital Fund
with respect to the borrowing of money and the lending of portfolio securities)
are not fundamental policies and may be changed by vote of the Board of
Directors without the approval of shareholders.
- --------------------------------------------------------------------------------
Additional Investment Activities
and Risk Factors
BANK OBLIGATIONS. Banks are subject to extensive governmental regulations which
may limit both the amounts and types of loans and other financial commitments
which may be made and interest rates and fees which may be charged. The
profitability of this industry is largely dependent upon the availability and
cost of capital funds for the purpose of financing lending operations under
prevailing money market conditions. Also, general economic conditions play an
important part in the operations of this industry and exposure to credit losses
arising from possible financial
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difficulties of borrowers might affect a bank's ability to meet its obligations.
Investors should also be aware that securities issued or guaranteed by foreign
banks, foreign branches of U.S. banks, and foreign government and private
issuers may involve investment risks in addition to those relating to domestic
obligations. See ' -- Foreign Securities' below. None of the Funds will
purchase bank obligations which SBAM believes, at the time of purchase, will be
subject to exchange controls or foreign withholding taxes; however, there can
be no assurance that such laws may not become applicable to certain of the
Funds' investments. In the event unforeseen exchange controls or foreign
withholding taxes are imposed with respect to a Fund's investments, the effect
may be to reduce the income received by the Fund on such investments.
FLOATING AND VARIABLE RATE INSTRUMENTS. Certain Funds may invest in floating
and variable rate obligations. Floating or variable rate obligations bear
interest at rates that are not fixed, but vary with changes in specified market
rates or indices, such as the prime rate, and at specified intervals. Certain
of the floating or variable rate obligations that may be purchased by a Fund
may carry a demand feature that would permit the holder to tender them back to
the issuer at par value prior to maturity. Such obligations include variable
rate master demand notes, which are unsecured instruments issued pursuant to an
agreement between the issuer and the holder that permit the indebtedness
thereunder to vary and provide for periodic adjustments in the interest rate. A
Fund will limit its purchases of floating and variable rate obligations to
those of the same quality as it otherwise is allowed to purchase. SBAM will
monitor on an ongoing basis the ability of an issuer of a demand instrument to
pay principal and interest on demand. For a further discussion of floating and
variable rate obligations, see 'Additional Information on Portfolio Instruments
and Investment Policies -- Floating and Variable Rate Instruments' in the
Statement of Additional Information.
MUNICIPAL LEASE OBLIGATIONS. Certain of the Funds may invest in municipal lease
obligations. Although lease obligations do not constitute general obligations
of the issuer for which the lessee's unlimited taxing power is pledged, a lease
obligation is frequently backed by the lessee's covenant to budget for,
appropriate and make the payments due under the lease obligation. However,
certain lease obligations contain 'nonappropriation' clauses which provide that
the lessee has no obligation to make lease or installment purchase payments in
future years unless money is appropriated for such purpose on a yearly basis.
Although 'nonappropriation' lease obligations are secured by the leased
property, disposition of the property in the event of foreclosure might prove
difficult.
REPURCHASE AGREEMENTS. Each Fund may enter into repurchase agreements for cash
management purposes. A repurchase agreement is a transaction in which the
seller of a security commits itself at the time of the sale to repurchase that
security from the buyer at a mutually agreed upon time and price.
Each Fund will enter into repurchase agreements only with dealers, domestic
banks or recognized financial institutions which, in the opinion of SBAM based
on guidelines established by the Board of Directors, are deemed creditworthy.
SBAM will monitor the value of the securities underlying the repurchase
agreement at the time the transaction is entered into and at all times during
the term of the repurchase agreement to ensure that the value of the securities
always equals or exceeds the repurchase price. Each Fund requires that
additional securities be deposited if the value of the securities purchased
decreases below their
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resale price and does not bear the risk of a decline in the value of the
underlying security unless the seller defaults under the repurchase obligation.
In the event of default by the seller under the repurchase agreement, a Fund
could experience losses and experience delays in connection with the
disposition of the underlying security. To the extent that, in the meantime, the
value of the securities that a Fund has purchased has decreased, the Fund could
experience a loss. Repurchase agreements with maturities of more than seven days
will be treated as illiquid securities by a Fund.
REVERSE REPURCHASE AGREEMENTS. Certain of the Funds may enter into 'reverse'
repurchase agreements to avoid selling securities during unfavorable market
conditions to meet redemptions. Pursuant to a reverse repurchase agreement, a
Fund will sell portfolio securities and agree to repurchase them from the buyer
at a particular date and price. Whenever a Fund enters into a reverse
repurchase agreement, it will establish a segregated account consisting of
liquid assets in an amount at least equal to the repurchase price marked to
market daily (including accrued interest), and will subsequently monitor the
account to ensure that such equivalent value is maintained. A Fund pays
interest on amounts obtained pursuant to reverse repurchase agreements. Reverse
repurchase agreements are considered to be borrowings by a Fund.
PARTICIPATION CERTIFICATES. The New York Municipal Money Market Fund and the
National Intermediate Municipal Fund may invest in participation certificates. A
participation certificate gives a Fund an undivided interest in the underlying
obligations in the proportion that a Fund's interest bears to the total
principal amount of such obligations. Certain of such participation
certificates may carry a demand feature that would permit the holder to tender
them back to the issuer or to a third party prior to maturity.
LOANS OF PORTFOLIO SECURITIES. Certain of the Funds may lend portfolio
securities to generate income. In the event of the bankruptcy of the other
party to a securities loan, a Fund could experience delays in recovering the
securities it lent. To the extent that, in the meantime, the value of the
securities a Fund lent has increased, the Fund could experience a loss. The
value of securities loaned will be marked to market daily. Any securities that
a Fund may receive as collateral will not become a part of its portfolio at the
time of the loan. In the event of a default by the borrower, the Fund will, if
permitted by law, dispose of such collateral except that the Fund may retain
any such part thereof that is a security in which the Fund is permitted to
invest. The Fund may invest the cash collateral and earn additional income or
receive an agreed-upon fee from a borrower that has delivered cash equivalent
collateral. Cash collateral received by a Fund may be invested in securities in
which the Fund is permitted to invest. Portfolio securities purchased with cash
collateral are subject to possible depreciation. Voting rights may pass with
the lending of portfolio securities. Loans of securities by a Fund will be
subject to termination at the Fund's or the borrower's option. A Fund may pay
administrative and custodial fees in connection with a securities loan and may
pay a negotiated portion of the interest or fee earned with respect to the
collateral to the borrower or a placing broker.
FIRM COMMITMENTS AND WHEN-ISSUED SECURITIES. A Fund may purchase securities on
a firm commitment basis, including when-issued securities. Securities purchased
on a firm commitment basis are purchased for delivery beyond the normal
settlement date at a stated price and yield. No income accrues to the purchaser
of a security on a firm commitment basis prior
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to delivery. Such securities are recorded as an asset and are subject to
changes in value based upon changes in the general level of interest rates.
Purchasing a security on a firm commitment basis can involve a risk that the
market price at the time of delivery may be lower than the agreed upon purchase
price, in which case there could be an unrealized loss at the time of delivery.
A Fund will only make commitments to purchase securities on a firm commitment
basis with the intention of actually acquiring the securities, but may sell
them before the settlement date if it is deemed advisable. A Fund will
establish a segregated account in which it will maintain liquid assets in an
amount at least equal in value to the Fund's commitments to purchase securities
on a firm commitment basis. If the value of these assets declines, the Fund
will place additional liquid assets in the account on a daily basis so that the
value of the assets in the account is equal to the amount of such commitments.
ZERO COUPON SECURITIES, PIK BONDS AND DEFERRED PAYMENT SECURITIES. Certain of
the Funds may invest in zero coupon securities, PIK bonds and deferred payment
securities.
Zero coupon securities are debt securities that pay no cash income but are sold
at substantial discounts from their value at maturity. When a zero coupon
security is held to maturity, its entire return, which consists of the
amortization of discount, comes from the difference between its purchase price
and its maturity value. This difference is known at the time of purchase, so
that investors holding zero coupon securities until maturity know at the time
of their investment what the expected return on their investment will be.
Certain zero coupon securities also are sold at substantial discounts from their
maturity value and provide for the commencement of regular interest payments at
a deferred date. Zero coupon securities may have conversion features. A Fund
also may purchase PIK bonds. PIK bonds pay all or a portion of their interest
in the form of debt or equity securities. Deferred payment securities are
securities that remain zero coupon securities until a predetermined date, at
which time the stated coupon rate becomes effective and interest becomes
payable at regular intervals.
Zero coupon securities, PIK bonds and deferred payment securities tend to be
subject to greater price fluctuations in response to changes in interest rates
than are ordinary interest-paying debt securities with similar maturities. The
value of zero coupon securities appreciates more during periods of declining
interest rates and depreciates more during periods of rising interest rates
than ordinary interest-paying debt securities with similar maturities. Zero
coupon securities, PIK bonds and deferred payment securities may be issued by a
wide variety of corporate and governmental issuers. Although these instruments
are generally not traded on a national securities exchange, they are widely
traded by brokers and dealers and, to such extent, will not be considered
illiquid for the purposes of a Fund's limitation on investments in illiquid
securities.
Current federal income tax law requires the holder of a zero coupon security,
certain PIK bonds, deferred payment securities and certain other securities
acquired at a discount (such as Brady Bonds) to accrue income with respect to
these securities prior to the receipt of cash payments. Accordingly, to avoid
liability for federal income and excise taxes, a Fund may be required to
distribute income accrued with respect to these securities and may have to
dispose of portfolio securities under disadvantageous circumstances in order to
generate cash to satisfy these distribution requirements.
LOAN PARTICIPATIONS AND ASSIGNMENTS. Certain of the Funds may invest in Loan
Participations and Assignments. The Funds
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consider these investments to be investments in debt securities for purposes of
this Prospectus. Loan Participations typically will result in a Fund having a
contractual relationship only with the Lender, not with the borrower. A Fund
will have the right to receive payments of principal, interest and any fees to
which it is entitled only from the Lender selling the Participation and only
upon receipt by the Lender of the payments from the borrower. In connection
with purchasing Loan Participations, a Fund generally will have no right to
enforce compliance by the borrower with the terms of the Loan agreement
relating to the Loan, nor any rights of set-off against the borrower, and the
Fund may not benefit directly from any collateral supporting the Loan in which
it has purchased the Participation. As a result, a Fund will assume the credit
risk of both the borrower and the Lender that is selling the Participation. In
the event of the insolvency of the Lender selling a Participation, a Fund may be
treated as a general creditor of the Lender and may not benefit from any set-off
between the Lender and the borrower. A Fund will acquire Loan Participations
only if the Lender interpositioned between the Fund and the borrower is
determined by SBAM to be creditworthy. When a Fund purchases Assignments from
Lenders, the Fund will acquire direct rights against the borrower on the Loan,
except that under certain circumstances such rights may be more limited than
those held by the assigning Lender.
A Fund may have difficulty disposing of Assignments and Loan Participations.
Because the market for such instruments is not highly liquid, the Funds
anticipate that such instruments could be sold only to a limited number of
institutional investors. The lack of a highly liquid secondary market may have
an adverse impact on the value of such instruments and will have an adverse
impact on a Fund's ability to dispose of particular Assignments or Loan
Participations in response to a specific economic event, such as deterioration
in the creditworthiness of the borrower.
The Board of Directors has adopted policies and procedures for the purpose of
determining whether Assignments and Loan Participations are liquid or illiquid.
Pursuant to those policies and procedures, the Board of Directors has delegated
to SBAM the determination as to whether a particular Loan Participation or
Assignment is liquid or illiquid, requiring that consideration be given to,
among other things, the frequency of quotes, the number of dealers willing to
sell and the number of potential purchasers, the nature of the Loan
Participation or Assignment and the time needed to dispose of it and the
contractual provisions of the relevant documentation. The Board of Directors
periodically reviews purchases and sales of Assignments and Loan
Participations. To the extent that liquid Assignments and Loan Participation
that a Fund holds become illiquid, due to the lack of sufficient buyers or
market or other conditions, the percentage of a Fund's assets invested in
illiquid assets would increase. SBAM, under the supervision of the Board of
Directors, monitors Fund investments in Assignments and Loan Participations and
will consider appropriate measures to enable a Fund to maintain sufficient
liquidity for operating purposes and to meet redemption requests.
In valuing a Loan Participation or Assignment held by a Fund for which a
secondary trading market exists, the Fund will rely upon prices or quotations
provided by banks, dealers or pricing services. To the extent a secondary
trading market does not exist, a Fund's Loan Participations and Assignments
will be valued in accordance with procedures adopted by the Board of Directors,
taking into consideration, among other factors: (i) the creditworthiness of the
borrower under the Loan and the Lender; (ii) the current interest rate; period
until next rate
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reset and maturity of the Loan; (iii) recent prices in the market for similar
Loans; and (iv) recent prices in the market for instruments of similar quality,
rate, period until next interest rate reset and maturity. See 'Net Asset Value.'
RESTRICTED SECURITIES AND SECURITIES WITH LIMITED TRADING MARKETS. Certain
Funds may purchase securities for which there is a limited trading market or
which are subject to restrictions on resale to the public. If a Fund were to
assume substantial positions in securities with limited trading markets, the
activities of the Fund could have an adverse effect upon the liquidity and
marketability of such securities and the Fund might not be able to dispose of
its holdings in those securities at then current market prices. Circumstances
could also exist (to satisfy redemptions, for example) when portfolio
securities might have to be sold by a Fund at times which otherwise might be
considered to be disadvantageous so that the Fund might receive lower proceeds
from such sales than it had expected to realize. Investments in securities
which are 'restricted' may involve added expenses to a Fund should the Fund be
required to bear registration costs with respect to such securities and could
involve delays in disposing of such securities which might have an adverse
effect upon the price and timing of sales of such securities and the liquidity
of the Fund with respect to redemptions. Restricted securities and securities
for which there is a limited trading market may be significantly more difficult
to value due to the unavailability of reliable market quotations for such
securities, and investment in such securities may have an adverse impact on net
asset value. As more fully described in the Statement of Additional Information,
certain Funds may purchase Rule 144A securities for which there may be a
secondary market of qualified institutional buyers as contemplated by recently
adopted Rule 144A under the 1933 Act. A Fund's holdings of Rule 144A securities
which are liquid securities will not be subject to the Fund's applicable
limitation on investments in illiquid securities. Rule 144A is a recent
development and there is no assurance that a liquid market in Rule 144A
securities will develop or be maintained. To the extent that the number of
qualified institutional buyers is reduced, a previously liquid Rule 144A
security may be determined to be illiquid, thus increasing the percentage of
illiquid assets in a Fund's portfolio. SBAM, under the supervision of the Board
of Directors, is responsible for monitoring the liquidity of Rule 144A
securities and the selection of such securities. The Board of Directors
periodically reviews purchases and sales of such securities.
VARIABLE RATE AUCTION SECURITIES AND INVERSE FLOATERS. The National
Intermediate Municipal Fund may invest in variable rate auction securities and
inverse floaters which are instruments created when an issuer or dealer
separates the principal portion of a long-term, fixed-rate municipal bond into
two long-term, variable-rate instruments. The interest rate on the variable
rate auction portion reflects short-term interest rates, while the interest
rate on the inverse floater portion is typically higher than the rate available
on the original fixed-rate bond. Changes in the interest rate paid on the
portion of the issue relative to short-term interest rates inversely affect the
interest rate paid on the latter portion of the issue. The latter portion
therefore is subject to greater price volatility than the original fixed-rate
bond, and the market value can be extremely volatile. Depending on market
availability, the two portions may be recombined to form a fixed-rate municipal
bond, although the holder of one portion might have difficulty finding a
purchaser.
WARRANTS. Certain of the Funds may invest in warrants, which are securities
permitting, but not obligating, their holder to subscribe for other securities.
Warrants
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do not carry the right to dividends or voting rights with respect to their
underlying securities, and they do not represent any rights in assets of the
issuer. An investment in warrants may be considered speculative. In addition,
the value of a warrant does not necessarily change with the value of the
underlying securities and a warrant ceases to have value if it is not exercised
prior to its expiration date.
FOREIGN SECURITIES. Investors should recognize that investing in the securities
of foreign issuers involves special considerations which are not typically
associated with investing in the securities of U.S. issuers. Investments in
securities of foreign issuers may involve risks arising from differences
between U.S. and foreign securities markets, including less volume, much
greater price volatility in and illiquidity of certain foreign securities
markets, different trading and settlement practices and less governmental
supervision and regulation, from changes in currency exchange rates, from high
and volatile rates of inflation, from economic, social and political conditions
and, as with domestic multinational corporations, from fluctuating interest
rates.
Investment in certain emerging market securities is restricted or controlled to
varying degrees which may at times limit or preclude investment in certain
emerging market securities and increase the costs and expenses of a Fund.
Certain emerging market countries require governmental approval prior to
investments by foreign persons, limit the amount of investment by foreign
persons in a particular issuer, limit the investment by foreign persons only to
a specific class of securities of an issuer that may have less advantageous
rights than other classes, restrict investment opportunities in issuers in
industries deemed important to national interests and/or impose additional
taxes on foreign investors.
Certain emerging market countries may require governmental approval for the
repatriation of investment income, capital or the proceeds of sales of
securities by foreign investors which could adversely affect a Fund. In
addition, if a deterioration occurs in the country's balance of payments, it
could impose temporary restrictions on foreign capital remittances. Investing
in local markets in emerging market countries may require a Fund to adopt
special procedures, seek local government approvals or take other actions, each
of which may involve additional costs to the Fund.
Other investment risks include the possible imposition of foreign withholding
taxes on certain amounts of a Fund's income, the possible seizure or
nationalization of foreign assets and the possible establishment of exchange
controls, expropriation, confiscatory taxation, other foreign governmental laws
or restrictions which might affect adversely payments due on securities held by
a Fund, the lack of extensive operating experience of eligible foreign
subcustodians and legal limitations on the ability of a Fund to recover assets
held in custody by a foreign subcustodian in the event of the subcustodian's
bankruptcy. Moreover, brokerage commissions and other transactions costs on
foreign securities exchanges are generally higher than in the United States.
In addition, there may be less publicly-available information about a foreign
issuer than about a U.S. issuer, and foreign issuers may not be subject to the
same accounting, auditing and financial record-keeping standards and
requirements as U.S. issuers. In particular, the assets and profits appearing
on the financial statements of an emerging market country issuer may not
reflect its financial position or results of operations in the way they would
be reflected and the financial statements been prepared in accordance with U.S.
generally accepted accounting principles. In addition, for an issuer that
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keeps accounting records in local currency, inflation accounting rules may
require, for both tax and accounting purposes, that certain assets and
liabilities be restated on the issuer's balance sheet in order to express items
in terms of currency of constant purchasing power. Inflation accounting may
indirectly generate losses or profits. Consequently, financial data may be
materially affected by restatements for inflation and may not accurately reflect
the real condition of those issuers and securities markets. See ' -- High Yield
Securities.'
Finally, in the event of a default in any such foreign obligations, it may be
more difficult for a Fund to obtain or enforce a judgment against the issuers
of such obligations. For a further discussion of certain risks involved in
investing in foreign securities, particularly of emerging market issuers, see
'Additional Information on Portfolio Instruments and Investment
Policies -- Foreign Securities' in the Statement of Additional Information.
FIXED-INCOME SECURITIES. Changes in market yields will affect a Fund's net asset
value as prices of fixed-income securities generally increase when interest
rates decline and decrease when interest rates rise. Prices of longer term
securities generally increase or decrease more sharply than those of shorter
term securities in response to interest rate changes, particularly if such
securities were purchased at a discount. Because the National Intermediate
Municipal Fund, U.S. Government Income Fund, the High Yield Bond Fund and the
Strategic Bond Fund will invest primarily in fixed-income securities and the
Total Return Fund may from time to time invest in a substantial amount of
fixed-income securities, the net asset value of these Fund's shares can be
expected to change as general levels of interest rates fluctuate. It should be
noted that the market values of securities rated below investment grade and
comparable unrated securities tend to react less to fluctuations in interest
rate levels than do those of higher-rated securities. Except to the extent that
values are affected independently by other factors such as developments
relating to a specific issuer, when interest rates decline, the value of a
fixed-income portfolio can generally be expected to rise. Conversely, when
interest rates rise, the value of a fixed-income portfolio can generally be
expected to decline.
In addition, many fixed-income securities contain call or buy-back features that
permit their issuers to call or repurchase the securities from their holders.
Such securities may present risks based on payment expectations. Although a Fund
would typically receive a premium if an issuer were to redeem a security, if an
issuer exercises such a 'call option' and redeems the security during a time of
declining interest rates, a Fund may realize a capital loss on its investment if
the security was purchased at a premium and a Fund may have to replace the
called security with a lower yielding security, resulting in a decreased rate
of return to the Fund.
Because the New York Municipal Money Market Fund and the National Intermediate
Municipal Fund invest primarily in municipal obligations, they are more
susceptible to factors adversely affecting issuers of such obligations than
funds that are not so concentrated. The secondary market for municipal
obligations may be less liquid than for most taxable fixed-income securities.
Consequently, the ability of the New York Municipal Money Market Fund and the
National Intermediate Municipal Fund to buy and sell municipal obligations may,
at any particular time and with respect to any particular securities, be
limited. The amount of information about the financial condition of an issuer
of municipal obligations may not be as extensive as information about
corporations whose securities are publicly traded. Obligations
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of issuers of municipal obligations may be subject to the provisions of
bankruptcy, insolvency and other laws affecting the rights and remedies of
creditors, such as the U.S. Bankruptcy Code and applicable state laws, which
could limit the ability of such Funds to recover payments of principal or
interest on such securities.
MORTGAGE-BACKED SECURITIES. The yield characteristics of the mortgage-backed
securities in which the U.S. Government Income Fund, the Strategic Bond Fund
and the Total Return Fund may invest differ from those of traditional debt
securities. Among the major differences are that interest and principal
payments are made more frequently on mortgage-backed securities, usually
monthly, and that principal may be prepaid at any time because the underlying
mortgage loans generally may be prepaid at any time. As a result, if these
securities are purchased at a premium, faster than expected prepayments will
reduce yield to maturity, while slower than expected prepayments will increase
yield to maturity. Conversely, if these securities are purchased at a discount,
faster than expected prepayments will increase yield to maturity, while slower
than expected prepayments will reduce yield to maturity. Accelerated
prepayments on securities purchased at a premium also impose a risk of loss of
principal because the premium may not have been fully amortized at the time the
principal is prepaid in full. Because of the reinvestment of prepayments of
principal at current rates, mortgage-backed securities may be less effective
than Treasury bonds of similar maturity at maintaining yields during periods of
declining interest rates. When interest rates rise, the value and liquidity of
mortgage-backed securities may decline sharply and generally will decline more
than would be the case with other fixed-income securities; however, when
interest rates decline, the value of mortgage-backed securities may not
increase as much as other fixed-income securities due to the prepayment
feature. Certain market conditions may result in greater than expected
volatility in the prices of mortgage-backed securities. For example, in periods
of supply and demand imbalances in the market for such securities and/or in
periods of sharp interest rate movements, the prices of mortgage-backed
securities may fluctuate to a greater extent than would be expected from
interest rate movements alone. For a description of multiple class mortgage
pass-through securities, see ' -- Collateralized Mortgage Obligations and
Multiclass Pass-Through Securities' below.
ADJUSTABLE RATE MORTGAGE SECURITIES. Unlike fixed rate mortgage securities,
adjustable rate mortgage securities are collateralized by or represent
interests in mortgage loans with variable rates of interest. These variable
rates of interest reset periodically to align themselves with market rates. A
Fund will not benefit from increases in interest rates to the extent that
interest rates rise to the point where they cause the current coupon of the
underlying adjustable rate mortgages to exceed any maximum allowable annual or
lifetime reset limits (or 'cap rates') for a particular mortgage. In this event,
the value of the mortgage securities in a Fund would likely decrease. Also, a
Fund's net asset value could vary to the extent that current yields on
adjustable rate mortgage securities are different than market yields during
interim periods between coupon reset dates or if the timing of changes to the
index upon which the rate for the underlying mortgages is based lags behind
changes in market rates. During periods of declining interest rates, income to a
Fund derived from adjustable rate mortgages which remain in a mortgage pool
will decrease in contrast to the income on fixed rate mortgages, which
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will remain constant. Adjustable rate mortgages also have less potential for
appreciation in value as interest rates decline than do fixed rate investments.
PRIVATELY-ISSUED MORTGAGE SECURITIES. The Strategic Bond Fund and the Total
Return Fund may also purchase mortgage-backed securities issued by private
issuers which may entail greater risk than mortgage-backed securities that are
guaranteed by the U.S. government, its agencies or instrumentalities. Privately-
issued mortgage securities are issued by private originators of, or investors
in, mortgage loans, including mortgage bankers, commercial banks, investment
banks, savings and loan associations and special purpose subsidiaries of the
foregoing. Since privately-issued mortgage certificates are not guaranteed by an
entity having the credit status of GNMA or FHLMC, such securities generally are
structured with one or more types of credit enhancement. Such credit support
falls into two categories: (i) liquidity protection; and (ii) protection against
losses resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the pass-through of
payments due on the underlying pool occurs in a timely fashion. Protection
against losses resulting from ultimate default enhances the likelihood of
ultimate payment of the obligations on at least a portion of the assets in the
pool. Such protection may be provided through guarantees, insurance policies or
letters of credit obtained by the issuer or sponsor from third parties, through
various means of structuring the transaction or through a combination of such
approaches.
The ratings of mortgage securities for which third-party credit enhancement
provides liquidity protection or protection against losses from default are
generally dependent upon the continued creditworthiness of the provider of the
credit enhancement. The ratings of such securities could be subject to reduction
in the event of deterioration in the creditworthiness of the credit enhancement
provider even in cases where the delinquency and loss experience on the
underlying pool of assets is better than expected. There can be no assurance
that the private issuers or credit enhancers of mortgage-backed securities can
meet their obligations under the relevant policies or other forms of credit
enhancement.
Examples of credit support arising out of the structure of the transaction
include 'senior-subordinated securities' (multiple class securities with one or
more classes subordinate to other classes as to the payment of principal
thereof and interest thereon, with the result that defaults on the underlying
assets are borne first by the holders of the subordinated class), creation of
'reserve funds' (where cash or investments sometimes funded from a portion of
the payments on the underlying assets are held in reserve against future
losses) and 'over-collateralization' (where the scheduled payments on, or the
principal amount of, the underlying assets exceed those required to make
payment of the securities and pay any servicing or other fees). The degree of
credit support provided for each issue is generally based on historical
information with respect to the level of credit risk associated with the
underlying assets. Delinquency or loss in excess of that which is anticipated
could adversely affect the return on an investment in such security.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH SECURITIES.
The U.S. Government Income Fund and the Strategic Bond Fund may invest in
collateralized mortgage obligations ('CMOs'). CMOs are debt obligations
collateralized by mortgage loans or mortgage pass-through securities.
Typically, CMOs are collateralized by GNMA, Fannie Mae or
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Freddie Mac Certificates, but also may be collateralized by whole loans or
private pass-throughs (such collateral collectively hereinafter referred to as
'Mortgage Assets'). Multiclass pass-through securities are interests in a trust
composed of Mortgage Assets. Unless the context indicates otherwise, all
references herein to CMOs include multiclass pass-through securities. Payments
of principal and of interest on the Mortgage Assets, and any reinvestment
income thereon, provide the funds to pay debt service on the CMOs or make
scheduled distributions on the multiclass pass-through securities. CMOs may be
issued by agencies or instrumentalities of the U.S. government, or by private
originators of, or investors in, mortgage loans, including savings and loan
associations, mortgage banks, commercial banks, investment banks and special
purpose subsidiaries of the foregoing. CMOs acquired by the U.S. Government
Income Fund will be limited to those issued or guaranteed by agencies or
instrumentalities of the U.S. government and, if available in the future, the
U.S. government.
In a CMO, a series of bonds or certificates is issued in multiple classes. Each
class of CMOs, often referred to as a 'tranche,' is issued at a specified fixed
or floating coupon rate and has a stated maturity or final distribution date.
Principal prepayments on the Mortgage Assets may cause the CMOs to be retired
substantially earlier than their stated maturities or final distribution dates.
Interest is paid or accrues on all classes of the CMOs on a monthly, quarterly
or semi-annual basis. The principal of and interest on the Mortgage Assets may
be allocated among the several classes of a series of a CMO in innumerable
ways. In one structure, payments of principal, including any principal
prepayments, on the Mortgage Assets are applied to the classes of a CMO in the
order of their respective stated maturities or final distribution dates, so
that no payment of principal will be made on any class of CMOs until all other
classes having an earlier stated maturity or final distribution date have been
paid in full. The U.S. Government Income and Strategic Bond Funds have no
present intention to invest in CMO residuals. As market conditions change, and
particularly during periods of rapid or unanticipated changes in market
interest rates, the attractiveness of the CMO classes and the ability of the
structure to provide the anticipated investment characteristics may be
significantly reduced. Such changes can result in volatility in the market
value, and in some instances reduced liquidity, of the CMO class.
The U.S. Government Income Fund and the Strategic Bond Fund may also invest in,
among others, parallel pay CMOs and Planned Amortization Class CMOs ('PAC
Bonds'). Parallel pay CMOs are structured to provide payments of principal on
each payment date to more than one class. These simultaneous payments are taken
into account in calculating the stated maturity date or final distribution date
of each class, which, as with other CMO structures, must be retired by its
stated maturity date or a final distribution date but may be retired earlier.
PAC Bonds are a type of CMO tranche or series designed to provide relatively
predictable payments of principal provided that, among other things, the actual
prepayment experience on the underlying mortgage loans falls within a
predefined range. If the actual prepayment experience on the underlying
mortgage loans is at a rate faster or slower than the predefined range or if
deviations from other assumptions occur, principal payments on the PAC Bond may
be earlier or later than predicted. The magnitude of the predefined range
varies from one PAC Bond to another; a narrower range increases the risk that
prepayments on the PAC Bond will be
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greater or smaller than predicted. Because of these features, PAC Bonds
generally are less subject to the risks of prepayment than are other types of
mortgage-backed securities.
STRIPPED MORTGAGE SECURITIES. The Strategic Bond Fund may purchase stripped
mortgage securities which are derivative multiclass mortgage securities.
Stripped mortgage securities may be issued by agencies or instrumentalities of
the U.S. government, or by private originators of, or investors in, mortgage
loans, including savings and loan associations, mortgage banks, commercial
banks, investment banks and special purpose subsidiaries of the foregoing.
Stripped mortgage securities have greater volatility than other types of
mortgage securities. Although stripped mortgage securities are purchased and
sold by institutional investors through several investment banking firms acting
as brokers or dealers, the market for such securities has not yet been fully
developed. Accordingly, stripped mortgage securities are generally illiquid.
Stripped mortgage securities are structured with two or more classes of
securities that receive different proportions of the interest and principal
distributions on a pool of mortgage assets. A common type of stripped mortgage
security will have at least one class receiving only a small portion of the
interest and a larger portion of the principal from the mortgage assets, while
the other class will receive primarily interest and only a small portion of the
principal. In the most extreme case, one class will receive all of the interest
('IO' or interest-only), while the other class will receive all of the
principal ('PO' or principal-only class). The yield to maturity on IOs, POs and
other mortgage-backed securities that are purchased at a substantial premium or
discount generally are extremely sensitive not only to changes in prevailing
interest rates but also to the rate of principal payments (including
prepayments) on the related underlying mortgage assets, and a rapid rate of
principal payments may have a material adverse effect on such securities' yield
to maturity. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, a Fund may fail to fully recoup its
initial investment in these securities even if the securities have received the
highest rating by a nationally recognized statistical rating organizations.
In addition to the stripped mortgage securities described above, the Strategic
Bond Fund may invest in similar securities such as Super POs and Levered IOs
which are more volatile than POs, IOs and IOettes. Risks associated with
instruments such as Super POs are similar in nature to those risks related to
investments in POs. Risks connected with Levered IOs and IOettes are similar in
nature to those associated with IOs. The Strategic Bond Fund may also invest in
other similar instruments developed in the future that are deemed consistent
with its investment objective, policies and restrictions. POs may generate
taxable income from the current accrual of original issue discount, without a
corresponding distribution of cash to the Fund. See 'Taxation' in this
Prospectus and 'Additional Information Concerning Taxes' in the Statement of
Additional Information.
MORTGAGE ROLLS. The U.S. Government Income Fund and the Strategic Bond Fund may
enter into mortgage 'dollar rolls' in which a Fund sells mortgage-backed
securities for delivery in the current month and simultaneously contracts to
repurchase substantially similar (same type, coupon and maturity) securities on
a specified future date. During the roll period, a Fund foregoes principal and
interest paid on the mortgage-backed securities. A Fund is compensated by the
difference between the current sales price and the lower forward price for the
future purchase (often referred to as the 'drop') as well
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as by the interest earned on the cash proceeds of the initial sale. A Fund may
only enter into covered rolls. A 'covered roll' is a specific type of dollar
roll for which there is an offsetting cash position which matures on or before
the forward settlement date of the dollar roll transaction. At the time a Fund
enters into a mortgage 'dollar roll,' it will establish a segregated account
with its custodian bank in which it will maintain cash, U.S. government
securities or other liquid high grade debt obligations equal in value to its
obligations in respect of dollar rolls, and accordingly, such dollar rolls will
not be considered borrowings. Mortgage dollar rolls involve the risk that the
market value of the securities the Fund is obligated to repurchase under the
agreement may decline below the repurchase price. In the event the buyer of
securities under a mortgage dollar roll files for bankruptcy or becomes
insolvent, the Fund's use of proceeds of the dollar roll may be restricted
pending a determination by the other party, or its trustee or receiver, whether
to enforce the Fund's obligation to repurchase the securities.
HIGH YIELD SECURITIES. The High Yield Bond Fund and the Strategic Bond Fund may
invest without limitation in domestic and foreign 'high yield' securities,
commonly known as 'junk bonds.' The Investors Fund, the Capital Fund and the
Total Return Fund may invest without limitation in convertible securities of
this type and up to 5%, 5% and 20%, respectively, of their net assets in non-
convertible securities of this type. The Asia Growth Fund may invest without
limitation in convertible non-U.S. high yield securities and up to 10% of its
total assets in non-convertible non-U.S. high yield securities.
Under rating agency guidelines, medium-and lower-rated securities and
comparable unrated securities will likely have some quality and protective
characteristics that are outweighed by large uncertainties or major risk
exposures to adverse conditions. Medium and lower rated securities are
considered to have extremely poor prospects of ever attaining any real
investment standing, to have a current identifiable vulnerability to default or
are in default, to be unlikely to have the capacity to pay interest and repay
principal when due in the event of adverse business, financial or economic
conditions, and/or to be in default or not current in the payment of interest or
principal. Such securities are considered speculative with respect to the
issuer's capacity to pay interest and repay principal in accordance with the
terms of the obligations. Accordingly, it is possible that these types of
factors could, in certain instances, reduce the value of securities held by a
Fund with a commensurate effect on the value of the Fund's shares.
Changes by recognized rating services in their ratings of any fixed-income
security and in the ability of an issuer to make payments of interest and
principal may also affect the value of these investments. A description of the
ratings used by Moody's and S&P is set forth in Appendix A to this Prospectus.
The ratings of Moody's and S&P generally represent the opinions of those
organizations as to the quality of the securities that they rate. Such ratings,
however, are relative and subjective, are not absolute standards of quality, are
subject to change and do not evaluate the market risk or liquidity of the
securities. Ratings of a non-U.S. debt instrument, to the extent that those
ratings are undertaken, are related to evaluations of the country in which the
issuer of the instrument is located. Ratings generally take into account the
currency in which a non-U.S. debt instrument is denominated. Instruments issued
by a foreign government in other than the local currency, for example,
typically have a lower rating than local currency instruments due to the
existence of an additional risk that the government will be unable to obtain
the required foreign currency to service its foreign
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currency-denominated debt. In general, the ratings of debt securities or
obligations issued by a non-U.S. public or private entity will not be higher
than the rating of the currency or the foreign currency debt of the central
government of the country in which the issuer is located, regardless of the
intrinsic creditworthiness of the issuer.
The secondary markets for high yield securities are not as liquid as the
secondary markets for higher rated securities. The secondary markets for high
yield securities are concentrated in relatively few market makers and
participants in the market are mostly institutional investors, including
insurance companies, banks, other financial institutions and mutual funds. In
addition, the trading volume for high yield securities is generally lower than
that for higher-rated securities and the secondary markets could contract under
adverse market or economic conditions independent of any specific adverse
changes in the condition of a particular issuer. These factors may have an
adverse effect on the ability of a Fund holding such securities to dispose of
particular portfolio investments, may adversely affect the Fund's net asset
value per share and may limit the ability of such a Fund to obtain accurate
market quotations for purposes of valuing securities and calculating net asset
value. If a Fund is not able to obtain precise or accurate market quotations
for a particular security, it will become more difficult to value such Fund's
portfolio securities, and a greater degree of judgment may be necessary in
making such valuations. Less liquid secondary markets may also affect the
ability of a Fund to sell securities at their fair value. If the secondary
markets for high yield securities contract due to adverse economic conditions
or for other reasons, certain liquid securities in a Fund's portfolio may
become illiquid and the proportion of the Fund's assets invested in illiquid
securities may significantly increase.
Prices for high yield securities may be affected by legislative and regulatory
developments. These laws could adversely affect a Fund's net asset value and
investment practices, the secondary market for high yield securities, the
financial condition of issuers of these securities and the value of outstanding
high yield securities. For example, federal legislation requiring the
divestiture by federally insured savings and loan associations of their
investments in high yield bonds and limiting the deductibility of interest by
certain corporate issuers of high yield bonds adversely affected the market in
recent years.
HIGH YIELD CORPORATE SECURITIES. While the market values of securities rated
below investment grade and comparable unrated securities tend to react less to
fluctuations in interest rate levels than do those of higher-rated securities,
the market values of certain of these securities also tend to be more sensitive
to individual corporate developments and changes in economic conditions than
higher-rated securities. In addition, such securities present a higher degree of
credit risk. Issuers of these securities are often highly leveraged and may not
have more traditional methods of financing available to them, so that their
ability to service their debt obligations during an economic downturn or during
sustained periods of rising interest rates may be impaired. The risk of loss
due to default by such issuers is significantly greater than with investment
grade securities because such securities generally are unsecured and frequently
are subordinated to the prior payment of senior indebtedness. A Fund also may
incur additional expenses to the extent that it is required to seek recovery
upon a default in the payment of principal or interest on its portfolio
holdings.
The development of a market for high yield non-U.S. corporate securities has
been a relatively recent phenomenon. On the other hand, the market for high
yield U.S. corporate debt securities is more established than that for high
yield non-
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U.S. corporate debt securities, but has undergone significant changes in the
past and may undergo significant changes in the future.
High yield non-U.S. and U.S. corporate securities in which the applicable Funds
may invest include bonds, debentures, notes, commercial paper and preferred
stock and will generally be unsecured. Most of the debt securities will bear
interest at fixed rates. However, a Fund may also invest in corporate debt
securities with variable rates of interest or which involve equity features,
such as contingent interest or participations based on revenues, sales or
profits (i.e., interest or other payments, often in addition to a fixed rate of
return, that are based on the borrower's attainment of specified levels of
revenues, sales or profits and thus enable the holder of the security to share
in the potential success of the venture).
HIGH YIELD FOREIGN SOVEREIGN DEBT SECURITIES. Investing in fixed and floating
rate high yield foreign sovereign debt securities will expose Funds investing in
such securities to the direct or indirect consequences of political, social or
economic changes in the countries that issue the securities. See ' -- Foreign
Securities' above. The ability and willingness of sovereign obligors in
developing and emerging market countries or the governmental authorities that
control repayment of their external debt to pay principal and interest on such
debt when due may depend on general economic and political conditions within
the relevant country. Countries such as those in which a Fund may invest have
historically experienced, and may continue to experience, high rates of
inflation, high interest rates, exchange rate trade difficulties and extreme
poverty and unemployment. Many of these countries are also characterized by
political uncertainty or instability. Additional factors which may influence
the ability or willingness to service debt include, but are not limited to, a
country's cash flow situation, the availability of sufficient foreign exchange
on the date a payment is due, the relative size of its debt service burden to
the economy as a whole, and its government's policy towards the International
Monetary Fund, the World Bank and other international agencies.
The ability of a foreign sovereign obligor to make timely payments on its
external debt obligations will also be strongly influenced by the obligor's
balance of payments, including export performance, its access to international
credits and investments, fluctuations in interest rates and the extent of its
foreign reserves. A country whose exports are concentrated in a few commodities
or whose economy depends on certain strategic imports could be vulnerable to
fluctuations in international prices of these commodities or imports. To the
extent that a country receives payment for its exports in currencies other than
U.S. dollars, its ability to make debt payments denominated in U.S. dollars
could be adversely affected. If a foreign sovereign obligor cannot generate
sufficient earnings from foreign trade to service its external debt, it may
need to depend on continuing loans and aid from foreign governments, commercial
banks and multilateral organizations, and inflows of foreign investment. The
commitment on the part of these foreign governments, multilateral organizations
and others to make such disbursements may be conditioned on the government's
implementation of economic reforms and/ or economic performance and the timely
service of its obligations. Failure to implement such reforms, achieve such
levels of economic performance or repay principal or interest when due may
result in the cancellation of such third parties' commitments to lend funds,
which may further impair the obligor's ability or willingness to timely service
its debts. The cost of servicing external debt will also generally be adversely
affected by rising international interest rates, because many external debt
obligations bear interest at rates which are adjusted based
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upon international interest rates. The ability to service external debt will
also depend on the level of the relevant government's international currency
reserves and its access to foreign exchange. Currency devaluations may affect
the ability of a sovereign obligor to obtain sufficient foreign exchange to
service its external debt.
As a result of the foregoing, a governmental obligor may default on its
obligations. If such an event occurs, a Fund may have limited legal recourse
against the issuer and/or guarantor. Remedies must, in some cases, be pursued
in the courts of the defaulting party itself, and the ability of the holder of
foreign sovereign debt securities to obtain recourse may be subject to the
political climate in the relevant country. In addition, no assurance can be
given that the holders of commercial bank debt will not contest payments to the
holders of other foreign sovereign debt obligations in the event of default
under their commercial bank loan agreements.
Certain debt obligations, customarily referred to as 'Brady Bonds,' are created
through the exchange of existing commercial bank loans to foreign entities for
new obligations in connection with debt restructuring under a plan introduced
by former U.S. Secretary of the Treasury, Nicholas F. Brady (the 'Brady Plan').
Brady Bonds have been issued only recently, and, accordingly, do not have a
long payment history. They may be collateralized or uncollateralized and issued
in various currencies (although most are dollar-denominated) and they are
actively traded in the over-the-counter secondary market. Dollar-denominated,
collateralized Brady Bonds, which may be fixed rate par bonds or floating rate
discount bonds, are generally collateralized in full as to principal due at
maturity by U.S. Treasury zero coupon obligations which have the same maturity
as the Brady Bonds. Certain interest payments on these Brady Bonds may be
collateralized by cash or securities in an amount that, in the case of fixed
rate bonds, is typically equal to between 12 and 18 months of rolling interest
payments or, in the case of floating rate bonds, initially is typically equal to
between 12 and 18 months rolling interest payments based on the applicable
interest rate at that time and is adjusted at regular intervals thereafter with
the balance of interest accruals in each case being uncollateralized. The
applicable Funds may purchase Brady Bonds with no or limited collateralization,
and will be relying for payment of interest and (except in the case of principal
collateralized Brady Bonds) principal primarily on the willingness and ability
of the foreign government to make payment in accordance with the terms of the
Brady Bonds. In the event of a default with respect to collateralized Brady
Bonds as a result of which the payment obligations of the issuer are
accelerated, the U.S. Treasury zero coupon obligations held as collateral for
the payment of principal will not be distributed to investors, nor will such
obligations be sold and the proceeds distributed. The collateral will be held
by the collateral agent to the scheduled maturity of the defaulted Brady Bonds,
which will continue to be outstanding, at which time the face amount of the
collateral will equal the principal payments which would have then been due on
the Brady Bonds in the normal course. Based upon current market conditions, a
Fund would not intend to purchase Brady Bonds which, at the time of investment,
are in default as to payments. However, in light of the residual risk of the
Brady Bonds and, among other factors, the history of default with respect to
commercial bank loans by public and private entities of countries issuing Brady
Bonds, investments in Brady Bonds are to be viewed as speculative. A substantial
portion of the Brady Bonds and other sovereign debt securities in which the
High Yield Bond and Strategic Bond Funds invest are likely to be acquired at a
discount, which involves certain considerations discussed below under
'Taxation.'
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Sovereign obligors in developing and emerging market countries are among the
world's largest debtors to commercial banks, other governments, international
financial organizations and other financial institutions. These obligors have
in the past experienced substantial difficulties in servicing their external
debt obligations, which led to defaults on certain obligations and the
restructuring of certain indebtedness. Restructuring arrangements have
included, among other things, reducing and rescheduling interest and principal
payments by negotiating new or amended credit agreements or converting
outstanding principal and unpaid interest to Brady Bonds, and obtaining new
credit to finance interest payments. Holders of certain foreign sovereign debt
securities may be requested to participate in the restructuring of such
obligations and to extend further loans to their issuers. There can be no
assurance that the Brady Bonds and other foreign sovereign debt securities in
which certain of the Funds may invest will not be subject to similar
restructuring arrangements or to requests for new credit which may adversely
affect a Fund's holdings. Furthermore, certain participants in the secondary
market for such debt may be directly involved in negotiating the terms of these
arrangements and may therefore have access to information not available to
other market participants.
INVESTMENT FUNDS. A Fund may invest in unaffiliated investment funds which
invest principally in securities in which that Fund is authorized to invest.
Under the 1940 Act, the Fund may invest a maximum of 10% of its total assets in
the securities of other investment companies. In addition, under the 1940 Act,
not more than 5% of the Fund's total assets may be invested in the securities
of any one investment company and a Fund may not purchase more than 3% of the
outstanding voting stock of such investment company. To the extent a Fund
invests in other investment funds, the Fund's shareholders will incur certain
duplicative fees and expenses, including investment advisory fees. A Fund's
investment in certain investment funds will result in special U.S. Federal
income tax consequences described below under 'Taxation.'
BORROWING. Each of the Funds may borrow in certain limited circumstances. See
'Investment Limitations.' Borrowing creates an opportunity for increased
return, but, at the same time, creates special risks. For example, borrowing may
exaggerate changes in the net asset value of a Fund's shares and in the return
on the Fund's portfolio. Although the principal of any borrowing will be fixed,
a Fund's assets may change in value during the time the borrowing is
outstanding. A Fund may be required to liquidate portfolio securities at a time
when it would be disadvantageous to do so in order to make payments with
respect to any borrowing, which could affect the investment manager's strategy
and the ability of the Fund to comply with certain provisions of the Internal
Revenue Code of 1986, as amended (the 'Code') in order to provide 'pass-though'
tax treatment to shareholders. Furthermore, if a Fund were to engage in
borrowing, an increase in interest rates could reduce the value of the Fund's
shares by increasing the Fund's interest expense.
NON-DIVERSIFICATION. The Asia Growth Fund, New York Municipal Money Market Fund
and the Capital Fund are classified as 'non-diversified' funds under the 1940
Act, which means that each Fund is not limited by the 1940 Act in the
proportion of its assets that may be invested in the obligations of a single
issuer. Each Fund, however, intends to comply with the diversification
requirements imposed by the Code in order to continue to qualify as a regulated
investment company. To the extent the Funds invest a greater proportion of
their assets in the securities of a smaller number of issuers, each Fund may be
more susceptible to any
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single economic, political or regulatory occurrence than a more widely
diversified fund and may be subject to greater risk of loss with respect to its
portfolio securities.
DERIVATIVES. Certain of the Funds may use various investment strategies
described below to hedge market risks (such as broad or specific market
movements, interest rates and currency exchange rates), to manage the effective
maturity or duration of debt instruments held by a Fund, or to seek to increase
a Fund's income or gain. Although these strategies are regularly used by some
investment companies and other institutional investors, it is not presently
anticipated that any of these strategies will be used to a significant degree by
any Fund unless otherwise specifically indicated in the description of the
particular Fund contained in this Prospectus. Over time, however, techniques
and instruments may change as new instruments and strategies are developed or
regulatory changes occur.
Subject to the constraints described above, a Fund may (if and to the extent so
authorized) purchase and sell interest rate, currency or stock or bond index
futures contracts and enter into currency forward contracts and currency swaps;
purchase and sell (or write) exchange listed and over-the-counter put and call
options on securities, currencies, futures contracts, indices and other
financial instruments, and a Fund may enter into interest rate transactions,
equity swaps and related transactions, invest in indexed debt securities and
other similar transactions which may be developed to the extent the investment
manager determines that they are consistent with the applicable Fund's
investment objective and policies and applicable regulatory requirements
(collectively, these transactions are referred to in this Prospectus as
'Derivatives'). A Fund's interest rate transactions may take the form of swaps,
caps, floors and collars, and a Fund's currency transactions may take the form
of currency forward contracts, currency futures contracts, currency swaps and
options on currencies.
Derivatives may be used to attempt to protect against possible changes in the
market value of securities held or to be purchased for a Fund's portfolio
resulting from securities markets or currency exchange rate fluctuations, to
protect a Fund's unrealized gains in the value of its securities, to facilitate
the sale of those securities for investment purposes, to manage the effective
maturity or duration of a Fund's portfolio or to establish a position in the
derivatives markets as a temporary substitute for purchasing or selling
particular securities or to seek to enhance a Fund's income or gain. A Fund may
use any or all types of Derivatives which it is authorized to use at any time;
no particular strategy will dictate the use of one type of transaction rather
than another, as use of any authorized Derivative will be a function of
numerous variables, including market conditions. The ability of a Fund to
utilize Derivatives successfully will depend on, in addition to the factors
described above, the investment manager's ability to predict pertinent market
movements, which cannot be assured. These skills are different from those
needed to select a Fund's portfolio securities. None of the Funds is a
'commodity pool' (i.e., a pooled investment vehicle which trades in commodity
futures contracts and options thereon and the operator of which is registered
with the CFTC), and Derivatives involving futures contracts and options on
futures contracts will be purchased, sold or entered into only for bona fide
hedging purposes, provided that a Fund may enter into such transactions for
purposes other than bona fide hedging if, immediately thereafter, the sum of
the amount of its initial margin and premiums on open contracts and options
would not exceed 5% of the liquidation value of the Fund's portfolio, after
taking into account unrealized
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profits and losses on existing contracts provided, further, that, in the case
of an option that is in-the-money, the in-the-money amount may be excluded in
calculating the 5% limitation. The use of certain Derivatives in certain
circumstances will require that a Fund segregate cash, liquid high grade debt
obligations or other assets to the extent a Fund's obligations are not otherwise
'covered' through ownership of the underlying security, financial instrument or
currency.
Derivatives involve special risks, including possible default by the other
party to the transaction, illiquidity and, to the extent the investment
manager's view as to certain market movements is incorrect, the risk that the
use of Derivatives could result in significantly greater losses than if it had
not been used. Use of put and call options could result in losses to a Fund,
force the purchase or sale of portfolio securities at inopportune times or for
prices higher or lower than current market values, or cause a Fund to hold a
security it might otherwise sell. The use of currency transactions could result
in a Fund's incurring losses as a result of the imposition of exchange
controls, suspension of settlements, or the inability to deliver or receive a
specified currency in addition to exchange rate fluctuations. The use of
options and futures transactions entails certain special risks. In particular,
the variable degree of correlation between price movements of futures contracts
and price movements in the related portfolio position of a Fund could create
the possibility that losses on the Derivative will be greater than gains in the
value of the Fund's position. In addition, futures and options markets could be
illiquid in some circumstances and certain over-the-counter options could have
no markets. A Fund might not be able to close out certain positions without
incurring substantial losses. To the extent a Fund utilizes futures and options
transactions for hedging, such transactions should tend to minimize the risk of
loss due to a decline in the value of the hedged position and, at the same
time, limit any potential gain to the Fund that might result from an increase
in value of the position. Finally, the daily variation margin requirements for
futures contracts create a greater ongoing potential financial risk than would
purchases of options, in which case the exposure is limited to the cost of the
initial premium and transaction costs. Losses resulting from the use of
Derivatives will reduce a Fund's net asset value, and possibly income, and the
losses may be significantly greater than if Derivatives had not been used.
Additional information regarding the risks and special considerations
associated with Derivatives appears in Appendix B to this Prospectus and the
Statement of Additional Information.
The degree of a Fund's use of Derivatives may be limited by certain provisions
of the Code. See 'Taxation.'
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Multiple Pricing System
The primary distinction between the four classes of Fund shares offered through
this Prospectus lies in their sales charge structures and ongoing expenses, as
summarized below. Each class has distinct advantages and disadvantages for
different investors and investors should choose the class that best suits their
circumstances and objectives.
CLASS A SHARES. Class A shares are offered for sale at net asset value per
share plus a front end sales charge of up to 4.75% payable at the time of
purchase (with the exception of Class A shares of the Cash Management Fund and
the New York Municipal Money Market Fund, which are offered without such a
charge). The initial sales charge may be reduced or waived for certain
purchases of Class A shares. Certain Class A shares for which the front end
sales charge is waived may be subject to a CDSC of 1% within one year after the
date of purchase. In addition, Class A shares are subject to a Rule 12b-1
service fee at an annual rate of .25% of their respective average daily net
assets (with the exception of Class A shares of the Cash Management Fund and
the New York Municipal Money Market Fund, which bear no such fees). The annual
service fee is compensation for ongoing services provided by Salomon Brothers,
the Funds' distributor, to shareholders, including payments to compensate
selected securities dealers for such services. See 'Purchase of Shares -- Class
A Shares -- Reduced Sales Charges' and ' -- Distributor' and 'Redemption of
Shares -- Class A Share Purchases of $1 Million or More.'
CLASS B SHARES. Class B shares are offered for sale for purchases of less than
$250,000. Class B shares are sold at net asset value without a front end sales
charge, but are subject to a CDSC of 5% of the dollar amount subject thereto
during the first and second year after purchase, and declining each year
thereafter to 0% after the sixth year. The applicable percentage is assessed on
an amount equal to the lesser of the original purchase price or the redemption
price of the shares redeemed. Any CDSC applicable to Class B shares excludes the
time the shares were held in the Cash Management Fund and/or the New York
Municipal Money Market Fund. The CDSC is not applicable with respect to
redemptions of Class B shares of the Cash Management Fund and the New York
Municipal Money Market Fund which were initially purchased as such and which
were never exchanged for Class B shares of another Fund. However, in the case of
Class B shares of the Cash Management Fund and the New York Municipal Money
Market Fund which were obtained through an exchange (other than an exchange
between the Cash Management Fund and the New York Municipal Money Market Fund),
such shares are subject to any applicable CDSC due at redemption. Similarly,
shares initially purchased as Class B shares of the Cash Management Fund and
the New York Municipal Money Market Fund which are subsequently exchanged for
Class B shares of other Funds (other than an exchange between the Cash
Management Fund and the New York Municipal Money Market Fund) will be subject
to any applicable CDSC due at redemption. See 'Shareholder Services --
Exchange Privilege.' In addition, Class B shares are subject to a Rule 12b-1
distribution fee at an annual rate of .75% of their respective average daily
net assets and a Rule 12b-1 service fee at an annual rate of .25% of their
respective average daily net assets (with the exception of Class B shares of
the Cash Management Fund and the New York Municipal Money Market Fund, which
bear no such fees). Like the service fee applicable to Class A shares, the Class
B service fee is compensation for ongoing services provided by Salomon Brothers
to
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shareholders, including payments to compensate selected securities dealers
for such services. Additionally, the distribution fee paid with respect to Class
B shares compensates Salomon Brothers for selling those shares. Class B shares
enjoy the benefit of permitting all of the investor's dollars to work from the
time the investment is made. The ongoing distribution fees paid by Class B
shares will cause such shares to have a higher expense ratio and to pay lower
dividends than Class A shares. See 'Purchase of Shares -- Class B Shares' and
' -- Distributor.' Class B shares will automatically convert to Class A shares
six years after the end of the calendar month in which the shareholder's order
to purchase was accepted. See ' -- Conversion Feature' below.
CLASS C SHARES. Class C shares are offered for purchases of less than
$1,000,000, are offered at net asset value without a front end sales charge and
are subject to a CDSC of 1% if redeemed within the first year of purchase (with
the exception of Class C shares of the Cash Management Fund and the New York
Municipal Money Market Fund, which are not subject to any CDSC upon redemption
if they were initially purchased as such and were never exchanged (other than an
exchange between the Cash Management Fund and the New York Municipal Money
Market Fund) for Class C shares of another Fund). Any CDSC applicable to Class
C shares excludes the time the shares were held in the Cash Management Fund
and/or the New York Municipal Money Market Fund. See 'Shareholder
Services -- Exchange Privilege.' Class C shares are subject to a Rule 12b-1
distribution fee at an annual rate of .75% of their respective average daily
net assets and a Rule 12b-1 service fee at an annual rate of .25% of their
respective average daily net assets (with the exception of Class C shares of
the Cash Management Fund and the New York Municipal Money Market Fund, which
bear no such fees). Like the services fees applicable to Class A and Class B
shares, the Class C service fee is compensation for ongoing services provided
by Salomon Brothers to shareholders, including payments to compensate selected
securities dealers for such services, and like the distribution fee applicable
to Class B shares, the Class C distribution fee compensates Salomon Brothers
for selling shares of that class. Class C shares, like Class B shares, enjoy
the benefit of permitting all of the investor's dollars to work from the time
the investment is made. The ongoing distribution fees paid by Class C shares
will cause such shares to have a higher expense ratio and to pay lower dividends
than Class A shares. See 'Purchase of Shares -- Class C Shares' and
' -- Distributor.' Class C shares will automatically convert to Class A shares
ten years after the end of the calendar month in which the shareholder's order
to purchase was accepted. See ' -- Conversion Feature' below.
CLASS O SHARES. Each Fund also offers Class O shares. However, only Class O
shareholders are permitted to purchase additional Class O shares. In connection
with the implementation of the Multiple Pricing System, shares outstanding as of
the close of business on December 31, 1994 of each of the Cash Management Fund
and the Investors Fund were reclassified as shares of Class O of each such
Fund. In addition, shares outstanding as of the close of business on October 31,
1996 of each of the New York Municipal Money Market Fund and the Capital Fund
were reclassified as Class O shares of each such Fund. Class O shares are not
subject to any sales charges, distribution or service fees.
CONVERSION FEATURE. Class B shares and Class C shares will automatically convert
to Class A shares six years and ten years, respectively, after the end of the
calendar month in which the shareholder's order to purchase was accepted and
will thereafter
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no longer be subject to a distribution fee. Such conversion will be on the basis
of the relative net asset values of each class, without the imposition of any
sales charge, fee or other charge. The purpose of the conversion feature is to
relieve the holders of Class B shares and Class C shares from most of the burden
of distribution-related expenses at such time as when the shares have been
outstanding for a duration sufficient for the Funds' distributor, Salomon
Brothers (in such capacity, the 'Distributor'), to have been substantially
compensated for distribution-related expenses incurred in connection with Class
B shares or Class C shares, as the case may be. Accordingly, Class B shares and
Class C shares of the Cash Management Fund and the New York Municipal Money
Market Fund, respectively, do not convert to Class A shares of the Cash
Management Fund and the New York Municipal Money Market Fund, respectively, at
any time, as shares of all classes of the Cash Management Fund and the New York
Municipal Money Market Fund do not bear any distribution or service fees. If a
shareholder effects one or more exchanges among Class B shares or Class C
shares, as the case may be, of the Funds during the applicable conversion
period, the period of time during which Class B shares or Class C shares were
held prior to an exchange will be added to the holding period of Class B shares
or Class C shares acquired in an exchange. However, because Class B shares and
Class C shares of the Cash Management Fund and the New York Municipal Money
Market Fund are not subject to any distribution or service fees, the applicable
conversion period is tolled for any period of time in which Class B shares or
Class C shares are held in the Cash Management Fund and/or the New York
Municipal Money Market Fund. For example, if Class B shares of a Fund other than
the Cash Management Fund or the New York Municipal Money Market Fund are
exchanged for Class B shares of the Cash Management Fund or the New York
Municipal Money Market Fund two years after purchase and are subsequently
exchanged one year later for Class B shares of a Fund other than the Cash
Management Fund or the New York Municipal Money Market Fund, the one year of
ownership in the Cash Management Fund or the New York Municipal Money Market
Fund does not count in the determination of the time of conversion to Class A
shares.
For purposes of the conversion of Class B shares and Class C shares to Class A
shares, shares purchased through the reinvestment of dividends and distributions
paid on Class B shares or Class C shares, as the case may be, in a shareholder's
Fund account will be considered to be held in a separate sub-account. Each time
any Class B shares or Class C shares in the shareholder's Fund account (other
than those in the sub-account) convert to Class A shares, a pro rata portion of
the Class B shares or Class C shares, as the case may be, in the sub-account
will also convert to Class A shares.
The conversion of Class B shares and Class C shares may be suspended under
certain limited circumstances, in the event a ruling from the Internal Revenue
Service or an opinion of counsel is not available. In that event, no further
conversions of Class B shares or Class C shares would occur, and those shares
might continue to be subject to distribution fees for an indefinite period which
may extend beyond the period ending six years or ten years, respectively, after
the end of the calendar month in which the shareholder's order to purchase was
accepted.
FACTORS FOR CONSIDERATION. In evaluating the options offered by the Multiple
Pricing System, investors should consider the foregoing factors, as well as the
following: Class A, Class B and Class C shares all pay an annual Rule 12b-1
service fee of .25% of average daily net assets, but Class A shares are not
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SALOMON BROTHERS INVESTMENT SERIES
subject to the annual Rule 12b-1 distribution fee of .75% of average daily net
assets paid by Class B and Class C shares, and, accordingly, Class A shares pay
correspondingly higher dividends per share. However, because a front end sales
charge is deducted at the time of purchase of Class A shares, the entire
purchase price is not immediately invested and, therefore, investors purchasing
Class A shares initially own fewer shares than they would own if they had
invested the same amount in Class B shares or Class C shares. Investors may,
however, benefit from the reduction or waiver of the front end sales charge
applicable to Class A shares for certain purchases.
Although investors purchasing Class B or Class C shares benefit from the
advantage of having all their funds invested initially, Class B and Class C
shares remain subject to an ongoing distribution fee which causes them to have
higher expenses and pay lower dividends than Class A shares and may be subject
to a CDSC upon redemption. Class B shares differ from Class C shares, however,
in that Class B shares may be subject to a CDSC upon redemption if redeemed
within six years of purchase, whereas Class C shares are subject to a CDSC only
if they are redeemed within one year after purchase. In addition, Class B
shares automatically convert to Class A shares six years after the end of the
month in which the shares were purchased and thereafter are not subject to an
ongoing distribution fee, whereas Class C shares, which automatically convert
to Class A shares ten years after the end of the month in which the shares were
purchased, remain subject to an ongoing distribution fee for a longer time
period. The purchase of Class C shares may therefore prove beneficial for an
investor expecting to hold Fund shares for less than six years.
Because of the differences among the classes of shares, in deciding which class
of shares to purchase, investors should consider, in addition to other facts and
circumstances, the following factors:
(i) Class A shares are, in general, the most beneficial for the investor who
qualifies for a waiver or certain reductions of the front end sales charges, as
described herein under 'Purchase of Shares -- Class A Shares.'
(ii) Class B and Class C shareholders may pay a CDSC upon redemption. Investors
who expect to redeem during the six year CDSC period applicable to Class B
shares or the one year CDSC period applicable to Class C shares should consider
the cost of the applicable CDSC plus the aggregate annual distribution and
service fees applicable to Class B and Class C shares, as compared with the
cost of the front end sales charge plus the aggregate annual service fees
applicable to Class A shares.
(iii) Over time, the cumulative distribution and service fees applicable to
Class B and Class C shares will approach and may exceed the 4.75% maximum front
end sales charge plus the service fee applicable to Class A shares. For example,
assuming a constant net asset value, the aggregate distribution and service fees
applicable to Class B and Class C shares would equal the front end sales charge
and aggregate service fees applicable to Class A shares at the end of the sixth
year after purchase. Because Class B shares convert to Class A shares (which
bear the same service fees as Class B and Class C shares but do not bear the
expense of ongoing distribution fees) approximately six years after purchase, an
investor expecting to hold Fund shares for longer than six years would generally
pay lower cumulative expenses by purchasing Class A or Class B shares than by
purchasing Class C shares. An investor expecting to hold Fund shares for less
than six years would generally pay lower cumulative expenses by purchasing Class
C shares than by purchasing Class A shares and, due to the CDSC that would
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SALOMON BROTHERS INVESTMENT SERIES
become payable on redemption of Class B shares, such an investor would generally
pay lower cumulative expenses by purchasing Class C shares than Class B shares.
(iv) Because Class B and Class C shareholders pay no front end sales charge,
the entire purchase price is immediately invested in Fund shares. Any return
realized on the additional funds initially invested may partially or wholly
offset the ongoing distribution fees applicable to Class B and Class C shares.
There can be no assurance, however, as to the investment return, if any, which
will be realized on such additional funds.
Investors should consult their investment representatives for assistance in
evaluating the relative benefits of the different classes of shares.
Dividends paid by each Fund with respect to all classes of shares will be
calculated in substantially the same manner at the same time on the same day,
except that distribution and service fees and any other costs specifically
attributable to a particular class of shares will be borne exclusively by the
applicable class. See 'Dividends and Distributions.' Net asset value per share
will also differ among the classes. Shares of each Fund may be exchanged for
shares of the same class of any other Fund, but not for shares of other classes
of any Fund. See 'Shareholder Services -- Exchange Privilege.'
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Investment Limitations
The following investment restrictions and those described in the Statement of
Additional Information are fundamental policies applicable to the individual
Funds which may be changed only when permitted by law and approved by the
holders of a majority of each Fund's outstanding voting securities, as defined
in the 1940 Act. Except for the investment restrictions set forth below and in
the Statement of Additional Information and each Fund's investment
objective(s), the other policies and percentage limitations referred to in this
Prospectus and in the Statement of Additional Information are not fundamental
policies of the Funds and may be changed by the applicable Fund's Board of
Directors without shareholder approval.
If a percentage restriction on investment or use of assets set forth below is
adhered to at the time a transaction is effected, later changes in percentages
resulting from changing values will not be considered a violation.
CASH MANAGEMENT FUND. The Cash Management Fund may not:
(1) purchase the securities of any one issuer, other than the U.S. government,
its agencies or instrumentalities, if immediately after such purchase, more
than 5% of the value of the Fund's total assets would be invested in such
issuer; provided, however, that such 5% limitation shall not apply to
repurchase agreements collateralized by obligations of the U.S. government, its
agencies or
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SALOMON BROTHERS INVESTMENT SERIES
instrumentalities; and provided, further, that the Fund may invest more than 5%
(but no more than 25%) of the value of the Fund's total assets in the securities
of a single issuer for a period of up to three business days;
(2) borrow money except as a temporary measure from banks for extraordinary or
emergency purposes, and in no event in excess of 15% of the value of its total
assets, except that for the purpose of this restriction, short-term credits
necessary for settlement of securities transactions are not considered
borrowings (the Fund will not purchase any securities at any time while such
borrowings exceed 5% of the value of its total assets);
(3) invest more than 10% of the value of its net assets in securities which are
illiquid, including repurchase agreements having notice periods of more than
seven days, fixed time deposits subject to withdrawal penalties and having
notice periods of more than seven days, receivables-backed obligations and
variable amount master demand notes that are not readily saleable in the
secondary market and with respect to which principal and interest may not be
received within seven days, and securities that would be illiquid by virtue of
legal or contractual restrictions on resale;
(4) invest less than 25% of the current value of its total assets in bank
obligations (including bank obligations subject to repurchase agreements),
provided that if at some future date adverse conditions prevail in the banking
industry or in the market for bank obligations, the Fund, for defensive
purposes, may invest temporarily less than 25% of its assets in bank
obligations; or
(5) pledge, hypothecate, mortgage or otherwise encumber its assets in excess of
20% of the value of its total assets, and then only to secure borrowings
permitted by (2) above.
NEW YORK MUNICIPAL MONEY MARKET FUND. The New York Municipal Money Market Fund
may not:
(1) invest more than 10% of the value of its net assets in securities which are
illiquid, including repurchase agreements having notice periods of more than
seven days, fixed time deposits subject to withdrawal penalties and having
notice periods of more than seven days and securities that would be illiquid by
virtue of legal or contractual restrictions on resale;
(2) purchase any securities which would cause more than 25% of the value of its
total assets to be invested in securities of one or more issuers conducting
their principal business activities in the same industry, provided that there
is no limitation with respect to investment in (a) obligations issued or
guaranteed by the United States Government, its agencies or instrumentalities
or by any state or territory, any possessions of the United States, or any of
their authorities, agencies, instrumentalities or political subdivisions, (b)
bank obligations, or (c) repurchase agreements with respect to any such
obligations;
(3) invest more than 5% of the current value of its total assets in the
securities of any one issuer, other than obligations issued or guaranteed by the
United States Government, is agencies or instrumentalities; however, up to 50%
of the value of the total assets of the Fund may be invested without regard to
this limitation so long as no more than 25% of its total assets are invested in
the securities of any one issuer;
(4) borrow money except as a temporary measure from banks for extraordinary or
emergency purposes, and in no event in excess of 15% of the value of its total
assets, except that for the purpose of this restriction, short-term credits
necessary for settlement of securities transactions are not considered
borrowings (the Fund will not purchase any securities at any time
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SALOMON BROTHERS INVESTMENT SERIES
while such borrowings exceed 5% of the value of its total assets); or
(5) pledge, hypothecate, mortgage or otherwise encumber its assets in excess of
20% of the value of its total assets, and then only to secure borrowings
permitted by (4) above.
The foregoing investment restrictions and those described in the Statement of
Additional Information are fundamental policies of the Fund which may be
changed only when permitted by law and approved by the holders of a majority of
the Fund's outstanding voting securities, as defined under 'Capital Stock' in
the Statement of Additional Information.
For purposes of the investment limitations applicable to the New York Municipal
Money Market Fund, the identification of the issuer of a municipal obligation
depends on the terms and conditions of the obligation. If the assets and
revenues of any agency, authority, instrumentality or other political
subdivision are separate from those of the government creating the subdivision
and the obligation is backed only by the assets and revenues of the
subdivision, such subdivision would be regarded as the sole issuer. Similarly,
in the case of a private activity bond, if the bond is backed only by the
assets and revenues of the non-governmental user, such non-governmental user
would be regarded as the sole issuer. If in either case the creating government
or another entity guarantees an obligation, the guarantee may be considered a
separate security and may be treated as an issue of such government or entity
in accordance with applicable regulations.
NATIONAL INTERMEDIATE MUNICIPAL FUND, U.S. GOVERNMENT INCOME FUND, HIGH YIELD
BOND FUND, STRATEGIC BOND FUND AND TOTAL RETURN FUND.
The National Intermediate Municipal Fund, the U.S. Government Income Fund, the
High Yield Bond Fund, the Strategic Bond Fund and the Total Return Fund may not:
(1) purchase securities of any issuer if the purchase would cause more than 5%
of the value of each Fund's total assets to be invested in the securities of
any one issuer (excluding securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities and bank obligations) or cause
more than 10% of the voting securities of the issuer to be held by a Fund,
except that up to 25% of the value of each Fund's total assets may be invested
without regard to this restriction and provided that each Fund may invest all
or substantially all of its assets in another registered investment company
having substantially the same investment objective(s) and policies and
substantially the same investment restrictions as those with respect to such
Fund;
(2) borrow money (including entering into reverse repurchase agreements), except
for temporary or emergency purposes and then not in excess of 10% of the value
of the total assets of the applicable Fund at the time the borrowing is made,
except that for the purpose of this restriction, short-term credits necessary
for settlement of securities transactions are not considered borrowings (a Fund
will not purchase additional securities at any time its borrowings exceed 5% of
total assets, provided, however, that a Fund may increase its interest in
another registered investment company having substantially the same investment
objective(s) and policies and substantially the same investment restrictions as
those with respect to such Fund while such borrowings are outstanding); or
(3) invest more than 25% of the total assets of each Fund in the securities of
issuers having their principal activities in any particular industry, except for
obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities or by any state, territory or any possession of the United
States or any of their authorities, agencies, instrumentalities or political
subdivisions, or with respect to repurchase agreements
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collateralized by any of such obligations (for purposes of this restriction,
supranational issuers will be considered to comprise an industry as will each
foreign government that issues securities purchased by a Fund), provided,
however, that each Fund may invest all or substantially all of its assets in
another registered investment company having substantially the same investment
objective(s) and policies and substantially the same investment restrictions as
those with respect to such Fund.
For purposes of investment limitations (1) and (3) above, both the borrower
under a Loan and the Lender selling a Participation will be considered an
'issuer.' See 'Additional Investment Activities and Risk Factors -- Loan
Participations and Assignments.'
ASIA GROWTH FUND. The Asia Growth Fund may not:
(1) borrow money, except for temporary or emergency purposes and then not in
excess of 5% of the value of the total assets of the applicable Fund at the time
the borrowing is made, except that for the purpose of this restriction,
short-term credits necessary for settlement of securities transactions are not
considered borrowings (the Fund will not purchase additional securities at any
time its borrowing exceed 5% of total assets); or
(2) invest more than 25% of the total assets of each Fund in the securities of
issuers having their principal activities in any particular industry, except for
obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities or by any state, territory or any possession of the United
States or any of their authorities, agencies, instrumentalities or political
subdivisions, or with respect to repurchase agreements collateralized by any of
such obligations (for purposes of this restriction, supranational issuers will
be considered to comprise an industry as will each foreign government that
issues securities purchased by a Fund).
INVESTORS FUND. The Investors Fund may not:
(1) purchase any securities of another issuer (other than the United States of
America) if upon said purchase more than 5% of its net assets would consist of
securities of such issuer, or purchase more than 10% of any class of securities
of such issuer;
(2) borrow money, except (i) in order to meet redemption requests or (ii) as a
temporary measure for extraordinary or emergency purposes and, in the case of
both (i) and (ii), only from banks and only in an aggregate amount not to
exceed 5% of its total assets taken at cost or value, whichever is less, or
mortgage or pledge any of its assets and except that for purposes of this
restriction, collateral arrangements with respect to the writing of options on
stocks and stock indices, the purchase and sale of futures contracts and
options on futures contracts, and forward currency contracts are not deemed a
pledge of assets or a borrowing of money;
(3) lend its funds or other assets to any other person other than through the
purchase of liquid debt securities pursuant to the Fund's investment policies,
except that (a) the Fund may lend its portfolio securities in an amount up to 33
1/3% of its total assets, provided that the borrower may not be affiliated,
directly or indirectly, with the Fund and (b) the Fund may enter into repurchase
agreements in an amount up to an aggregate of 25% of its total assets; or
(4) invest in the securities of issuers which have been in operation for less
than three years if such purchase at the time thereof would cause more than 5%
of the net assets of the Fund to be so invested.
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CAPITAL FUND. The Capital Fund may not:
(1) hold more than 25% of the value of its total assets in the securities of
any single company or in the securities of companies in any one industry. As to
50% of the value of its total assets, the Fund's investment in any one security
other than United States Government obligations will not exceed 5% of the value
of its total assets and as to this 50%, the Fund will not invest in more than
10% of the outstanding voting securities of any one issuer;
(2) borrow money or pledge or mortgage its assets, except as described under
'Investment Objective and Policies' and except that for purposes of this
restriction, collateral arrangements with respect to the writing of options on
stocks and stock indices, the purchase and sale of futures contracts and
options on futures contracts, and forward currency contracts are not deemed a
pledge of assets or a borrowing of money;
(3) underwrite securities, except in instances where the Fund has acquired
portfolio securities which it may not be free to sell publicly without
registration under the 1933 Act ('restricted securities'); in such
registrations the Fund may technically be deemed an 'underwriter' for purposes
of the 1933 Act. No more than 10% of the value of Fund's total assets may be
invested in illiquid securities;
(4) make loans other than through (a) the lending of its portfolio securities in
accordance with the procedures described under 'Additional Information on
Portfolio Instruments and Investment Policies -- Loans of Portfolio Securities'
in the Statement of Additional Information, or (b) entering into repurchase
agreements in an amount up to an aggregate of 25% of its total assets, but this
restriction shall not prevent the Fund from buying a portion of an issue of
bonds, debentures or other obligations which are liquid, or from investing up
to an aggregate of 10% (including investments in other types of illiquid
securities) of the value of its total assets in portions of issues of bonds,
debentures or other obligations of a type privately placed with financial
institutions and which are illiquid; or
(5) invest more than 10% of the value of the Fund's total assets in securities
of unseasoned issuers, including their predecessors, which have been in
operation for less than three years, and equity securities which are not readily
marketable.
Each Fund may, in the future, seek to achieve its investment objective(s) by
investing all of its assets in a no-load, open-end management investment
company for which SBAM serves as investment manager and which has substantially
the same investment objective(s) and policies and substantially the same
investment restrictions as those applicable to such Fund. In such event, the
Fund's applicable investment advisory agreement would be terminated since the
investment management would be performed by or on behalf of such other
registered investment company.
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Management
The business and affairs of each Fund are managed under the direction of its
Board of Directors. The Board of Directors approves all significant agreements
between a Fund and the persons or companies that furnish services to the Fund,
including agreements with its distributor, investment manager, administrator,
custodian and transfer agent. The day-to-day operations of a Fund are delegated
to the Fund's investment manager and administrator. The Statement of Additional
Information contains general background information regarding each director and
executive officer of each Fund.
INVESTMENT MANAGER
Each Fund retains SBAM, a wholly owned subsidiary of Salomon Brothers Holding
Company Inc, which is in turn wholly owned by SI, as its investment manager
under an investment management contract. SBAM was incorporated in 1987 and
together with affiliates in London, Frankfurt, Tokyo and Hong Kong, provides a
broad range of fixed-income and equity investment advisory services to various
individuals and institutional clients located throughout the world, and serves
as investment adviser to various investment companies. In providing such
services, SBAM has access to SI's more than 400 economists and mortgage, bond,
sovereign and equity analysts. As of February 28, 1997, SBAM and its worldwide
investment advisory affiliates managed approximately $20.7 billion of assets of
which approximately $1.3 billion is invested in high yield securities and
approximately $2.3 billion is invested in mortgage backed securities. Michael S.
Hyland serves as President of SBAM. SBAM's business offices are located at 7
World Trade Center, New York, New York 10048.
In connection with SBAM's service as investment manager to the Strategic Bond
Fund, SBAM Limited, whose business address is Victoria Plaza, 111 Buckingham
Palace Road, London SW1W OSB, England, provides certain advisory services to
SBAM relating to currency transactions and investments in non-dollar-
denominated debt securities for the benefit of the Strategic Bond Fund. SBAM
Limited is compensated by SBAM at no additional expense to the Fund. Like SBAM,
SBAM Limited is a direct, wholly-owned subsidiary of Salomon Brothers Holding
Company Inc. SBAM Limited is a member of the Investment Management Regulatory
Organization Limited in the United Kingdom and is registered as an investment
adviser in the United States pursuant to the Investment Advisers Act of 1940,
as amended.
Pursuant to a subadvisory agreement, SBAM has retained SBAM AP, whose business
address is Three Exchange Square, Hong Kong, to act as sub-adviser to the Asia
Growth Fund, subject to the supervision of SBAM. SBAM AP is compensated by SBAM
at no additional cost to the Fund. Like SBAM, SBAM AP is an indirect,
wholly-owned subsidiary of Salomon Inc. SBAM AP, which was organized in 1995,
is a member of the Hong Kong Securities and Futures Commission and is
registered as an investment adviser in the United States pursuant to the
Investment Advisers Act of 1940, as amended. The business address of SBAM AP is
Three Exchange Square, Hong Kong.
Marybeth Whyte is primarily responsible for the day-to-day management of the
National Intermediate Municipal Fund and the New York Municipal Money
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Market Fund. Prior to joining SBAM on July 25, 1994, Ms. Whyte was a Senior
Vice President and head of the Municipal Bond Area at Fiduciary Trust Company
International, where her responsibilities included managing and advising
portfolios with assets of approximately $1.3 billion.
Steven Guterman is primarily responsible for the day-to-day management of the
U.S. Government Income Fund and the mortgage-backed securities and U.S.
government securities portions of the Strategic Bond Fund. Mr. Guterman is
assisted by Roger Lavan in the management of the two foregoing Funds. Mr.
Guterman joined SBAM in 1990 and is currently a Senior Portfolio Manager,
responsible for SBAM's investment company and institutional portfolios which
invest primarily in mortgage-backed securities and U.S. government issues. Mr.
Guterman also serves as portfolio manager for two offshore mortgage funds. In
addition, Mr. Guterman serves as portfolio manager for a number of SBAM's
institutional clients. Mr. Guterman joined Salomon Brothers in 1983. He
initially worked in the mortgage research group where he became a Research
Director and later traded derivative mortgage-backed securities for Salomon
Brothers. Mr. Lavan joined SBAM in 1990 and is a Portfolio Manager and
Quantitative Fixed Income Analyst. He is responsible for working with senior
portfolio managers to monitor and analyze market relationships and identify and
implement relative value transactions in SBAM's investment company and
institutional portfolios which invest in mortgage-backed securities and U.S.
Government securities. Prior to joining SBAM, Mr. Lavan spent four years
analyzing portfolios for Salomon Brothers' Fixed Income Sales Group and Product
Support Divisions. David J. Scott is primarily responsible for a portion of the
Strategic Bond Fund relating to currency transactions and investments in
non-dollar denominated debt securities. Prior to joining SBAM Limited in April,
1994, Mr. Scott worked for four years at JP Morgan Investment Management where
he was responsible for global and non-dollar portfolios. Before joining JP
Morgan Investment Management, Mr. Scott worked for three years at Mercury Asset
Management where he was responsible for captive insurance portfolios and
products.
Peter J. Wilby is primarily responsible for the day-to-day management of the
High Yield Bond Fund and the high yield and sovereign bond portions of the
Strategic Bond Fund. Mr. Wilby, who joined SBAM in 1989, is a Managing Director
of Salomon Brothers and SBAM and a Senior Portfolio Manager of SBAM, responsible
for SBAM's investment company and institutional portfolios which invest in high
yield non-U.S. and U.S. corporate debt securities and high yield foreign
sovereign debt securities. Mr. Wilby is the portfolio manager for Salomon
Brothers Institutional High Yield Bond Fund and Salomon Brothers Institutional
Emerging Markets Debt Fund, each a portfolio of Salomon Brothers Institutional
Series Funds Inc ('Institutional Series Funds'), Global Partners Income Fund
Inc., The Emerging Markets Income Fund Inc, The Emerging Markets Income Fund II
Inc, The Emerging Markets Floating Rate Fund Inc, Salomon Brothers Worldwide
Income Fund Inc, Salomon Brothers High Income Fund Inc, and the foreign
sovereign debt component of Salomon Brothers 2008 Worldwide Dollar Government
Term Trust Inc.
Giampaolo G. Guarnieri is primarily responsible for the day-to-day management
of the Asia Growth Fund. Mr. Guarnieri has served as a Director of SBAM AP
since July 1996 and has been employed as a Senior Portfolio Manager since
joining SBAM AP in April 1995. Prior to joining SBAM AP, Mr. Guarnieri spent
five years as a Senior Portfolio Investment Manager at Credit Agricole Asset
Management (South East Asia) Limited in Hong Kong, a wholly-owned subsidiary of
the Credit Agricole Group as a senior portfolio
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manager since 1992 and as head of direct investment activities prior to that.
Mr. Guarnieri is the portfolio manager for Salomon Brothers Institutional Asia
Growth Fund, a portfolio of Institutional Series Funds.
Allan R. White III is primarily responsible for day-to-day management of the
Investors Fund. Mr. White has been Executive Vice President and portfolio
manager for the Investors Fund since April 1992. Since 1989 he has been a Vice
President of SBAM to 1989 he was a Vice President at The First Boston
Corporation. Mr. White is also Executive Vice President and portfolio manager
for The Salomon Brothers Fund Inc. Mr. White is assisted in the management of
the Investors Fund by Pamela P. Milunovich. Ms. Milunovich has been a Director
of SBAM since January 1997, and a portfolio manager since joining SBAM in June
1992. Prior to June 1992, Ms. Milunovich was an associate at James Capel
Wardley Inc.
Richard E. Dahlberg is primarily responsible for the day-to-day management of
the Total Return Fund. Prior to joining SBAM in July 1995, Mr. Dahlberg was
employed by Massachusetts Financial Services Company since 1968. Mr. Dahlberg
had been primarily responsible for the day-to-day management of the MFS Total
Return Fund for ten years prior to joining SBAM.
Ross S. Margolies is primarily responsible for the day-to-day management of the
Capital Fund. Mr. Margolies is a portfolio manager with SBAM who manages other
investments in equities, options, convertible bonds and high yield bonds. Prior
to joining SBAM in 1992, Mr. Margolies was a Senior Vice President and analyst
in the High Yield Research Department at Lehman Brothers.
Subject to policy established by the Board of Directors, which has overall
responsibility for the business and affairs of each Fund, SBAM manages the
investment and reinvestment of each Fund's assets pursuant to the applicable
management contract. SBAM also furnishes office space, personnel and certain
facilities required for the performance by SBAM of certain additional services
provided by it to each Fund under the applicable management contract, including
SEC compliance, supervision of Fund operations and certain administrative and
clerical services, and pays the compensation of the Funds' officers, employees
and directors affiliated with SBAM. Except for the expenses paid by SBAM that
are described herein, each Fund bears all costs of its operations.
As compensation for its services, the Cash Management Fund pays SBAM a monthly
fee at an annual rate of .20% of the Fund's average daily net assets; the New
York Municipal Money Market Fund pays SBAM a monthly fee at an annual rate of
.20% of the Fund's average daily net assets; the National Intermediate
Municipal Fund pays SBAM a monthly fee at an annual rate of .50% of the Fund's
average daily net assets; the U.S. Government Income Fund pays SBAM a monthly
fee at an annual rate of .60% of the Fund's average daily net assets; the High
Yield Bond Fund pays SBAM a monthly fee at an annual rate of .75% of the Fund's
average daily net assets; the Strategic Bond Fund pays SBAM a monthly fee at an
annual rate of .75% of the Fund's average daily net assets; the Total Return
Fund pays SBAM a monthly fee at an annual rate of .55% of the Fund's average
daily net assets; the Asia Growth Fund pays SBAM a monthly fee at an annual
rate of .80% of the Fund's average daily net assets; and the Capital Fund pays
SBAM a monthly fee at an annual rate of 1.00% of average daily net assets up to
$100 million, .75% on the next $100 million, .625% on the next $200 million and
.50% on average daily net assets in excess of $400 million. With respect to
each Fund other than Investors Fund and Capital Fund, for the 1996 fiscal year,
SBAM has voluntarily agreed to impose an expense cap on total Fund
PAGE 88
<PAGE>
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SALOMON BROTHERS INVESTMENT SERIES
operating expenses (exclusive of taxes, interest and extraordinary expenses
such as litigation and indemnification expenses) at the amount of such Fund's
total Fund operating expenses shown under 'Expense Information -- Annual Fund
Operating Expense.' See 'Expense Information -- Annual Fund Operating
Expenses.' The Investors Fund pays SBAM a quarterly fee (the 'Base Fee') at the
end of each calendar quarter based on the following rates:
<TABLE>
<CAPTION>
ANNUAL FEE
AVERAGE DAILY NET ASSETS RATE
- ---------------------------------- ----------
<S> <C>
First $350 million .650%
Next $150 million .550%
Next $250 million .525%
Next $250 million .500%
Over $1 billion .450%
</TABLE>
The Base Fee for the Investors Fund may be increased or decreased based on the
performance of the Investors Fund relative to the investment record of the S&P
500 Index. At the end of each calendar quarter, for each percentage point by
which the investment performance of the Investors Fund exceeds or is exceeded by
the investment record of the S&P 500 Index over the one year period ending on
the last day of the calendar quarter for which the adjustment is being
calculated, the Base Fee will be adjusted upward or downward by the product of
(i) 1/4 of .01% multiplied by (ii) the average daily net assets of the
Investors Fund for the one year period preceding the end of the calendar
quarter. If the amount by which the Investors Fund outperforms or underperforms
the S&P 500 Index is not a whole percentage point, a pro rata adjustment shall
be made. However, there will be no performance adjustment unless the investment
performance of the Investors Fund exceeds or is exceeded by the investment
record of the S&P 500 Index by at least one percentage point. The maximum
quarterly adjustment is 1/4 of .10%, which would occur if the Investors Fund's
performance exceeds or is exceeded by the S&P 500 Index by ten or more
percentage points. The first performance adjustment was paid on September 30,
1995 for the one year period ending on that date. Thereafter, the performance
adjustment is paid quarterly based on a rolling one year period.
With respect to the Strategic Bond Fund and in connection with the subadvisory
consulting agreement between SBAM and SBAM Limited, SBAM pays SBAM Limited, as
full compensation for all services provided under the subadvisory consulting
agreement, a portion of its investment management fee. The amount payable to
SBAM Limited is equal to the fee payable under SBAM's management agreement
multiplied by the portion of the assets of the Strategic Bond Fund that SBAM
Limited has been delegated to manage divided by the current value of the net
assets of the Strategic Bond Fund.
With respect to the Asia Growth Fund, SBAM pays SBAM AP as full compensation
for its services provided under the subadvisory agreement, a portion of its
investment management fee.
SBAM may waive all or part of its fee from time to time in order to increase
each Fund's net investment income available for distribution to shareholders.
The Funds will not be required to reimburse SBAM for any advisory fees waived.
SBAM may from time to time, at its own expense, provide compensation to certain
selected dealers for performing administrative services for their customers.
These services include maintaining account records, processing orders to
purchase, redeem and exchange Fund shares and responding to certain customer
inquiries. The amount of such compensation may be up to .12% annually of the
average net assets of a Fund attributable to shares of such Fund held by
customers of such selected dealers.
The services of SBAM, SBAM Limited and SBAM AP are not deemed to be exclusive,
and nothing in the relevant agreements will prevent either of them or
PAGE 89
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SALOMON BROTHERS INVESTMENT SERIES
their affiliates from providing similar services to other investment companies
and other clients (whether or not their investment objectives and policies are
similar to those of any of the Funds) or from engaging in other activities.
Consistent with the Rules of Fair Practice of the National Association of
Securities Dealers (the 'NASD'), and subject to seeking the most favorable
price and execution available, the investment manager may consider sales of
shares of the Funds as a factor in the selection of brokers to execute
portfolio transactions for the Funds. The Funds may use Salomon Brothers and
its affiliates to execute portfolio transactions when the investment manager
believes that the broker's charge for the transaction does not exceed the usual
and customary levels charged by other brokers in connection with comparable
transactions involving similar securities. See the Statement of Additional
Information for a more complete description of the Funds' policies with respect
to portfolio transactions.
PERFORMANCE OF ASIA GROWTH FUND AND RELATED ACCOUNTS
ASIA GROWTH FUND. Set forth in the chart below is performance data provided by
SBAM AP relating: (i) for the period from January 1, 1992 to February 28, 1995,
to a non-U.S. collective investment vehicle (the 'Offshore Fund I') managed by
the portfolio manager of the Asia Growth Fund while he was employed by a
different investment adviser unaffiliated with SBAM; (ii) for the month ending
September 30, 1995, and the quarter ending December 31, 1996, to a non-U.S.
collective investment vehicle managed by the portfolio manager after
commencement of employment with an affiliate of SBAM (the 'Offshore Fund II');
and (iii) for the year ending December 31, 1996 and the two months ending
February 28, 1997, to a composite ('Composite') consisting of Offshore Fund II
and Salomon Brothers Institutional Asia Growth Fund ('Institutional Asia Growth
Fund'), a portfolio of Salomon Brothers Institutional Series Funds Inc, a U.S.
registered investment company. The Institutional Asia Growth Fund and Asia
Growth Fund have the same portfolio manager and have identical investment
objectives, policies and strategies. Both Offshore Fund I and Offshore Fund II
have substantially similar, though not identical, investment objectives,
policies and strategies as those of the Asia Growth Fund. With respect to
Offshore Fund I, the period shown reflects the period for which the portfolio
manager was primarily responsible for the day-to-day management of the
portfolio of Offshore Fund I. During the period shown for Offshore Fund I, the
size of the fund ranged from approximately $45 million to $95 million and
during the period shown solely for Offshore Fund II, the size of the fund was
approximately $8.5 million. During the period shown for the Composite, its size
ranged from $8.9 million to $18.4 million.
The Morgan Stanley Capital International All Country Asia Free Ex-Japan Index
is a widely recognized market index of Asian country equity issues. The index is
composed of a sample of companies from the following ten countries: Hong Kong,
India, Indonesia, Korea, Malaysia, Pakistan, Philippines, Singapore, Sri Lanka
and Thailand. Constituent stocks are selected for the index on the basis of
industry representation, liquidity and sufficient float. The index is unmanaged
and accordingly, does not reflect the effect of operating expenses, including
advisory fees, transaction costs and other expenses but does reflect
reinvestment of dividends.
The aggregate total return for each class of shares of the Asia Growth Fund
(after management fee waiver and reimbursement of certain expenses and
reflecting the effects of the maximum applicable front end sales charges and any
applicable CDSCs payable by an investor under the Multiple Pricing System) for
PAGE 90
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<PAGE>
SALOMON BROTHERS INVESTMENT SERIES
certain periods of time ending February 28, 1997 is set forth below. See
'Performance Data' in the Statement of Additional Information.
<TABLE>
<CAPTION>
PERIOD CLASS A CLASS B CLASS C CLASS O
- --------------------------------------------------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
May 6, 1996 (commencement of investment operations)
through December 31, 1996 0.17% (0.35)% 3.64% 5.31%
January 1, 1997 through February 28, 1997 0.33% 0.24 % 4.24% 5.43%
May 6, 1996 through February 28, 1997 5.52% 5.13 % 9.13% 11.03%
</TABLE>
The performance data shown below should be read in conjunction with the
information in 'General' that follows:
<TABLE>
<CAPTION>
1/1/92 - 1/1/93 - 1/1/94 -
12/31/92 12/31/93 12/31/94
-------- -------- --------
<S> <C> <C> <C>
Offshore Fund I... 29.50% 95.05% (13.55)%
Morgan Stanley
Capital
International All
Country Asia
Free Ex-Japan
Index............ 21.80 103.39 (16.94)
</TABLE>
<TABLE>
<CAPTION>
AVERAGE
ANNUAL
TOTAL TOTAL
1/1/95 - RETURN RETURN
2/28/95 1/1/92 - 1/1/92 -
(ANNUALIZED) 2/28/95 2/28/95
------------ ------------ -------
<S> <C> <C> <C>
Offshore Fund I... (5.47)% 106.42% 25.72%
Morgan Stanley
Capital
International All
Country Asia
Free Ex-Japan
Index............ (15.55) 100.05 24.48
</TABLE>
<TABLE>
<CAPTION>
FOR THE FOR THE
MONTH QUARTER
ENDED: ENDED:
9/30/95 12/31/95
-------- --------
<S> <C> <C>
Offshore Fund
II............... 2.12% 3.23%
Morgan Stanley
Capital
International All
Country Asia
Free Ex-Japan
Index............ 1.19 0.80
</TABLE>
<TABLE>
<CAPTION>
FOR THE FOR THE CUMULATIVE
YEAR TWO MONTHS RETURN
ENDED: ENDED: SINCE
12/31/96 2/28/97 9/1/95*
----------- ------------ ----------
<S> <C> <C> <C>
Composite......... 12.26% 5.63% 25.01%
Morgan Stanley
Capital
International All
Country Asia
Free Ex-Japan
Index............ 10.03 2.95 15.55
</TABLE>
------------------------
* These return figures are asset-weighted, is a weighted-average figure,
representing, for the period from September 1, 1995 to May 30, 1996,
cumulative return of Offshore Fund II, and for the period June 1, 1996 to
February 28, 1997, for the Composite.
GENERAL. The performance results shown above are based on total returns
reflecting realized and unrealized gains and losses and income, including that
derived from cash positions. Returns are calculated monthly for Offshore Fund
I, Offshore Fund II and the Institutional Asia Growth Fund and are compounded
monthly. The investment results are time-weighted on a daily basis and
market-weighted based on market values determined as of the first business day
of each month. The performance results are net of transaction costs and
advisory and other fees incurred and reflect reinvestment of dividends and
capital gains distributions, if any.
The performance results shown above are not performance results for the Asia
Growth Fund, which has recently commenced investment operations. The results
shown above should not be deemed to be indicative of future results for the
Asia Growth Fund owing to differences in brokerage commissions and dealer
spreads, expenses, including investment advisory fees, the size of positions
taken in relation to fund size, timing of purchases and sales and market
conditions at the time of a transaction, timing of cash flows and availability
of cash for new investments.
Although substantially similar, the investment objectives, policies and
strategies for Offshore Fund I and Offshore Fund II differ in certain respects
from those of the Asia Growth Fund. In addition, such accounts were and are
managed without regard to certain tax requirements applicable to U.S. registered
investment companies that limit the proportions of short-term gains that such
companies may realize to maintain their tax status. See 'Dividends,
Distributions and Taxes.' Accordingly, the performance
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SALOMON BROTHERS INVESTMENT SERIES
results shown above and that of the Asia Growth Fund are expected to differ.
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. INVESTORS SHOULD ALSO BE
AWARE THAT THE USE OF METHODS OF DETERMINING PERFORMANCE DIFFERENT THAN THAT
USED BY SBAM AP WOULD RESULT IN DIFFERENT PERFORMANCE DATA. NO ADJUSTMENT HAS
BEEN MADE FOR ANY INCOME TAXES WHICH ARE PAYABLE ON INCOME DIVIDENDS OR CAPITAL
GAINS DISTRIBUTIONS. THE EFFECT OF TAXES ON ANY INVESTOR WILL DEPEND ON SUCH
INVESTOR'S TAX STATUS. SEE 'DIVIDENDS AND DISTRIBUTIONS' AND 'TAXATION.'
DISTRIBUTOR
Salomon Brothers, located at 7 World Trade Center, New York, New York 10048,
serves as each Fund's distributor. Salomon Brothers is a wholly-owned
subsidiary of Salomon Brothers Holding Company Inc, which is in turn wholly-
owned by SI. It is also one of the largest securities dealers in the world and a
registered broker-dealer. Salomon Brothers makes markets in securities and
provides a broad range of underwriting, research, and financial advisory
services to governments, international corporations, and institutional
investors. Salomon Brothers from time to time may receive fees from the Funds in
connection with the execution of portfolio transactions on behalf of the Funds.
See 'Purchase of Shares -- Distribution Fees.'
ADMINISTRATOR
Each Fund employs Investors Bank & Trust Company ('Investors Bank') under an
administration agreement to provide certain administrative services. The
administrator is not involved in the Funds' investment decisions.
The services provided by Investors Bank under the applicable administration
agreements include certain accounting, clerical and bookkeeping services, Blue
Sky compliance, corporate secretarial services and assistance in the preparation
and filing of tax returns and reports to shareholders and the SEC. For its
services as administrator, each Fund, other than the Investors Fund and the
Capital Fund, pays Investors Bank a fee, calculated daily and payable monthly,
at an annual rate of .08% of the applicable Fund's aggregate average daily net
assets. As compensation for its services to the Investors Fund and the Capital
Fund and at no additional cost to either Fund, SBAM pays Investors Bank a fee
each month at an annual rate of .08% and .06%, respectively, of the average
daily value of the Investors Fund's and the Capital Fund's net assets,
respectively.
EXPENSES
Each Fund's expenses include taxes, interest, fees and salaries of the directors
and officers who are not directors, officers or employees of the Fund's service
contractors, SEC fees, state securities qualification fees, costs of preparing
and printing prospectuses for regulatory purposes and for distribution to
existing shareholders, advisory and administration fees, charges of the
custodian, transfer agent and dividend disbursing agent, certain insurance
premiums, outside auditing and legal expenses, costs of shareholder reports and
shareholder meetings and any extraordinary expenses. Each Fund also pays for
brokerage fees and commissions (if any) in connection with the purchase and
sale of portfolio securities. Fund expenses are allocated to a particular class
based on either expenses identifiable to the class or relative net assets of
the class and other classes of Fund shares.
PAGE 92
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SALOMON BROTHERS INVESTMENT SERIES
- -------------------------------------------------------------------------
Determination
of Net Asset Value
For the purpose of pricing purchase and redemption orders, the net asset value
per share of each class of each Fund is calculated separately and is determined
once daily as of the close of regularly scheduled trading on the NYSE (except
with respect to the Cash Management Fund and the New York Municipal Money
Market Fund for which the determination is made at 12:00 noon (New York time)).
With respect to each Fund, such calculation is determined on each day that the
NYSE is open for trading, i.e., Monday through Friday, except for New Year's
Day, President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day, and the preceding Friday or subsequent
Monday when one of those holidays falls on a Saturday or Sunday, respectively.
Net asset value per share of each class of each Fund is calculated by dividing
the value of the portion of the Fund's securities and other assets attributable
to that class, less the liabilities attributable to that class, by the number of
shares of that class outstanding. In calculating net asset value, all portfolio
securities will be valued at market value when there is a reliable market
quotation available for the securities and otherwise pursuant to procedures
adopted by each Fund's Board of Directors. Securities that are primarily traded
on foreign exchanges generally are valued at the preceding closing values of
such securities on their respective exchanges, except that when an occurrence
subsequent to the time a value was so established is likely to have changed
such value, then the fair value of those securities will be determined by
consideration of other factors by or under the direction of the Board of
Directors. Securities may be valued by independent pricing services which use
prices provided by market-makers or estimates of market values obtained from
yield data relating to instruments or securities with similar characteristics.
In valuing a Fund's assets, any assets or liabilities initially expressed in
terms of a foreign currency are converted to U.S. dollar equivalents at the
then current exchange rate. Corporate actions by issuers of foreign securities
held by the Fund, such as payment of dividends or distributions, are reflected
in the net asset value on the ex-dividend date therefor, except that such
actions will be so reflected on the date the Fund is actually advised of the
corporate action if subsequent to the ex-dividend date. Further information
regarding the Funds' valuation policies is contained in the Statement of
Additional Information.
Each of the Cash Management Fund and the New York Municipal Money Market Fund
use the amortized cost method to value its portfolio securities and, with
respect to each class of shares of the Fund, seeks to maintain a stable net
asset value of $1.00 per share. Each of the other Funds values short-term
investments that mature in 60 days or less at amortized cost whenever the Board
of Directors determines that amortized cost is the fair value of those
investments. If a Fund acquires securities with more than sixty days remaining
to maturity, they will be valued at current market value (using the bid price)
until the 60th day prior to maturity, and will then be valued on an amortized
cost basis based upon the value on such date unless the Board determines during
such 60-day period that this amortized cost basis does not represent fair
value. The amortized cost method involves valuing a security at its cost and
amortizing any discount or premium over the period until maturity, regardless
of the impact of fluctuating interest rates on the market value of the
security. See the Statement of Additional Information for a more complete
description of the amortized cost method.
PAGE 93
<PAGE>
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SALOMON BROTHERS INVESTMENT SERIES
- --------------------------------------------------------------------------------
Purchase of Shares
Shares of each Fund may be purchased through First Data Investor Services
Group, Inc. ('FDISG') (formerly, The Shareholder Services Group, Inc.) (the
'Transfer Agent') or from selected dealers. Purchases of shares made through a
selected dealer should be made in accordance with the procedures prescribed by
such selected dealer. The Fund reserves the right to reject any purchase order
in whole or in part.
HOW TO OPEN AN ACCOUNT AND PURCHASE SHARES
Shares may be purchased initially by completing a Purchase Application and
mailing it, together with a check payable to Salomon Brothers Funds to:
(Name of Fund)
c/o FDISG
P.O. Box 5127
Westborough, MA 01581-5127
Subsequent investments may be made at any time through a selected dealer or by
mailing a check to FDISG, at the address set forth above, along with the
detachable stub from the Statement of Account (or a letter providing the
account number). Shareholders should be sure to write the Fund account number
on the check. If an investor's purchase check is not collected, the purchase
will be cancelled and FDISG will charge a fee of $10 to the shareholder's
account. FDISG does not intend to resubmit such checks for collection.
Subsequent investments may also be made by wiring federal funds to FDISG. Prior
notification by telephone is not required. The investor should instruct the
wiring bank to transmit the specified amount in federal funds to:
Boston Safe Deposit and Trust Company
Boston, Massachusetts
ABA No. 011-001-234
Account #142743
Attn: (Name of Fund)
Name of Account:
Account # (As assigned):
Shareholders should note that their bank may charge a fee in connection with
transferring money by bank wire.
To ensure prompt credit to their accounts, investors or their dealers should
call (800) 446-1013 with a reference number for the wire. If wires are received
after 4:00 p.m. New York time, or during a bank holiday, purchases will be
confirmed at the price determined on the next business day of the applicable
Fund.
MINIMUM INVESTMENT
The minimum initial investment in any class of shares in any Fund is $500 and
the minimum subsequent investment is $50. However, for IRAs and Self-Employed
Retirement Plans (formerly Keogh Plans), the minimum initial investment in any
class of shares of any Fund is $50. In addition, an account can be established
with a minimum of $50 if the account will be receiving periodic, regular
investments through programs such as Automatic Investment Plans, Automatic
Dividend Diversification and Systematic Investing. See 'Shareholder Services.'
When purchasing shares of any Fund, investors must specify the class of shares.
Each Fund and the investment manager reserve the right to reject any purchase
order, to suspend the offering of shares for a period of time or to waive or
lower the minimum investment requirements.
PAGE 94
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<PAGE>
SALOMON BROTHERS INVESTMENT SERIES
TIMING OF PURCHASE ORDERS
Orders for the purchase of Fund shares (other than the Cash Management Fund and
the New York Municipal Money Market Fund) received by selected dealers by the
close of regular trading on the NYSE (currently, 4:00 p.m., New York time) on
any day that a Fund calculates its net asset value and either transmitted to
Salomon Brothers by the close of its business day (normally 5:00 p.m., New York
time) or transmitted by dealers to FDISG, through the facilities of the
National Securities Clearing Corporation ('NSCC') by 7:00 p.m., New York time,
on that day will be priced according to the net asset value determined on that
day plus any applicable sales charge. Otherwise, the orders will be priced as of
the time the net asset value is next determined. Purchase orders for shares of
the Cash Management Fund and the New York Municipal Money Market Fund will be
executed at the net asset value per share next determined after the order has
become effective, i.e., payment has been received in or converted into federal
funds. See 'Determination of Net Asset Value.' It is the dealers'
responsibility to ensure that orders are transmitted on a timely basis to
Salomon Brothers or FDISG through the facilities of NSCC. Any loss resulting
from a dealer's failure to submit an order within the prescribed time frame
will be borne by that dealer. See 'How to Open an Account and Purchase Shares'
above for information on obtaining a reference number for wire orders, which
will facilitate the handling of such orders and ensure prompt credit to the
investor's account.
Funds transmitted by a wire system other than the Federal Reserve Wire System
generally take one business day to be converted into federal funds. In those
cases in which an investor pays for shares by a check drawn on a member bank of
the Federal Reserve System, federal funds generally will become available on
the business day after the check is deposited. Checks drawn on banks which are
not members of the Federal Reserve System or foreign banks may take
substantially longer to be converted into federal funds.
STOCK CERTIFICATES
Although most shareholders elect not to receive stock certificates,
certificates for full shares can be obtained on specific written request at no
cost to the shareholder. No certificates are issued for fractional shares or
for any shares of the Cash Management Fund and the New York Municipal Money
Market Fund.
MULTIPLE PRICING SYSTEM
Each Fund currently offers three classes of shares to the general public
through the Multiple Pricing System. Although the Class A, Class B and Class C
shares of a particular Fund represent an interest in the same portfolio of
investments, each class is subject to different sales charge structures and
expense levels. Class A shares of all Funds are sold with a front end sales
charge (with the exception of Class A shares of the Cash Management Fund and
the New York Municipal Money Market Fund, which are sold at net asset value)
and may, under limited circumstances, be subject to a CDSC upon redemption.
Class B shares and Class C shares of all Funds are sold without a front end
sales charge but may be subject to a CDSC upon redemption (with the exception
of sales of Class B shares and Class C shares of the Cash Management Fund and
the New York Municipal Money Market Fund, which are not subject to a CDSC). The
Multiple Pricing System allows investors to select the class that is best
suited to their needs and objectives. In considering the options afforded by the
Multiple Pricing System, investors should consider both the applicable front end
sales charge or CDSC, as well as the applicable service or distribution fee, and
other relevant factors such as whether their investment goals are long-term or
short-term in order to determine the class
PAGE 95
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SALOMON BROTHERS INVESTMENT SERIES
that best suits their circumstances and objectives. See 'Multiple Pricing
System' for a discussion of factors to consider in selecting which class of
shares to purchase. In addition, Class O shareholders may purchase additional
Class O shares which are sold at net asset value and are not subject to any
sales charges, distribution or service fees.
CLASS A SHARES
The public offering price for Class A shares of each Fund is the per share net
asset value of that class plus a front end sales charge, expressed as a
percentage of the offering price as set forth in the table below. No front end
sales charge is imposed on the purchase of Class A shares of the Cash
Management Fund and the New York Municipal Money Market Fund. However, when
Class A shares of the Cash Management Fund or the New York Municipal Money
Market Fund on which no sales charge has been paid or waived are exchanged for
Class A shares of another Fund for which a sales charge is normally imposed on
the purchase of Class A shares, the sales charge applicable to purchases of
Class A shares will be assessed at that time.
CLASS A SALES CHARGE TABLE
<TABLE>
<CAPTION>
CONCESSION TO
PERCENTAGE OF BROKER-DEALER AS
AMOUNT OF PERCENTAGE OF THE NET AMOUNT A PERCENTAGE OF
PURCHASE PAYMENT THE OFFERING PRICE INVESTED OFFERING PRICE
<S> <C> <C> <C>
Less than $50,000 4.75% 4.99% 4.25%
$50,000 but less than $100,000 4.50% 4.71% 4.00%
$100,000 but less than $250,000 4.00% 4.17% 3.50%
$250,000 but less than $500,000 2.50% 2.56% 2.25%
$500,000 but less than 1 million 2.00% 2.04% 1.75%
$1 million or more None* None **
</TABLE>
------------------------------------------------------------------
* With respect to purchases of Class A shares of $1 million or more, a CDSC
will apply if the shares are redeemed within one year after purchase. See
'Redemption of Shares -- Class A Share Purchases of $1 million or more.'
** The Distributor may in its discretion compensate selected dealers in
connection with the sale of Class A Shares in an aggregate amount of $1
million or more up to the following amounts:
<TABLE>
<CAPTION>
DEALER'S
AMOUNT OF PURCHASE CONCESSION
- ----------------------------------- ----------
<S> <C>
1 million up to $2 million 1.00%
Over $2 million up to $3 million .75%
Over $3 million up to $5 million .50%
Over $5 million .25%
</TABLE>
The Distributor may reallow concessions to selected dealers and retain the
balance over such concessions, and at times the Distributor may reallow the
entire front end sales charge to such dealers. In such circumstances, dealers
may be deemed to be 'underwriters' as that term is defined under the 1933 Act.
The Distributor has determined to reallow the entire front end sales charge to
dealers for sales of Class A shares until further notice.
REDUCED SALES CHARGES
Investors purchasing Class A shares may be able to benefit from a reduction or
elimination of the front end sales charge through several purchase plans.
RIGHT OF ACCUMULATION. For the purposes of determining which sales charge level
in the table above is applicable to a purchase of Class A shares, investors may
combine the total of the value of the shares being purchased with the amount
equal to the current net asset value of the investor's holdings of Class A
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SALOMON BROTHERS INVESTMENT SERIES
shares in all Funds, excluding Class A shares purchased or held in the Cash
Management Fund or the New York Municipal Money Market Fund. Also, for purposes
of the foregoing calculation, Class A shares (excluding Class A shares
purchased or held in the Cash Management Fund or the New York Municipal Money
Market Fund) beneficially owned by the investor's spouse and the investor's
children under the age of 21 may, upon written notice to the transfer agent,
also be included in the investor's beneficial holdings at the current net asset
value to reach a level specified in the above table. The investor must notify
the transfer agent in writing of all share accounts to be considered in
exercising the right of accumulation described above.
LETTER OF INTENT. For the purposes of determining which sales charge level in
the table above is applicable to a purchase of Class A shares, investors may
also establish a total investment goal in shares of the Funds to be achieved
over a thirteen-month period and may purchase Class A shares during such period
at the applicable reduced front end sales charge. All Class A shares,
(excluding Class A shares purchased or held in the Cash Management Fund or the
New York Municipal Money Market Fund), previously purchased and still
beneficially owned by the investor and his or her spouse and children under the
age of 21 may, upon written notice to the transfer agent, also be included at
the current net asset value to reach a level specified in the table above.
Shares totaling 5% of the dollar amount of the Letter of Intent will be held in
escrow by the transfer agent in the name of the purchaser. The effective date
of a Letter of Intent may be back-dated up to 90 days, in order that any
investments made during this 90-day period, valued at the purchaser's cost, can
be applied to the fulfillment of the Letter of Intent goal.
The Letter of Intent does not obligate the investor to purchase, nor any Fund
to sell, the indicated amount. In the event the Letter of Intent goal is not
achieved within the thirteen-month period, the investor is required to pay the
difference between the front end sales charge otherwise applicable to the
purchases of Class A shares made during this period and the sales charge
actually paid. If a payment is due under the preceding sentence, it must be
made directly to the transfer agent within twenty days of notification or, if
not paid, the transfer agent will liquidate sufficient escrowed shares to
obtain such difference. For additional information, shareholders should contact
the applicable Fund, the transfer agent or eligible securities dealers.
GROUP PURCHASES. A reduced sales charge is available to employees (and
partners) of the same employer purchasing as a group. The sales charge
applicable to purchases by each member of such a group will be determined by
the table set forth above and will be based upon the aggregate sales of Class A
shares to, and share holdings of, all members of the group. To be eligible for
such reduced sales charges, all purchases must be pursuant to an employer or
partnership sanctioned plan meeting certain requirements; one such requirement
is that the plan must be open to specified partners or employees of the
employer and its subsidiaries, if any. Such plans include, but are not limited
to, plans which provide for payroll deductions and retirement plans under
Sections 401 or 408 of the Code. The Distributor may also offer a reduced sales
charge for aggregating related fiduciary accounts under such conditions that
the Distributor will realize economies of sales efforts and sales related
expenses. An individual who is a member of a qualified group may also purchase
Class A shares of a Fund at the reduced sales charge applicable to the group as
a whole. The sales charge is based upon the aggregate dollar value of Class A
shares
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SALOMON BROTHERS INVESTMENT SERIES
previously purchased and still owned by the group, plus the amount of the
current purchase. A 'qualified group' is one which (i) has been in existence
for more than six months, (ii) has a purpose other than acquiring Fund shares
at a discount and (iii) satisfies uniform criteria which enables the
Distributor to realize economies of scale in its costs of distributing shares. A
qualified group must have more than 10 members, must be available to arrange for
group meetings between representatives of a Fund and the members, and must agree
to include sales and other materials related to the Funds in its publications
and mailings to members at no cost to the Distributor. In order to obtain such
reduced sales charge, the purchases must provide sufficient information at the
time of purchase to permit verification that the purchase qualifies for the
reduced sales charge. Approval of group purchase reduced sales charge plans is
subject to the discretion of the Distributor.
CERTAIN QUALIFIED PURCHASERS. No front end sales charge is applicable to any
sale of Class A shares to a Director or officer of a Fund and to their immediate
families (i.e., the spouse, children, mother or father of such persons),
employees of SBAM and their immediate families, or any full-time employee or
registered representative of the Distributor or of broker-dealers having dealer
agreements with the Distributor ('Selling Broker') and their immediate families
(or any trust, pension, profit sharing or other benefit plan for the benefit of
such persons), any full-time employee of a bank, savings and loan, credit union
or other financial institution that utilizes a Selling Broker to clear
purchases of the Funds' shares and their immediate families, participants in
certain 'wrap-fee' or asset allocation programs sponsored by broker-dealers and
other financial institutions that have entered into agreements with Salomon
Brothers, any accounts established on behalf of registered investment advisers
or their clients by broker-dealers that charge a transaction fee and that have
entered into agreements with Salomon Brothers or investors who purchase Class A
shares with proceeds from the sale of shares of any other investment company
with respect to which the investor previously paid a commission, whether a
front-end sales charge or CDSC or otherwise.
CLASS B SHARES
Class B shares of each Fund are offered for sale at net asset value and are
offered for purchases of less than $250,000. No initial sales charge is imposed
at the time of purchase. A CDSC is imposed, however, on certain redemptions of
Class B shares. See 'Redemption of Shares' which describes the CDSC in greater
detail.
In general, a sales commission of 4% of the amount of Class B share purchases
(other than Class B shares of the Cash Management Fund and the New York
Municipal Money Market Fund) will be paid by the Distributor to broker-dealers
at the time of sale.
CLASS C SHARES
Class C shares of each Fund are offered for sale at net asset value and are
offered for purchases of less than $1,000,000. Class C shares are sold without
a front end sales charge and are subject to a CDSC of 1% within the first year
of purchase.
A sales commission of 1% of the amount of Class C share (other than Class C
shares of the Cash Management Fund and the New York Municipal Money Market
Fund) will be paid by the Distributor to broker dealers at the time of sale.
CLASS O SHARES
Class O shares of each Fund are offered for sale at net asset value and are not
subject to any sales charges. Only Class O
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SALOMON BROTHERS INVESTMENT SERIES
shareholders may purchase additional Class O shares.
DISTRIBUTION FEES
Each class of each Fund (other than the Cash Management Fund and the New York
Municipal Money Market Fund) is authorized, pursuant to a services and
distribution plan applicable to that class of shares (the 'Class A Plan,' the
'Class B Plan' and the 'Class C Plan,' collectively, the 'Plans') adopted
pursuant to Rule 12b-1 promulgated under the 1940 Act, to pay Salomon Brothers
an annual service fee with respect to Class A, Class B and Class C shares of
the applicable Fund (other than the Cash Management Fund and the New York
Municipal Money Market Fund) at the rate of .25% of the value of the average
daily net assets of the respective class. Salomon Brothers is also paid an
annual distribution fee with respect to Class B and Class C shares of each Fund
(other than the Cash Management Fund and the New York Municipal Money Market
Fund) at the rate of .75% of the value of the average daily net assets of the
respective class. Class O shares are not subject to a services and distribution
plan. The service fees are used for servicing shareholder accounts, including
payments by Salomon Brothers to selected securities dealers. The distribution
fees are paid to Salomon Brothers to compensate for activities primarily
intended to result in the sale of Class B and Class C shares. The expenses
incurred in connection with these activities include: costs of printing and
distributing the Funds' Prospectus, Statement of Additional Information and
sales literature to prospective investors; an allocation of overhead and other
Salomon Brothers' branch office distribution-related expenses; payments to and
expenses of other persons who provide support services in connection with the
distribution of the shares; any other costs and expenses relating to
distribution or sales support activities; compensation for the Distributor's
initial expense of paying investment representatives or introducing brokers a
commission upon the sale of the Funds' shares; and accruals for interest on the
amount of the foregoing expenses that exceed the amount of the distribution fee
and the CDSC received by the Distributor. Under the Plans, Salomon Brothers may
retain all or a portion of the service and distribution fees. The payments to
selected securities dealers may include a commission paid at the time of sale
and a continuing fee based upon the value of the average daily net assets of
the applicable class of shares that remain invested in a Fund (a 'trail fee')
with respect to accounts that dealers continue to service. With respect to
Class B shares, Salomon Brothers will pay broker-dealers at the time of sale a
commission of 4% of the purchase price and a quarterly trail fee at an annual
rate of .25% which will begin to accrue in the thirteenth month after
settlement. With respect to Class C shares, Salomon Brothers will pay
broker-dealers at the time of sale a commission of 1% of the purchase price and
a quarterly trail fee at an annual rate of .90% which will begin to accrue in
the thirteenth month after settlement. In addition, with respect to Class A
shares, Salomon Brothers will pay broker-dealers at the time of sale a
commission as discussed above under 'Purchase of Shares -- Class A Shares' and
a quarterly trail commission at an annual rate of .25% which will begin to
accrue immediately after settlement.
Sales personnel of broker/dealers distributing each Fund's shares and any other
persons entitled to receive compensation for selling or servicing a Fund's
shares may receive different compensation for selling or servicing one class of
shares over another. The distribution and shareholder service expenses incurred
by the Distributor and dealers in connection with the sale of shares will be
paid, in the case of Class A shares, from the proceeds of front end sales
charges and the ongoing service fees;
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SALOMON BROTHERS INVESTMENT SERIES
and in the cases of Class B and Class C shares, from the proceeds of applicable
CDSCs and ongoing distribution and service fees. Investors should understand
that the purpose of the front end sales charge and ongoing service fees
applicable to Class A shares is the same as that of the CDSCs and ongoing
distribution and service fees applicable to Class B and Class C shares.
The Plans provide that Salomon Brothers may make payments to assist in the
distribution of a Fund's shares out of the other fees received by it or its
affiliates from such Fund, its past profits or any other sources available to
it. From time to time, Salomon Brothers may waive receipt of fees under a Plan
while retaining the ability to be paid under such Plan thereafter. The fees
payable to Salomon Brothers under the Plans and payments by Salomon Brothers to
selected securities dealers are payable without regard to actual expenses
incurred.
The Distributor may, from time to time, assist dealers by, among other things,
providing sales literature to, and holding informational programs for the
benefit of, dealers' registered representatives which may include payment for
travel expenses, including lodging, incurred in connection with trips taken by
qualifying registered representatives and members of their families within or
outside the United States. Participation of registered representatives in such
informational programs may require the sale of minimum dollar amounts of shares
of the Funds. In addition, the Distributor may also, from time to time, at its
expense or as an expense for which it may be compensated under a distribution
plan, if applicable, pay a bonus or other consideration or incentives to
dealers who sell a minimum dollar amount of shares of the Funds during a
specified period of time. In some instances, these incentives may be offered
only to certain dealers who have sold or may sell significant amounts of
shares. Any such bonus or incentive programs will not change the price paid by
investors for the purchase of the applicable Fund's shares or the amount that
any particular Fund will receive as proceeds from such sales. Dealers may not
use sales of the Funds' shares to qualify for any incentives to the extent that
such incentives may be prohibited by the laws of any state. Incentive payments
will be provided for out of the front end sales charges and CDSCs retained by
the Distributor, any applicable Plan payments or the Distributor's other
resources. Other than Plan payments, the Funds do not bear distribution
expenses.
---------------
Under certain circumstances, certain broker/dealers may impose additional
transaction fees on the purchase and/or sale of shares.
- --------------------------------------------------------------------------------
Redemption of Shares
Shareholders may redeem all or any part of their shareholdings on any business
day at the applicable net asset value next determined after the receipt of
proper redemption instructions. The value of
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SALOMON BROTHERS INVESTMENT SERIES
shares on redemption may be more or less than the investor's cost.
Payment of redemption proceeds may be made in securities, subject to regulation
by some state securities commissions. Payment of the redemption price will be
made within seven days after receipt of the redemption instructions in good
order (or such shorter time period as may be required), but each Fund may
suspend the right of redemption during any period when: (i) trading on the NYSE
is restricted or the NYSE is closed, other than customary weekend and holiday
closings; (ii) the SEC has by order permitted such suspension; or (iii) an
emergency exists, as defined by rules of the SEC, making disposal of portfolio
securities or determination of the value of the net assets of each Fund not
reasonably practicable.
For the shareholder's convenience each Fund has established different redemption
procedures. No redemption requests will be processed until the applicable Fund
has received a completed Purchase Application. If a shareholder holds shares in
more than one class, any request for redemption must specify the class being
redeemed. Each Fund will not credit redemption proceeds for any shares until
checks received in payment for such shares have been collected, which may take
up to 15 days or more. A shareholder who anticipates the need for more
immediate access to his or her investment should purchase shares by federal
funds or bank wire, or by a certified or cashier's check.
REDEMPTION THROUGH SELECTED
DEALERS
Salomon Brothers will accept orders from dealers with whom it has sales
agreements for the repurchase of shares held by investors. With respect to each
Fund (other than the Cash Management Fund and the New York Municipal Money
Market Fund), redemption orders received by the dealer prior to the close of
trading on the NYSE on any business day and transmitted to Salomon Brothers
prior to the close of its business day (normally 5:00 p.m., New York time) are
effective that day. Otherwise, the shares will be redeemed at the applicable
net asset value next determined. With respect to the Cash Management Fund and
the New York Municipal Money Market Fund, redemption requests received by the
dealer and transmitted to Salomon Brothers by 12:00 noon, New York time, on any
business day generally will be effected on that same day. It is the
responsibility of the dealer to transmit orders on a timely basis. The dealer
may charge the investor a fee for executing the order. This redemption
arrangement is discretionary and may be withdrawn or modified at any time.
REDEMPTION BY MAIL
Shares may be redeemed by mail by submitting the following documents:
(1) Written instructions from registered owner(s), signed exactly as shares are
registered (facsimile instructions will not be accepted);
(2) All certificates, if any, to be redeemed;
(3) If shares to be redeemed have a net asset value of $50,000 or more, a
letter or a stock power signed by the registered owner(s) with the signature(s)
guaranteed by an acceptable guarantor. A guarantee of each shareholder's
signature is required for all redemptions, regardless of the amount involved,
when: (i) the proceeds are to be paid to someone other than the registered
owner(s) of the shares redeemed; (ii) are to be wired to a bank; or (iii) are
to be sent to other than the registered address. The Transfer Agent has adopted
standards and procedures pursuant to which signature-guarantees in proper form
generally will be accepted from domestic banks, brokers, dealers, credit
unions, national securities
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SALOMON BROTHERS INVESTMENT SERIES
exchanges, registered securities associations, clearing agencies and savings
associations, as well as from participants in the New York Stock Exchange
Medallion Signature Program, the Securities Transfer Agents Medallion Program
('STAMP') and the Stock Exchanges Medallion Program. Stockholders with any
questions regarding signature-guarantees should call the telephone number
listed on the cover; and
(4) In the case of shares of record held in the name of a corporation, trust,
fiduciary or partnership, the redemption agent requires evidence of authority
to sign and a stock power with signature(s) guaranteed.
TO EXPEDITE PROCESSING OF REDEMPTIONS BY MAIL, SHAREHOLDERS SHOULD SUBMIT
REDEMPTION REQUESTS AND ALL RELATED DOCUMENTS DIRECTLY TO FIRST DATA INVESTOR
SERVICES GROUP, INC., P.O. BOX 5127, WESTBOROUGH, MA 01581-5127.
Checks for redemption proceeds will be mailed within seven days after
redemption. Unless other instructions are given in proper form, checks for
redemption proceeds will be sent to the shareholder's address of record if the
shareholder does not have a brokerage account.
Upon request, the proceeds of a redemption amounting to $500 or more will be
sent by federal funds or bank wire to the shareholder's predesignated bank
account.
TELEPHONE REDEMPTION PRIVILEGE
Shareholders having direct accounts with FDISG may redeem shares by means of
the Telephone Redemption Privilege. The Application for Telephone Redemption
Privilege must be completed by the shareholder with the signature(s) guaranteed
in the manner described above under 'Redemption by Mail' prior to initiating a
telephone redemption.
Shareholders cannot apply the Telephone Redemption Privilege to shares held in
certificate form or for accounts requiring additional supporting documentation
for redemptions such as trust, corporate, estate and guardian accounts.
Proceeds from the telephone redemption will be forwarded to the shareholder by
check unless the shareholder has requested redemption by wire in the manner
described below under 'Redemption by Wire.' The check will be made payable to
the registered shareholder(s) and sent to the address of record on file with
FDISG.
Shareholders should realize that by making redemption requests by telephone,
they may be giving up a measure of security that they may have if they were to
redeem their shares in writing. Each Fund reserves the right to refuse a
telephone request for redemption if it is believed advisable to do so.
Procedures for redeeming shares by telephone may be modified or terminated at
any time by the applicable Fund. None of the Funds or FDISG will be liable for
following redemption instructions received by telephone, which are reasonably
believed to be genuine, and the shareholder will bear the risk of loss in the
event of unauthorized or fraudulent telephone instructions. Each Fund and FDISG
will employ reasonable procedures to confirm that instructions communicated by
telephone are genuine. Each Fund and/or FDISG may be liable for any losses due
to unauthorized or fraudulent instructions if they do not follow such
procedures. When requesting a redemption by telephone, shareholders should have
available the correct account registration and account numbers or tax
identification number.
REDEMPTION BY WIRE
If redemption by wire has been elected on the Purchase Application, shares may
be redeemed, in the amount of $500 or more, on any business day upon request
made by telephone or letter. No signature guarantee is required on such a
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SALOMON BROTHERS INVESTMENT SERIES
redemption request. To elect this service subsequent to opening an account, call
SBAM or FDISG for further information.
You may either:
Telephone the redemption request to FDISG at the following number: (800)
446-1013 or
Mail the request to FDISG at the following address:
(Name of Fund)
c/o FDISG
P.O. Box 5127
Westborough, MA 01581-5127
Proceeds of wire redemptions of $500 or more will be wired to the shareholder's
bank indicated in the Purchase Application or by letter which has been properly
guaranteed. With respect to the Cash Management Fund and the New York Municipal
Money Market Fund, if a wire redemption request is received by FDISG by 12:00
noon, New York time, on any business day, the redemption proceeds generally
will be transmitted to the shareholder's bank that same day. Checks for
redemption proceeds of less than $500 will be mailed to the shareholder's
address of record.
Shareholders should note that their bank may charge a fee in connection with
transferring money by bank wire.
CHECKWRITING
Checkwriting is available only to Class A and Class O shareholders of the Cash
Management Fund and the New York Municipal Money Market Fund. If redemption by
check has been elected on the Purchase Application, the redemption of shares
may be made by using redemption checks provided by FDISG. There is no charge
for this service. Checks may be made payable to the order of any person or
organization designated by the shareholder and must be for amounts of $500 or
more. Shareholders will continue to earn dividends on the shares redeemed until
the check clears the banking system. If a shareholder's account does not contain
an available amount sufficient to cover the amount of a check, the check will be
returned marked insufficient funds and a $10 charge per returned check will be
imposed. If checks are improperly signed, they will not be honored. Checks
cannot be used to close an account. Redemption by check may be terminated at
any time by FDISG or the applicable Fund.
SMALL ACCOUNTS
Under each Fund's present policy, it reserves the right to redeem upon not less
than 30 days' notice, the shares in an account which have a value of $500 or
less or, in the case of an IRA or Self-Employed Retirement Plan, $250 or less if
the reduction in value is the result of shareholder redemptions or transfers and
not as a result of a decline in the net asset value. However, any shareholder
affected by the exercise of this right will be allowed to make additional
investments prior to the date fixed for redemption to avoid liquidation of the
account.
CONTINGENT DEFERRED SALES CHARGES
Redemptions may be subject to a CDSC as described below. The CDSC is not
applicable with respect to redemptions of shares of the Cash Management Fund or
the New York Municipal Money Market Fund which have never been exchanged from
another Fund that normally imposes a CDSC. However, in the case of shares of
the Cash Management Fund or the New York Municipal Money Market Fund which were
obtained through an exchange from another Fund that normally imposes a CDSC,
such shares will be subject to any applicable CDSC due at redemption.
Similarly, shares initially purchased in the Cash Management Fund or the New
York Municipal Money Market Fund which are subsequently exchanged for shares of
other Funds that normally impose a CDSC will
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be subject to any applicable CDSC due at redemption. Shares of any Fund may be
exchanged for shares of any other Fund without the imposition of a CDSC,
although a CDSC may apply upon redemption of the shares acquired through the
exchange. See 'Shareholder Services -- Exchange Privilege.'
Because shares of the Cash Management Fund and the New York Municipal Money
Market Fund are not subject to any distribution or service fees, any applicable
CDSC period is tolled for the period of time in which shares of other Funds that
normally impose a CDSC are held in the Cash Management Fund and/or the New York
Municipal Money Market Fund. For example, if shares subject to a CDSC of a Fund
other than the Cash Management Fund or the New York Municipal Money Market Fund
are exchanged for shares of the Cash Management Fund or the New York Municipal
Money Market Fund two years after purchase and are subsequently redeemed one
year later, only the first two years of ownership count in the determination of
the applicable CDSC percentage to be applied to that redemption.
The CDSC is assessed on an amount equal to the lesser of the net asset value at
redemption or the initial purchase price of the shares being redeemed. In
determining the amount of the CDSC that may be applicable to a redemption, the
calculation is determined in the manner that results in the lowest possible rate
being charged. Therefore, any shares in the redeeming shareholder's account that
may be redeemed without charge will be assumed to be redeemed prior to those
subject to a charge. In addition, if the CDSC is determined to be applicable to
redeemed shares, it will be assumed that shares held for the longest duration
are redeemed first. No CDSC is imposed on: (i) amounts representing increases
in the net asset value per share and (ii) shares acquired through reinvestment
of income dividends or capital gains distributions.
The CDSC may be waived on a redemption of shares in connection with:
(a) redemptions made following the death or disability (as defined in the
Code), of a shareholder; (b) redemptions effected pursuant to each Fund's right
to liquidate a shareholder's account if the aggregate net asset value of the
shares held in the account is less than the applicable minimum account size;
(c) a tax-free return of an excess contribution to any retirement plan; (d)
exchanges; (e) automatic cash withdrawals in amounts equal to or less than 12%
annually or 2% monthly of their initial account balances (see 'Shareholder
Services -- Automatic Withdrawal Plan'); (f) redemptions of shares in
connection with mandatory post-retirement distributions and withdrawals from
retirement plans or IRAs; (g) redemption proceeds from other Funds that are
reinvested within 60 days of the redemption (see 'Shareholder Services --
Reinstatement Privilege'); (h) certain redemptions of shares of a Fund in
connection with lump-sum or other distributions made by eligible retirement
plans; and (i) redemption of shares by participants in certain 'wrap-fee' or
asset allocation programs sponsored by broker-dealers and other financial
institutions that have entered into agreements with Salomon Brothers or SBAM.
CLASS A SHARE PURCHASES
OF $1 MILLION OR MORE
Class A shares that were purchased without a sales charge by reason of a
purchase of $1 million or more within one year after the date of purchase are
subject to a CDSC of 1% if redeemed within the first year of purchase (with the
exception of Class A shares of the Cash Management Fund and the New York
Municipal Money Market Fund, which are not subject to any CDSC upon redemption).
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CLASS B SHARES
Class B shares that are redeemed within six years of purchase are subject to a
CDSC at the rates set forth in the table below, charged as a percentage of the
dollar amount subject thereto (with the exception of Class B shares of the Cash
Management Fund and the New York Municipal Money Market Fund, which are not
subject to any CDSC upon redemption). The amount of any CDSC payable upon
redemption varies depending on the number of years elapsed from the time of the
purchase of Class B shares until the time of redemption. Solely for purposes of
determining the number of years from the time of any payment for the purchase
of shares until redemption, all orders accepted during a month are aggregated
and deemed to have been made on the last business day of that month.
CLASS B CDSC TABLE
<TABLE>
<CAPTION>
CDSC AS A PERCENTAGE OF
YEAR(S) SINCE PURCHASE ORDER DOLLAR AMOUNT SUBJECT TO CHARGE
- ------------------------------------------------------------------------------------------------
<S> <C>
Up to 2 years 5%
2 years or more but less than 3 years 4%
3 years or more but less than 4 years 3%
4 years or more but less than 5 years 2%
5 years or more but less than 6 years 1%
6 or more years 0%
</TABLE>
CLASS C SHARES
Class C shares are subject to a CDSC of 1% if redeemed within the first year of
purchase (with the exception of Class C shares of the Cash Management Fund and
the New York Municipal Money Market Fund, which are not subject to any CDSC
upon redemption).
- --------------------------------------------------------------------------------
Performance Information
From time to time, a Fund may advertise its 'yield,' 'tax-equivalent yield,'
'effective yield' and/or standardized and nonstandardized 'average annual total
return' over various periods of time. Total return and yield quotations are
computed separately for each class of shares of a Fund. Total return figures
show the average annual percentage change in value of an investment in a Fund
from the beginning date of the measuring period to the end of the measuring
period. These figures reflect changes in the price of the shares and assume
that any income dividends and/or capital gains distributions made by a Fund
during the period were reinvested in shares of the same class. Total return
figures for the Funds' Class A shares (except for the Cash Management Fund and
the New York Municipal Money Market Fund, which have no sales charge) include
the maximum initial 4.75% sales charge and for Class B and Class C shares
include any applicable CDSC during the
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SALOMON BROTHERS INVESTMENT SERIES
measuring period. These figures also take into account the service and
distribution fees, if any, payable with respect to each class of a Fund's
shares.
Standardized total return is calculated in accordance with the SEC's formula.
Nonstandardized total return differs from the standardized total return only in
that it may relate to a nonstandard period or is presented in the aggregate
rather than as an annual average.
Total return figures will be given for the most current one-, five- and ten-year
periods, or the life of the relevant class of a Fund to the extent it has not
been in existence for any such periods, and may be given for other periods as
well, such as on a year-by-year basis. When considering average total return
figures for periods longer than one year, it is important to note that the
total return for any one year in the period might have been greater or less
than the average for the entire period. 'Aggregate total return' figures may be
used for various periods, representing the cumulative change in value of an
investment in Fund shares for the specific period (again reflecting changes in
share prices and assuming reinvestment of dividends and distributions).
Aggregate total return may be calculated either with or without the effect of
the maximum 4.75% sales charge for the Class A shares (except for the Cash
Management Fund and the New York Municipal Money Market Fund, which have no
sales charge) or any applicable CDSC for Class B and Class C shares, and may be
shown by means of schedules, charts or graphs and may indicate subtotals of the
various components of total return (i.e., change in the value of initial
investment, income dividends and capital gains distributions). Because of the
differences in sales charges, distribution fees and certain other expenses, the
performance for each of the classes will differ.
Yield is calculated in accordance with the SEC's formula. The tax-equivalent
yield is calculated by determining the portion of the yield which is tax-exempt
and calculating the equivalent taxable yield and adding to such amount any
fully taxable yield. Yield differs from total return in that it does not
consider changes in net asset value.
From time to time the Cash Management Fund and the New York Municipal Money
Market Fund may make available information as to its 'yield' and 'effective
yield.' The 'yield' of the Cash Management Fund and the New York Municipal
Money Market Fund refers to the income generated by an investment in each such
Fund over a seven-day period. This income is then 'annualized.' That is, the
amount of income generated by the investment during that week is assumed to be
generated each week over a 52-week period and is shown as a percentage of the
investment. The 'effective yield' is calculated similarly but, when annualized,
the income earned by an investment in the Fund is assumed to be reinvested in
shares of the same class. The effective yield will be slightly higher than the
yield because of the compounding effect of this assumed reinvestment.
Distribution rate differs from yield in that it is calculated by dividing the
annualization of the most recent month's distribution by the maximum offering
price at the end of the month.
Furthermore, in reports or other communications to shareholders or in
advertising materials, performance of Fund shares may be compared with that of
other mutual funds or classes of shares of other mutual funds, as listed in the
rankings prepared by Lipper Analytical Services, Inc. or similar independent
services that monitor the performance of mutual funds, financial indices such
as the S&P 500 Index or other industry or financial publications, including,
but not limited to, Bank Rate Monitor, Barron's, Business Week, CDA Investment
Technologies, Inc., Changing Times, Forbes, Fortune, ICB Donaghue's Money Fund
Report, Institutional Investor, Investors Daily,
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Money, Morningstar Mutual Fund Values, The New York Times, USA Today and The
Wall Street Journal. The annual reports to shareholders for each of the Series
Funds, the Investors Fund and the Capital Fund for the fiscal year ended
December 31, 1996 containing additional performance information are available
without charge and can be obtained by writing or calling the address or
telephone number printed on the front cover. The yield of the Cash Management
Fund and the New York Municipal Money Market Fund may also be compared to
yields set forth in the weekly statistical release H.15(519) or the monthly
statistical release designated G.13(415) published by the Board of Governors of
the Federal Reserve System. Performance figures are based on historical
earnings and are not intended to indicate future performance. See 'Performance
Data' in the Statement of Additional Information.
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Dividends and Distributions
Each of the Cash Management Fund and the New York Municipal Money Market Fund
intend to declare as a dividend substantially all of its net investment income
at the close of each business day to the Fund's shareholders of record at 12:00
noon, New York time, on that day, and will pay such dividends monthly. The
National Intermediate Municipal Fund, the U.S. Government Income Fund, the High
Yield Bond Fund, the Strategic Bond Fund and the Total Return Fund will declare
dividends from net investment income daily and pay them monthly. The Asia
Growth Fund will declare dividends from net investment income annually and pay
them annually. The Investors Fund's present policy is to pay quarterly dividends
from net investment income and the Capital Fund's present policy is to pay
annual dividends from net investment income.
Net investment income is a Fund's investment company taxable income, as that
term is defined in the Code, determined without regard to the deduction for
dividends paid and excluding any net realized capital gains. For the purpose of
calculating dividends, net investment income shall consist of interest earned,
which includes, where applicable, any discount accreted or premium amortized to
the date of maturity, minus estimated expenses.
Shares of a Fund (other than the Cash Management Fund and the New York
Municipal Money Market Fund, as described below) are entitled to dividends
declared beginning on the day after the purchase order is received in good
order. Purchase orders for shares of the Cash Management Fund and the New York
Municipal Money Market Fund for which payment is received in or converted into
federal funds by 12:00 noon, New York time on any business day will become
effective and begin to earn dividends that same day. Purchase orders for shares
of the Cash Management Fund and the New York Municipal Money Market Fund for
which payment is received in or converted into federal funds after 12:00 noon,
New York time, on any business day will become effective and begin to earn
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SALOMON BROTHERS INVESTMENT SERIES
dividends on the following business day. With respect to the Cash Management
Fund and the New York Municipal Money Market Fund, shares redeemed by 12:00
noon, New York time, will accrue dividends through the day prior to redemption
and shares redeemed after 12:00 noon, New York time, will accrue dividends
through the day of redemption. The National Intermediate Municipal Fund, the
U.S. Government Income Fund, the High Yield Bond Fund, the Strategic Bond Fund
and the Total Return Fund will accrue dividends on settled shares through the
day of redemption. For Funds that will declare dividends daily, net investment
income for a Saturday, Sunday or holiday will be declared as a dividend on the
previous business day.
Dividends are determined in the same manner and are paid in the same amount for
each Fund share, except certain expenses borne differ by class. In addition,
the maximum distribution and service fees payable by the Class B and Class C
shares of each Fund (other than the Cash Management Fund and the New York
Municipal Money Market Fund, which bear no such fees) are more than the maximum
fees payable by such Fund's Class A and Class O shares. Moreover, Class O
shares are not subject to any distribution or service fees. As a result, the
per share dividends on the Class O shares will generally be higher than Class A,
Class B and Class C shares of each Fund (other than the Cash Management Fund
and the New York Municipal Money Market Fund) and the per share dividends on
Class A shares of each Fund will generally be higher than those on Class B and
Class C shares (other than the Cash Management Fund and the New York Municipal
Money Market Fund).
Net realized short-term capital gains of each Fund, if any, will be distributed
whenever the Directors determine that such distributions would be in the best
interest of shareholders, but in any event at least once a year. Each Fund
distributes annually any net realized long-term capital gains from the sale of
securities (after deducting any net realized losses that may be carried forward
from prior years). The Cash Management Fund and the New York Municipal Money
Market Fund do not expect to realize any long-term capital gains.
If a shareholder elects to receive dividends and/or distributions in cash and
the check cannot be delivered to a shareholder due to an invalid address or
otherwise remains uncashed by the shareholder for a period of six months, each
Fund reserves the right to reinvest the dividend and/or distribution in a
shareholder's account at the then-current net asset value and to convert the
shareholder's election to automatic reinvestment in shares of the Fund from
which the distributions were made.
If, for any full fiscal year, a Fund's total distributions exceed net investment
income and net realized capital gains, the excess distributions generally will
be treated as a tax-free return of capital (up to the amount of the
shareholder's tax basis in his or her shares). The amount treated as a tax-free
return of capital will reduce a shareholder's adjusted basis in his or her
shares. Pursuant to the requirements of the 1940 Act and other applicable laws,
a notice will accompany any distribution paid from sources other than net
investment income. In the event a Fund distributes amounts in excess of its net
investment income and net realized capital gains, such distributions may have
the effect of decreasing the Fund's total assets, which may increase the Fund's
expense ratio.
Dividend and/or capital gains distributions will be reinvested automatically in
additional shares of the same class of a Fund at the applicable net asset value
per share and such shares will be automatically credited to a shareholder's
account, unless a shareholder elects to receive either dividends or capital
gains distributions in cash. A shareholder who does not have a
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SALOMON BROTHERS INVESTMENT SERIES
brokerage account may inform FDISG, by notice sent to P.O. Box 5127,
Westborough, Massachusetts 01581-5127, that he or she wishes to receive such
dividends or distributions in cash directly from FDISG. If such distribution is
to be sent to an address other than the address on record, a signature
guarantee is required. See 'Redemptions by Mail' above for instructions
concerning signature guarantees. Such signature must be signed exactly as
registered with FDISG. Shareholders may change the distribution option at any
time by mailing written notification to FDISG at the above address or by
calling (800) 446-1013 prior to the record date of any such dividend or
distribution.
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Taxation
FEDERAL INCOME TAX MATTERS. Each Fund has qualified for the fiscal year ended
December 31, 1996 and intends to continue to qualify and elect to be treated as
a regulated investment company under Subchapter M of the Code. If it so
qualifies, a Fund will not be subject to U.S. federal income taxes on its net
investment income (i.e., its investment company taxable income, as that term is
defined in the Code, determined without regard to the deduction for dividends
paid) and net capital gain (i.e., the excess of a Fund's net realized long-term
capital gain over its net realized short-term capital loss), if any, that it
distributes to its shareholders in each taxable year, provided that it
distributes to its shareholders (i) at least 90% of its net investment income
for such taxable year, and (ii) with respect to the New York Municipal Money
Market Fund and the National Intermediate Municipal Fund at least 90% of its
net tax-exempt interest income for such taxable year. If in any year a Fund
fails to qualify as a regulated investment company, such Fund would incur
regular corporate federal income tax on its taxable income for that year and be
subject to certain additional distribution requirements upon requalification.
Each Fund will be subject to federal corporate income tax (currently at a
maximum rate of 35%) on any undistributed income other than tax-exempt income
from municipal obligations and to alternative minimum tax (currently at a
maximum rate of 28%) on alternative minimum taxable income, which includes
interest income on certain 'private activity' obligations that is otherwise
exempt from tax.
Each Fund is subject to a nondeductible 4% excise tax calculated as a
percentage of certain undistributed amounts of ordinary income and net realized
capital gains. To the extent possible, each Fund intends to make sufficient
distributions to avoid the application of both the corporate income and excise
taxes.
All dividends and distributions to shareholders of a Fund of net investment
income will be taxable to shareholders whether paid in cash or reinvested in
additional shares. For federal income tax purposes, distributions of net
investment income which includes the excess of the Fund's net realized
short-term capital
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SALOMON BROTHERS INVESTMENT SERIES
gains over net realized long-term capital losses, are taxable to shareholders as
ordinary income.
Distributions of net capital gains designated by a Fund as 'capital gain
dividends' will be taxable as long-term capital gains, whether paid in cash or
additional shares, regardless of how long the shares have been held by such
shareholders, and such distributions will not be eligible for the dividends
received deduction. With respect to each Fund, a portion of each Fund's
dividends may qualify for the dividends received deduction available to
corporations. In general, the maximum federal income tax rate imposed on
individuals with respect to long-term capital gain will be limited to 28%,
whereas the maximum federal income tax rate imposed on individuals with respect
to ordinary income (and short-term capital gains, which currently are taxed at
the same rates as ordinary income) will be 39.6%. With respect to corporate
taxpayers, long-term capital gains currently are taxed at the same federal
income tax rates as ordinary income and short-term capital gains. Investors
should consider the tax implications of buying shares shortly before the record
date of a distribution because distributions will be taxable even though the
net asset value of shares of a Fund is reduced by the distribution.
Funds investing in foreign securities or currencies may be required to pay
withholding or other taxes to foreign governments on dividends and interest.
The investment yield of a Fund investing in foreign securities or currencies
will be reduced by these foreign taxes. Shareholders will bear the cost of any
foreign taxes but may not be able to claim a foreign tax credit or deduction
for these foreign taxes. In addition, a Fund investing in securities of passive
foreign investment companies may be subject to U.S. federal income taxes (and
interest on such taxes) as a result of such investments. The investment yield
of a Fund making such investments will be reduced by these taxes and interest.
Shareholders will bear the cost of these taxes and interest, but will not be
able to claim a deduction for these amounts.
The redemption, sale or exchange of shares of one Fund for shares of another is
a taxable event and may result in a gain or loss. Gain or loss, if any,
recognized on the sale or other disposition of shares of a Fund will be taxed
as capital gain or loss if the shares are capital assets in the shareholder's
hands. Generally, a shareholder's gain or loss will be a long-term gain or loss
if the shares have been held for more than one year. If a shareholder sells or
otherwise disposes of shares of a Fund before holding them for more than six
months, any loss on the sale or other disposition of such shares shall be (i)
treated as a long-term capital loss to the extent of any capital gain dividends
received by the shareholder with respect to such shares or (ii) disallowed to
the extent of any exempt-interest dividends received by the shareholder with
respect to such shares. A loss realized on a sale or exchange of shares may be
disallowed if other shares are acquired within a 61-day period beginning 30
days before and ending 30 days after the date that the shares are disposed of.
Generally, shareholders will be taxable on dividends or distributions in the
year of receipt. However, if a Fund declares a dividend or distribution in
October, November or December to shareholders of record on a specified date in
such a month which is actually paid during the following January, it will be
deemed to have been received by the shareholders and paid by the Fund no later
than December 31 of the year in which the dividend or distribution is declared.
A Fund may make investments that produce income that is not matched by a
corresponding cash distribution to the Fund, such as investments in PIK bonds
or in obligations such as certain Brady Bonds or zero coupon securities having
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SALOMON BROTHERS INVESTMENT SERIES
original issue discount (i.e., an amount equal to the excess of the stated
redemption price of the security at maturity over its issue price), or market
discount (i.e., an amount equal to the excess of the stated redemption price of
the security over the basis of such bond immediately after it was acquired) if
the Fund elects to accrue market discount on a current basis. In addition,
income may continue to accrue for federal income tax purposes with respect to a
non-performing investment. Any such income would be treated as income earned by
a Fund and therefore would be subject to the distribution requirements of the
Code. Because such income may not be matched by a corresponding cash
distribution to a Fund, such Fund may be required to borrow money or dispose of
other securities to be able to make distributions to its investors. The extent
to which a Fund may liquidate securities at a gain may be limited by the
requirement that less than 30% of its annual gross income be derived from the
sale or other disposition of securities and certain other investments held for
less than three months (the 'short-short test'). In addition, if an election is
not made to currently accrue market discount with respect to a market discount
bond, all or a portion of any deduction or any interest expense incurred to
purchase or hold such bond may be deferred until such bond is sold or otherwise
disposed.
Each Fund may be required to withhold federal income tax at a rate of 31%
('backup withholding') from dividends (other than exempt-interest dividends) and
redemption proceeds paid to non-corporate shareholders. This tax may be
withheld from dividends if (i) the payee fails to furnish the Fund with the
payee's correct taxpayer identification number (e.g., an individual's social
security number), (ii) the Internal Revenue Service ('IRS') notifies the Fund
that the payee has failed to report properly certain interest and dividend
income to the IRS and to respond to notices to that effect, or (iii) when
required to do so, the payee fails to certify that he or she is not subject to
backup withholding. Redemption proceeds may be subject to withholding under the
circumstances described in (i) above. Backup withholding is not an additional
tax and any amounts withheld may be credited against the shareholder's federal
income tax liability.
HONG KONG TAX MATTERS. The Asia Growth Fund would be subject to Hong Kong
profits tax, which is currently charged at the rate of 16.5% for corporations
and 15% for individuals, if, by virtue of the fact that SBAM AP is located in
Hong Kong, (a) the Fund or its agents were deemed to carry on a trade,
profession or business in Hong Kong and (b) profits from that trade, profession
or business were to arise in or be derived from Hong Kong. Hong Kong profits tax
will not be payable in respect of profits from the sale of shares and other
securities transacted outside Hong Kong, interest arising or derived from
outside Hong Kong and profits in the nature of capital gains. The sale of
securities will not be treated as the sale of capital assets if the profit or
loss from such sale is regarded as attributable to a trade or business carried
on in Hong Kong. The Asia Growth Fund does not currently believe that it will
be subject to Hong Kong profits tax.
Dividends which the Fund pays to its shareholders are not taxable in Hong Kong
(whether through withholding or otherwise) under current legislation and
practice. No Hong Kong stamp duty will be payable in respect of transactions in
shares of the Asia Growth Fund provided that the register of shareholders is
maintained outside of Hong Kong.
STATE AND LOCAL TAX MATTERS. Depending on the residence of the shareholder for
tax purposes, distributions
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SALOMON BROTHERS INVESTMENT SERIES
may also be subject to state and local taxes or withholding taxes.
Most states provide that a regulated investment company may pass through
(without restriction) to its shareholders state and local income tax exemptions
available to direct owners of certain types of U.S. government securities (such
as U.S. Treasury obligations). Thus, for residents of these states,
distributions derived from a Fund's investment in certain types of U.S.
government securities should be free from state and local income taxes to the
extent that the interest income from such investments would have been exempt
from state and local income taxes if such securities had been held directly by
the respective shareholders themselves. Certain states, however, do not allow a
regulated investment company to pass through to its shareholders the state and
local income tax exemptions available to direct owners of certain types of U.S.
government securities unless the regulated investment company holds at least a
required amount of U.S. government securities. Accordingly, for residents of
these states, distributions derived from a Fund's investment in certain types
of U.S. government securities may not be entitled to the exemptions from state
and local income taxes that would be available if the shareholders had
purchased U.S. government securities directly. Shareholders' dividends
attributable to a Fund's income from repurchase agreements generally are
subject to state and local income taxes, although states and regulations vary
in their treatment of such income. The exemption from state and local income
taxes does not preclude states from asserting other taxes on the ownership of
U.S. government securities. To the extent that a Fund invests to a substantial
degree in U.S. government securities which are subject to favorable state and
local tax treatment, shareholders of such Fund will be notified as to the
extent to which distributions from the Fund are attributable to interest on such
securities.
NEW YORK MUNICIPAL MONEY MARKET FUND AND NATIONAL INTERMEDIATE MUNICIPAL FUND.
The New York Municipal Money Market Fund and the National Intermediate
Municipal Fund each intends to qualify to pay 'exempt-interest dividends,' as
that term is defined in the Code, by holding at the end of each quarter of its
taxable year at least 50% of the value of its total assets in the form of
obligations described in section 103(a) of the Code. Each Fund's policy is to
pay in each taxable year exempt-interest dividends equal to at least 90% of such
Fund's interest from tax-exempt obligations net of certain deductions. Except
as discussed below, exempt-interest dividends will be exempt from regular
federal income tax. In addition, dividends from the New York Municipal Money
Market Fund will not be subject to New York State and New York City personal
income taxes to the extent that such distributions qualify as exempt-interest
dividends and represent interest income attributable to federally tax-exempt
obligations of the State of New York and its political subdivisions (as well as
certain other federally tax-exempt obligations the interest on which is exempt
from New York State and New York City personal income taxes). Dividends from
the New York Municipal Money Market Fund, however, are not excluded in
determining New York State or New York City franchise taxes on corporations and
financial institutions.
All or a portion of the gain from sale or redemption of tax-exempt obligations
acquired after April 30, 1993 attributable to market discount will be treated as
ordinary income rather than capital gain. This rule may increase the amount of
ordinary income dividends received by shareholders of the New York Municipal
Money Market Fund and the National Intermediate Municipal Fund.
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Although exempt-interest dividends may be excluded from a shareholder's gross
income for regular federal income tax purposes, a portion of the exempt-interest
dividends may be a specific preference item for purposes of determining the
shareholder's liability (if any) under the federal individual and corporate
alternative minimum tax provisions of the Code. Exempt-interest dividends will
constitute a specific preference item for purposes of the federal alternative
minimum tax to the extent that such dividends are derived from certain types of
private activity bonds issued after August 7, 1986. In addition, all
exempt-interest dividends will be a component of the 'adjusted current
earnings' adjustment item for purposes of the federal corporate alternative
minimum tax. Moreover, the receipt of exempt-interest dividends may increase a
corporate shareholder's liability for environmental taxes under Section 59A of
the Code and a foreign corporate shareholder's liability under the branch
profits tax, and may also affect the federal tax liability of certain
Subchapter S corporations and insurance companies. Furthermore, the receipt of
exempt-interest dividends may be a factor in determining the extent to which a
shareholder's Social Security benefits are taxable.
With respect to the New York Municipal Money Market Fund, the exemption of
interest income for regular federal income tax purposes and for New York State
and New York City personal income tax purposes may not result in similar
exemptions under the tax law of state and local taxing authorities outside New
York. In general, a state exempts from state income tax only interest earned on
obligations issued by that state or its political subdivisions and
instrumentalities.
Under the Code, interest on indebtedness incurred or continued to purchase or
carry shares of the New York Municipal Money Market Fund and the National
Intermediate Municipal Fund, which interest is deemed to relate to exempt-
interest dividends, will not be deductible by shareholders of the Fund for
federal income tax purposes.
The New York Municipal Money Market Fund and the National Intermediate
Municipal Fund each intends that substantially all dividends and distributions
it pays to its respective shareholders will be designated as exempt-interest
dividends and as such will be exempt from regular federal income taxes.
However, to the extent the National Intermediate Municipal Fund each earns
income from taxable investments or realizes capital gains, some portion of its
respective dividends and distributions may not qualify as exempt-interest
dividends and may be subject to regular federal income taxes.
Statements detailing the tax status of each shareholder's dividends and
distributions will be mailed annually.
The foregoing is intended to be general information to shareholders and
potential investors in a Fund and does not constitute tax advice. Shareholders
and potential investors should consult their own tax advisers regarding
federal, state, local and foreign tax consequences of ownership of shares in a
Fund.
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Shareholder Services
Each Fund offers the following shareholder services. See the Statement of
Additional Information for further details about these services or call or
write the Fund.
AUTOMATIC INVESTMENT PLAN
An investor who opens an account and wishes to make subsequent, periodic
investments in a Fund by electronic funds transfer from a bank account may
establish an Automatic Investment Plan on the account. The bank at which the
bank account is maintained must be a member of the Automated Clearing House
(ACH). The investor specifies the frequency with which the investments occur
(monthly, every alternate month, quarterly, etc.) with the exception that no
more than one investment will be processed each month. On or about the tenth of
the month, the Fund will debit the bank account in the specified amount
(minimum of $25 per draft) and the proceeds will be invested at the applicable
offering price determined on the date of the debit. In the event of a full
exchange, this plan will follow into the new Fund unless otherwise specified.
AUTOMATIC DIVIDEND
DIVERSIFICATION ('ADD')
The ADD program allows an investor to have all dividends and any other
distributions from a Fund automatically used to purchase shares of the same
class of any other Fund. The receiving account must be in the same name as the
investor's existing account. The purchase of shares to the Fund receiving the
cross-investment of the dividends will be using the net asset value at the
close of business of the dividend payable date.
SYSTEMATIC INVESTING
An investor may request that shares of any class of a Fund be exchanged monthly
for shares of the same class of any other Fund. A predetermined dollar amount of
at least $50 per exchange will then occur on or about the 15th of each month in
accordance with the instructions provided on the initial account application or
on the Systematic Investing application. This Systematic Investing program is
also referred to as 'Dollar Cost Averaging.'
EXCHANGE PRIVILEGE
Shareholders of any Fund may exchange all or part of their shares for shares of
the same class of any other Fund, at the applicable relative net asset value per
share without the imposition of any front end sales charge or CDSC, except as
described below. Shares of a Fund are eligible for exchange 30 days after
purchase. Shares of one class may not be exchanged for shares of any other
class of any Fund.
A front end sales charge will be imposed with respect to Class A shares of a
Fund (except for the Cash Management Fund and the New York Municipal Money
Market Fund) which are issued upon an exchange from Class A Cash Management
Fund shares or Class A New York Municipal Money Market Fund shares and as to
which no front end sales charge had been previously paid or waived.
For purposes of determining a shareholder's holding period in the calculation
of any applicable CDSC, the period of time during which shares were held prior
to an exchange will be added to the holding period of shares acquired in an
exchange. However, the CDSC period
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is tolled for any period of time in which shares are held in the Cash Management
Fund and/or the New York Municipal Money Market Fund. For example, if shares
subject to a CDSC of a Fund other than the Cash Management Fund or the New York
Municipal Money Market Fund are exchanged for shares of the Cash Management
Fund or the New York Municipal Money Market Fund two years after purchase and
are subsequently redeemed one year later, only the first two years of ownership
count in the determination of the applicable CDSC percentage to be applied to
that redemption. Furthermore, when Cash Management Fund shares or New York
Municipal Money Market Fund shares are exchanged for shares of any other Fund
that imposes a CDSC, the CDSC becomes (or, in the case of Cash Management Fund
shares or New York Municipal Money Market Fund shares which were subject to a
CDSC prior to a previous exchange for Cash Management Fund shares or New York
Municipal Money Market Fund shares, again becomes) applicable to those shares
commencing at the time of exchange. If such shares are subsequently redeemed,
only time of ownership spent in Funds that impose a CDSC counts toward
determining the applicable CDSC.
Each Fund reserves the right to refuse a telephone request for exchange if it is
believed advisable to do so. Procedures for exchanging shares by telephone may
be modified or terminated at any time by a Fund. None of the Funds or FDISG will
be liable for following exchange instructions received by telephone, which are
reasonably believed to be genuine, and the shareholder will bear the risk of
loss in the event of unauthorized or fraudulent telephone instructions. The
Funds and FDISG may employ reasonable procedures to confirm that instructions
communicated by telephone are genuine. The Funds and/or FDISG may be liable for
any losses due to unauthorized or fraudulent instructions if they do not follow
such procedures. When requesting an exchange by telephone, shareholders should
have available the correct account registration and account numbers or tax
identification number.
The exchange of shares of one Fund for shares of another Fund is treated for
federal income tax purposes as a sale of the shares given in exchange by the
shareholder, and an exchanging shareholder may, therefore, realize a taxable
gain or loss in connection with an exchange. See 'Taxation' above.
The exchange privilege is available to shareholders residing in any state in
which the shares of the Fund being acquired may be legally sold. Each Fund
reserves the right to reject any exchange request. The exchange privilege may
be modified or terminated at any time upon written notice to shareholders.
AUTOMATIC WITHDRAWAL PLAN
A shareholder may establish a plan for redemptions to be made automatically at
monthly, quarterly, semiannual or annual intervals with payments sent directly
to him or her or to persons designated by the shareholders as recipients of the
withdrawals. Requests for this service not made on the initial application
require signature guarantees unless the payments are to be made to the
shareholder and mailed to the address of record on the account. Investors are
required to have a minimum account value of $10,000 in a single account in
order to establish a monthly withdrawal plan, and a minimum of $5,000 in a
single account for quarterly, semiannual and annual withdrawal plans. Each
withdrawal constitutes a redemption of shares on which a gain or loss may be
recognized. Class B and Class C shareholders may redeem 12% annually or no more
than 2% monthly of their initial account balances without incurring a CDSC.
With respect to the Investors Fund and the Capital Fund, a Withdrawal Plan
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may be opened with an account having a total value of at least $7,500, and a
shareholder can arrange for automatic distributions to be made monthly or
quarterly in amounts not less than $250, $50 and $50 from the Investors Fund and
the Capital Fund, respectively. Maintenance of an Automatic Withdrawal Plan
concurrently with purchases of additional shares may be disadvantageous to an
investor because of the sales charges on certain purchases and redemptions.
The redemptions will occur on or about the 10th day or the 25th day of the month
and the checks will generally be mailed within two days after the redemption
occurs. No redemption will occur if the account balance falls below the amount
required to meet the requested withdrawal amount. This service may be
terminated at any time.
REINSTATEMENT PRIVILEGE
A shareholder may return any dividend, capital gain or redemption check to a
Fund within 60 days of the transaction and have it reinvested at the applicable
net asset value without incurring a sales charge. With regard to Class A
shares, a shareholder may reinstate at net asset value any portion of shares
which have been previously redeemed if the redemption occurred within 60 days
of the request. With regard to Class B and Class C shares, if an investor
redeems Class B or Class C shares and pays a CDSC upon redemption, and then uses
those proceeds to purchase Class B or Class C shares of any Fund within 60
days, the Class B or Class C shares purchased will be credited with any CDSC
paid in connection with the prior redemption. There are no restrictions on the
number of times a shareholder may use the Reinstatement Privilege.
Any gain recognized on a redemption or repurchase is taxable despite the
reinstatement in the Fund. Any loss realized as a result of the redemption or
repurchase may not be allowed as a deduction for federal income tax purposes
but may be applied, depending on the amount reinstated, to adjust the cost basis
of the shares acquired upon reinstatement. In addition, if the shares redeemed
or repurchased had been acquired within the 60 days preceding the redemption or
repurchase, the amount of any gain or loss on the redemption or repurchase may
have to be computed without regard to any sales charges incurred on the
redeemed or repurchased shares (except to the extent those sales charges exceed
the sales charges waived in connection with the reinstatement).
SELF-EMPLOYED RETIREMENT PLAN
A prototype defined contribution retirement plan is available for self-employed
individuals who wish to contribute earned income on behalf of themselves and
each of their employees to purchase shares of a Fund and/or certain other
mutual funds managed by SBAM. Shareholders should consult with a financial
adviser regarding such plan.
INDIVIDUAL RETIREMENT ACCOUNTS
A prototype Individual Retirement Account ('IRA') is available generally for
all working individuals who receive compensation (which for self-employed
individuals includes earned income) for services rendered and for certain
individuals who receive alimony or separate maintenance payments pursuant to a
divorce or separation instrument. Contributions to an IRA made available by the
Funds may be invested in shares of a Fund and/or certain other mutual funds
managed by SBAM. The New York Municipal Money Market Fund and the National
Intermediate Municipal Fund may not be suitable investments for IRAs.
Shareholders should consult with a financial adviser regarding an IRA.
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Account Services
Shareholders of each Fund are kept informed through semi-annual reports showing
current investments and other financial data for such Fund. Annual reports for
all Funds include audited financial statements. Shareholders of each Fund will
receive a Statement of Account following each share transaction, except for
shareholders of the Cash Management Fund and the National Intermediate Municipal
Fund who will receive a Statement of Account at least monthly showing
transactions in the account, the total number of shares owned, and any dividends
or distributions paid. Shareholders can write or call a Fund at the address and
telephone number on the first page of this Prospectus with any questions
relating to their investment in shares of such Fund.
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Capital Stock
The Series Funds was incorporated in Maryland on April 17, 1990. The authorized
capital stock of the Series Funds consists of 10,000,000,000 shares having a par
value of $.001 per share. Pursuant to the Series Funds' Articles of
Incorporation and Articles Supplementary, the Directors have authorized the
issuance of nine series of shares, each representing shares in one of nine
separate Funds; namely, the National Intermediate Municipal Fund, U.S.
Government Income Fund, High Yield Bond Fund, Strategic Bond Fund, Total Return
Fund, Asia Growth Fund, the Cash Management Fund, the New York Municipal Money
Market Fund and the Money Market Fund (formerly, the U.S. Treasury Securities
Money Market Fund). The assets of each Fund are segregated and separately
managed. The Series Funds' Board of Directors may, in the future, authorize the
issuance of additional classes of capital stock representing shares of
additional investment portfolios. As of the date of this Prospectus, Salomon
Brothers Holding Company Inc, the parent company of SBAM and its affiliates, own
a significant percentage of the outstanding shares of the Cash Management Fund
Class O shares, New York Municipal Money Market Fund Class B and Class C shares,
U.S. Government Income Class O and Class C shares, High Yield Bond Fund Class O
shares, Strategic Bond Fund Class O shares, National Intermediate Municipal Fund
Class O, Class A, Class B and Class C shares, Asia Growth Fund Class O shares,
Class A shares and Class B shares and Capital Fund Class O shares and
consequently are deemed to be 'control persons,' as defined in the 1940 Act, of
such Funds.
The Investors Fund was incorporated in Maryland on April 2, 1958. The authorized
capital stock of the Fund consists of 50,000,000 shares having a par value of
$1.00 per share.
The Capital Fund was incorporated in Maryland on August 23, 1976. The authorized
capital of the Fund consists of
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SALOMON BROTHERS INVESTMENT SERIES
25,000,000 shares having a par value of $.001 per share.
Although each Fund is offering only its own shares, it is possible that a Fund
could become liable for a misstatement in this Prospectus about another Fund.
The Directors of the Series Funds, the Investors Fund and the Capital Fund have
considered this factor in approving the use of a combined Prospectus.
Shares of each class of a Fund represent interests in that Fund in proportion to
each share's net asset value. The per share net asset value of each class of
shares in a Fund is calculated separately and may differ as between classes as a
result of the differences in distribution and service fees payable by the
classes and the allocation of certain incremental class-specific expenses to the
appropriate class to which such expenses apply.
All shares of each Fund have equal voting rights and will be voted in the
aggregate, and not by series or class, except where voting by series or class is
required by law or where the matter involved affects only one series or class.
Each shareholder is entitled to cast, at all meetings of shareholders, such
number of votes as is equal to the number of full and fractional shares held by
such shareholder. All shares of each Fund will, when issued, be fully paid and
nonassessable. None of the Funds will issue any senior securities. Under the
corporate law of Maryland, the state of incorporation of the Series Funds, the
Investors Fund and the Capital Fund, and the By-Laws of each of the Series
Funds, the Investors Fund and the Capital Fund, neither the Series Fund, the
Investors Fund nor the Capital Fund is required and does not currently intend to
hold annual meetings of shareholders for the election of directors except as
required under the 1940 Act. A more complete statement of the voting rights of
shareholders is contained in the Statement of Additional Information.
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Appendix A:
Description of Ratings
A DESCRIPTION OF THE RATING POLICIES OF MOODY'S, S&P AND FITCH WITH RESPECT TO
BONDS AND COMMERCIAL PAPER APPEARS BELOW.
MOODY'S CORPORATE BOND RATINGS
Aaa -- Bonds which are rated 'Aaa' are judged to be of the best quality and
carry the smallest degree of investment risk. Interest payments are protected
by a large or by an exceptionally stable margin, and principal is secure. While
the various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of
such issues.
Aa -- Bonds which are rated 'Aa' are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A -- Bonds which are rated 'A' possess many favorable investment qualities and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds which are rated 'Baa' are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba -- Bonds which are rated 'Ba' are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B -- Bonds which are rated 'B' generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of maintenance and
other terms of the contract over any long period of time may be small.
Caa -- Bonds which are rated 'Caa' are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca -- Bonds which are rated 'Ca' represent obligations which are speculative to
a high degree. Such issues are often in default or have other marked
shortcomings.
C -- Bonds which are rated 'C' are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
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SALOMON BROTHERS INVESTMENT SERIES
Moody's applies numerical modifiers '1', '2' and '3' to certain of its rating
classifications. The modifier '1' indicates that the security ranks in the
higher end of its generic rating category; the modifier '2' indicates a
mid-range ranking; and the modifier '3' indicates that the issue ranks in the
lower end of its generic rating category.
S&P's CORPORATE BOND RATINGS
AAA -- This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to repay principal and pay interest.
AA -- Bonds rated 'AA' also qualify as high quality debt obligations. Capacity
to pay principal and interest is very strong, and differs from 'AAA' issues
only in small degree.
A -- Bonds rated 'A' have a strong capacity to repay principal and pay interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher-rated categories.
BBB -- Bonds rated 'BBB' are regarded as having an adequate capacity to repay
principal and pay interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to repay principal and pay interest for
bonds in this category than for higher-rated categories.
BB-B-CCC-CC-C -- Bonds rated 'BB', 'B', 'CCC', 'CC' and 'C' are regarded, on
balance, as predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal in accordance with the terms of the
obligations. BB indicates the lowest degree of speculation and C the highest
degree of speculation. While such bonds will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions.
CI -- Bonds rated 'CI' are income bonds on which no interest is being paid.
D -- Bonds rated 'D' are in default. The 'D' category is used when interest
payments or principal payments are not made on the date due even if the
applicable grace period has not expired unless S&P believes that such payments
will be made during such grace period. The 'D' rating is also used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
The ratings set forth above may be modified by the addition of a plus or minus
to show relative standing within the major rating categories.
MOODY'S COMMERCIAL PAPER RATINGS
PRIME-1 -- Issuers (or related supporting institutions) rated 'Prime-1' have a
superior ability for repayment of senior short-term debt obligations. 'Prime-1'
repayment ability will often be evidenced by many of the following
characteristics: leading market positions in well-established industries, high
rates of return on funds employed, conservative capitalization structures with
moderate reliance on debt and ample asset protection, broad margins in earnings
coverage of fixed financial charges and high internal cash generation, and
well-established access to a range of financial markets and assured sources of
alternate liquidity.
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SALOMON BROTHERS INVESTMENT SERIES
PRIME-2 -- Issuers (or related supporting institutions) rated 'Prime-2' have a
strong ability for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternative liquidity is
maintained.
PRIME-3 -- Issuers (or related supporting institutions) rated 'Prime-3' have an
acceptable ability for repayment of senior short-term obligations. The effect
of industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and the requirement for relatively high financial
leverage. Adequate alternate liquidity is maintained.
NOT PRIME -- Issuers rated 'Not Prime' do not fall within any of the Prime
rating categories.
S&P's RATINGS GROUP COMMERCIAL PAPER RATINGS
A -- S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.
Ratings are graded into several categories, ranging from 'A-1' for the highest
quality obligations to 'D' for the lowest. The four categories are as follows:
A-1 -- This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus (+) sign designation.
A-2 -- Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated 'A-1'.
A-3 -- Issues carrying this designation have adequate capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
B -- Issues rated 'B' are regarded as having only speculative capacity for
timely payment.
C -- This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D -- Debt rated 'D' is in payment default. The 'D' rating category is used when
interest payments or principal payments are not made on the date due, even if
the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period.
MOODY'S MUNICIPAL BOND RATINGS
Aaa -- Bonds which are rated Aaa are judged to be of the best quality and carry
the smallest degree of investment risk. Interest payments are protected by a
large or by an exceptionally stable margin, and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of
such issues.
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SALOMON BROTHERS INVESTMENT SERIES
Aa -- Bonds which are rated Aa are judged to be of high-quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long term risks appear somewhat larger than in Aaa
securities.
A -- Bonds which are rated A possess many favorable investment qualities and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Moody's applies numerical modifiers '1', '2' and '3' to certain of its rating
classifications. The modifier '1' indicates that the security ranks in the
higher end of its generic rating category; the modifier '2' indicates a
mid-range ranking; and the modifier '3' indicates that the issue ranks in the
lower end of its generic rating category.
S&P's MUNICIPAL BOND RATINGS
AAA -- This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA -- Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong, and in the majority of instances
they differ from AAA issues only in small degrees.
A -- Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions.
BBB -- Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds
in this category than for bonds in the A category.
The ratings set forth above may be modified by the addition of a plus or minus
to show relative standing within the major rating categories.
MOODY'S RATINGS OF STATE AND MUNICIPAL NOTES
MIG-1/VMIG-1 -- Notes rated MIG-1/VMIG-1 are of the best quality. There is
present strong protection by established cash flows, superior liquidity support
or broad-based access to the market for refinancing.
MIG-2/VMIG-2 -- Notes which are rated MIG-2/VMIG-2 are of high-quality. Margins
of protection are ample though not so large as in the preceding group.
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SALOMON BROTHERS INVESTMENT SERIES
S&P's RATINGS OF STATE AND MUNICIPAL NOTES
SP-1 -- Notes which are rated SP-1 have a very strong or strong capacity to pay
principal and interest. Those issues determined to possess overwhelming safety
characteristics will be given a plus (+) designation.
SP-2 -- Notes which are rated SP-2 have a satisfactory capacity to pay
principal and interest.
FITCH MUNICIPAL BOND RATINGS
AAA -- Bonds rated AAA by Fitch are considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
AA -- Bonds rated AA by Fitch are considered to be investment grade and of very
high credit quality. The obligor's ability to pay interest and repay principal
is very strong, although not quite as strong as bonds rated AAA. Because bonds
rated in the AAA and AA categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issues is generally
rated F-1+ by Fitch.
A -- Bonds rated A by Fitch are considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
BBB -- Bonds rated BBB by Fitch are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have adverse consequences on
these bonds, and therefore impair timely payment. The likelihood that the
ratings of these bonds will fall below investment grade is higher than for
bonds with higher ratings.
Plus and minus signs are used by Fitch to indicate the relative position of a
credit within a rating category. Plus and minus signs, however, are not used in
the AAA category.
FITCH SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable on demand
or have original maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal and
investment notes.
The short-term rating places greater emphasis than a long-term rating on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.
Fitch's short-term ratings are as follows:
F-1+ -- Issues assigned this rating are regarded as having the strongest degree
of assurance for timely payment.
F-1 -- Issues assigned this rating reflect an assurance of timely payment only
slightly less in degree than issues rated F-1+.
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SALOMON BROTHERS INVESTMENT SERIES
F-2 -- Issues assigned this rating have a satisfactory degree of assurance for
timely payment but the margin of safety is not as great as for issues assigned
F-1+ and F-1 ratings.
F-3 -- Issues assigned this rating have characteristics suggesting that the
degree of assurance for timely payment is adequate, although near-term adverse
changes could cause these securities to be rated below investment grade.
LOC -- The symbol LOC indicates that the rating is based on a letter of credit
issued by a commercial bank.
Like higher-rated bonds, bonds rated in the Baa or BBB categories are
considered to have adequate capacity to pay principal and interest. However,
such bonds may have speculative characteristics, and changes in economic
conditions or other circumstances are more likely to lead to a weakened
capacity to make principal and interest payments than is the case with higher
grade bonds.
After purchase by a Fund, a security may cease to be rated or its rating may be
reduced below the minimum required for purchase by such Fund. Neither event will
require a sale of such security by a Fund. However, a Fund's investment manager
will consider such event in its determination of whether such Fund should
continue to hold the security. To the extent the ratings given by Moody's, S&P
or Fitch may change as a result of changes in such organizations or their
rating systems, a Fund will attempt to use comparable ratings as standards for
investments in accordance with the investment policies contained in this
Prospectus and in the Statement of Additional Information.
For each Fund that invested more than an average of 5% of its total assets in
below investment grade securities during the period ended December 31, 1995,
the following tables indicate the percentage of assets of each such Fund
invested in the rating categories shown. The percentage corresponding to each
category is calculated using the dollar-weighted average of the month-end
percentages during the period from commencement of investment operations of
each such Fund through December 31, 1995. 'Rating' reflects the rating of S&P,
or in the case of certain U.S. and foreign government debt securities, the
implicit rating of the related government.
PAGE A-6
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Appendix B:
General Characteristics
and Risks of Derivatives
A detailed discussion of Derivatives (as defined below) that may be used by the
investment manager on behalf of certain Funds follows below. The description in
this Prospectus of each Fund indicates which, if any, of these types of
transactions may be used by that Fund. A Fund will not be obligated, however,
to use any Derivatives and makes no representation as to the availability of
these techniques at this time or at any time in the future. 'Derivatives,' as
used in this Appendix B, refers to interest rate, currency or stock or bond
index futures contracts, currency forward contracts and currency swaps, the
purchase and sale (or writing) of exchange listed and over-the-counter ('OTC')
put and call options on debt and equity securities, currencies, interest rate,
currency or stock index futures and fixed-income and stock indices and other
financial instruments, entering into various interest rate transactions such as
swaps, caps, floors, collars, entering into equity swaps, caps, floors, the
purchase and sale of indexed debt securities or trading in other similar types
of instruments.
A Fund's ability to pursue certain of these strategies may be limited by the
Commodity Exchange Act, as amended, applicable regulations of the CFTC
thereunder and the federal income tax requirements applicable to regulated
investment companies which are not operated as commodity pools.
GENERAL CHARACTERISTICS OF OPTIONS
Put options and call options typically have similar structural characteristics
and operational mechanics regardless of the underlying instrument on which they
are purchased or sold. Thus, the following general discussion relates to each
of the particular types of options discussed in greater detail below. In
addition, many Derivatives involving options require segregation of Fund assets
in special accounts, as described below under 'Use of Segregated and Other
Special Accounts.'
A put option gives the purchaser of the option, upon payment of a premium, the
right to sell, and the writer of the obligation to buy, the underlying
security, index, currency or other instrument at the exercise price. A Fund's
purchase of a put option on a security, for example, might be designed to
protect its holdings in the underlying instrument (or, in some cases, a similar
instrument) against a substantial decline in the market value of such
instrument by giving the Fund the right to sell the instrument at the option
exercise price. A call option, upon payment of a premium, gives the purchaser
of the option the right to buy, and the seller the obligation to sell, the
underlying instrument at the exercise price. A Fund's purchase of a call option
on a security, financial futures contract, index, currency or other instrument
might be intended to protect the Fund against an increase in the price of the
underlying instrument that it intends to purchase in the future by fixing the
price at which it may purchase the instrument. An 'American' style put or call
option may be exercised at any time during the option period, whereas a
'European' style put or call option may be exercised only upon expiration or
during a fixed period prior to expiration. Exchange-listed options are issued
by a regulated intermediary such as the Options Clearing Corporation ('OCC'),
which guarantees the performance of the obligations of
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SALOMON BROTHERS INVESTMENT SERIES
the parties to the options. The discussion below uses the OCC as an example,
but is also applicable to other similar financial intermediaries.
OCC-issued and exchange-listed options, with certain exceptions, generally
settle by physical delivery of the underlying security or currency, although in
the future, cash settlement may become available. Index options are cash
settled for the net amount, if any, by which the option is 'in-the-money' (that
is, the amount by which the value of the underlying instrument exceeds, in the
case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
A Fund's ability to close out its position as a purchaser or seller of an
OCC-issued or exchange-listed put or call option is dependent, in part, upon
the liquidity of the particular option market. Among the possible reasons for
the absence of a liquid option market on an exchange are: (1) insufficient
trading interest in certain options, (2) restrictions on transactions imposed
by an exchange, (3) trading halts, suspensions or other restrictions imposed
with respect to particular classes or series of options or underlying
securities, including reaching daily price limits, (4) interruption of the
normal operations of the OCC or an exchange, (5) inadequacy of the facilities
of an exchange or the OCC to handle current trading volume or (6) a decision by
one or more exchanges to discontinue the trading of options (or a particular
class or series of options), in which event the relevant market for that option
on that exchange would cease to exist, although any such outstanding options on
that exchange would continue to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours during
which the underlying financial instruments are traded. To the extent that the
option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that would not be reflected in the corresponding option
markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties (collectively referred to as 'Counterparties' and
individually referred to as a 'Counterparty') through a direct bilateral
agreement with the Counterparty. In contrast to exchange-listed options, which
generally have standardized terms and performance mechanics, all of the terms
of an OTC option, including such terms as method of settlement, term, exercise
price, premium, guaranties and security, are determined by negotiation of the
parties. It is anticipated that any Portfolio authorized to use OTC options
will generally only enter into OTC options that have cash settlement provisions,
although it will not be required to do so.
Unless the parties provide for it, no central clearing or guaranty function is
involved in an OTC option. As a result, if a Counterparty fails to make or take
delivery of the security, currency or other instrument underlying an OTC option
it has entered into with the Fund or fails to make a cash settlement payment
due in accordance with the terms of that option, the Fund will lose any premium
it paid for the option as well as any anticipated benefit of the transaction.
Thus, the investment manager must assess the creditworthiness of each such
Counterparty or any guarantor or credit enhancement of the Counterparty's
credit to determine the likelihood that the terms of the OTC option will be
met. A Fund will enter into OTC option transactions only with U.S. Government
securities dealers recognized by the Federal Reserve Bank of New York as
'primary dealers,' or broker-dealers, domestic or foreign banks, or other
financial institutions that the investment
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SALOMON BROTHERS INVESTMENT SERIES
manager deems to be creditworthy. In the absence of a change in the current
position of the staff of the SEC, OTC options purchased by a Fund and the
amount of a Fund's obligation pursuant to an OTC option sold by the Fund (the
cost of the sell-back plus the in-the-money amount, if any) or the value of the
assets held to cover such options will be deemed illiquid.
If a Fund sells a call option, the premium that it receives may serve as a
partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments held by the Fund or will
increase the Fund's income. Similarly, the sale of put options can also provide
gains for a Fund.
A Fund may purchase and sell call options on securities that are traded on U.S.
and foreign securities exchanges and in the OTC markets, and on securities
indices, currencies and futures contracts. All calls sold by a Fund must be
'covered' (that is, the Fund must own the securities or futures contract
subject to the call), or must otherwise meet the asset segregation requirements
described below for so long as the call is outstanding. Even though the Fund
will receive the option premium to help protect it against loss, a call sold by
a Fund will expose the Fund during the term of the option to possible loss of
opportunity to realize appreciation in the market price of the underlying
security or instrument and may require the Fund to hold a security or
instrument that it might otherwise have sold.
A Fund reserves the right to purchase or sell options on instruments and
indices which may be developed in the future to the extent consistent with
applicable law, the Fund's investment objective and the restrictions set forth
herein.
A Fund may purchase and sell put options on securities (whether or not it holds
the securities in its portfolio) and on securities indices, currencies and
futures contracts. In selling put options, a Fund faces the risk that it may be
required to buy the underlying security at a disadvantageous price above the
market price.
GENERAL CHARACTERISTICS OF FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
A Fund may trade financial futures contracts or purchase or sell put and call
options on those contracts as a hedge against anticipated interest rate,
currency or market changes, and for risk management purposes, or a Fund may
seek to increase its income or gain. Futures contracts are generally bought and
sold on the commodities exchanges on which they are listed with payment of
initial and variation margin as described below. The sale of a futures contract
creates a firm obligation by the Fund, as seller, to deliver to the buyer the
specific type of financial instrument called for in the contract at a specific
future time for a specified price (or, with respect to certain instruments, the
net cash amount). Options on futures contracts are similar to options on
securities except that an option on a futures contract gives the purchaser the
right, in return for the premium paid, to assume a position in a futures
contract and obligates the seller to deliver that position.
A Fund's use of financial futures contracts and options thereon will in all
cases be consistent with applicable regulatory requirements and in particular
the rules and regulations of the CFTC. Maintaining a futures contract or
selling an option on a futures contract will typically require the Fund to
deposit with a financial intermediary, as security for its obligations, an
amount of cash or other specified assets ('initial margin') that initially is
from 1% to 10% of the face amount of the contract (but may be higher in some
circumstances). Additional cash or assets ('variation margin') may be required
to be deposited thereafter daily as the mark-to-market value of the futures
contract fluctuates.
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The purchase of an option on a financial futures contract involves payment of a
premium for the option without any further obligation on the part of the Fund.
If the Fund exercises an option on a futures contract it will be obligated to
post initial margin (and potentially variation margin) for the resulting
futures position just as it would for any futures position. Futures contracts
and options thereon are generally settled by entering into an offsetting
transaction, but no assurance can be given that a position can be offset prior
to settlement or that delivery will occur.
A Fund will not enter into a futures contract or option thereon if, immediately
thereafter, the sum of the amount of its initial margin and premiums required
to maintain permissible non-bona fide hedging positions in futures contracts
and options thereon would exceed 5% of the liquidation value of the Fund's
portfolio, after taking into account unrealized profits and losses on existing
contracts; however, in the case of an option that is in-the-money at the time
of the purchase, the in-the-money amount may be excluded in calculating the 5%
limitation. The value of all futures contracts sold by the Fund (adjusted for
the historical volatility relationship between the Fund and the contracts) will
not exceed the total market value of the Fund's securities. The segregation
requirements with respect to futures contracts and options thereon are
described below under 'Use of Segregated and Other Special Accounts.'
OPTIONS ON SECURITIES INDICES AND OTHER FINANCIAL INDICES
A Fund may purchase and sell call and put options on securities indices and
other financial indices. In so doing, the Fund can achieve many of the same
objectives it would achieve through the sale or purchase of options on
individual securities or other instruments. Options on securities indices and
other financial indices are similar to options on a security or other
instrument except that, rather than settling by physical delivery of the
underlying instrument, options on indices settle by cash settlement; that is,
an option on an index gives the holder the right to receive, upon exercise of
the option, an amount of cash if the closing level of the index upon which the
option is based exceeds, in the case of a call, or is less than, in the case of
a put, the exercise price of the option (except if, in the case of an OTC
option, physical delivery is specified). This amount of cash is equal to the
excess of the closing price of the index over the exercise price of the option,
which also may be multiplied by a formula value. The seller of the option is
obligated, in return for the premium received, to make delivery of this amount.
The gain or loss on an option on an index depends on price movements in the
instruments comprising the market, market segment, industry or other composite
on which the underlying index is based, rather than price movements in
individual securities, as is the case with respect to options on securities.
CURRENCY TRANSACTIONS
A Fund may engage in currency transactions with Counterparties to hedge the
value of portfolio securities denominated in particular currencies against
fluctuations in relative value or to generate income or gain. Currency
transactions include currency forward contracts, exchange-listed currency
futures contracts and options thereon, exchange-listed and OTC options on
currencies, and currency swaps. A forward currency contract involves a
privately negotiated obligation to purchase or sell (with delivery generally
required) a specific currency at a future date, which may be any fixed number
of days from the date of the contract agreed upon by the parties, at a price
set at the time of the contract. A currency swap is an agreement to exchange
cash flows based on the notional difference
PAGE B-4
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SALOMON BROTHERS INVESTMENT SERIES
among two or more currencies and operates similarly to an interest rate swap,
which is described below under 'Swaps, Caps, Floors and Collars.' A Fund may
enter into currency transactions only with Counterparties that the investment
manager deems to be creditworthy.
Transaction hedging is entering into a currency transaction with respect to
specific assets or liabilities of the Fund, which will generally arise in
connection with the purchase or sale of the Fund's portfolio securities or the
receipt of income from them. Position hedging is entering into a currency
transaction with respect to portfolio securities positions denominated or
generally quoted in that currency. A Fund will not enter into a transaction to
hedge currency exposure to an extent greater, after netting all transactions
intended wholly or partially to offset other transactions, than the aggregate
market value (at the time of entering into the transaction) of the securities
held by the Fund that are denominated or generally quoted in or currently
convertible into the currency, other than with respect to proxy hedging as
described below.
A Fund may cross-hedge currencies by entering into transactions to purchase or
sell one or more currencies that are expected to increase or decline in value
relative to other currencies to which the Fund has or in which the Fund expects
to have exposure. To reduce the effect of currency fluctuations on the value of
existing or anticipated holdings of its securities, a Fund may also engage in
proxy hedging. Proxy hedging is often used when the currency to which the
Fund's holdings is exposed is difficult to hedge generally or difficult to
hedge against the dollar. Proxy hedging entails entering into a forward
contract to sell a currency, the changes in the value of which are generally
considered to be linked to a currency or currencies in which some or all of the
Fund's securities are or are expected to be denominated, and to buy dollars.
The amount of the contract would not exceed the market value of the Fund's
securities denominated in linked currencies.
Currency transactions are subject to risks different from other portfolio
transactions, as discussed below under 'Risk Factors.' If a Fund enters into a
currency hedging transaction, the Fund will comply with the asset segregation
requirements described below under 'Use of Segregated and Other Special
Accounts.'
COMBINED TRANSACTIONS
A Fund may enter into multiple transactions, including multiple options
transactions, multiple futures transactions, multiple currency transactions
(including forward currency contracts), multiple interest rate transactions and
any combination of futures, options, currency and interest rate transactions,
instead of a single Derivative, as part of a single or combined strategy when,
in the judgment of the investment manager, it is in the best interests of the
Fund to do so. A combined transaction will usually contain elements of risk
that are present in each of its component transactions. Although combined
transactions will normally be entered into by a Fund based on the investment
manager's judgment that the combined strategies will reduce risk or otherwise
more effectively achieve the desired portfolio management goal, it is possible
that the combination will instead increase the risks or hinder achievement of
the Fund management objective.
SWAPS, CAPS, FLOORS AND COLLARS
A Fund may enter into interest rate, currency and equity swaps, the purchase or
sale of related caps, floors and collars and other similar arrangements. A Fund
will enter into these transactions primarily to seek to preserve a return or
spread on a particular
PAGE B-5
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SALOMON BROTHERS INVESTMENT SERIES
investment or portion of its portfolio, to protect against currency
fluctuations, as a duration management technique, to protect against any
increase in the price of securities the Fund anticipates purchasing or selling
at a later date or to generate income or gain. Interest rate swaps involve the
exchange by the Fund with another party of their respective commitments to pay
or receive interest (for example, an exchange of floating rate payments for
fixed rate payments with respect to a notional amount of principal). An equity
swap is an agreement to exchange cash flows on a notional principal amount based
on changes in the values of the reference index. A currency swap is an
agreement to exchange cash flows on a notional amount based on changes in the
values of the currency exchange rates. The purchase of a cap entitles the
purchaser to receive payments on a notional principal amount from the party
selling the cap to the extent that a specified interest rate, currency exchange
rate or index exceeds a predetermined rate or amount. The purchase of a floor
entitles the purchaser to receive payments on a notional principal amount from
the party selling the floor to the extent that a specified interest rate,
currency exchange rate or index falls below a predetermined rate or amount. A
collar is a combination of a cap and a floor that preserves a certain return
with a predetermined range of rates or values.
A Fund will usually enter into swaps on a net basis, that is, the two payments
streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. A Fund will not enter into any
swap, cap, floor, collar or other similar type of transaction unless the
investment manager deems the Counterparty to be creditworthy. If a Counterparty
defaults, the Fund may have contractual remedies pursuant to the agreements
related to the transaction. The swap market has grown substantially in recent
years with a large number of banks and investment banking firms acting both as
principals and as agents utilizing standardized swap documentation. As a
result, the swap market has become relatively liquid. Caps, floors and collars
are more recent innovations for which standardized documentation has not yet
been fully developed and, for that reason, they are less liquid than swaps.
The liquidity of swap agreements will be determined by the investment manager
based on various factors, including (1) the frequency of trades and quotations,
(2) the number of dealers and prospective purchasers in the marketplace, (3)
dealer undertakings to make a market, (4) the nature of the security (including
any demand or tender features), and (5) the nature of the marketplace for
trades (including the ability to assign or offset the Fund's rights and
obligations relating to the investment). Such determination will govern whether
a swap will be deemed within the percentage restriction on investments in
securities that are not readily marketable.
A Fund will maintain cash, cash equivalents or other appropriate liquid assets
(i.e., high grade debt securities) in a segregated custodial account to cover
its current obligations under swap agreements. If a Fund enters into a swap
agreement on a net basis, it will segregate assets with a daily value at least
equal to the excess, if any, of the Fund's accrued obligations under the swap
agreement over the accrued amount the Fund is entitled to receive under the
agreement. If a Fund enters into a swap agreement on other than a net basis, it
will segregate assets with a value equal to the full amount of the Fund's
accrued obligations under the agreement. See 'Use of Segregated and Other
Special Accounts' below.
PAGE B-6
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<PAGE>
SALOMON BROTHERS INVESTMENT SERIES
INDEXED SECURITIES
A Fund may purchase securities whose prices are indexed to the prices of other
securities, securities indices, currencies, or other financial indicators.
Indexed securities typically, but not always, are debt securities or deposits
whose value at maturity or coupon rate is determined by reference to a specific
instrument or statistic. Currency-indexed securities typically are short-term
to intermediate-term debt securities whose maturity values or interest rates
are determined by reference to the values of one or more specified foreign
currencies, and may offer higher yields than U.S. dollar-denominated securities
of equivalent issuers. Currency-indexed securities may be positively or
negatively indexed; that is, their maturity value may increase when the
specified currency value increases, resulting in a security that performs
similarly to a foreign currency-denominated instrument, or their maturity value
may decline when foreign currencies increase, resulting in a security whose
price characteristics are similar to a put on the underlying currency.
Currency-indexed securities may also have prices that depend on the values of a
number of different foreign currencies relative to each other.
RISK FACTORS
Derivatives have special risks associated with them, including possible default
by the Counterparty to the transaction, illiquidity and, to the extent the
investment manager's view as to certain market movements is incorrect, the risk
that the use of the Derivatives could result in losses greater than if they had
not been used. Use of put and call options could result in losses to a Fund,
force the sale or purchase of portfolio securities at inopportune times or for
prices higher than (in the case of put options) or lower than (in the case of
call options) current market values, or cause a Fund to hold a security it might
otherwise sell.
The use of futures and options transactions entails certain special risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related securities position of a
Fund could create the possibility that losses on the hedging instrument are
greater than gains in the value of the Fund's position. In addition, futures
and options markets could be illiquid in some circumstances and certain
over-the-counter options could have no markets. As a result, in certain
markets, a Fund might not be able to close out a transaction without incurring
substantial losses. Although a Fund's use of futures and options transactions
for hedging should tend to minimize the risk of loss due to a decline in the
value of the hedged position, at the same time it will tend to limit any
potential gain to the Fund that might result from an increase in value of the
position. There is also the risk of loss by a Fund of margin deposits in the
event of bankruptcy of a broker with whom the Fund has an open position in a
futures contract or option thereon. Finally, the daily variation margin
requirements for futures contracts create a greater ongoing potential financial
risk than would purchases of options, in which case the exposure is limited to
the cost of the initial premium. However, because option premiums paid by a
Fund are small in relation to the market value of the investments underlying
the options, buying options can result in large amounts of leverage. The
leverage offered by trading in options could cause a Fund's net asset value to
be subject to more frequent and wider fluctuation than would be the case if the
Fund did not invest in options.
As is the case with futures and options strategies, the effective use of swaps
and related transactions by a Fund may depend, among other things, on a Fund's
ability to terminate the transactions at times when SBAM deems it desirable to
do so. To the extent a Fund
PAGE B-7
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SALOMON BROTHERS INVESTMENT SERIES
does not, or cannot, terminate such a transaction in a timely manner, a Fund
may suffer a loss in excess of any amounts that it may have received, or
expected to receive, as a result of entering into the transaction.
Currency hedging involves some of the same risks and considerations as other
transactions with similar instruments. Currency transactions can result in
losses to a Fund if the currency being hedged fluctuates in value to a degree
or in a direction that is not anticipated. Further, the risk exists that the
perceived linkage between various currencies may not be present or may not be
present during the particular time that the Fund is engaging in proxy hedging.
Currency transactions are also subject to risks different from those of other
portfolio transactions. Because currency control is of great importance to the
issuing governments and influences economic planning and policy, purchases and
sales of currency and related instruments can be adversely affected by
government exchange controls, limitations or restrictions on repatriation of
currency, and manipulations or exchange restrictions imposed by governments.
These forms of governmental actions can result in losses to a Fund if it is
unable to deliver or receive currency or monies in settlement of obligations
and could also cause hedges it has entered into to be rendered useless,
resulting in full currency exposure as well as incurring transaction costs.
Buyers and sellers of currency futures contracts are subject to the same risks
that apply to the use of futures contracts generally. Further, settlement of a
currency futures contract for the purchase of most currencies must occur at a
bank based in the issuing nation. Trading options on currency futures contracts
is relatively new, and the ability to establish and close out positions on
these options is subject to the maintenance of a liquid market that may not
always be available. Currency exchange rates may fluctuate based on factors
extrinsic to that country's economy.
Because the amount of interest and/or principal payments which the issuer of
indexed debt securities is obligated to make is linked to the prices of other
securities, securities indices, currencies, or other financial indicators, such
payments may be significantly greater or less than payment obligations in
respect of other types of debt securities. As a result, an investment in
indexed debt securities may be considered speculative. Moreover, the
performance of indexed securities depends to a great extent on the performance
of and may be more volatile than the security, currency, or other instrument to
which they are indexed, and may also be influenced by interest rate changes in
the United States and abroad. At the same time, indexed securities are subject
to the credit risks associated with the issuer of the security, and their
values may decline substantially if the issuer's creditworthiness deteriorates.
Losses resulting from the use of Derivatives will reduce a Fund's net asset
value, and possibly income, and the losses can be greater than if Derivatives
had not been used.
RISKS OF DERIVATIVES OUTSIDE THE UNITED STATES
When conducted outside the United States, Derivatives may not be regulated as
rigorously as in the United States, may not involve a clearing mechanism and
related guarantees, and will be subject to the risk of governmental actions
affecting trading in, or the prices of, foreign securities, currencies and
other instruments. In addition, the price of any foreign futures or foreign
options contract and, therefore, the potential profit and loss thereon, may be
affected by any variance in the foreign exchange rate between the time an order
is placed and the time it is liquidated, offset or exercised. The value of
positions taken as part of non-U.S. Derivatives also could be adversely
affected by: (1) other complex foreign political, legal and economic factors,
(2) lesser availability of data on which to make
PAGE B-8
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<PAGE>
SALOMON BROTHERS INVESTMENT SERIES
trading decisions than in the United States, (3) delays in the Fund's ability
to act upon economic events occurring in foreign markets during nonbusiness
hours in the United States, (4) the imposition of different exercise and
settlement terms and procedures and margin requirements than in the United
States and (5) lower trading volume and liquidity.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS
Use of many Derivatives by a Fund will require, among other things, that the
Fund segregate cash, cash equivalents, liquid high grade debt obligations or
other assets with its custodian, or a designated sub-custodian, to the extent
the Fund's obligations are not otherwise 'covered' through ownership of the
underlying security, financial instrument or currency. In general, either the
full amount of any obligation by a Fund to pay or deliver securities or assets
must be covered at all times by the securities, instruments or currency
required to be delivered, or, subject to any regulatory restrictions, an amount
of cash, cash equivalents or other liquid high grade debt obligations at least
equal to the current amount of the obligation must be segregated with the
custodian or sub-custodian. The segregated assets cannot be sold or transferred
unless equivalent assets are substituted in their place or it is no longer
necessary to segregate them. A call option on securities written by a Fund, for
example, will require the Fund to hold the securities subject to the call (or
securities convertible into the needed securities without additional
consideration) or to segregate liquid high grade debt obligations sufficient to
purchase and deliver the securities if the call is exercised. A call option
sold by a Fund on an index will require the Fund to own portfolio securities
that correlate with the index or to segregate liquid high grade debt
obligations equal to the excess of the index value over the exercise price on a
current basis. A put option on securities written by a Fund will require the
Fund to segregate liquid high grade debt obligations equal to the exercise
price. Except when a Fund enters into a forward contract in connection with the
purchase or sale of a security denominated in a foreign currency or for other
non-speculative purposes, which requires no segregation, a currency contract
that obligates the Fund to buy or sell a foreign currency will generally
require the Fund to hold an amount of that currency or liquid securities
denominated in that currency equal to the Fund's obligations or to segregate
liquid high grade debt obligations equal to the amount of the Fund's
obligations.
OTC options entered into by a Fund, including those on securities, currency,
financial instruments or indices, and OCC-issued and exchange-listed index
options will generally provide for cash settlement, although the Fund will not
be required to do so. As a result, when a Fund sells these instruments it will
segregate an amount of assets equal to its obligations under the options.
OCC-issued and exchange-listed options sold by a Fund other than those
described above generally settle with physical delivery, and the Fund will
segregate an amount of assets equal to the full value of the option. OTC
options settling with physical delivery or with an election of either physical
delivery or cash settlement will be treated the same as other options settling
with physical delivery.
In the case of a futures contract or an option on a futures contract, a Fund
must deposit initial margin and, in some instances, daily variation margin in
addition to segregating assets sufficient to meet its obligations to purchase
or provide securities or currencies, or to pay the amount owed at the
expiration of an index-based futures contract. These assets may consist of
cash, cash equivalents, liquid debt or equity securities or other acceptable
assets. A Fund will accrue the net amount of the excess, if any, of its
obligations relating to swaps over its entitlements with respect to each swap
on a daily basis and will segregate with its custodian, or designated
sub-custodian, an amount of cash, cash equivalents or
PAGE B-9
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SALOMON BROTHERS INVESTMENT SERIES
other liquid high grade debt obligations having an aggregate value equal to at
least the accrued excess. Caps, floors and collars require segregation of
assets with a value equal to the Fund's net obligation, if any.
Derivatives may be covered by means other than those described above when
consistent with applicable regulatory policies. A Fund may also enter into
offsetting transactions so that its combined position, coupled with any
segregated assets, equals its net outstanding obligation in related
Derivatives. A Fund could purchase a put option, for example, if the strike
price of that option is the same or higher than the strike price of a put
option sold by the Fund. Moreover, instead of segregating assets if it holds a
futures contract or forward contract, a Fund could purchase a put option on the
same futures contract or forward contract with a strike price as high or higher
than the price of the contract held. Other Derivatives may also be offset in
combinations. If the offsetting transaction terminates at the time of or after
the primary transaction, no segregation is required, but if it terminates prior
to that time, assets equal to any remaining obligation would need to be
segregated.
PAGE B-10
<PAGE>
<PAGE>
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Salomon Brothers Investment Series
ACCOUNT APPLICATION Please Note: A separate application must be used to open an
IRA account.
- --------------------------------------------------------------------------------
1. TYPE OF ACCOUNT (Please print) (Account will not be opened without Taxpayer
I.D. No. or Social Security No.)
[ ] INDIVIDUAL [ ] JOINT Social Security No. or Taxpayer I.D. No.
Name__________________________________ ________________________________________
Joint Registrant (if any)(1,2) Social Security No. or Taxpayer I.D. No.
Name__________________________________ ________________________________________
(1) Use only the Social Security Number or Taxpayer Indentification Number of
the first listed joint tenant.
(2) For joint registrations, the account registrants will be joint tenants with
right of survivorship and not tenants in common unless tenants in common or
community property registrations are requested.
- --------------------------------------------------------------------------------
[ ] UNIFORM GIFT TO MINORS OR [ ] UNIFORM TRANSFER TO MINORS (where allowed
by law)
Name of Adult Custodian (only one permitted)
Name________________________________________________
Minor's Date of Birth_______________________________
Name of Minor (only one permitted) Minor's Social Security No.
Name_____________________________________________ ___________________________
(Account will not be opened without minor's Social Security No.)
under the_________________________________ Uniform Gifts/Transfer to Minors Act.
State of Residence of Minor
- --------------------------------------------------------------------------------
[ ] CORPORATION [ ] PARTNERSHIP Social Security No. or Taxpayer I.D. No.
[ ] TRUST* [ ] OTHER ________________________________
(Account will not be opened without Taxpayer I.D. No. or Social Security No.)
Name of Corporation, Partnership, or Other______________________________________
________________________________________________________________________________
Name(s) of Trustee(s)___________________________________________________________
* If a Trust, include date of trust
instrument and list trustees
if they are to be named in the
registration. Date of the Trust Agreement______________
- --------------------------------------------------------------------------------
2. MAILING ADDRESS
Street or P.O. Box_____________________________________________________________
_____________________________________________________________
City_____________________________ State________ Zip_______________
Business Telephone_______________ Home Telephone___________________
-------------------------------------------------------------------------------
3. INVESTMENT INFORMATION
METHOD OF INVESTMENT.
[ ] I have enclosed a check for the minimum of $500 per Fund.
[ ] I have enclosed a check for the minimum of $25 per Fund and completed the
Automatic Investment Plan information in Section 13.
[ ] I purchased ____ shares of _____ through my broker on ____/____/____.
Confirm #____________________________________________________________
PLEASE MAKE MY INVESTMENT IN THE FUNDS DESIGNATED BELOW:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C SALOMON BROTHERS INVESTMENT SERIES INVESTMENT
<C> <C> <C> <S> <C>
- -------------------------------------------------------------------------------------------------------
________ ________ ________ Cash Management Fund $
________ ________ ________ New York Municipal Money Market Fund $
________ ________ ________ National Intermediate Municipal Fund $
________ ________ ________ U.S. Government Income Fund $
________ ________ ________ High Yield Bond Fund $
________ ________ ________ Strategic Bond Fund $
________ ________ ________ Total Return Fund $
________ ________ ________ Investors Fund $
________ ________ ________ Asia Growth Fund $
________ ________ ________ Capital Fund $
TOTAL INVESTMENT AMOUNT $
</TABLE>
- --------------------------------------------------------------------------------
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
4. REDUCED SALES CHARGE (Available for CLASS A Shares Only)
METHOD OF INVESTMENT.
Are you a shareholder in another Salomon Brothers Investment Series
Fund? [ ] Yes [ ] No
[ ] I apply for Right of Accumulation reduced sales charges based on the
following Salomon Brothers Investment Series Fund accounts (excluding
Class B and Class C Shares).
Fund Account No. or Social Security No.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
LETTER OF INTENT.
[ ] I agree to the Letter of Intent provisions contained in the Fund's current
Prospectus. During a 13-month period, I plan to invest a dollar amount of at
least:
[ ] $50,000 [ ] $100,000 [ ] $250,000 [ ] $500,000 [ ] $1,000,000
- --------------------------------------------------------------------------------
5. DIVIDEND AND CAPITAL GAINS DISTRIBUTIONS
Dividends and capital gains will be reinvested in the same Fund if no other
option is selected.
<TABLE>
<S> <C>
DIVIDENDS CAPITAL GAINS
[ ] I wish to reinvest dividends in the same Fund. [ ] I wish to reinvest capital gains in the same
Fund.
[ ] I wish to have dividends paid in cash. [ ] I wish to have capital gains paid in cash.
</TABLE>
The AUTOMATIC DIVIDEND DIVERSIFICATION PROGRAM allows an investor to have
dividends and any other distributions from a Fund automatically used to purchase
shares of the same class of any other Fund. The receiving account must be in the
same name as your existing account.
[ ] Please reinvest dividends and capital gains from the _____ Fund to the _____
Fund.
OPTIONAL FEATURES
- --------------------------------------------------------------------------------
6. AUTOMATIC WITHDRAWAL PLAN
I would like to receive payments of _________: Payment Date selected:__________
[ ] Monthly [ ] Quarterly [ ] Startup Month/Year:_____________________
Payments will be made on or near the 10th or the 25th of the month if no Payment
Date is selected.
A minimum account value of $10,000 in a single account is required to establish
a monthly withdrawal plan. For quarterly, semi-annual and annual withdrawal
plans a minimum of $5,000 in a single account is required.
For the Investors Fund and the Capital Fund, shareholders are required to have a
minimum value of $7,500 in a single account. A shareholder can arrange for
automatic distributions to be made monthly or quarterly for amounts not less
than $50 and $50 from the Investors Fund and Capital Fund, respectively.
<TABLE>
<S> <C>
Please mail checks to: Wire transfers to:
[ ] Address of Record (named in Section 2) [ ] Bank of Record (named in Section 10)
</TABLE>
Name____________________________________________________________________________
____________________________________________________________________________
Address_________________________________________________________________________
City__________________________________ State____________ Zip___________________
________________________________________________________________________________
7. TELEPHONE REDEMPTION PRIVILEGE
Unless indicated below, I authorize the Transfer Agent to accept instructions
from any person to redeem shares in my account(s) by telephone, in accordance
with the procedures and conditions set forth in the Fund's current Prospectus.
Checks for redemption of proceeds will be sent by check via U.S. Mail to the
address of record, unless the information in Section 10 is completed for
redemption by wire of $500 or more.
[ ] I DO NOT want the Telephone Redemption Privilege.
- --------------------------------------------------------------------------------
8. SYSTEMATIC INVESTMENT PLAN
I would like to exchange shares in my __________________ Fund account, for which
no certificates have been issued, to:
$ _______________ into the _____________________ Fund, Account # _______________
$50 Minimum
$ _______________ into the _____________________ Fund, Account # _______________
$50 Minimum
$ _______________ into the _____________________ Fund, Account # _______________
$50 Minimum
The exchange will occur on or about the 15th of each month, beginning in the
month of
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
9. TELEPHONE EXCHANGE PRIVILEGE
Unless indicated below, I authorize the Transfer Agent to accept instructions
from any person to exchange shares in my account(s) by telephone, in accordance
with the procedures and conditions set forth in the Funds' current prospectus.
[ ] I DO NOT want the Telephone Exchange Privilege.
- --------------------------------------------------------------------------------
10. AUTOMATIC INVESTMENT PLAN
The Automatic Investment Plan, which is available to shareholders of the Salomon
Brothers Investment Series Funds, makes possible regular monthly purchases of
Fund shares to allow dollar-cost averaging. The Funds' transfer agent
can arrange for an amount of money selected by you ($25 minimum) to be deducted
from your checking account and used to purchase shares of a specified Salomon
Brothers Investment Series Fund.
Please withdraw $__________________ from my checking account (named in Section
11) on or about the 10th of the month for investment:
[ ] Monthly [ ] Every alternate month [ ] Other
[ ] Quarterly [ ] Semianually
No more than one investment will be processed per month.
$ _______________ into the_____________________________ Fund
$25 Minimum
$ _______________ into the_____________________________ Fund
$25 Minimum
$ _______________ into the_____________________________ Fund
$25 Minimum
If you are applying for the Telephone Redemption Privilege or Automatic
Investment Plan, please attach your voided check on top of our sample below.
JOHN DOE 000
123 Main Street
Anywhere, USA 12345 [ ]
________________________________________________$
______________________________________________________________
___________________________ _______________________________
- --------------------------------------------------------------------------------
11. BANK OF RECORD
Please attach a voided check in the space provided in Section 10.
Bank Name ____________________________________________________________
Address ____________________________________________________________
City _______________________________________ State____ Zip_______
Bank ABA No. __________________________________
Bank Account No. __________________________________
Account Name ____________________________________________________________
<PAGE>
<PAGE>
SIGNATURE AND DEALER INFORMATION
- --------------------------------------------------------------------------------
12. SIGNATURE AND TAXPAYER CERTIFICATION
The undersigned warrants that I (we) have full authority and, if a natural
person, I (we) am (are) of legal age to purchase shares pursuant to this
Application, and have received a current Prospectus for the Salomon Brothers
Investment Series Fund(s) in which I (we) am (are) investing. THE UNDERSIGNED
ACKNOWLEDGES THAT THE TELEPHONE EXCHANGE PRIVILEGE IS AUTOMATIC AND THAT I (WE)
MAY BEAR THE RISK OF LOSS IN THE EVENT OF FRAUDULENT USE OF THE PRIVILEGE. If I
(we) do not want the Telephone Exchange Privilege, I (we) have so indicated on
this Application.
UNDER THE INTEREST AND DIVIDEND TAX COMPLIANCE ACT OF 1983, THE FUND IS REQUIRED
TO HAVE THE FOLLOWING CERTIFICATION:
UNDER THE PENALTY OF PERJURY, I CERTIFY THAT:
(1) THE NUMBER SHOWN ON THIS FORM IS MY CORRECT TAXPAYER IDENTIFICATION NUMBER
(OR I AM WAITING FOR A NUMBER TO BE ISSUED TO ME), AND
(2) I AM NOT SUBJECT TO BACKUP WITHHOLDING BECAUSE: (A) I AM EXEMPT FROM BACKUP
WITHHOLDING; OR (B) I HAVE NOT BEEN NOTIFIED BY THE INTERNAL REVENUE SERVICE
THAT I AM SUBJECT TO BACKUP WITHHOLDING AS A RESULT OF A FAILURE TO REPORT ALL
INTEREST OR DIVIDENDS OR; (C) THE IRS HAS NOTIFIED ME THAT I AM NO LONGER
SUBJECT TO BACKUP WITHHOLDING.
CERTIFICATION INSTRUCTIONS -- YOU MUST CROSS OUT ITEM (2) ABOVE IF YOU HAVE
BEEN NOTIFIED BY THE IRS THAT YOU ARE CURRENTLY SUBJECT TO BACKUP WITHHOLDING
BECAUSE OF UNDERREPORTING OF INTEREST OR DIVIDENDS ON YOUR TAX RETURN. FOR REAL
ESTATE TRANSACTIONS, ITEM (2) DOES NOT APPLY. FOR MORTGAGE INTEREST PAID, THE
ACQUISITION OR ABANDONMENT OF SECURED PROPERTY, CONTRIBUTIONS TO AN INDIVIDUAL
RETIREMENT ACCOUNT (IRA), AND GENERALLY PAYMENTS OTHER THAN INTEREST AND
DIVIDENDS, YOU ARE NOT REQUIRED TO SIGN THE CERTIFICATION, BUT YOU MUST PROVIDE
YOUR CORRECT TAXPAYER IDENTIFICATION NUMBER.
[ ] Exempt from Backup Withholding (i.e., exempt entity as described in
Application Instructions)
[ ] Nonresident alien [form W-8 attached] Country of Citizenship ___________
THE INTERNAL REVENUE SERVICE DOES NOT REQUIRE YOUR CONSENT TO ANY PROVISION OF
THIS DOCUMENT OTHER THAN THE CERTIFICATIONS REQUIRED TO AVOID BACKUP
WITHHOLDING.
Authorized signature ______________ Title ____________________ Date ____________
Authorized signature ______________ Title ____________________ Date ____________
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13. FOR DEALER USE ONLY (Please print)
We hereby authorize Salomon Brothers Inc to act as our agent in connection with
transactions authorized by the Application and agree to notify Salomon Brothers
Inc of any purchases made under a Letter of Intent or Right of Accumulation. If
this Application includes a Telephone Exchange Privilege authorization, a
Telephone Redemption Privilege authorization or an Automatic Withdrawal Plan
request, we guarantee the signature(s) above.
Dealers's Name _________________________________________________________________
Main Office Address ___________________________________________________________
Dealer Number __________________ Branch #_______________ Rep # ________________
Representative's Name __________________________________________________________
Branch Address______________________________ Telephone No.______________________
Authorized Signature of Dealer _______________________ Title ___________________
If desired, I elect to have third party statements sent to the following
address:
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
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SERVICE ASSISTANCE
Our knowledgeable Client Services Representatives are available to assist you
between 9:00 a.m. and 5:00 p.m. Eastern Time at:
1-800-446-1013
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MAILING INSTRUCTIONS
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Mail your completed account application and check OR (for overnight and express mail delivery)
made payable to Salomon Brothers Funds to:
SALOMON BROTHERS INVESTMENT SERIES SALOMON BROTHERS INVESTMENT SERIES
C/O FIRST DATA INVESTOR SERVICES GROUP, INC. C/O FIRST DATA INVESTOR SERVICES GROUP, INC.
P.O. BOX 5127 4400 COMPUTER DRIVE
WESTBOROUGH, MA 01581-5127 WESTBOROUGH MA 01581-5120
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Salomon Brothers Inc SBAPP-9/95
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SIGNATURE CARD
CASH MANAGEMENT FUND
NEW YORK MUNICIPAL MONEY MARKET FUND
Boston Safe Deposit and Trust Company
ACCOUNT NUMBER
- --------------------------------------------------------------------------------
ACCOUNT NAME(S) AS REGISTERED
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AUTHORIZED SIGNATURE(S) -- Individuals must sign as their names appear in
account registration
1 ______________________________________________________________________________
2 ______________________________________________________________________________
3 ______________________________________________________________________________
4 ______________________________________________________________________________
[ ] Check if all signatures are required
[ ] Check if only one signature is required Date _____________
[ ] Check if combination of signatures is required and specify number and/or
individual(s)
SUBJECT TO CONDITION ON REVERSE SIDE
THE PAYMENT OF FUNDS IS AUTHORIZED BY THE SIGNATURE(S) APPEARING ON REVERSE
SIDE.
By executing this signature card, I (we) hereby authorize Boston Safe Deposit
and Trust Company ('Bank') to honor checks drawn by me (us) on my (our)
Account in the Investment Company ('Fund') indicated on the reverse side of
this form with payment therefore to be made by redeeming sufficient full and
fractional shares in that Account without a signature guarantee.
If this card is signed by more than one person, all checks will require only
one of the signatures appearing on the reverse side if the option of 'only
one signature is required' has been selected.
Checks may not be written for amounts less than $500 or such other minimum or
maximum as may from time to time be established by the Fund. Shares for which
certificates have been issued may not be redeemed by check. No redemption of
shares purchased by check will be permitted pursuant to this Check Redemption
Service until 15 days after such shares were credited to the shareholder's
account. The Bank reserves the right to dishonor checks in amounts exceeding
the value of the shareholder's account at the time the check is presented for
payment.
Neither the Bank nor the Fund shall incur any liability for honoring my (our)
redemption checks, or for effecting redemptions pursuant to the Check
Redemption Service or for returning checks which have not been honored. The
Bank and the Fund shall be liable only for their own negligence.
I (we) understand and agree that this Check Redemption Service is in all
respects subject to the procedures, rules and regulations of the Bank
governing checking accounts, and also to the terms and conditions in the
Fund's current Prospectus and Statement of Additional Information, and that
the Bank and the Fund reserve the right to change, modify or terminate the
Service at any time upon written notification mailed to my (our) address of
record.
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VOID
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TELEPHONES
(800) SALOMON
(800) 725-6666
DISTRIBUTOR
Salomon Brothers Inc
7 World Trade Center
New York, New York 10048
INVESTMENT MANAGER
Salomon Brothers Asset
Management Inc
7 World Trade Center
New York, New York 10048
CUSTODIAN
Investors Bank & Trust Company
89 South Street
Boston, Massachusetts 02111
TRANSFER AGENT AND
DIVIDEND DISBURSING AGENT
First Data Investor Services Group, Inc.
P.O. Box 5127
Westborough, Massachusetts 01581-5127
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
LEGAL COUNSEL
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION
OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, IN CONNECTION WITH THE OFFER CONTAINED IN THIS PROSPECTUS, AND,
IF GIVEN OR MADE, SUCH THER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY A FUND, THE DISTRIBUTOR OR THE INVESTMENT
MANAGER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY STATE IN
WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
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SALOMON BROTHERS ASSET MANAGEMENT
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SALOMON BROTHERS INVESTMENT SERIES
7 WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
(800) SALOMON
(800) 725-6666
STATEMENT OF ADDITIONAL INFORMATION
Salomon Brothers Investment Series consists of Salomon Brothers Cash
Management Fund (the 'Cash Management Fund'), Salomon Brothers New York
Municipal Money Market Fund (the 'New York Municipal Money Market Fund'),
Salomon Brothers National Intermediate Municipal Fund (the 'National
Intermediate Municipal Fund'), Salomon Brothers U.S. Government Income Fund (the
'U.S. Government Income Fund'), Salomon Brothers High Yield Bond Fund (the 'High
Yield Bond Fund'), Salomon Brothers Strategic Bond Fund (the 'Strategic Bond
Fund'), Salomon Brothers Total Return Fund (the 'Total Return Fund'), Salomon
Brothers Asia Growth Fund (the 'Asia Growth Fund'), Salomon Brothers Investors
Fund Inc (the 'Investors Fund') and Salomon Brothers Capital Fund Inc (the
'Capital Fund') (each, a 'Fund' and collectively, the 'Funds'). Each of the
Funds, except for the Investors Fund and the Capital Fund, is an investment
portfolio of the Salomon Brothers Series Funds Inc (the 'Series Funds'), an
open-end investment company incorporated in Maryland on April 17, 1990. The Asia
Growth Fund is a non-diversified portfolio and the other Funds which are part of
the Series Funds are diversified portfolios. The Investors Fund is a diversified
open-end management investment company incorporated in Maryland on April 2,
1958. The Capital Fund is a non-diversified open-end management investment
company incorporated in Maryland on August 23, 1976. The Series Funds, Capital
Fund and Investors Fund are, individually, a 'Company,' or collectively, the
'Companies.'
This Statement of Additional Information (the 'SAI') is not a prospectus
and is only authorized for distribution only when preceded or accompanied by the
Fund's current Prospectus dated April 29, 1997 (the 'Prospectus'). This SAI
supplements and should be read in conjunction with the Prospectus, a copy of
which may be obtained without charge by writing the Funds at the address, or by
calling the toll-free telephone numbers, listed above.
April 29, 1997
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TABLE OF CONTENTS
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Additional Information on Portfolio Instruments and Investment Policies......................... 3
Special Factors Affecting the Fund's Investment in New York Municipal Obligations............... 18
Investment Limitations.......................................................................... 42
Management...................................................................................... 47
Investment Manager.............................................................................. 60
Portfolio Transactions.......................................................................... 67
Net Asset Value................................................................................. 68
Additional Purchase Information................................................................. 69
Additional Redemption Information............................................................... 70
Additional Information Concerning Taxes......................................................... 70
Performance Data................................................................................ 75
Shareholder Services............................................................................ 80
Capital Stock................................................................................... 81
Custodian and Transfer Agent.................................................................... 82
Independent Accountants......................................................................... 82
Counsel......................................................................................... 82
Financial Statements............................................................................ 83
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ADDITIONAL INFORMATION ON PORTFOLIO INSTRUMENTS
AND INVESTMENT POLICIES
The Prospectus indicates the extent to which each Fund may purchase the
instruments or engage in the investment activities described below. The
discussion below supplements the information set forth in the Prospectus under
'Investment Objectives and Policies,' 'Additional Investment Activities and Risk
Factors' and 'Appendix B -- General Characteristics and Risks of Derivatives.'
References herein to the investment manager means Salomon Brothers Asset
Management Inc ('SBAM'), except with respect to the Asia Growth Fund, in which
case it means Salomon Brothers Asset Management Asia Pacific Limited ('SBAM
AP').
Foreign Securities. As discussed in the Prospectus, investing in the
securities of foreign issuers generally, and particularly in emerging market
issuers, involves special considerations which are not typically associated with
investing in securities of U.S. issuers. The following discussion supplements
the discussion contained in the Prospectus under 'Additional Investment
Activities and Risk Factors -- Foreign Securities' and ' -- High Yield
Securities -- High Yield Foreign Sovereign Debt Securities.' See also ' -- Brady
Bonds' below.
Certain of the risks associated with international investments and
investing in smaller capital markets are heightened for investments in emerging
market countries. For example, some of the currencies of emerging market
countries have experienced devaluations relative to the U.S. dollar, and major
adjustments have been made periodically in certain of such currencies. Certain
of such countries face serious exchange constraints. In addition, governments of
many emerging market countries have exercised and continue to exercise
substantial influence over many aspects of the private sector. In certain cases,
the government owns or controls many companies. Accordingly, government actions
in the future could have a significant effect on economic conditions in
developing countries which could affect private sector companies and
consequently, the value of certain securities held in a Fund's portfolio.
Certain markets are in only the earliest stages of development. There is
also a high concentration of market capitalization and trading volume in a small
number of issuers representing a limited number of industries, as well as a high
concentration of investors and financial intermediaries. Many of such markets
also may be affected by developments with respect to more established markets in
the region. Brokers in emerging market countries typically are fewer in number
and less capitalized than brokers in the United States. These factors, combined
with the U.S. regulatory requirements for open-end investment companies and the
restrictions on foreign investment, result in potentially fewer investment
opportunities for a Fund and may have an adverse impact on the investment
performance of a Fund.
There generally is less governmental supervision and regulation of
exchanges, brokers and issuers in foreign countries than there is in the United
States. For example, there may be no comparable provisions under certain foreign
laws to insider trading and similar investor protection securities laws that
apply with respect to securities transactions consummated in the United States.
Further, brokerage commissions and other transaction costs on foreign securities
exchanges generally are higher than in the United States.
With respect to investments in certain emerging market countries, different
legal standards may have an adverse impact on a Fund. For example, while the
potential liability of a shareholder in a U.S. corporation with respect to acts
of the corporation is generally limited to the amount of the shareholder's
investment, the notion of limited liability is less clear in certain emerging
market countries. Similarly, the rights of investors in emerging market
companies may be more limited than those of shareholders of U.S. corporations.
In some countries, banks or other financial institutions may constitute a
substantial number of the leading companies or companies with the most actively
traded securities. The Investment Company Act of 1940, as amended (the '1940
Act'), limits a Fund's ability to invest in any equity security of an issuer
which, in its most recent fiscal year, derived more than 15% of its revenues
from 'securities related activities,' as defined by the rules thereunder. These
provisions may also restrict a Fund's investments in certain foreign banks and
other financial institutions.
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The manner in which foreign investors may invest in companies in certain
emerging market countries, as well as limitations on such investments, also may
have an adverse impact on the operations of a Fund. For example, the Fund may be
required in some countries to invest initially through a local broker or other
entity and then have the shares purchased re-registered in the name of the Fund.
Re-registration may in some instances not occur on a timely basis, resulting in
a delay during which the Fund may be denied certain of its rights as an
investor.
Foreign markets have different clearance and settlement procedures, and in
certain markets there have been times when settlements have failed to keep pace
with the volume of securities transactions, making it difficult to conduct such
transactions. Further, satisfactory custodial services for investment securities
may not be available in some countries having smaller, emerging capital markets,
which may result in a Fund incurring additional costs and delays in transporting
and custodying such securities outside such countries. Delays in settlement or
other problems could result in periods when assets of a Fund are uninvested and
no return is earned thereon. The inability of a Fund to make intended security
purchases due to settlement problems or the risk of intermediary counterparty
failures could cause a Fund to forego attractive investment opportunities. The
inability to dispose of a portfolio security due to settlement problems could
result either in losses to a Fund due to subsequent declines in the value of
such portfolio security or, if the Fund has entered into a contract to sell the
security, could result in possible liability to the purchaser.
Rules adopted under the 1940 Act permit a Fund to maintain its foreign
securities and cash in the custody of certain eligible non-U.S. banks and
securities depositories. Certain banks in foreign countries may not be 'eligible
sub-custodians,' as defined in the 1940 Act, for a Fund, in which event the Fund
may be precluded from purchasing securities in certain foreign countries in
which it otherwise would invest or which may result in the Fund's incurring
additional costs and delays in providing transportation and custody services for
such securities outside of such countries. A Fund may encounter difficulties in
effecting on a timely basis portfolio transactions with respect to any
securities of issuers held outside their countries. Other banks that are
eligible foreign sub-custodians may be recently organized or otherwise lack
extensive operating experience. In addition, in certain countries there may be
legal restrictions or limitations on the ability of a Fund to recover assets
held in custody by foreign sub-custodians in the event of the bankruptcy of the
sub-custodian.
U.S. GOVERNMENT OBLIGATIONS
In addition to the U.S. Treasury obligations described in the Prospectus, a
Fund may invest in separately traded interest components of securities issued or
guaranteed by the U.S. Treasury. The interest components of selected securities
are traded independently under the Separate Trading of Registered Interest and
Principal of Securities program ('STRIPS'). Under the STRIPS program, the
interest components are individually numbered and separately issued by the U.S.
Treasury at the request of depository financial institutions, which then trade
the component parts independently.
Securities issued or guaranteed by U.S. government agencies and
instrumentalities include obligations that are supported by: (a) the full faith
and credit of the U.S. Treasury (e.g., direct pass-through certificates of the
Government National Mortgage Association ('Ginnie Maes')); (b) the limited
authority of the issuer or guarantor to borrow from the U.S. Treasury (e.g.,
obligations of Federal Home Loan Banks); or (c) only the credit of the issuer or
guarantor (e.g., obligations of the Federal Home Loan Mortgage Corporation
('Freddie Macs')). In the case of obligations not backed by the full faith and
credit of the U.S. Treasury, the agency issuing or guaranteeing the obligation
is principally responsible for ultimate repayment.
Agencies and instrumentalities that issue or guarantee debt securities and
that have been established or sponsored by the U.S. government include, in
addition to those identified above, the Bank for Cooperatives, the Export-Import
Bank, the Federal Farm Credit System, the Federal Intermediate Credit Banks, the
Federal Land Banks, the Federal National Mortgage Association and the Student
Loan Marketing Association.
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BANK OBLIGATIONS
As stated in the Prospectus, bank obligations that may be purchased by a
Fund include certificates of deposit, banker's acceptances and fixed time
deposits. A certificate of deposit is a short-term negotiable certificate issued
by a commercial bank against funds deposited in the bank and is either
interest-bearing or purchased on a discount basis. A bankers' acceptance is a
short-term draft drawn on a commercial bank by a borrower, usually in connection
with an international commercial transaction. The borrower is liable for payment
as is the bank, which unconditionally guarantees to pay the draft at its face
amount on the maturity date. Fixed time deposits are obligations of branches of
U.S. banks or foreign banks which are payable at a stated maturity date and bear
a fixed rate of interest. Although fixed time deposits do not have a market,
there are no contractual restrictions on the right to transfer a beneficial
interest in the deposit to a third party.
Bank obligations may be general obligations of the parent bank or may be
limited to the issuing branch by the terms of the specific obligations or by
government regulation.
FLOATING AND VARIABLE RATE INSTRUMENTS
As stated in the Prospectus, certain of the floating or variable rate
obligations that may be purchased by a Fund may carry a demand feature that
would permit the holder to tender them back to the issuer of the instrument or
to a third party at par value prior to maturity. Some of the demand instruments
purchased by a Fund are not traded in a secondary market and derive their
liquidity solely from the ability of the holder to demand repayment from the
issuer or third party providing credit support. If a demand instrument is not
traded in a secondary market, each Fund will nonetheless treat the instrument as
'readily marketable' for the purposes of its investment restriction limiting
investments in illiquid securities unless the demand feature has a notice period
of more than seven days in which case the instrument will be characterized as
'not readily marketable' and therefore illiquid.
A Fund's right to obtain payment at par on a demand instrument could be
affected by events occurring between the date such Fund elects to demand payment
and the date payment is due that may affect the ability of the issuer of the
instrument or third party providing credit support to make payment when due,
except when such demand instruments permit same day settlement. To facilitate
settlement, these same day demand instruments may be held in book entry form at
a bank other than a Fund's custodian subject to a sub-custodian agreement
approved by such Fund between that bank and the Fund's custodian.
ASSET-BACKED SECURITIES
Asset-backed securities are generally issued as pass through certificates,
which represent undivided fractional ownership interests in the underlying pool
of assets, or as debt instruments, which are generally issued as the debt of a
special purpose entity organized solely for the purpose of owning such assets
and issuing such debt. The pool of assets generally represents the obligations
of a number of different parties. Asset-backed securities frequently carry
credit protection in the form of extra collateral, subordinated certificates,
cash reserve accounts, letters of credit or other enhancements. For example,
payments of principal and interest may be guaranteed up to certain amounts and
for a certain time period by a letter of credit or other enhancement issued by a
financial institution unaffiliated with the entities issuing the securities.
Assets which, to date, have been used to back asset-backed securities include
motor vehicle installment sales contracts or installment loans secured by motor
vehicles, and receivables from revolving credit (credit card) agreements.
Asset-backed securities present certain risks which are, generally, related
to limited interests, if any, in related collateral. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. Most issuers of automobile receivables permit the servicers to
retain possession of the underlying obligations. If the servicer were to sell
these obligations to another party, there is a risk that the purchaser would
acquire an interest superior to that of the holders of the related automobile
receivables. In addition, because of
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the large number of vehicles involved in a typical issuance and technical
requirements under state laws, the trustee for the holders of the automobile
receivables may not have a proper security interest in all of the obligations
backing such receivables. Therefore, there is the possibility that recoveries on
repossessed collateral may not, in some cases, be available to support payments
on these securities. Other types of asset-backed securities will be subject to
the risks associated with the underlying assets. If a letter of credit or other
form of credit enhancement is exhausted or otherwise unavailable, holders of
asset-backed securities may also experience delays in payments or losses if the
full amounts due on underlying assets are not realized. Because asset-backed
securities are relatively new, the market experience in these securities is
limited and the market's ability to sustain liquidity through all phases of the
market cycle has not been tested.
MUNICIPAL LEASE OBLIGATIONS
Municipal lease obligations are secured by revenues derived from the lease
of property to state and local government units. The underlying leases generally
are renewable annually by the governmental user, although the lease may have a
term longer than one year. If the governmental user does not appropriate
sufficient funds for the following year's lease payments, the lease will
terminate, with the possibility of default on the lease obligations and
significant loss to a Fund. In the event of a termination, assignment or
sublease by the governmental user, the interest paid on the municipal lease
obligation could become taxable, depending upon the identity of the succeeding
user.
LOANS OF PORTFOLIO SECURITIES
Each of the Funds, except the Cash Management Fund, the New York Municipal
Money Market Fund and the National Intermediate Municipal Fund, may lend
portfolio securities to brokers or dealers or other financial institutions. The
Capital Fund may lend portfolio securities to selected member firms of the New
York Stock Exchange ('NYSE'). The procedure for the lending of securities will
include the following features and conditions. The borrower of the securities
will deposit cash with the Fund in an amount equal to a minimum of 100% of the
market value of the securities lent. The Fund will invest the collateral in
short-term debt securities or cash equivalents and earn the interest thereon. A
negotiated portion of the income so earned may be paid to the borrower or the
broker who arranged the loan. If the deposit drops below the required minimum at
any time, the borrower may be called upon to post additional cash. If the
additional cash is not paid, the loan will be immediately due and the Fund may
use the collateral or its own cash to replace the securities by purchase in the
open market charging any loss to the borrower. These will be 'demand' loans and
may be terminated by the Fund at any time. A Fund will receive any dividends and
interest paid on the securities lent and the loans will be structured to assure
that the Fund will be able to exercise its voting rights on the securities. Such
loans will be authorized only to the extent that the receipt of income from such
activity would not cause any adverse tax consequences to a Fund's shareholders
and only in accordance with applicable rules and regulations. The borrowers may
not be affiliated, directly or indirectly, with a Fund. Each of the U.S.
Government Income Fund, the High Yield Bond Fund, the Strategic Bond Fund, the
Total Return Fund, the Asia Growth Fund, the Investors Fund and the Capital Fund
did not lend any of its portfolio securities during 1996 and with the exception
of the Capital Fund and the Investors Fund, each of these Funds has no present
intention to do so.
The foregoing policy regarding the lending of portfolio securities is a
fundamental policy of the Capital Fund which may be changed only when approved
by the holders of a majority of the Fund's outstanding voting securities, as
defined in the 1940 Act.
RULE 144A SECURITIES
As indicated in the Prospectus, certain Funds may purchase certain
restricted securities ('Rule 144A securities') for which there is a secondary
market of qualified institutional buyers, as defined in Rule 144A promulgated
under the Securities Act of 1933, as amended
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(the '1933 Act'). Rule 144A provides an exemption from the registration
requirements of the 1933 Act for the resale of certain restricted securities to
qualified institutional buyers.
One effect of Rule 144A is that certain restricted securities may now be
liquid, though there is no assurance that a liquid market for Rule 144A
securities will develop or be maintained. In promulgating Rule 144A, the
Securities and Exchange Commission (the 'SEC') stated that the ultimate
responsibility for liquidity determinations is that of an investment company's
board of directors. However, the Commission stated that the board may delegate
the day-to-day function of determining liquidity to the fund's investment
adviser, provided that the board retains sufficient oversight. The Board of
Directors of each Fund has adopted policies and procedures for the purpose of
determining whether securities that are eligible for resale under Rule 144A are
liquid or illiquid. Pursuant to those policies and procedures, each Board of
Directors has delegated to the investment manager the determination as to
whether a particular security is liquid or illiquid, requiring that
consideration be given to, among other things, the frequency of trades and
quotes for the security, the number of dealers willing to sell the security and
the number of potential purchasers, dealer undertakings to make a market in the
security, the nature of the security and the time needed to dispose of the
security. The Board of Directors periodically reviews Fund purchases and sales
of Rule 144A securities.
To the extent that liquid Rule 144A securities that a Fund holds become
illiquid, due to the lack of sufficient qualified institutional buyers or market
or other conditions, the percentage of a Fund's assets invested in illiquid
assets would increase. The investment manager, under the supervision of the
Boards of Directors, will monitor Fund investments in Rule 144A securities and
will consider appropriate measures to enable a Fund to maintain sufficient
liquidity for operating purposes and to meet redemption requests.
MORTGAGE-BACKED SECURITIES
The following describes certain characteristics of mortgage-backed
securities. Mortgage-backed securities acquired by the U.S. Government Income
Fund will be limited to those issued or guaranteed by the U.S. government, its
agencies and instrumentalities. The Strategic Bond Fund and the Total Return
Fund may, in addition, purchase privately issued mortgage securities which are
not guaranteed by the U.S. government, its agencies or instrumentalities. It
should be noted that new types of mortgage-backed securities are developed and
marketed from time to time and that, consistent with its investment limitations,
a Fund may invest in those new types of mortgage-backed securities that the
investment manager believes may assist it in achieving its investment
objective(s).
Background. Mortgage-backed securities were introduced in the 1970s when
the first pool of mortgage loans was converted into a mortgage pass-through
security. Since the 1970s, the mortgage-backed securities market has vastly
expanded and a variety of structures have been developed to meet investor needs.
Yield Characteristics. Interest and principal payments on mortgage-backed
securities are typically made monthly, and principal may be prepaid at any time
because the underlying mortgage loans or other assets generally may be prepaid
at any time. As a result, if a Fund purchases such a security at a premium, a
prepayment rate that is faster than expected will reduce yield to maturity,
while a prepayment rate that is slower than expected will have the opposite
effect of increasing yield to maturity. Conversely, if a Fund purchases these
securities at a discount, faster than expected prepayments will increase, while
slower than expected prepayments will reduce, yield to maturity.
Prepayments on a pool of mortgage loans are influenced by a variety of
economic, geographic, social and other factors, including changes in mortgagors'
housing needs, job transfers, unemployment, mortgagors' net equity in the
mortgaged properties and servicing decisions. Generally, however, prepayments on
fixed rate mortgage loans will increase during a period of falling interest
rates. Accordingly, amounts available for reinvestment by a Fund are likely to
be greater during a period of relatively low interest rates and, as a result,
likely to be reinvested at lower interest rates than during a period of
relatively high interest rates. This prepayment effect has been particularly
pronounced during recent years as borrowers
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have refinanced higher interest rate mortgages into lower interest rate
mortgages available in the marketplace. Mortgage-backed securities may decrease
in value as a result of increases in interest rates and may benefit less than
other fixed income securities from declining interest rates because of the risk
of prepayment.
Guaranteed Mortgage Pass-Through Securities. The U.S. Government Income,
Strategic Bond and Total Return Funds may invest in mortgage pass-through
securities representing participation interests in pools of residential mortgage
loans originated by U.S. governmental or private lenders and guaranteed, to the
extent provided in such securities, by the U.S. government or one of its
agencies or instrumentalities. Any guarantee of such securities runs only to
principal and interest payments on the securities and not to the market value of
such securities or the principal and interest payments on the underlying
mortgages. In addition, the guarantee only runs to the portfolio securities held
by a Fund and not to the purchase of shares of the Fund. Such securities, which
are ownership interests in the underlying mortgage loans, differ from
conventional debt securities, which provide for periodic payment of interest in
fixed amounts (usually semi-annually) and principal payments at maturity or on
specified call dates. Mortgage pass-through securities provide for monthly
payments that are a 'pass-through' of the monthly interest and principal
payments (including any prepayments) made by the individual borrowers on the
pooled mortgage loans, net of any fees paid to the guarantor of such securities
and the servicer of the underlying mortgage loans. Guaranteed mortgage
pass-through securities are often sold on a to-be-acquired or 'TBA' basis. Such
securities are typically sold one to three months in advance of issuance, prior
to the identification of the underlying pools of mortgage securities but with
the interest payment provisions fixed in advance. The underlying pools of
mortgage securities are identified shortly before settlement and must meet
certain parameters.
The guaranteed mortgage pass-through securities in which a Fund may invest
may include those issued or guaranteed by Ginnie Mae, the Federal National
Mortgage Association ('Fannie Mae') and Freddie Mac.
Ginnie Mae Certificates. Ginnie Mae is a wholly-owned corporate
instrumentality of the United States within the Department of Housing and Urban
Development. The full faith and credit of the U.S. government is pledged to the
payment of amounts that may be required to be paid under any guarantee, but not
as to the market value of such securities. The Ginnie Mae Certificates will
represent a pro rata interest in one or more pools of the following types of
mortgage loans: (i) fixed rate level payment mortgage loans; (ii) fixed rate
graduated payment mortgage loans; (iii) fixed rate growing equity mortgage
loans; (iv) fixed rate mortgage loans secured by manufactured (mobile) homes;
(v) mortgage loans on multifamily residential properties under construction;
(vi) mortgage loans on completed multifamily projects; (vii) fixed rate mortgage
loans as to which escrowed funds are used to reduce the borrower's monthly
payments during the early years of the mortgage loans ('buydown' mortgage
loans); (viii) mortgage loans that provide for adjustments in payments based on
periodic changes in interest rates or in other payment terms of the mortgage
loans; and (ix) mortgage-backed serial notes. All of these mortgage loans will
be Federal Housing Administration Loans ('FHA Loans') or Veterans'
Administration Loans ('VA Loans') and, except as otherwise specified above, will
be fully amortizing loans secured by first liens on one- to four-family housing
units.
Fannie Mae Certificates. Fannie Mae is a federally chartered and privately
owned corporation organized and existing under the Federal National Mortgage
Association Charter Act. Each Fannie Mae Certificate will entitle the registered
holder thereof to receive amounts representing such holder's pro rata interest
in scheduled principal payments and interest payments (at such Fannie Mae
Certificate's pass-through rate, which is net of any servicing and guarantee
fees on the underlying mortgage loans), and any principal prepayments on the
mortgage loans in the pool represented by such Fannie Mae Certificate and such
holder's proportionate interest in the full principal amount of any foreclosed
or otherwise finally liquidated mortgage loan. The full and timely payment of
principal of and interest on each Fannie Mae Certificate, but not the market
value thereof, will be guaranteed by Fannie Mae, which guarantee is not backed
by the full faith and credit of the U.S. government. Each Fannie Mae Certificate
will represent a pro rata interest in one or more
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pools of FHA Loans, VA Loans or conventional mortgage loans (i.e., mortgage
loans that are not insured or guaranteed by any governmental agency) of the
following types: (i) fixed rate level payment mortgage loans; (ii) fixed rate
growing equity mortgage loans; (iii) fixed rate graduated payment mortgage
loans; (iv) variable rate California mortgage loans; (v) other adjustable rate
mortgage loans; and (vi) fixed rate mortgage loans secured by multifamily
projects.
Freddie Mac Certificates. Freddie Mac is a corporate instrumentality of the
United States created pursuant to the Emergency Home Finance Act of 1970, as
amended (the 'FHLMC Act'). Freddie Mac guarantees to each registered holder of a
Freddie Mac Certificate ultimate collection of all principal of the related
mortgage loans, without any offset or deduction, but does not, generally,
guarantee the timely payment of scheduled principal or the market value of the
securities. Freddie Mac may remit the amount due on account of its guarantee of
collection of principal at any time after default on an underlying mortgage
loan, but not later than 30 days following: (i) foreclosure sale; (ii) payment
of a claim by any mortgage insurer; or (iii) the expiration of any right of
redemption, whichever occurs later, but in any event no later than one year
after demand has been made upon the mortgagor for accelerated payment of
principal. The obligations of Freddie Mac under its guarantee are obligations
solely of Freddie Mac and are not backed by the full faith and credit of the
U.S. government.
Freddie Mac Certificates represent a pro rata interest in a group of
mortgage loans (a 'Freddie Mac Certificate group') purchased by Freddie Mac. The
mortgage loans underlying the Freddie Mac Certificates will consist of fixed
rate or adjustable rate mortgage loans with original terms to maturity of
between ten and thirty years, substantially all of which are secured by first
liens on one- to four-family residential properties or multifamily projects.
Each mortgage loan must meet the applicable standards set forth in the FHLMC
Act. A Freddie Mac Certificate group may include whole loans, participation
interests in whole loans and undivided interests in whole loans and
participations comprising another Freddie Mac Certificate group.
BRADY BONDS
Brady Bonds are debt securities, generally denominated in U.S. dollars,
issued under the framework of the Brady Plan. The Brady Plan is an initiative
announced by former U.S. Treasury Secretary Nicholas F. Brady in 1989 as a
mechanism for debtor nations to restructure their outstanding external
commercial bank indebtedness. In restructuring its external debt under the Brady
Plan framework, a debtor nation negotiates with its existing bank lenders as
well as multilateral institutions such as the International Bank for
Reconstruction and Development (the 'World Bank') and the International Monetary
Fund (the 'IMF'). The Brady Plan framework, as it has developed, contemplates
the exchange of external commercial bank debt for newly issued bonds known as
'Brady Bonds.' Brady Bonds may also be issued in respect of new money being
advanced by existing lenders in connection with the debt restructuring. The
World Bank and/or the IMF support the restructuring by providing funds pursuant
to loan agreements or other arrangements which enable the debtor nation to
collateralize the new Brady Bonds or to repurchase outstanding bank debt at a
discount. Under these arrangements with the World Bank and/or the IMF, debtor
nations have been required to agree to the implementation of certain domestic
monetary and fiscal reforms. Such reforms have included the liberalization of
trade and foreign investment, the privatization of state-owned enterprises and
the setting of targets for public spending and borrowing. These policies and
programs seek to promote the debtor country's economic growth and development.
Investors should also recognize that the Brady Plan only sets forth general
guiding principles for economic reform and debt reduction, emphasizing that
solutions must be negotiated on a case-by-case basis between debtor nations and
their creditors. The investment manager believes that economic reforms
undertaken by countries in connection with the issuance of Brady Bonds may make
the debt of countries which have issued or have announced plans to issue Brady
Bonds an attractive opportunity for investment. However, there can be no
assurance that SBAM's expectations with respect to Brady Bonds will be realized.
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Investors should recognize that Brady Bonds have been issued only recently,
and accordingly, do not have a long payment history. Brady Bonds which have been
issued to date are rated in the categories 'BB' or 'B' by Standard & Poor's
Corporation ('S&P') or 'Ba' or 'B' by Moody's Investors Service, Inc.
('Moody's') or, in cases in which a rating by S&P or Moody's has not been
assigned, are generally considered by the investment manager to be of comparable
quality.
Agreements implemented under the Brady Plan to date are designed to achieve
debt and debt-service reduction through specific options negotiated by a debtor
nation with its creditors. As a result, the financial packages offered by each
country differ. The types of options have included the exchange of outstanding
commercial bank debt for bonds issued at 100% of face value of such debt which
carry a below-market stated rate of interest (generally known as par bonds),
bonds issued at a discount from the face value of such debt (generally known as
discount bonds), bonds bearing an interest rate which increases over time and
bonds issued in exchange for the advancement of new money by existing lenders.
Discount bonds issued to date under the framework of the Brady Plan have
generally borne interest computed semiannually at a rate equal to 13/16 of 1%
above the then current six month London Inter-Bank Offered Rate ('LIBOR') rate.
Regardless of the stated face amount and stated interest rate of the various
types of Brady Bonds, the applicable Funds will purchase Brady Bonds in
secondary markets, as described below, in which the price and yield to the
investor reflect market conditions at the time of purchase. Brady Bonds issued
to date have traded at a deep discount from their face value. Certain sovereign
bonds are entitled to 'value recovery payments' in certain circumstances, which
in effect constitute supplemental interest payments but generally are not
collateralized. Certain Brady Bonds have been collateralized as to principal due
at maturity (typically 30 years from the date of issuance) by U.S. Treasury zero
coupon bonds with a maturity equal to the final maturity of such Brady Bonds,
although the collateral is not available to investors until the final maturity
of the Brady Bonds. Collateral purchases are financed by the IMF, the World Bank
and the debtor nations' reserves. In addition, interest payments on certain
types of Brady Bonds may be collateralized by cash or high-grade securities in
amounts that typically represent between 12 and 18 months of interest accruals
on these instruments with the balance of the interest accruals being
uncollateralized. The applicable Funds may purchase Brady Bonds with no or
limited collateralization, and will be relying for payment of interest and
(except in the case of principal collateralized Brady Bonds) principal primarily
on the willingness and ability of the foreign government to make payment in
accordance with the terms of the Brady Bonds. Brady Bonds issued to date are
purchased and sold in secondary markets through U.S. securities dealers and
other financial institutions and are generally maintained through European
transnational securities depositories. A substantial portion of the Brady Bonds
and other sovereign debt securities in which these Funds may invest are likely
to be acquired at a discount, which involves certain considerations discussed
below under 'Additional Information Concerning Taxes.'
INVERSE FLOATING RATE OBLIGATIONS
Certain Funds may invest in inverse floating rate obligations, or 'inverse
floaters.' Inverse floaters have coupon rates that vary inversely at a multiple
of a designated floating rate (which typically is determined by reference to an
index rate, but may also be determined through a dutch auction or a remarketing
agent) (the 'reference rate'). Inverse floaters may constitute a class of
Collateralized Mortgage Obligations ('CMOs ') with a coupon rate that moves
inversely to a designated index, such as LIBOR or COFI (Cost of Funds Index).
Any rise in the reference rate of an inverse floater (as a consequence of an
increase in interest rates causes a drop in the coupon rate while any drop in
the reference rate of an inverse floater causes an increase in the coupon rate.
In addition, like most other fixed income securities, the value of inverse
floaters will generally decrease as interest rates increase.
Inverse floaters exhibit substantially greater price volatility than fixed
rate obligations having similar credit quality, redemption provisions and
maturity, and inverse floater CMOs exhibit greater price volatility than the
majority of mortgage pass-through securities or CMOs. In addition, some inverse
floater CMOs exhibit extreme sensitivity to changes in
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prepayments. As a result, the yield to maturity of an inverse floater CMO is
sensitive not only to changes in interest rates but also to changes in
prepayment rates on the related underlying mortgage assets.
INVESTMENT FUNDS
Each Fund may invest in unaffiliated investment funds which invest
principally in securities in which that Fund is authorized to invest, in
accordance with the limits of the 1940 Act. The Fund may invest a maximum of 10%
of its total assets in the securities of other investment companies. In
addition, under the 1940 Act, not more than 5% of the Fund's total assets may be
invested in the securities of any one investment company. To the extent a Fund
invests in other investment funds, the Fund's shareholders will incur certain
duplicative fees and expenses, including investment advisory fees. A Fund's
investment in certain investment funds will result in special U.S. Federal
income tax consequences described below under 'Taxation.'
DERIVATIVES
Forward Currency Exchange Contracts. As indicated in the Prospectus, in
order to hedge against currency exchange rate risks or to increase income or
gain, certain Funds may enter into forward currency exchange contracts with
securities dealers, financial institutions or other parties, through direct
bilateral agreements with such counterparties. A Fund will enter into forward
currency exchange contracts only with counterparties which the investment
manager deems creditworthy. In connection with a Fund's forward currency
transactions, the Fund will set aside a segregated account consisting of cash,
cash equivalents or high quality debt securities in an amount equal to the
amount of the contract, to be used to pay for the commitment. The segregated
account will be marked-to-market on a daily basis. In addition to the
circumstances set forth in the Prospectus, a Fund may enter into forward
currency exchange contracts when the investment manager believes that the
currency of a particular country may suffer a substantial decline against the
U.S. dollar. In those circumstances, a Fund may enter into a forward contract to
sell, for a fixed amount of U.S. dollars, the amount of that currency
approximating the value of some or all of the Fund's portfolio securities
denominated in such currency. Forward contracts may limit potential gain from a
positive change in the relationship between the U.S. dollar and foreign
currencies.
Futures Contracts. As indicated in the Prospectus, Fund each may trade
futures contracts: (1) on domestic and foreign exchanges on currencies, interest
rates and bond indices; and (2) on domestic and, to the extent permitted by the
Commodity Futures Trading Commission ('CFTC'), foreign exchanges on stock
indices. None of the Funds is a commodity pool, and each Fund, where permitted,
will use futures contracts and options thereon solely: (i) for bona fide hedging
purposes; and (ii) for other purposes in amounts permitted by the rules and
regulations promulgated by the CFTC. A Fund may not enter into any futures
contract or related option other than for bona fide hedging purposes if,
immediately thereafter, the sum of the amount of aggregate initial margin
deposits on the Fund's existing futures contracts and premiums paid for options
on futures contracts would exceed 5% of the liquidation value of the Fund's
portfolio, after taking into account unrealized profits and losses on existing
contracts. In addition, the value of a Fund's long futures and options positions
(futures contracts on stock or bond indices, interest rates or foreign
currencies and call options on such futures contracts) will not exceed the sum
of: (a) cash, cash equivalents or high quality debt securities segregated for
this purpose; (b) cash proceeds on existing investments due within thirty days;
and (c) accrued profits on the particular futures or options positions.
Furthermore, with respect to the sale of futures contracts by a Fund, the value
of such contracts may not exceed the total market value of such Fund's portfolio
securities.
Interest Rate Futures Contracts. A Fund may enter into interest rate
futures contracts in order to protect it from fluctuations in interest rates
without necessarily buying or selling fixed income securities. An interest rate
futures contract is an agreement to take or make delivery of either: (i) an
amount of cash equal to the difference between the value of a particular index
of debt securities at the beginning and at the end of the contract period; or
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(ii) a specified amount of a particular debt security at a future date at a
price set at time of the contract. For example, if a Fund owns bonds, and
interest rates are expected to increase, the Fund might sell futures contracts
on debt securities having characteristics similar to those held in the
portfolio. Such a sale would have much the same effect as selling an equivalent
value of the bonds owned by the Fund. If interest rates did increase, the value
of the debt securities in the portfolio would decline, but the value of the
futures contracts to the Fund would increase at approximately the same rate,
thereby keeping the net asset value of each class of the Fund from declining as
much as it otherwise would have. A Fund could accomplish similar results by
selling bonds with longer maturities and investing in bonds with shorter
maturities when interest rates are expected to increase. However, since the
futures market may be more liquid than the cash market, the use of futures
contracts as a risk management technique allows a Fund to maintain a defensive
position without having to sell its portfolio securities.
Similarly, when the investment manager expects that interest rates may
decline, a Fund may purchase interest rate futures contracts in an attempt to
hedge against having to make subsequently anticipated purchases of bonds at the
higher prices subsequently expected to prevail. Since the fluctuations in the
value of appropriately selected futures contracts should be similar to that of
the bonds that will be purchased, a Fund could take advantage of the anticipated
rise in the cost of the bonds without actually buying them until the market had
stabilized. At that time, a Fund could make the intended purchase of the bonds
in the cash market and the futures contracts could be liquidated.
At the time of delivery of securities pursuant to an interest rate futures
contract, adjustments are made to recognize differences in value arising from
the delivery of securities with a different interest rate from that specified in
the contract. In some (but not many) cases, securities called for by a futures
contract may have a shorter term than the term of the futures contract and,
consequently, may not in fact have been issued when the futures contract was
entered.
Municipal Bond Index Futures Contracts. A municipal bond index futures
contract is an agreement to take or make delivery of an amount of cash equal to
the difference between the value of the index at the beginning and at the end of
the contract period. Certain Funds may enter into short municipal bond index
futures contracts in anticipation of or during a market decline to attempt to
offset the potential decrease in market value of securities in its portfolio.
When a Fund is not fully invested in securities and anticipates a significant
market advance, it may enter into long municipal bond index futures contracts in
order to gain rapid market exposure that may wholly or partially offset
increases in the costs of securities that it intends to purchase. In a
substantial majority of these transactions, a Fund will purchase such securities
upon termination of the futures position but, under unusual market conditions, a
futures position may be terminated without the corresponding purchase of
securities.
Options. As indicated in the Prospectus, in order to hedge against adverse
market shifts or to increase income or gain, certain Funds may purchase put and
call options or write 'covered' put and call options on futures contracts on
stock indices, interest rates and currencies. In addition, in order to hedge
against adverse market shifts or to increase its income, a Fund may purchase put
and call options and write 'covered' put and call options on stocks, stock
indices and currencies. A Fund may utilize options on currencies in order to
hedge against currency exchange rate risks. A call option is 'covered' if, so
long as the Fund is obligated as the writer of the option, it will own: (i) the
underlying investment subject to the option; (ii) securities convertible or
exchangeable without the payment of any consideration into the securities
subject to the option; or (iii) a call option on the relevant security or
currency with an exercise price no higher than the exercise price on the call
option written. A put option is 'covered' if, to support its obligation to
purchase the underlying investment if a put option that a Fund writes is
exercised, the Fund will either (a) deposit with its custodian in a segregated
account cash, cash equivalents, U.S. government securities or other high grade
liquid debt obligations having a value at least equal to the exercise price of
the underlying investment or (b) continue to own an equivalent number of puts of
the same 'series' (that is, puts on the same underlying investment having the
same exercise prices and expiration dates as those written by the Fund), or an
equivalent
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number of puts of the same 'class' (that is, puts on the same underlying
investment) with exercise prices greater than those that it has written (or, if
the exercise prices of the puts it holds are less than the exercise prices of
those it has written, it will deposit the difference with its custodian in a
segregated account). Parties to options transactions must make certain payments
and/or set aside certain amounts of assets in connection with each transaction,
as described in the Prospectus.
In all cases except for certain options on interest rate futures contracts,
by writing a call, a Fund will limit its opportunity to profit from an increase
in the market value of the underlying investment above the exercise price of the
option for as long as the Fund's obligation as writer of the option continues.
By writing a put, a Fund will limit its opportunity to profit from a decrease in
the market value of the underlying investment below the exercise price of the
option for as long as the Fund's obligation as writer of the option continues.
Upon the exercise of a put option written by a Fund, the Fund may suffer an
economic loss equal to the difference between the price at which the Fund is
required to purchase the underlying investment and its market value at the time
of the option exercise, less the premium received for writing the option. Upon
the exercise of a call option written by a Fund, the Fund may suffer an economic
loss equal to an amount not less than the excess of the investment's market
value at the time of the option exercise over the Fund's acquisition cost of the
investment, less the sum of the premium received for writing the option and the
positive difference, if any, between the call price paid to the Fund and the
Fund's acquisition cost of the investment.
In all cases except for certain options on interest rate futures contracts,
in purchasing a put option, a Fund will seek to benefit from a decline in the
market price of the underlying investment, while in purchasing a call option, a
Fund will seek to benefit from an increase in the market price of the underlying
investment. If an option purchased is not sold or exercised when it has
remaining value, or if the market price of the underlying investment remains
equal to or greater than the exercise price, in the case of a put, or remains
equal to or below the exercise price, in the case of a call, during the life of
the option, the Fund will lose its investment in the option. For the purchase of
an option to be profitable, the market price of the underlying investment must
decline sufficiently below the exercise price, in the case of a put, and must
increase sufficiently above the exercise price, in the case of a call, to cover
the premium and transaction costs.
In the case of certain options on interest rate futures contracts, a Fund
may purchase a put option in anticipation of a rise in interest rates, and
purchase a call option in anticipation of a fall in interest rates. By writing a
covered call option on interest rate futures contracts, a Fund will limit its
opportunity to profit from a fall in interest rates. By writing a covered put
option on interest rate futures contracts, a Fund will limit its opportunity to
profit from a rise in interest rates.
A Fund may choose to exercise the options it holds, permit them to expire
or terminate them prior to their expiration by entering into closing
transactions. A Fund may enter into a closing purchase transaction in which the
Fund purchases an option having the same terms as the option it had written or a
closing sale transaction in which the Fund sells an option having the same terms
as the option it had purchased. A covered option writer unable to effect a
closing purchase transaction will not be able to sell the underlying security
until the option expires or the underlying security is delivered upon exercise,
with the result that the writer will be subject to the risk of market decline in
the underlying security during such period. Should a Fund choose to exercise an
option, the Fund will purchase in the open market the securities, commodities or
commodity futures contracts underlying the exercised option.
Exchange-listed options on securities and currencies, with certain
exceptions, generally settle by physical delivery of the underlying security or
currency, although in the future, cash settlement may become available.
Frequently, rather than taking or making delivery of the underlying instrument
through the process of exercising the option, listed options are closed by
entering into offsetting purchase or sale transactions that do not result in
ownership of the new option. Index options are cash settled for the net amount,
if any, by which the option is 'in-the-money' (that is, the amount by which the
value of the underlying instrument
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exceeds, in the case of a call option, or is less than, in the case of a put
option, the exercise price of the option) at the time the option is exercised.
A Fund's ability to close out its position as a purchaser or seller of an
exchange-listed put or call option is dependent upon the existence of a liquid
secondary market on option exchanges. Among the possible reasons for the absence
of a liquid secondary market on an exchange are: (i) insufficient trading
interest in certain options; (ii) restrictions on transactions imposed by an
exchange; (iii) trading halts, suspensions or other restrictions imposed with
respect to particular classes or series of options or underlying securities;
(iv) interruption of the normal operations on an exchange; (v) inadequacy of the
facilities of an exchange or the Options Clearing Corporation ('OCC') to handle
current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the secondary market on that exchange (or in that class or series
of options) would cease to exist, although outstanding options on that exchange
that had been listed by the OCC as a result of trades on that exchange would
generally continue to be exercisable in accordance with their terms.
Over-the-counter options ('OTC options') are purchased from or sold to
securities dealers, financial institutions or other parties, through direct
bilateral agreement with such counterparties. The staff of the SEC considers OTC
options to be illiquid securities. A Fund will purchase and sell
over-the-counter options only from and to counterparties which the investment
manager deems to be creditworthy.
The hours of trading for options on securities may not conform to the hours
during which the underlying securities are traded. To the extent that the option
markets close before the markets for the underlying securities, significant
price and rate movements can take place in the underlying markets that cannot be
reflected in the options markets.
(a) Options on Stocks and Stock Indices. A Fund may purchase put and call
options and write covered put and call options on stocks and stock indices
listed on domestic and foreign securities exchanges in order to hedge against
movements in the equity markets or to increase income or gain to the Fund. In
addition, the Fund may purchase options on stocks that are traded
over-the-counter. Options on stock indices are similar to options on specific
securities. However, because options on stock indices do not involve the
delivery of an underlying security, the option represents the holder's right to
obtain from the writer cash in an amount equal to a fixed multiple of the amount
by which the exercise price exceeds (in the case of a put) or is less than (in
the case of a call) the closing value of the underlying stock index on the
exercise date. Currently, options traded include the Standard & Poor's 100 Index
of Composite Stocks, Standard & Poor's 500 Index of Composite Stocks (the 'S&P
500 Index'), the NYSE Composite Index, the American Stock Exchange ('AMEX')
Market Value Index, the National Over-the-Counter Index and other standard
broadly based stock market indices. Options are also traded in certain industry
or market segment indices such as the Oil Index, the Computer Technology Index
and the Transportation Index. Stock index options are subject to position and
exercise limits and other regulations imposed by the exchange on which they are
traded.
If the investment manager expects general stock market prices to rise, a
Fund might purchase a call option on a stock index or a futures contract on that
index as a hedge against an increase in prices of particular equity securities
it wants ultimately to buy. If the stock index does rise, the price of the
particular equity securities intended to be purchased may also increase, but
that increase would be offset in part by the increase in the value of the Fund's
index option or futures contract resulting from the increase in the index. If,
on the other hand, the investment manager expects general stock market prices to
decline, it might purchase a put option or sell a futures contract on the index.
If that index does decline, the value of some or all of the equity securities in
a Fund's portfolio may also be expected to decline, but that decrease would be
offset in part by the increase in the value of the Fund's position in such put
option or futures contract.
(b) Options on Currencies. A Fund may invest in options on currencies
traded on domestic and foreign securities exchanges in order to hedge against
currency exchange rate risks or to increase income or gain, as described above
in 'Forward Currency Exchange Contracts.'
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(c) Options on Futures Contracts. A Fund may purchase put and call options
and write covered put and call options on futures contracts on stock indices,
interest rates and currencies traded on domestic and, to the extent permitted by
the CFTC, foreign exchanges, in order to hedge all or a portion of its
investments or to increase income or gain and may enter into closing
transactions in order to terminate existing positions. There is no guarantee
that such closing transactions can be effected. An option on a stock index
futures contract, interest rate futures contract or currency futures contract,
as contrasted with the direct investment in such a contract, gives the purchaser
the right, in return for the premium paid, to assume a position in the
underlying contract at a specified exercise price at any time on or before the
expiration date of the option. Upon exercise of an option, the delivery of the
futures position by the writer of the option to the holder of the option will be
accompanied by delivery of the accumulated balance in the writer's futures
margin account. The potential loss related to the purchase of an option on a
futures contract is limited to the premium paid for the option (plus transaction
costs). While the price of the option is fixed at the point of sale, the value
of the option does change daily and the change would be reflected in the net
asset value of the Fund.
Interest Rate and Equity Swaps and Related Transactions. Certain Funds may
enter into interest rate and equity swaps and may purchase or sell (i.e., write)
interest rate and equity caps, floors and collars. A Fund expects to enter into
these transactions in order to hedge against either a decline in the value of
the securities included in the Fund's portfolio, or against an increase in the
price of the securities which it plans to purchase, or in order to preserve or
maintain a return or spread on a particular investment or portion of its
portfolio or to achieve a particular return on cash balances, or in order to
increase income or gain. Interest rate and equity swaps involve the exchange by
a Fund with another party of their respective commitments to make or receive
payments based on a notional principal amount. The purchase of an interest rate
or equity cap entitles the purchaser, to the extent that a specified index
exceeds a predetermined level, to receive payments on a contractually-based
principal amount from the party selling the interest rate or equity cap. The
purchase of an interest rate or equity floor entitles the purchaser, to the
extent that a specified index falls below a predetermined rate, to receive
payments on a contractually-based principal amount from the party selling the
interest rate or equity floor. A collar is a combination of a cap and a floor
which preserve a certain return within a predetermined range of values.
A Fund may enter into interest rate and equity swaps, caps, floors and
collars on either an asset-based or liability-based basis, depending on whether
it is hedging its assets or its liabilities, and will usually enter into
interest rate and equity swaps on a net basis (i.e., the two payment streams are
netted out), with the Fund receiving or paying, as the case may be, only the net
amount of the two payments. The net amount of the excess, if any, of a Fund's
obligations over its entitlements with respect to each interest rate or equity
swap will be accrued on a daily basis, and an amount of cash and/or liquid high
grade debt securities having an aggregate net asset value at least equal to the
accrued excess will be maintained in a segregated account by the Fund's
custodian. If a Fund enters into an interest rate or equity swap on other than a
net basis, the Fund will maintain a segregated account in the full amount
accrued on a daily basis of the Fund's obligations with respect to the swap. A
Fund will only enter into interest rate and equity swap, cap, floor or collar
transactions with counterparties the investment manager deems to be
creditworthy. The investment manager will monitor the creditworthiness of
counterparties to its interest rate and equity swap, cap, floor and collar
transactions on an ongoing basis. If there is a default by the other party to
such a transaction, a Fund will have contractual remedies pursuant to the
agreements related to the transaction. The swap market has grown substantially
in recent years with a large number of banks and investment banking firms acting
both as principals and agents utilizing standardized swap documentation. The
investment manager determined that, as a result, the swap market is liquid.
Caps, floors and collars are more recent innovations for which standardized
documentation has not yet been developed and, accordingly, they are less liquid
than swaps. To the extent a Fund sells caps, floors and collars it will maintain
in a segregated account cash and/or, cash equivalents or other liquid high grade
debt securities having an aggregate net asset value at least equal to the full
amount, accrued on a daily basis, of the Fund's obligations with respect to the
caps, floors or collars. The use of interest rate and
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equity swaps is a highly specialized activity which involves investment
techniques and risks different from those associated with ordinary portfolio
securities transactions. If the investment manager is incorrect in its forecasts
of market values, interest rates and other applicable factors, the investment
performance of a Fund would diminish compared with what it would have been if
these investment techniques were not utilized. Moreover, even if the investment
manager is correct in its forecasts, there is a risk that the swap position may
correlate imperfectly with the price of the asset or liability being hedged.
There is no limit on the amount of interest rate and equity swap
transactions that may be entered into by a Fund. These transactions do not
involve the delivery of securities or other underlying assets or principal.
Accordingly, the risk of loss with respect to interest rate and equity swaps is
limited to the net amount of payments that a Fund is contractually obligated to
make, if any. The effective use of swaps and related transactions by a Fund may
depend, among other things, on the Fund's ability to terminate the transactions
at times when the investment manager deems it desirable to do so. Because swaps
and related transactions are bilateral contractual arrangements between a Fund
and counterparties to the transactions, the Fund's ability to terminate such an
arrangement may be considerably more limited than in the case of an exchange
traded instrument. To the extent a Fund does not, or cannot, terminate such a
transaction in a timely manner, the Fund may suffer a loss in excess of any
amounts that it may have received, or expected to receive, as a result of
entering into the transaction. If the other party to a swap defaults, a Fund's
risk of loss is the net amount of payments that the Fund contractually is
entitled to receive, if any. A Fund may purchase and sell caps, floors and
collars without limitation, subject to the segregated account requirement
described above.
PORTFOLIO TURNOVER
Purchases and sales of portfolio securities may be made as considered
advisable by the investment manager in the best interests of the shareholders.
Each Fund intends to limit portfolio trading to the extent practicable and
consistent with its investment objectives. Each Fund's portfolio turnover rate
may vary from year to year, as well as within a year. Short-term gains
realized from portfolio transactions are taxable to shareholders as ordinary
income. In addition, higher portfolio turnover rates can result in corresponding
increases in portfolio transaction costs for a Fund. See 'Portfolio
Transactions' in the Statement of Additional Information.
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With respect to each of the Cash Management Fund and the New York Municipal
Money Market Fund, SBAM seeks to enhance the Fund's yield by taking advantage of
yield disparities or other factors that occur in the money market. For example,
market conditions frequently result in similar securities trading at different
prices. The Cash Management Fund and the New York Municipal Money Market Fund
may dispose of any portfolio security prior to its maturity if such disposition
and reinvestment of the proceeds are expected to enhance yield consistent with
the investment manager's judgment as to a desirable portfolio maturity structure
or if such disposition is believed to be advisable due to other circumstances or
considerations. Subsequent to its purchase, a portfolio security may be assigned
a lower rating or cease to be rated. Such an event would not require the
disposition of the instrument, but the investment manager will consider such an
event in determining whether the Cash Management Fund and the New York Municipal
Money Market Fund should continue to hold the security. The policy of each of
the Cash Management Fund and the New York Municipal Money Market Fund regarding
dispositions of portfolio securities and its policy of investing in securities
deemed to have maturities of thirteen months or less will result in high
portfolio turnover. A higher rate of portfolio turnover results in increased
transaction costs to the Cash Management Fund and the New York Municipal Money
Market Fund in the form of dealer spreads.
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SPECIAL FACTORS AFFECTING THE FUND'S INVESTMENT
IN NEW YORK MUNICIPAL OBLIGATIONS
Some of the significant financial considerations relating to the
investments of the New York Municipal Bond Fund in New York municipal securities
are summarized below. The following information constitutes only a brief
summary, does not purport to be a complete description and is largely based on
information drawn from official statements relating to securities offerings of
New York municipal obligations available as of the date of this Statement of
Additional Information. The accuracy and completeness of the information
contained in such offering statements has not been independently verified.
NEW YORK STATE
New York State Financing Activities. There are a number of methods by which
New York State (the 'State') may incur debt. Under the State Constitution, the
State may not, with limited exceptions for emergencies, undertake long-term
general obligation borrowing (i.e., borrowing for more than one year) unless the
borrowing is authorized in a specific amount for a single work or purpose by the
New York State Legislature (the 'Legislature') and approved by the voters. There
is no limitation on the amount of long-term general obligation debt that may be
so authorized and subsequently incurred by the State. With the exception of
general obligation housing bonds (which must be paid in equal annual
installments or installments that result in substantially level or declining
debt service payments, within 50 years after issuance, commencing no more than
three years after issuance), general obligation bonds must be paid in equal
annual installments or installments that result in substantially level or
declining debt service payments, within 40 years after issuance, beginning not
more than one year after issuance of such bonds.
The State may undertake short-term borrowings without voter approval (i) in
anticipation of the receipt of taxes and revenues, by issuing tax and revenue
anticipation notes ('TRANs'), and (ii) in anticipation of the receipt of
proceeds from the sale of duly authorized but unissued bonds, by issuing bond
anticipation notes ('BANs'). TRANs must mature within one year from their dates
of issuance and may not be refunded or refinanced beyond such period. BANS may
only be issued for the purposes and within the amounts for which bonds may be
issued pursuant to voter authorizations. Such BANs must be paid from the
proceeds of the sale of bonds in anticipation of which they were issued or from
other sources within two years of the date of issuance or, in the case of BANs
for housing purposes, within five years of the date of issuance.
The State may also, pursuant to specific constitutional authorization,
directly guarantee certain public authority obligations. The State Constitution
provides for the State guarantee of the repayment of certain borrowings for
designated projects of the New York State Thruway Authority, the Job Development
Authority and the Port Authority of New York and New Jersey. The State has never
been called upon to make any direct payments pursuant to such guarantees. The
constitutional provisions allowing a State-guarantee of certain Port Authority
of New York and New Jersey debt stipulates that no such guaranteed debt may be
outstanding after December 31, 1996. State-guaranteed bonds issued by the
Thruway Authority were fully retired on July 1, 1995.
Payments of debt service on State general obligation and State-guaranteed
bonds and notes are legally enforceable obligations of the State.
The State employs additional long-term financing mechanisms, lease-purchase
and contractual-obligation financing, which involve obligations of public
authorities or municipalities that are State-supported but not general
obligations of the State. Under these financing arrangements, certain public
authorities and municipalities have issued obligations to finance the
construction and rehabilitation of facilities or the acquisition and
rehabilitation of equipment, and expect to meet their debt service requirements
through the receipt of rental or other contractual payments made by the State.
Although these financing arrangements involve a contractual agreement by the
State to make payments to a public authority, municipality or other entity, the
State's obligation to make such payments is generally expressly made subject to
appropriation by the Legislature and the actual availability of
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money to the State for making the payments. The State has also entered into a
contractual-obligation financing arrangement with the New York Local Government
Assistance Corporation ('LGAC') to restructure the way the States makes certain
local aid payments. The State also participates in the issuance of certificates
of participation ('COPs') in a pool of leases entered into by the State's Office
of General Services on behalf of several State departments and agencies
interested in acquiring operational equipment, or in certain cases, real
property. Legislation enacted in 1986 established restrictions upon and
centralized State control, through the Comptroller and the Director of the
Budget, over the issuance of COPs representing the State's contractual
obligation, subject to annual appropriation by the Legislature and availability
of money, to make installment or lease-purchase payments for the State's
acquisition of such equipment or real property.
The State has never defaulted on any of its general obligation indebtedness
or its obligations under lease-purchase or contractual-obligation financing
arrangements and has never been called upon to make any direct payments pursuant
to its guarantees although there can be no assurance that such a default or call
will not occur in the future.
The State also employs moral obligations financing. Moral obligation
financing generally involves the issuance of debt by a public authority to
finance a revenue-producing project or other activity. The debt is secured by
project revenues and includes statutory provisions requiring the State, subject
to appropriation by the Legislature, to make up any deficiencies which may occur
in the issuer's debt service reserve fund. There has never been a default on any
moral obligation debt of any public authority although there can be no assurance
that such a default will not occur in the future. The State does not intend to
increase statutory authorizations for moral obligation bond programs. From 1976
through 1987, the State was called upon to appropriate and make payments
totaling $162.8 million to make up deficiencies in the debt service reserve
funds of the Housing Finance Agency pursuant to moral obligation provisions. In
the same period, the State also expended additional funds to assist the Project
Finance Agency, the Urban Development Corporation ('UDS') and other public
authorities which had moral obligation debt outstanding. The State has not been
called upon to make any payments pursuant to any moral obligations since the
1986-87 fiscal year and no such requirements are anticipated by the State during
the 1996-97 fiscal year although there can be no assurance in this regard.
The State anticipates that its capital programs will be financed, in part,
through borrowings by the State and public authorities in the 1996-97 fiscal
year. The State expects to issue $411 million in general obligation bonds
(including $153.6 million for purposes of redeeming outstanding BANs) and $154
million in general obligation commercial paper. The Legislature has also
authorized the issuance of up to $101 million in COPs during the State's 1996-97
fiscal year for equipment purchases. The projection of the State regarding its
borrowings for the 1996-97 fiscal year may change if circumstances require.
Borrowings by other public authorities pursuant to lease-purchase and
contractual-obligation financings for capital programs of the State are
projected to total $2.15 billion, including costs of issuances, reserve funds,
and other costs, net of anticipated refundings and other adjustments for 1996-97
capital projects. Included therein are borrowings by (i) DASNY for SUNY, The
City University of New York ('CUNY'), health facilities, and mental health
facilities; (ii) Thruway Authority for the Dedicated Highway and Bridge Trust
Fund and Consolidated Highway Improvement Program; (iii) UDC (doing business as
the Empire State Development Corporation) for prison and youth facilities; (iv)
the Housing Finance Agency ('HFA') for housing programs; and (v) borrowings by
the Environmental Facilities Corporation ('EFC') or other authorities. In
addition, the Legislature has authorized DASNY to refinance a $787 million
pension obligation of the State.
In the 1996 legislative session, the Legislature approved the Governor's
proposal to present to the voters in November 1996 a $1.75 billion State general
obligation bond referendum to finance various environmental improvement and
remediation projects. If the Clean Water, Clean Air Bond Act is approved by the
voters, the amount of general obligation bonds issued during the 1996-97 fiscal
year may increase above the $411 million currently included in the 1996-97
Borrowing Plan to finance a portion of this new program.
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In addition to the arrangements described above, State law provides for
State municipal assistance corporations, which are Authorities authorized to aid
financially troubled localities. The Municipal Assistance Corporation for The
City of New York ('MAC'), created to provide financing assistance to New York
City (the 'City'), is the only municipal assistance corporation created to date.
To enable MAC to pay debt service on its obligations, MAC receives, subject to
annual appropriation by the Legislature, receipts from the 4% New York State
Sales Tax for the Benefit of New York City, the State-imposed Stock Transfer Tax
and, subject to certain prior liens, certain local assistance payments otherwise
payable to the City. The legislation creating MAC also includes a moral
obligation provision. Under its enabling legislation, MAC's authority to issue
bonds and notes (other than refunding bonds and notes) expired on December 31,
1984. In 1995, the State created the Municipal Assistance Corporation for the
City of Troy ('Troy MAC'). The bonds expected to be issued by Troy MAC would not
be subject to the State's moral obligation.
State Financial Operations. During the 1982-83 recession, overall economic
activity in the State declined less than that of the nation as a whole. However,
in the calendar years 1987 through 1995, the State's rate of economic growth was
somewhat slower than that of the nation. In particular, during the 1990-91
recession and post-recession period, the economy of the State, and that of the
rest of the Northeast, was more heavily damaged than that of the nation as a
whole and has been slower to recover. The total employment growth rate in the
State has been below the national average since 1987. The unemployment rate in
the State dipped below the national rate in the second half of 1981 and remained
lower until 1991; since then, it has been higher. According to data published by
the US Bureau of Economic Analysis, during the past ten years, total personal
income in the State rose slightly faster than the national average only from
1986 through 1988.
State per capita personal income has historically been significantly higher
than the national average, although the ratio has varied substantially. Because
the City is a regional employment center for a multi-state region, state
personal income measured on a residence basis understates the relative
importance of the State to the national economy and the size of the base to
which State taxation applies.
The national economy has resumed a more robust rate of growth after a 'soft
landing' in 1995, with over 11 million jobs added nationally since early 1992.
The State economy has continued to expand, but growth remains somewhat slower
than in the nation. Although the State has added approximately 240,000 jobs
since late 1992, employment growth in the State has been hindered during recent
years by significant cutbacks in the computer and instrument manufacturing,
utility, defense, and banking industries. Government downsizing has also
moderated these job gains.
The State Division of Budget ('DOB') forecasts that national economic
growth will be quite strong in the first half of calendar 1996, but will
moderate considerably as the year progresses. The overall growth rate of the
national economy during calendar year 1996 is expected to be just slightly below
the 'consensus' of a widely followed survey of national economic forecasters.
Growth in real Gross Domestic Product during 1996 and 1997 is projected to be
moderate at 2.3 percent followed by a 2.4 percent increase in 1998, with
anticipated declines in federal spending and net exports more than offset by
increases in consumption and investment. Inflation, as measured by the Consumer
Price Index, is projected to be contained at about 3 percent due to moderate
wage growth and foreign competition. The inflation rate is expected to remain
stable at 2.9 percent in 1997 and decrease to 2.8 percent in 1998. Personal
income and wages are projected to increase by about 5 percent and to slow
accordingly in 1997 and 1998.
The forecast of the State's economy shows modest expansion during the first
half of calendar 1996, but some slowdown is projected during the second half of
the year. Although industries that export goods and services are expected to
continue to do well, growth is expected to be slowed by government cutbacks at
all levels and by tight fiscal constraints on health and social services. On an
average annual basis, employment growth in the State is expected to be up
slightly from the 1995 rate. Moderate growth is projected to continue in 1997
for employment, wages, and personal income, followed by a slight slowing in
1998. Personal income is estimated to have grown 5.2 percent in 1996, fueled in
part by an
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unusually large increase in financial sector bonus payments, and is projected to
grow 4.5 percent in 1997 and 4.2 percent in 1998. Overall employment growth will
continue at a modest rate, reflecting the moderate growth of the national
economy, continued spending restraint in government, and restructuring in the
health care, social service, and banking sectors.
There can be no assurance that these forecasts will prove to be accurate.
For example, the forecast for continued slow growth, and any resultant impact on
the State's 1996-97 Financial Plan, contains some uncertainties.
Stronger-than-expected gains in employment could lead to a significant
improvement in consumption spending. Investments could also remain robust.
Conversely, the prospect of a continuing deadlock on federal budget deficit
reduction or fears of excessively rapid economic growth could create upward
pressures on interest rates. In addition, the State economic forecast could
over- or underestimate the level of future bonus payments or inflation growth,
resulting in forecasted average wage growth that could differ significantly from
actual growth. Similarly, the State forecast could fail to correctly account for
expected declines in government and banking employment and the direction of
employment change that is likely to accompany telecommunications deregulation.
The State's current fiscal year commenced on April 1, 1996, and ends on
March 31, 1997, and is referred to herein as the State's 1996-97 fiscal year.
The State's budget for the 1996-97 fiscal year was enacted by the
Legislature on July 13, 1996, more than three months after the start of the
fiscal year. Prior to adoption of the budget, the Legislature enacted
appropriations for disbursements considered to be necessary for State operations
and other purposes, including necessary appropriations for all State-supported
debt service. The State Financial Plan for the 1996-97 fiscal year was
formulated on July 25, 1996 and is based on the State's budget as enacted by the
Legislature and signed into law by the Governor, as well as actual results for
the first quarter of the current fiscal year. The State is required to issue
three quarterly updates to the cash-basis State Financial Plan in July, October,
and January, respectively. These updates reflect analysis of actual receipts and
disbursements on a cash basis for each respective period, and contain revised
estimates of receipts and disbursements for the then current fiscal year.
The State issued its first update to the cash-basis 1996-97 State Financial
Plan (the 'Mid-Year Update') on October 25, 1996. As part of the release of the
1997-98 Executive Budget, the State updated its 1996-97 cash-basis State
Financial Plan (the 'Third Quarter Update') on January 14, 1997.
After adjustments for comparability between fiscal years, the adopted
1996-97 budget projects a year-over-year increase in General Fund disbursements
of 0.2 percent. Adjusted State Funds (excluding federal grants) disbursements
are projected to increase by 1.6 percent from the prior fiscal year. All
Government Funds projected disbursements increase by 4.1 percent over the prior
fiscal year, after adjustments for comparability.
TABLE 1
CASH DISBURSEMENT COMPARISON
1995-96 TO 1996-97
(MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
ADOPTED PERCENT
ADJUSTED BUDGET CHANGE
ACTUAL PROJECTION FROM
1995-96 1996-97 1995-96
-------- ---------- --------
<S> <C> <C> <C>
General Fund(1)........................................... 33,042 33,123 0.2
State Funds(2)............................................ 43,057 43,726 1.6
All Governmental Funds(2)................................. 63,499 66,125 4.1
</TABLE>
- ------------
Source: State Division of the Budget.
(footnotes continued on next page)
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(footnotes continued from previous page)
(1) 1995-96 reported totals are increased to reflect the use of $271 million in
LGAC bond proceeds to finance education aid that otherwise would have been
financed in the General Fund, and the reclassification of $92 million of
spending formerly budgeted in Special Revenue Funds that is now budgeted in
the General Fund for 1996-97.
(2) 1995-96 reported totals are increased to reflect the use of $271 million in
LGAC bond proceeds to finance education aid that otherwise would have been
financed in the General Fund.
The 1996-97 State Financial Plan is projected to be balanced on a cash
basis. As compared to the Governor's proposed budget as revised on March 20,
1996, the State's adopted budget for 1996-97 increases General Fund spending by
$842 million, primarily from increases for education, special education and
higher education ($563 million). The balance represents funding increases to a
variety of other programs, including community projects and increased assistance
to fiscally distressed cities. Resources used to fund these additional
expenditures include $540 million in increased revenues projected for 1996-97
based on higher-than-projected tax collections during the first half of calendar
1996, $110 million in projected receipts from a new State tax amnesty program,
and other resources including certain non-recurring resources. The total amount
of non-recurring resources included in the 1996-97 State budget is projected by
DOB to be $1.3 billion, or 3.9 percent of total General Fund receipts.
The economic and financial condition of the State may be affected by
various financial, social, economic and political factors. Those factors can be
very complex, may vary from fiscal year to fiscal year, and are frequently the
result of actions taken not only by the State and its agencies and
instrumentalities, but also by entities, such as the federal government, that
are not under the control of the State. In addition, the State Financial Plan is
based upon forecasts of national and State economic activity. Economic forecasts
have frequently failed to predict accurately the timing and magnitude of changes
in the national and the State economies. The Division of Budget believes that
its projections of receipts and disbursements relating to the current State
Financial Plan, and the assumptions on which they are based, are reasonable.
There can be no assurance that these forecasts will prove to be accurate. For
example, actual results could differ materially and adversely from the projected
results and those projections may be changed materially and adversely from time
to time. There are also risks and uncertainties concerning the future-year
impact of actions taken in the 1996-97 budget.
The following discussion summarizes updates to the 1996-97 State Financial
Plan and recent fiscal years with particular emphasis on the State's General
Fund. Pursuant to statute, the State updates the financial plan at least on a
quarterly basis. Due to changing economic conditions and information, public
statements or reports may be released by the Governor, members of the
Legislature, and their respective staffs, as well as others involved in the
budget process from time to time. Those statements or reports may contain
predictions, projections or other items of information relating to the State's
financial condition, including potential operating results for the current
fiscal year and projected baseline gaps for future fiscal years, that may vary
materially and adversely from the information provided herein.
The General Fund is the principal operating fund of the State and is used
to account for all financial transactions, except those required to be accounted
for in another fund. It is the State's largest fund and receives almost all
State taxes and other resources not dedicated to particular purposes. In the
State's 1996-97 fiscal year, the General Fund is expected by the State to
account for approximately 47 percent of total governmental-fund receipts and 71
percent of total State Funds disbursements. General Fund moneys are also
transferred to other funds, primarily to support certain capital projects and
debt service payments in other fund types.
The General Fund is projected to be balanced on a cash basis for the
1996-97 fiscal year. Total receipts and transfers from other funds are projected
to be $33.17 billion, an increase of $365 million from the prior fiscal year.
Total General Fund disbursements and transfers to
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other funds are projected to be $33.12 billion, an increase of $444 million from
the total in the prior fiscal year.
As of the Third Quarter Update, the 1996-97 General Fund Financial Plan
continues to be balanced. The Division of the Budget projects that, prior to
taking the actions described below, the General Fund Financial Plan would have
shown an operating surplus of approximately $1.3 billion. These actions include
implementing reduced personal income tax withholding to reflect the impact of
tax reduction actions which took effect on January 1, 1997. This has the effect
of raising taxpayer's current take-home pay rather than requiring taxpayers to
wait until the spring of 1998 for larger refunds. The Financial Plan assumes the
use of $250 million for this purpose. In addition, $943 million is projected to
be used to pay tax refunds during the 1996-97 fiscal year or reserved to pay
refunds during the 1997-98 fiscal year, which produces a benefit for the 1997-98
Financial Plan (see below). Finally, $65 million is projected to be deposited
into the Tax Stabilization Reserve Fund (the 'TSRF') (in addition to the
required deposit of $15 million), increasing the cash balance in that fund to
$317 million by the end of 1996-97.
The projected surplus results primarily from growth in the underlying
forecast for projected receipts. As compared to the enacted budget, revenues are
expected to increase by more than $1 billion, while disbursements are expected
to fall by $228 million. These changes from original Financial Plan projections
reflect actual results through December 1996 as well as modified economic and
social services caseload projections for the balance of the fiscal year.
The General Fund closing balance is expected to be $358 million at the end
of 1996-97. Of this amount, $317 million would be on deposit in the TSRF, while
another $41 million would remain on deposit in the Contingency Reserve Fund (the
'CRF') as a reserve for litigation or other unbudgeted costs to the Financial
Plan. The TSRF had an opening balance of $237 million, to be supplemented by a
required payment of $15 million and an extraordinary deposit of $65 million from
surplus 1996-97 monies. The $9 million on deposit in the Revenue Accumulation
Fund will be drawn down as planned. A planned deposit of $85 million to the CRF,
projected to be received from contractual efforts to maximize federal revenue,
is no longer expected to be deposited this year.
In addition to the General Fund, the State Financial Plan includes Special
Revenue Funds, Capital Projects Funds and Debt Service Funds.
Special Revenue Funds are used to account for the proceeds of specific
revenue sources such as Federal grants that are legally restricted, either by
the Legislature or outside parties, to expenditures for specified purposes.
Although activity in this fund type is expected to comprise more than 43 percent
of total government funds receipts and disbursements in the 1996-97 fiscal year,
about three-quarters of that activity relates to Federally-funded programs.
Projected receipts in this fund type total $28.04 billion, an increase of
$2.43 billion (9.5 percent) over the prior year. Projected disbursements in this
fund type total $28.51 billion, an increase of $2.25 billion (8.6 percent) over
1995-96 levels. Disbursements from federal funds, primarily the federal share of
Medicaid and other social services programs, are projected to total $21.31
billion in the 1996-97 fiscal year. Remaining projected spending of $7.20
billion primarily reflects aid to SUNY supported by tuition and dormitory fees,
education aid funded from lottery receipts, operating aid payments to the
Metropolitan Transportation Authority (the 'MTA') funded from the proceeds of
dedicated transportation taxes, and costs of a variety of self-supporting
programs which deliver services financed by user fees.
Capital Projects Funds are used to account for the financial resources used
for the acquisition, construction, or rehabilitation of major State capital
facilities and for capital assistance grants to certain local governments or
public authorities. This fund type consists of the Capital Projects Fund, which
is supported by tax dollars transferred from the General Fund, and 37 other
capital funds established to distinguish specific capital construction purposes
supported by other revenues. In the 1996-97 fiscal year, activity in these funds
is expected to comprise 6 percent of total governmental receipts and
disbursements.
Total receipts in this fund type are projected at $3.58 billion.
Disbursements from this fund type are projected to be $3.85 billion, a decrease
of $120 million (3.1 percent) over
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prior-year levels, due in part to a reclassification of economic development
projects to the category of grants to local governments in the General Fund. The
Dedicated Highway and Bridge Trust Fund is the single largest dedicated fund,
comprising an estimated $920 million (24 percent) of the activity in this fund
type. Total spending for capital projects will be financed through a combination
of sources: federal grants (28 percent), public authority bond proceeds (34
percent), general obligation bond proceeds (12 percent), and pay-as-you-go
revenues (26 percent).
Debt Service Funds are used to account for the payment of principal of, and
interest on, long-term debt of the State and to meet commitments under
lease-purchase and other contractual-obligation financing arrangements. This
fund is expected to comprise 4 percent of total governmental fund receipts and
disbursements in the 1996-97 fiscal year. Receipts in these funds in excess of
debt service requirements are transferred to the General Fund and Special
Revenue Funds, pursuant to law.
The Debt Service Fund type consists of the General Debt Service Fund, which
is supported primarily by tax dollars transferred from the General Fund, and
other funds established to accumulate moneys for the payment of debt service. In
the 1996-97 fiscal year, total disbursements in this fund type are projected at
$2.58 billion, an increase of $164 million or 6.8 percent. The projected
transfer from the General Fund of $1.59 billion is expected to finance 62
percent of these payments.
The remaining payments are expected to be financed by pledged revenues,
including $1.83 billion in taxes, $234 million in dedicated fees, and $2.35
billion in patient revenues, including transfers of federal and state
reimbursements and state dedicated taxes. After required impoundment for debt
service, $3.7 billion is expected to be transferred to the General Fund and
other funds in support of State operations. The largest transfer -- $1.9
billion -- is made to the Special Revenue Fund type in support of operations of
the mental hygiene agencies. Another $1.4 billion in excess sales taxes is
expected to be transferred to the General Fund, following payment of projected
debt service on LGAC bonds.
A narrative description of cash-basis results in the General Fund for the
prior three fiscal years is presented below, as well as a brief summary of
activity in the Special Revenue Funds, Capital Projects Funds and Debt Service
Funds for the prior three fiscal years.
New York State's financial operations have improved during recent fiscal
years. During the period 1989-90 through 1991-92, the State incurred General
Fund operating deficits that were closed with receipts from the issuance of
TRANs. A national recession, followed by the lingering economic slowdown in the
New York and regional economy, resulted in repeated shortfalls in receipts and
three budget deficits during those years. During its last four fiscal years,
however, the State has recorded balanced budgets on a cash basis, with positive
fund balances as described below.
The State ended its 1995-96 fiscal year on March 31, 1996 with a General
Fund cash surplus. The Division of the Budget reported that revenues exceeded
projections by $270 million, while spending for social service programs was
lower than forecast by $120 million and all other spending was lower by $55
million. From the resulting benefit of $445 million, a $65 million voluntary
deposit was made into the TSRF, and $380 million was used to reduce 1996-97
Financial Plan liabilities by accelerating 1996-97 payments, deferring 1995-96
revenues, and making a deposit to the tax refund reserve account.
The General Fund closing fund balance was $287 million, an increase of $129
million from 1994-95 levels. The $129 million change in fund balance is
attributable to the $65 million voluntary deposit to the TSRF, a $15 million
required deposit to the TSRF, a $40 million deposit to the CRF, and a $9 million
deposit to the Revenue Accumulation Fund. The closing fund balance includes $237
million on deposit in the TSRF, to be used in the event of any future General
Fund deficit as provided under the State Constitution and State Finance Law. In
addition, $41 million is on deposit in the CRF. The CRF was established in State
fiscal year 1993-94 to assist the State in financing the costs of extraordinary
litigation. The remaining $9 million reflects amounts on deposit in the Revenue
Accumulation Fund. This fund was created to hold certain tax receipts
temporarily before their deposit to other accounts. In addition, $678 million
was on deposit in the tax refund reserve account, of which
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$521 million was necessary to complete the restructuring of the State's cash
flow under the LGAC program.
General Fund receipts totaled $32.81 billion, a decrease of 1.1 percent
from 1994-95 levels. This decrease reflects the impact of tax reductions enacted
and effective in both 1994 and 1995. General Fund disbursements totaled $32.68
billion for the 1995-96 fiscal year, a decrease of 2.2 percent from 1994-95
levels. Mid-year spending reductions, taken as part of a management review
undertaken in October at the direction of the Governor, yielded savings from
Medicaid utilization controls, office space consolidation, overtime and
contractual expense reductions, and statewide productivity improvements achieved
by State agencies. Together with decreased social services spending, this
management review accounts for the bulk of the decline in spending.
The State ended its 1994-95 fiscal year with the General Fund in balance.
The $241 million decline in the fund balance reflects the planned use of $264
million from the CRF, partially offset by the required deposit of $23 million to
the TSRF. In addition, $278 million was on deposit in the tax refund reserve
account, $250 million of which was deposited to continue the process of
restructuring the State's cash flow as part of the LGAC program. The closing
fund balance of $158 million reflects $157 million in the TSRF and $1 million in
the CRF.
General Fund receipts totaled $33.16 billion, an increase of 2.9 percent
from 1993-94 levels. General Fund disbursements totaled $33.40 billion for the
1994-95 fiscal year, an increase of 4.7 percent from the previous fiscal year.
The increase in disbursements was primarily the result of one-time litigation
costs for the State, funded by the use of the CRF, offset by $188 million in
spending reductions initiated in January 1995 to avert a potential gap in the
1994-95 State Financial Plan. These actions included savings from a hiring
freeze, halting the development of certain services, and the suspension of
non-essential capital projects.
The State ended its 1993-94 fiscal year with a General Fund cash surplus,
primarily the result of an improving national economy, State employment growth,
tax collections that exceeded earlier projections and disbursements that were
below expectations. A deposit of $268 million was made to the CRF, with a
withdrawal during the year of $3 million, and a deposit of $67 million was made
to the TSRF. These three transactions result in the change in fund balance of
$332 million. In addition, a deposit of $1.14 billion was made to the tax refund
reserve account, of which $1.03 billion was available for budgetary purposes in
the 1994-95 fiscal year. (For more information on the personal income tax refund
reserve account, see Table 5.) The remaining $114 million was redeposited in the
tax refund reserve account at the end of the State's 1994-95 fiscal year to
continue the process of restructuring the State's cash flow as part of the LGAC
program. The General Fund closing balance was $399 million, of which $265
million was on deposit in the CRF and $134 million in the TSRF. The CRF was
initially funded with a transfer of $100 million attributable to a positive
margin recorded in the 1992-93 fiscal year.
General Fund receipts totaled $32.23 billion, an increase of 2.6 percent
from 1992-93 levels. General Fund disbursements totaled $31.90 billion for the
1993-94 fiscal year, 3.5 percent higher than the previous fiscal year. Receipts
were higher in part due to improved tax collections from renewed State economic
growth, although the State continued to lag behind the national economic
recovery. Disbursements were higher due in part to increased local assistance
costs for school aid and social services, accelerated payment of certain
Medicaid expenses, and the cost of an additional payroll for State employees.
Activity in the three other governmental funds has remained relatively
stable over the last three fiscal years, with federally-funded programs
comprising approximately two-thirds of these funds. The most significant change
in the structure of these funds has been the redirection, beginning in the
1993-94 fiscal year, of a portion of transportation-related revenues from the
General Fund to two new dedicated funds in the Special Revenue and Capital
Projects Fund types. These revenues are used to support the capital programs of
the Department of Transportation and the MTA.
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In the Special Revenue Funds, disbursements increased from $22.72 billion
to $26.26 billion over the last three years, primarily as a result of increased
costs for the federal share of Medicaid. Other activity reflected dedication of
taxes to a new fund for mass transportation, new lottery games, and new fees for
criminal justice programs.
Disbursements in the Capital Projects Funds grew from $3.10 billion to
$3.97 billion over the last three years, as spending for transportation and
mental hygiene programs increased, partially offset by declines for corrections
and environmental programs. The composition of this fund type's receipts also
changed as the dedicated transportation taxes began to be deposited, general
obligation bond proceeds declined substantially, federal grants remained stable,
and reimbursements from public authority bonds (primarily transportation
related) increased. The increase in the negative fund balance in 1994-95
resulted from delays in reimbursements caused by delays in the timing of public
authority bond sales.
Activity in the Debt Service Funds reflected increased use of bonds during
the three-year period for improvements to the State's capital facilities and the
continued implementation of the LGAC fiscal reform program. The increases were
moderated by the refunding savings achieved by the State over the last several
years using strict present value savings criteria. The growth in LGAC debt
service was offset by reduced short-term borrowing costs reflected in the
General Fund.
The economic and financial condition of the State may be affected by
various financial, social, economic and political factors. These factors can be
very complex, may vary from fiscal year to fiscal year, and are frequently the
result of actions taken not only by the State and its agencies and
instrumentalities, but also by entities, such as the federal government, that
are not under the control of the State. For example, various proposals relating
to federal tax and spending policies that are currently being publicly discussed
and debated could, if enacted, have a significant impact on the State's
financial condition in the current and future fiscal years. Because of the
uncertainty and unpredictability of the changes, their impact cannot, as a
practical matter, be included in the assumptions underlying the State's
projections at this time.
The State Financial Plan is based upon forecasts of national and State
economic activity developed through both internal analysis and review of State
and national economic forecasts prepared by commercial forecasting services and
other public and private forecasters. Economic forecasts have frequently failed
to predict accurately the timing and magnitude of changes in the national and
the State economies. Many uncertainties exist in forecasts of both the national
and State economies, including consumer attitudes toward spending, the extent of
corporate and governmental restructuring, federal fiscal and monetary policies,
the level of interest rates, and the condition of the world economy, which could
have an adverse effect on the State. There can be no assurance that the State
economy will not experience results in the current fiscal year that are worse
than predicted, with corresponding material and adverse effects on the State's
projections of receipts and disbursements.
Projections of total State receipts in the State Financial Plan are based
on the State tax structure in effect during the fiscal year and on assumptions
relating to basic economic factors and their historical relationships to State
tax receipts. In preparing projections of State receipts, economic forecasts
relating to personal income, wages, consumption, profits and employment have
been particularly important. The projection of receipts from most tax or revenue
sources is generally made by estimating the change in yield of such tax or
revenue source caused by economic and other factors, rather than by estimating
the total yield of such tax or revenue source from its estimated tax base. The
forecasting methodology, however, ensures that State fiscal year estimates for
taxes that are based on a computation of annual liability, such as the business
and personal income taxes, are consistent with estimates of total liability
under such taxes.
Projections of total State disbursements are based on assumptions relating
to economic and demographic factors, levels of disbursements for various
services provided by local governments (where the cost is partially reimbursed
by the State), and the results of various administrative and statutory
mechanisms in controlling disbursements for State operations.
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Factors that may affect the level of disbursements in the fiscal year include
uncertainties relating to the economy of the nation and the State, the policies
of the federal government, and changes in the demand for and use of State
services.
The Division of the Budget believes that its projections of receipts and
disbursements relating to the current State Financial Plan, and the assumptions
on which they are based, are reasonable. Actual results, however, could differ
materially and adversely from the projections set forth in this Annual
Information Statement. In the past, the State has taken management actions and
made use of internal sources to address potential State Financial Plan
shortfalls, and DOB believes it could take similar actions should variances
occur in its projections for the current fiscal year.
In recent years, State actions affecting the level of receipts and
disbursements, the relative strength of the State and regional economy, actions
of the federal government and other factors, have created structural budget gaps
for the State. These gaps resulted from a significant disparity between
recurring revenues and the costs of maintaining or increasing the level of
support for State programs. To address a potential imbalance in any given fiscal
year, the State would be required to take actions to increase receipts and/or
reduce disbursements as it enacts the budget for that year, and under the State
Constitution, the Governor is required to propose a balanced budget each year.
There can be no assurance, however, that the Legislature will enact the
Governor's proposals or that the State's actions will be sufficient to preserve
budgetary balance in a given fiscal year or to align recurring receipts and
disbursements in future fiscal years.
The Governor presented his 1997-98 Executive Budget to the Legislature on
January 14, 1997. The Executive Budget also contains financial projections for
the State's 1998-99 and 1999-2000 fiscal years, detailed estimates of receipts
and an updated Capital Plan. It is expected that the Governor will prepare
amendments to his Executive Budget as permitted under law and that these
amendments will be reflected in a revised Financial Plan to be released on or
before February 13, 1997. There can be no assurance that the Legislature will
enact the Executive Budget as proposed by the Governor into law, or that the
State's adopted budget projections will not differ materially and adversely from
the projected budget.
The 1997-98 Financial Plan projects balance on a cash basis in the General
Fund. It reflects a continuing strategy of substantially reduced State spending,
including program restructurings, reductions in social welfare spending, and
efficiency and productivity initiatives. Total General Fund receipts and
transfers from other funds are projected to be $32.88 billion, a decrease of $88
million from total receipts projected in the current fiscal year. Total General
Fund disbursements and transfers to other funds are projected to be $32.84
billion, a decrease of $56 million from spending totals projected for the
current fiscal year. As compared to the 1996-97 State Financial Plan, the
Executive Budget proposes a year-to-year decline in General Fund spending of 0.2
percent. State funds spending (i.e., General Fund plus other dedicated funds,
with the exception of federal aid) is projected to grow by 1.2 percent. Spending
from All Governmental Funds (excluding transfers) is proposed to increase by 2.2
percent from the prior fiscal year.
The Executive Budget proposes $2.3 billion in actions to balance the
1997-98 Financial Plan. Before reflecting any actions proposed by the Governor
to restrain spending, General Fund disbursements for 1997-98 were projected to
grow by approximately 4 percent. This increase would have resulted from growth
in Medicaid, higher fixed costs such as pensions and debt service, collective
bargaining agreements, inflation, and the loss of non-recurring resources that
offset spending in 1996-97. General Fund receipts were projected to fall by
roughly 3 percent. This reduction would have been attributable to modest growth
in the State's economy and underlying tax base, the loss of non-recurring
revenues available in 1996-97 and implementation of previously enacted tax
reduction programs.
The Executive Budget proposes to close this gap primarily through a series
of spending reductions and Medicaid cost containment measures, the use of a
portion of the 1996-97 projected budget surplus, and other actions. The 1997-98
Financial Plan projects receipts of $32.88 billion and spending of $32.84
billion, allowing for a deposit of $24 million into the
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CRF and a year-ending CRF reserve of $65 million, and a required repayment of
$15 million to the TSRF.
The Division of the Budget believes that the economic assumptions and
projections of receipts and disbursements accompanying the 1997-98 Executive
Budget are reasonable. However, the economic and financial condition of the
State may be affected by various financial, social, economic and political
factors. Those factors can be very complex, can vary from fiscal year to fiscal
year, and are frequently the result of actions taken not only by the State but
also by entities, such as the federal government, that are outside the State's
control. Because of the uncertainty and unpredictability of changes in these
factors, their impact cannot be fully included in the assumptions underlying the
State's projections. There can be no assurance that the State economy will not
experience results that are worse than predicted, with corresponding material
and adverse effects on the State's financial projections.
To make progress toward addressing recurring budgetary imbalances, the
1997-98 Executive Budget proposes significant actions to align recurring
receipts and disbursements in future fiscal years. However, there can be no
assurance that the Legislature will enact the Governor's proposals or that the
State's actions will be sufficient to preserve budgetary balance or to align
recurring receipts and disbursements in either 1997-98 or in future fiscal
years.
In addition, there has been discussion of additional tax reductions, beyond
those reflected in the State's current projections for 1997-98 and the out years
that, if enacted, could make it more difficult to achieve budget balance over
this period. In particular, modifying the State's sales tax treatment of
clothing has been discussed. The State now receives approximately $700 million
annually under the current tax statutes from taxation on clothing, and
localities receive a roughly equivalent amount.
Uncertainties with regard to both the economy and potential decisions at
the federal level add further pressure on future budget balance in New York
State. Risks to the Financial Plan include either a financial market or broader
economic 'correction' during the period, a risk heightened by the relatively
lengthy expansions currently underway. In addition, a normal 'forecast error' of
one percentage point in the expected growth rate could raise or lower receipts
by $600 million during the last year of the projection period. Potential changes
to federal tax law could alter the federal definitions of income on which many
State taxes rely. Similarly, the Financial Plan assumes no significant federal
disallowances or other actions which could affect State finances.
On August 22, 1996, the President signed into law the Personal
Responsibility and Work Opportunity Reconciliation Act of 1996 (the '1996
Welfare Act'). This federal legislation fundamentally changed the programmatic
and fiscal responsibilities for administration of welfare programs at the
federal, state and local levels. The new law abolishes the federal Aid to
Families with Dependent Children program ('AFDC'), and creates a new Temporary
Assistance to Needy Families program ('TANF') funded with a fixed federal block
grant to states. The new law also imposes (with certain exceptions) a five-year
durational limit on TANF recipients, requires that virtually all recipients be
engaged in work or community service activities within two years of receiving
benefits, and limits assistance provided to certain immigrants and other classes
of individuals. States are required to meet work activity participation targets
for their TANF caseload; these requirements are phased in over time. States that
fail to meet these federally mandated job participation rates, or that fail to
conform with certain other federal standards, face potential sanctions in the
form of a reduced federal block grant.
On October 16, 1996, the Governor submitted the State's TANF implementation
plan to the federal government as required under the new federal welfare law. On
December 13, 1996, the State's plan was approved by the federal government.
Legislation will be required to implement the State's TANF plan, and the
Governor has introduced legislation necessary to conform with federal law.
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States are required to comply with the new federal welfare reform law no
later than July 1, 1997. There can be no assurances that the State Legislature
will enact welfare reform proposals as submitted by the Governor and as required
under federal law.
An additional risk to the 1997-98 State Financial Plan arises from the
potential impact of certain litigation now pending against the State, which
could produce adverse effects on the State's projections of receipts and
disbursements. However, the Division of the Budget believes that certain court
decisions discussed in the section entitled 'Litigation' below will not have a
material impact on the current Financial Plan although there can be no assurance
in this regard. Specifically, in the case of Tug Buster Bouchard et al. v.
Wetzler, the Division of the Budget believes that the court's decision, as
interpreted by the State, will reduce tax revenues by approximately $5 million
in 1997-98 and $2 million thereafter.
On January 13, 1992, Standard & Poor's ('S&P') lowered its rating on the
State's general obligation bonds from A to A - and, in addition, reduced its
ratings on the State's moral obligation, lease purchase, guaranteed and
contractual obligation debt. S&P also continued its negative rating outlook
assessment on State general obligation debt. On April 26, 1993 S&P revised the
rating outlook assessment to stable. Prior to this, on March 26, 1990, S&P
lowered its rating of all of the State's outstanding general obligation bonds
from AA- to A. Previous S&P ratings were AA- from August, 1987 to March, 1990
and A+ from November, 1982 to August, 1987. On February 14, 1994, S&P revised
its outlook to positive and, on August 5, 1995, confirmed its A - rating. On
January 6, 1992, Moody's reduced its ratings on outstanding limited-liability
State lease purchase and contractual obligations from A to Baa1. On February 10,
1997, Moody's confirmed its A2 rating on the State's general obligation
long-term indebtedness.
On June 6, 1990, Moody's changed its ratings on all of the State's
outstanding general obligation bonds from A1 to A, the rating having been A1
since May 27, 1986. On November 12, 1990, Moody's confirmed the A rating.
Authorities. The fiscal stability of the State is related, in part, to the
fiscal stability of its Public authorities, which generally have responsibility
for financing, constructing and operating revenue-producing public benefit
facilities. Public authorities are not subject to the constitutional
restrictions on the incurrence of debt which apply to the State itself, and may
issue bonds and notes within the amounts of, and as otherwise restricted by,
their legislative authorization. The State's access to the public credit markets
could be impaired, and the market price of its outstanding debt may be
materially adversely affected, if any of its public authorities were to default
on their respective obligations. As of September 30, 1995 there were 17
Authorities that had outstanding debt of $100 million or more, and the aggregate
outstanding debt, including refunding bonds, of all state Public authorities was
$73.45 billion.
There are numerous public authorities, with various responsibilities,
including those which finance, construct and/or operate revenue producing public
facilities. Public authority operating expenses and debt service costs are
generally paid by revenues generated by the projects financed or operated, such
as tolls charged for the use of highways, bridges or tunnels, rentals charged
for housing units, and charges for occupancy at medical care facilities. In
addition, State legislation authorizes several financing techniques for public
authorities. Also, there are statutory arrangements providing for State local
assistance payments otherwise payable to localities to be made under certain
circumstances to public authorities. Although the State has no obligation to
provide additional assistance to localities whose local assistance payments have
been paid to public authorities under these arrangements, if local assistance
payments are so diverted the affected localities could seek additional State
assistance. Some authorities also receive monies from State appropriations to
pay for the operating costs of certain of their programs. As described below,
the MTA receives the bulk of this money in order to carry out mass transit and
commuter services.
Metropolitan Transportation Authority. The MTA oversees the operation of
the City's subway and bus lines by its affiliates, the New York City Transit
Authority and the Manhattan and Bronx Surface Transit Operating Authority
(collectively, the 'TA'). The MTA operates certain commuter rail and bus lines
in the New York Metropolitan area through MTA's subsidiaries, the Long Island
Rail Road Company, the Metro-North Commuter Railroad Company and the
Metropolitan Suburban Bus Authority. In addition,
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the Staten Island Rapid Transit Operating Authority, an MTA subsidiary, operates
a rapid transit line on Staten Island. Through its affiliated agency, the
Triborough Bridge and Tunnel Authority (the 'TBTA'), the MTA operates certain
intrastate toll bridges and tunnels. Because fare revenues are not sufficient to
finance the mass transit portion of these operations, the MTA has depended, and
will continue to depend for operating support upon a system of State, local
government and TBTA support, and, to the extent available, Federal operating
assistance, including loans, grants and operating subsidies. If current revenue
projections are not realized and/or operating expenses exceed current
projections, the TA or commuter railroads may be required to seek additional
State assistance, raise fares or take other actions.
Since 1980, the State has enacted several taxes -- including a surcharge on
the profits of banks, insurance corporations and general business corporations
doing business in the 12-county Metropolitan Transportation Region served by the
MTA and a special one-quarter of 1 percent regional sales and use tax -- that
provide revenues for mass transit purposes, including assistance to the MTA. In
addition, since 1987, State law has required that the proceeds of a one quarter
of 1% mortgage recording tax paid on certain mortgages in the Metropolitan
transportation Region be deposited in a special MTA fund for operating or
capital expenses. Further, in 1993 the State dedicated a portion of the State
petroleum business tax to fund operating or capital assistance to the MTA. For
the 1996-97 fiscal year, total State assistance to the MTA is estimated by the
State to be approximately $1.09 billion.
State legislation accompanying the 1996-97 adopted State budget authorized
the MTA, TBTA and TA to issue an aggregate of $6.5 billion in bonds to finance a
portion of a new $11.98 billion MTA capital plan for the 1995 through 1999
calendar years (the '1995-99 Capital Program'), and authorized the MTA to submit
the 1995-99 Capital Program to the Capital Program Review Board for approval.
Such plan, once approved by the MTA Capital Program Review Board, will supersede
the MTA's 1992-96 Capital Program. The MTA expects such approval before the end
of the 1997 legislative session. In the interim, the MTA will proceed with
financings for projects approved under the MTA's 1992-96 Capital Program, as
well as a subset of the 1997 portion of the 1995-96 Capital Program using
federal, New York City and other non-bonded sources of funds. This is the fourth
capital plan since the Legislature authorized procedures for the adoption,
approval and amendment of MTA capital programs and is designed to upgrade the
performance of the MTA's transportation systems by investing in new rolling
stock, maintaining replacement schedules for existing assets and bringing the
MTA system into a state of good repair. The 1995-99 Capital Program assumes the
issuance of an estimated $5.1 billion in bonds under this $6.5 billion aggregate
bonding authority. The remainder of the plan is projected to be financed through
assistance from the State, the federal government, and the City of New York, and
from various other revenues generated from actions taken by the MTA.
There can be no assurance that all the necessary governmental actions for
the 1995-99 Capital Program will be taken, that funding sources currently
identified will not be decreased or eliminated, or that the 1995-99 Capital
Program, or parts thereof, will not be delayed or reduced. If the 1995-99
Capital Program is delayed or reduced, ridership and fare revenues may decline,
which could, among other things, impair the MTA's ability to meet its operating
expenses without additional assistance.
Localities. Certain localities outside the City have experienced financial
problems and have requested and received additional State assistance during the
last several State fiscal years. The potential impact on the State of any future
requests by localities for additional assistance is not included in the
projections of the State's receipts and disbursements for the State's 1996-97
fiscal year.
Fiscal difficulties experienced by the City of Yonkers resulted in the
re-establishment of the Financial Control Board for the City of Yonkers by the
State in 1984. That Board is charged with oversight of the fiscal affairs of
Yonkers. Future actions taken by the State to assist Yonkers could result in
increased State expenditures for extraordinary local assistance.
Beginning in 1990, the City of Troy experienced a series of budgetary
deficits that resulted in the establishment of a Supervisory Board for the City
of Troy in 1994. The Supervisory Board's powers were increased in 1995, when
Troy MAC was created to help
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Troy avoid default on certain obligations. The legislation creating Troy MAC
prohibits the City of Troy from seeking federal bankruptcy protection while Troy
MAC bonds are outstanding.
Seventeen municipalities received extraordinary assistance during the 1996
legislative session through $50 million in special appropriations targeted for
distressed cities.
Municipal Indebtedness. Municipalities and school districts have engaged in
substantial short-term and long-term borrowings. In 1994, the total indebtedness
of all localities in the State other than the City was approximately $17.7
billion. A small portion (approximately $82.9 million) of that indebtedness
represented borrowing to finance budgetary deficits and was issued pursuant to
State enabling legislation. State law requires the Comptroller to review and
make recommendations concerning the budgets of those local government units
other than the City authorized by State law to issue debt to finance deficits
during the period that such deficit financing is outstanding. Fifteen localities
had outstanding indebtedness for deficit financing at the close of their fiscal
year ending in 1994.
From time to time, Federal expenditure reductions could reduce, or in some
cases eliminate, Federal funding of some local programs and accordingly might
impose substantial increased expenditure requirements on affected localities. If
the State, the City or any of the Authorities were to suffer serious financial
difficulties jeopardizing their respective access to the public credit markets,
the marketability of notes and bonds issued by localities within the State could
be adversely affected. Localities also face anticipated and potential problems
resulting from certain pending litigation, judicial decisions and long-range
economic trends. Long-range potential problems of declining urban population,
increasing expenditures and other economic trends could adversely affect certain
localities and require increasing State assistance in the future.
Litigation. Certain litigation pending against the State or its officers or
employees could have a substantial or long-term adverse effect on State
finances. Among the more significant of these cases are those that involve: (i)
two challenges to regulations promulgated by the Superintendent of Insurance
establishing excess medical malpractice premium rates for 1986-87 through
1995-96 and 1996-97 fiscal years, respectively; (ii) several challenges to
provisions of Chapter 81 of the Laws of 1995 which after the nursing home
Medicaid reimbursement methodology; (iii) the validity of agreements and
treaties by which various Indian tribes transferred title to the State of
certain land in central and upstate New York; (iv) challenges to the practice of
using patients' Social Security benefits for the costs of care of patients of
State Office of Mental Health facilities; (v) an action against State and City
officials alleging that the present level of shelter allowance for public
assistance recipients is inadequate under statutory standards to maintain proper
housing; (vi) challenges to the practice of reimbursing certain Office of Mental
Health patient care expenses from the client's Social Security benefits; (vii)
alleged responsibility of State officials to assist in remedying racial
segregation in the City of Yonkers; (viii) alleged responsibility of the State
Department of Environmental Conservation for a plaintiff's inability to complete
construction of a cogeneration facility in a timely fashion and the damages
suffered thereby; (ix) challenges to the promulgation of the State's proposed
procedure to determine the eligibility for and nature of home care services for
Medicaid recipients; (x) a challenge to State implementation of a program which
reduces Medicaid benefits to certain home-relief recipients; (xi) a challenge to
the constitutionality of petroleum business tax assessments authorized by Tax
Law SS 301; (xii) an action for reimbursement from the State for certain costs
arising out of the provision of preschool services and programs for children
with handicapping conditions, pursuant to Sections 4410 (10) and (11) of the
Education Law; and (xiii) a challenge to the enactment of the Clean Water/Clean
Air Bond Act of 1996 and its impending legislation.
Adverse developments in the proceedings described above or the initiation
of new proceedings could affect the ability of the State to maintain a balanced
1996-97 State Financial Plan. In its Notes to its General Purpose Financial
Statements for the fiscal year ended March 31, 1996, the State reports its
estimated liability for awards and anticipated unfavorable judgments at $474
million. There can be no assurance that an adverse decision in any of the above
cited proceedings would not exceed the amount of the 1996-97 State
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Financial Plan reserves for the payment of judgments and, therefore, could
affect the ability of the State to maintain a balanced 1996-97 State Financial
Plan.
NEW YORK CITY
The fiscal health of the State may also be impacted by the fiscal health of
its localities, particularly the City, which continues to require significant
financial assistance from the State. The City depends on State aid both to
enable the City to balance its budget and to meet its cash requirements. The
State could also be affected by the ability of the City to market its securities
successfully in the public credit markets. The City has achieved balanced
operating results for each of its fiscal years since 1981 as reported in
accordance with the then-applicable GAAP standards. The City's financial plans
are usually prepared quarterly, and the annual financial report for its most
recent completed fiscal year is prepared at the end of October of each year.
In response to the City's fiscal crisis in 1975, the State took action to
assist the City in returning to fiscal stability. Among these actions, the State
established the MAC to provide financing assistance to the City. The State also
enacted the New York State Financial Emergency Act for The City of New York (the
'Financial Emergency Act') which, among other things, established the New York
State Financial Control Board (the 'Control Board') to oversee the City's
financial affairs. The State also established the Office of the State Deputy
Comptroller for the City of New York ('OSDC') to assist the Control Board in
exercising its powers and responsibilities; and a 'Control Period' from 1975 to
1986 during which the City was subject to certain statutorily-prescribed
fiscal-monitoring arrangements. Although the Control Board terminated the
Control Period in 1986 when certain statutory conditions were met, thus
suspending certain Control Board powers, the Control Board, MAC and OSDC
continue to exercise various fiscal-monitoring functions over the City, and upon
the occurrence or 'substantial likelihood and imminence' of the occurrence of
certain events, including, but not limited to a City operating budget deficit of
more than $100 million, the Control Board is required by law to reimpose a
Control Period. Currently, the City and its Covered Organizations (i.e., those
which receive or may receive money from the City directly, indirectly or
contingently) operate under a four-year financial plan, which the City prepares
annually and updates periodically and which includes the City's capital, revenue
and expense projections and outlines proposed gap-closing programs for years
with projected budget gaps. The City's current four-year financial plan projects
substantial budget gaps for each of the 1997 through 1999 fiscal years, before
implementation of the proposed gap-closing program contained in the current
financial plan. The City is required to submit its financial plans to review
bodies, including the New York State Financial Control Board.
There can be no assurance that the City's projections set forth in the
Financial Plan will prove to be accurate. Such projections are based on various
assumptions and contingencies, some of which are uncertain and may not
materialize. Unforeseen developments and changes in major assumptions could
significantly affect the City's ability to balance its budget as required by
State law and to meet its annual cash flow and financing requirements.
Implementation of the Financial Plan is also dependent upon the ability of
the City and certain Covered Organizations to market their securities
successfully. The City issues securities to finance, refinance and rehabilitate
infrastructure and other capital needs, as well as for seasonal financing needs.
The City currently projects that if no action is taken, it will exceed its State
Constitutional general debt limit beginning in City fiscal year 1998. The
current Financial Plan includes certain alternative methods of financing a
portion of the City's capital program which require State or other outside
approval. Future developments concerning the City or its Covered Organizations,
and public discussion of such developments, as well as prevailing market
conditions and securities credit ratings, may affect the ability or cost to sell
securities issued by the City or such Covered Organizations and may also affect
the market for their outstanding securities.
The staffs of the Control Board, OSDC and the City Comptroller issue
periodic reports on the City's Financial Plans which analyze the City's
forecasts of revenues and expenditures, cash flow, and debt service requirements
for, and Financial Plan compliance by, the City and its Covered Organizations.
According to recent staff reports, the City's economy has
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experienced weak employment and moderate wage and income growth throughout the
mid-1990s. Although this trend is expected to continue for the rest of the
decade, there is the risk of a slowdown in the City's economy in the next few
years, which would depress revenue growth and put further strains on the City's
budget. These reports have also indicated that recent City budgets have been
balanced in part through the use of non-recurring resources; that the City's
Financial Plan tends to rely on actions outside its direct control; that the
City has not yet brought its long-term expenditure growth in line with recurring
revenue growth; and that the City is therefore likely to continue to face
substantial future budget gaps that must be closed with reduced expenditures
and/or increased revenues.
The City's operating results for the 1996 fiscal year were balanced in
accordance with GAAP, after taking into account a discretionary transfer of $224
million, the sixteenth consecutive year of GAAP balanced results. On January 30,
1997, the City submitted to the Control Board the Financial Plan for the 1997
through 2000 fiscal years, which relates to the City, the Board of Education
('BOE') and CUNY. The Financial Plan is a modification to the financial plan
submitted to the Control Board on June 21, 1996 (the 'June Financial Plan').
The June Financial Plan identified actions to close a previously projected
gap of approximately $2.6 billion for the 1997 fiscal year. The proposed actions
in the June Financial Plan for the 1997 fiscal year included (i) agency actions
totaling $1.2 billion; (ii) a revised tax reduction program which would increase
projected tax revenues by $369 million due to the extension of the 12.5%
personal income tax surcharge beyond December 31, 1996, and other actions; (iii)
savings resulting from cost containment in entitlement programs to reduce City
expenditures and additional proposed State aid of $75 million; (iv) the assumed
receipt of revenues relating to rent payments for the City's airports, which are
currently the subject of a dispute with the Port Authority of New York and New
Jersey (the 'Port Authority'); (v) the sale of the City's television station for
$207 million; and (vi) pension cost savings totaling $134 million resulting from
a proposed increase in the earnings assumption for pension assets from 8.5% to
8.75%. In March 1997, the 12.5% personal income tax surcharge was extended to
December 31, 1998.
The 1997-2000 Financial Plan published on January 30, 1997 projects
revenues and expenditures for the 1997 and 1998 fiscal years balanced in
accordance with GAAP, and projects gaps of $1.9 billion and $2.7 billion for the
1999 and 2000 fiscal years, respectively. Changes in forecast revenues and
expenditures since the June Financial Plan include (i) an increase in projected
tax revenues of $571 million, $207 million, $73 million and $56 million in
fiscal years 1997 through 2000, respectively; (ii) a delay in the assumed
receipt of $304 million relating to projected rent payments for the City
airports from the 1997 fiscal year to the 1998 and 1999 fiscal years; (iii) an
approximately $200 million to $300 million increase in projected overtime and
other expenditures in each of the 1997 through 200 fiscal years; (iv) a $250
million increase in expenditures for BOE in the 1997 and 1998 fiscal years for
school text books and other initiatives, to be funded by savings from the
refunding of outstanding indebtedness of the MAC; and (v) debt service savings
of $44 million in the 1998 fiscal year resulting from the refunding of
outstanding City bonds consummated in the 1997 fiscal year, and a reduction in
projected pension costs of $34 million, $50 million, $49 million and $47 million
in fiscal years 1997 through 2000, respectively.
In addition, the Financial Plan sets forth gap-closing actions to eliminate
a previously projected gap of $1.4 billion for the 1998 fiscal year, and to
reduce projected gaps for the 1999 and 2000 fiscal years. The gap-closing
actions for the 1998 through 2000 fiscal years include (i) additional agency
actions totaling $558 million, $488 million and $600 million in fiscal years
1998 through 2000; (ii) the prepayment in the 1997 fiscal year of $391 million
of debt service due in the 1998 fiscal year; (iii) the proposed sale of various
assets including the U.N. Plaza Hotel in the 1998 fiscal year for $125 million;
(iv) additional State aid of $210 million in the 1998 fiscal year and $85
million in each of the 1999 and 2000 fiscal years, including a proposal that the
State accelerate a $142 million revenue sharing payment to the City from March
1999; and (v) entitlement savings of $415 million in the 1998 fiscal year and
$364 million in each of the 1999 and 2000 fiscal years, which would result from
reductions in
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Medicaid spending for health care providers, reimbursement limits and the State
making available to the City $77 million of additional Federal block grant aid,
as proposed in the Governor's 1997-1998 Executive Budget on January 14, 1997.
The Financial Plan does not reflect the subsequent amendment of the 1997-1998
Executive Budget by the Governor to restore part of the proposed reductions in
Medicaid spending for health care providers, which might reduce the projected
entitlement savings for the City, depending upon the method by which such
restoration is implemented. The gap-closing actions are partially offset by a
proposed tax reduction program totaling $250 million, $463 million and $518
million in the 1998 through 2000 fiscal years, respectively, including the
proposed elimination of the 4% City sales tax on clothing items under $500 as of
December 1, 1997, which is subject to State legislative approval.
The Financial Plan assumes (i) approval by the Governor and the State
Legislature of the extension of the 14% personal income tax surcharge, which is
scheduled to expire on December 31, 1997 and is projected to provide revenue of
$169 million, $504 million and $534 million in the 1998 through 2000 fiscal
years, respectively, and of the extension of the 12.5% personal income tax
surcharge, which is scheduled to expire on December 31, 1998 and is projected to
provide revenue of $190 million and $528 million in the 1999 and 2000 fiscal
years, respectively; (ii) collection of the projected rent payments for the
City's airports, totalling $270 million and $180 million in the 1998 and 1999
fiscal years, respectively, which may depend on the successful completion of
negotiations with the Port Authority or the enforcement of the City's rights
under the existing leases through pending legal actions; (iii) the ability of
the New York City Health and Hospitals Corporation ('HHC') and BOE to identify
actions to offset substantial City and State revenue reductions and the receipt
by BOE of additional State aid; and (iv) State approval of the cost containment
initiatives and State aid proposed by the City as gap-closing actions for the
1998 fiscal year, and $115 million in additional State aid which is assumed in
the Financial Plan but not provided for in the Governor's 1997-1998 Executive
Budget. The Financial Plan does not reflect any increased costs which the City
might incur as a result of welfare legislation recently enacted by Congress or
legislation proposed by the Governor, which would, if enacted, implement such
Federal welfare legislation, but does assume the entitlement savings and
additional Federal aid for localities provided in the Governor's 1997-1998
Executive Budget. Moreover, certain proposed entitlement cost containment and
other initiatives have been previously considered and rejected by the State
Legislature. The nature and extent of the impact on the City of the State
budget, when adopted, is uncertain, and no assurance can be given that the State
actions included in the State adopted budget may not have a significant adverse
impact on the City's budget and its Financial Plan. It can be expected that the
proposals contained in the Financial Plan to close the previously projected
budget gap for the 1998 fiscal year will engender substantial public debate
which will continue through the time the budget is scheduled to be adopted in
June 1997. Accordingly, the Financial Plan may be changed significantly by the
time the budget for the 1998 fiscal year is adopted. In addition, the economic
and financial condition of the City may be affected by various financial,
social, economic and political factors which could have a material effect on the
City.
The City's financial plans have been the subject of extensive public
comment and criticism. On July 16, 1996, the staff of the City Comptroller
issued a report on the Financial Plan. The report concluded that the City's
fiscal situation remains serious, and that the City faces budgetary risks of
approximately $787 million to $941 million for the 1997 fiscal year, which
increase to $4.16 billion to $4.31 billion for fiscal year 2000.
Although the City has maintained balanced budgets in each of its last
fifteen fiscal years, and is projected to achieve balanced operating results for
the 1996 fiscal year, there can be no assurance that the gap-closing actions
proposed in the Financial Plan can be successfully implemented or that the City
will maintain a balanced budget in future years without additional State aid,
revenue increases or expenditure reductions. Additional tax increases and
reductions in essential City services could adversely affect the City's economic
base.
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ASSUMPTIONS
The 1997-2000 Financial Plan is based on numerous assumptions, including
the condition of the City's and the region's economy and a modest employment
recovery and the concomitant receipt of economically sensitive tax revenues in
the amounts projected. The 1997-2000 Financial Plan is subject to various other
uncertainties and contingencies relating to, among other factors, the extent, if
any, to which wage increases for City employees exceed the annual wage costs
assumed for the 1997 through 2000 fiscal years; continuation of projected
interest earnings assumptions for pension fund assets and current assumptions
with respect to wages for City employees affecting the City's required pension
fund contributions; the willingness and ability of the State, in the context of
the State's current financial condition, to provide the aid contemplated by the
Financial Plan and to take various other actions to assist the City; the ability
of HHC, BOE and other such agencies to maintain balanced budgets; the
willingness of the Federal government to provide the amount of Federal aid
contemplated in the Financial Plan; adoption of the City's budgets by the City
Council in substantially the forms submitted by the Mayor; the ability of the
City to implement proposed reductions in City personnel and other cost reduction
initiatives, and the success with which the City controls expenditures; the
impact of conditions in the real estate market on real estate tax revenues; the
City's ability to market its securities successfully in the public credit
markets; and unanticipated expenditures that may be incurred as a result of the
need to maintain the City's infrastructure. Certain of these assumptions have
been questioned by the City Comptroller and other public officials.
The projections and assumptions contained in the 1997-2000 Financial Plan
are subject to revision which may involve substantial change, and no assurance
can be given that these estimates and projections, which include actions which
the City expects will be taken but which are not within the City's control, will
be realized. The principal projections and assumptions described below are based
on information available in May 1996.
Substantially all of the City's full-time employees are members of labor
unions. The Financial Emergency Act requires that all collective bargaining
agreements entered into by the City and the Covered Organizations be consistent
with the City's current financial plan, except for certain awards arrived at
through impasse procedures. During a Control Period, and subject to the
foregoing exception, the Control Board would be required to disapprove
collective bargaining agreements that are inconsistent with the City's current
financial plan.
Under applicable law, the City may not make unilateral changes in wages,
hours or working conditions under any of the following circumstances: (i) during
the period of negotiations between the City and a union representing municipal
employees concerning a collective bargaining agreement; (ii) if an impasse panel
is appointed, then during the period commencing on the date on which such panel
is appointed and ending sixty days thereafter or thirty days after it submits
its report, whichever is sooner, subject to extension under certain
circumstances to permit completion of panel proceedings; or (iii) during the
pendency of an appeal to the Board of Collective Bargaining. Although State law
prohibits strikes by municipal employees, strikes and work stoppages by
employees of the City and the Covered Organizations have occurred.
The 1997-2000 Financial Plan projects that the authorized number of
City-funded employees whose salaries are paid directly from City funds, as
opposed to Federal or State funds, will decrease from an estimated level of
202,411 on June 30, 1997 to an estimated level of 200,920 by June 30, 2000,
before implementation of the gap-closing program outlined in the Financial Plan.
Contracts with all of the City's municipal unions expired in the 1995 and
1996 fiscal years. The City has reached settlements with unions representing
approximately two-thirds of the City's workforce. The Financial Plan reflects
the costs of the settlements and assumes similar increases for all other
City-funded employees.
The terms of wage settlements could be determined through the impasse
procedure in the New York City Collective Bargaining Law, which can impose a
binding settlement.
The projections for the 1997 through 2000 fiscal years reflect the costs of
the settlements with the United Federation of Teachers ('UFT') and a coalition
of unions headed by
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District Council 37 of the American Federation of State, County and Municipal
Employees ('District Council 37'), which together represent approximately
two-thirds of the City's workforce, and assume that the City will reach
agreement with its remaining municipal unions under terms which are generally
consistent with such settlements. The settlement provides for a wage freeze in
the first two years, followed by a cumulative effective wage increase of 11% by
the end of the five year period covered by the proposed agreements, ending in
fiscal years 2000 and 2001. Additional benefit increases would raise the total
cumulative effective increase to 13% above present costs. Costs associated with
similar settlements for all City-funded employees would total $49 million, $459
million and $1.2 billion in the 1997, 1998 and 1999 fiscal years, respectively,
and exceed $2 billion in each fiscal year after the 1999 fiscal year. There can
be no assurance that the City will reach an agreement with the unions that have
not yet reached a settlement with the City on the terms contained in the
Financial Plan.
In the event of a collective bargaining impasse, the terms of wage
settlements could be determined through statutory impasse procedures, which can
impose a binding settlement except in the case of collective bargaining with the
UFT, which may be subject to non-binding arbitration. On January 23, 1996, the
City requested the Office of Collective Bargaining to declare an impasse against
the Patrolmen's Benevolent Association ('PBA') and the Uniformed Firefighters
Association ('UFA'). On April 7, 1997, the City reached a tentative settlement
with the UFA covering a 65-month period from January 1, 1995 to May 31, 2000. In
January 1997, the PBA rejected the City's proposal for a wage increase.
Accordingly, at the request of both parties, the City's Office of Collective
Bargaining declared an impasse between the City and the PBA on January 30, 1997.
However, while the parties prepare for the impasse proceeding, negotiations are
continuing, which may eliminate the need for such a proceeding.
From time to time, the New York State Financial Control Board (the 'Control
Board') staff, MAC, OSDC, the City Comptroller and others issue reports and make
public statements regarding the City's financial condition, commenting on, among
other matters, the City's financial plans, projected revenues and expenditures
and actions by the City to eliminate projected operating deficits. Some of these
reports and statements have warned that the City may have underestimated certain
expenditures and overestimated certain revenues and have suggested that the City
may not have adequately provided for future contingencies. Certain of these
reports have analyzed the City's future economic and social conditions and have
questioned whether the City has the capacity to generate sufficient revenues in
the future to meet the costs of its expenditure increases and to provide
necessary services. It is reasonable to expect that reports and statements will
continue to be issued and to engender public comment.
On February 25, 1997, the City Comptroller issued a report on the Financial
Plan with respect to the 1997 and 1998 fiscal years. The report noted that
generally favorable national and local economic conditions, characterized by low
inflation, relatively stable interest rates and the surging stock market, have
resulted in a recovery in City tax revenues in the 1997 fiscal year generated
primarily by profits in the financial services sector. However, the report
concluded that the positive news concerning the City's short-term budget
prospects represents a temporary departure from longer term trends, that it is
unlikely that tax revenue collections will be sustained in the long run by
continuing expansion on Wall Street and that the City will face large and
continuing budget gaps in the 1998 and subsequent fiscal years. The report noted
that the Financial Plan continues to use non-recurring actions to close budget
gaps in the 1997 and 1998 fiscal years, which results in larger gaps in
succeeding years, requiring continuing reductions in City services and programs.
With respect to the 1997 fiscal year, the report identified up to $296
million in potential risks, which could be more than offset by potential
additional resources, resulting in a potential year-end surplus of between $220
million and $396 million. The principal risks for the 1997 fiscal year
identified in the report include uncertainties totaling $85 million connected
with BOE, resulting primarily from projected State aid which has not been
appropriated by the State Legislature, State approval of the extension of the
12.5% personal income tax surcharge beyond December 31, 1996, which would
generate $171 million and
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which has been subsequently extended through December 31, 1998, and $25 million
relating to projected overtime expenditures. The report also noted that the
City's capital budget includes $607 million in capital from the proposed sale of
the City's water and sewer system, which has been declared illegal by the State
Court of Appeals.
With respect to the 1998 fiscal year, the report identified total net
budget risks of between $864 million and $2.0 billion, depending primarily on
whether the proposed tax reduction program is implemented and the 12.5% personal
income tax surcharge was extended beyond December 31, 1996 and the 14% personal
income tax surcharge is extended beyond December 31, 1997. These risks include
(i) $305 million in assumed payments from the Port Authority relating to the
City's claim for back rentals and an increase in future rentals, part of which
are the subject of arbitration; (ii) risks of $228 million related to BOE,
resulting primarily from unidentified expenditure reductions; (iii) State aid
totaling $115 million which is assumed in the Financial Plan but not provided
for in the Governor's Executive Budget; (iv) State approval of the extension of
the 12.5% personal income tax surcharge beyond December 31, 1996 and the 14%
personal income tax surcharge beyond December 31, 1997, which would generate
$469 million and $239 million, respectively, in the 1998 fiscal year; and (v)
gap-closing actions totaling $688 million. Uncertain gap-closing actions
identified in the report include Medicaid entitlement savings, totaling $338
million proposed in the Governor's Executive Budget, City proposals for State
aid totaling $68 million and the acceleration of $142 million of State revenue
sharing payments from the 1999 fiscal year to the 1998 fiscal year, which are
subject to approval by the Governor and/or the State legislature, and assumed
assets sales which are uncertain. With respect to the gap-closing programs
proposed in the Financial Plan, the report noted that many of the proposed
actions have been unsuccessful in the past, including proposed intergovernmental
aid and reductions in entitlement programs. The report also noted that the
ultimate impact of the new Federal welfare program is contingent upon decisions
to be made by the State, including the allocation of Federal block grants to
municipalities; that HHC must generate at least $172 million and $270 million in
fiscal years 1999 and 2000, respectively, to fund collective bargaining
increases; and that debt service costs during the Financial Plan period will
consume an historically high amount of tax revenues. Finally, the report noted
that unspecified State aid and reductions in entitlement programs constitute
greater than 50% of the assumed gap-closing actions in the 1999 and 2000 fiscal
years, and that it is highly unlikely that such aid will be forthcoming, given
the recent trend to reduce or contain spending increases by the Federal and
State governments and the State's current fiscal condition.
In a subsequent report the City Comptroller noted that $874 million in
State education aid receivables are currently outstanding for the 1989 through
1996 fiscal years and that, in recent years, the State has appropriated only $9
million annually for payment of these outstanding claims. The report noted that
the State's continued delay in addressing this issue could potentially, over.
the long-run, result in the City considering reserving the oldest receivable
balances, which would ultimately have a significant negative impact on the
City's Financial Plan.
On February 25, 1997, the staff of the OSDC issued a report on the
Financial Plan. The report projected budget gaps for the 1998 through 2000
fiscal years which slightly exceed the gaps set forth in the Financial Plan for
such fiscal years. The report also identified net additional risks of $246
million, $1.3 billion, $1.0 billion and $739 million for the 1997 through 2000
fiscal years, respectively. The additional risks identified in the report relate
to (i) uncertain State education aid and expenditure reductions relating to BOE,
totalling $75 million in the 1997 fiscal year and $239 million in each of the
1998, 1999 and 2000 fiscal years; (ii) the receipt of Port Authority lease
payments totalling $300 million and $245 million in the 1998 and 1999 fiscal
years, respectively, which are the subject of arbitration and a renegotiated
lease; (iii) State approval of a four-year extension to the City's 12.5%
personal income tax surcharge, which had expired on December 31, 1996 and which
would generate revenues of $171 million in the 1997 fiscal year and $470 million
in each of the 1998, 1999 and 2000 fiscal years; (iv) the receipt of $200
million in the 1998 fiscal year in connection with the proposed sale of the New
York Coliseum; and (v) the receipt of $49 million in the 1998 fiscal year from
the sale of assets. The report noted that the Financial Plan (i) assumes that
the
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State will extend the 14% personal income tax surcharge which is scheduled to
expire in December 1997 and which would generate revenues of $200 million in the
1998 fiscal year and approximately $500 million annually thereafter and (ii)
contains additional high risk initiatives in its gap-closing program totalling
$849 million, $643 million and $768 million in the 1998 through 2000 fiscal
years, respectively, resulting primarily from proposed social service
entitlement initiatives and other State aid which is subject to uncertain State
Legislative approval, as well as collective bargaining initiatives, which
involve the City ceasing to fund the cost of labor agreements for Covered
Organizations commencing in the 1999 fiscal year.
Overall, the report noted that expenditure growth continues to exceed
revenue growth during the Financial Plan period, with the future budget gaps
resulting primarily from the cost of labor agreements and medical and debt
service costs, as well as enacted tax cuts. The report stated that the Financial
Plan reflects the City's decision to use the tax windfall from Wall Street
profits for spending increases and tax cuts rather than for addressing long-term
budget problems or mitigating the effects of any future economic downturn, and
that the City proposes to use non-recurring actions exceeding $1.4 billion in
the 1998 Fiscal year to pay for its spending decisions, in the face of minimal
revenue growth in such year. The report further noted that the City's revenue
forecasts are subject to profits in the financial sector, which are volatile,
and that there is the additional potential for a recession. Finally, the report
noted that the City faces a potential $900 million liability from retroactive
claims for State education aid which have been recorded as revenue in past
budgets, although the Governor's Executive Budget includes an appropriation for
only a nominal portion of the aid. The report noted that the State Education
Department has acknowledged that the City's claims are valid based on the
documentation it has received for approximately two-thirds of the claims.
On March 11, 1997, the staff of the Control Board issued a report
commenting on the Financial Plan. The report stated that, although a windfall in
tax collections, primarily generated by large Wall Street profits, has enabled
the City to project a surplus for the 1997 fiscal year, the staff of the Control
Board projects substantial deficits for the 1998 and subsequent fiscal years,
reflecting projected revenue growth substantially below the rate of inflation
and spending, driven by increasing salaries, debt service and employee fringe
benefits, at more than twice the rate of revenues. The report identified risks
totaling $68 million, $778 million, $879 million and $1.2 billion for the 1997
through 2000 fiscal years, respectively, in addition to the gaps projected in
the Financial Plan for fiscal years 1999 and 2000. The principal risks
identified in the report included (i) implementation by BOE of various actions
totaling $111 million, $136 million, $216 million and $225 million in the 1997
through 2000 fiscal years, respectively, which include unspecified expenditure
reductions and uncertain State funding: (ii) the proposed sale of certain assets
in the 1998 fiscal year totaling $174 million, which the City has failed to
implement in the past or which lack supporting detail; (iii) the City's
assumption in the Financial Plan that certain Covered Organizations, rather than
the City, will fund collective bargaining increases for the Covered
Organizations starting in fiscal year 1999, thereby generating savings for the
City of $104 million in the 1999 fiscal year and $225 million in fiscal year
2000; (iv) assumed additional State aid totaling $210 million in the 1998 fiscal
year and $85 million in each of the 1999 and 2000 fiscal years, which is
uncertain due to budget difficulties experienced by the State; (v) revenues from
the extension of the 12.5% personal income tax surcharge beyond December 31,
1998, totaling $204 million and $528 million in the 1999 and 2000 fiscal years,
respectively, which requires State legislation; and (vi) the receipt of $300
million, $245 million and $30 million from the Port Authority in the 1998
through 2000 fiscal years, respectively, which is the subject of arbitration.
Taking into account the risks identified in the report and the gaps projected in
the Financial Plan, the Control Board projected gaps of $778 million, $2.8
billion and $3.9 billion for the 1998 through 2000 fiscal years, respectively.
The report noted that the volatility inherent in the securities market,
together with a possibility of a national recession in the later years of the
Financial Plan, leaves the City vulnerable to significant shortfalls in
projected non-property tax revenues. In addition, the report noted that the
City's gap-closing program for the 1999 and 2000 fiscal years assumes
substantial State assistance, which is uncertain, given the financial
difficulties at all levels of
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government and the fact that the City has not identified specific programs to
achieve this assistance. The report further noted that debt service will place
an increasing burden on the operating budget during the Financial Plan period,
requiring the use of approximately 18.8% of tax revenues in each of the 1999
through 2001 fiscal years and approximately 19.4% in each of the 2002 through
2005 fiscal years. With respect to HHC, the report noted that HHC remains under
competitive pressure from the rapidly changing health care market, which is the
subject of reform at both the State and federal levels. Finally, the report
identified a number of issues which the City faces, including providing
sufficient funding for maintenance of capital assets; developing specific
strategies to achieve the high level of entitlement reductions assumed in the
gap-closing program; developing specific programs to reduce agency spending,
while maintaining BOE funding for growing enrollment; and controlling the cost
of tort claims made against the City. The report concluded that the Financial
Plan continues the chronic pattern of budget balance in the current year and
structural imbalance in subsequent fiscal years, reflecting expenditures which
grow faster than revenues, slow growth in the property tax and reliance on
non-recurring resources.
On March 21, 1997, the independent budget office (the 'IBO') established
pursuant to the City Charter to provide analysis to elected officials and the
public on relevant fiscal and budgetary issues affecting the City released a
report analyzing the Financial Plan. In its report, the IBO estimated gaps of
$87 million, $701 million, $2.7 billion and $3.6 billion for the 1997 through
2000 fiscal years, respectively, before the implementation of gap-closing
initiatives for fiscal years 1999 and 2000. The gaps estimated in the IBO
report, which exceed those in the Financial Plan, reflect (i) uncertainty
concerning the size and timing of projected airport rents of $270 million and
$215 million in the 1998 and 1999 fiscal years, respectively, which are the
subject of an ongoing dispute between the Port Authority and the City; (ii) the
potential impact on the Financial Plan of the new Federal welfare law and the
potential for less than forecast case load reductions, which the IBO projects
will result in additional City spending for public assistance of $103 million,
$121 million and $147 million in the 1998 through 2000 fiscal years,
respectively; (iii) significantly higher projected spending on medical
assistance, totaling $281 million, $251 million and $266 million in the 1998
through 2000 fiscal years, respectively, reflecting uncertainty as to whether
the measures in the Governor's Executive Budget to curtail Medicaid costs will
be adopted and the limited growth in overall Medicaid costs assumed in the
Financial Plan will be realized; (iv) increased projected education spending,
totaling $111 million in each of the 1999 and 2000 fiscal years, as a result of
growing enrollment and other factors; and (v) additional funding needs for the
City's labor reserve totaling $104 million and $224 million in the 1999 and 2000
fiscal years, respectively, to pay for collective bargaining increases for the
Covered Organizations, which the Financial Plan assumes will be paid for by the
Covered Organizations, rather than the City. With respect to public assistance
costs, the report stated that the provisions of the new Federal welfare law
increasing work quotas for adult welfare recipients will require substantial
expenditures for workfare administration and associated child care, and that the
restrictions on Federal assistance to legal aliens will significantly increase
State and City Home Relief case loads as elderly and disabled individuals are
removed from Federal welfare rolls. With respect to decreased Medicaid costs
projected in the Financial Plan, the report noted that in recent years actual
reductions adopted by the State legislature have been less than those proposed
by the Governor and that the growth rates of Medicaid expenditures assumed in
the Financial Plan are low compared to historical trends. The report noted that
the Financial Plan assumes continued growth in the local economy and that, in
the event of an economic downturn, spending needs would likely increase,
particularly for social programs, at a time when revenues would likely be
decreasing, which would make future budget gaps substantially larger than those
projected in the report.
On October 31, 1996, the IBO released a report assessing the costs that
could be incurred by the City in response to the 1996 Welfare Act, which, among
other things, replaces the AFDC entitlement program with TANF, imposes a
five-year time limit on TANF assistance, requires 50% of states' TANF caseload
to be employed by 2002, and restricts assistance to legal aliens. Assuming
continued moderate economic performance, the IBO report projects that the City's
cost of providing welfare could increase by $33 million in 1999, growing to $269
million by 2002. Moreover, if the requirement that all recipients work
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after two years of receiving benefits is enforced, these additional costs could
total $723 million in 1999 and approximately $1 billion annually through 2002,
reflecting substantial costs for worker training and supervision of new workers
and increased child care costs. The report further noted that, if economic
performance weakened, resulting in an increased number of public assistance
cases, potential costs to the City could substantially increase.
States are required to develop plans during 1997 to implement the new law.
The report noted that decisions to be made by the State which will have a
significant impact on the City budget include the allocation of block grant
funds between the State and New York local governments such as the City and the
division between the State and its local governments of welfare costs not funded
by the Federal government. For purposes of its report, the IBO assumed that (i)
60% of block grant funds would be allocated to the City, based on informal
indications from State officials, (ii) the City and the State will continue to
equally share the costs of the Home Relief program and eligibility and benefit
levels will remain unchanged, and (iii) the State and City will equally share
the non-federally funded costs of providing assistance through TANF. Moreover,
given the State's history and constitutional requirement to provide for the aid,
care and support of the needy, IBO's analysis assumes that individuals reaching
the five-year time limit on TANF assistance and removed from the TANF program
will be covered by the Home Relief program, and that legal aliens deemed
ineligible for TANF will be covered by the Home Relief program.
Finally, the report noted that the new welfare law's most significant
fiscal impact is likely to occur in the years 2002 and beyond, reflecting the
full impact of the lifetime limit on welfare participation which only begins to
be felt in 2002 when the first recipients reach the five-year limit and are
assumed to be covered by Home Relief. In addition, the report noted that, given
the constitutional requirement to care for the needy, the 1996 Welfare Act might
well prompt a migration of benefit-seekers into the City, thereby increasing
City welfare expenditures in the long run. The report concluded that the impact
of the 1996 Welfare Act on the City will ultimately depend on the decisions of
State and City officials, the performance of the local economy and the behavior
of thousands of individuals in response to the new system.
The City since 1981 has fully satisfied its seasonal financing needs in the
public credit markets, repaying all short-term obligations within their fiscal
year of issuance. The City has issued $2.4 billion of short-term obligations in
fiscal year 1997 to finance the City's current estimate of its seasonal cash
flow needs for the 1997 fiscal year. Seasonal financing requirements for the
1996 fiscal year increased to $2.4 billion from $2.2 billion and $1.75 billion
in the 1995 and 1994 fiscal years, respectively. Seasonal financing requirements
were $1.4 billion and $2.25 billion in the 1993 and 1992 fiscal years,
respectively. The delay in the adoption of the State's budget in certain past
fiscal years has required the City to issue short-term notes in amounts
exceeding those expected early in such fiscal years.
The City is a defendant in a significant number of lawsuits. Such
litigation includes, but is not limited to, actions commenced and claims
asserted against the City arising out of alleged constitutional violations,
alleged torts, alleged breaches of contracts and other violations of law and
condemnation proceedings. While the ultimate outcome and fiscal impact, if any,
on the proceedings and claims are not currently predictable, adverse
determinations in certain of them might have a material adverse effect upon the
City's ability to carry out the 1997-2000 Financial Plan. The City is a party to
numerous lawsuits and is the subject of numerous claims and investigations. The
City has estimated that its potential future liability on account of outstanding
claims against it as of June 30, 1996 amounted to approximately $2.8 billion.
This estimate was made by categorizing the various claims and applying a
statistical model, based primarily on actual settlements by type of claim during
the preceding ten fiscal years, and by supplementing the estimated liability
with information supplied by the City's Corporation Counsel.
On July 10, 1995, S&P revised downward its rating on City general
obligation bonds from A - to BBB+ and removed City bonds from CreditWatch. S&P
stated that 'structural budgetary balance remains elusive because of persistent
softness in the City's economy, highlighted by weak job growth and a growing
dependence on the historically volatile financial services sector.' Other
factors identified by S&P's in lowering its rating on City
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bonds included a trend of using one-time measures, including debt refinancings,
to close projected budget gaps, dependence on unratified labor savings to help
balance the Financial Plan, optimistic projections of additional federal and
State aid or mandate relief, a history of cash flow difficulties caused by State
budget delays and continued high debt levels. In 1975, S&P suspended its A
rating of City bonds. This suspension remained in effect until March 1981, at
which time the City received an investment grade rating of BBB from S&P. On July
2, 1985, S&P revised its rating of City bonds upward to BBB+ and on November 19,
1987, to A - . On July 10, 1995, S&P revised its rating of City general
obligation bonds downward to BBB+, as discussed above. On November 25, 1996,
S&P's issued a report which stated that, if the City reached its debt limit
without the ability to issue bonds through other means, it would cause a
deterioration in the City's infrastructure and significant cutbacks in the
capital plan which would eventually impact the City's economy and revenues, and
could have eventual negative credit implications.
Moody's rating for City general obligation bonds is Baa1. On March 1, 1996,
Moody's stated that the rating for the City's Baa1 general obligation bonds
remains under review for a possible downgrade pending the outcome of the
adoption of the City's budget for the 1997 fiscal year and in light of the
status of the debate on public assistance and Medicaid reform; the enactment of
a State budget, upon which major assumptions regarding State aid are dependent,
which may be extensively delayed; and the seasoning of the City's economy with
regard to its strength and direction in the face of a potential national
economic slowdown. Moody's ratings of City bonds were revised in November 1981
from B (in effect since 1977) to Ba1, in November 1983 to Baa, in December 1985
to Baa1, in May 1988 to A and again in February 1991 to Baa1.
Fitch Investors Service, Inc. ('Fitch') rates City general obligation bonds
A - since July 15, 1993. On February 28, 1996, Fitch placed the City's general
obligation bonds on FitchAlert with negative implications. On November 5, 1996,
Fitch removed the City's general obligation bonds from FitchAlert, although
Fitch stated that the outlook remains negative. There is no assurance that such
ratings will continue for any given period of time or that they will not be
revised downward or withdrawn entirely. Any such downward revision or withdrawal
could have an adverse effect on the market prices of the City's general
obligation bonds.
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INVESTMENT LIMITATIONS
Unless otherwise indicated, the investment restrictions described below as
well as those described under 'Investment Limitations' in the Prospectus are
fundamental investment policies which may be changed only when permitted by law,
if applicable, and approved by the holders of a majority of the applicable
Fund's outstanding voting securities, which, as defined by the 1940 Act means
the lesser of: (i) 67% of the shares represented at a meeting at which more than
50% of the outstanding shares are represented; or (ii) more than 50% of the
outstanding shares. Except for: (i) the investment restrictions set forth below
which are indicated as fundamental policies; (ii) the investment restrictions
set forth in the Prospectus; and (iii) each Fund's investment objective(s) as
described in the Prospectus, the other policies and percentage limitations
referred to in this Statement of Additional Information and the Prospectus are
not fundamental policies of the Funds and may be changed by vote of each
Company's Board of Directors without shareholder approval.
If a percentage restriction on investment or utilization of assets in a
fundamental policy or restriction set forth below is adhered to at the time a
transaction is effected, a later change in percentage ownership of a security or
kind of security resulting from changing market values or a similar type of
event will not be considered a violation of such policy or restriction.
Cash Management Fund. The Cash Management Fund may not:
(1) purchase any securities which would cause more than 25% of the
value of its total assets at the time of such purchase to be invested in
securities of one or more issuers conducting their principal business
activities in the same industry, provided that there is no limitation with
respect to investment in obligations issued or guaranteed by the U.S.
government, its agencies or instrumentalities, with respect to bank
obligations or with respect to repurchase agreements collateralized by any
of such obligations (the fundamental policy of the Fund to invest at least
25% of its assets in bank obligations is described under 'Investment
Limitations' in the Prospectus);
(2) own more than 10% of the outstanding voting stock or other
securities, or both, of any one issuer (other than securities of the U.S.
government or any agency or instrumentality thereof);
(3) purchase shares of other investment companies (except as part of a
merger, consolidation or reorganization or purchase of assets approved by
the Fund's shareholders), provided that the Fund may purchase shares of any
registered open-end investment company that determines its net asset value
per share based on the amortized cost-or penny-rounding method, if
immediately after any such purchase the Fund does not (a) own more than 3%
of the outstanding voting stock of any one investment company, (b) invest
more than 5% of the value of its total assets in any one investment
company, or (c) invest more than 10% of the value of its total assets in
the aggregate in securities of investment companies;
(4) purchase securities on margin (except for delayed delivery or
when-issued transactions or such short-term credits as are necessary for
the clearance of transactions);
(5) sell securities short;
(6) purchase or sell commodities or commodity contracts, including
futures contracts;
(7) invest for the purposes of exercising control over management of
any company;
(8) make loans, except that the Fund may (a) purchase and hold debt
instruments (including bonds, debentures or other obligations and
certificates of deposit, banker's acceptances and fixed time deposits) in
accordance with its investment objectives and policies; and (b) enter into
repurchase agreements with respect to portfolio securities;
(9) underwrite the securities of other issuers, except to the extent
that the purchase of investments directly from the issuer thereof and later
disposition of such securities in accordance with the Fund's investment
program may be deemed to be an underwriting;
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(10) purchase real estate or real estate limited partnership interests
(other than money market securities secured by real estate or interests
therein or securities issued by companies that invest in real estate or
interests therein);
(11) invest directly in interests in oil, gas or other mineral
exploration development programs or mineral leases; or
(12) purchase warrants.
With respect to the Cash Management Fund, for the purpose of applying the
above percentage restrictions and the percentage investment limitations set
forth in the Prospectus to receivables-backed obligations, the special purpose
entity issuing the receivables-backed obligations and/or one or more of the
issuers of the underlying receivables will be considered an issuer in accordance
with applicable regulations.
New York Municipal Money Market Fund. The New York Municipal Money Market
Fund may not:
(1) own more than 10% of the outstanding voting stock or other
securities, or both, of any one issuer (other than securities of the United
States government or any agency or instrumentality thereof);
(2) purchase shares of other investment companies (except as part of a
merger, consolidation or reorganization or purchase of assets approved by
the Fund's shareholders), provided that the Fund may purchase shares of any
registered open-end investment company that determines its net asset value
per share based on the amortized cost or penny-rounding method, if
immediately after any such purchase the Fund does not (a) own more than 3%
of the outstanding voting stock of any one investment company, (b) invest
more than 5% of the value of its total assets in any one investment
company, or (c) invest more than 10% of the value of its total assets in
the aggregate in securities of investment companies;
(3) purchase securities on margin (except for delayed delivery or
when-issued transactions or such short-term credits as are necessary for
the clearance of transactions);
(4) sell securities short;
(5) purchase or sell commodities or commodity contracts, including
futures contracts;
(6) invest for the purpose of exercising control over management of
any company;
(7) make loans, except that the Fund may (a) purchase and hold debt
instruments (including bonds, debentures or other obligations and
certificates of deposit, banker's acceptances and fixed time deposits) in
accordance with its investment objectives and policies; and (b) enter into
repurchase agreements with respect to portfolio securities;
(8) underwrite the securities of other issuers, except to the extent
that the purchase of investments directly from the issuer thereof and later
disposition of such securities in accordance with the Fund's investment
program may be deemed to be an underwriting;
(9) purchase real estate or real estate limited partnership interests
(other than money market securities secured by real estate or interests
therein or securities issued by companies that invest in real estate or
interests therein);
(10) invest directly in interests in oil, gas or other mineral
exploration development programs or mineral leases; or
(11) purchase warrants.
National Intermediate Municipal Fund, U.S. Government Income Fund,
High Yield Bond Fund, Strategic Bond Fund, Total Return Fund and Asia
Growth Fund. Each of the National Intermediate Municipal Fund, U.S.
Government Income Fund, High Yield Bond Fund, Strategic Bond Fund, Total
Return Fund and Asia Growth Fund may not:
(1) underwrite securities of other issuers, except to the extent that
the purchase of investments directly from the issuer thereof or from an
underwriter for an issuer and the
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later disposition of such securities in accordance with a Fund's investment
program may be deemed to be an underwriting;
(2) purchase or sell real estate, although a Fund may purchase and
sell securities of companies which deal in real estate, may purchase and
sell marketable securities which are secured by interests in real estate
and may invest in mortgages and mortgage-backed securities;
(3) purchase or sell commodities or commodity contracts except that a
Fund may engage in hedging and derivative transactions to the extent
permitted by its investment policies as stated in the Prospectus and this
Statement of Additional Information;
(4) make loans, except that (a) a Fund may purchase and hold debt
securities in accordance with its investment objective(s) and policies, (b)
a Fund may enter into repurchase agreements with respect to portfolio
securities, subject to applicable limitations of its investment policies,
(c) a Fund may lend portfolio securities with a value not in excess of
one-third of the value of its total assets, provided that collateral
arrangements with respect to options, forward currency and futures
transactions will not be deemed to involve loans of securities, and (d)
delays in the settlement of securities transactions will not be considered
loans;
(5) purchase the securities of other investment companies except as
permitted under the 1940 Act or in connection with a merger, consolidation,
acquisition or reorganization;
(6) purchase securities on margin (except for delayed delivery or
when-issued transactions or such short-term credits as are necessary for
the clearance of transactions, and except for initial and variation margin
payments in connection with purchases or sales of futures contracts);
(7) sell securities short (except for short positions in a futures
contract or forward contract);
(8) purchase or retain any securities of an issuer if one or more
persons affiliated with a Fund owns beneficially more than 1/2 of 1% of the
outstanding securities of such issuer and such affiliated persons so owning
1/2 of 1% together own beneficially more than 5% of such securities;
(9) invest in oil, gas and other mineral leases, provided, however,
that this shall not prohibit a Fund from purchasing publicly traded
securities of companies engaging in whole or in part in such activities;
(10) except with respect to the Asia Growth Fund, purchase the
securities of any issuer if by reason thereof the value of its investment
in all securities of that issuer will exceed 5% of the value of the
issuer's total assets;
(11) except with respect to the Asia Growth Fund purchase securities
of issuers which it is restricted from selling to the public without
registration under the 1933 Act if by reason thereof the value of its
aggregate investment in such classes of securities will exceed 10% of its
total assets, provided, however, that this limitation shall not apply to
Rule 144A securities;
(12) invest more than 5% of its total assets in securities of
unseasoned issuers (other than securities issued or guaranteed by U.S.
federal or state or foreign governments or agencies, instrumentalities or
political subdivisions thereof) which, including their predecessors, have
been in operation for less than three years;
(13) purchase puts, calls, straddles, spreads and any combination
thereof if by reason thereof the value of its aggregate investment in such
classes of securities will exceed 5% of its total assets;
(14) invest in warrants (other than warrants acquired by a Fund as
part of a unit or attached to securities at the time of purchase) if, as a
result, the investments (valued at the lower of cost or market) would
exceed 5% of the value of the Fund's net assets or if, as a result, more
than 2% of the Fund's net assets would be invested in warrants that are not
listed on AMEX or NYSE; or
44
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(15) invest for the purpose of exercising control over the management
of any company.
Investment restrictions (1) through (5) described above are fundamental
policies of each of the National Intermediate Municipal Fund, U.S. Government
Income Fund, High Yield Bond Fund, Strategic Bond Fund, Total Return Fund and
Asia Growth Fund. Restrictions (6) through (15) are non-fundamental policies of
such Fund.
For the purposes of the investment limitations applicable to the National
Intermediate Municipal Fund, the identification of the issuer of a municipal
obligation depends on the terms and conditions of the obligation. If the assets
and revenues of an agency, authority, instrumentality, or other political
subdivision are separate from those of the government creating the subdivision
and the obligation is backed only by the assets and revenues of the subdivision,
such subdivision would be regarded as the sole issuer. Similarly, in the case of
a private activity bond, if the bond is backed only by the assets and revenues
of the non-governmental user, such non-governmental user would be regarded as
the sole issuer. If in either case the creating government or another entity
guarantees an obligation, the guarantee may be considered a separate security
and treated as an issue of such government or entity in accordance with
applicable regulations.
Investors Fund. The Investors Fund may not:
(1) purchase any securities on margin (except that the Fund may make
deposits in connection with transactions in options on securities), make
any so-called 'short' sales of securities or participate in any joint or
joint and several trading accounts;
(2) act as underwriter of securities of other issuers;
(3) purchase the securities of another investment company or
investment trust except in the open market where no profit to a sponsor or
dealer, other than the customary broker's commission, results from such
purchase (but the aggregate of such investments shall not be in excess of
10% of the net assets of the Fund), or except when such purchase is part of
a plan of merger or consolidation;
(4) buy securities from, or sell securities to, any of its officers,
directors, employees, investment manager or distributor, as principals;
(5) purchase or retain any securities of an issuer if one or more
persons affiliated with the Fund owns beneficially more than 1/2 of 1% of
the outstanding securities of such issuer and such affiliated persons so
owning 1/2 of 1% together own beneficially more than 5% of such securities;
(6) purchase real estate (not including investments in securities
issued by real estate investment trusts) or commodities or commodity
contracts, provided that the Fund may enter into futures contracts,
including futures contracts on interest rates, stock indices and
currencies, and options thereon, and may engage in forward currency
transactions and buy, sell and write options on currencies;
(7) invest in warrants (other than warrants acquired by the Investors
Fund as part of a unit or attached to securities at the time of purchase)
if, as a result, the investments (valued at the lower of cost or market)
would exceed 5% of the value of the Investors Fund's net assets or if, as a
result, more than 2% of the Investors Fund's net assets would be invested
in warrants that are not listed on AMEX or NYSE;
(8) invest in oil, gas and other mineral leases, provided, however,
that this shall not prohibit the Investors Fund from purchasing publicly
traded securities of companies engaging in whole or in part in such
activities; or
(9) purchase or sell real property (including limited partnership
interests) except to the extent described in investment restriction number
6 above.
Investment restrictions (1) through (6) described above are fundamental
policies of the Investors Fund. Restrictions (7) through (9) are non-fundamental
policies of the Investors Fund.
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Capital Fund. The Capital Fund may not:
(1) invest in companies for the purpose of exercising control or
management. (The Fund may on occasion be considered part of a control group
of a portfolio company by reason of the size or manner of its investment,
in which event the securities of such portfolio company held by the Fund
may not be publicly saleable unless registered under the Securities Act of
1933 or pursuant to an available exemption thereunder.);
(2) purchase securities on margin (except for such short-term credits
as are necessary for the clearance of transactions and except that the Fund
may make deposits in connection with transactions in options on securities)
or make short sales of securities (except for sales 'against the box',
i.e., when a security identical to one owned by the Fund, or which the Fund
has the right to acquire without payment of additional consideration, is
borrowed and sold short);
(3) purchase or sell real estate, interests in real estate, interests
in real estate investment trusts, or commodities or commodity contracts;
however, the Fund (a) may purchase interests in real estate investment
trusts or companies which invest in or own real estate if the securities of
such trusts or companies are registered under the Securities Act of 1933
and are readily marketable and (b) may enter into futures contracts,
including futures contracts on interest rates, stock indices and
currencies, and options thereon, and may engage in forward currency
contracts and buy, sell and write options on currencies;
(4) purchase more than 3% of the stock of another investment company,
or purchase stock of other investment companies equal to more than 5% of
the Fund's net assets in the case of any one other investment company and
10% of such net assets in the case of all other investment companies in the
aggregate. Any such purchase will be made only in the open market where no
profit to a sponsor or dealer results from the purchase, except for the
customary broker's commission. This restriction shall not apply to
investment company securities received or acquired by the Fund pursuant to
a merger or plan of reorganization. (The return on such investments will be
reduced by the operating expenses, including investment advisory and
administrative fees of such investment funds and will be further reduced by
the Fund's expenses, including management fees; that is, there will be a
layering of certain fees and expenses.);
(5) purchase or hold securities of an issuer if one or more persons
affiliated with the Fund or with SBAM owns beneficially more than 1/2 of 1%
of the securities of that issuer and such persons owning more than 1/2 of
1% of such securities together own beneficially more than 5% of the
securities of such issuer;
(6) buy portfolio securities from, or sell portfolio securities to,
any of the Fund's officers, directors or employees of its investment
manager or distributor, or any of their officers or directors, as
principals;
(7) purchase or sell warrants; however, the Fund may invest in debt or
other securities which have warrants attached (not to exceed 10% of the
value of the Fund's total assets). Covered options with respect to no more
than 10% in value of the Fund's total assets will be outstanding at any one
time; or
(8) invest in interest in oil, gas or other mineral exploration or
development programs.
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MANAGEMENT
DIRECTORS AND OFFICERS
The directors and executive officers of each Company for the past five
years are listed below. The address of each, unless otherwise indicated, is
Seven World Trade Center, New York, New York 10048. Certain of the directors and
officers are also directors and officers of one or more other investment
companies for which SBAM, the Fund's investment manager, acts as investment
adviser. 'Interested directors' of the Fund (as defined in the 1940 Act) are
indicated by an asterisk.
SERIES FUND
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION(S) HELD PRINCIPAL OCCUPATION(S) PAST 5 YEARS
- ------------------------------------ ------------------- -----------------------------------------
<S> <C> <C>
Charles F. Barber .................. Director and Consultant. Formerly, Chairman of the
66 Glenwood Drive Chairman, Audit Board of ASARCO Incorporated.
Greenwich, CT 06830 Committee
Age: 80
Carol L. Colman .................... Director and Audit President of Colman Consulting Co., Inc.
Consulting Co., Inc. Committee Member
278 Hawley Road
North Salem, NY 10560
Age: 51
Daniel P. Cronin ................... Director and Audit Vice President and General Counsel of
Pfizer, Inc Committee Member Pfizer International Inc. Senior
235 East 42nd Street Assisting General Counsel of Pfizer,
New York, NY 10017 Inc.
Age: 51
Michael S. Hyland* ................. Director and President and Managing Director of SBAM
Age: 51 President and Managing Director and Member of the
Management Board of Salomon Brothers
Inc ('SBI').
Giampaolo G. Guarnieri ............. Executive Vice Member of Board of Directors and Head of
Salomon Brothers Asset Management President SBAM AP from January 1997 to present.
Asia Pacific Limited Director of SBAM AP since July 1996.
Three Exchange Square, Vice President and Senior Portfolio
Hong Kong Manager of SBAM AP from April 1995 to
Age: 33 June 1996. From April 1995 to January
1996, Vice President and Senior Vice
President of Salomon Brothers Hong Kong
Limited. From January 1992 to March
1995, Senior Portfolio Investment
Manager of Credit Agricole Asset
Management (South East Asia) Limited.
Steven Guterman .................... Executive Vice Managing Director of SBAM and SBI since
Age: 43 President January 1996. Prior to January 1996,
Director of SBAM and SBI.
Peter J. Wilby ..................... Executive Vice Managing Director of SBAM and SBI since
Age: 38 President January 1996. Prior to January 1996,
Director of SBAM and SBI.
Marybeth Whyte ..................... Executive Vice Director of SBAM and SBI since January
Age: 41 President 1995. From July 1994 to December 1994,
Vice President of SBAM and SBI. Prior
to July 1994, Senior Vice President and
head of the Municipal Bond area at
Fiduciary Trust Company International.
</TABLE>
47
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<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION(S) HELD PRINCIPAL OCCUPATION(S) PAST 5 YEARS
- ------------------------------------ ------------------- -----------------------------------------
<S> <C> <C>
Richard E. Dahlberg ................ Executive Vice Managing Director of SBAM and SBI since
Age: 57 President January 1996. From July 1995 to January
1996, Director of SBAM and SBI. Prior
to July 1995, Senior Vice President
and Senior Portfolio Manager of
Massachusetts Financial Services
Company.
Beth A. Semmel ..................... Executive Vice Director of SBAM and SBI since January
Age: 36 President 1996. From May 1993 to December 1995,
Vice President of SBAM and SBI. From
January 1989 to May 1993, Vice
President of Morgan Stanley Asset
Management.
Maureen O'Callaghen ................ Executive Vice Vice President of SBAM and SBI since
Age: 33 President October 1988.
James E. Craige .................... Executive Vice Vice President, SBAM and Salomon Brothers
Age: 29 President Inc since 1992.
Thomas K. Flanagan ................. Executive Vice Director, SBAM and Salomon Brothers Inc
Age: 44 President since 1991.
Lawrence H. Kaplan ................. Executive Vice Vice President and Chief Counsel of SBAM
Age: 40 President and and Vice President of SBI since May
General Counsel 1995. Prior to May 1995, Senior Vice
President, Director, Assistant
Secretary and General Counsel, Kidder
Peabody Asset Management, Inc. and
Senior Vice President of Kidder,
Peabody & Co. Incorporated.
Nancy Noyes ........................ Vice President Director of SBAM and SBI since January
Age: 38 1996. From August 1992 to January 1996,
Vice President of SBAM and SBI. Prior
to August 1992, Vice President of Swiss
Bank Corp.
Eliza Lau .......................... Vice President Vice President and Portfolio Manager of
Salomon Brothers Asset SBAM AP since March 1996. From July
Management Asia 1994 to March 1996, Vice President and
Pacific Limited Portfolio Manager of Salomon Brothers
Three Exchange Square Hong Kong Limited; from October 1991 to
Hong Kong July 1994, research analyst with SBI.
Age: 34
Jennifer G. Muzzey ................. Secretary Employee of SBAM since June 1994. Prior
Age: 37 to June 1994, Vice President of
SunAmerica Asset Management
Corporation.
Noel B. Daugherty .................. Assistant Secretary Employee of SBAM since November 1996.
Age: 31 From August 1993 to October 1996, an
employee of Chancellor LGT Asset
Management. From October 1989 to August
1993, an employee of The Dreyfus
Corporation.
Alan M. Mandel ..................... Treasurer Vice President of SBAM and SBI since
Age: 39 January 1995. Prior to January 1995,
Chief Financial Officer and Vice
President of Hyperion Capital
Management Inc.
</TABLE>
48
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<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION(S) HELD PRINCIPAL OCCUPATION(S) PAST 5 YEARS
- ------------------------------------ ------------------- -----------------------------------------
<S> <C> <C>
Reji Paul .......................... Assistant Treasurer Investment Accounting Manager of SBAM
Age: 34 since February 1995. Prior to February
1995, Assistant Vice President of
Mitchell Hutchins Asset Management,
Inc.
Janet S. Tolchin ................... Assistant Treasurer Investment Accounting Manager of SBAM.
Age: 37
</TABLE>
INVESTORS FUND AND CAPITAL FUND
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION(S) HELD PRINCIPAL OCCUPATIONS DURING PAST 5 YEARS
- ------------------------------------ ------------------- -----------------------------------------
<S> <C> <C>
Charles F. Barber .................. Director and Consultant. Formerly, Chairman of the
66 Glenwood Drive Chairman, Audit Board of ASARCO Incorporated.
Greenwich, CT 06830 Committee
Age: 80
Andrew L. Breech ................... Director and President of Dealer Operating Control
2120 Wilshire Boulevard Chairman, Proxy Service, Inc.
Suite 400 Committee
Santa Monica, CA 90403
Age: 44
Thomas W. Brock* ................... Director Chairman, Managing Director and Chief
Age: 49 Executive Officer of SBAM and Managing
Director and member of the Management
Board of SBI.
Carol L. Colman .................... Director and Audit President of Colman Consulting Co., Inc.
Consulting Co., Inc. Committee Member
378 Hawley Lane
North Salem, NY 10560
Age: 51
William R. Dill .................... Director and Member President, Boston Architectural Center;
25 Birch Lane of Nominating formerly, President, Anna Maria
Cumberland Foreside, ME 07110 Committee College; Consultant.
Age: 66
Michael S. Hyland* ................. Director and President and Managing Director of SBAM
Age: 51 President and Managing Director of SBI.
Clifford M. Kirtland, Jr. .......... Director and Member Member of Advisory Committee,
9 North Parkway Square of the Nominating Noro-Moseley Partners. Formerly,
4200 Northside Pkwy, N.W. Committee Director of Oxford Industries, Shaw
Atlanta, GA 30327 (Investors Fund) Industries, Inc. and Graphic Industries
Age: 73 and Proxy Committee Inc. Formerly, Chairman and President
(Investors Fund) of Cox Communications Inc.
Robert W. Lawless .................. Director and Member President and Chief Executive Officer,
2877 East 35th Street of Proxy Committee University of Tulsa. Formerly,
Tulsa, OK 74105 (Capital Fund) President and Chief Executive Officer
Age: 60 of Texas Tech University and Texas Tech
University Health Sciences Center.
Louis P. Mattis .................... Director and Member Consultant. Formerly, Chairman and
P.O. Box #6535 of Nominating President of Sterling Winthrop Inc.,
SnowMass Village, CO 81615 Committee (Capital a pharmaceutical company. Formerly,
Age: 55 Fund) Executive Vice President of Richardson-
Vicks, Inc.
</TABLE>
49
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION(S) HELD PRINCIPAL OCCUPATIONS DURING PAST 5 YEARS
- ------------------------------------ ------------------- -----------------------------------------
<S> <C> <C>
Thomas F. Schlafly ................. Director, Audit Of counsel to Peper, Martin, Jensen,
8 Portland Place Committee Member Maichel & Hetlage (law firm) and
St. Louis, Missouri 63108 and Nominating President of The Saint Louis Brewery,
Age: 47 Committee Member Inc.
Richard E. Dahlberg ................ Executive Vice Managing Director of SBAM and SBI since
Age: 57 President January 1996. From July 1995 to January
1996, Director of SBAM and SBI. Prior
to July 1995, Senior Vice President
and Senior Portfolio Manager of
Massachusetts Financial Services
Company.
Allan R. White, III ................ Executive Vice Managing Director of SBAM and SBI since
Age: 37 President January 1996. Prior to January 1996,
Director of SBAM and SBI.
Ross S. Margolies .................. Executive Vice Director of SBAM and SBI since June 1992.
Age: 38 President Prior to June 1992, Senior Vice
(Capital Fund Only) President of Lehman Brothers Inc.
Lawrence H. Kaplan ................. Executive Vice Vice President and Chief Counsel of SBAM
Age: 40 President and and Vice President of SBI since May
General Counsel 1995. Prior to May 1995, Senior
Vice President, Director, Assistant
Secretary and General Counsel of Kidder
Peabody Asset Management, Inc. and
Senior Vice President of Kidder,
Peabody & Co. Incorporated.
Pamela P. Milunovich ............... Vice President Director of SBAM and SBI since January
Age: 34 (Investors Fund 1997. Vice President of SBAM and SBI
Only) from June 1992 to December 1996. Prior
to June 1992, an associate with James
Capel.
Jennifer G. Muzzey ................. Secretary Employee of SBAM since June 1994. Prior
Age: 37 to June 1994, Vice President of
SunAmerica Asset Management Corporation
Noel B. Daugherty .................. Assistant Secretary Employee of SBAM since November 1996.
Age: 31 From August 1993 to October 1996, an
employee of Chancellor LGT Asset
Management. From October 1989 to August
1993, an employee of The Dreyfus
Corporation.
Alan M. Mandel ..................... Treasurer Vice President of SBAM and SBI since
Age: 39 January 1995. Prior to January 1995,
Chief Financial Officer and Vice
President of Hyperion Capital
Management Inc.
Reji Paul .......................... Assistant Treasurer Investment Accounting Manager of SBAM
Age: 34 since February 1995. Prior to February
1995, formerly Assistant Vice President
of MHAM.
Janet Tolchin ...................... Assistant Treasurer Investment Accounting Manager of SBAM.
Age: 37
</TABLE>
50
<PAGE>
<PAGE>
COMPENSATION TABLE
The following table provides information concerning the compensation paid
during the fiscal year ended December 31, 1996 to each director of the
Companies. The Companies do not provide any pension or retirement benefits to
directors. In addition, no remuneration was paid during the fiscal year ended
December 31, 1996 by the Companies to officers of any Company or to Mr. Hyland
or to Mr. Brock, who as employees of SBAM are 'interested persons,' as defined
in the 1940 Act.
SERIES FUNDS
<TABLE>
<CAPTION>
TOTAL COMPENSATION
AGGREGATE FROM OTHER FUNDS
COMPENSATION ADVISED BY TOTAL
NAME OF PERSON, POSITION FROM THE FUND SBAM(A) COMPENSATION(A)
- --------------------------------------------- ------------- ------------------ ---------------
<S> <C> <C> <C>
Charles F. Barber
Director................................... $ 4,326 $110,149(13) $ 114,475(14)
Carol Colman
Director................................... $ 4,416 $ 28,250(4) $ 32,666(5)
Daniel P. Cronin
Director................................... $ 3,544 $ 26,399(4) $ 29,943(5)
</TABLE>
- ------------
(A) The numbers in parenthesis indicate the applicable number of investment
company directorships held by that director.
INVESTORS FUND
<TABLE>
<CAPTION>
TOTAL COMPENSATION
AGGREGATE FROM OTHER FUNDS
COMPENSATION ADVISED BY TOTAL
NAME OF PERSON, POSITION FROM THE FUND SBAM(A) COMPENSATION(A)
- --------------------------------------------- ------------- ------------------ ---------------
<S> <C> <C> <C>
Charles F. Barber,
Director................................... $ 9,000 $105,475(13) $ 114,475(14)
Andrew L. Breech,
Director................................... 8,250 17,750(2) 26,000(3)
Carol L. Colman,
Director................................... 9,000 23,666(4) 32,666(5)
William R. Dill,
Director................................... 8,250 17,000(2) 25,250(3)
Clifford M. Kirtland, Jr.,
Director................................... 7,500 15,500(2) 23,000(3)
Robert W. Lawless,
Director................................... 9,000 18,500(2) 27,500(3)
Louis P. Mattis,
Director................................... 6,000 14,750(2) 20,750(3)
Thomas F. Schlafly
Director................................... 8,250 19,250(2) 27,500(3)
</TABLE>
- ------------
(A) The numbers in parenthesis indicate the applicable number of investment
company directorships held by that director.
51
<PAGE>
<PAGE>
CAPITAL FUND
<TABLE>
<CAPTION>
TOTAL COMPENSATION
PAID TO DIRECTORS
AGGREGATE FROM OTHER FUNDS
COMPENSATION ADVISED BY TOTAL
NAME OF PERSON, POSITION FROM THE FUND SBAM(A) COMPENSATION(A)
- --------------------------------------------- ------------- ------------------ ---------------
<S> <C> <C> <C>
Charles F. Barber
Director................................... $ 7,250 $107,225(13) $ 114,475(14)
Andrew L. Breech
Director................................... 6,500 19,500(2) 26,000(3)
Carol L. Colman
Director................................... 7,250 25,416(4) 32,666(5)
William R. Dill
Director................................... 6,500 18,750(2) 25,250(3)
Clifford M. Kirtland, Jr.
Director................................... 5,750 17,250(2) 23,000(3)
Robert W. Lawless
Director................................... 7,250 20,250(2) 27,500(3)
Louis P. Mattis
Director................................... 5,000 15,750(2) 20,750(3)
Thomas F. Schlafly
Director................................... 7,250 20,250(2) 27,500(3)
</TABLE>
- ------------
(A) The number in parentheses indicates the applicable number of investment
company directorships held by that director.
The members of each Company's Board of Directors who are not 'interested
persons,' as defined in the 1940 Act, receive a fee for each meeting of Board of
Directors and committee meeting attended and are reimbursed for all
out-of-pocket expenses relating to attendance at such meetings. The Directors
who are 'interested persons,' as defined in the 1940 Act, do not receive
compensation from their respective Funds but are reimbursed for all
out-of-pocket expenses relating to attendance at such meetings.
As of December 31, 1996 directors and officers of the Series Funds, the
Investors Fund and the Capital Fund, individually and as a group, beneficially
owned less than 1% of the outstanding shares of their respective Funds.
PRINCIPAL HOLDERS OF SECURITIES
The following lists shareholders of record who held 5% or more of the
outstanding securities of the Funds as of April 1, 1997. Shareholders who own
greater than 25% of the outstanding shares of a class of shares are deemed to be
'control persons,' as defined in the 1940 Act of such class.
<TABLE>
<CAPTION>
FUND CLASS SHAREHOLDER PERCENTAGE HELD
- ------------------------------- ----- -------------------------------------------- ---------------
<S> <C> <C> <C>
Cash Management Fund........... O Salomon Brothers A/C XQSSHMF 35.5%
7 World Trade Center 40th Floor
Attn: Peter Krzystek
New York, NY 10048
State Street Bank & Trust Co. FBO 22.8
Salomon Brothers NY Municipal Dept
7 World Trade Center, 38th Floor
New York, NY 10048
Salomon Brothers Inc A/C V0300 8.1
7 World Trade Center, 40th Floor
New York, NY 10048
Salomon Brothers Inc 6.2
7 World Trade Center 40th Floor
New York, NY 10048
Attn: Peter Hegel
</TABLE>
52
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
FUND CLASS SHAREHOLDER PERCENTAGE HELD
- ------------------------------- ----- -------------------------------------------- ---------------
<S> <C> <C> <C>
A Northstar Advantage Funds 73.5%
FBO Class A Shareholders
2 Pickwick Plaza
Greenwich, CT 06830
Charles Floyd Rechlin 8.9
c/o Sullivan & Cromwell
444 South Flower St
Los Angeles, CA 90071
B Northstar Advantage Funds 51.5
FBO Class T Shareholders
2 Pickwick Plaza
Greenwich, CT 06830
Northstar Advantage Funds 39.9
FBO Class B Shareholders
2 Pickwick Plaza
Greenwich, CT 06830
C Northstar Advantage Funds 87.5
FBO Class C Shareholders
2 Pickwick Plaza
Greenwich, CT 06830
BSDT Cust IRA R/O 11.9
FBO Donald Burke
Rt One Box 1365
Elkhart, TX 75839
Jennifer L. Wedge 9.3
8044 63rd Avenue
Kenosha, WI 53142
Sterling Trust Co. Cust 8.4
FBO Lilie Garcia A02045
PO Box 2526
Waco, TX 76702-2526
Kathleen M. Rinehart 6.2
1633 Prairie Drive
Plainfield, IL 60544
New York Municipal Money Market
Fund......................... O Salomon Brothers A/C V0270 7.1
7 World Trade Center 40th Floor
Attn: Peter Krzystek
New York, NY 10048
Salomon Brothers Inc A/C V0349 5.1
Attn: Peter Krzystek 40th Fl
7 World Trade Center
New York, NY 10048
Les J. Lieberman 5.1
360 East 88th Street, Apt 39A
New York, NY 10128
A Robert J. King 40.3
40 Misty Pine Road
Fairport, NY 14450
Mark Finestone 22.3
PO Box 18034
Rochester, NY 14618
Marvin Finestone 12.7
194 Roby Lane
Rochester, NY 14618
Lisa Burns 12.7
c/o Burns McClellan Inc
304 Park Avenue South, 11th Floor
New York, NY 10010-0000
B Salomon Brothers Holding Co Inc 100.0
Attn: Marc Peckman 38th Floor
7 World Trade Center
New York, NY 10048
</TABLE>
53
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
FUND CLASS SHAREHOLDER PERCENTAGE HELD
- ------------------------------- ----- -------------------------------------------- ---------------
<S> <C> <C> <C>
C Salomon Brothers Holding Co Inc 100%
Attn: Marc Peckman 38th Floor
7 World Trade Center
New York, NY 10048
U.S. Government Income Fund.... O Salomon Brothers Holding Co Inc 98.8
7 World Trade Center
New York, NY 10048
A Jane S Falk TTEE 21.5
Falk Family Trust
UDT DTD 06/12/69
5591-B Avenida Soseiga West
Laguna Hills CA 92653
Everen Clearing Corp. 18.5
A/C 3335-1996
4 Quarters Inc
111 East Kilbourn Avenue
Milwaukee, WI 53202
Carole Fischer 11.6
1641 Third Ave., Apt. 22H
New York, NY 10128
B Salomon Brothers Holding Co Inc 18.5
7 World Trade Center
New York, NY 10048
Smith Barney Inc 6.0
00164765037
388 Greenwich Street
New York, New York 10013
Ethel H. Holt 5.7
3521 Starline Dr
Austin, TX 78759-8941
Smith Barney Inc. 5.5
00118337851
388 Greenwich Street
New York, New York 10013
Smith Barney Inc. 5.2
00152915017
388 Greenwich Street
New York, New York 10013
C Salomon Brothers Holding Co Inc 58.5
Attn: Marc Peckman 38th Floor
7 World Trade Center
New York, NY 10048
Smith Barney Inc. 28.0
00106221327
388 Greenwich Street
New York, NY 10013
Smith Barney Inc. 8.8
00148100605
388 Greenwich Street
New York, NY 10013
High Yield Bond Fund........... O Salomon Brothers Inc A/C V0410 29.7
7 World Trade Center 40th Floor
New York, NY 10048
Attn: Peter Hegel
Salomon Brothers Inc V0407 17.6
Attn: Peter Hegel
7 World Trade Center 40th Floor
New York, NY 10048
Salomon Brothers Inc A/C V0288 17.4
7 World Trade Center 40th Floor
New York, NY 10048
Attn: Peter Krzyster
</TABLE>
54
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
FUND CLASS SHAREHOLDER PERCENTAGE HELD
- ------------------------------- ----- -------------------------------------------- ---------------
<S> <C> <C> <C>
Salomon Brothers A/C V0276 15.0%
7 World Trade Center 40th Floor
Attn: Peter Krzyster
New York, NY 10048
A CITIBANK N A TTEE 8.6
FBO Salomon Brothers Inc Ret Plan
U/A DTD 9/1/90
111 Wall Street, 20th Floor, Zone 1
New York, NY 10043
B N/A N/A
C N/A N/A
Strategic Bond Fund............ O Salomon Brothers Holding Co Inc 87.0
Attn: Marc Peckman 38th Floor
7 World Trade Center
New York, NY 10048
A Austin English Aire Ltd A Ptnr 10.0
1919 Burton Drive
Austin, TX 78741-0000
NFSC Febo #CL5-538809 6.7
Larry Pomerantz
180 Harbor Road
Sands Point, NY 11050
B N/A N/A
C Alex Brown & Sons Incorporated 5.8
PO Box 1346
Baltimore, MD 21203
Smith Barney Inc. 5.1
00148125547
388 Greenwich Street
New York, NY 10013
National Intermediate Municipal
Fund......................... O Salomon Brothers Holding Co Inc 97.4
7 World Trade Center
New York, NY 10048
A Salomon Brothers Holding Co Inc 35.7
Attn: Marc Peckman 38th Floor
7 World Trade Center
New York, NY 10048
Maureen Torsney-Weir 13.7
686 Conestoga Road
Berwyn, PA 19312-1315
Raymond James & Assoc Inc 12.5
For Elite Acct# 50105047
FAO Alice C Aldrich
c/o Alan Aldrich
1080 Darby Rd
San Marino, Ca 91108-2425800
Wexford Clearing Services Corp FBO 9.2
Harry Weiss TTEE
The Weiss FAM Marital Trust
UA DTD 03/29/88
c/o Barbara Luboff
Northridge, CA 91325-1839
Wexford Clearing Services Corp FBO 6.4
Barry J Pearson
125 Falcon Road
Guilford, CT 06437-3142
Ricardo Gomez Derosas & 5.4
Carmen Gomez Derosas
Tenants in Common
3609 Lake Winnipeg Dr
Harvey, LA 70058-5170
</TABLE>
55
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
FUND CLASS SHAREHOLDER PERCENTAGE HELD
- ------------------------------- ----- -------------------------------------------- ---------------
<S> <C> <C> <C>
Dorothy M Unger TTEE 5.3%
Louis A Unger Trust
U/A DTD April 25 1991
205 Magnolia Street
Satellite Bch, FL 32937-3010
B Salomon Brothers Holding Co Inc 31.2
Attn: Marc Peckman 38th Floor
7 World Trade Center
New York, NY 10048
Diane J Connors 21.0
c/o Waystack & King
N Main St PO Box 137
Colebrook, NH 03576-0137
Jeanette S Toll 14.6
c/o Mary Toll
1530 East Lasalle
South Bend, IN 46617
Wexford Clearing Services Corp FBO Ronald 12.1
Segal
4760 Walnut St #100
Boulder, CO 80301-2561
Ross M Maki TTEE 6.7
Rose M Maki Trust REV
3-27-96
7207 210th St SW #203
Edmonds, WA 98026-7273
Fred Da Nicol & 6.0
Margaret A. Nicol
JT Ten
P.O. Box 14
Eastsound, WA 98245-0014
C Salomon Brothers Holding Co Inc 49.5
7 World Trade Center
New York, NY 10048
H R Lewis TTEE 19.3
H R Lewis MD PA Corporation
Professional Plaza One
One Medical Parkway Ste 139
Dallas, TX 75234
Alan Neil Dumesco 10.2
8513 Churchill Downs Rd.
Gaithersburg, MD 20882-1443134
James Omer Olson & 10.1
Connie K. Olson JTWROS
502 Sixth Avenue
Hazen, ND 58545-4627
Total Return Fund.............. O BSDT Custodian for the IRA Account of John 10.2
C. Tate
308 College Street
Marion, VA 24354
Heather H. Dahlberg 10.0
60 Boulder Road
Wellesley Hills, MA 02181-1520
BSD&T Cust 9.7
Alan L. Dahlberg IRA-RO
WAFI #907 P.O. Box 2750
Dubai United Arab Emirates
BSDT Custodian for the IRA Account of Betty 9.5
Bane Tate
308 College Street
Marion, VA 24354
Tana E. Tselepis 8.1
111 Judson Street
Malden, MA 02148
</TABLE>
56
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
FUND CLASS SHAREHOLDER PERCENTAGE HELD
- ------------------------------- ----- -------------------------------------------- ---------------
<S> <C> <C> <C>
Michael S. Hyland & 6.2%
Mary Hyland Ttees
FBO Christopher J. Hyland Trust
U/A DTD 12/25/89
2 South Drive
Larchmont, NY 10538
Michael Hyland Jr. and 6.1
Mary Hyland Ttees
for Michael T. Hyland Trust
U/A DTD 12/25/89
2 South Drive
Larchmont, NY 10538
Michael S. Hyland & 6.1
Mary Hyland Ttees
FBO Catherine E. Hyland Trust
2 South Drive
Larchmont, NY 10538
Michael S. Hyland Jr. & 6.1
Mary Hyland Ttees
for Courtney J. Hyland Trust
2 South Drive
Larchmont, NY 10538
Michael S. Hyland Jr. & 6.1
Mary Hyland Ttees
for Thomas P. Hyland Trust
2 South Drive
Larchmont, NY 10538
Peter S. Blumberg 5.9
Marilyn Rose Cane Co-Execs
Est of Howard G. Blumberg
106 Ciena Oaks Circle W
Palm Beach Gardens, FL 33410
A N/A N/A
B N/A N/A
C A.G. Edwards & Sons Inc C/F 5.2
Marjorie H. Mahler
Rollover IRA Account
P.O. Box 560067
Dallas, TX 75356-0067
Asia Growth Fund............... O Salomon Brothers Holding Co Inc 60.9
Attn: Marc Peckman 38th Floor
7 World Trade Center
New York, NY 10048
California Central Trust Bank Corp. 13.5
FBO Omnibus Participants -- Reinvest
Box 5024
Costa Mesa, CA 92628-5024
Robert W. Collier MD 9.7
119 North 12th Street
Oakdale, LA 71463
BSDT Cust IRA Rollover 8.4
FBO Carol L. Colman
278 Hawley Road
North Salem, NY 10560
A Salomon Brothers Holding Co Inc 57.1
7 World Trade Center
New York, NY 10048
John F. Purcell & 6.4
Jan Purcell JTWROS
470 West End Avenue Apt 12E
New York, NY 10024
B Salomon Brothers Holding Co Inc 67.3
7 World Trade Center
New York, NY 10048
</TABLE>
57
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
FUND CLASS SHAREHOLDER PERCENTAGE HELD
- ------------------------------- ----- -------------------------------------------- ---------------
<S> <C> <C> <C>
C Salomon Brothers Holding Co Inc 22.1%
7 World Trade Center
New York, NY 10048
A.G. Edwards & Sons Inc. C/F 7.2
John L.D. Kronfeld
6820 E. Mississippi Unit D
Denver, CO 80224-1881
Edward J. Kaufman & 5.3
Bonnie B. Kaufman JTWROS
186 N Fifth Ave.
Monrovia, CA 91016
Carolyn S. Edwards 5.0
507 Inwood Dr.
Baytown, TX 77521-4011
Investors Fund................. O N/A N/A
A Smith Barney Inc. 5.2
388 Greenwich Street
New York, NY 10013
Salomon Brothers Inc A/C PWM1389 5.1
Attn: Peter Hegel
7 World Trade Center
40th Floor
New York, NY 10048
B N/A N/A
C Raymond James & Assoc. Inc. 7.2
For Elite Acct #50125031
FAO AME Zion Church Brthrhood
Pensions Department
PO Box 34454
Charlotte, NC 28234-4454545
Smith Barney Inc. 5.1
388 Greenwich Street
New York, NY 10013
Capital Fund................... O Salomon Inc 54.0
Profit Sharing Plan
7 World Trade Center 34th Floor
New York, NY 10048
A Ramon J. Falero Ttee 6.4
Ramon J. Falero Rev. Trust
10125 NW 116th Way Ste 5
Miami, FL 33178-1164259
Lawrence D. Hutchins 5.0
83 Delafield Island Rd.
Darien, CT 06820-6016
B Audrie T. Allen Tr 41.2
The Audrie T. Allen Trust
U/A Dated 6/23/93
1011 Bonnie Brae Place
Vista, CA 92084-5529
Raymond James & Assoc. Inc. CSDN 20.8
Michael G. Kushnick IRA
107 Pommander Walk
Alexandria, VA 22314
Everen Clearing Corp. Cust. 8.7
FBO Tiran Porter IRA Rollover
15250 Ventura Blvd. #900
Sherman Oaks, CA 91403-3221
C H. R Lewis Ttee 11.0
H. R Lewis MD PA Corporation
Professional Plaza One
One Medical Parkway Ste 139
Dallas, TX 75234
</TABLE>
58
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
FUND CLASS SHAREHOLDER PERCENTAGE HELD
- ------------------------------- ----- -------------------------------------------- ---------------
<S> <C> <C> <C>
William Lintner Jr. 9.1%
24 Partridge Run
Montvale, NJ 07645-0000
Everen Clearing Corp. Cust 6.0
FBO Jack N. Chidester
IRA Rollover
A/C 2231-5778
1713 E Colter
Phoenix, AZ 85016-3305
Stephen J. Walker & 5.9
Barbara J. Walker Jtwros
1276 32nd Court NW
Salem, OR 97304
Muriel Landi-Fontana 5.9
5 Freshmeadow Road
Easton, CT 06612
A.G. Edwards & Sons Inc. C/F 5.6
Sally A. Maag
Rollover IRA Account
2933 Belmont Woods Way
Belmont, CA 94002-2973
Interstate/Johnson Lane 5.1
FBO 201-85984-13
Interstate Tower
P.O. Box 1220
Charlotte, NC 28201-1220
</TABLE>
59
<PAGE>
<PAGE>
INVESTMENT MANAGER
Each Fund retains SBAM to act as its investment manager. SBAM, a
wholly-owned subsidiary of Salomon Brothers Holding Company Inc, which in turn
is wholly-owned by Salomon Inc, serves as the investment manager to numerous
individuals and institutions and other investment companies. On May 1, 1990,
SBAM purchased substantially all of the assets of Lehman Management Co., Inc.,
the previous investment adviser to the Investors Fund and the Capital Fund, and
the name of each Fund was changed from Lehman Investors Fund, Inc. and Lehman
Capital Fund, Inc. to Salomon Brothers Investors Fund Inc and Salomon Brothers
Capital Fund Inc, respectively.
The management contract between SBAM and each respective Fund provides that
SBAM shall manage the operations of the Fund, subject to policy established by
the Board of Directors. Pursuant to the applicable management contract, SBAM
manages each Fund's investment portfolio, directs purchases and sales of
portfolio securities and reports thereon to the Fund's officers and directors
regularly. SBAM also provides the office space, facilities, equipment and
personnel necessary to perform the following services for each Fund: Commission
compliance, including record keeping, reporting requirements and registration
statements and proxies; supervision of Fund operations, including coordination
of functions of administrator, transfer agent, custodian, accountants, counsel
and other parties performing services or operational functions for each Fund;
certain administrative and clerical services, including certain accounting
services, facilitation of redemption requests, exchange privileges, and account
adjustments, development of new shareholder services and maintenance of certain
books and records; and certain services to each Fund's shareholders, including
assuring that investments and redemptions are completed efficiently, responding
to shareholder inquiries and maintaining a flow of information to shareholders.
In connection with SBAM's service as investment manager to the Strategic
Bond Fund, Salomon Brothers Asset Management Limited ('SBAM Limited'), whose
business address is Victoria Plaza, 111 Buckingham Palace Road, London SW1W OSB,
England, provides certain advisory services to SBAM relating to currency
transactions and investments in non-dollar-denominated debt securities for the
benefit of the Strategic Bond Fund pursuant to a subadvisory consulting
agreement. At no additional expense to the Strategic Bond Fund, SBAM pays SBAM
Limited, as full compensation for all services provided under the subadvisory
consulting agreement, a fee in an amount equal to the fee payable to SBAM under
its management contract with respect to the Strategic Bond Fund multiplied by
the current value of the net assets of the portion of the assets of the
Strategic Bond Fund as SBAM shall allocate and divided by the current value of
the net assets of the Strategic Bond Fund. Like SBAM, SBAM Limited is an
indirect, wholly-owned subsidiary of Salomon Inc. SBAM Limited is a member of
the Investment Management Regulatory Organization Limited in the United Kingdom
and is registered as an investment adviser in the United States pursuant to the
Investment Advisers Act of 1940, as amended (the 'Advisers Act').
Pursuant to a sub-advisory agreement, SBAM has retained SBAM AP as
sub-adviser to the Asia Growth Fund (the 'Subadvisory Agreement'). Subject to
the supervision of SBAM, SBAM AP will have responsibility for the day-to-day
management of the Fund's portfolio. SBAM AP is compensated at no additional cost
to the Asia Growth Fund. Like SBAM, SBAM AP is an indirect, wholly-owned
subsidiary of Salomon Inc. SBAM AP is a member of the Hong Kong Securities and
Futures Commission and is registered as an investment adviser in the United
States pursuant to the Advisers Act. Pursuant to a sub-administration agreement,
SBAM has retained SBAM Limited to provide certain administrative services to
SBAM relating to the Asia Growth Fund (the 'Subadministration Agreement').
Investment decisions for a particular Fund are made independently from
those of other funds or accounts managed by SBAM, SBAM AP or SBAM Limited. Such
other funds or accounts may also invest in the same securities as a Fund. If
those funds or accounts are prepared to invest in, or desire to dispose of, the
same security at the same time as a Fund, however, transactions in such
securities will be made, insofar as feasible, for the respective funds and
accounts in a manner deemed equitable to all. In some cases, this procedure may
adversely affect the size of the position obtained for or disposed of by a Fund
or the price paid or received by a Fund. In addition, because of different
investment objectives, a
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particular security may be purchased for one or more funds or accounts when one
or more funds or accounts are selling the same security.
As compensation for its services, SBAM receives, on behalf of each Fund
other than the Investors Fund, as described below, a monthly management fee, at
annual rate based upon the average daily net assets of the Fund as follows: .20%
for the Cash Management Fund and the New York Municipal Money Market Fund; .50%
for the National Intermediate Municipal Fund; .60% for the U.S. Government
Income Fund; .75% for the High Yield Bond Fund and the Strategic Bond Fund; .55%
for the Total Return Fund, .80% for the Asia Growth Fund. SBAM receives from the
Capital Fund a management fee payable monthly, at an annual rate of 1.00% of
average daily net assets up to $100 million, .75% on the next $100 million,
.625% on the next $200 million and .50% on average daily net assets in excess of
$400 million. For the last three fiscal years ended December 31, 1996, the SBAM
has received the following amounts as management fees and has reimbursed the
Funds for expenses in the following amounts:
<TABLE>
<CAPTION>
EXPENSES
GROSS FEES WAIVER REIMBURSED
---------- -------- ----------
<S> <C> <C> <C>
CASH MANAGEMENT FUND
Year Ended December 31, 1994........................ $ 29,088 $ 29,088 $ 0
Year Ended December 31, 1995........................ $ 25,505 $ 25,505 $ 75,716
Year Ended December 31, 1996........................ $ 36,898 $ 36,898 $ 13,646
NEW YORK MUNICIPAL MONEY MARKET FUND
Year Ended December 31, 1994........................ $ 468,902
Year Ended December 31, 1995........................ $ 449,809 $ 31,455
Year Ended December 31, 1996........................ $ 393,078 0
NATIONAL INTERMEDIATE MUNICIPAL FUND
February 22, 1995 (commencement of operations)
December 31, 1995................................. $ 44,953 $ 44,953 $ 35,803
Year Ended December 31, 1996........................ $ 56,186 $ 56,186 $ 83,959
U.S. GOVERNMENT INCOME FUND
February 22, 1995 (commencement of operations)
December 31, 1995................................. $ 53,073 $ 53,073 $ 39,324
Year Ended December 31, 1996........................ $ 66,682 $ 66,682 $ 85,462
HIGH YIELD BOND FUND
February 22, 1995 (commencement of operations)
December 31, 1995................................. $ 108,535 $ 79,385
Year Ended December 31, 1996........................ $ 565,248 $191,119 0
STRATEGIC BOND FUND
February 22, 1995 (commencement of operations)
December 31, 1995................................. $ 71,026 $ 71,026 $ 11,822
Year Ended December 31, 1996........................ $ 146,387 $144,551 0
TOTAL RETURN FUND
September 11, 1995 (commencement of operations)
December 31, 1995................................. $ 15,069 $ 15,069 $ 4,346
Year Ended December 31, 1996........................ $ 184,118 $184,118 $102,651
ASIA GROWTH FUND
May 6, 1996 (commencement of operations) December
31, 1996.......................................... $ 30,723 $ 30,723 $132,687
CAPITAL FUND
Year Ended December 31, 1994........................ $1,035,255
Year Ended December 31, 1995........................ $ 957,755
Year Ended December 31, 1996........................ $1,143,084
</TABLE>
With respect to each Fund other than the Investors Fund and the Capital
Fund, for the 1996 fiscal year, SBAM has voluntarily agreed to impose a cap on
the total Fund operating expenses (exclusive of taxes, interest and
extraordinary expenses such as litigation and indemnification expenses) through
reimbursement of certain expenses and, to the extent necessary, waiver of
management fees. See 'Expense Information -- Annual Fund Operating Expenses' in
the Prospectus. For its services under the Subadvisory Agreement, SBAM AP
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is compensated by SBAM at a rate agreed to between SBAM and SBAM AP from time to
time.
The Investors Fund pays SBAM a quarterly fee (the 'Base Fee') at the end of
each calendar quarter based on the following rates:
<TABLE>
<CAPTION>
AVERAGE DAILY NET ASSETS ANNUAL FEE RATE
- ------------------------------------------------------ ---------------
<S> <C>
First $350 million.................................... .650%
Next $150 million..................................... .550%
Next $250 million..................................... .525%
Next $250 million..................................... .500%
Over $1 billion....................................... .450%
</TABLE>
This fee may be increased or decreased based on the performance of the
Investors Fund relative to the investment record of the S&P 500 Index. At the
end of each calendar quarter, for each percentage point by which the investment
performance of the Investors Fund exceeds or is exceeded by the investment
record of the S&P 500 Index over the one year period ending on the last day of
the calendar quarter for which the adjustment is being calculated, the Base Fee
will be adjusted upward or downward by the product of: (i) 1/4 of .01%
multiplied by; (ii) the average daily net assets of the Investors Fund for the
one year period preceding the end of the calendar quarter. If the amount by
which the Investors Fund outperforms or underperforms the S&P 500 Index is not a
whole percentage point, a pro rata adjustment shall be made. However, there will
be no performance adjustment unless the investment performance of the Investors
Fund exceeds or is exceeded by the investment record of the S&P 500 Index by at
least one percentage point. The maximum quarterly adjustment is 1/4 of .10%,
which would occur if the Investors Fund's performance exceeds or is exceeded by
the S&P 500 Index by ten or more percentage points. The performance adjustment
will be paid quarterly based on a rolling one year period.
For purposes of determining the performance adjustment, the investment
performance of the Investors Fund for any one year period shall mean the sum of:
(i) the change in the Fund's net asset value per share during such period; (ii)
the value of cash distributions per share accumulated to the end of such period;
and (iii) the value of capital gains taxes per share (if any) paid or payable on
undistributed realized long-term capital gains accumulated to the end of such
period; expressed as a percentage of its net asset value per share at the
beginning of such period. For this purpose, the value of distributions per share
of realized capital gains and of dividends per share paid from investment income
shall be treated as reinvested in shares of the Investors Fund at the net asset
value per share in effect at the close of business on the record date for the
payment of such distributions and dividends, after giving effect to such
distributions and dividends. In addition, while the Investors Fund does not
anticipate paying any taxes, the value of any capital gains taxes per share paid
or payable on undistributed realized long-term capital gains shall be treated as
reinvested in shares of the Fund at the net asset value per share in effect at
the close of business on the date on which provision is made for such taxes,
after giving effect to such taxes.
For purposes of calculating the performance adjustment, the investment
record of the S&P 500 Index for any one year period shall mean the sum of: (i)
the change in the level of the index during such period; and (ii) the value,
computed consistently with the index, of cash distributions made by companies
whose securities comprise the index accumulated to the end of such period;
expressed as a percentage of the index level at the beginning of such period.
For this purpose, cash distributions on the securities which comprise the index
shall be treated as reinvested in the index at least as frequently as the end of
each calendar quarter following the payment of the dividend.
Prior to May 1, 1997, the Investors Fund paid SBAM the following Base Fee:
.500% of average daily net assets up to $350 million, .400% on the next $150
million, .375% on the next $250 million, .350% on the next $250 million and
.300% on average daily net assets over $1 billion. Prior to August 1, 1994, the
Investors Fund paid SBAM a management fee each quarter, based upon the average
daily value of the Investors Fund's net assets, at an annual rate computed as
follows: none on the first $25 million; 1/8 of 1% (.50% annually) on the next
$325 million; 3/40 of 1% (.30% annually) on the next $150 million; 1/16 of 1%
(.25% annually) on the next $250 million; and 1/20 of 1% (.20% annually) on the
amount in excess of $750
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million. SBAM was paid $1,614,897, $1,747,839 and $1,721,023 in management fees
for the years ended December 31, 1995, 1994 and 1993, respectively.
For its services under the Subadministration Agreement, SBAM Limited is
compensated by SBAM at no additional cost to the Asia Growth Fund at an annual
rate of .10% of the Asia Growth Fund's daily net assets.
The management contract for each of the Series Funds provides that it will
continue for an initial two year period and thereafter for successive annual
periods, and the management contract for each of the Investors Fund and the
Capital Fund provides that it will continue for successive annual periods;
provided that, with respect to each such contract, such continuance is
specifically approved at least annually: (a) by the vote of a majority of the
directors not parties to the management contract or 'interested persons' of such
parties, as defined in the 1940 Act, cast in person at a meeting called for the
specific purpose of voting on such management contract and (b) either by the
Board of Directors or a majority of the outstanding voting securities. The
management contract may be terminated on 60 days' written notice by either party
and will terminate automatically if assigned.
Under the terms of the management contract between each Fund and SBAM,
neither SBAM nor its affiliates shall be liable for losses or damages incurred
by the Fund (including, with respect to the Asia Growth Fund, the imposition of
certain Hong Kong tax liabilities on the Fund), unless such losses or damages
are attributable to the wilful misfeasance, bad faith or gross negligence on
either the part of SBAM or its affiliate or from reckless disregard by it of its
obligations and duties under the Management Contract ('disabling conduct'). In
addition, the Asia Growth Fund will indemnify SBAM and its affiliates and hold
each of them harmless against any losses or damages, including the imposition of
certain Hong Kong tax liabilities on the Fund, not resulting from disabling
conduct.
Rule 17j-1 under the 1940 Act requires all registered investment companies
and their investment advisers and principal underwriters to adopt written codes
of ethics and institute procedures designed to prevent 'access persons' (as
defined in Rule 17j-1) from engaging in any fraudulent, deceptive or
manipulative trading practices. The Board of Directors for the Series Fund, the
Investors Fund and the Capital Fund have each adopted a code of ethics (the
'Fund Code') that incorporates personal trading policies and procedures
applicable to access persons of each Fund, which includes officers, directors
and other specified persons who may make, participate in or otherwise obtain
information concerning the purchase or sale of securities by the Fund. In
addition, the Fund Code attaches and incorporates personal trading policies and
procedures applicable to access persons of the investment manager and if
applicable, any sub-adviser to each Fund, which policies serve as such adviser's
code of ethics (the 'Adviser Code'). The Fund and Adviser Codes have been
designed to address potential conflict of interests that can arise in connection
with the personal trading activities of investment company and investment
advisory personnel.
Pursuant to the Fund and Adviser Codes, access persons are generally
permitted to engage in personal securities transactions, provided that a
transaction does not involve securities that are being purchased or sold, are
being considered for purchase or sale, or are being recommended for purchase or
sale by or for a Fund. In addition, the Adviser Code contains specified
prohibitions and blackout periods for certain categories of securities and
transactions, including a prohibition on short-term trading and purchasing
securities during an initial public offering. The Adviser Code, with certain
exceptions, also requires that access persons obtain preclearance to engage in
personal securities transactions. Finally, the Fund and Adviser Codes require
access persons to report all personal securities transactions periodically.
ADMINISTRATOR
Investors Bank & Trust Company ('IBT'), located at 89 South Street, Boston,
Massachusetts 02111, provides certain administrative services to each Fund. The
services provided by Investors Bank under the applicable administration
agreement include certain accounting, clerical and bookkeeping services, Blue
Sky compliance, corporate secretarial services and assistance in the preparation
and filing of tax returns and reports to shareholders and the SEC.
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For its services as administrator, each Fund (except the Investors Fund and
the Capital Fund) pays IBT a fee, calculated daily and payable monthly, at an
annual rate of .08% of the applicable Fund's average daily net assets. Pursuant
to a sub-administration agreement between SBAM and Investors Bank, for its
services as administrator to each of the Investors Fund and the Capital Fund and
at no additional cost to the Investors Fund or the Capital Fund, SBAM pays
Investors Bank a fee each month at an annual rate of .08% of the average daily
net assets of the Investors Fund and .06% of the average daily net assets of the
Capital Fund, respectively. For its services as administrator to the Cash
Management Fund, the Series Funds paid The Boston Company Advisors, Inc.
('Boston Company'), the Fund's previous administrator, a fee, calculated daily
and payable monthly, at an annual rate of .08% of the Cash Management Fund's
average daily net assets. For the last three fiscal years ended December 31,
1996, the Funds have paid the amounts as administration fees pursuant to each
administration and sub-administration agreement as set forth below.
<TABLE>
<CAPTION>
BOSTON COMPANY IBT
-------------- --------
<S> <C> <C>
CASH MANAGEMENT FUND
Year Ended December 31, 1994.................................. $ 10,499 $ 1,136
Year Ended December 31, 1995.................................. N/A $ 10,216
Year Ended December 31, 1996.................................. N/A $ 14,400
NEW YORK MUNICIPAL MONEY MARKET FUND
Year Ended December 31, 1994.................................. $174,144 $ 15,878
Year Ended December 31, 1995.................................. N/A $180,146
Year Ended December 31, 1996.................................. N/A $162,833
NATIONAL INTERMEDIATE MUNICIPAL FUND
February 22, 1995 (commencement of operations) December 31,
1995........................................................ N/A $ 5,570
Year Ended December 31, 1996.................................. N/A $ 8,145
U.S. GOVERNMENT INCOME FUND
February 22, 1995 (commencement of operations) December 31,
1995........................................................ N/A $ 5,491
Year Ended December 31, 1996.................................. N/A $ 7,918
HIGH YIELD BOND FUND
February 22, 1995 (commencement of operations) December 31,
1995........................................................ N/A $ 7,904
Year Ended December 31, 1996.................................. N/A $ 34,645
STRATEGIC BOND FUND*
February 22, 1995 (commencement of operations) December 31,
1995........................................................ N/A $ 5,778
Year Ended December 31, 1996.................................. N/A $ 12,012
TOTAL RETURN FUND
September 11, 1995 (commencement of operations) December 31,
1995........................................................ N/A $ 1,841
Year Ended December 31, 1996.................................. N/A $ 18,789
ASIA GROWTH FUND
May 6, 1996 (commencement of operations) December 31, 1996.... N/A $ 24,167
</TABLE>
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DISTRIBUTOR
SBI, located at 7 World Trade Center, New York, New York 10048, serves as
each Fund's distributor pursuant to a distribution contract. SBI is a wholly
owned subsidiary of Salomon Brothers Holding Company Inc, which is in turn
wholly owned by Salomon Inc.
Rule 12b-1 promulgated under the 1940 Act (the 'Rule') provides, among
other things, that an investment company may bear expenses of distributing its
shares only pursuant to a plan adopted in accordance with the Rule. The Board of
Directors of each Fund (other than the Cash Management Fund and the New York
Municipal Money Market Fund) has adopted a services and distribution plan with
respect to each class of shares (other than Class O) of each Fund pursuant to
the Rule (the 'Plan'). The Board of Directors of each Fund has determined that
there is a reasonable likelihood that the Plan will benefit such Fund and its
shareholders.
Under the Plans, each Fund (other than the Cash Management Fund and the New
York Municipal Money Market Fund) pays SBI a service fee, accrued daily and paid
monthly, calculated at the annual rate of .25% of the value of the applicable
Fund's average daily net assets attributable to Class A, Class B and Class C
shares. In addition, each Fund (other than the Cash Management Fund and New York
Municipal Money Market Fund) pays SBI a distribution fee with respect to Class B
and Class C shares primarily intended to compensate SBI for its initial expense
of paying investment representatives a commission upon sales of Class B shares
or Class C shares, as the case may be. The Class B and Class C distribution fees
are each calculated at the annual rate of .75% of the value of a Fund's average
daily net assets attributable to the Class B or Class C shares, and New York
Municipal Money Market Fund as the case may be. Such fees may be used as
described in the Prospectus. Class O shares and shares of all classes of the
Cash Management Fund and the New York Municipal Money Market Fund pay no
distribution or shareholder service fee. SBI is authorized, to the extent
indicated in the Prospectus, to retain all or a portion of the payments made to
it pursuant to the applicable Plan and make payments to third parties that
provide assistance in selling Fund shares, or to institutions that provide
certain shareholder support services to investors. Each Plan provides that SBI
may make payments to assist in the distribution of each class of a Fund's shares
out of the other fees received by it or its affiliates from a Fund, its past
profits or any other sources available to it.
A quarterly report of the amounts expended with respect to each Fund under
the applicable Plan, and the purposes for which such expenditures were incurred,
is presented to the Board of Directors for its review. In addition, each Plan
provides that it may not be amended with respect to any class of shares of the
applicable Fund to increase materially the costs which may be borne for
distribution pursuant to the Plan without the approval of shareholders of that
class, and that other material amendments of the Plan must be approved by the
Board of Directors, and by the Directors who are neither 'interested persons,'
as defined in the 1940 Act, nor have any direct or indirect financial interest
in the operation of the Plan or any related agreements, by vote cast in person
at a meeting called for the purpose of considering such amendments. Each Plan
and any related agreements are subject to annual approval by such vote cast in
person at a meeting called for the purpose of voting on the Plan. Each Plan may
be terminated with respect to a Fund or any class thereof at any time by vote of
a majority of the Directors who are not 'interested persons' and have no direct
or indirect financial interest in the operation of the Plan or in any related
agreement or by vote of a majority of the shares of a Fund or class, as the case
may be. For the year ended December 31, 1996, the aggregate amount spent by the
various classes of each Fund under the applicable Plan was as follows:
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<TABLE>
<CAPTION>
AMOUNT AMOUNT
SPENT ON SPENT ON AMOUNT
AMOUNT PRINTING AND INTEREST, CARRYING SPENT ON TOTAL
SPENT ON MAILING OF OR OTHER MISCELLANEOUS AMOUNT
ADVERTISING PROSPECTUS FINANCIAL CHARGES EXPENSES SPENT
----------- ------------ ------------------ ------------- --------
<S> <C> <C> <C> <C> <C>
NATIONAL INTERMEDIATE FUND
Class A............................. $33,334 $ 812 $ 12,673 $ 1,914 $ 48,733
Class B............................. $33,333 $ 681 $ 13,057 $ 729 $ 47,800
Class C............................. $33,333 $ 437 $ 13,057 $ 550 $ 47,377
U.S. GOVERNMENT INCOME FUND
Class A............................. $33,334 $ 713 $ 7,757 $ 1,880 $ 43,684
Class B............................. $33,333 $ 1,028 $ 13,292 $ 578 $ 48,231
Class C............................. $33,333 $ 423 $ 12,792 $ 536 $ 47,034
HIGH YIELD BOND FUND
Class A............................. $41,667 $ 35,070 $ 0 $77,782 $154,519
Class B............................. $41,667 $ 49,652 $ 0 $ 4,949 $ 96,268
Class C............................. $41,666 $ 6,375 $ 0 $ 579 $ 48,620
STRATEGIC BOND FUND
Class A............................. $33,334 $ 3,611 $ 6,993 $ 7,532 $ 51,470
Class B............................. $33,333 $ 7,155 $ 6,993 $ 1,386 $ 48,867
Class C............................. $33,333 $ 2,106 $ 6,993 $ 350 $ 42,782
TOTAL RETURN FUND
Class A............................. $50,000 $ 11,426 $ 9,766 $30,742 $101,934
Class B............................. $50,000 $ 15,682 $ 9,762 $ 1,718 $ 77,162
Class C............................. $50,000 $ 1,717 $ 9,768 $ 67 $ 61,552
ASIA GROWTH FUND
Class A............................. $16,667 $ 1,378 $ 89,408 $ 4,874 $112,327
Class B............................. $16,667 $ 1,180 $ 89,317 $-- $107,164
Class C............................. $16,666 $ 92 $ 3,314 $-- $ 20,072
INVESTORS FUND
Class A............................. $33,333 $ 4,496 $ 11,868 $ 8,870 $ 58,567
Class B............................. $33,333 $ 4,214 $ 11,844 $ 747 $ 50,138
Class C............................. $33,333 $ 1,028 $ 11,844 $ 506 $ 46,711
CAPITAL FUND
Class A............................. $ 0 $ 128 $ 0 $ 43 $ 171
Class B............................. $ 0 $ 82 $ 0 $ 0 $ 82
Class C............................. $ 0 $ 48 $ 0 $ 0 $ 48
</TABLE>
EXPENSES
Each Fund's expenses include taxes, interest, fees and salaries of such
Fund directors and officers who are not directors, officers or employees of the
Fund's service contractors, Commission fees, state securities qualification
fees, costs of preparing and printing prospectuses for regulatory purposes and
for distribution to existing shareholders, advisory and administration fees,
charges of the custodian and of the transfer and dividend disbursing agent,
certain insurance premiums, outside auditing and legal expenses, costs of
shareholder reports and shareholder meetings and any extraordinary expenses.
Each Fund also pays for brokerage fees and commissions (if any) in connection
with the purchase and sale of portfolio securities. Fund expenses are allocated
to a particular class of Fund shares based on either expenses identifiable to
the class or the relative net assets of the class and other classes of Fund
shares.
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PORTFOLIO TRANSACTIONS
Subject to policy established by the Board of Directors, the investment
manager is primarily responsible for each Fund's portfolio decisions and the
placing of the Fund's portfolio transactions.
Fixed-income, certain short-term securities and certain equities normally
will be purchased or sold from or to issuers directly or to dealers serving as
market makers for the securities at a net price, which may include dealer
spreads and underwriting commissions. Equity securities may also be purchased or
sold through brokers who will be paid a commission.
The general policy of each Fund in selecting brokers and dealers is to
obtain the best results taking into account factors such as the general
execution and operational facilities of the broker or dealer, the type and size
of the transaction involved, the creditworthiness of the broker or dealer, the
stability of the broker or dealer, execution and settlement capabilities, time
required to negotiate and execute the trade, research services and the
investment manager's arrangements related thereto (as described below), overall
performance, the dealer's risk in positioning the securities involved, and the
broker's commissions and dealer's spread or mark-up. While the investment
manager generally seeks the best price in placing its orders, a Fund may not
necessarily be paying the lowest price available.
Notwithstanding the above, in compliance with Section 28(e) of the
Securities Exchange Act of 1934, the investment manager may select brokers who
charge a commission in excess of that charged by other brokers, if the
investment manager determines in good faith that the commission to be charged is
reasonable in relation to the brokerage and research services provided to the
investment manager by such brokers. Research services generally consist of
research or statistical reports or oral advice from brokers and dealers
regarding particular companies, industries or general economic conditions. The
investment manager may also have arrangements with brokers pursuant to which
such brokers provide research services to the investment manager in exchange for
a certain volume of brokerage transactions to be executed by such broker. While
the payment of higher commissions increases a Fund's costs, the investment
manager does not believe that the receipt of such brokerage and research
services significantly reduces its expenses as a Fund's investment manager.
Arrangements for the receipt of research services from brokers may create
conflicts of interest.
Research services furnished to the investment manager by brokers who effect
securities transactions for a Fund may be used by the investment manager in
servicing other investment companies and accounts which it manages. Similarly,
research services furnished to the investment manager by brokers who effect
securities transactions for other investment companies and accounts which the
investment manager manages may be used by the investment manager in servicing a
Fund. Not all of these research services are used by the investment manager in
managing any particular account, including the Funds.
Under the 1940 Act, 'affiliated persons' of a Fund are prohibited from
dealing with it as a principal in the purchase and sale of securities unless an
exemptive order allowing such transactions is obtained from the SEC. However,
each Fund may purchase securities from underwriting syndicates of which the
investment manager or any of its affiliates as defined in the 1940 Act, is a
member under certain conditions, in accordance with Rule 10f-3 promulgated under
the 1940 Act.
Each Fund contemplates that, consistent with the policy of obtaining the
best net results, brokerage transactions may be conducted through 'affiliated
broker/dealers,' as defined in the 1940 Act. Each Company's Board of Directors
has adopted procedures in accordance with Rule 17e-1 promulgated under the 1940
Act to ensure that all brokerage commissions paid to such affiliates are
reasonable and fair in the context of the market in which such affiliates
operate. Any such compensation will be paid in accordance with applicable SEC
regulations. For the fiscal years ended December 31, 1994 (where applicable),
1995 and 1996,
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the Funds paid aggregate brokerage commissions, including affiliated brokerage
commissions as follows:
<TABLE>
<CAPTION>
AGGREGATE BROKERAGE BROKERAGE COMMISSIONS
COMMISSIONS PAID PAID BY THE FUNDS TO SBI
------------------- ------------------------
<S> <C> <C>
TOTAL RETURN FUND
September 11, 1995 (commencement of
operations) December 31, 1995............. $ 9,432 $ 210**
Year Ended December 31, 1996................ $ 42,520 $ 1,758**
CAPITAL FUND
Year Ended December 31, 1994................ $ 482,953 $ 45,612
Year Ended December 31, 1995................ $ 629,443 $ 57,993***
Year Ended December 31, 1996................ $ 621,777 $ 29,772***
INVESTORS FUND
Year Ended December 31, 1994................ $ 676,229 $ 61,788
Year Ended December 31, 1995................ $ 998,071 $ 95,179+
Year Ended December 31, 1996................ $ 619,781 $ 59,316+
</TABLE>
- ------------
** Represents 2.2% and 4.1% of total brokerage commissions paid by the Total
Return Fund, and SBI executed 1.60% and 4.2% of the aggregate dollar amount
of transactions involving commissions during the 1995 and 1996 fiscal years
end, respectively.
*** Represents 9.0% and 4.8% of total brokerage commissions paid by the Capital
Fund, and SBI executed 7.0% and 6.3% of the aggregate dollar amount of
transactions involving commissions during the 1995 and 1996 fiscal years
end, respectively.
+ Represents 9.5% and 9.6% of total brokerage commissions paid by the
Investors Fund, and SBI executed 9.9% and 9.8% of the aggregate dollar
amount of transactions involving commissions during the 1995 and 1996 fiscal
years end, respectively.
NET ASSET VALUE
Because of the differences in service and distribution fees and
class-specific expenses, the per share net asset value of each class may differ.
The following is a description of the procedures used by a Fund in valuing its
assets.
In calculating net asset value, portfolio securities listed or traded on
national securities exchanges, or reported by the NASDAQ National Market
reporting system, are valued at the last sale price, or, if there have been no
sales on that day, at the mean of the current bid and ask price which represents
the current value of the security. Over-the-counter securities are valued at the
mean of the current bid and ask price.
Securities that are primarily traded on foreign exchanges generally are
valued at the closing price of such securities on their respective exchanges,
except that if the investment manager is of the opinion that such price would
result in an inappropriate value for a security, including as a result of an
occurrence subsequent to the time a value was so established then the fair value
of those securities will be determined by consideration of other factors by or
under the direction of the Board of Directors or its delegates. In valuing
assets, prices denominated in foreign currencies are converted to U.S. dollar
equivalents at the current exchange rate. Securities may be valued by
independent pricing services which use prices provided by market-makers or
estimates of market values obtained from yield data relating to instruments or
securities with similar characteristics. Short-term obligations with maturities
of 60 days or less are valued at amortized cost, which constitutes fair value as
determined by the Board of Directors. Amortized cost involves valuing an
instrument at its original cost to a Fund and thereafter assuming a constant
amortization to maturity of any discount or premium, regardless of the impact of
fluctuating interest rates on the market value of the instrument. All other
securities and other assets of a Fund will be valued at fair value as determined
in good faith pursuant to procedures adopted by the Board of Directors of each
Fund.
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As stated in the Prospectus, each of the Cash Management Fund and the New
York Municipal Money Market Fund seeks to maintain a net asset value of $1.00
per share and, in this connection, values the Fund's instruments on the basis of
amortized cost pursuant to Rule 2a-7 promulgated under the 1940 Act. While this
method provides certainty in valuation, it may result in periods during which
value, as determined by amortized cost, is higher or lower than the price the
Fund would receive if it sold the instrument. During such periods the yield to
investors in the Fund may differ somewhat from that obtained in a similar
company which uses market values for all its portfolio securities. For example,
if the use of amortized cost resulted in a lower (higher) aggregate portfolio
value on a particular day, a prospective investor in the Fund would be able to
obtain a somewhat higher (lower) yield than would result from investment in such
a similar company, and existing investors would receive less (more) investment
income. The purpose of using the amortized cost method of calculation is to
attempt to maintain a stable net asset value per share of $1.00.
The Board of Directors has established procedures reasonably designed,
taking into account current market conditions and the investment objective of
the Cash Management Fund and the New York Municipal Money Market Fund, to
stabilize the net asset value per share as computed for the purposes of sales
and redemptions at $1.00. These procedures include periodic review, as the Board
of Directors deem appropriate and at such intervals as are reasonable in light
of current market conditions, of the relationship between the amortized cost
value per share and net asset value per share based upon available indications
of market value.
In the event of a deviation of 1/2 of 1% between the net asset value of the
Cash Management Fund or the New York Municipal Money Market Fund, as applicable,
based upon available market quotations or market equivalents and $1.00 per share
based on amortized cost, the Board of Directors will promptly consider what
action, if any, should be taken. The Board of Directors will also take such
action as they deem appropriate to eliminate or to reduce to the extent
reasonably practicable any material dilution or other unfair result which might
arise from differences between the two. Such action may include redemption in
kind, selling instruments prior to maturity to realize capital gains or losses
or to shorten the average maturity, withholding dividends, or utilizing a net
asset value per share as determined by using available market quotations.
ADDITIONAL PURCHASE INFORMATION
DETERMINATION OF PUBLIC OFFERING PRICE
Each Fund offers its shares to the public on a continuous basis. The public
offering price per Class A share of each Fund is equal to the net asset value
per share at the time of purchase plus a sales charge based on the aggregate
amount of the investment, except for Class A purchases, including rights of
accumulation, equalling or exceeding $1 million. The public offering price per
Class B share, Class C share and Class O share is equal to the net asset value
per share at the time of purchase and no sales charge is imposed at the time of
purchase. A contingent deferred sales charge ('CDSC'), however, is imposed on
certain redemptions of Class A shares, Class B shares and Class C shares.
CLASS A SHARES
Volume Discounts. The schedule of sales charges on Class A shares described
in the Prospectus relating to Class A shares applies to purchases made by any
'purchaser,' which is defined to include the following: (a) an individual; (b)
an individual, his or her spouse and their children under the age of 21
purchasing shares for his or her own account; (c) a trustee or other fiduciary
purchasing shares for a single trust estate or single fiduciary account; (d) a
pension, profit-sharing or other employee benefit plan qualified under Section
401(a) of the Internal Revenue Code of 1986, as amended (the 'Code'), and
qualified employee benefit plans of employers who are 'affiliated persons' of
each other within the meaning of the 1940 Act; (e) tax-exempt organizations
enumerated in Section 501(c)(3) or (13) of the Code; (f) any other organized
group of persons, provided that the organization has been in
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existence for at least six months and was organized for a purpose other than the
purchase of investment company securities at a discount; or (g) a trustee or
other professional fiduciary (including a bank, or an investment adviser
registered with the Commission under the Advisers Act) purchasing shares of a
Fund for one or more trust estates or fiduciary accounts. Purchasers who wish to
combine purchase orders to take advantage of volume discounts on Class A shares
should call 800 446-1013.
Right of Accumulation. Reduced sales charges, in accordance with the
schedule in the Prospectus relating to Class A shares, apply to any purchase of
Class A shares if the aggregate investment in Class A shares of all Funds in the
Salomon Brothers Investment Series, excluding holdings in Class B and Class C
shares and shares purchased or held in the Cash Management Fund and/or the New
York Municipal Money Market Fund, and including the purchase being made, of any
purchaser is $100,000 or more. The reduced sales charge is subject to
confirmation of the shareholder's holdings through a check of appropriate
records. A Fund reserves the right to terminate or amend the combined right of
accumulation at any time after written notice to shareholders. For further
information regarding the combined right of accumulation, shareholders should
call (800) 446-1013.
ADDITIONAL REDEMPTION INFORMATION
If the Board of Directors shall determine that it is in the best interests
of the remaining shareholders of a Fund, such Fund may pay the redemption price
in whole, or in part, by a distribution in kind from the portfolio of the Fund,
in lieu of cash, taking such securities at their value employed for determining
such redemption price, and selecting the securities in such manner as the Board
of Directors may deem fair and equitable. However, each Fund has made an
election pursuant to Rule 18f-1 under the 1940 Act requiring that all
redemptions be effected in cash to each redeeming shareholder, during periods of
90 days, up to the lesser of $250,000 or 1% of the net assets of such Fund. A
shareholder who receives a distribution in kind may incur a brokerage commission
upon a later disposition of such securities and may receive less than the
redemption value of such securities or property upon sale, particularly where
such securities are sold prior to maturity.
Under the 1940 Act, a Fund may suspend the right of redemption or postpone
the date of payment upon redemption for any period during which the NYSE is
closed, other than customary weekend and holiday closings, or during which
trading on said Exchange is restricted, or during which (as determined by the
SEC by rule or regulation) an emergency exists as a result of which disposal or
valuation of portfolio securities is not reasonably practicable, or for such
other periods as the SEC may permit. (A Fund may also suspend or postpone the
recordation of the transfer of its shares upon the occurrence of any of the
foregoing conditions.)
ADDITIONAL INFORMATION CONCERNING TAXES
TAXATION OF A FUND
The following discussion is a brief summary of certain additional tax
considerations affecting a Fund and its shareholders. No attempt is made to
present a detailed explanation of all federal, state, local and foreign tax
concerns, and the discussions set forth here and in the Prospectus do not
constitute tax advice. Investors are urged to consult their own tax advisers
with specific questions relating to federal, state, local or foreign taxes.
Each Fund has qualified for the fiscal year ended December 31, 1996 and
intends to continue to qualify and elect to be treated as a regulated investment
company (a 'RIC') under Subchapter M of the Code. Qualification as a RIC
requires, among other things, that a Fund: (a) derive at least 90% of its gross
income in each taxable year from dividends, interest, payments with respect to
securities loans and gains from the sale or other disposition of stock or
securities, foreign currencies or other income (including gains from options,
futures or forward contracts) derived with respect to its business of investing
in such stock, securities or currencies; (b) derive less than 30% of its gross
income in each taxable year from the sale or other disposition of any of the
following held for less than three months: stock, securities, options, futures,
certain forward contracts, or foreign currencies (or
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any options, futures or forward contracts on foreign currencies) but only if
such currencies are not directly related to a Fund's principal business of
investing in stock or securities (the '30% limitation); and (c) diversify its
holdings so that, at the end of each quarter of each taxable year: (i) at least
50% of the market value of a Fund's assets is represented by cash, cash items,
U.S. government securities, securities of other RICs and other securities with
such other securities limited, in respect of any one issuer, to an amount not
greater than 5% of the value of a Fund's assets and 10% of the outstanding
voting securities of such issuer; and (ii) not more than 25% of the value of its
assets is invested in the securities of any one issuer (other than U.S.
government securities or the securities of other RICs).
As a RIC, a Fund will not be subject to federal income tax on its net
investment income (i.e., its investment company taxable income, as that term is
defined in the Code, determined without regard to the deduction for dividends
paid) and 'net capital gains' (the excess of the Fund's net long-term capital
gains over net short-term capital losses), if any, that it distributes in each
taxable year to its shareholders, provided that it distributes 90% of its net
investment income for such taxable year, and with respect to the New York
Municipal Money Market Fund and the National Intermediate Municipal Fund, at
least 90% of its net tax-exempt income for such taxable year. However, a Fund
would be subject to corporate income tax (currently at a maximum rate of 35%) on
any undistributed net investment income and net capital gains. Each Fund expects
to designate amounts retained as undistributed net capital gains in a notice to
its shareholders who (i) will be required to include in income for United States
federal income tax purposes, as long-term capital gains, their proportionate
shares of the undistributed amount, (ii) will be entitled to credit their
proportionate shares of the 35% tax paid by a Fund on the undistributed amount
against their federal income tax liabilities and to claim refunds to the extent
such credits exceed their liabilities and (iii) will be entitled to increase
their tax basis, for federal income tax purposes, in their shares by an amount
equal to 65% of the amount of undistributed net capital gains included in the
shareholder's income.
A Fund will be subject to a non-deductible 4% excise tax to the extent that
a Fund does not distribute by the end of each calendar year: (a) at least 98% of
its ordinary income for such calendar year; (b) at least 98% of the excess of
its capital gains over its capital losses for the one-year period ending, as a
general rule, on October 31 of each year; and (c) 100% of the undistributed
income and gains from the preceding calendar year (if any) pursuant to the
calculations in (a) and (b). For this purpose, any income or gain retained by a
Fund that is subject to corporate tax will be considered to have been
distributed by year-end.
A Fund's investment in options, swaps and related transactions, futures
contracts and forward contracts, options on futures contracts and stock indices
and certain other securities, including transactions involving actual or deemed
short sales or foreign exchange gains or losses are subject to many complex and
special tax rules. For example, over-the-counter options on debt securities and
equity options, including options on stock and on narrow-based stock indexes,
will be subject to tax under Section 1234 of the Code, generally producing a
long-term or short-term capital gain or loss upon exercise, lapse or closing out
of the option or sale of the underlying stock or security. By contrast, a Fund's
treatment of certain other options, futures and forward contracts entered into
by a Fund is generally governed by Section 1256 of the Code. These 'Section
1256' positions generally include listed options on debt securities, options on
broad-based stock indexes, options on securities indexes, options on futures
contracts, regulated futures contracts and certain foreign currency contracts
and options thereon.
Absent a tax election to the contrary, each such Section 1256 position held
by a Fund will be marked-to-market (i.e., treated as if it were sold for fair
market value) on the last business day of a Fund's fiscal year, and all gain or
loss associated with fiscal year transactions and mark-to-market positions at
fiscal year end (except certain currency gain or loss covered by Section 988 of
the Code) will generally be treated as 60% long-term capital gain or loss and
40% short-term capital gain or loss. The effect of Section 1256 mark-to market
rules may be to accelerate income or to convert what otherwise would have been
long-term capital gains into short-term capital gains or short-term capital
losses into long-term capital losses within a Fund. The acceleration of income
on Section 1256 positions may
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require a Fund to accrue taxable income without the corresponding receipt of
cash. In order to generate cash to satisfy the distribution requirements of the
Code, a Fund may be required to dispose of portfolio securities that they
otherwise would have continued to hold or to use cash flows from other sources
such as the sale of Fund shares. In these ways, any or all of these rules may
affect the amount, character and timing of income earned and in turn distributed
to shareholders by a Fund.
When a Fund holds options or contracts which substantially diminish their
risk of loss with respect to other positions (as might occur in some hedging
transactions), this combination of positions could be treated as a 'straddle'
for tax purposes, resulting in possible deferral of losses, adjustments in the
holding periods of Fund securities and conversion of short-term capital losses
into long-term capital losses. Certain tax elections exist for mixed straddles
i.e., straddles comprised of at least one Section 1256 position and at least one
non-Section 1256 position which may reduce or eliminate the operation of these
straddle rules.
The 30% limitation (discussed above) may limit a Fund's ability to engage
in options, spreads, straddles, hedging transactions, forward or futures
contracts or options on any of these positions because these transactions are
often consummated in less than three months, may require the sale of portfolio
securities held less than three months and may, as in the case of short sales of
portfolio securities reduce the holding periods of certain securities within a
Fund.
A Fund will monitor its transactions in such options and contracts and may
make certain other tax elections in order to mitigate the effect of the above
rules and to prevent disqualification of the Fund as a RIC under Subchapter M of
the Code.
A Fund may make investments that produce income that is not matched by a
corresponding cash distribution to the Fund, such as investments in pay-in-kind
bonds or in obligations such as certain Brady Bonds or zero-coupon securities
having original issue discount (i.e., an amount equal to the excess of the
stated redemption price of the security at maturity over its issue price), or
market discount (i.e., an amount equal to the excess of the stated redemption
price of the security over the basis of such bond immediately after it was
acquired) if the Fund elects to accrue market discount on a current basis. In
addition, income may continue to accrue for federal income tax purposes with
respect to a non-performing investment. Any such income would be treated as
income earned by a Fund and therefore would be subject to the distribution
requirements of the Code. Because such income may not be matched by a
corresponding cash distribution to a Fund, such Fund may be required to borrow
money or dispose of other securities to be able to make distributions to its
investors. The extent to which a Fund may liquidate securities at a gain may be
limited by the 'short-short test' discussed above. In addition, if an election
is not made to currently accrue market discount with respect to a market
discount bond, all or a portion of any deduction for any interest expense
incurred to purchase or hold such bond may be deferred until such bond is sold
or otherwise disposed.
If a Fund purchases shares in certain foreign investment entities, called
'passive foreign investment companies' ('PFICs'), the Fund may be subject to
U.S. federal income tax on a portion of any 'excess distribution' or gain from
the disposition of shares even if the income is distributed as a taxable
dividend by the Fund to its shareholders. Additional charges in the nature of
interest may be imposed on either a Fund or its shareholders with respect to
deferred taxes arising from the distributions or gains. If a fund were to invest
in a PFIC and (if the Fund received the necessary information available from the
PFIC, which may be difficult to obtain) elected to treat the PFIC as a
'qualified electing fund' under the Code (a 'QEF'), in lieu of the foregoing
requirements, the Fund would be required to include in income each year a
portion of the ordinary earnings and net capital gains of the PFIC, even if not
distributed to the Fund, and the amounts would be subject to the 90% and excise
tax distribution requirements described above. Because of the expansive
definition of a PFIC, it is possible that a Fund may invest a portion of its
assets in PFICs.
Moreover, on April 1, 1992 the Internal Revenue Service ('IRS') proposed
regulations providing a mark-to-market election for RICs that would avoid the
need for a RIC to make
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a QEF election. These regulations would be effective for taxable years ending
after promulgation of the regulations as final regulations.
TAXATION OF U.S. SHAREHOLDERS
The Prospectus describes each Fund's policy with respect to distribution of
net investment income and any net capital gains. Shareholders should consider
the tax implications of buying shares just prior to a distribution. Although the
price of shares purchased at that time may reflect the amount of the forthcoming
distribution, those purchasing just prior to a distribution will receive a
distribution which will nevertheless be taxable to them.
Shareholders receiving a distribution in the form of additional shares will
be treated for federal income tax purposes as receiving a distribution in an
amount equal to the fair market value, determined as of the distribution date,
of the shares received and will have a cost basis in each share received equal
to the fair market value of a share of a Fund on the distribution date.
Shareholders will be notified annually as to the federal tax status of
distributions, and shareholders receiving distributions in the form of shares
will receive a report as to the fair market value of the shares received.
Gain or loss on the sale or other disposition of Fund shares will result in
capital gain or loss to shareholders. Generally, a shareholder's capital gain or
loss will be long-term gain or loss if the shares have been held for more than
one year. In general, the maximum federal income tax rate imposed on individuals
with respect to net realized long-term capital gains will be limited to 28%,
whereas the maximum federal income tax rate imposed on individuals with respect
to net realized short-term capital gains (which are taxed at ordinary income
rates) will be 39.6%. With respect to corporate taxpayers, long-term capital
gains are taxed at the same federal income tax rates as short-term capital
gains, the maximum rate being 35%. If a shareholder redeems or exchanges shares
of a Fund before he or she has held them for more than six months, any
short-term capital loss on such redemption or exchange will be treated as a
long-term capital loss to the extent of any capital gain dividends received by
the shareholder (or credited to the shareholder as an undistributed capital
gain) with respect to such shares.
It is expected that a portion of the dividends of net investment income
received by corporate shareholders from a Fund (other than the Cash Management
Fund and the New York Municipal Money Market Fund) will qualify for the federal
dividends received deduction generally available to corporations. The dividends
received deduction for corporate shareholders may be reduced if the securities
with respect to which dividends are received by a Fund are (1) considered to be
'debt-financed' (generally, acquired with borrowed funds), (2) held by a Fund
for less than 46 days (91 days in the case of certain preferred stock) or (3)
subject to certain forms of hedges or short sales. The amount of any dividend
distribution eligible for the corporate dividends received deduction will be
designated by a Fund in a written notice within 60 days of the close of the
taxable year.
A Fund may be subject to certain taxes, including without limitation, taxes
imposed by foreign countries with respect to its income and capital gains. If a
Fund qualifies as a RIC, certain distribution requirements are satisfied and
more than 50% of the value of the Fund's total assets at the close of any
taxable year consists of stock or securities of foreign corporations, which for
this purpose may include obligations of foreign governmental issuers, the Fund
may elect, for United States federal income tax purposes, to treat any foreign
country's income or withholding taxes paid by the Fund that can be treated as
income taxes under the United States income tax principles, as paid by its
shareholders.
The Asia Growth Fund expects to qualify for and make this election. For any
year that the Asia Growth Fund makes such an election, each shareholder will be
required to include in its income an amount equal to his or her allocable share
of such income taxes paid by the Asia Growth Fund to a foreign country's
government and shareholders will be entitled, subject to certain limitations, to
credit their portions of these amounts against their United States federal
income tax due, if any, or to deduct their portions from their United States
taxable income, if any. No deductions for foreign taxes paid by the Asia Growth
Fund may be claimed, however, by non-corporate shareholders (including certain
foreign shareholders
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described below) who do not itemize deductions. Shareholders that are exempt
from tax under Section 501(a) of the Code, such as pension plans, generally will
derive no benefit from this election. However, such shareholders should not be
disadvantaged either because the amount of additional income they are deemed to
receive equal to their allocable share of such foreign countries' income taxes
paid by the Asia Growth Fund generally will not be subject to United States
federal income tax.
THE NEW YORK MUNICIPAL MONEY MARKET FUND AND THE NATIONAL INTERMEDIATE MUNICIPAL
FUND
The New York Municipal Money Market Fund and the National Intermediate
Municipal Fund each intends to qualify to pay 'exempt-interest dividends,' as
that term is defined in the Code, by holding at the end of each quarter of its
taxable year at least 50% of the value of its total assets in the form of
obligations described in section 103(a) of the Code. Each Fund's policy is to
pay in each taxable year exempt-interest dividends equal to at least 90% of such
Fund's interest from tax-exempt obligations net of certain deductions. Except as
discussed below, exempt-interest dividends will be exempt from regular federal
income tax. In addition, dividends from the New York Municipal Money Market Fund
will not be subject to New York State and New York City personal income taxes to
the extent that such distributions qualify as exempt-interest dividends and
represent interest income attributable to federally tax-exempt obligations of
the State of New York and its political subdivisions (as well as certain other
federally tax-exempt obligations the interest on which is exempt from New York
State and New York City personal income taxes). Dividends from the New York
Municipal Money Market Fund, however, are not excluded in determining New York
State or New York City franchise taxes on corporations and financial
institutions. Further, gain from a sale or redemption of shares of the New York
Municipal Money Market Fund and the National Intermediate Municipal Fund will be
taxable to the shareholders as capital gain even though the increase in value of
such shares is attributable to tax-exempt income.
Because the New York Municipal Money Market Fund and the National
Intermediate Municipal Fund will primarily invest in municipal obligations,
dividends from these Funds will generally be exempt from regular federal income
tax in the hands of shareholders. A portion may be subject to the alternative
minimum tax, however. Federal tax law imposes an alternative minimum tax with
respect to both corporations and individuals based on certain items of tax
preference. Interest on certain municipal obligations, such as bonds issued to
make loans for housing purposes or to private entities (but not to certain
tax-exempt organizations such as universities and non-profit hospitals) is
included as an item of tax preference in determining the amount of a taxpayer's
alternative minimum taxable income. To the extent the New York Municipal Money
Market Fund or the National Intermediate Municipal Fund makes such an
investment, a portion of the exempt-interest dividends paid, although otherwise
exempt from federal income tax, will be taxable to shareholders to the extent
that their tax liability will be determined under the alternative minimum tax.
The New York Municipal Money Market Fund and the National Intermediate Municipal
Fund will annually supply shareholders with a report indicating the percentage
of Fund income attributable to municipal obligations which may be subject to the
alternative minimum tax. Additionally, taxpayers must disclose to the Internal
Revenue Service on their tax returns the entire amount of tax-exempt interest
(including exempt-interest dividends on shares of the Fund) received or accrued
during the year.
In addition, for corporations, the alternative minimum taxable income is
increased by a percentage of the amount by which an alternative measure of
income ('adjusted current earnings,' referred to as 'ACE') exceeds the amount
otherwise determined to be the alternative minimum taxable income. Interest on
all municipal obligations, and therefore all exempt-interest dividends paid by
the New York Municipal Money Market Fund or the National Intermediate Municipal
Fund, is included in calculating ACE.
The Superfund Act of 1986 imposes a separate tax on corporations at a rate
of 0.12% of the excess of such corporation's 'modified alternative minimum
taxable income' over $2,000,000. A portion of a corporate shareholder's
tax-exempt interest, including exempt-interest dividends from the New York
Municipal Money Market Fund or the National
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Intermediate Municipal Fund, may be includible in calculating such shareholder's
modified alternative minimum taxable income.
Taxpayers that may be subject to the alternative minimum tax should consult
their tax advisers before investing in the New York Municipal Money Market Fund
or the National Intermediate Municipal Fund.
Shares of the New York Municipal Money Market Fund and the National
Intermediate Municipal Fund would not be a suitable investment for tax-exempt
institutions and may not be a suitable investment for retirement plans qualified
under Section 401 of the Code, H.R. 10 plans and individual retirement accounts
('IRAs'), because such plans and accounts are generally tax-exempt or tax
deferred and, therefore, would not gain any additional benefit from the receipt
of exempt-interest dividends from the Fund. Moreover, subsequent distributions
of such dividends to the beneficiaries will be taxable.
In addition, the New York Municipal Money Market Fund and the National
Intermediate Municipal Fund may not be an appropriate investment for entities
that are 'substantial users' of facilities financed by private activity bonds or
'related persons' thereof. A 'substantial user' is defined under U.S. Treasury
Regulations to include a non-exempt person who regularly uses a part of such
facilities in his trade or business and, unless such facility, or part thereof,
is constructed, reconstructed or acquired specifically for the non-exempt
person, whose gross revenue derived with respect to the facilities financed by
the issuance of bonds is more than 5% of the total revenue derived by all users
of such facilities. 'Related persons' include certain related natural persons,
affiliated corporations, partnerships and their partners and S Corporations and
their shareholders. The foregoing is not a complete statement of all of the
provisions of the Code covering the definitions of 'substantial user' and
'related person'. For additional information, investors should consult their tax
advisers before investing in the New York Municipal Money Market Fund or the
National Intermediate Municipal Fund.
All or a portion of the exempt-interest dividends received by certain
foreign corporations may be subject to the federal branch profits tax. Likewise,
all or a portion of the exempt-interest dividends may be taxable to certain
Subchapter S Corporations that have Subchapter C earnings and profits and
substantial passive investment income. In addition, the exempt-interest
dividends may reduce the deduction for loss reserves for certain insurance
companies. Such corporations and insurance companies should consult their tax
advisers before investing in the New York Municipal Money Market Fund or the
National Intermediate Municipal Fund. The Code may also require shareholders
that receive exempt-interest dividends to treat as taxable income a portion of
certain otherwise nontaxable social security and railroad retirement benefit
payments.
PERFORMANCE DATA
As indicated in the Prospectus, from time to time, a Fund may quote its
'yield,' 'tax-equivalent yield,' 'effective yield,' 'average annual total
return' and/or 'aggregate total return' for all classes of shares in
advertisements or in reports and other communications to shareholders and
compare its performance figures to those of other funds or accounts with similar
objectives and to relevant indices. Such performance information may include
time periods prior to the implementation of the Multiple Pricing System
described in the Prospectus, and will be calculated as described below.
AVERAGE ANNUAL TOTAL RETURN
A Fund's 'average annual total return' figures, as described and shown in
the Prospectus, are computed according to a formula prescribed by the
Commission. The formula can be expressed as follows:
P(1+T)'pp'n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = Ending Redeemable Value of a hypothetical $1,000 payment made at the
beginning of a 1-5 or 10-year period at the end of such period (or
fractional portion thereof), assuming reinvestment of all dividends
and distributions.
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In calculating the ending redeemable value, for Class A shares, the current
maximum front end sales charge of 4.75% (as a percentage of the offering price)
is deducted from the initial $1,000 payment, and for Class B and Class C shares,
the applicable CDSC imposed on redemption is deducted. The schedule of CDSCs due
upon redemption is described under 'Redemption of Shares' in the Prospectus.
The Cash Management Fund, the New York Municipal Money Market Fund, the
Investors Fund and the Capital Fund implemented the Multiple Pricing System by
reclassifying the then existing shares of each such Fund as Class O shares of
each such Fund. This reclassification was effected in such a manner so that the
shares of each of the Cash Management Fund and the Investors Fund outstanding at
December 31, 1994, and shares of the New York Municipal Money Market Fund and
the Capital Fund outstanding at October 31, 1996, would be subject to identical
distribution and service fees both before and after the reclassification.
The percentages shown in the tables below reflect front end sales charges
and CDSCs, if any, currently payable by each class of shares under the Multiple
Pricing System, and are based on the fees and expenses actually paid by each
such Fund for the periods presented. The distribution and service fees currently
payable by each class of shares under the Multiple Pricing System are described
in 'Purchase of Shares -- Distributor' in the Prospectus.
The following tables set forth the average annual total returns for each
class of shares of each of the National Intermediate Fund, U.S. Government
Income Fund, High Yield Bond Fund, Strategic Bond Fund, Total Return Fund (in
each case, after management fee waiver and reimbursement of certain expenses),
Investors Fund and Class O shares of the Capital Fund for certain periods of
time ending December 31, 1996 and reflect the effects of the maximum applicable
front end sales charges and any applicable CDSCs payable by an investor under
the Multiple Pricing System.
NATIONAL INTERMEDIATE MUNICIPAL FUND
<TABLE>
<CAPTION>
FROM FEBRUARY 22, 1995
(COMMENCEMENT OF
INVESTMENT OPERATIONS)
YEAR ENDED THROUGH
DECEMBER 31, 1996 DECEMBER 31, 1996
----------------- ----------------------
<S> <C> <C>
Class A.................................................. -0.77% 4.16%
Class B.................................................. -1.60% 3.49%
Class C.................................................. 2.37% 6.08%
Class O.................................................. 4.32% 7.13%
</TABLE>
U.S. GOVERNMENT INCOME FUND
<TABLE>
<CAPTION>
FROM FEBRUARY 22, 1995
(COMMENCEMENT OF
INVESTMENT OPERATIONS)
YEAR ENDED THROUGH
DECEMBER 31, 1996 DECEMBER 31, 1996
----------------- ----------------------
<S> <C> <C>
Class A.................................................. -1.29% 4.23%
Class B.................................................. -2.18% 3.56%
Class C.................................................. 1.71% 6.14%
Class O.................................................. 3.73% 7.20%
</TABLE>
HIGH YIELD BOND FUND
<TABLE>
<CAPTION>
FROM FEBRUARY 22, 1995
(COMMENCEMENT OF
INVESTMENT OPERATIONS)
YEAR ENDED THROUGH
DECEMBER 31, 1996 DECEMBER 31, 1996
----------------- ----------------------
<S> <C> <C>
Class A.................................................. 16.08% 17.67%
Class B.................................................. 16.16% 17.61%
Class C.................................................. 20.06% 19.89%
Class O.................................................. 22.03% 20.97%
</TABLE>
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STRATEGIC BOND FUND
<TABLE>
<CAPTION>
FROM FEBRUARY 22, 1995
(COMMENCEMENT OF
INVESTMENT OPERATIONS)
YEAR ENDED THROUGH
DECEMBER 31, 1996 DECEMBER 31, 1996
----------------- -----------------------
<S> <C> <C>
Class A................................................. 8.59% 13.66%
Class B................................................. 7.96% 13.32%
Class C................................................. 12.07% 15.74%
Class O................................................. 14.21% 16.88%
</TABLE>
TOTAL RETURN FUND
<TABLE>
<CAPTION>
FROM SEPTEMBER 11, 1995
(COMMENCEMENT OF
INVESTMENT OPERATIONS)
YEAR ENDED THROUGH
DECEMBER 31, 1996 DECEMBER 31, 1996
----------------- -----------------------
<S> <C> <C>
Class A................................................. 12.66% 15.07%
Class B................................................. 12.41% 15.41%
Class C................................................. 16.46% 18.67%
Class O................................................. 19.03% 20.19%
</TABLE>
INVESTORS FUND
<TABLE>
<CAPTION>
FROM COMMENCEMENT OF
INVESTMENT OPERATIONS OF
CLASS A, B AND C
(JANUARY 3, 1995)
THROUGH
DECEMBER 31, 1996 1 YEAR 5 YEARS 10 YEARS
------------------------ ------ ------- --------
<S> <C> <C> <C> <C>
Class A........................................ 29.59% 24.09 % N/A N/A
Class B........................................ 29.93% 24.22 % N/A N/A
Class C........................................ 31.85% 28.25 % N/A N/A
Class O........................................ N/A 30.56 % 16.65% 14.12%
</TABLE>
CAPITAL FUND
<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS
------ ------- --------
<S> <C> <C> <C>
Class O.................................................................. 33.34 % 13.63% 12.00%
</TABLE>
As described in the Prospectus under the caption 'Expense Information,'
each of the Funds, except the Investors Fund and the Capital Fund, has been and
still is subject to certain fee waivers and expense reimbursements. Absent such
waiver and reimbursement, the returns shown above for such Funds would be lower.
The performance data quoted represents past performance; investment returns
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.
77
<PAGE>
<PAGE>
AGGREGATE TOTAL RETURN
The 'aggregate total return' figures for each class of a Fund, as described
in the Prospectus, represent the cumulative change in the value of an investment
in Fund shares of such class for the specified period and are computed by the
following formula:
AGGREGATE TOTAL RETURN = ERV - P
-------
P
Where: P = a hypothetical initial payment of $10,000.
ERV = Ending Redeemable Value of a hypothetical $10,000 investment made
at the beginning of a 1-, 5-, or 10-year period at the end of such
period (or fractional portion thereof), assuming reinvestment of
all dividends and distributions.
The following tables set forth the aggregate total return of each class of
shares of the Asia Growth Fund (after management fee waiver and reimbursement of
certain expenses) and Class A, B and C shares of the Capital Fund for certain
periods of time ending December 31, 1996 and reflect the effects of the maximum
applicable front end sales charges and any applicable CDSCs payable by an
investor under the Multiple Pricing System.
ASIA GROWTH FUND
<TABLE>
<CAPTION>
FROM MAY 6, 1996
(COMMENCEMENT OF
INVESTMENT OPERATIONS)
THROUGH
DECEMBER 31, 1996
-----------------------
<S> <C>
Class A..................................................................... 0.17%
Class B..................................................................... -0.35%
Class C..................................................................... 3.64%
Class O..................................................................... 5.31%
</TABLE>
CAPITAL FUND
<TABLE>
<CAPTION>
FROM COMMENCEMENT OF
INVESTMENT OPERATIONS OF
CLASS A, B AND C
(NOVEMBER 1, 1996)
THROUGH
DECEMBER 31, 1996
------------------------
<S> <C>
Class A..................................................................... 2.60%
Class B..................................................................... 3.11%
Class C..................................................................... 6.78%
</TABLE>
YIELD
With respect to the Cash Management Fund and the New York Municipal Money
Market Fund, yield quotations are expressed in annualized terms and may be
quoted on a compounded basis.
The current yield for each of the Cash Management Fund and the New York
Municipal Money Market Fund is computed by (a) determining the net change in the
value of a hypothetical pre-existing account in the Fund having a balance of one
share at the beginning of a seven calendar day period for which yield is to be
quoted; (b) dividing the net change by the value of the account at the beginning
of the period to obtain the base period return; and (c) annualizing the results
(i.e. multiplying the base period return by 365/7). The net change in the value
of the account reflects the value of additional shares, but does not include
realized gains and losses or unrealized appreciation and depreciation. In
addition, the Cash Management Fund may calculate a compound effective annualized
yield by adding 1 to the base period return (calculated as described above),
raising the sum to a power equal to 365/7 and subtracting 1.
For the seven-day period ended December 31, 1996 the annualized yield and
effective yield for each class of shares of the Cash Management Fund were 5.05%
and 5.18%, respectively. For the seven day period ended December 31, 1996 the
annualized yield and effective yield for the New York Municipal Money Market
Fund were 3.81% and 3.88%, respectively. Because Class A, B and C shares of the
Cash Management Fund and the New York Municipal Money Market Fund, like Class O
shares, are not subject to any sales
78
<PAGE>
<PAGE>
charges or service or distribution fees, the yield and effective yield figures
for Class A, B and C shares of the Cash Management Fund and the New York
Municipal Money Market Fund would be the same as those for Class O shares.
In periods of declining interest rates the yield of the Cash Management
Fund and the New York Municipal Money Market Fund will tend to be somewhat
higher than prevailing market rates on short-term obligations, and in periods of
rising interest rates the yield will tend to be somewhat lower. Also, when
interest rates are falling, the inflow of net new money to the Cash Management
Fund and the New York Municipal Money Market Fund from the continuous sale of
shares will likely be invested in portfolio instruments producing lower yields
than the balance of these Funds' portfolios, thereby reducing these Funds'
current yields. In periods of rising interest rates, the opposite can be
expected to occur.
THIRTY DAY YIELD
Certain Funds may advertise the yields for each class of such Funds based
on a 30-day (or one month) period according to the following formula:
a-b
Yield = 2 [( --- + 1)'pp'6 - 1]
cd
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period that
were entitled to receive dividends
d = the maximum offering price per share on the last day of the period
Under this formula, interest earned on debt obligations for purposes of 'a'
above, is calculated by (1) computing the yield to maturity of each obligation
held by the New York Municipal Bond Fund or the National Intermediate Municipal
Fund based on the market value of the obligation (including actual accrued
interest) at the close of business on the last day of each month, or, with
respect to obligations purchased during the month, the purchase price (plus
actual accrued interest), (2) dividing that figure by 360 and multiplying the
quotient by the market value of the obligation (including actual accrued
interest as referred to above) to determine the interest income on the
obligation in the Fund's portfolio (assuming a month of 30 days) and (3)
computing the total of the interest earned on all debt obligations during the
30-day or one month period. Any amounts representing sales charges will not be
included among these expenses; however, the New York Municipal Bond Fund and the
National Intermediate Municipal Fund will disclose the maximum sales charge as
well as any amount or specific rate of any nonrecurring account charges.
Undeclared dividends, computed in accordance with Commission guidelines, may be
subtracted from the maximum offering price calculation required pursuant to 'd'
above.
The thirty day yield of the National Intermediate Municipal Fund at
December 31, 1996 was 4.14% for Class A, 3.58% for Class B, 3.61% for Class C
and 4.61% for Class O.
The tax equivalent yield of each of the New York Municipal Money Market
Fund and the National Intermediate Municipal Fund is computed by dividing that
portion of the respective Fund's yield (computed as described above for each
Fund) that is tax-exempt by one minus the stated combined regular federal income
and, in the case of the New York Municipal Money Market Fund and the New York
Municipal Bond Fund, the New York State personal and, if applicable, New York
City personal income tax rate and adding the result to that portion, if any, of
the yield of the Fund that is not tax-exempt.
The tax equivalent yield for the New York Municipal Money Market Fund for
the seven-day period ended December 31, 1996 was 7.13%. Because Class A, B and C
shares of the New York Municipal Money Market Fund, like Class O Shares, are not
subject to any sales charges or service or distribution fees, the tax equivalent
yield figures for Class A, B and C shares of the Fund would be the same as those
for Class O shares. The tax equivalent yield of the National Intermediate
Municipal Fund at December 31, 1996 was 6.85% for Class A, 5.93% for Class B,
5.98% for Class C and 7.63% for Class O.
Any quotation of performance stated in terms of yield (whether or not based
on a 30-day period) will be given no greater prominence than the information
prescribed under Commission rules. In addition, all advertisements containing
performance data of any kind
79
<PAGE>
<PAGE>
will include a legend disclosing that such performance data represents past
performance and that the investment return and principal value of an investment
will fluctuate so that an investor's shares, when redeemed, may be worth more or
less than their original cost.
Yield and total return figures are calculated separately for Class A, Class
B, Class C and Class O shares of a Fund. In the examples above, these
calculations adjust for the different front end sales charges and CDSCs
currently payable with respect to each class and are based on expenses actually
paid by each Fund for the periods presented.
Advertisements and communications may compare a Fund's performance with
that of other mutual funds, as reported by Lipper Analytical Services, Inc. or
similar independent services or financial publications. From time to time,
advertisements and other Fund materials and communications may cite statistics
to reflect a Fund's performance over time utilizing, for example, with respect
to the National Intermediate Municipal Fund, comparisons to indices including,
but not limited to, the Bond Buyer 40-Bond Index.
A Fund's performance will vary from time to time depending upon market
conditions, the composition of its portfolio and operating expenses.
Consequently, any given performance quotation should not be considered
representative of the performance of Fund shares for any specified period in the
future. Because performance will vary, it may not provide a basis for comparing
an investment in Fund shares with certain bank deposits or other investments
that pay a fixed return for a stated period of time. Investors comparing a
Fund's performance with that of other mutual funds should give consideration to
the nature, quality and maturity of the respective investment companies'
portfolio securities and market conditions. An investor's principal is not
guaranteed by any Fund.
SHAREHOLDER SERVICES
Exchange Privilege. Shareholders may exchange all or part of their Fund
shares for shares of the same class of other Funds in the Salomon Brothers
Investment Series, as indicated in the Prospectus, to the extent such shares are
offered for sale in the shareholder's state of residence.
The exchange privilege enables shareholders of a Fund to acquire shares in
a Fund with different investment objectives when they believe that a shift
between Funds is an appropriate investment decision. This privilege is available
to shareholders residing in any state in which the Fund shares being acquired
may legally be sold.
Exercise of the exchange privilege is treated as a sale and purchase for
federal income tax purposes and, depending on the circumstances, a short- or
long-term capital gain or loss may be realized. The price of the shares of the
fund into which shares are exchanged will be the new cost basis for tax
purposes.
Upon receipt of proper instructions and all necessary supporting documents,
shares submitted for exchange are redeemed at the then-current net asset value
and the proceeds immediately invested in shares of the Fund being acquired at a
price equal to the then current net asset value of such shares plus any
applicable sales charge.
All accounts involved in a telephone or telegram exchange must have the
same registration. If a new account is to be established, the dollar amount to
be exchanged must be at least as much as the minimum initial investment of the
Fund whose shares are being purchased. Any new account established by exchange
will automatically be registered in the same way as the account from which
shares are exchanged and will carry the same dividend option.
The exchange privilege is not designed for investors trying to catch
short-term savings in market prices by making frequent exchanges. A Fund
reserves the right to impose a limit on the number of exchanges a shareholder
may make. Call or write the applicable Fund for further details.
Automatic Withdrawal Plan. With respect to any Fund, an Automatic
Withdrawal Plan may be opened with an account having a minimum account value as
described in the Prospectus. All dividends and distributions on the shares held
under the Withdrawal Plan are automatically reinvested at net asset value in
full and fractional shares of the same class of a Fund. Withdrawal payments are
made by First Data Investor Services Group, Inc. ('FDISG'), formerly The
Shareholders Services Group, Inc., as agent, from the proceeds of
80
<PAGE>
<PAGE>
the redemption of such number of shares as may be necessary to make each
periodic payment. As such redemptions involve the use of capital, over a period
of time they may exhaust the share balance of an account held under a Withdrawal
Plan. Use of a Withdrawal Plan cannot assure realization of investment
objectives, including capital growth or protection against loss in declining
markets. A Withdrawal Plan can be terminated at any time by the investor, a Fund
or FDISG upon written notice.
The Withdrawal Plan will not be carried over on exchanges between Funds or
classes. A new Withdrawal Plan application is required to establish the
Withdrawal Plan in the new Fund or class. For additional information,
shareholders should call (800) 446-1013 for more information.
Self Employed Retirement Plans. The Funds offer a prototype retirement plan
for self-employed individuals. Under such plan, self-employed individuals may
contribute out of earned income to purchase Fund shares.
Boston Safe Deposit and Trust Company ('Boston Safe') has agreed to serve
as custodian and furnish the services provided for in the plan and the related
custody agreement. Boston Safe will charge individuals adopting a self employed
retirement plan an application fee as well as certain additional fees for its
services under the custody agreement.
For information required for adopting a self employed retirement plan,
including information on fees, obtain the form of the plan and custody agreement
available from a Fund. Because application of particular tax provisions will
vary depending on each individual's situation, consultation with a financial
adviser regarding a self employed retirement plan is recommended.
Individual Retirement Accounts. A prototype individual retirement account
('IRA') is available, which has been approved as to form by the IRS.
Contributions to an IRA made available by a Fund may be invested in shares of
such Fund and/or certain other mutual funds managed by SBAM.
Boston Safe has agreed to serve as custodian of the IRA and furnish the
services provided for in the custody agreement. Boston Safe will charge each IRA
an application fee as well as certain additional fees for its services under the
custody agreement. In accordance with IRS regulations, an individual may revoke
an IRA within seven calendar days after it is established.
Contributions in excess of allowable limits, premature distributions to an
individual who is not disabled before age 59 1/2 or insufficient distributions
after age 70 1/2 will generally result in substantial adverse tax consequences.
For information required for adopting an IRA, including information fees,
investors may obtain the form of custody agreement and related materials,
including disclosure materials, by calling (800) 446-1013. Consultation with a
financial adviser regarding an IRA is recommended.
CAPITAL STOCK
As used in this Statement of Additional Information and the Prospectus, the
term 'majority', when referring to the approvals to be obtained from
shareholders in connection with matters affecting a particular Fund or any other
single portfolio (e.g., approval of investment management contracts) or any
particular class (e.g., approval of plans of distribution) and requiring a vote
under the 1940 Act means the vote of the lesser of: (i) 67% of the shares of
that particular portfolio or class, as appropriate, represented at a meeting if
the holders of more than 50% of the outstanding shares of such portfolio or
class, as appropriate, are present in person or by proxy; or (ii) more than 50%
of the outstanding shares of such portfolio or class, as appropriate.
Shareholders are entitled to one vote for each full share held and fractional
votes for fractional shares held.
Shares of each class of each Fund are entitled to such dividends and
distributions out of the assets belonging to that class as are declared in the
discretion of the applicable Board of Directors. In determining the net asset
value of a class of a Fund, assets belonging to a particular class are credited
with a proportionate share of any general assets of the Fund not belonging to a
particular class and are charged with the direct liabilities in respect of that
class of the Fund and with a share of the general liabilities of the investment
company which
81
<PAGE>
<PAGE>
are normally allocated in proportion to the relative net asset values of the
respective classes of the Funds at the time of allocation.
In the event of the liquidation or dissolution of the investment company,
shares of each class of a Fund are entitled to receive the assets attributable
to it that are available for distribution, and a proportionate distribution,
based upon the relative net assets of the classes of each Fund, of any general
assets not attributable to a portfolio that are available for distribution.
Shareholders are not entitled to any preemptive rights. All shares, when issued,
will be fully paid, non-assessable, fully transferable and redeemable at the
option of the holder.
Subject to the provisions of the applicable investment company's charter,
determinations by the Board of Directors as to the direct and allocable
liabilities and the allocable portion of any general assets of the investment
company, with respect to a particular Fund or class are conclusive.
The shares of the Investors Fund and Capital Fund have non-cumulative
voting rights. This means that the holders of more than 50% of the shares voting
for the election of directors can elect 100% of the directors, if they choose to
do so. In such event, the holders of the remaining less than 50% of the shares
voting for such election will not be able to elect any person or persons to the
Board of Directors.
CUSTODIAN AND TRANSFER AGENT
IBT, located at 89 South Street, Boston, Massachusetts 02111, serves as
each Fund's custodian. As custodian, IBT, among other things: maintains a
custody account or accounts in the name of each Fund; receives and delivers all
assets for each Fund upon purchase and upon sale or maturity; collects and
receives all income and other payments and distributions on account of the
assets of each Fund; and makes disbursements on behalf of each Fund. The
custodian neither determines the Funds' investment policies, nor decides which
securities each Fund will buy or sell. For its services, the custodian receives
a monthly fee based upon the daily average market value of securities held in
custody and also receives securities transaction charges, including
out-of-pocket expenses. A Fund may also periodically enter into arrangements
with other qualified custodians with respect to certain types of securities or
other transactions such as repurchase agreements or derivatives transactions.
FDISG, a subsidiary of First Data Corporation, located at P.O. Box 5127,
Westborough, Massachusetts 01581-5127, serves as each Fund's transfer agent. As
a Fund's transfer agent, FDISG: registers and processes transfers of the Fund's
stock, processes purchase and redemption orders, acts as dividend disbursing
agent for the Fund and maintains records and handles correspondence with respect
to shareholder accounts, pursuant to a transfer agency agreement. For these
services, FDISG receives a monthly fee computed separately for each class of a
Fund's shares and is reimbursed separately by each class for out-of-pocket
expenses.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP ('Price Waterhouse') provides audit services, tax
return preparation and assistance and consultation in connection with review of
Commission filings. The financial statements and financial highlights included
or incorporated by reference in the Prospectus and included in this Statement of
Additional Information have been included in reliance on the report of Price
Waterhouse, independent accountants, given on the authority of that firm as
experts in auditing and accounting. Price Waterhouse's address is 1177 Avenue of
the Americas, New York, New York 10036.
COUNSEL
Simpson Thacher & Bartlett (a partnership which includes professional
corporations) serves as counsel to each Fund, and is located at 425 Lexington
Avenue, New York, New York 10017-3954.
Piper Marbury L.L.P. of Baltimore, Maryland has issued an opinion regarding
the valid issuance of shares being offered for sale pursuant to the Fund's
Prospectus.
82
<PAGE>
<PAGE>
FINANCIAL STATEMENTS
The audited financial statements of each of Cash Management Fund, New York
Municipal Money Market Fund, National Intermediate Municipal Fund, U.S.
Government Income Fund, High Yield Bond Fund, Strategic Bond Fund and Total
Return Fund for the fiscal year ended December 31, 1996 and the audited
financial statements for the Asia Growth Fund for the period May 6, 1996
(commencement of operations) to December 31, 1996.
83
<PAGE>
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
84
<PAGE>
<PAGE>
Portfolio of Investments (December 31, 1996)
SALOMON BROTHERS ASIA GROWTH FUND
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Value
Shares Description (Note 1a)
- -----------------------------------------------------------------------------------------------------
<S> <C>
Common Stocks -- 91.7%
Hong Kong -- 32.3%
53,600 Asia Satellite Telecommunications Holdings*....................................$ 124,393
116,000 ASM Pacific Technology......................................................... 89,986
15,800 Bank of East Asia Hong Kong.................................................... 70,272
14,000 Cheung Kong.................................................................... 124,442
59,000 Cheung Kong Infrastructure*.................................................... 156,377
162,000 China Overseas Land & Investment............................................... 82,210
85,000 China Resources Beijing Land*.................................................. 53,850
78,000 China Resources Enterprises.................................................... 175,474
70,000 Cosco Pacific.................................................................. 81,453
19,000 Dickson Concepts International................................................. 71,239
48,000 First Pacific.................................................................. 62,370
62,000 Giordano Holdings.............................................................. 52,906
86,000 Guang Nan Holdings............................................................. 73,941
4,900 Guangdong Tannery*............................................................. 1,235
3,000 HSBC Holdings.................................................................. 64,193
20,000 Hutchison Whampoa.............................................................. 157,088
36,000 Hysan Development.............................................................. 143,358
115,000 Kerry Properties*.............................................................. 315,211
17,000 New World Development.......................................................... 114,843
150,000 Qingling Motors................................................................ 82,908
18,000 Shanghai Industrial Holdings*.................................................. 65,628
290,000 Shanghai Petrochemical......................................................... 88,112
172,000 USI Holdings................................................................... 80,057
----------
2,331,546
----------
India -- 9.9%
22,300 Arvind Mills-- GDR............................................................. 101,465
7,200 Ashok Leyland-- GDR............................................................ 67,680
8,000 Gujarat Ambuja Cements-- GDR................................................... 68,800
6,000 Industrial Credit & Investment-- GDR........................................... 58,500
10,000 Mahindra & Mahindra-- GDR...................................................... 117,500
5,100 Reliance Industries-- GDR...................................................... 61,200
7,950 State Bank of India-- GDR...................................................... 138,092
9,400 Tata Engineering & Locomotive-- GDR............................................ 99,875
----------
713,112
----------
Indonesia -- 3.2%
37,500 Lippo Karawaci (a)*............................................................ 42,866
50,000 PT Inti Indorayon Utama (a).................................................... 37,045
78,000 PT Lippo Life Insurance (a).................................................... 71,825
44,000 PT Telekomunikasion (a)........................................................ 75,910
----------
227,646
----------
Korea -- 4.7%
3,800 Dong Ah Construction........................................................... 80,947
1,500 Hanwha Chemical................................................................ 11,627
4,532 Korea Mobile Telecommunications--ADR*.......................................... 58,350
4,800 LG Electronics................................................................. 60,781
1,400 LG Information & Communication................................................. 89,467
2,740 Shinhan Bank................................................................... 37,290
----------
338,462
----------
</TABLE>
See accompanying notes to financial statements
85
<PAGE>
<PAGE>
Portfolio of Investments (continued)
SALOMON BROTHERS ASIA GROWTH FUND (continued)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Value
Shares Description (Note 1a)
- -----------------------------------------------------------------------------------------------------
<S> <C>
Malaysia -- 14.3%
13,000 Ekran..........................................................................$ 54,563
26,000 IJM, Class A................................................................... 61,255
67,000 IOI............................................................................ 102,934
12,000 Kian Joo Can Factory........................................................... 66,521
25,000 Land & General Holdings........................................................ 59,889
35,000 Leader Universal Holdings...................................................... 73,451
14,000 Malakoff....................................................................... 68,739
40,000 MBM Resources.................................................................. 85,528
76,000 Pernas International Holdings.................................................. 92,687
16,000 Rashid Hussein................................................................. 105,801
63,000 Renong......................................................................... 111,756
17,000 United Engineers............................................................... 153,475
----------
1,036,599
----------
Pakistan -- 0.4%
4,420 Pakistan State Oil............................................................. 28,562
----------
Philippines -- 3.6%
137,000 Ayala Land, Series B........................................................... 156,275
125,000 Belle*......................................................................... 34,696
78,000 Pilipino Telephone............................................................. 65,989
----------
256,960
----------
Singapore -- 8.1%
8,000 Cycle & Carriage............................................................... 97,763
13,000 Hong Leong Finance (a)......................................................... 45,151
20,000 Sembawang...................................................................... 105,767
2,500 Singapore Press Holdings (a)................................................... 49,310
15,000 United Overseas Bank (a)....................................................... 167,226
42,000 Wing Tai Holdings.............................................................. 120,060
----------
585,277
----------
Sri Lanka -- 0.5%
162,800 Asia Capital*.................................................................. 22,240
26,000 United Motors Lanka............................................................ 12,661
----------
34,901
----------
Taiwan -- 10.9%
31,000 Accton Technology*............................................................. 110,473
23,000 Cathay Life Insurance.......................................................... 146,364
63,000 China Steel.................................................................... 59,105
54,843 First International Computer*.................................................. 104,700
30,000 Formosa Plastics............................................................... 75,273
28,000 International Commercial Bank China............................................ 85,527
133,000 Pacific Construction*.......................................................... 113,655
71,690 Yang Ming Marine Transport..................................................... 94,891
----------
789,988
----------
</TABLE>
See accompanying notes to financial statements
86
<PAGE>
<PAGE>
SALOMON BROTHERS ASIA GROWTH FUND (concluded)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Value
Shares Description (Note 1a)
- -----------------------------------------------------------------------------------------------------
<S> <C>
Thailand -- 3.8%
13,650 Bangkok Bank...................................................................$ 101,659
18,000 Dhana Siam Finance (a)......................................................... 42,814
15,000 Property Perfect............................................................... 14,915
16,800 Thai Farmers Bank.............................................................. 81,884
41,000 Thai Telephone & Telecommunications (a)*....................................... 36,770
----------
278,042
----------
Total Common Stocks
(cost $6,667,747)............................................................ 6,621,095
----------
Warrants* -- 2.6%
370,000 China Resources, expires 08/28/97.............................................. 53,578
126,000 Credit Lyonnais Finance, expires 10/23/97...................................... 36,654
2,050,000 Guandong Investments Call, expires 11/27/97.................................... 51,419
800,000 Lai Sun Call, expires 11/13/97................................................. 22,755
120,000 Shanghai & Shenzen, expires 11/20/97........................................... 25,680
----------
Total Warrants
(cost $116,053).............................................................. 190,086
----------
Contracts
- ---------
Purchased Options* -- 0.8%
48,000 Hysan Call (expiring 01/17/97, exercise price $25.3575)........................ 33,822
401 Hang Seng Index OTC Put (expiring 4/2/97, exercise price 13,500 HKD)........... 26,441
----------
Total Purchased Options
(cost $34,452)............................................................... 60,263
----------
Total Investments -- 95.1%
(cost $6,818,252)............................................................ 6,871,444
Other assets in excess of liabilities -- 4.9%.................................. 353,924
----------
Net Assets -- 100.0% ..........................................................$7,225,368
==========
</TABLE>
* Non-income producing security.
(a) Foreign Shares
Abbreviations used in this statement:
ADR American Depository Receipt
GDR Global Depository Receipt
HKD Hong Kong Dollar
OTC Over The Counter
See accompanying notes to financial statements
87
<PAGE>
<PAGE>
Portfolio of Investments (continued)
SALOMON BROTHERS CAPITAL FUND INC
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Value
Shares Description (Note 1a)
- -----------------------------------------------------------------------------------------------------
<S> <C>
Common Stock -- 93.6%
Basic Industries -- 5.0%
25,000 Guilford Mills............................................................... $ 665,625
65,000 Nalco Chemical............................................................... 2,348,125
60,000 OM Group..................................................................... 1,620,000
40,000 Steel Dynamics *............................................................. 765,000
30,000 Union Camp................................................................... 1,432,500
-----------
6,831,250
-----------
Capital Goods -- 6.2%
45,000 Fluor........................................................................ 2,823,750
55,000 Gulfstream Aerospace *....................................................... 1,333,750
50,000 Lear *....................................................................... 1,706,250
50,000 Tyco International........................................................... 2,643,750
-----------
8,507,500
-----------
Consumer Cyclicals -- 16.7%
20,000 Eastman Kodak................................................................ 1,605,000
40,000 Federated Department Stores *................................................ 1,365,000
125,000 Fine Host *.................................................................. 2,406,250
60,000 Ford Motor................................................................... 1,912,500
25,000 General Motors............................................................... 1,393,750
192,500 Hollinger.................................................................... 1,780,625
20,000 Hollinger International...................................................... 230,000
30,000 Magna International, Class A................................................. 1,672,500
40,000 Omnicom Group................................................................ 1,830,000
140,000 Price/Costco *............................................................... 3,517,500
30,000 Quality Dining *............................................................. 536,250
100,000 Sears, Roebuck............................................................... 4,612,500
-----------
22,861,875
-----------
Consumer Non-Cyclicals -- 16.6%
75,000 Coca-Cola Enterprises........................................................ 3,637,500
400,000 Food Lion.................................................................... 4,050,000
100,000 Hormel Foods................................................................. 2,700,000
100,000 Kroger *..................................................................... 4,650,000
15,000 Loews........................................................................ 1,413,750
75,000 Penn Traffic *............................................................... 271,875
15,000 Philip Morris Companies...................................................... 1,689,375
60,000 Pittston Brink's Group....................................................... 1,620,000
30,000 Ryland Group................................................................. 412,500
100,000 Whitman...................................................................... 2,287,500
-----------
22,732,500
-----------
</TABLE>
See accompanying notes to financial statements
88
<PAGE>
<PAGE>
SALOMON BROTHERS CAPITAL FUND INC (continued)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Value
Shares Description (Note 1a)
- -----------------------------------------------------------------------------------------------------
<S> <C>
Energy -- 15.3%
15,000 Amoco........................................................................ $ 1,207,500
40,000 Ashland...................................................................... 1,755,000
45,000 Devon Energy................................................................. 1,563,750
75,000 Holly........................................................................ 2,006,250
20,000 Nuevo Energy *............................................................... 1,040,000
10,000 Oryx Energy Company *........................................................ 247,500
80,000 Sun.......................................................................... 1,950,000
20,000 Tejas Gas *.................................................................. 952,500
75,000 Ultramar Diamond Shamrock.................................................... 2,371,875
150,000 Union Pacific Resources Group................................................ 4,387,500
90,000 Williams Companies........................................................... 3,375,000
-----------
20,856,875
-----------
Financial Services -- 10.2%
20,000 Bank of Boston............................................................... 1,285,000
100,000 Bank of New York............................................................. 3,375,000
15,000 Chase Manhattan Bank......................................................... 1,338,750
100,000 Dime Bancorp *............................................................... 1,475,000
30,000 Glendale Federal Bank *...................................................... 697,500
15,000 Long Island Bancorp.......................................................... 525,000
40,000 Mercantile Bankshares........................................................ 1,280,000
20,000 MGIC Investment ............................................................. 1,520,000
55,000 Travelers Group.............................................................. 2,495,625
-----------
13,991,875
-----------
Health Care -- 8.4%
35,000 Aetna........................................................................ 2,800,000
90,000 Columbia/HCA Healthcare...................................................... 3,667,500
20,000 Rhone-Poulenc Rorer.......................................................... 1,562,500
50,000 SmithKline Beecham-- ADR..................................................... 3,400,000
-----------
11,430,000
-----------
Technology -- 8.4%
20,000 BA Merchant Services, Class A *.............................................. 357,500
62,000 Electric Fuel *.............................................................. 434,000
45,000 First Data................................................................... 1,642,500
10,000 International Business Machines.............................................. 1,510,000
90,000 Plantronics *................................................................ 4,050,000
100,000 S3 *......................................................................... 1,625,000
75,000 Silicon Graphics *........................................................... 1,912,500
-----------
11,531,500
-----------
Telecommunications & Utilities -- 2.6%
80,000 AT&T......................................................................... 3,480,000
-----------
Transportation -- 4.2%
75,000 Canadian National Railway.................................................... 2,850,000
110,000 Canadian Pacific............................................................. 2,915,000
-----------
5,765,000
-----------
Total Common Stocks
(cost $106,691,533)........................................................ 127,988,375
-----------
</TABLE>
See accompanying notes to financial statements
89
<PAGE>
<PAGE>
Portfolio of Investments (continued)
SALOMON BROTHERS CAPITAL FUND INC (concluded)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Value
Shares Description (Note 1a)
- -----------------------------------------------------------------------------------------------------
<S> <C>
Convertible Preferred Stocks -- 2.2%
Capital Goods--1.1%
30,000 Crown Cork & Seal 4.50%...................................................... $1,560,000
-----------
Consumer Cyclicals--1.1%
125,000 Hollinger International 9.75%................................................ 1,437,500
-----------
Total Convertible Preferred Stocks
(cost $2,549,313).......................................................... 2,997,500
-----------
Principal
Amount
- ---------
Corporate Bonds--1.5%
Consumer Non-Cyclicals--1.5%
$ 3,500,000 Penn Traffic, 9.625%, due 04/15/05 (cost $1,963,300)......................... 2,021,250
-----------
Contracts
- ----------
Purchased Options*--0.1%
50 S&P Midcap Index Call
(expiring January 1997, exercise price $240)............................... 76,875
100 S&P Midcap Index Call
(expiring January 1997, exercise price $265)............................... 6,875
100 S&P 500 Index Call
(expiring January 1997, exercise price $800)............................... 3,750
-----------
Total Purchased Options
(cost $148,250)........................................................... 87,500
-----------
Total Investments--97.4%
(cost $111,352,396)...................................................... 133,094,625
Principal
Amount
- ---------
Repurchase Agreement--2.7%
$ 3,667,000 Repurchase Agreement, 6.75%, due 01/02/97, dated
12/31/96, with UBS Securities, collateralized by
$3,029,000 U.S. Treasury Bonds, 8.75%, due
05/15/17 valued at $3,740,815; proceeds: $3,668,375
(cost $3,667,000).......................................................... 3,667,000
Liabilities in excess of other assets--(0.1%).............................. (126,255)
------------
Net Assets--100.0%..................................................... $136,635,370
============
</TABLE>
* Non-income producing security.
Abbreviation used in this statement:
ADR American Depository Receipt
See accompanying notes to financial statements
90
<PAGE>
<PAGE>
SALOMON BROTHERS INVESTORS FUND INC
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Value
Shares Description (Note 1a)
- -----------------------------------------------------------------------------------------------------
<S> <C>
Common Stocks--94.7%
Basic Industries--8.3%
90,700 Crown Cork & Seal............................................................ $ 4,931,813
96,000 Du Pont (E.I.) de Nemours.................................................... 9,060,000
7,800 Millennium Chemicals......................................................... 138,450
150,000 Nalco Chemical............................................................... 5,418,750
318,000 OM Group..................................................................... 8,586,000
265,000 Praxair...................................................................... 12,223,125
100,000 Union Camp................................................................... 4,775,000
-----------
45,133,138
-----------
Capital Goods--8.5%
100,000 AlliedSignal................................................................. 6,700,000
115,500 Deere........................................................................ 4,692,188
77,500 General Electric............................................................. 7,662,813
385,000 Gulfstream Aerospace *....................................................... 9,336,250
225,000 Tyco International........................................................... 11,896,875
100,000 York International........................................................... 5,587,500
-----------
45,875,626
-----------
Consumer Cyclicals--11.4%
100,000 Eastman Kodak................................................................ 8,025,000
140,000 Federated Department Stores *................................................ 4,777,500
72,000 Ford Motor................................................................... 2,295,000
80,000 General Motors............................................................... 4,460,000
366,500 Host Marriott *.............................................................. 5,864,000
195,000 Lear *....................................................................... 6,654,375
70,000 Magna International, Class A................................................. 3,902,500
300,000 Price/Costco *............................................................... 7,537,500
168,200 Sears, Roebuck............................................................... 7,758,225
105,000 Sherwin-Williams............................................................. 5,880,000
132,200 U.S. Industries *............................................................ 4,544,375
-----------
61,698,475
-----------
Consumer Non-Cyclicals--9.5%
191,700 Coca-Cola Enterprises........................................................ 9,297,450
105,000 ConAgra...................................................................... 5,223,750
70,000 Estee Lauder Companies, Class A.............................................. 3,561,250
175,400 Hormel Foods................................................................. 4,735,800
209,200 Kroger *..................................................................... 9,727,800
50,000 Loews........................................................................ 4,712,500
99,000 Penn Traffic *............................................................... 358,875
60,500 Philip Morris Companies...................................................... 6,813,813
250,000 Pittston Brink's Group....................................................... 6,750,000
-----------
51,181,238
-----------
</TABLE>
See accompanying notes to financial statements
91
<PAGE>
<PAGE>
Portfolio of Investments (continued)
SALOMON BROTHERS INVESTORS FUND INC (continued)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Value
Shares Description (Note 1a)
- -----------------------------------------------------------------------------------------------------
<S> <C>
Energy--11.8%
113,500 Amoco........................................................................ $ 9,136,750
85,000 Chevron...................................................................... 5,525,000
75,000 Dresser Industries........................................................... 2,325,000
92,700 Mobil........................................................................ 11,332,575
69,000 Royal Dutch Petroleum, 5 Guilder............................................. 11,781,750
150,000 Suncor....................................................................... 6,206,250
133,557 TOTAL-- ADR.................................................................. 5,375,669
131,613 Union Pacific Resources Group................................................ 3,849,663
215,700 Williams Companies........................................................... 8,088,750
-----------
63,621,407
-----------
Financial Services--14.8%
57,500 ADVANTA, Class B............................................................. 2,350,313
85,600 American Express............................................................. 4,836,400
78,300 Associates First Capital..................................................... 3,454,988
157,500 Bank of Boston............................................................... 10,119,375
414,400 Bank of New York............................................................. 13,986,000
29,000 Chase Manhattan Bank......................................................... 2,588,250
146,000 Dime Bancorp *............................................................... 2,153,500
73,500 Federal Home Loan Mortgage Corporation....................................... 8,094,188
57,500 Federal National Mortgage Association........................................ 2,141,875
110,000 Long Island Bancorp.......................................................... 3,850,000
82,500 MGIC Investment.............................................................. 6,270,000
175,000 SunAmerica................................................................... 7,765,625
277,686 Travelers Group.............................................................. 12,599,999
-----------
80,210,513
-----------
Health Care--11.6%
106,500 Aetna........................................................................ 8,520,000
120,000 American Home Products....................................................... 7,035,000
210,000 Astra AB, Class A............................................................ 10,378,126
360,000 Columbia/HCA Healthcare...................................................... 14,670,000
125,000 Rhone-Poulenc Rorer.......................................................... 9,765,625
180,000 SmithKline Beecham-- ADR..................................................... 12,240,000
-----------
62,608,751
-----------
Real Estate Investment Trusts--5.2%
235,000 Arden Realty Group........................................................... 6,521,250
112,000 Beacon Properties............................................................ 4,102,000
150,000 Highwoods Properties......................................................... 5,062,500
149,500 Patriot American Hospitality................................................. 6,447,188
178,100 Sun Communities.............................................................. 6,144,450
-----------
28,277,388
-----------
</TABLE>
See accompanying notes to financial statements
92
<PAGE>
<PAGE>
SALOMON BROTHERS INVESTORS FUND INC (concluded)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Value
Shares Description (Note 1a)
- -----------------------------------------------------------------------------------------------------
<S> <C>
Technology--7.4%
80,000 BA Merchant Services, Class A *.............................................. $ 1,430,000
162,500 Ceridian *................................................................... 6,581,250
35,500 DST Systems *................................................................ 1,113,813
379,000 First Data................................................................... 13,833,500
16,000 First USA Paymentech *....................................................... 542,000
46,000 International Business Machines.............................................. 6,946,000
30,000 National Data................................................................ 1,305,000
56,600 Plantronics *................................................................ 2,547,000
90,239 Seagate Technology *......................................................... 3,564,441
75,500 Silicon Graphics *........................................................... 1,925,250
-----------
39,788,254
-----------
Telecommunications & Utilities--1.3%
156,400 AT&T......................................................................... 6,803,400
-----------
Transportation--4.9%
375,000 Canadian National Railway.................................................... 14,250,000
365,000 Canadian Pacific............................................................. 9,672,500
45,000 Union Pacific................................................................ 2,705,625
-----------
26,628,125
-----------
Total Common Stocks
(cost $341,266,581)........................................................ 511,826,315
-----------
Convertible Preferred Stocks--0.5%
Financial Services--0.5%
65,000 SunAmerica $3.188 (cost $2,437,500)...................................... 2,746,250
-----------
Principal
Amount
- --------
Convertible Corporate Bonds--0.9%
Consumer Cyclicals--0.4%
$ 2,000,000 Federated Department Stores, 5.00%, due 10/01/03 ......................... 2,295,000
-----------
Financial Services--0.5%
2,500,000 National Data, 5.00%, due 11/01/03........................................ 2,593,750
-----------
Total Convertible Corporate Bonds
(cost $4,522,368)....................................................... 4,888,750
-----------
Total Investments--96.1%
(cost $348,226,449).................................................... 519,461,315
Repurchase Agreement--3.9%
21,222,000 Repurchase Agreement, 6.75%, due 01/02/97, dated 12/31/96,
with UBS Securities, collateralized by $18,191,000
U.S. Treasury Bonds, 8.125%, due 8/15/19,
valued at $21,647,290; proceeds: $21,229,958
(cost $21,222,000)........................................................ 21,222,000
Liabilities in excess of other assets--(0.0%)............................ (25,489)
------------
Net Assets--100.0%....................................................... $540,657,826
============
</TABLE>
* Non-income producing security.
Abbreviation used in this statement:
ADR American Depository Receipt
See accompanying notes to financial statements
93
<PAGE>
<PAGE>
Portfolio of Investments (continued)
SALOMON BROTHERS TOTAL RETURN FUND
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Value
Shares Description (Note 1a)
- -----------------------------------------------------------------------------------------------------
<S> <C>
Common Stocks--44.7%
Basic Industries--6.5%
5,000 Aluminum Company of America.................................................. $ 318,750
4,600 Dow Chemical................................................................. 360,525
7,000 Du Pont (E.I.) de Nemours.................................................... 660,625
10,000 Monsanto..................................................................... 388,750
16,000 Nalco Chemical............................................................... 578,000
11,000 Petrolite.................................................................... 528,000
12,000 Union Camp................................................................... 573,000
-----------
3,407,650
-----------
Capital Goods--2.4%
4,800 Boeing....................................................................... 510,600
8,000 Deere........................................................................ 325,000
5,000 Raytheon..................................................................... 240,625
2,200 Textron...................................................................... 207,350
-----------
1,283,575
-----------
Consumer Cyclicals--5.3%
13,000 Eastman Kodak................................................................ 1,043,250
14,000 Ford Motor................................................................... 446,250
5,000 General Motors............................................................... 278,750
9,100 May Department Stores........................................................ 425,425
7,499 Price/Costco *............................................................... 188,412
10,000 Ryland Group................................................................. 137,500
5,700 Sears, Roebuck............................................................... 262,913
-----------
2,782,500
-----------
Consumer Non-Cyclicals--2.5%
75,000 Food Lion.................................................................... 759,375
5,000 Philip Morris Companies...................................................... 563,125
-----------
1,322,500
-----------
Energy--8.5%
6,500 Amoco........................................................................ 523,250
16,000 Dresser Industries........................................................... 496,000
4,000 Exxon........................................................................ 392,000
2,000 Mobil........................................................................ 244,500
2,000 Royal Dutch Petroleum, 5 Guilder............................................. 341,500
12,500 Sun.......................................................................... 304,688
20,000 Suncor....................................................................... 827,500
3,000 Texaco....................................................................... 294,375
17,000 USX-Marathon Group........................................................... 405,875
18,000 Williams Companies........................................................... 675,000
-----------
4,504,688
-----------
Financial Services--5.1%
8,000 Allstate..................................................................... 463,000
10,000 Bay View Capital............................................................. 423,750
2,500 Cigna........................................................................ 341,563
5,300 Citicorp..................................................................... 545,900
10,000 First Virginia Banks......................................................... 478,750
6,000 UNUM......................................................................... 433,500
-----------
2,686,463
-----------
</TABLE>
See accompanying notes to financial statements
94
<PAGE>
<PAGE>
SALOMON BROTHERS TOTAL RETURN FUND (continued)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Value
Shares Description (Note 1a)
- -----------------------------------------------------------------------------------------------------
<S> <C>
Health Care--3.4%
6,000 Aetna........................................................................ $ 480,000
9,000 American Home Products....................................................... 527,625
11,200 SmithKline Beecham--ADR....................................................... 761,600
-----------
1,769,225
-----------
Real Estate Investment Trusts--5.9%
20,000 Arden Realty Group........................................................... 555,000
21,000 Beacon Properties............................................................ 769,125
22,000 Highwoods Properties......................................................... 742,500
15,000 Patriot American Hospitality................................................. 646,875
18,000 Prentiss Properties Trust *.................................................. 450,000
-----------
3,163,500
-----------
Telecommunications & Utilities--2.8%
6,000 American Electric Power...................................................... 246,750
5,000 Ameritech.................................................................... 303,125
10,000 AT&T......................................................................... 435,000
11,000 GTE.......................................................................... 500,500
-----------
1,485,375
-----------
Transportation--2.3%
32,000 Canadian National Railway.................................................... 1,216,000
-----------
Total Common Stocks
(cost $19,765,803)......................................................... 23,621,476
-----------
Convertible Preferred Stocks--4.7%
Basic Industries--0.8%
3,000 AK Steel Holdings 7.00%...................................................... 105,750
4,000 Boise Cascade $1.58.......................................................... 104,500
4,000 Crown Cork & Seal 4.50%...................................................... 208,000
-----------
418,250
-----------
Consumer Cyclicals--0.5%
15,000 Hollinger International 9.75%................................................ 172,500
2,000 Host Marriott 6.75%.......................................................... 107,250
-----------
279,750
-----------
Consumer Non-Cyclicals--0.2%
2,000 James River $3.50............................................................ 103,500
-----------
Energy--2.0%
2,500 Ashland $3.125............................................................... 171,563
6,500 Enron 6.25%.................................................................. 156,000
30,000 Mesa 8.00% (a)............................................................... 191,250
7,500 Sun $1.80.................................................................... 188,438
3,000 Tosco 5.75%.................................................................. 154,500
2,000 Ultramar Diamond Shamrock 5.00%.............................................. 123,000
2,500 USX 6.75%.................................................................... 65,938
-----------
1,050,689
-----------
</TABLE>
See accompanying notes to financial statements
95
<PAGE>
<PAGE>
Portfolio of Investments (continued)
SALOMON BROTHERS TOTAL RETURN FUND (continued)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Interest Maturity Value
Shares Description Rate Date (Note 1a)
- -----------------------------------------------------------------------------------------------------
<S> <C>
Financial Services--0.6%
2,500 Finova Finance Trust 5.50%................................................... $131,250
3,000 Glendale Federal Bank 8.75%.................................................. 176,250
-----------
307,500
-----------
Health Care--0.3%
2,000 Aetna 6.25%.................................................................. 158,750
-----------
Technology--0.3%
2,000 Microsoft $2.196............................................................. 160,250
-----------
Total Convertible Preferred Stocks
(cost $2,284,669).......................................................... 2,478,689
-----------
Principal
Amount
- --------
Corporate Bonds--21.5%
Basic Industries--3.9%
$100,000 Algoma Steel............................... 12.375% 07/15/05 108,000
200,000 Alvey Systems.............................. 11.375 01/31/03 208,500
200,000 Clark-Schwebel............................. 10.500 04/15/06 214,000
100,000 Crown Paper................................ 11.000 09/01/05 94,000
100,000 Foamex..................................... 11.875 10/01/04 106,750
200,000 Four M..................................... 12.000 06/01/06 208,000
200,000 Norcal Waste Systems....................... 13.000 11/15/05 221,000
375,000 Pohang Iron & Steel........................ 7.500 08/01/02 385,586
100,000 Renco Metals............................... 11.500 07/01/03 104,500
200,000 Southdown.................................. 10.000 03/01/06 211,000
200,000 Specialty Equipment........................ 11.375 12/01/03 218,500
-----------
2,079,836
-----------
Consumer Cyclicals--3.2%
50,000 Continental Homes Holding.................. 6.875 11/01/02 52,938
150,000 Finlay Fine Jewelry........................ 10.625 05/01/03 150,750
100,000 Guitar Center Management................... 11.000 07/01/06 106,000
100,000 Herff Jones................................ 11.000 08/15/05 107,500
200,000 Hines Horticulture......................... 11.750 10/15/05 214,000
100,000 Jitney-Jungle Stores....................... 12.000 03/01/06 105,750
200,000 Revlon Worldwide (b)....................... 10.379 03/15/98 172,000
100,000 Speedy Muffler King........................ 10.875 10/01/06 106,625
380,000 Stand Credit Card Master Trust............. 7.850 02/07/02 395,675
50,000 U.S. Home.................................. 4.875 11/01/05 44,250
200,000 Wyndham Hotel.............................. 10.500 05/15/06 213,000
-----------
1,668,488
-----------
</TABLE>
See accompanying notes to financial statements
96
<PAGE>
<PAGE>
SALOMON BROTHERS TOTAL RETURN FUND (continued)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Principal Interest Maturity Value
Amount Description Rate Date (Note 1a)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Consumer Non-Cyclicals--4.8%
$100,000 American Safety Razor...................... 9.875% 08/01/05 $ 106,250
100,000 Americold.................................. 12.875 05/01/08 103,500
200,000 Berry Plastics............................. 12.250 04/15/04 221,000
100,000 Borg-Warner................................ 9.125 05/01/03 98,000
100,000 Carr-Gottstein Foods....................... 12.000 11/15/05 106,750
100,000 Cobb Theatres.............................. 10.625 03/01/03 105,750
150,000 Doane Products............................. 10.625 03/01/06 159,750
150,000 Eyecare Centers of America................. 12.000 10/01/03 162,750
100,000 Iron Mountain.............................. 10.125 10/01/06 106,000
200,000 Jordan Industries.......................... 10.375 08/01/03 197,000
200,000 Radnor Holdings............................ 10.000 12/01/03 204,000
200,000 Rayovac.................................... 10.250 11/01/06 206,000
200,000 Remington Product.......................... 11.000 05/15/06 171,000
100,000 Samsonite.................................. 11.125 07/15/05 109,500
100,000 Selmer..................................... 11.000 05/15/05 108,000
200,000 Stroh Brewery.............................. 11.100 07/01/06 209,500
200,000 Trump Atlantic City........................ 11.250 05/01/06 198,000
-----------
2,572,750
-----------
Energy--0.8%
200,000 Cliffs Drilling............................ 10.250 05/15/03 212,750
200,000 National Energy Group...................... 10.750 11/01/06 208,000
-----------
420,750
-----------
Financial Services--4.2%
495,000 Associates N.A............................. 5.600 01/15/01 477,175
275,000 Commercial Credit.......................... 6.875 05/01/02 277,076
200,000 Dollar Financial........................... 10.875 11/15/06 207,000
525,000 Ford Motor Credit.......................... 6.250 12/08/05 497,427
250,000 Mellon Financial........................... 9.750 06/15/01 277,920
350,000 Nationsbank Credit Card Master Trust....... 6.450 04/15/03 351,313
100,000 USL Capital................................ 8.125 02/15/00 104,450
-----------
2,192,361
-----------
Health Care--0.8%
300,000 Aetna...................................... 7.625 08/15/26 302,502
100,000 Fresenius Medical Care..................... 9.000 12/01/06 101,750
-----------
404,252
-----------
Media--1.7%
200,000 American Media Operation................... 11.625 11/15/04 215,000
200,000 Cablevision Systems........................ 10.500 05/15/16 206,500
200,000 Diamond Cable
(Zero Coupon until 12/15/00, 11.75%
thereafter) (b).......................... 11.750 12/15/05 144,000
200,000 Marcus Cable
(Zero Coupon until 12/15/00, 14.125%
thereafter) (b).......................... 12.921 12/15/05 141,250
100,000 SFX Broadcasting........................... 10.750 05/15/06 105,500
150,000 United International Holdings (b).......... 13.187 11/15/99 106,500
-----------
918,750
-----------
</TABLE>
See accompanying notes to financial statements
97
<PAGE>
<PAGE>
Portfolio of Investments (continued)
SALOMON BROTHERS TOTAL RETURN FUND (continued)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Principal Interest Maturity Value
Amount Description Rate Date (Note 1a)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Technology--1.1%
$200,000 Exide Electronics Group, including 200 warrants 11.500% 03/15/06 $ 219,000
100,000 Talley Manufacturing & Technology.......... 10.750 10/15/03 103,250
100,000 UNC........................................ 11.000 06/01/06 107,500
150,000 Xilinx..................................... 5.250 11/01/02 149,250
-----------
579,000
-----------
Telecommunications & Utilities--1.0%
200,000 Arch Communications Group
(Zero Coupon until 03/15/01, 10.875%
thereafter) (b)........................ 10.875 03/15/08 114,000
125,000 ICG Holdings
(Zero Coupon until 09/15/00, 13.50%
thereafter) (b)......................... 12.725 09/15/05 88,125
150,000 International CableTel
(Zero Coupon until 02/01/01, 11.500%
thereafter) (b)......................... 11.804 02/01/06 102,000
200,000 Western Wireless.......................... 10.500 06/01/06 209,500
-----------
513,625
-----------
Total Corporate Bonds
(cost $11,125,665)....................... 11,349,812
-----------
Convertible Corporate Bonds--7.4%
Basic Industries--0.5%
150,000 Coeur D'Alene Mines........................ 6.375 01/31/04 140,250
100,000 Inco....................................... 5.750 07/01/04 123,000
-----------
263,250
-----------
Consumer Cyclicals--2.4%
100,000 Charming Shoppes........................... 7.500 07/15/06 99,500
150,000 Federated Department Stores................ 5.000 10/01/03 172,125
125,000 Guilford Mills............................. 6.000 09/15/12 126,875
750,000 Hollinger (b).............................. 6.607 10/05/13 266,250
200,000 Home Depot................................. 3.250 10/01/01 195,000
150,000 Magna International........................ 5.000 10/15/02 172,125
75,000 Price/Costco............................... 5.500 02/28/12 78,750
150,000 Waban...................................... 6.500 07/01/02 163,875
-----------
1,274,500
-----------
Consumer Non-Cyclicals--0.8%
450,000 Texas Instruments.......................... 6.125 02/01/06 424,665
-----------
Energy--0.6%
200,000 Baker Hughes (b)........................... 3.246 05/05/08 151,000
150,000 Pennzoil................................... 4.750 10/01/03 175,500
-----------
326,500
-----------
Financial Services--0.7%
75,000 First Financial Management................. 5.000 12/15/99 129,281
200,000 Sandoz Capital............................. 2.000 10/06/02 216,000
-----------
345,281
-----------
</TABLE>
See accompanying notes to financial statements
98
<PAGE>
<PAGE>
SALOMON BROTHERS TOTAL RETURN FUND (concluded)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Principal Interest Maturity Value
Amount Description Rate Date (Note 1a)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Technology--1.6%
$200,000 Data General............................... 7.750% 06/01/01 $206,000
50,000 General Signal............................. 5.750 06/01/02 54,750
150,000 National Data.............................. 5.000 11/01/03 155,625
75,000 Quantum.................................... 5.000 03/01/03 104,531
150,000 S3......................................... 5.750 10/01/03 168,000
300,000 Silicon Graphics (b)....................... 3.836 11/02/13 157,875
-----------
846,781
-----------
Telecommunications & Utilities--0.5%
750,000 U.S. Cellular (b).......................... 5.573 06/15/15 250,313
-----------
Transportation--0.3%
150,000 Continental Airlines....................... 6.750 04/15/06 165,000
-----------
Total Convertible Corporate Bonds
(cost $3,820,099)........................ 3,896,290
-----------
U.S. Government & Agency--11.4%
295,188 Federal Home Loan Mortgage Corporation..... 6.500 03/01/26 282,637
298,440 Federal Home Loan Mortgage Corporation..... 6.500 03/01/26 285,663
250,000 Federal National Mortgage Association (c).. 7.000 ** 244,766
250,000 Federal National Mortgage Association...... 7.000 ** 244,765
44,838 Federal National Mortgage Association...... 6.500 10/01/10 44,181
297,977 Federal National Mortgage Association...... 6.500 10/01/11 292,948
102,927 Federal National Mortgage Association...... 7.500 08/01/23 103,230
96,652 Federal National Mortgage Association...... 7.000 09/01/25 94,603
89,578 Federal National Mortgage Association...... 6.500 12/01/25 85,573
293,575 Federal National Mortgage Association...... 7.000 03/01/26 287,611
503,209 Federal National Mortgage Association...... 6.500 06/01/26 480,082
94,917 Government National Mortgage Association... 7.500 01/15/23 95,772
202,380 Government National Mortgage Association... 7.500 03/15/26 202,760
200,000 U.S. Treasury Bond......................... 7.625 02/15/25 222,156
710,000 U.S. Treasury Note......................... 6.625 07/31/01 721,317
540,000 U.S. Treasury Note......................... 6.250 10/31/01 540,508
950,000 U.S. Treasury Note......................... 5.750 08/15/03 921,496
325,000 U.S. Treasury Note (d)..................... 7.000 07/15/06 337,646
525,000 U.S. Treasury Note......................... 6.500 10/15/06 527,872
-----------
Total U.S. Government & Agency
(cost $6,029,146)........................ 6,015,586
-----------
Total Investments--89.7%
(cost $43,025,382)....................... 47,361,853
Repurchase Agreements--9.5%
4,996,000 Repurchase Agreement dated 12/31/96, with J.P.
Morgan Securities, collateralized by $4,053,000
U.S. Treasury Bonds, 8.75%, due 08/15/20 valued
at $5,121,979; proceeds: $4,997,832
(cost $4,996,000)......................... 6.600 01/02/97 4,996,000
Other assets in excess of liabilities--0.8%. 450,898
-----------
Net Assets--100.0%.......................... $52,808,751
===========
</TABLE>
* Non-income producing security.
** To be announced.
(a) Security pays payment-in-kind dividends through 09/30/00.
(b) Zero or step coupon bond. Interest rate shown reflects yield to maturity on
date of purchase.
(c) Mortgage Dollar Roll. See Note 1.
(d) Security segregated for mortgage dollar roll.
Abbreviation used in this statement:
ADR American Depository Receipt
See accompanying notes to financial statements
99
<PAGE>
<PAGE>
Portfolio of Investments (continued)
SALOMON BROTHERS HIGH YIELD BOND FUND
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Principal Interest Maturity Value
Amount(a) Description Rate Date (Note 1a)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Corporate Bonds -- 73.8%
Basic Industries -- 15.1%
1,000,000 Algoma Steel............................... 12.375% 07/15/05 $1,080,000
1,500,000 Alvey Systems.............................. 11.375 01/31/03 1,563,750
500,000 Asia Pulp & Paper International Finance.... 11.750 10/01/05 536,250
1,500,000 Clark Materials............................ 10.750 11/15/06 1,560,000
1,000,000 Clark-Schwebel............................. 10.500 04/15/06 1,070,000
1,000,000 Commonwealth Aluminum...................... 10.750 10/01/06 1,030,000
1,000,000 Crown Paper................................ 11.000 09/01/05 940,000
500,000 Doman Industries Limited................... 8.750 03/15/04 467,500
1,500,000 Foamex..................................... 11.875 10/01/04 1,601,250
500,000 Forest Oil................................. 11.250 09/01/03 527,500
1,000,000 Freedom Chemical........................... 10.625 10/15/06 1,050,000
1,000,000 ISP Holdings............................... 9.000 10/15/03 1,015,000
1,000,000 Mesa Operating............................. 10.625 07/01/06 1,085,000
3,350,000 NL Industries
(Zero Coupon until 10/15/98, 13.00%
thereafter)(b)........................... 11.777 10/15/05 2,881,000
1,000,000 Norcal Waste Systems *..................... 13.000 11/15/05 1,105,000
1,000,000 Pierce Leahy............................... 11.125 07/15/06 1,092,500
1,000,000 Plastic Containers......................... 10.000 12/15/06 1,040,000
1,000,000 Renco Metals............................... 11.500 07/01/03 1,045,000
500,000 Repap Wisconsin............................ 9.875 05/01/06 510,000
1,000,000 Sequa...................................... 9.375 12/15/03 1,020,000
500,000 Southdown.................................. 10.000 03/01/06 527,500
1,250,000 Specialty Equipment........................ 11.375 12/01/03 1,365,625
1,000,000 Spinnaker Industries....................... 10.750 10/15/06 1,045,000
500,000 Terex...................................... 13.250 05/15/02 542,500
1,500,000 Texas Petrochemical........................ 11.125 07/01/06 1,612,500
1,000,000 Valcor..................................... 9.625 11/01/03 945,000
-----------
28,257,875
-----------
Consumer Cyclicals -- 13.9%
1,000,000 AmeriKing.................................. 10.750 12/01/06 1,040,000
1,500,000 Cinemark USA............................... 9.625 08/01/08 1,500,000
1,300,000 Cole National Group........................ 9.875 12/31/06 1,339,000
1,500,000 CSK Auto................................... 11.000 11/01/06 1,575,000
2,000,000 Delta Beverage............................. 9.750 12/15/03 2,052,500
1,500,000 E & S Holdings............................. 10.375 10/01/06 1,571,250
1,000,000 Guitar Center Management................... 11.000 07/01/06 1,060,000
1,000,000 Herff Jones................................ 11.000 08/15/05 1,075,000
500,000 Hines Horticulture......................... 11.750 10/15/05 535,000
1,000,000 Hollinger International Publishing......... 9.250 02/01/06 990,000
1,800,000 Lamar Advertising.......................... 9.625 12/01/06 1,872,000
1,000,000 Newport News Shipbuilding.................. 9.250 12/01/06 1,025,000
3,500,000 Revlon Worldwide(b)........................ 11.494 03/15/98 3,010,000
1,000,000 Safelite Glass............................. 9.875 12/15/06 1,032,500
1,500,000 Scholastic Brands.......................... 11.000 01/15/07 1,526,250
500,000 Simmons.................................... 10.750 04/15/06 522,500
500,000 Specialty Retailers........................ 11.000 08/15/03 515,000
1,000,000 Speedy Muffler King........................ 10.875 10/01/06 1,066,250
1,500,000 Universal Outdoor.......................... 9.750 10/15/06 1,548,750
1,000,000 Wyndham Hotel.............................. 10.500 05/15/06 1,065,000
-----------
25,921,000
-----------
</TABLE>
See accompanying notes to financial statements
100
<PAGE>
<PAGE>
SALOMON BROTHERS HIGH YIELD BOND FUND (continued)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Principal Interest Maturity Value
Amount(a) Description Rate Date (Note 1a)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Consumer Non-Cyclicals -- 15.1%
500,000 Americold.................................. 12.875% 05/01/08 $ 517,500
1,500,000 Berry Plastics............................. 12.250 04/15/04 1,657,500
1,000,000 Big V Supermarkets......................... 11.000 12/15/04 920,000
500,000 Borg-Warner................................ 9.125 05/01/03 490,000
1,000,000 Carr-Gottstein Foods....................... 12.000 11/15/05 1,067,500
500,000 Cobb Theatres.............................. 10.625 03/01/03 528,750
1,000,000 Dade International......................... 11.125 05/01/06 1,085,000
1,500,000 Doane Products............................. 10.625 03/01/06 1,597,500
1,000,000 Ekco Group................................. 9.250 04/01/06 980,000
750,000 Harvey Casinos............................. 10.625 06/01/06 791,250
1,000,000 Hills Stores............................... 12.500 07/01/03 887,500
250,000 Hollywood Casino........................... 12.750 11/01/03 240,000
1,300,000 IMED....................................... 9.750 12/01/06 1,322,750
1,000,000 Iron Mountain.............................. 10.125 10/01/06 1,060,000
1,000,000 Jordan Industries.......................... 10.375 08/01/03 985,000
250,000 Jordan Industries
(Zero Coupon until 08/01/98, 11.75%
thereafter)(b)............................ 14.013 08/01/05 198,750
1,000,000 Majestic Star Casino....................... 12.750 05/15/03 1,072,500
1,000,000 Penn Traffic............................... 9.625 04/15/05 577,500
1,000,000 Plastic Specialties........................ 11.250 12/01/03 1,040,000
2,000,000 Radnor Holdings............................ 10.000 12/01/03 2,040,000
1,500,000 Rayovac.................................... 10.250 11/01/06 1,545,000
1,500,000 Remington Product.......................... 11.000 05/15/06 1,282,500
800,000 Rose Hills................................. 9.500 11/15/04 822,000
500,000 Selmer..................................... 11.000 05/15/05 540,000
1,000,000 Smiths Food & Drug......................... 11.250 05/15/07 1,105,000
250,000 Specialty Foods............................ 11.125 10/01/02 237,500
2,000,000 Stroh Brewery.............................. 11.100 07/01/06 2,095,000
1,000,000 Trump Atlantic City........................ 11.250 05/01/06 990,000
500,000 Twin Laboratories.......................... 10.250 05/15/06 515,000
-----------
28,191,000
-----------
Energy -- 4.2%
500,000 Benton Oil & Gas........................... 11.625 05/01/03 553,750
1,500,000 Cliffs Drilling............................ 10.250 05/15/03 1,595,625
2,000,000 Costilla Energy............................ 10.250 10/01/06 2,090,000
750,000 Flores & Rucks............................. 9.750 10/01/06 795,000
1,500,000 National Energy Group...................... 10.750 11/01/06 1,560,000
1,250,000 Parker Drilling............................ 9.750 11/15/06 1,318,750
-----------
7,913,125
-----------
Financial Services -- 4.0%
1,000,000 Aames Financial............................ 9.125 11/01/03 1,017,500
1,000,000 Dollar Financial........................... 10.875 11/15/06 1,035,000
1,000,000 First Nationwide Escrow.................... 10.625 10/01/03 1,080,000
1,400,000 HMH Properties............................. 9.500 05/15/05 1,456,000
1,000,000 Intertek Finance PLC....................... 10.250 11/01/06 1,040,000
2,000,000 Tembec Finance............................. 9.875 09/30/05 1,870,000
-----------
7,498,500
-----------
</TABLE>
See accompanying notes to financial statements
101
<PAGE>
<PAGE>
Portfolio of Investments (continued)
SALOMON BROTHERS HIGH YIELD BOND FUND (continued)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Principal
Value Interest Maturity
Amount(a) Description Rate Date (Note 1a)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Health Care -- 1.1%
1,000,000 Fresenius Medical Care..................... 9.000% 12/01/06 $1,017,500
1,000,000 Maxxim Medical............................. 10.500 08/01/06 1,045,000
-----------
2,062,500
-----------
Media -- 7.1%
2,000,000 Adelphia Communications.................... 12.500 05/15/02 2,050,000
500,000 American Media Operation................... 11.625 11/15/04 537,500
2,000,000 Cablevision Systems........................ 10.500 05/15/16 2,065,000
1,500,000 Chancellor Broadcasting.................... 9.375 10/01/04 1,515,000
1,500,000 Diamond Cable
(Zero Coupon until 12/15/00, 11.75%
thereafter)(b)........................... 11.732 12/15/05 1,080,000
2,750,000 Marcus Cable
(Zero Coupon until 06/15/00, 14.125%
thereafter)(b)........................... 13.068 12/15/05 1,942,188
1,000,000 Rogers Cable Systems....................... 10.000 03/15/05 1,072,500
1,500,000 SFX Broadcasting........................... 10.750 05/15/06 1,582,500
1,750,000 United International Holdings(b)........... 12.392 11/15/99 1,242,500
250,000 Wireless One............................... 13.000 10/15/03 242,500
-----------
13,329,688
-----------
Technology -- 2.9%
1,000,000 Exide Electronics Group.................... 11.500 03/15/06 1,065,000
1,000,000 Mettler Toledo............................. 9.750 10/01/06 1,050,000
1,500,000 Talley Manufacturing & Technology ......... 10.750 10/15/03 1,548,750
500,000 Telex Communications....................... 12.000 07/15/04 557,500
1,000,000 UNC........................................ 11.000 06/01/06 1,075,000
-----------
5,296,250
-----------
Telecommunications & Utilities -- 7.8%
1,000,000 AES........................................ 10.250 07/15/06 1,080,000
1,500,000 AES China Generating....................... 10.125 12/15/06 1,567,500
900,000 Arch Communications Group
(Zero Coupon until 03/15/01, 10.875%
thereafter)(b)........................... 10.875 03/15/08 513,000
500,000 El Paso Electric........................... 9.400 05/01/11 530,000
2,500,000 ICG Holdings
(Zero Coupon until 09/15/00, 13.50%
thereafter)(b)........................... 11.712 09/15/05 1,762,500
1,000,000 Intermedia Commission of Florida
(Zero Coupon until 05/15/01, 12.50%
thereafter)(b)............................ 12.271 05/15/06 680,000
2,250,000 International CableTel
(Zero Coupon until 02/01/01, 11.500%
thereafter)(b)............................ 11.416 02/01/06 1,530,000
1,810,000 Jacor Communications....................... 9.750 12/15/06 1,846,200
1,000,000 Nextlink................................... 12.500 04/15/06 1,065,000
2,000,000 Paging Network............................. 10.000 10/15/08 2,032,500
1,500,000 Western Wireless........................... 10.500 06/01/06 1,571,250
600,000 Winstar Communications
(Zero Coupon until 10/15/00, 14.00%
thereafter)(b)............................ 14.000 10/15/05 370,500
-----------
14,548,450
-----------
</TABLE>
See accompanying notes to financial statements
102
<PAGE>
<PAGE>
SALOMON BROTHERS HIGH YIELD BOND FUND (continued)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Principal Interest Maturity Value
Amount(a) Description Rate Date (Note 1a)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Transportation -- 2.6%
500,000 Airplanes Pass Through Trust ................. 10.875% 03/15/19 $ 556,250
2,000,000 Central Transport Rental Group ............... 9.500 04/30/03 1,900,000
250,000 Petro PSC Properties.......................... 12.500 06/01/02 255,000
1,300,000 Ryder TRS..................................... 10.000 12/01/06 1,355,250
890,000 Venture Holdings Trust........................ 9.750 04/01/04 818,800
-----------
4,885,300
-----------
Total Corporate Bonds
(cost $133,998,075)......................... 137,903,688
-----------
Convertible Corporate Bonds -- 0.1%
Telecommunications & Utilities -- 0.1%
300,000 Winstar Communications
(Zero Coupon until 10/15/00, 14.00%
thereafter)(b) (cost $180,024).............. 14.000 10/15/05 198,000
-----------
Sovereign Bonds -- 17.5%
Argentina -- 2.7%
3,675,000 Republic of Argentina FRB *................... 6.625 03/31/05 3,201,844
ARP 684,712 Republic of Argentina, BOCON, Pre 1 *(c)...... 3.576 04/01/01 593,952
1,044,668 Republic of Argentina, BOCON, Pre 2 *(c)...... 5.375 04/01/01 990,000
250,000 Republic of Argentina, Par Bond, Series L*.... 5.250 03/31/23 157,656
-----------
4,943,452
-----------
Brazil -- 3.7%
7,984,933 Federal Republic of Brazil,
Capitalization Bond(c) ..................... 4.500 04/15/14 5,893,876
1,500,000 Federal Republic of Brazil,
Investment (Exit) Bond ..................... 6.000 09/15/13 1,074,375
-----------
6,968,251
-----------
Bulgaria -- 0.8%
3,000,000 Republic of Bulgaria FLIRB, Series A * ....... 2.250 07/28/12 1,153,125
750,000 Republic of Bulgaria, Discount Bond,
Tranche A * ................................ 6.688 07/28/24 426,094
-----------
1,579,219
-----------
Ecuador -- 2.6%
6,714,429 Republic of Ecuador, PDI Bond *(c)............ 6.500 02/27/15 4,129,374
1,057,404 Republic of Ecuador, Registered PDI Bond *(c). 6.500 02/27/15 650,304
-----------
4,779,678
-----------
Mexico -- 2.7%
2,000,000 United Mexico States, Global Bond............. 11.500 05/15/26 2,115,000
4,000,000 United Mexico States, Par Bonds, Series A,
including 4,000,000 attached warrants....... 6.250 12/31/19 2,932,500
-----------
5,047,500
-----------
</TABLE>
See accompanying notes to financial statements
103
<PAGE>
<PAGE>
Portfolio of Investments (continued)
SALOMON BROTHERS HIGH YIELD BOND FUND (continued)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Principal Interest Maturity Value
Amount(a) Description Rate Date (Note 1a)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Panama -- 2.3%
4,000,000 Government of Panama IRB *................. 3.500% 07/17/14 $2,770,000
2,000,000 Government of Panama, PDI Bond *........... 4.000 07/17/16 1,562,500
-----------
4,332,500
-----------
Poland -- 0.1%
350,000 Republic of Poland, RSTA Bond *............ 3.250 10/27/24 219,625
-----------
Russia -- 0.7%
2,000,000 Russian Government IAN(d).................. -- 12/29/49 1,388,750
-----------
Venezuela -- 1.9%
3,000,000 Republic of Venezuela FLIRB, Series B *.... 6.438 03/31/07 2,681,250
1,000,000 Republic of Venezuela FLIRB, Series A *.... 6.625 03/31/07 893,750
-----------
3,575,000
-----------
Total Sovereign Bonds
(cost $30,135,267)....................... 32,833,975
-----------
Loan Participations -- 4.2%
Morocco -- 3.3%
7,500,000 Kingdom of Morocco, Tranche A *(e)
(Chase Manhattan Bank, N.A. and
Morgan Guaranty Trust Company)........... 6.375 01/01/09 6,192,188
-----------
Russia -- 0.9%
2,000,000 Russian Bank of Foreign Economic Affairs(e)(f)
(Merrill Lynch International)............ -- 12/29/49 1,590,000
-----------
Total Loan Participations (cost $7,092,194) 7,782,188
-----------
Shares
- ------
Warrants -- 0.0%
500 Exide Electronics Group, expires 03/15/06.. 15,000
900 In Flight Phone, expires 08/31/02.......... 0
2,000 Terex, expires 05/15/02.................... 0
750 Wireless One, expires 10/19/00............. 0
-----------
Total Warrants
(cost $50,391)........................... 15,000
-----------
Total Investments -- 95.6%
(cost $171,455,951)...................... 178,732,851
</TABLE>
See accompanying notes to financial statements
104
<PAGE>
<PAGE>
SALOMON BROTHERS HIGH YIELD BOND FUND (concluded)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Principal
Amount(a)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Repurchase Agreement -- 10.6%
19,870,000 Repurchase Agreement dated 12/31/96, with J.P.
Morgan Securities, collateralized by $16,117,000
U.S. Treasury Bonds, 8.750%, due 08/15/20,
valued at $20,367,859; proceeds: $19,877,286
(cost $19,870,000)(g).................... 6.600 01/02/97 19,870,000
Liabilities in excess of other assets -- (6.2%) (11,704,562)
-----------
Net Assets-- 100.0%........................ $186,898,289
===========
</TABLE>
* Interest rate shown reflects current rate on instrument with variable rate
or step coupon rate.
(a) Principal denominated in U.S. dollars unless otherwise indicated.
(b) Zero or step coupon bond. Interest rate shown reflects yield to maturity on
date of purchase.
(c) Payment-in-kind security for which all or part of the interest earned is
paid by the issuance of additional bonds.
(d) When and if issued. Security issued pursuant to Russia's Brady Plan debt
restructuring. The investment advisor believes that the Brady Plan will be
finalized and the related bonds issued. Accordingly, the Fund has
marked-to-market its investment in this security at year end.
(e) Participation interest was acquired through the financial institutions
indicated parenthetically.
(f) Security is in default.
(g) Held in segregated account as collateral for when and if issued securities.
Abbreviations used in this statement:
ARP Argentinean Peso
FLIRB Front-Loaded Interest Reduction Bonds
FRB Floating Rate Bonds
IAN Interest Arrears Notes
IRB Interest Reduction Bonds
PDI Past Due Interest
RSTA Revolving Short-Term Agreement
See accompanying notes to financial statements
105
<PAGE>
<PAGE>
Portfolio of Investments (continued)
SALOMON BROTHERS STRATEGIC BOND FUND
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Principal Interest Maturity Value
Amount(a) Description Rate Date (Note 1a)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Corporate Bonds--44.0%
Basic Industries--8.9%
250,000 Algoma Steel............................... 12.375% 07/15/05 $ 270,000
250,000 Alvey Systems.............................. 11.375 01/31/03 260,625
250,000 Clark-Schwebel............................. 10.500 04/15/06 267,500
250,000 Crown Paper................................ 11.000 09/01/05 235,000
250,000 Foamex..................................... 11.875 10/01/04 266,875
200,000 Forest Oil................................. 11.250 09/01/03 211,000
400,000 International Semi-Technology
(Zero Coupon until 08/15/00, 11.50%
thereafter)(b)........................... 11.737 08/15/03 258,000
250,000 NL Industries
(Zero Coupon until 10/15/98, 13.00%
thereafter)(b)........................... 12.619 10/15/05 215,000
250,000 Norcal Waste Systems *..................... 13.000 11/15/05 276,250
250,000 Terex...................................... 13.250 05/15/02 271,250
250,000 Valcor..................................... 9.625 11/01/03 236,250
----------
2,767,750
----------
Consumer Cyclicals--4.4%
250,000 Hines Horticulture......................... 11.750 10/15/05 267,500
300,000 Revlon Worldwide (b)....................... 11.105 03/15/98 258,000
250,000 Speedy Muffler King........................ 10.875 10/01/06 266,563
150,000 Universal Outdoor.......................... 9.750 10/15/06 154,875
200,000 U.S. Leasing International................. 8.450 01/25/05 216,276
200,000 Wyndham Hotel.............................. 10.500 05/15/06 213,000
----------
1,376,214
----------
Consumer Non-Cyclicals-- 14.1%
250,000 Americold.................................. 12.875 05/01/08 258,750
250,000 Berry Plastics............................. 12.250 04/15/04 276,250
250,000 Cobb Theatres.............................. 10.625 03/01/03 264,375
250,000 Dade International......................... 11.125 05/01/06 271,250
250,000 Doane Products............................. 10.625 03/01/06 266,250
200,000 Dole Foods................................. 6.750 07/15/00 199,696
250,000 Ekco Group................................. 9.250 04/01/06 245,000
250,000 Eyecare Centers of America................. 12.000 10/01/03 271,250
125,000 Hollywood Casino........................... 12.750 11/01/03 120,000
250,000 Iron Mountain.............................. 10.125 10/01/06 265,000
250,000 Jordan Industries
(Zero Coupon until 08/01/98, 11.75%
thereafter)(b)........................... 14.013 08/01/05 198,750
250,000 Radnor Holdings............................ 10.000 12/01/03 255,000
250,000 Rayovac.................................... 10.250 11/01/06 257,500
250,000 Remington Product.......................... 11.000 05/15/06 213,750
250,000 Selmer..................................... 11.000 05/15/05 270,000
250,000 Smiths Food & Drug......................... 11.250 05/15/07 276,250
250,000 Stroh Brewery.............................. 11.100 07/01/06 261,875
200,000 Twin Laboratories.......................... 10.250 05/15/06 206,000
----------
4,376,946
----------
Energy--3.3%
200,000 Arkla...................................... 8.875 07/15/99 210,088
250,000 Benton Oil & Gas........................... 11.625 05/01/03 276,875
250,000 Cliffs Drilling............................ 10.250 05/15/03 265,938
250,000 National Energy Group...................... 10.750 11/01/06 260,000
----------
1,012,901
----------
</TABLE>
See accompanying notes to financial statements
106
<PAGE>
<PAGE>
SALOMON BROTHERS STRATEGIC BOND FUND (continued)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Principal Interest Maturity Value
Amount(a) Description Rate Date (Note 1a)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Financial Services--0.7%
60,000 Mellon Financial........................... 9.750% 06/15/01 $ 66,701
150,000 Paine Webber Group......................... 7.000 03/01/00 151,031
----------
217,732
----------
Media--6.1%
150,000 Adelphia Communications.................... 12.500 05/15/02 153,750
250,000 American Media Operation................... 11.625 11/15/04 268,750
250,000 Cablevision Systems........................ 10.500 05/15/16 258,125
375,000 Diamond Cable
(Zero Coupon until 12/15/00, 11.75%
thereafter)(b)........................... 11.087 12/15/05 270,000
500,000 Marcus Cable
(Zero Coupon until 06/15/00, 14.125%
thereafter)(b) ......................... 12.813 12/15/05 353,125
350,000 People's Choice TV
(Zero Coupon until 06/01/00, 13.125%
thereafter)(b)........................... 13.125 06/01/04 147,000
250,000 SFX Broadcasting........................... 10.750 05/15/06 263,750
250,000 United International Holdings(b)........... 13.893 11/15/99 177,500
----------
1,892,000
----------
Technology--2.2%
250,000 Exide Electronics Group.................... 11.500 03/15/06 266,250
150,000 Quest Diagnostic........................... 10.750 12/15/06 157,500
250,000 Talley Manufacturing & Technology.......... 10.750 10/15/03 258,125
----------
681,875
----------
Telecommunications & Utilities--2.6%
300,000 Arch Communications Group
(Zero Coupon until 03/15/01, 10.875%
thereafter)(b)........................... 10.875 03/15/08 171,000
350,000 ICG Holdings
(Zero Coupon until 09/15/00, 13.50%
thereafter)(b)........................... 11.459 09/15/05 246,750
200,000 Jacor Communications....................... 9.750 12/15/06 204,000
300,000 Winstar Communications
(Zero Coupon until 10/15/00, 14.00%
thereafter)(b)........................... 14.000 10/15/05 185,250
----------
807,000
----------
Transportation -- 1.7%
250,000 Airplanes Pass Through Trust............... 10.875 03/15/19 278,125
250,000 Central Transport Rental Group............. 9.500 04/30/03 237,500
----------
515,625
----------
Total Corporate Bonds
(cost $13,253,361)....................... 13,648,043
----------
</TABLE>
See accompanying notes to financial statements
107
<PAGE>
<PAGE>
Portfolio of Investments (continued)
SALOMON BROTHERS STRATEGIC BOND FUND (continued)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Principal Interest Maturity Value
Amount(a) Description Rate Date (Note 1a)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Convertible Corporate Bonds -- 0.3%
Telecommunications & Utilities -- 0.3%
$150,000 Winstar Communications
(Zero Coupon until 10/15/00, 14.00%
thereafter)(b) (cost $90,011)...... 14.000% 10/15/05 $ 99,000
----------
Sovereign Bonds -- 21.2%
Argentina -- 2.1%
522,334 Republic of Argentina, BOCON, Pre 2*(c) 5.375 04/01/01 495,000
250,000 Republic of Argentina, Par Bond, Series L* 5.250 03/31/23 157,656
----------
652,656
----------
Australia -- 0.1%
AUD 20,000 Government of Australia.............. 6.750 11/15/06 15,191
----------
Brazil -- 3.5%
1,486,850 Federal Republic of Brazil,
Capitalization Bond(c)............. 4.500 04/15/14 1,097,481
----------
Bulgaria -- 1.7%
1,000,000 Republic of Bulgaria FLIRB, Series A* 2.250 07/28/12 384,375
250,000 Republic of Bulgaria, Discount Bond,
Tranche A* .......................... 6.688 07/28/24 142,031
----------
526,406
----------
Canada -- 1.9%
CAD 430,000 Government of Canada................. 6.500 08/01/99 328,314
CAD 190,000 Government of Canada................. 7.500 09/01/00 149,613
CAD 160,000 Government of Canada................. 7.000 09/01/01 124,255
----------
602,182
----------
Denmark -- 0.3%
DKK 560,000 Kingdom of Denmark................... 8.000 11/15/01 105,531
----------
Ecuador -- 0.9%
600,000 Republic of Ecuador, Par Bond*....... 6.500 02/28/25 279,750
----------
Germany -- 0.4%
DEM 100,000 Government of Germany................ 7.500 11/11/04 72,557
DEM 50,000 Government of Germany................ 8.250 09/20/01 37,164
----------
109,721
----------
Ireland -- 0.7%
IEP 70,000 Irish Gilts.......................... 6.500 10/18/01 120,786
IEP 60,000 Irish Gilts.......................... 6.250 04/01/99 102,209
----------
222,995
----------
Korea -- 1.4%
400,000 Korea Development Bank............... 9.600 12/01/00 440,444
----------
Mexico -- 1.8%
750,000 United Mexico States, Series B,
including 750,000 attached warrants 6.250 12/31/19 549,837
----------
</TABLE>
See accompanying notes to financial statements
108
<PAGE>
<PAGE>
SALOMON BROTHERS STRATEGIC BOND FUND (continued)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Principal Interest Maturity Value
Amount(a) Description Rate Date (Note 1a)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Panama -- 0.6%
250,000 Government of Panama IRB *................. 3.500% 07/17/14 $ 173,125
----------
Poland -- 1.0%
500,000 Republic of Poland, RSTA Bond*............. 3.250 10/27/24 313,750
----------
Russia -- 3.4%
1,500,000 Russian Government IAN (d)................. -- 12/29/49 1,041,563
----------
Venezuela -- 1.4%
250,000 Republic of Venezuela DCB, Series DL*...... 6.500 12/18/07 220,625
250,000 Republic of Venezuela FLIRB Series B*...... 6.438 03/31/07 223,438
----------
444,063
----------
Total Sovereign Bonds
(cost $6,097,858)........................ 6,574,695
----------
Loan Participation -- 4.0%
Morocco -- 4.0%
1,500,000 Kingdom of Morocco, Tranche A * (e)
(Chase Manhattan Bank, N.A. and
Morgan Guaranty Trust Company)
(cost $1,151,408)........................ 6.375 01/01/09 1,238,438
----------
U.S. Government & Agency -- 24.6%
19,897 Federal Home Loan Mortgage Corporation..... 6.000 10/01/10 19,233
540,493 Federal Home Loan Mortgage Corporation..... 7.000 07/01/11 540,369
288,697 Federal Home Loan Mortgage Corporation..... 10.000 05/15/20 309,717
200,000 Federal National Mortgage Association(f)... 7.000 ** 195,813
28,523 Federal National Mortgage Association...... 13.000 11/15/15 33,684
117,446 Federal National Mortgage Association...... 10.400 04/25/19 126,694
99,201 Federal National Mortgage Association...... 6.500 02/01/26 94,642
969,571 Federal National Mortgage Assaociation..... 6.500 03/01/26 926,222
2,000,000 U.S. Treasury Bond......................... 5.750 12/31/98 1,995,320
80,000 U.S. Treasury Bond (g)..................... 6.750 08/15/26 80,600
60,000 U.S. Treasury Note......................... 6.125 05/31/97 60,169
510,000 U.S. Treasury Note......................... 5.625 02/28/01 499,882
600,000 U.S. Treasury Note (g)..................... 6.250 04/30/01 601,314
100,000 U.S. Treasury Note......................... 6.500 08/31/01 101,094
750,000 U.S. Treasury Note......................... 6.125 12/31/01 747,188
250,000 U.S. Treasury Note (g)..................... 5.875 11/15/05 241,055
480,000 U.S. Treasury Note (g)..................... 6.875 05/15/06 494,626
550,000 U.S. Treasury Note......................... 6.500 10/15/06 553,009
----------
Total U.S. Government & Agency
(cost $7,596,161)........................ 7,620,631
----------
</TABLE>
See accompanying notes to financial statements
109
<PAGE>
<PAGE>
Portfolio of Investments (continued)
SALOMON BROTHERS STRATEGIC BOND FUND (continued)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Interest Maturity Value
Shares Description Rate Date (Note 1a)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Warrants -- 0.0%
250 Exide Electronics Group, expires 03/15/06.. $ 7,500
400 In Flight Phone, expires 08/31/02.......... 0
1,000 Terex, expires 05/15/02.................... 0
----------
Total Warrants
(cost $22,396)........................... 7,500
----------
Total Investments -- 94.1%
(cost $28,211,195)....................... 29,188,307
----------
Principal
Amount(a)
- ---------
Repurchase Agreements -- 22.2%
3,446,000 Repurchase Agreement dated 12/31/96,
with J.P. Morgan Securities,
collateralized by $2,866,000
U.S. Treasury Bonds, 8.500%,
due 02/15/20valued at $3,532,345;
proceeds: $3,447,264 ......................... 6.600% 01/02/97 3,446,000
3,447,000 Repurchase Agreement dated 12/31/96,
with Merrill Lynch, Pierce, Fenner & Smith,
collateralized by $2,750,000 U.S. Treasury
Bonds, 8.875%, due 02/15/19, valued at
$3,516,563; proceeds: $3,448,245.............. 6.500 01/02/97 3,447,000
----------
Total Repurchase Agreements
(cost $6,893,000).............................. 6,893,000
----------
Liabilities in excess of other assets--(16.3%) (5,053,861)
----------
Net Assets-- 100.0%........................ $31,027,446
==========
</TABLE>
See accompanying notes to financial statements
110
<PAGE>
<PAGE>
SALOMON BROTHERS STRATEGIC BOND FUND (concluded)
- --------------------------------------------------------------------------------
FORWARD FOREIGN CURRENCY CONTRACTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Unrealized
Maturity Contracts to In Exchange Contracts at Appreciation
Dates Receive/Deliver for Value (Depreciation)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Purchases
01/22/97 DEM 2,696,748 $1,774,086 $1,755,127 $(18,959)
01/22/97 DKK 200,634 33,720 34,097 377
01/22/97 IEP 519,731 858,216 880,373 22,157
01/22/97 NZD 663,350 466,534 467,520 986
Sales
01/22/97 AUD 19,327 15,268 15,342 (74)
01/22/97 CAD 839,558 626,986 613,681 13,305
01/22/97 DEM 2,695,607 1,760,970 1,754,384 6,586
01/22/97 DKK 808,055 138,913 137,325 1,588
01/22/97 IEP 651,650 1,064,055 1,103,830 (39,775)
01/22/97 NZD 663,350 468,375 467,520 855
--------
$(12,954)
========
</TABLE>
* Interest rate shown reflects current rate on instrument with variable rate
or step coupon rate.
** To be announced.
(a) Principal denominated in U.S. dollars unless otherwise indicated.
(b) Zero or step coupon bond. Interest rate shown reflects yield to maturity on
date of purchase.
(c) Payment-in-kind security for which all or part of the interest earned is
paid by the issuance of additional bonds.
(d) When and if issued. Security issued pursuant to Russia's Brady Plan debt
restucturing. The investment advisor believes that the Brady Plan will be
finalized and the related bonds issued. Accordingly, the Fund has
marked-to-market its investment in this security at year end.
(e) Participation interest was acquired through the financial institutions
indicated parenthetically.
(f) Mortgage Dollar Roll. See Note 1.
(g) Segregated as collateral for mortgage dollar rolls and when and if issued
security.
Abbreviations used in this statement:
DCB Debt Conversion Bonds
FLIRB Front-Loaded Interest Reduction Bonds
IAN Interest Arrears Notes
IRB Interest Reduction Bonds
RSTA Revolving Short-Term Agreement
AUD Australian Dollar
CAD Canadian Dollar
IEP Irish Punt
DEM German Deutschemark
DKK Danish Krone
NZD New Zealand Dollar
See accompanying notes to financial statements
111
<PAGE>
<PAGE>
Portfolio of Investments (continued)
SALOMON BROTHERS U.S. GOVERNMENT INCOME FUND
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Principal Interest Maturity Value
Amount Description Rate Date (Note 1a)
- ---------------------------------------------------------------------------------------------------------
U.S. Treasury Notes -- 46.2%
<S> <C> <C> <C>
$3,350,000 U.S. Treasury Note (a) 6.125% 05/31/97 $3,359,414
550,000 U.S. Treasury Note 6.625 07/31/01 558,767
500,000 U.S. Treasury Note 6.500 08/15/05 503,205
150,000 U.S. Treasury Note 5.875 11/15/05 144,633
575,000 U.S. Treasury Note 7.000 07/15/06 597,373
500,000 U.S. Treasury Note 6.500 10/15/06 502,735
----------
Total U.S. Treasury Notes
(cost $5,662,963)................. 5,666,127
----------
U.S. Government Agency -- 45.5%
100,000 Federal Home Loan Bank 5.940 06/13/00 99,047
34,574 Federal Home Loan Mortgage Corporation 6.000 07/01/10 33,562
37,145 Federal Home Loan Mortgage Corporation 11.750 01/01/11 40,943
198,439 Federal Home Loan Mortgage Corporation 7.000 05/01/11 198,394
488,099 Federal Home Loan Mortgage Corporation 7.000 07/01/11 487,986
769,039 Federal Home Loan Mortgage Corporation 7.000 07/01/11 768,862
375,975 Federal Home Loan Mortgage Corporation 7.000 08/01/11 375,888
917 Federal Home Loan Mortgage Corporation 11.750 06/01/14 991
24,905 Federal Home Loan Mortgage Corporation 11.750 12/01/14 27,976
35,390 Federal Home Loan Mortgage Corporation 11.750 07/01/15 39,753
13,857 Federal Home Loan Mortgage Corporation 11.750 01/01/16 15,637
298,190 Federal Home Loan Mortgage Corporation 8.250 04/01/17 308,522
316,220 Federal National Mortgage Association 6.500 12/01/03 314,009
1,300,000 Federal National Mortgage Association(b) 7.000 ** 1,272,781
50,512 Federal National Mortgage Association 14.500 11/01/14 62,304
23,500 Federal National Mortgage Association 12.500 08/01/15 27,602
103,547 Federal National Mortgage Association 12.500 09/01/15 119,694
114,092 Federal National Mortgage Association 13.000 11/15/15 134,735
40,499 Federal National Mortgage Association 12.000 01/01/16 47,472
34,658 Federal National Mortgage Association 11.500 04/01/19 39,521
199,072 Federal National Mortgage Association 11.500 02/01/20 227,004
245,235 Federal National Mortgage Association 10.500 08/01/20 272,133
65,319 Federal National Mortgage Association 6.500 04/01/26 62,317
416,772 Federal National Mortgage Association 6.500 04/01/26 398,138
200,000 Government National Mortgage Association(b) 7.000 01/22/26 195,938
----------
Total U.S. Government Agency
(cost $5,526,754) 5,571,209
----------
Total Investments -- 91.7%
(cost $11,189,717) 11,237,336
----------
Repurchase Agreements -- 18.9%
1,156,000 Repurchase Agreement dated 12/31/96, with
Merrill Lynch, Pierce, Fenner & Smith,
collateralized by $925,000 U.S. Treasury Bonds,
8.875%, due 02/15/19, valued at $1,182,844;
proceeds: $1,156,417 6.500 01/02/97 1,156,000
1,156,000 Repurchase Agreement dated 12/31/96, with
J.P. Morgan Securities, collateralized
by $938,000 U.S. Treasury Bonds, 8.75%,
due 08/15/20 valued at $1,185,398;
proceeds: $1,156,424 6.600 01/02/97 1,156,000
----------
Total Repurchase Agreements
(cost $2,312,000)........................... 2,312,000
----------
Liabilities in excess of other assets -- (10.6%) (1,298,919)
----------
Net Assets-- 100.0% $12,250,417
============
</TABLE>
(a) A portion of the security held is segregated as collateral for mortgage
dollar rolls.
(b) Mortgage Dollar Roll. See Note 1.
** To be announced.
See accompanying notes to financial statements
112
<PAGE>
<PAGE>
Portfolio of Investments (continued)
SALOMON BROTHERS NATIONAL INTERMEDIATE MUNICIPAL FUND
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Principal Interest Maturity Value
Amount Description Rate Date (Note 1a)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Municipal Securities -- 95.9%
California -- 2.6%
$285,000 Los Angeles, California AMBAC.............. 6.000% 08/01/03 $306,224
----------
Florida -- 1.6%
180,000 Florida Housing Finance Agency............. 6.150 07/01/06 184,012
----------
Hawaii -- 2.2%
250,000 Hawaii State Department of Budget & Finance 5.600 07/01/06 256,291
----------
Illinois -- 8.6%
300,000 Chicago, Illinois Metropolitan Water GO.... 5.900 12/01/06 322,839
250,000 Chicago, Illinois O'Hare International Airport 5.000 01/01/02 253,750
400,000 Illinois Student Assistance Commission..... 6.400 03/01/04 423,960
----------
1,000,549
----------
Indiana -- 12.9%
500,000 Indiana Health Facilities Finance Authority 5.800 08/15/06 499,595
300,000 Indiana Secondary Market for Education AMBAC 5.550 12/01/05 303,771
650,000 Indiana Transportation Finance Authority... 6.250 11/01/03 694,668
----------
1,498,034
----------
Louisiana -- 4.9%
100,000 Ascension Parish, Louisiana Pollution
Authority VR............................. 5.100 01/02/97 100,000
450,000 Louisiana Public Facilities Authority...... 6.750 09/01/06 473,837
----------
573,837
----------
Massachusetts -- 3.8%
400,000 Commonwealth of Massachusetts
Health & Educational Facilities Authority. 6.500 12/01/05 437,064
----------
Mississippi -- 4.0%
460,000 Mississippi Higher Education............... 6.050 09/01/07 470,704
----------
New Jersey -- 4.0%
450,000 Passaic Valley, New Jersey
Sewer Commission AMBAC.................... 5.750 12/01/07 471,821
----------
New York -- 26.7%
450,000 New York City, New York GO................. 6.500 02/01/02 475,979
500,000 New York State Dormitory Authority......... 6.000 07/01/06 520,185
700,000 New York State Dormitory Authority MBIA.... 5.600 07/01/06 729,309
400,000 New York State Dormitory Authority
(State University of New York)........... 6.625 07/01/04 451,568
500,000 New York State Mortgage Agency............. 5.900 10/01/06 504,815
400,000 New York State Thruway Authority MBIA...... 6.000 01/01/04 430,716
----------
3,112,572
----------
Ohio -- 2.2%
250,000 Miami County, Ohio Hospital Facilities..... 5.600 05/15/02 252,323
----------
Pennsylvania -- 8.0%
400,000 Geisinger Authority, Pennsylvania Health
System.................................... 6.000 07/01/01 421,368
500,000 Monroeville, Pennsylvania Hospital Authority 5.750 10/01/05 510,175
----------
931,543
----------
</TABLE>
See accompanying notes to financial statements
113
<PAGE>
<PAGE>
Portfolio of Investments (continued)
SALOMON BROTHERS NATIONAL INTERMEDIATE MUNICIPAL FUND (concluded)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Principal Interest Maturity Value
Amount Description Rate Date (Note 1a)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
South Carolina -- 7.1%
$750,000 South Carolina State
Public Service Authority FGIC............ 6.500% 01/01/05 $829,680
----------
Texas -- 5.6%
500,000 Austin, Texas Airport Systems MBIA......... 6.500 11/15/05 553,935
100,000 Lubbock, Texas Health Facilities VR........ 5.000 01/02/97 100,000
----------
653,935
----------
Wyoming -- 1.7%
200,000 Uinta County, Wyoming Pollution Control VR. 5.000 01/02/97 200,000
----------
Total Investments -- 95.9%
(cost $10,832,716)....................... 11,178,589
Other assets in excess of liabilities-- 4.1%
473,862
----------
Net Assets-- 100.0%........................ $11,652,451
==========
</TABLE>
Abbreviations used in this statement:
AMBAC Insured as to principal and interest by the American Municipal Bond
Assurance Corporation. 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.
VR Variable Rate Demand Note. Maturity date shown is the date of next
interest rate change.
See accompanying notes to financial statements
114
<PAGE>
<PAGE>
SALOMON BROTHERS NEW YORK MUNICIPAL BOND FUND
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Principal Interest Maturity Value
Amount Description Rate Date (Note 1a)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Municipal Securities -- 97.1%
New York -- 93.9%
$150,000 Grand Central District Management
Association ............................. 5.250% 01/01/22 $ 139,556
150,000 Metropolitan Transportation Authority
New York FSA ............................ 5.700 07/01/24 149,586
200,000 Nassau County, New York GO FGIC............ 5.200 08/01/12 196,598
300,000 New York City, New York GO................. 7.375 08/15/13 332,643
300,000 New York City, New York GO................. 6.750 10/01/17 311,115
100,000 New York City, New York
Industrial Development Agency VR......... 5.050 01/02/97 100,000
300,000 New York City, New York
Municipal Water Finance Authority........ 6.000 06/15/17 304,122
150,000 New York State Dormitory Authority......... 6.250 07/01/13 152,709
150,000 New York State Dormitory Authority......... 5.875 08/01/16 151,684
150,000 New York State Dormitory Authority......... 5.500 07/01/25 140,984
150,000 New York State Dormitory Authority......... 5.500 05/15/23 138,629
100,000 New York State Dormitory Authority
(City University System of New York)..... 5.750 07/01/18 99,148
140,000 New York State Dormitory Authority
. (State University Educational Facilities). 6.000 05/15/17 138,690
200,000 New York State GO.......................... 6.000 03/15/20 208,738
200,000 New York State Energy Research &
Development Authority MBIA .............. 5.500 01/01/21 196,600
100,000 New York State Energy Research &
Development Authority VR ................ 4.400 01/02/97 100,000
100,000 New York State Energy Research &
Development Authority VR ................ 4.750 01/02/97 100,000
250,000 New York State
Local Government Assistance Corporation.. 6.000 04/01/18 254,230
100,000 New York State Medical Care Facilities
Finance Agency MBIA ..................... 5.900 02/15/21 101,969
200,000 New York State Mortgage Agency............. 6.500 04/01/13 209,574
150,000 New York State Thruway Authority........... 6.000 04/01/10 151,382
150,000 New York State
Urban Development Corporation............ 5.500 01/01/14 145,967
150,000 New York State
Urban Development Corporation............ 5.500 01/01/19 143,907
200,000 Port Authority of New York & New Jersey.... 5.500 09/01/13 198,690
150,000 Triborough Bridge & Tunnel Authority
New York ................................ 5.500 01/01/17 151,455
200,000 Western Nassau County, New York
Water Authority AMBAC.................... 5.500 05/01/16 198,106
----------
4,516,082
----------
Puerto Rico -- 3.2%
150,000 Commonwealth of Puerto Rico GO............. 6.000 07/01/14 152,168
----------
Total Investments -- 97.1%
(cost $4,560,814)........................ 4,668,250
Other assets in excess of liabilities-- 2.9% 138,141
----------
Net Assets-- 100.0%........................ $4,806,391
==========
</TABLE>
Abbreviations used in this statement:
AMBAC Insured as to principal and interest by the American Municipal Bond
Assurance Corporation.
FGIC Insured as to principal and interest by the Financial Guaranty Insurance
Corporation.
FSA Insured as to principal and interest by the Financial Security Assurance
Corporation.
GO General Obligation.
MBIA Insured as to principal and interest by the MBIA Insurance Corporation.
VR Variable Rate Demand Note. Maturity date shown is the date of next
interest rate change.
See accompanying notes to financial statements
115
<PAGE>
<PAGE>
Portfolio of Investments (continued)
SALOMON BROTHERS NEW YORK MUNICIPAL MONEY MARKET FUND
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Yield to
Principal Maturity on Date Maturity Value
Amount Description of Purchase* Date (Note 1a)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Municipal Securities -- 99.4%
New York -- 96.8%
$ 90,000 Albany County, New York
Industrial Development Agency VR......... 4.400% 01/02/97 $ 90,000
2,265,000 Albany, New York
Industrial Development Agency PUT........ 4.200 07/01/97 2,265,000
2,185,000 Amherst, New York
Industrial Development Agency VR......... 4.550 01/02/97 2,185,000
3,100,000 Amherst, New York
Industrial Development Agency PUT........ 3.650 05/01/97 3,100,000
1,550,000 Auburn, New York
Industrial Development Agency VR......... 4.550 01/01/97 1,550,000
725,000 Babylon, New York
Industrial Development Agency VR......... 4.550 01/02/97 725,000
1,700,000 Broome County, New York
Industrial Development Agency VR......... 4.400 01/02/97 1,700,000
1,300,000 Buffalo, New York GO RAN................... 3.600 07/15/97 1,304,430
2,100,000 Chautauqua County, New York
Industrial Development Agency VR......... 4.550 01/01/97 2,100,000
1,990,000 Chemung County, New York
Industrial Development Agency VR......... 4.400 01/02/97 1,990,000
710,000 Colonie, New York
Housing Development Corporation VR....... 3.650 01/01/97 710,000
540,000 Colonie, New York
Industrial Development Agency VR......... 4.400 01/02/97 540,000
1,000,000 Delhi, New York
Central School District BAN.............. 3.900 06/27/97 1,002,788
1,150,000 Dutchess County, New York
Industrial Development Agency VR......... 4.400 01/02/97 1,150,000
5,000,000 Erie County, New York GO RAN............... 3.600 11/19/97 5,027,644
1,180,000 Erie County, New York
Industrial Development Agency VR......... 4.400 01/02/97 1,180,000
410,000 Erie County, New York
Industrial Development Agency VR......... 4.400 01/02/97 410,000
326,000 Erie County, New York
Industrial Development Agency VR......... 4.400 01/02/97 326,000
300,000 Erie County, New York
Industrial Development Agency VR......... 4.400 01/02/97 300,000
1,805,000 Fulton County, New York
Industrial Development Agency VR......... 4.300 01/02/97 1,805,000
390,000 Geneva, New York
Industrial Development Authority VR...... 4.300 01/02/97 390,000
2,950,000 Islip, New York
Industrial Development Authority VR...... 4.400 01/02/97 2,950,000
1,690,000 Monroe County, New York
Industrial Development Agency PUT........ 3.700 06/01/97 1,690,000
700,000 Monroe County, New York
Industrial Development Agency PUT........ 4.050 06/15/97 700,000
2,700,000 Monroe County, New York
Industrial Development Agency VR......... 4.300 01/02/97 2,700,000
3,925,000 Monroe County, New York
Industrial Development Agency VR......... 4.400 01/02/97 3,925,000
</TABLE>
See accompanying notes to financial statements
116
<PAGE>
<PAGE>
SALOMON BROTHERS NEW YORK MUNICIPAL MONEY MARKET FUND (continued)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Yield to
Principal Maturity on Date Maturity Value
Amount Description of Purchase* Date (Note 1a)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$1,640,000 Monroe County, New York
Industrial Development Agency VR......... 4.400% 01/02/97 $1,640,000
6,500,000 Monroe County, New York
Industrial Development Agency VR......... 4.550 01/01/97 6,500,000
3,325,000 Monroe County, New York
Industrial Development Agency VR......... 4.550 01/02/97 3,325,000
3,140,000 Monroe County, New York
Industrial Development Agency VR......... 4.550 01/02/97 3,140,000
2,190,000 Monroe County, New York
Industrial Development Agency VR......... 4.550 01/02/97 2,190,000
1,535,000 Monroe County, New York
Industrial Development Agency VR......... 4.550 01/02/97 1,535,000
1,420,000 Monroe County, New York
Industrial Development Agency VR......... 4.550 01/02/97 1,420,000
885,000 Monroe County, New York
Industrial Development Agency VR......... 4.550 01/02/97 885,000
1,800,000 Monroe County, New York
Industrial Development Agency VR.......... 4.600 01/01/97 1,800,000
2,200,000 Municipal Assistance Corporation,
New York City, New York................... 3.800 07/01/97 2,202,845
2,000,000 Municipal Assistance Corporation,
New York City, New York................... 3.800 07/01/97 2,029,888
450,000 Nassau County, New York
Industrial Development Agency VR.......... 4.400 01/02/97 450,000
2,000,000 New York City, New York GO P/R............. 3.670 11/01/97 2,111,442
5,235,000 New York City, New York GO VR.............. 4.500 01/02/97 5,235,000
400,000 New York City, New York GO VR.............. 4.500 01/02/97 400,000
6,200,000 New York City, New York GO VR.............. 5.000 01/02/97 6,200,000
2,200,000 New York City, New York GO VR.............. 5.000 01/02/97 2,200,000
700,000 New York City, New York GO VR.............. 5.000 01/02/97 700,000
500,000 New York City, New York GO VR.............. 5.000 01/02/97 500,000
500,000 New York City, New York GO VR.............. 5.000 01/02/97 500,000
500,000 New York City, New York GO VR.............. 5.000 01/02/97 500,000
400,000 New York City, New York GO VR.............. 5.000 01/02/97 400,000
2,000,000 New York City, New York GO VR FGIC......... 4.500 01/02/97 2,000,000
10,000,000 New York City, New York
Housing Development Corporation VR........ 4.000 01/02/97 10,000,000
3,500,000 New York City, New York
Housing Development Corporation VR........ 4.250 01/02/97 3,500,000
15,200,000 New York City, New York
Housing Development Corporation VR........ 4.300 01/02/97 15,200,000
400,000 New York City, New York
Housing Development Corporation VR........ 4.300 01/02/97 400,000
2,000,000 New York City, New York
Housing Development Corporation VR........ 4.350 01/02/97 2,000,000
1,600,000 New York City, New York
Industrial Development Agency VR.......... 4.000 01/01/97 1,600,000
200,000 New York City, New York
Industrial Development Agency VR.......... 4.100 01/01/97 200,000
2,000,000 New York City, New York.
Industrial Development Agency VR.......... 4.200 01/02/97 2,000,000
965,000 New York City, New York
Industrial Development Agency VR.......... 4.300 01/02/97 965,000
See accompanying notes to financial statements
</TABLE>
117
<PAGE>
<PAGE>
Portfolio of Investments (continued)
SALOMON BROTHERS NEW YORK MUNICIPAL MONEY MARKET FUND (continued)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Yield to
Principal Maturity on Date Maturity Value
Amount Description of Purchase* Date (Note 1a)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 1,535,000 New York City, New York
Industrial Development Agency VR........ 4.550% 01/02/97 $ 1,535,000
700,000 New York City, New York
Industrial Development Agency VR........ 4.550 01/02/97 700,000
500,000 New York City, New York
Industrial Development Agency VR........ 4.550 01/02/97 500,000
325,000 New York City, New York
Industrial Development Agency VR........ 4.700 01/02/97 325,000
1,600,000 New York City, New York
Industrial Development Agency VR........ 4.800 01/02/97 1,600,000
12,500,000 New York City, New York
Industrial Development Agency VR........ 5.050 01/02/97 12,500,000
2,205,000 New York City, New York
Municipal Water Finance Authority P/R.... 3.75-3.80 06/15/97 2,299,323
1,000,000 New York City, New York
Municipal Water Finance Authority TECP... 5.000 01/02/97 1,000,000
500,000 New York City, New York
Municipal Water Finance Authority VR FGIC 4.700 01/02/97 500,000
5,000,000 New York City, New York TECP.............. 5.000 01/02/97 5,000,000
9,259,000 New York State, Dormitory Authority TECP.. 4.000 02/12/97 9,259,000
2,500,000 New York State,
Dormitory Authority VR................... 4.000 01/02/97 2,500,000
10,500,000 New York State, Energy Research &
Development Authority VR ................ 4.700 01/01/97 10,500,000
3,400,000 New York State,
Energy Research & Development
Authority VR ............................ 4.750 01/01/97 3,400,000
1,020,000 New York State,
Job Development Authority VR............. 3.600 01/02/97 1,020,000
820,000 New York State,
Job Development Authority VR............. 3.600 01/02/97 820,000
675,000 New York State,
Job Development Authority VR............. 3.600 01/02/97 675,000
535,000 New York State,
Job Development Authority VR............. 3.600 01/02/97 535,000
315,000 New York State,
Job Development Authority VR............. 3.600 01/02/97 315,000
85,000 New York State,
Job Development Authority VR............. 3.600 01/02/97 85,000
1,390,000 New York State,
Job Development Authority VR.............. 3.750 01/02/97 1,390,000
1,160,000 New York State,
Job Development Authority VR.............. 3.750 01/02/97 1,160,000
700,000 New York State,
Job Development Authority VR.............. 5.000 01/02/97 700,000
500,000 New York State,
Job Development Authority VR.............. 5.000 01/02/97 500,000
255,000 New York State,
Job Development Authority VR.............. 5.000 01/02/97 255,000
100,000 New York State,
Job Development Authority VR.............. 5.000 01/02/97 100,000
4,700,000 New York State,
Local Government Assistance
Corporation VR ........................... 4.000 01/01/97 4,700,000
</TABLE>
See accompanying notes to financial statements
118
<PAGE>
<PAGE>
SALOMON BROTHERS NEW YORK MUNICIPAL MONEY MARKET FUND (continued)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Yield to
Principal Maturity on Date Maturity Value
Amount Description of Purchase* Date (Note 1a)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 2,700,000 New York State, Local
Government Assistance Corporation VR .... 4.000% 01/01/97 $ 2,700,000
2,000,000 New York State, Local Government
Assistance Corporation VR ............... 4.000 01/01/97 2,000,000
1,400,000 New York State, Local Government
Assistance Corporation VR ............... 4.000 01/02/97 1,400,000
2,000,000 New York State,
Medical Care Facilities P/R.............. 3.800 08/15/97 2,099,948
5,000,000 Niagara County, New York
Industrial Development Agency TECP....... 3.750 01/08/97 5,000,000
3,400,000 Niagara County, New York
Industrial Development Agency TECP....... 3.900 01/10/97 3,400,000
16,000,000 Niagara County, New York
Industrial Development Agency TECP....... 3.900 02/05/97 16,000,000
10,000,000 Niagara County, New York
Industrial Development Agency VR......... 4.450 01/01/97 10,000,000
1,045,000 Niagara County, New York
Industrial Development Agency VR......... 4.550 01/02/97 1,045,000
400,000 Oneida County, New York
Industrial Development Agency VR......... 4.250 01/02/97 400,000
1,760,000 Oneida County, New York
Industrial Development Agency VR......... 4.550 01/02/97 1,760,000
3,800,000 Onondaga County, New York
Industrial Development Agency VR......... 4.500 01/01/97 3,800,000
1,400,000 Onondaga County, New York
Industrial Development Agency VR......... 4.500 01/01/97 1,400,000
3,500,000 Ontario County, New York
Industrial Development Agency VR......... 5.000 01/02/97 3,500,000
1,000,000 Port Authority of New York & New
Jersey VR. .............................. 4.850 01/02/97 1,000,000
1,500,000 Rockland County, New York
Industrial Development Agency VR......... 4.550 01/02/97 1,500,000
260,000 Schoharie County, New York
Industrial Development Agency VR......... 4.250 01/02/97 260,000
2,500,000 St. Lawrence County, New York
Industrial Development Agency VR......... 4.550 01/02/97 2,500,000
1,450,000 Syracuse, New York
Industrial Development Agency PUT........ 4.050 06/15/97 1,450,000
3,550,000 Syracuse, New York
Industrial Development Agency VR......... 4.600 01/01/97 3,550,000
1,000,000 Triborough Bridge & Tunnel
Authority New York ...................... 3.700 01/01/97 1,000,000
1,460,000 Warren & Washington Counties, New York
Industrial Development Agency VR......... 4.300 01/02/97 1,460,000
310,000 Wyoming County, New York
Industrial Development Agency VR......... 4.400 01/02/97 310,000
6,330,000 Wyoming County, New York
Industrial Development Agency VR......... 4.550 01/02/97 6,330,000
1,315,000 Yates County, New York
Industrial Development Agency VR......... 4.300 01/02/97 1,315,000
920,000 Yonkers, New York
Industrial Development Agency VR......... 4.400 01/02/97 920,000
-----------
265,518,308
-----------
</TABLE>
See accompanying notes to financial statements
119
<PAGE>
<PAGE>
Portfolio of Investments (continued)
SALOMON BROTHERS NEW YORK MUNICIPAL MONEY MARKET FUND (concluded)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Yield to
Principal Maturity on Date Maturity Value
Amount Description of Purchase* Date (Note 1a)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Puerto Rico -- 2.6%
$7,100,000 Puerto Rico Industrial,
Tourist, Educational, Medical
& Environmental Control
Facilities VR .................... 4.100% 01/01/97 $ 7,100,000
------------
Total Investments -- 99.4%
(cost $272,618,308)............... 272,618,308
Other assets in excess
of liabilities-- 0.6% ............ 1,525,727
------------
Net Assets-- 100%.................. $274,144,035
============
</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,
maturity date shown is the date of next interest rate change.
Abbreviations used in this statement:
BAN Bond Anticipation Note.
FGIC Insured as to principal and interest by the Financial Guaranty
Insurance Corporation.
GO General Obligation.
P/R Prerefunded in U.S. Government Securities.
PUT Optional or mandatory put. Maturity date shown is the put date as
well as the date of the next interest rate change.
RAN Revenue Anticipation Note.
TECP Tax Exempt Commercial Paper.
See accompanying notes to financial statements
120
<PAGE>
<PAGE>
SALOMON BROTHERS CASH MANAGEMENT FUND
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Yield to
Principal Maturity on Date Maturity Value
Amount Description of Purchase* Date (Note 1a)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Certificates of Deposit -- 9.3%
Banks -- 9.3%
$1,000,000 Bank Austria............................................ 5.380% 01/21/97 $1,000,005
1,000,000 Mellon Bank N.A......................................... 5.750 02/18/97 1,000,126
500,000 Rabobank................................................ 5.530 02/10/97 500,000
----------
Total Certificates of Deposit
(cost $2,500,131)..................................... 2,500,131
----------
Commercial Paper -- 58.5%
Aerospace & Defense -- 3.7%
1,000,000 AlliedSignal............................................ 5.600 01/27/97 995,956
----------
Banks -- 14.7%
800,000 ANZ Delaware............................................ 5.280 05/12/97 784,628
800,000 BBL North America....................................... 5.340 01/07/97 799,288
570,000 Commerzbank U.S. Finance................................ 5.350 01/31/97 567,459
800,000 Nordbanken N.A.......................................... 5.380 02/28/97 793,066
1,000,000 UBS Finance............................................. 5.550 01/21/97 996,917
----------
3,941,358
----------
Chemicals -- 3.7%
1,000,000 Air Products & Chemicals................................ 5.400 03/28/97 987,100
----------
Communications -- 3.7%
1,000,000 Lucent Technologies..................................... 5.370 04/07/97 985,680
----------
Education -- 3.0%
800,000 Regents of the University of California................. 5.330 01/17/97 798,105
----------
Financial Services -- 6.6%
1,000,000 General Electric Capital................................ 5.340 06/23/97 974,338
800,000 Metlife Funding......................................... 5.300 01/27/97 796,938
----------
1,771,276
----------
Food -- 3.0%
800,000 Heinz (H.J.)............................................ 5.400 01/22/97 797,480
----------
Heavy Machinery -- 3.0%
800,000 Cooperative Association of Tractor Dealers.............. 5.550 01/23/97 797,287
----------
Household Products -- 3.7%
1,000,000 Clorox.................................................. 5.350 04/22/97 983,504
----------
Municipal -- 4.5%
400,000 De Kalb County, Georgia Development Authority........... 5.500 02/04/97 400,000
400,000 Methodist Hospital (Houston, Texas)..................... 5.450 04/01/97 400,000
400,000 New York City, New York GO.............................. 5.550 02/19/97 400,000
----------
1,200,000
----------
Office Equipment -- 3.0%
800,000 Xerox................................................... 5.300 01/14/97 798,469
----------
Securities Brokers -- 2.9%
800,000 Goldman Sachs Group..................................... 5.340 02/14/97 794,779
----------
</TABLE>
See accompanying notes to financial statements
121
<PAGE>
<PAGE>
Portfolio of Investments (continued)
SALOMON BROTHERS CASH MANAGEMENT FUND (continued)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Yield to
Principal Maturity on Date Maturity Value
Amount Description of Purchase* Date (Note 1a)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Transportation -- 3.0%
$800,000 Daimler-Benz NA.......................................... 5.320% 01/13/97 $ 798,581
----------
Total Commercial Paper
(cost $15,649,575)..................................... 15,649,575
----------
Floating Rate Notes -- 17.3%
California -- 1.5%
400,000 Pasadena, California Certificates of Participation VR ... 5.800 01/07/97 400,000
----------
Florida -- 1.5%
400,000 Florida Housing Finance Agency VR........................ 5.880 01/01/97 400,000
----------
Michigan -- 0.7%
200,000 Genesis Health Systems VR................................ 5.950 01/01/97 200,000
----------
New Jersey -- 1.9%
285,000 New Jersey Economic Development Authority VR ............ 6.230 01/06/97 285,000
230,000 New Jersey Economic Development Authority VR ............ 6.110 01/06/97 230,000
----------
515,000
----------
New York -- 5.8%
390,000 Fulton County, New York Industrial Development Agency VR.. 6.050 01/02/97 390,000
400,000 Health Insurance Plan, Greater New York VR. 5.800 01/01/97 400,000
350,000 New York City, New York Industrial Development Agency VR . 6.000 01/01/97 350,000
100,000 New York City, New York Industrial Development Agency VR . 6.000 01/01/97 100,000
300,000 Syracuse, New York GO VR.................................. 6.200 01/01/97 300,000
----------
1,540,000
----------
North Carolina -- 1.5%
390,000 Greensboro, North Carolina GO VR.......................... 5.950 01/01/97 390,000
----------
Tennessee -- 1.5%
400,000 Community Health Systems VR............................... 5.900 01/01/97 400,000
----------
Texas -- 1.4%
375,000 Texas State GO VR......................................... 5.880 01/01/97 375,000
----------
Virginia -- 1.5%
400,000 Virginia State, Housing Development Authority VR ......... 5.800 01/01/97 400,000
----------
Total Floating Rate Notes
(cost $4,620,000)....................................... 4,620,000
----------
Total Investments -- 85.1%
(cost $22,769,706)...................................... 22,769,706
----------
</TABLE>
See accompanying notes to financial statements
122
<PAGE>
<PAGE>
SALOMON BROTHERS CASH MANAGEMENT FUND (concluded)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Yield to
Principal Maturity on Date Maturity Value
Amount Description of Purchase* Date (Note 1a)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Repurchase Agreements -- 14.6%
$1,947,134 Repurchase Agreement dated
12/31/96 with J.P.
Morgan Securities, collateralized by $1,962,000
U.S. Treasury Bonds, 6.375%, due 05/15/99
valued at $1,996,335; proceeds: $1,947,848 .......... 6.600% 01/02/97 $ 1,947,134
1,947,134 Repurchase Agreement dated 12/31/96 with
UBS Securities, collateralized by $1,554,000
U.S. Treasury Bonds, 8.875%, due 02/15/19
valued at $1,987,178; proceeds: $1,947,837 .......... 6.500 01/02/97 1,947,134
----------
Total Repurchase Agreements
(cost $3,894,268)..................................... 3,894,268
----------
Other assets in excess of liabilities -- 0.3% 91,407
----------
Net Assets-- 100.0% ................................... $26,755,381
==========
</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.
Abbreviations used in this statement:
GO General Obligation.
See accompanying notes to financial statements
123
<PAGE>
<PAGE>
Statements of Assets and Liabilities
December 31, 1996
<TABLE>
<CAPTION>
Asia Capital Investors
Growth Fund Fund Fund
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS:
Investments, at value (Note A) ............................. $ 6,871,444 $ 133,094,625 $ 519,461,315
Repurchase agreements, at value and cost ................... -- 3,667,000 21,222,000
Cash (including foreign currency) .......................... 353,589 969 737
Receivable for securities sold ............................. -- 771,904 --
Receivable for Fund shares sold ............................ 39,181 514,657 396,076
Interest and dividends receivable .......................... 4,079 204,143 600,215
Receivable from investment advisor ......................... 132,687 -- --
Deferred organization expense .............................. 86,584 -- --
------------- ------------- -------------
Total assets ............................................... 7,487,564 138,253,298 541,680,343
------------- ------------- -------------
LIABILITIES:
Payable for:
Securities purchased ..................................... 72,323 1,382,706 --
Fund shares redeemed ..................................... 11 5,605 29,995
Dividends and distributions declared ..................... 92,494 -- --
Affiliate transactions: .................................. -- -- --
Management fees ........................................ -- 106,287 688,509
Service and distribution fees .......................... 9,880 258 25,178
Net unrealized depreciation of forward foreign currency
contracts ................................................ -- -- --
Accrued expenses and other liabilities ..................... 87,488 123,072 278,835
------------- ------------- -------------
Total liabilities .......................................... 262,196 1,617,928 1,022,517
------------- ------------- -------------
Net assets ................................................. $ 7,225,368 $ 136,635,370 $ 540,657,826
============= ============= =============
Net assets consist of:
Paid-in capital ............................................ $ 6,960,358 $ 112,317,524 $ 363,551,636
Undistributed net investment income or (distributions in
excess of net investment income) ......................... 10,809 (333) 2,113
Accumulated net realized gain (loss) on investments,
options and foreign currency transactions ................ 201,064 2,575,978 5,869,408
Net unrealized appreciation on investments, foreign
currency transactions and other assets ................... 53,137 21,742,201 171,234,669
------------- ------------- -------------
Net assets ................................................. $ 7,225,368 $ 136,635,370 $ 540,657,826
============= ============= =============
Class A .................................................... $ 3,693,002 $ 343,683 $ 10,904,980
============= ============= =============
Class B .................................................... $ 3,162,606 $ 218,901 $ 9,433,023
============= ============= =============
Class C .................................................... $ 246,067 $ 130,007 $ 1,958,792
============= ============= =============
Class O .................................................... $ 123,693 $ 135,942,779 $ 518,361,031
============= ============= =============
Shares outstanding:
Class A .................................................... 357,945 17,288 577,173
============= ============= =============
Class B .................................................... 306,685 11,001 500,214
============= ============= =============
Class C .................................................... 23,879 6,531 103,835
============= ============= =============
Class O .................................................... 11,983 6,839,481 27,430,775
============= ============= =============
Net asset value:
Class A shares
Net asset value and redemption price per share ............. $ 10.32 $ 19.88 $ 18.89
============= ============= =============
Maximum offering price per share (based on maximum sales
charge of 4.75%, except Cash Management Fund and New
York Municipal Money Fund)................................ $ 10.83 $ 20.87 $ 19.83
============= ============= =============
Class B shares
Net asset value and offering price per share*............... $ 10.31 $ 19.90 $ 18.86
============= ============= =============
Class C shares
Net asset value and offering price per share*............... $ 10.30 $ 19.91 $ 18.86
============= ============= =============
Class O shares
Net asset value, offering price and redemption price per
share..................................................... $ 10.32 $ 19.88 $ 18.90
============= ============= =============
Note A: Cost of investments................................. $ 6,818,252 $ 111,352,396 $ 348,226,449
============= ============= =============
</TABLE>
* Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
See accompanying notes to financial statements
124
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
U.S. National New York New York Cash
Total High Yield Strategic Government Intermediate Municipal Municipal Management
Return Fund Bond Fund Bond Fund Income Fund Municipal Fund Bond Fund Money Fund Fund
- ---------------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C> <C>
$ 47,361,853 $ 178,732,851 $ 29,188,307 $ 11,237,336 $ 11,178,589 $ 4,668,250 $ 272,618,308 $ 22,769,706
4,996,000 19,870,000 6,893,000 2,312,000 -- -- -- 3,894,268
103 40 959 451 80,247 30,738 83,818 --
22,540 2,974,633 1,265,920 503,393 -- -- -- --
517,104 2,757,082 544,013 40 106,079 -- 752,568 111,727
418,702 3,301,417 384,866 103,414 206,205 90,029 1,195,185 67,372
102,651 -- -- 85,462 83,959 25,063 -- 13,646
70,680 92,615 92,944 76,025 73,438 13,855 -- --
- ------------- ------------- ------------- ------------- ------------- ------------- ------------- -------------
53,489,633 207,728,638 38,370,009 14,318,121 11,728,517 4,827,935 274,649,879 26,856,719
- ------------- ------------- ------------- ------------- ------------- ------------- ------------- -------------
492,280 19,052,322 7,016,787 1,983,715 -- -- -- --
11,027 49,719 55,939 10 -- -- 238,521 42,403
26,957 1,011,711 196,961 69,780 65,933 7,296 11,529 41,058
-- -- -- -- -- -- -- --
-- 374,129 1,835 -- -- -- 49,967 --
78,250 265,252 39,302 4,361 2,937 2,510 -- --
-- -- 12,954 -- -- -- -- --
72,368 77,216 18,785 9,838 7,196 11,738 205,827 17,877
- ------------- ------------- ------------- ------------- ------------- ------------- ------------- -------------
680,882 20,830,349 7,342,563 2,067,704 76,066 21,544 505,844 101,338
- ------------- ------------- ------------- ------------- ------------- ------------- ------------- -------------
$ 52,808,751 $ 186,898,289 $ 31,027,446 $ 12,250,417 $ 11,652,451 $ 4,806,391 $ 274,144,035 $ 26,755,381
============= ============= ============= ============= ============= ============= ============= =============
$ 48,297,802 $ 179,492,801 $ 30,045,780 $ 12,197,017 $ 11,296,354 $ 5,311,298 $ 274,368,811 $ 26,757,505
33,205 -- (9,936) -- 1,574 4,786 -- --
139,592 159,677 27,427 5,781 8,650 (617,129) (224,776) (2,124)
4,338,152 7,245,811 964,175 47,619 345,873 107,436 -- --
- ------------- ------------- ------------- ------------- ------------- ------------- ------------- -------------
$ 52,808,751 $ 186,898,289 $ 31,027,446 $ 12,250,417 $ 11,652,451 $ 4,806,391 $ 274,144,035 $ 26,755,381
============= ============= ============= ============= ============= ============= ============= =============
$ 21,108,539 $ 65,934,945 $ 8,344,667 $ 1,187,796 $ 696,228 $ 792,077 $ 359,918 $ 8,175,114
============= ============= ============= ============= ============= ============= ============= =============
$ 28,042,598 $ 106,796,993 $ 14,290,631 $ 1,266,160 $ 702,385 $ 539,449 $ 25,000 $ 3,920,077
============= ============= ============= ============= ============= ============= ============= =============
$ 3,444,600 $ 13,773,078 $ 4,574,873 $ 421,662 $ 467,863 $ 281,799 $ 25,000 $ 434,883
============= ============= ============= ============= ============= ============= ============= =============
$ 213,014 $ 393,273 $ 3,817,275 $ 9,374,799 $ 9,785,975 $ 3,193,066 $ 273,734,117 $ 14,225,307
============= ============= ============= ============= ============= ============= ============= =============
1,785,577 5,712,605 770,669 118,004 67,273 79,813 359,913 8,175,118
============= ============= ============= ============= ============= ============= ============= =============
2,373,141 9,266,321 1,321,002 125,880 67,998 54,372 25,000 3,920,078
============= ============= ============= ============= ============= ============= ============= =============
290,767 1,195,228 422,727 41,966 45,282 28,400 25,000 434,883
============= ============= ============= ============= ============= ============= ============= =============
17,932 34,107 352,949 932,104 946,252 321,703 273,959,755 14,227,426
============= ============= ============= ============= ============= ============= ============= =============
$ 11.82 $ 11.54 $ 10.83 $ 10.07 $ 10.35 $ 9.92 $ 1.00 $ 1.00
============= ============= ============= ============= ============= ============= ============= =============
$ 12.41 $ 12.12 $ 11.37 $ 10.57 $ 10.87 $ 10.41 $ 1.00 $ 1.00
============= ============= ============= ============= ============= ============= ============= =============
$ 11.82 $ 11.53 $ 10.82 $ 10.06 $ 10.33 $ 9.92 $ 1.00 $ 1.00
============= ============= ============= ============= ============= ============= ============= =============
$ 11.85 $ 11.52 $ 10.82 $ 10.05 $ 10.33 $ 9.92 $ 1.00 $ 1.00
============= ============= ============= ============= ============= ============= ============= =============
$ 11.88 $ 11.53 $ 10.82 $ 10.06 $ 10.34 $ 9.93 $ 1.00 $ 1.00
============= ============= ============= ============= ============= ============= ============= =============
$ 43,025,382 $ 171,455,951 $ 28,211,195 $ 11,189,717 $ 10,832,716 $ 4,560,814 $ 272,618,308 $ 22,769,706
============= ============= ============= ============= ============= ============= ============= =============
</TABLE>
See accompanying notes to financial statements
125
<PAGE>
<PAGE>
STATEMENTS OF OPERATIONS
For the Year Ended December 31, 1996
<TABLE>
<CAPTION>
Asia
Growth Capital Investors
Fund* Fund Fund
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income:
Interest ............................................................... $ 18,814 $ 514,027 $ 1,523,972
Dividends (Note A) ..................................................... 64,177 1,913,899 8,551,401
--------- ----------- ------------
82,991 2,427,926 10,075,373
Expenses:
Management fee ......................................................... 30,723 1,143,084 2,455,501
Registration and filing fees ........................................... 2,450 40,000 40,001
Custody and administration fees ........................................ 126,686 62,524 68,889
Legal .................................................................. 1,267 130,000 89,999
Printing ............................................................... 5,798 38,500 285,001
Shareholder services ................................................... 14,500 45,000 393,000
Amortization of organization expenses .................................. 13,416 -- --
Audit and tax return preparation fees .................................. 3,356 77,000 86,001
Directors' fees and expenses ........................................... 1,951 67,725 77,998
Other .................................................................. 1,500 31,000 110,000
--------- ----------- ------------
201,647 1,634,833 3,606,390
Management fee waived and expenses absorbed by investment advisor ...... (163,410) -- --
Credits earned from custodian on cash balances ......................... (219) (69) (242)
--------- ----------- ------------
38,018 1,634,764 3,606,148
Distribution and service fees:
Class A Shares ......................................................... 4,842 45 9,375
Class B Shares ......................................................... 17,196 105 28,496
Class C Shares ......................................................... 1,125 108 7,296
--------- ----------- ------------
Net expenses ........................................................... 61,181 1,635,022 3,651,315
--------- ----------- ------------
Net investment income .................................................. 21,810 792,904 6,424,058
========= =========== ============
Realized and unrealized gain (loss): Net realized gain (loss) on:
Investments (Note B) ................................................... 319,467 22,843,163 52,051,879
Options written ........................................................ 319 19,754 --
Foreign currency transactions .......................................... (5,493) (165) (36)
--------- ----------- ------------
314,293 22,862,752 52,051,843
--------- ----------- ------------
Net change in unrealized appreciation (depreciation) on:
Investments ............................................................ 53,192 10,601,638 70,016,706
Foreign currency transactions and other assets ......................... (55) (28) (197)
--------- ----------- ------------
53,137 10,601,610 70,016,509
--------- ----------- ------------
Net realized and unrealized gain (loss) ................................ 367,430 33,464,362 122,068,352
--------- ----------- ------------
Net increase in net assets from operations ............................. $ 389,240 $34,257,266 $128,492,410
========= =========== ============
Note A: Net of foreign withholding tax of: ............................. $ 6,183 $ 29,513 $ 158,622
========= =========== ============
Note B: Net of foreign withholding tax of: ............................. $ 2,237 $ -- $ --
========= =========== ============
</TABLE>
* Fund's commencement of investment operations was May 6, 1996.
See accompanying notes to financial statements
126
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
U.S. National New York New York Cash
Total High Yield Strategic Government Intermediate Municipal Municipal Management
Return Fund Bond Fund Bond Fund Income Fund Municipal Fund Bond Fund Money Fund Fund
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$1,325,501 $ 7,951,108 $1,847,036 $ 680,165 $ 604,683 $239,208 $7,434,967 $1,014,725
539,726 -- -- -- -- -- -- --
---------- ----------- ---------- --------- --------- -------- ---------- ----------
1,865,227 7,951,108 1,847,036 680,165 604,683 239,208 7,434,967 1,014,725
184,118 565,248 146,387 66,682 56,186 21,043 393,078 36,898
37,968 69,000 27,234 27,000 27,000 7,002 2,500 35,001
65,358 88,500 43,029 26,573 19,554 11,315 236,311 33,909
17,301 3,899 333 -- -- -- 53,700 3,602
17,601 26,502 10,300 6,300 5,100 -- 87,000 7,901
75,000 86,000 52,500 49,000 49,000 2,900 110,001 12,600
19,175 29,894 29,998 24,603 23,780 14,040 -- --
24,401 50,000 14,500 7,000 7,000 3,500 130,001 12,701
1,739 1,903 1,929 1,929 1,929 2,430 2,811 2,811
11,532 17,000 12,000 9,800 9,100 7,000 32,737 6,601
---------- ----------- ---------- --------- --------- -------- ---------- ----------
454,193 937,946 338,210 218,887 198,649 69,230 1,048,139 152,024
(286,769) (191,119) (144,551) (152,144) (140,145) (46,106) -- (50,544)
(44) (700) (429) (61) (2,317) (2,080) (2,477) (9)
---------- ----------- ---------- --------- --------- -------- ---------- ----------
167,380 746,127 193,230 66,682 56,187 21,044 1,045,662 101,471
31,644 72,432 7,229 1,712 1,550 1,659 -- --
147,557 404,316 63,712 7,971 5,978 5,193 -- --
19,472 45,496 15,131 2,780 3,418 2,715 -- --
---------- ----------- ---------- --------- --------- -------- ---------- ----------
366,053 1,268,371 279,302 79,145 67,133 30,611 1,045,662 101,471
---------- ----------- ---------- --------- --------- -------- ---------- ----------
1,499,174 6,682,737 1,567,734 601,020 537,550 208,597 6,389,305 913,254
========== =========== ========== ========= ========= ======== ========== ==========
540,093 1,779,535 467,146 88,860 23,657 6,816 2,563 (10)
(4) -- 83,360 -- -- -- -- --
---------- ----------- ---------- --------- --------- -------- ---------- ----------
540,089 1,779,535 550,506 88,860 23,657 6,816 2,563 (10)
---------- ----------- ---------- --------- --------- -------- ---------- ----------
3,888,005 6,815,932 410,629 (277,785) (78,007) (43,124) -- --
-- (18,249) 3,258 -- -- -- -- --
---------- ----------- ---------- --------- --------- -------- ---------- ----------
3,888,005 6,797,683 413,887 (277,785) (78,007) (43,124) -- --
---------- ----------- ---------- --------- --------- -------- ---------- ----------
4,428,094 8,577,218 964,393 (188,925) (54,350) (36,308) 2,563 (10)
$5,927,268 $15,259,955 $2,532,127 $ 412,095 $ 483,200 $172,289 $6,391,868 $ 913,244
========== =========== ========== ========= ========= ======== ========== ==========
$ 5,576 $ -- $ -- $ -- $ -- $ -- $ -- $ --
========== =========== ========== ========= ========= ======== ========== ==========
$ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
========== =========== ========== ========= ========= ======== ========== ==========
</TABLE>
127
<PAGE>
<PAGE>
Statements of Changes in Net Assets
For the Year Ended December 31, 1996
<TABLE>
<CAPTION>
Asia
Growth Capital Investors
Fund* Fund Fund
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operations:
Net investment income ......................................... $ 21,810 $ 792,904 $ 6,424,058
Net realized gain (loss) on investments, options, and
foreign currency transactions ................................. 314,293 22,862,752 52,051,843
Net change in unrealized appreciation (depreciation) on
investments, options, foreign currency transactions
and other assets .............................................. 53,137 10,601,610 70,016,509
------------- ------------- -------------
Net increase in net assets from operations .................... 389,240 34,257,266 128,492,410
------------- ------------- -------------
Dividends and distributions to shareholders:
Dividends from net investment income:
Class A ..................................................... (16,828) (233) (52,117)
Class B ..................................................... (1,406) (120) (15,140)
Class C ..................................................... (329) (120) (3,893)
Class O ..................................................... (728) (797,069) (6,351,142)
------------- ------------- -------------
(19,291) (797,542) (6,422,292)
------------- ------------- -------------
Dividends in excess of net investment income:
Class A ..................................................... -- -- --
Class B ..................................................... -- -- --
Class C ..................................................... -- -- --
Class O ..................................................... -- -- --
------------- ------------- -------------
-- -- --
------------- ------------- -------------
Distributions from net realized gains:
Class A ..................................................... (53,543) (6,217) (766,906)
Class B ..................................................... (46,007) (3,992) (609,635)
Class C ..................................................... (3,591) (3,992) (111,830)
Class O ..................................................... (1,798) (25,587,085) (59,558,730)
------------- ------------- -------------
(104,939) (25,601,286) (61,047,101)
------------- ------------- -------------
Net fund capital share transactions:
Class A ..................................................... 3,549,887 342,420 10,214,466
Class B ..................................................... 3,050,781 218,589 8,511,239
Class C ..................................................... 237,212 130,425 1,554,480
Class O ..................................................... 117,478 25,656,871 28,941,018
------------- ------------- -------------
Net increase in net assets derived from share transactions . 6,955,358 26,348,305 49,221,203
------------- ------------- -------------
Net increase in net assets ...................................... 7,220,368 34,206,743 110,244,220
Net assets:
Beginning of period ........................................... 5,000 102,428,627 430,413,606
------------- ------------- -------------
End of period (a) ............................................. $ 7,225,368 $ 136,635,370 $ 540,657,826
============= ============= =============
(a) Including undistributed net investment income or
distributions in excess of net investment income of: ........ $ 2,519 $ (111,168) $ 1,766
============= ============= =============
</TABLE>
* Fund's commencement of investment operations was May 6, 1996.
See accompanying notes to financial statements
128
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
U.S. National New York New York Cash
Total High Yield Strategic Government Intermediate Municipal Municipal Management
Return Fund Bond Fund Bond Fund Income Fund Municipal Fund Bond Fund Money Fund Fund
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 1,499,174 $ 6,682,737 $ 1,567,734 $ 601,020 $ 537,550 $ 208,597 $ 6,389,305 $ 913,254
540,089 1,779,535 550,506 88,860 23,657 6,816 2,563 (10)
3,888,005 6,797,683 413,887 (277,785) (78,007) (43,124) -- --
- ------------ ------------ ----------- ----------- ----------- ---------- ------------ -----------
5,927,268 15,259,955 2,532,127 412,095 483,200 172,289 6,391,868 913,244
- ------------ ------------ ----------- ----------- ----------- ---------- ------------ -----------
(608,681) (2,693,853) (223,497) (35,750) (28,388) (32,335) (802) (264,829)
(585,187) (3,488,256) (463,295) (35,916) (23,706) (21,617) (142) (137,835)
(76,316) (390,999) (103,804) (12,551) (13,552) (11,310) (142) (13,718)
(195,785) (138,093) (812,077) (516,803) (474,259) (141,908) (6,388,219) (496,872)
- ------------ ------------ ----------- ----------- ----------- ---------- ------------ -----------
(1,465,969) (6,711,201) (1,602,673) (601,020) (539,905) (207,170) (6,388,219) (913,254)
- ------------ ------------ ----------- ----------- ----------- ---------- ------------ -----------
-- -- (1,487) -- -- -- -- --
-- -- (3,010) -- -- -- -- --
-- -- (706) -- -- -- -- --
-- -- (4,733) -- -- -- -- --
- ------------ ------------ ----------- ----------- ----------- ---------- ------------ -----------
-- -- (9,936) -- -- -- -- --
- ------------ ------------ ----------- ----------- ----------- ---------- ------------ -----------
(152,704) (611,200) (125,860) (4,728) (1,449) -- -- --
(203,017) (942,499) (218,299) (5,771) (1,467) -- -- --
(25,301) (118,077) (67,806) (2,179) (976) -- -- --
(28,599) (10,856) (58,871) (65,419) (20,439) -- -- --
- ------------ ------------ ----------- ----------- ----------- ---------- ------------ -----------
(409,621) (1,682,632) (470,836) (78,097) (24,331) -- -- --
- ------------ ------------ ----------- ----------- ----------- ---------- ------------ -----------
15,969,336 52,531,457 7,803,194 914,633 131,024 252,823 359,913 6,419,571
20,798,943 93,129,376 12,296,600 707,635 271,514 21,121 25,000 1,681,592
2,758,002 12,100,036 4,143,135 157,310 198,788 20,592 25,000 252,342
(4,743,447) (7,754,436) (6,230,578) 62,922 185,121 712,785 47,182,964 7,541,082
- ------------ ------------ ----------- ----------- ----------- ---------- ------------ -----------
34,782,834 150,006,433 18,012,351 1,842,500 786,447 1,007,321 47,592,877 15,894,587
- ------------ ------------ ----------- ----------- ----------- ---------- ------------ -----------
38,834,512 156,872,555 18,461,033 1,575,478 705,411 972,440 47,595,440 15,894,577
13,974,239 30,025,734 12,566,413 10,674,939 10,947,040 3,833,951 226,548,595 10,860,804
- ------------ ------------ ----------- ----------- ----------- ---------- ------------ -----------
$ 52,808,751 $186,898,289 $31,027,446 $12,250,417 $11,652,451 $4,806,391 $274,144,035 $26,755,381
============ ============ =========== =========== =========== ========== ============ ===========
$ 33,205 $ (395,860) $ (212,591) $ (61,032) $ 1,574 $ 4,786 $ -- $ --
- ------------ ------------ ----------- ----------- ----------- ---------- ------------ -----------
</TABLE>
See accompanying notes to financial statements
129
<PAGE>
<PAGE>
Statements of Changes in Net Assets
For the Year Ended December 31, 1995
<TABLE>
<CAPTION>
Asia
Growth Capital Investors
Fund(a) Fund Fund
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operations:
Net investment income........................................... $ -- $ 702,996 $ 6,537,153
Net realized gain (loss) on investments, options, and foreign
curency transactions.......................................... -- 20,581,764 49,873,168
Net change in unrealized appreciation (depreciation) on
investments, options, foreign currency transactions and
other assets................................................... -- 7,415,877 62,151,251
----------- ---------- --------------
Net increase in net assets from operations...................... -- 28,700,637 118,561,572
----------- ---------- --------------
Dividends and distributions to shareholders:
Dividends from net investment income:
Class A........................................................ -- -- (4,087)
Class B........................................................ -- -- (2,179)
Class C........................................................ -- -- (1,577)
Class O........................................................ -- (698,526) (6,529,373)
----------- ----------- --------------
-- (698,526) (6,537,216)
----------- ------------- --------------
Distributions from net realized gains:
Class A........................................................ -- -- (37,569)
Class B........................................................ -- -- (61,264)
Class C........................................................ -- -- (26,879)
Class O........................................................ -- (11,082,177) (36,419,464)
----------- ------------- --------------
-- (11,082,177) (36,545,176)
----------- ------------- --------------
Distributions in excess of net realized gains:
Class A........................................................ -- -- --
Class B........................................................ -- -- --
Class C........................................................ -- -- --
Class O........................................................ -- -- --
----------- ------------- -------------
-- -- --
----------- ------------- -------------
Net fund capital share transactions:
Class A........................................................ -- -- 396,175
Class B........................................................ -- -- 675,659
Class C........................................................ -- -- 264,858
Class O........................................................ -- (1,195,665) 5,383,498
----------- -------------- -------------
Net increase (decrease) in net assets derived from share
transactions.................................................. -- (1,195,665) 6,720,190
----------- -------------- -------------
Net increase (decrease) in net assets............................ -- 15,724,269 82,199,370
Net assets:
Beginning of period............................................ -- 86,704,358 348,214,236
----------- -------------- -------------
End of period *................................................ -- $102,428,627 $430,413,606
=========== =============== =============
* Including undistributed net investment income or
distributions in excess of net investment income of: $ -- $ 4,470 $ --
========== ================ =============
</TABLE>
(a) Fund's commencement of investment operations was May 6, 1996.
(b) Fund's commencement of investment operations was September 11, 1995.
(c) Fund's commencement of investment operations was February 22, 1995.
See accompanying notes to financial statements
130
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
U.S. National New York New York Cash
Total High Yield Strategic Government Intermediate Municipal Municipal Management
Return Fund(b) Bond Fund(c) Bond Fund(c) Income Fund(c) Municipal Fund(c) Bond Fund Money Fund Fund
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 132,091 $ 1,503,286 $ 912,394 $ 517,510 $ 430,514 $ 202,366 $ 8,261,332 $ 695,618
24,049 472,003 278,481 110,378 39,589 (65,526) 27,905 --
450,147 448,128 550,288 325,404 423,880 481,771 -- --
- ------------ ------------- ------------- ------------- --------------- -------------- ------------- ------------
606,287 2,423,417 1,741,163 953,292 893,983 618,611 8,289,237 695,618
- ------------ ------------- ------------- ------------- --------------- -------------- ------------- ------------
(35,724) (428,959) (30,591) (12,734) (17,376) (11,538) -- (40,161)
(47,121) (212,975) (59,198) (16,038) (11,207) (12,739) -- (26,516)
(3,465) (42,228) (23,725) (10,967) (8,442) (9,206) -- (2,693)
(45,781) (790,660) (804,713) (477,771) (389,560) (165,524) (8,261,332) (626,248)
- ------------ ------------ ------------- -------------- --------------- -------------- ------------ ------------
(132,091) (1,474,822) (918,227) (517,510) (426,585) (199,007) (8,261,332) (695,618)
- ------------ ------------ ------------- -------------- --------------- -------------- ------------ ------------
(3,900) (146,101) (11,724) (2,801) (1,569) -- -- --
5,711) (137,393) (42,853) (4,374) (1,193) -- -- --
(469) (17,451) (9,338) (2,795) (749) -- -- --
(4,845) (108,284) (226,037) (100,408) (26,754) -- -- --
- ------------ -------------- ------------- -------------- --------------- -------------- ----------- ------------
(14,925) (409,229) (289,952) (110,378) (30,265) -- -- --
- ----------- -------------- ------------- -------------- --------------- -------------- ----------- ------------
-- -- -- (216) -- -- -- --
-- -- -- (1,765) -- -- -- --
-- -- -- (174) -- -- -- --
-- -- -- (2,827) -- -- -- --
- ----------- -------------- ------------ -------------- -------------- -------------- ----------- ------------
-- -- -- (4,982) -- -- -- --
- ----------- -------------- ------------ -------------- -------------- -------------- ----------- ------------
3,580,176 10,746,292 498,371 269,838 551,191 528,982 -- 1,755,547
5,255,708 10,103,804 1,866,229 561,475 417,842 504,427 -- 2,238,486
424,084 1,264,713 397,920 265,054 260,067 250,059 -- 182,541
4,250,000 7,371,479 9,270,829 9,258,070 9,280,727 (1,202,551) (43,267,305) (12,442,586)
- ----------- -------------- ------------ -------------- -------------- -------------- ----------- -----------
13,509,968 29,486,288 12,033,349 10,354,437 10,509,827 80,917 (43,267,305) (8,266,012)
- ----------- -------------- ------------ -------------- -------------- -------------- ----------- -----------
13,969,239 30,025,654 12,566,333 10,674,859 10,946,960 500,521 (43,239,400) (8,266,012)
5,000 80 80 80 80 3,333,430 269,787,995 19,126,816
- ----------- -------------- ------------- -------------- -------------- -------------- ------------ ------------
$13,974,239 $ 30,025,734 $12,566,413 $10,674,939 $ 10,947,040 $ 3,833,951 $226,548,595 $ 10,860,804
=========== ============== ============= ============== ============== ============== ============ ============
$ -- $ 28,464 $ (29,376) $ -- $ 3,929 $ 3,359 $ -- $ --
=========== ============== ============= ============== ============== ============== ============ ============
</TABLE>
See accompanying notes to financial statements
131
<PAGE>
<PAGE>
Notes to Financial Statements
1. Organization and Significant Accounting Policies
The Salomon Brothers Investment Series (the "Investment Series") consists of
certain portfolios of the Salomon Brothers Series Funds Inc (the "Series
Funds"), as indicated below, the Salomon Brothers Investors Fund Inc (the
"Investors Fund") and the Salomon Brothers Capital Fund Inc (the "Capital
Fund"). The Series Funds were incorporated in Maryland on April 17, 1990 as an
open-end management investment company, and currently operate as a series
company comprised of ten portfolios: Salomon Brothers Cash Management Fund (the
"Cash Management Fund"), Salomon Brothers New York Municipal Money Market Fund
(the "New York Municipal Money Fund"), Salomon Brothers Institutional Money
Market Fund (the "Institutional Money Market Fund"), Salomon Brothers New York
Municipal Bond Fund (the "New York Municipal Bond Fund"), Salomon Brothers
National Intermediate Municipal Fund (the "National Intermediate Municipal
Fund"), Salomon Brothers U.S. Government Income Fund (the "U.S. Government
Income Fund"), Salomon Brothers High Yield Bond Fund (the "High Yield Bond
Fund"), Salomon Brothers Strategic Bond Fund (the "Strategic Bond Fund"),
Salomon Brothers Total Return Fund (the "Total Return Fund"), and Salomon
Brothers Asia Growth Fund (the "Asia Growth Fund"). Separate financial
statements are prepared for the Institutional Money Market Fund which is not
part of the Investment Series. All of the other portfolios of the Series Funds
are included in the Investment Series, which also includes the Investors Fund, a
diversified open-end management investment company incorporated in Maryland on
April 2, 1958 and the Capital Fund, 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
C, and Class O shares, each with their own expense structure. Each Fund has a
specific investment objective: the Cash Management Fund's and New York Municipal
Money Fund's objective is to seek as high a level of current income as is
consistent with liquidity and the stability of principal; the New York Municipal
Bond Fund's objective is to achieve a high level of current income which is
exempt from regular federal income taxes and New York State and New York City
personal income taxes, consistent with the preservation of capital; the National
Intermediate Municipal Fund's objective is to seek a high level of current
income which is exempt from regular federal income taxes; the U.S. Government
Income Fund's objective is to seek a high level of current income; the High
Yield Bond Fund's primary objective is to maximize current income; the Strategic
Bond Fund's primary objective is to seek a high level of current income; the
Total Return Fund's primary objective is to obtain above-average income
(compared to a portfolio entirely invested in equity securities); the Asia
Growth Fund's objective is to seek long-term capital appreciation; the Investors
Fund's primary objective is to seek long-term growth of capital; the Capital
Fund's objective is to seek capital appreciation.
132
<PAGE>
<PAGE>
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, 1996 for each Fund is as follows:
<TABLE>
<CAPTION>
Fund Expiration of Amortization Amount
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
New York Municipal Bond Fund............................. February 1998 $13,855
National Intermediate Municipal Fund..................... February 2000 $73,438
U.S. Government Income Fund.............................. February 2000 $76,025
High Yield Bond Fund..................................... February 2000 $92,615
Strategic Bond Fund...................................... February 2000 $92,944
Total Return Fund........................................ September 2000 $70,680
Asia Growth Fund......................................... May 2001 $86,584
</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
that market. Short-term securities with less than 60 days remaining to
maturity when acquired by a Fund will be valued at amortized cost which
approximates market value. If a Fund, other than the Cash Management Fund
and New York Municipal Money Fund, acquires such securities with more than
60 days remaining to maturity, they will be valued at current market value,
until the 60th day prior to maturity, and will then be valued on an
amortized cost basis.
Portfolio securities for the Cash Management Fund and the New York
Municipal Money Fund 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.
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 2:30 p.m.
133
<PAGE>
<PAGE>
Notes to Financial Statements (continued)
Eastern time (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. The New York Municipal Bond Fund, National
Intermediate Municipal Fund, High Yield Bond Fund, Strategic Bond Fund,
Total Return Fund, Asia Growth Fund, Investors Fund and Capital 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
will be 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 exercises an option or 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 U.S. Government Income Fund, Strategic Bond
Fund and Total Return 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
daily balance of dollar rolls outstanding during the year ended December
31, 1996 was approximately $1,181,000, $334,000 and $471,000 for the U.S.
Government Income Fund, Strategic Bond Fund and Total Return 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 always 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) 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, Strategic Bond Fund, Total Return
Fund, Asia Growth Fund, Investors Fund and Capital 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
134
<PAGE>
<PAGE>
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.
(g) Forward Foreign Currency Contracts. The High Yield Bond Fund,
Strategic Bond Fund, Total Return Fund, Asia Growth Fund and Investors 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.
(h) Loan Participations. The High Yield Bond Fund, Strategic Bond Fund,
Total Return Fund and Asia Growth 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, 1996 were $7,782,188 and $1,238,438,
respectively.
(i) Federal Income Taxes. Each Fund intends to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies 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.
The Asia Growth Fund may be subject to taxes imposed by countries in
which it invests. Such taxes are generally based on income and/or capital
gains earned or repatriated. Taxes are accrued and applied to net
investment income, net realized gains and net unrealized appreciation as
such income and/or gains are earned.
(j) Dividends and Distributions to Shareholders. Dividends from net
investment income on the shares of each of the Funds (except the Asia
Growth Fund, Investors Fund, and Capital 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 and the Capital Fund will be declared on an annual basis. Dividends
from net investment income for the Investors 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. Dividends and distributions which exceed net
investment income and net realized gains for financial reporting purposes
but not for tax purposes are reported as distributions in excess of net
investment income and distributions in excess of net realized capital
gains.
(k) 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
135
<PAGE>
<PAGE>
Notes to Financial Statements (continued)
per share dividend rates are generally due to differences in separate class
expenses.
(l) 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.
(m) 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 distribution fees) and 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, an indirect wholly owned subsidiary of Salomon Inc, 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 officers. The
management fee for these services for each Fund (except the Investors Fund and
Capital Fund) is payable monthly and is based on the following annual
percentages of each Fund's average daily net assets: .20% for the Cash
Management Fund and New York Municipal Money Fund, .50% for the New York
Municipal Bond Fund and the National Intermediate Municipal Fund, .60% for the
U.S. Government Income Fund, .75% for the High Yield Bond Fund and Strategic
Bond Fund, .55% for the Total Return Fund and .80% for the Asia 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--.75% ; next $200 million--.625%; excess over
$400 million--.50%. SBAM Limited, an affiliate of SBAM, provides certain
advisory services to SBAM for the benefit of the Strategic Bond Fund, as well
as, certain administrative services for the Asia Growth Fund. SBAM Limited is
compensated by SBAM at no additional expense to the Strategic Bond and Asia
Growth Fund. SBAM has retained 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.
The Investors Fund pays SBAM a base fee subject to an increase or decrease
depending on the extent, if any, to which the investment performance of the
Investors 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.................................................................... .500%
Next $150 million.................................................................... .400%
Next $250 million.................................................................... .375%
Next $250 million.................................................................... .350%
Over $1 billion...................................................................... .300%
</TABLE>
The performance adjustment is paid quarterly based on a rolling one year period.
A performance adjustment will only be made after the investment performance of
the Investors 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
136
<PAGE>
<PAGE>
Investors 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 .01% (annualized).
The maximum annual adjustment is .10% which would occur if the Investors Fund's
performance exceeds or is exceeded by the S&P 500 Index by ten or more
percentage points. For the rolling one-year periods, ended March 31, 1996, June
30, 1996, September 30, 1996 and December 31, 1996 the Investors Fund's
performance exceeded the investment record of the S&P Index by approximately
two, three, six, and six percent, respectively. As a result, base management
fees were increased in aggregate by $199,931 for the year ended December 31,
1996.
For the year ended December 31, 1996, SBAM waived management fees of $36,898,
$21,043, $56,186, $66,682, $191,119, $144,551, $184,118 and $30,723 for the Cash
Management Fund, New York Municipal Bond Fund, National Intermediate Municipal
Fund, U.S. Government Income Fund, High Yield Bond Fund, Strategic Bond Fund,
Total Return Fund, and Asia Growth Fund, respectively, and voluntarily absorbed
expenses of $13,646, $25,063, $83,959, $85,462, $102,651 and $132,687 for the
Cash Management Fund, New York Municipal Bond Fund, National Intermediate
Municipal Fund, U.S. Government Income Fund, Total Return Fund and Asia Growth
Fund, respectively.
Investors Bank & Trust Company serves as custodian and administrator for each
Fund, which includes performing certain administrative services in connection
with the operation of each Fund. During the year ended December 31, 1996,
credits earned on outstanding cash balances were used to reduce custodian fees.
Each Fund has an agreement with Salomon Brothers Inc ("Salomon Brothers"), an
affiliate of the Investment Adviser, to distribute its shares pursuant to a
multiple pricing system. Each class (except for Class O) of each Fund (except
for the Cash Management Fund and New York Municipal Money Fund) is authorized
pursuant to a services and distribution plan applicable to that class of shares
(the "Class A Plan," the "Class B Plan," and the "Class C Plan," collectively,
the "Plans") adopted pursuant to Rule 12b-1 under the Investment Company Act of
1940, as amended (the "1940 Act"), to pay Salomon Brothers an annual service fee
with respect to Class A, Class B, and Class C shares of the applicable Funds at
the rate of .25% of the value of the average daily net assets of the respective
class. Salomon Brothers is also paid an annual distribution fee with respect to
Class B and Class C shares of each Fund (except for the Cash Management Fund and
New York Municipal Money Fund) at the rate of .75% of the value of the average
daily net assets of the respective class. Class O shares are not subject to a
services and distribution plan fee.
Brokerage commissions of $1,758, $59,316 and $29,772 were paid by the Total
Return Fund, Investors Fund and Capital Fund, respectively, to Salomon Brothers,
the Funds' distributor and an indirect wholly-owned subsidiary of Salomon Inc,
for transactions executed on behalf of the Funds for the year ended December 31,
1996.
Salomon Brothers received $20,462 as its portion of the front-end sales charge
on sales of Class A shares of the Funds during the year ended December 31, 1996.
In addition, contingent deferred sales charges of $160,530 were paid to Salomon
Brothers in connection with redemptions of certain Class B and Class C shares of
the Funds during the year ended December 31, 1996.
3. Capital Stock
At December 31, 1996, the Series Funds had 10,000,000,000 shares of authorized
capital stock, par value $.001 per share, of which the Cash Management Fund, New
York Municipal Money Fund, New York Municipal Bond Fund, National Intermediate
Municipal Fund, U.S. Government Income Fund, High Yield Bond Fund, and Strategic
Bond Fund, each had 1,000,000,000 shares authorized. The Total Return Fund and
Asia Growth Fund had 999,999,992 and 1,000,000,008 shares authorized,
respectively. The Investors 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 $.001 per share. Transactions in Fund shares
for the periods indicated were as follows:
137
<PAGE>
<PAGE>
Notes to Financial Statements (continued)
<TABLE>
<CAPTION>
Class A Class B
- -------------------------------------------------------------------------------------------------------------------------------
Period Ended Period Ended Period Ended Period Ended
December 31, 1996 December 31, 1995 December 31, 1996 December 31, 1995
- -------------------------------------------------------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount Shares Amount
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Asia Growth Fund
Sold ................... 356,682 $ 3,537,272 -- -- 305,714 $ 3,042,058 -- --
Issued as reinvestment . 2,175 22,436 -- -- 846 8,723 -- --
Redeemed ............... (1,037) (9,821) -- -- -- -- -- --
----------- ------------ ---------- ------------ ---------- ----------- --------- -----------
Net increase ........... 357,820 $ 3,549,887 -- -- 306,560 $ 3,050,781 -- --
=========== ============ ========== ============ ========== =========== ========= ===========
Capital Fund
Sold ................... 17,551 $ 347,514 -- -- 11,001 $ 218,589 -- --
Issued as reinvestment . 121 2,304 -- -- -- -- -- --
Redeemed ............... (384) (7,398) -- -- -- -- -- --
----------- ------------ ---------- ------------ ---------- ----------- --------- -----------
Net increase (decrease) 17,288 $ 342,420 -- -- 11,001 $ 218,589 -- --
=========== ============ ========== ============ ========== =========== ========= ===========
Investors Fund
Sold ................... 557,317 $ 10,367,582 27,922 $ 420,791 473,935 $ 8,823,215 41,769 $ 654,082
Issued as reinvestment . 43,043 791,687 760 12,451 30,569 561,476 1,335 21,837
Redeemed ............... (49,750) (944,803) (2,119) (37,067) (47,379) (873,452) (15) (260)
----------- ------------ ---------- ------------ ---------- ----------- --------- -----------
Net increase ........... 550,610 $ 10,214,466 26,563 $ 396,175 457,125 $ 8,511,239 43,089 $ 675,659
=========== ============ ========== ============ ========== =========== ========= ===========
Total Return Fund
Sold ................... 1,634,908 $ 18,197,811 343,940 $ 3,552,510 1,941,522 $21,665,343 518,625 $ 5,342,405
Issued as reinvestment . 56,167 639,053 2,713 28,624 57,560 656,054 3,801 40,062
Redeemed ............... (252,184) (2,867,528) (93) (958) (136,340) (1,522,454) (12,152) (126,759)
----------- ------------ ---------- ---------- ---------- ----------- -------- --------
Net increase (decrease) 1,438,891 $ 15,969,336 346,560 $ 3,580,176 1,862,742 $20,798,943 510,274 $ 5,255,708
=========== ============ ========== ============ ========== =========== ========= ===========
High Yield Bond Fund
Sold ................... 5,579,873 $ 62,422,667 1,019,841 $ 10,701 8,434,142 $94,520,293 946,768 $ 9,961,848
Issued as reinvestment . 178,995 2,017,850 40,936 430,949 173,250 1,963,617 15,920 168,888
Redeemed ............... (1,070,460) (11,909,060) (36,582) (386,153) (301,187) (3,354,534) (2,574) (26,932)
----------- ------------ ---------- ---------- ---------- ----------- -------- --------
Net increase (decrease) 4,688,408 $ 52,531,457 1,024,195 $ 10,746,292 8,306,205 $93,129,376 960,114 $10,103,804
=========== ============ ========== ============ ========== =========== ========= ===========
Strategic Bond Fund
Sold ................... 749,039 $ 8,090,137 53,771 $ 551,616 1,214,882 $13,060,764 174,744 $ 1,827,448
Issued as reinvestment . 22,056 238,009 1,158 12,171 33,453 360,441 3,737 39,371
Redeemed ............... (49,131) (524,952) (6,226) (65,416) (105,759) (1,124,605) (57) (590)
----------- ------------ ---------- ---------- ---------- ----------- -------- --------
Net increase (decrease) 721,964 $ 7,803,194 48,703 $ 498,371 1,142,576 $12,296,600 178,424 $ 1,866,229
=========== ============ ========== ============ ========== =========== ========= ===========
U.S. Government Income
Fund
Sold ................... 117,000 $ 1,173,487 26,869 $ 269,137 114,615 $ 1,149,715 54,833 $ 554,953
Issued as reinvestment . 1,688 16,972 76 721 1,043 10,504 637 6,542
Redeemed ............... (27,629) (275,826) (2) (20) (45,248) (452,584) (2) (20)
----------- ------------ ---------- ---------- ---------- ----------- -------- --------
Net increase ........... 91,059 $ 914,633 26,943 $ 269,838 70,410 $ 707,635 55,468 $ 561,475
=========== ============ ========== ============ ========== =========== ========= ===========
National Intermediate
Municipal Fund
Sold ................... 30,133 $ 310,751 54,100 $ 546,146 45,974 $ 472,141 41,260 $ 416,180
Issued as reinvestment . 1,305 13,429 710 7,331 623 6,378 163 1,682
Redeemed ............... (18,756) (193,156) (221) (2,286) (20,022) (207,005) (2) (20)
----------- ------------ ---------- ------------ ---------- ----------- --------- -----------
Net increase ........... 12,682 $ 131,024 54,589 $ 551,191 26,575 $ 271,514 41,421 $ 417,842
=========== ============ ========== ============ ========== =========== ========= ===========
New York Municipal Bond
Fund
Sold ................... 36,597 $ 358,657 53,966 $ 528,846 1,615 $ 16,000 52,010 $ 502,220
Issued as reinvestment . 424 4,166 16 157 523 5,121 226 2,229
Redeemed ............... (11,188) (110,000) (2) (21) -- -- (2) (22)
----------- ------------ ---------- ------------ ---------- ----------- --------- -----------
Net increase (decrease) 25,833 $ 252,823 53,980 $ 528,982 2,138 $ 21,121 52,234 $ 504,427
=========== ============ ========== ============ ========== =========== ========= ===========
New York Municipal Money
Fund
Sold ................... 359,251 $ 359,251 -- -- 25,000 $ 25,000 -- --
Issued as reinvestment . 662 662 -- -- -- -- -- --
Redeemed ............... -- -- -- -- -- -- -- --
----------- ------------ ---------- ------------ ---------- ----------- --------- -----------
Net increase (decrease) 359,913 $ 359,913 -- -- 25,000 $ 25,000 -- --
=========== ============ ========== ============ ========== =========== ========= ===========
Cash Management Fund
Sold ................... 34,309,623 $ 34,309,623 8,291,614 $ 8,291,614 4,686,602 $ 4,686,602 3,213,151 $ 3,213,151
Issued as reinvestment . 59,295 59,295 4,672 4,672 111,779 111,779 24,262 24,262
Redeemed ............... (27,949,347) (27,949,347) (6,540,739) (6,540,739) (3,116,789) (3,116,789) (998,927) (998,927)
----------- ------------ ---------- ------------ ---------- ----------- --------- -----------
Net increase (decrease) 6,419,571 $ 6,419,571 1,755,547 $ 1,755,547 1,681,592 $ 1,681,592 2,238,486 $ 2,238,486
=========== ============ ========== ============ ========== =========== ========= ===========
See accompanying notes to financial statements
138
<PAGE>
<PAGE>
<CAPTION>
Class C Class O
- ----------------------------------------------------------------------------------------------------------------------------------
Period Ended Period Ended Period Ended Period Ended
December 31, 1996 December 31, 1995 December 31, 1996 December 31, 1995
- ----------------------------------------------------------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount Shares Amount
- ----------------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C> <C>
34,069 $ 333,338 -- -- 12,221 $ 123,183 -- --
19 190 -- -- 37 387 -- --
(10,334) (96,316) -- -- (400) (4,092) -- --
--------- ------------ ------- ----------- ---------- ------------- ----------- -------------
23,754 $ 237,212 -- -- 11,858 $ 117,478 -- --
========= ============ ======= =========== ========== ============= =========== =============
6,531 $ 130,425 -- -- 1,669,366 $ 33,303,396 1,609,281 $ 29,031,088
-- -- -- -- 1,304,403 24,802,608 600,042 11,026,944
-- -- -- -- (1,619,111) (32,449,133) (2,277,011) (41,253,697)
--------- ------------ ------- ----------- ---------- ------------- ----------- -------------
6,531 $ 130,425 -- -- 1,354,658 $ 25,656,871 (67,688) $ (1,195,665)
========= ============ ======= =========== ========== ============= =========== =============
100,645 $ 1,851,974 18,595 $ 267,020 350,444 $ 6,256,570 245,958 $ 3,783,857
5,651 103,990 60 980 2,822,018 50,986,119 2,017,845 32,672,713
(20,916) (401,484) (200) (3,142) (1,570,151) (28,301,671) (1,987,122) (31,073,072)
--------- ------------ ------- ----------- ---------- ------------- ----------- -------------
85,380 $ 1,554,480 18,455 $ 264,858 1,602,311 $ 28,941,018 276,681 $ 5,383,498
========= ============ ======= =========== ========== ============= =========== =============
278,826 $ 3,090,704 41,886 $ 423,053 17,355 $ 195,012 425,000 $ 4,250,000
7,242 82,831 99 1,041 456 5,295 -- --
(37,410) (415,533) (1) (10) (425,004) (4,943,754) -- --
--------- ------------ ------- ----------- ---------- ------------- ----------- -------------
248,658 $ 2,758,002 41,984 $ 424,084 (407,193) $ (4,743,447) 425,000 $ 4,250,000
========= ============ ======= =========== ========== ============= =========== =============
1,118,377 $ 12,586,569 124,291 $ 1,298,229 32,418 $ 371,211 926,518 $ 9,265,788
29,193 330,589 1,229 12,925 495 5,673 791 7,911
(73,411) (817,122) (4,453) (46,441) (744,326) (8,131,320) (181,791) (1,902,220)
--------- ------------ ------- ----------- ---------- ------------- ----------- -------------
1,074,159 $ 12,100,036 121,067 $ 1,264,713 (711,413) $ (7,754,436) 745,518 $ 7,371,479
========= ============ ======= =========== ========== ============= =========== =============
425,748 $ 4,594,269 38,420 $ 391,367 1,757 $ 18,841 926,274 $ 9,263,323
13,409 144,660 625 6,573 59 642 754 7,526
(55,475) (595,794) (2) (20) (575,895) (6,250,061) (2) (20)
--------- ------------ ------- ----------- ---------- ------------- ----------- -------------
383,682 $ 4,143,135 39,043 $ 397,920 (574,079) $ (6,230,578) 927,026 $ 9,270,829
========= ============ ======= =========== ========== ============= =========== =============
16,846 $ 170,867 27,164 $ 272,000 6,017 $ 60,175 925,200 $ 9,252,000
103 1,029 20 206 276 2,757 816 8,164
(1,471) (14,586) (698) (7,152) (1) (10) (206) (2,094)
--------- ------------ ------- ----------- ---------- ------------- ----------- -------------
15,478 $ 157,310 26,486 $ 265,054 6,292 $ 62,922 925,810 $ 9,258,070
========= ============ ======= =========== ========== ============= =========== =============
18,942 $ 195,000 25,963 $ 260,000 18,217 $ 184,880 927,748 $ 9,278,117
368 3,788 9 87 24 241 263 2,630
-- -- (2) (20) -- -- (2) (20)
--------- ------------ ------- ----------- ---------- ------------- ----------- -------------
19,310 $ 198,788 25,970 $ 260,067 18,241 $ 185,121 928,009 $ 9,280,727
========= ============ ======= =========== ========== ============= =========== =============
2,072 $ 20,000 26,263 $ 250,020 134,576 $ 1,300,860 14,323 $ 137,924
61 592 6 60 11,918 117,064 17,711 169,082
-- -- (2) (21) (71,444) (705,139) (156,388) (1,509,557)
--------- ------------ ------- ----------- ---------- ------------- ----------- -------------
2,133 $ 20,592 26,267 $ 250,059 75,050 $ 712,785 (124,354) $ 1,202,550
========= ============ ======= =========== ========== ============= =========== =============
25,000 $ 25,000 -- -- 310,065,553 $ 310,065,553 298,776,320 $ 298,776,320
-- -- -- -- 6,167,495 6,167,495 7,924,931 7,924,931
-- -- -- -- (269,050,082) (269,050,082) (349,968,556) (349,968,556)
--------- ------------ ------- ----------- ---------- ------------- ----------- -------------
25,000 $ 25,000 -- -- 47,182,964 $ 47,182,964 (43,267,305) $ (43,267,305)
========= ============ ======= =========== ========== ============= =========== =============
1,086,079 $ 1,086,079 180,044 $ 180,044 51,041,652 $ 51,041,652 47,254,877 $ 47,254,877
4,192 4,192 2,497 2,497 342,904 342,904 431,706 431,706
(837,929) (837,929) -- -- (43,843,474) (43,843,474) (60,129,169) (60,129,169)
--------- ------------ ------- ----------- ---------- ------------- ----------- -------------
252,342 $ 252,342 182,541 $ 182,541 7,541,082 $ 7,541,082 (12,442,586) $ (12,442,586)
========= ============ ======= =========== ========== ============= =========== =============
</TABLE>
See accompanying notes to financial statements
139
<PAGE>
<PAGE>
Notes to Financial Statements (continued)
At December 31, 1996, Salomon Brothers owned approximately the following
percentages of total shares outstanding of the following Funds:
<TABLE>
<S> <C>
New York Municipal Bond Fund........................................ 16%
National Intermediate Municipal Fund................................ 89%
U.S. Government Income Fund......................................... 80%
Strategic Bond Fund................................................. 12%
Asia Growth Fund.................................................... 71%
</TABLE>
4. Portfolio Activity
Cost of purchases and proceeds from sales of securities, excluding short-term
obligations, for the year ended December 31, 1996, were as follows:
<TABLE>
<CAPTION>
Purchases Sales
- -----------------------------------------------------------------------------
<S> <C> <C>
New York Municipal Bond Fund................ $ 1,796,965 $ 730,598
============= =============
National Intermediate Municipal Fund........ $ 2,450,323 $ 2,093,489
============= =============
U.S. Government Income Fund
U.S. Government Securities................ $ 37,700,042 $ 36,421,810
============= =============
High Yield Bond Fund........................ $202,131,817 $ 61,569,952
============= =============
Strategic Bond Fund
U.S. Government Securities................ $ 10,744,465 $ 4,812,199
Other Investments......................... 27,396,761 16,899,420
------------- -------------
$ 38,141,226 $ 21,711,619
============= =============
Total Return Fund
U.S. Government Securities................ $ 10,269,335 $ 6,137,663
Other Investments......................... 42,111,218 16,232,109
------------- -------------
$ 52,380,553 $ 22,369,771
============= =============
Asia Growth Fund............................ $ 13,109,300 $ 6,614,370
============= =============
Investors Fund.............................. $263,706,387 $275,088,241
============= =============
Capital Fund................................ $216,469,842 $212,131,218
============= =============
</TABLE>
140
<PAGE>
<PAGE>
Transactions in options written for the Funds during the year ended December 31,
1996 were as follows:
<TABLE>
<CAPTION>
Asia Growth Fund Capital Fund
----------------------------------------------------
Number of Premiums Number of Premiums
Contracts Received Contracts Received
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Options outstanding at December 31, 1995...... -- -- -- --
Options written............................... (26,000) $(4,353) (245) $(41,326)
Options terminated in closing purchase
transactions................................ 26,000 4,353 245 41,326
------- ------- ---- --------
Options outstanding at December 31, 1996...... -- -- -- --
======= ======= ==== ========
</TABLE>
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.
The Cash Management Fund and New York Municipal Money Fund invest in money
market instruments maturing in thirteen months or less whose short-term credit
ratings are within the 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. The New York Municipal Bond Fund and New York Municipal
Money Fund pursues their investment objectives by investing at least 80% of
their net assets in obligations that are exempt from regular federal income
taxes and at least 65% of their net assets in obligations that are exempt from
personal income taxes of the State and City of New York. Because the New York
Municipal Bond and the New York Municipal 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.
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
141
<PAGE>
<PAGE>
Notes to Financial Statements (continued)
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, the High Yield Bond
Fund and the Strategic Bond Fund 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.
The risk in writing a covered call option is that the Fund may forego the
opportunity of profit if the market price of the underlying security increases
and the option is exercised. The risk in writing a put option is that the Fund
may incur a loss if the market price of the underlying security decreases and
the option is exercised. In addition, there is the risk that the Fund may not be
able to enter 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.
6. Tax Information
At December 31, 1996, the New York Municipal Money Fund, Cash Management Fund
and New York Municipal Bond Fund had net capital loss carry-forwards available
to offset future capital gains as follows:
<TABLE>
<CAPTION>
New York New York
Municipal Cash Municipal
Year of Money Management Bond
Expiration Fund Fund Fund
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
1999................................. $ 64,677 $ 894 --
2000................................. 94,778 396 --
2001................................. -- 409 --
2002................................. 65,321 415 $299,006
2003................................. -- -- 318,123
2004................................. -- 10 --
-------- ------ --------
$224,776 $2,124 $617,129
======== ====== ========
</TABLE>
During the year ended December 31, 1996, the New York Municipal Money Fund and
New York Municipal Bond Fund utilized capital loss carryforwards of $2,563 and
$6,816, respectively, to offset net realized capital gains. In addition, as
permitted under Federal income tax regulations, the High Yield Bond Fund and
Strategic Bond Fund have elected to defer $182,015 and $6,605, respectively, of
Post-October net capital losses to the next taxable year. The Asia Growth Fund,
Investors Fund and Capital Fund have also elected to defer to January 1, 1997,
Post-October net foreign currency losses of $1,390, $71 and $333, respectively.
142
<PAGE>
<PAGE>
At December 31, 1996, paid-in capital, undistributed net investment income and
accumulated net realized gain (loss) on investments have been adjusted for
current period permanent book/tax differences which arose principally from
differing book/tax treatments of foreign currency transactions and gains of
securities of certain corporations designated as "passive foreign investment
companies." The Strategic Bond Fund, Asia Growth Fund, Investors Fund and
Capital Fund reclassified $64,315, $8,290, $347 and $165, respectively, from
accumulated net realized gain (loss) on investments to undistributed net
investment income. Net investment income, net realized gain (loss) on
investments and net assets were not affected by this reclassification.
At December 31, 1996, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in value of investments held in each
Fund were as follows:
<TABLE>
<CAPTION>
Gross Gross Net
Aggregate Unrealized Unrealized Unrealized
Cost Appreciation (Depreciation)
Appreciation
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
New York Municipal Bond Fund.......... $ 4,560,814 $ 123,494 $ (16,058) $ 107,436
National Intermediate Municipal Fund.. 10,832,716 349,615 (3,742) 345,873
U.S. Government Income Fund........... 13,507,302 82,435 (40,401) 42,034
High Yield Bond Fund.................. 191,372,174 7,975,293 (744,616) 7,230,677
Strategic Bond Fund................... 35,138,730 1,138,471 (195,894) 942,577
Total Return Fund..................... 48,046,839 4,637,625 (326,611) 4,311,014
Asia Growth Fund...................... 6,826,585 558,417 (513,558) 44,859
Investors Fund........................ 369,242,001 175,377,475 (3,936,161) 171,441,314
Capital Fund.......................... 115,034,839 22,886,941 (1,160,155) 21,726,786
</TABLE>
7. Subsequent Event
On January 28, 1997, pending shareholder approval, the Board of Directors of the
Investors Fund approved an increase in the base management fee payable to SBAM.
Information regarding this matter will be contained in a proxy statement to be
mailed to Investors Fund shareholders on or about March 7, 1997.
143
<PAGE>
<PAGE>
Financial Highlights
Selected data per share of capital stock outstanding throughout each period:
ASIA GROWTH FUND
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Class A Class B Class C Class O
-------------------------------------------------------------
Period Ended December 31, 1996 (a)'SS'
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period ..................... $ 10.00 $10.00 $ 10.00 $ 10.00
--------- --------- -------- --------
Net investment income .................................... 0.05 0.01 0.01 0.07
Net gain on investments
(both realized and unrealized) ........................ 0.47 0.46 0.45 0.46
--------- --------- -------- --------
Total from investment operations ...................... 0.52 0.47 0.46 0.53
--------- --------- -------- --------
Dividends from net investment income ..................... (0.05) (0.01) (0.01) (0.06)
Distributions from net realized gain on investments ...... (0.15) (0.15) (0.15) (0.15)
--------- --------- -------- --------
Total dividends and distributions ..................... (0.20) (0.16) (0.16) (0.21)
--------- --------- -------- --------
Net asset value, end of period ........................... $ 10.32 $ $10.31 $ 10.30 $ 10.32
========= ========= ======== ========
Net assets, end of period (thousands) .................... $ 3,693 $ 3,163 $ 246 $124
Total return* ............................................ +5.2 % +4.7 % +4.6 % +5.3 %
Ratios to average net assets:
Expenses .............................................. 1.24%** 1.99%** 2.00%** 0.99%**
Net investment income ................................. 0.90%** 0.20%** 0.08%** 1.21%**
Portfolio turnover rate .................................. 119% 119% 119% 119%
Average Broker Commission Rate ........................... $ 0.0052 $ 0.0052 $ 0.0052 $ 0.0052
Before 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 ....................... ($0.18) ($0.23) ($0.20) ($0.18)
Expense ratio ......................................... 5.50%** 6.25%** 6.26%** 5.25%**
</TABLE>
CAPITAL FUND
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class A Class B Class C
---------------------------------------------
Period Ended December 31, 1996 (b)'SS'
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period ..................... $ 21.98 $ 21.98 $ 21.98
-------- -------- --------
Net investment income .................................... 0.01 (0.02) (0.02)
Net gain on investments
(both realized and unrealized) ........................ 1.54 1.56 1.57
-------- -------- --------
Total from investment operations ...................... 1.55 1.54 1.55
-------- -------- --------
Dividends from net investment income ..................... (0.15) (0.12) (0.12)
Distributions from net realized gain on investments ...... (3.50) (3.50) (3.50)
Distributions in excess of net realized gains ............ -- -- --
-------- -------- --------
Total dividends and distributions ..................... (3.65) (3.62) (3.62)
- -------- -------- --------
Net asset value, end of period ........................... $ 19.88 $ 19.90 $ 19.91
======== ======== ========
Net assets, end of period (thousands) .................... $ 344 $ 219 $ 130
Total return* ............................................ +7.7 % +7.6 % +7.7 %
Ratios to average net assets:
Expenses .............................................. 1.88%** 2.73%** 2.45%**
Net investment income ................................. 0.18%** -0.66%** -0.05%**
Portfolio turnover rate .................................. 191% 191% 191%
Average Broker Commission Rate ........................... $ 0.0586 $ 0.0586 $ 0.0586
</TABLE>
(a) May 6, 1996, commencement of investment operations, through December 31,
1996.
(b) November 1, 1996, commencement of investment operations, through December
31, 1996.
'SS' Per share information calculated using the average shares outstanding
method, whch more accurately represents amounts.
* 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 ex-dividend date, and a sale at net asset value on the last day of
each period reported. Initial sales charge or contingent deferred sales
charge is not reflected in the calculation of total return. Total return
calculated for a period of less than one year is not annualized.
** Annualized.
See accompanying notes to financial statements
144
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Class O
- --------------------------------------------------------------------------------------------------------
Year Ended December 31,
- --------------------------------------------------------------------------------------------------------
1996'SS' 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 18.67 $ 15.62 $ 20.80 $ 19.64 $ 19.06
-------- -------- -------- -------- --------
0.13 0.14 0.03 0.028 0.10
5.70 5.27 (2.87) 3.242 0.80
-------- -------- -------- -------- --------
5.83 5.41 (2.84) 3.27 0.90
-------- -------- -------- -------- --------
(0.15) (0.14) (0.03) (0.035) (0.105)
(4.47) (2.22) (1.51) (2.075) (0.215)
-- -- (0.80) -- --
-------- -------- -------- -------- --------
(4.62) (2.36) (2.34) (2.11) (0.32)
-------- -------- -------- --------- --------
$ 19.88 $ 18.67 $ 15.62 $ 20.80 $ 19.64
======== ======== ======== ======== ========
$135,943 $102,429 $ 86,704 $113,905 $103,356
+33.3 % +34.9 % -14.2 % +17.2 % +4.7 %
1.38% 1.36% 1.30% 1.31% 1.34%
0.67% 0.74% 0.12% 0.13% 0.58%
191% 217% 152% 104% 41%
$ 0.0586 N/A N/A N/A N/A
</TABLE>
145
<PAGE>
<PAGE>
Financial Highlights (continued)
Selected data per share of capital stock outstanding throughout each period:
INVESTORS FUND
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class A Class B
----------------------------------------------------------------
Year Ended December 31,
----------------------------------------------------------------
1996 1995 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period ..................... $ 16.62 $ 13.61 $ 16.61 $ 13.61
------- ------- ------- -------
Net investment income .................................... 0.19 0.19 0.08 0.10
Net gain (loss) on investments
(both realized and unrealized) ........................ 4.63 4.55 4.60 4.54
------- ------- ------- -------
Total from investment operations ...................... 4.82 4.74 4.68 4.64
------- ------- ------- -------
Dividends from net investment income ..................... (0.22) (0.23) (0.10) (0.14)
Distributions from net realized gain on investments ...... (2.33) (1.50) (2.33) (1.50)
------- ------- ------- -------
Total dividends and distributions ..................... (2.55) (1.73) (2.43) (1.64)
------- ------- ------- -------
Net asset value, end of period ........................... $ 18.89 $ 16.62 $ 18.86 $ 16.61
======= ======= ======= =======
Net assets, end of period (thousands) .................... $10,905 $ 441 $ 9,433 $ 716
Total return* ............................................ +30.3 % +35.3 % +29.2 % +34.5 %
Ratios to average net assets:
Expenses .............................................. 1.06% 0.94% 1.82% 1.71%
Net investment income ................................. 0.94% 1.41% 0.21% 0.63%
Portfolio turnover rate .................................. 58% 86% 58% 86%
Average Broker Commission Rate ........................... $0.0593 N/A $0.0593 N/A
</TABLE>
TOTAL RETURN FUND'SS'
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class A Class B
-------------------------------------------------------------------
Year Ended Period Ended Year Ended Period Ended
December 31, December 31, December 31, December 31,
1996 1995(a) 1996 1995(a)
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period ..................... $ 10.55 $ 10.00 $ 10.54 $ 10.00
------- ------- ------- -------
Net investment income .................................... 0.54 0.15 0.45 0.13
Net gain on investments
(both realized and unrealized) ........................ 1.35 0.52 1.35 0.51
------- ------- ------- -------
Total from investment operations ...................... 1.89 0.67 1.80 0.64
------- ------- ------- -------
Dividends from net investment income ..................... (0.52) (0.11) (0.42) (0.09)
Distributions from net realized gain on investments ...... (0.10) (0.01) (0.10) (0.01)
------- ------- ------- -------
Total dividends and distributions ..................... (0.62) (0.12) (0.52) (0.10)
------- ------- ------- -------
Net asset value, end of period ........................... $ 11.82 $ 10.55 $ 11.82 $ 10.54
======= ======= ======= =======
Net assets, end of period (thousands) .................... $21,109 $ 3,658 $28,043 $ 5,378
Total return* ............................................ +18.3 % +6.7 % +17.4 % +6.4 %
Ratios to average net assets:
Expenses .............................................. 0.75% 0.74%** 1.50% 1.49%**
Net investment income ................................. 4.81% 4.82%** 4.06% 4.06%**
Portfolio turnover rate .................................. 76% 16% 76% 16%
Average Broker Commission Rate ........................... $0.0534 N/A $0.0534 N/A
Before 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 ....................... $ 0.44 $ 0.13 $ 0.36 $ 0.11
Expense ratio ......................................... 1.61% 1.45%** 2.36% 2.19%**
</TABLE>
(a) September 11, 1995, commencement of investment operations, through December
31, 1995.
'SS' Per share information calculated using the average shares outstanding
method, which more accurately represents amounts.
* 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 reported. Initial sales charge or contingent deferred sales charge
is not reflected in the calculation of total return. Total return
calculated for a period of less than one year is not annualized.
** Annualized.
See accompanying notes to financial statements
146
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Class C Class O
- --------------------------------------------------------------------------------------------------
Year Ended December 31,
- --------------------------------------------------------------------------------------------------
1996 1995 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$16.61 $13.61 $16.61 $13.63 $15.60 $16.10 $17.10
-------- -------- -------- -------- -------- -------- --------
0.07 0.09 0.25 0.27 0.27 0.32 0.41
4.60 4.55 4.62 4.48 (0.48) 2.03 0.79
-------- -------- -------- -------- -------- -------- --------
4.67 4.64 4.87 4.75 (0.21) 2.35 1.20
-------- -------- -------- -------- -------- -------- --------
(0.09) (0.14) (0.25) (0.27) (0.27) (0.33) (0.41)
(2.33) (1.50) (2.33) (1.50) (1.49) (2.52) (1.79)
-------- -------- -------- -------- -------- -------- --------
(2.42) (1.64) (2.58) (1.77) (1.76) (2.85) (2.20)
-------- -------- -------- -------- -------- -------- --------
$18.86 $16.61 $18.90 $16.61 $13.63 $15.60 $16.10
======== ======== ======== ======== ======== ======== ========
$1,959 $306 $518,361 $428,950 $348,214 $386,147 $370,350
+29.3 % +34.5 % +30.6 % +35.4 % -1.3 % +15.1 % +7.4 %
1.80% 1.68% 0.76% 0.69% 0.69% 0.68% 0.68%
0.23% 0.66% 1.36% 1.67% 1.75% 1.90% 2.47%
58% 86% 58% 86% 66% 79% 48%
$0.0593 N/A $0.0593 N/A N/A N/A N/A
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Class C Class O
- ----------------------------------------------------------------------------------------------
Year Ended Period Ended Year Ended Period Ended
December 31, December 31, December 31, December 31,
1996 1995(a) 1996 1995(a)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$10.56 $10.00 $10.57 $10.00
------- ------- ------- -------
0.46 0.14 0.57 0.17
1.35 0.51 1.39 0.52
------- ------- ------- -------
1.81 0.65 1.96 0.69
------- ------- ------- -------
(0.42) (0.08) (0.55) (0.11)
(0.10) (0.01) (0.10) (0.01)
------- ------- ------- -------
(0.52) (0.09) (0.65) (0.12)
------- ------- ------- -------
$11.85 $10.56 $11.88 $10.57
======= ======= ======= =======
$3,445 $445 $213 $4,494
+17.5 % +6.5 % +19.0 % +6.9 %
1.50% 1.51%** 0.50% 0.51%**
4.07% 4.26%** 5.13% 5.30%**
76% 16% 76% 16%
$0.0534 N/A $0.0534 N/A
$0.36 $0.11 $0.47 $0.15
2.36% 2.22%** 1.36% 1.22%**
</TABLE>
147
<PAGE>
<PAGE>
Financial Highlights (continued)
Selected data per share of capital stock outstanding throughout each period:
HIGH YIELD BOND FUND
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Class A Class B
- ------------------------------------------------------------------------------------------------------
Year Ended Period Ended Year Ended Period Ended
December 31, December 31, December 31, December 31,
1996 1995(a) 1996 1995(a)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period.......... $ 10.53 $ 10.00 $ 10.53 $ 10.00
--------- --------- -------- --------
Net investment income......................... 1.10 0.92 1.02 0.85
Net gain on investments
(both realized and unrealized)............. 1.11 0.67 1.11 0.68
--------- --------- -------- --------
Total from investment operations........... 2.21 1.59 2.13 1.53
--------- --------- -------- --------
Dividends from net investment income.......... (1.10) (0.91) (1.03) (0.85)
Distributions from net realized gain on
investments................................ (0.10) (0.15) (0.10) (0.15)
--------- --------- -------- --------
Total dividends and distributions.......... (1.20) (1.06) (1.13) (1.00)
--------- --------- -------- --------
Net asset value, end of period................ $ 11.54 $ 10.53 $ 11.53 $ 10.53
========= ========= ======== ========
Net assets, end of period (thousands)......... $ 65,935 $ 10,789 $ 106,797 $ 10,108
Total return*................................. +21.9 % +16.6 % +21.2 % +15.7 %
Ratios to average net assets:
Expenses................................... 1.24% 1.24%** 1.99% 1.96%**
Net investment income...................... 9.38% 10.58%** 8.49% 9.53%**
Portfolio turnover rate....................... 85% 109% 85% 109%
Before waiver of management fee and credits earned on custodian
cash balances, net investment income per share and expense ratios
would have been:
Net investment income per share............ $ 1.09 $ 0.87 $ 1.01 $ 0.80
Expense ratio.............................. 1.50% 1.80%** 2.24% 2.51%**
</TABLE>
STRATEGIC BOND FUND
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Class A Class B
- -------------------------------------------------------------------------------------------------------
Year Ended Period Ended Year Ended Period Ended
December 31, December 31, December 31, December 31,
1996'SS' 1995(a) 1996'SS' 1995(a)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period.......... $ 10.53 $ 10.00 $ 10.53 $ 10.00
------- ------- ------- -------
Net investment income......................... 0.87 0.84 0.79 0.76
Net gain on investments
(both realized and unrealized)............. 0.55 0.78 0.53 0.79
------- ------- ------- -------
Total from investment operations........... 1.42 1.62 1.32 1.55
------- ------- ------- -------
Dividends from net investment income.......... (0.94) (0.85) (0.85) (0.78)
Dividends in excess of net investment income.. (0.01) -- (0.01) --
Distributions from net realized gain on
investments................................ (0.17) (0.24) (0.17) (0.24)
------- ------- ------- -------
Total dividends and distributions.......... (1.12) (1.09) (1.03) (1.02)
------- ------- ------- -------
Net asset value, end of period................ $ 10.83 $ 10.53 $ 10.82 $ 10.53
======= ======= ======= =======
Net assets, end of period (thousands)......... $ 8,345 $ 513 $14,291 $ 1,879
Total return*................................. +14.1 % +16.8 % +13.0 % +16.1 %
Ratios to average net assets:
Expenses................................... 1.24% 1.23%** 1.98% 1.97%**
Net investment income...................... 8.09% 9.51%** 7.34% 8.75%**
Portfolio turnover rate....................... 122% 161% 122% 161%
Before 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 $ 0.76 $ 0.71 $ 0.69
Expense ratio.............................. 1.98% 2.11%** 2.73% 2.85%**
</TABLE>
(a) February 22, 1995, commencement of investment operations, through December
31, 1995.
'SS' Per share information calculated using the average shares outstanding
method, which more accurately represents amounts.
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 reported. Initial sales charge or contingent deferred sales charge
is not reflected in the calculation of total return. Total return
calculated for a period of less than one year is not annualized.
** Annualized.
See accompanying notes to financial statements
148
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Class C Class O
- ----------------------------------------------------------------------------------------------
Year Ended Period Ended Year Ended Period Ended
December 31, December 31, December 31, December 31,
1996 1995(a) 1996'SS' 1995(a)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 10.53 $ 10.00 $ 10.54 $ 10.00
-------- -------- --------- --------
1.02 0.85 1.16 0.95
1.10 0.68 1.05 0.67
-------- -------- --------- --------
2.12 1.53 2.21 1.62
-------- -------- --------- --------
(1.03) (0.85) (1.12) (0.93)
(0.10) (0.15) (0.10) (0.15)
-------- -------- --------- --------
(1.13) (1.00) (1.22) (1.08)
-------- -------- --------- --------
$ 11.52 $ 10.53 $ 11.53 $ 10.54
======== ======== ========= ========
$ 13.773 $ 1,274 $ 393 $ 7,854
+21.1 % +15.8 % +22.0 % +16.8%
1.99% 1.98%** 0.99% 1.00%**
8.43% 9.61%** 10.64% 10.59%**
85% 109% 85% 109%
$ 1.01 $ 0.80 $ 1.13 $ 0.90
2.24% 2.54%** 1.24% 1.55%**
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Class C Class O
- ----------------------------------------------------------------------------------------------
Year Ended Period Ended Year Ended Period Ended
December 31, December 31, December 31, December 31,
1996'SS' 1995(a) 1996'SS' 1995(a)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 10.53 $ 10.00 $ 10.53 $ 10.00
-------- -------- -------- -------
0.78 0.77 0.92 0.87
0.54 0.78 0.51 0.77
-------- -------- -------- -------
1.32 1.55 1.43 1.64
-------- -------- -------- -------
(0.85) (0.78) (0.96) (0.87)
(0.01) -- (0.01) --
(0.17) (0.24) (0.17) (0.24)
-------- -------- --------- --------
(1.03) (1.02) (1.14) (1.11)
-------- -------- --------- --------
$ 10.82 $ 10.53 $ 10.82 $ 10.53
======== ======== ======== ========
$ 4,575 $ 411 $ 3,817 $ 9,763
+13.1% +16.1% +14.2% +17.0%
1.98% 1.99%** 1.00% 0.99%**
7.26% 8.77%** 8.65% 9.74%**
122% 161% 122% 161%
$ 0.70 $ 0.70 $ 0.84 $ 0.79
2.72% 2.87%** 1.74% 1.87%**
</TABLE>
149
<PAGE>
<PAGE>
Financial Highlights (continued)
Selected data per share of capital stock outstanding throughout each period:
U.S. GOVERNMENT INCOME FUND
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Class A Class B
- -----------------------------------------------------------------------------------------------------------------------------------
Year Ended Period Ended Year Ended Period Ended
December 31, December 31, December 31, December 31,
1996 1995(a) 1996 1995(a)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period ........................ $10.32 $10.00 $10.32 $10.00
------ ------ ------ ------
Net investment income ....................................... 0.54 0.49 0.46 0.43
Net gain on investments
(both realized and unrealized) ........................... (0.19) 0.43 (0.20) 0.43
------ ------ ------ ------
Total from investment operations ......................... 0.35 0.92 0.26 0.86
------ ------ ------ ------
Dividends from net investment income ........................ (0.54) (0.49) (0.46) (0.43)
Distributions from net realized gain on investments ......... (0.06) (0.10) (0.06) (0.10)
Distributions in excess of net realized gain on investments . -- (0.01) -- (0.01)
------ ------ ------ ------
Total dividends and distributions ........................ (0.60) (0.60) (0.52) (0.54)
------ ------ ------ ------
Net asset value, end of period .............................. $10.07 $10.32 $10.06 $10.32
====== ====== ====== ======
Net assets, end of period (thousands) ....................... $1,188 $278 $1,266 $572
Total return* ............................................... +3.6 % +9.5 % +2.7 % +8.8 %
Ratios to average net assets:
Expenses ................................................. 0.84% 0.85%** 1.59% 1.60%**
Net investment income .................................... 5.22% 5.67%** 4.51% 4.85%**
Portfolio turnover rate ..................................... 365% 230% 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 ............................. $0.38 $0.40 $0.30 $0.34
Expense ratio ............................................... 2.21% 1.90%** 2.96% 2.64%**
</TABLE>
NATIONAL INTERMEDIATE MUNICIPAL FUND
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class A Class B
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended Period Ended Year Ended Period Ended
December 31, December 31, December 31, December 31,
1996 1995(a) 1996 1995(a)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period ........................ $10.43 $10.00 $10.42 $10.00
------ ------ ------ ------
Net investment income ....................................... 0.48 0.40 0.40 0.34
Net gain on investments
(both realized and unrealized) ........................... (0.06) 0.46 (0.06) 0.45
------ ------ ------ ------
Total from investment operations ......................... 0.42 0.86 0.34 0.79
------ ------ ------ ------
Dividends from net investment income ........................ (0.48) (0.40) (0.41) (0.34)
Distributions from net realized gain on investments ......... (0.02) (0.03) (0.02) (0.03)
------ ------ ------ ------
Total dividends and distributions ........................ (0.50) (0.43) (0.43) (0.37)
------ ------ ------ ------
Net asset value, end of period .............................. $10.35 $10.43 $10.33 $10.42
====== ====== ====== ======
Net assets, end of period (thousands) ....................... $696 $569 $702 $432
Total return* ............................................... +4.2 % +8.7 % +3.4 % +8.0 %
Ratios to average net assets:
Expenses ................................................. 0.75% 0.75%** 1.50% 1.50%**
Net investment income .................................... 4.62% 4.63%** 3.88% 3.85%**
Portfolio turnover rate ..................................... 19% 29% 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 .......................... $0.35 $0.32 $0.27 $0.25
Expense ratio ........................................... 2.02% 1.71%** 2.77% 2.45%**
(a) February 22, 1995, commencement of investment operations, through December
31, 1995.
* 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 reported. Initial sales charge or contingent deferred sales charge
is not reflected in the calculation of total return. Total return
calculated for a period of less than one year is not annualized.
** Annualized.
See accompanying notes to financial statements
150
<PAGE>
<PAGE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Class C Class O
- ----------------------------------------------------------------------------------------------
Year Ended Period Ended Year Ended Period Ended
December 31, December 31, December 31, December 31,
1996 1995(a) 1996 1995(a)
- ----------------------------------------------------------------------------------------------
<C> <C> <C> <C>
$10.32 $10.00 $10.32 $10.00
------ ------ ------ ------
0.46 0.43 0.56 0.52
(0.21) 0.43 (0.20) 0.42
------ ------ ------ ------
0.25 0.86 0.36 0.94
------ ------ ------ ------
(0.46) (0.43) (0.56) (0.52)
(0.06) (0.10) (0.06) (0.10)
-- (0.01) -- --
------ ------ ------ ------
(0.52) (0.54) (0.62) (0.62)
------ ------ ------ ------
$10.05 $10.32 $10.06 $10.32
====== ====== ====== ======
$422 $273 $9,375 $9,552
+2.7 % +8.8 % +3.7 % +9.7 %
1.60% 1.60%** 0.60% 0.60%**
4.51% 4.92%** 5.53% 5.92%**
365% 230% 365% 230%
$0.31 $0.34 $0.41 $0.42
2.97% 2.64%** 1.97% 1.64%**
- ----------------------------------------------------------------------------------------------
Class C Class O
- ----------------------------------------------------------------------------------------------
Year Ended Period Ended Year Ended Period Ended
December 31, December 31, December 31, December 31,
1996 1995(a) 1996 1995(a)
- ----------------------------------------------------------------------------------------------
<C> <C> <C> <C>
$10.42 $10.00 $10.43 $10.00
------ ------ ------ ------
0.40 0.34 0.50 0.42
(0.06) 0.45 (0.07) 0.46
------ ------ ------ ------
0.34 0.79 0.43 0.88
------ ------ ------ ------
(0.41) (0.34) (0.50) (0.42)
(0.02) (0.03) (0.02) (0.03)
------ ------ ------ ------
(0.43) (0.37) (0.52) (0.45)
------ ------ ------ ------
$10.33 $10.42 $10.34 $10.43
====== ====== ====== ======
$468 $271 $9,786 $9,675
+3.4 % +8.0 % +4.3 % +9.0 %
1.50% 1.50%** 0.50% 0.50%**
3.88% 3.85%** 4.88% 4.86%**
19% 29% 19% 29%
$0.27 $0.25 $0.37 $0.34
2.77% 2.46%** 1.77% 1.46%**
</TABLE>
151
<PAGE>
<PAGE>
Financial Highlights (continued)
Selected data per share of capital stock outstanding throughout each period:
NEW YORK MUNICIPAL BOND FUND
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Class A Class B
- ----------------------------------------------------------------------------------------------------
Year Ended December 31,
- ----------------------------------------------------------------------------------------------------
1996 1995 1996 1995
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period.......... $10.11 $ 8.96 $10.11 $ 8.96
------ ------ ------ ------
Net investment income......................... 0.48 0.42 0.41 0.36
Net gain (loss) on securities and futures
(both realized and unrealized)............. (0.19) 1.14 (0.19) 1.14
------ ------ ------ ------
Total from investment operations........... 0.29 1.56 0.22 1.50
------ ------ ------ ------
Dividends from net investment income.......... (0.48) (0.41) (0.41) (0.35)
Distributions from net realized gain on
securities and futures..................... -- -- -- --
------ ------ ------ ------
Total dividends and distributions.......... (0.48) (0.41) (0.41) (0.35)
------ ------ ------ ------
Net asset value, end of period................ $ 9.92 $10.11 $ 9.92 $10.11
====== ====== ====== ======
Net assets, end of period (thousands)......... $ 792 $ 546 $ 539 $ 528
Total return*................................. +3.0 % +17.7 % +2.3 % +17.0 %
Ratios to average net assets:
Expenses................................... 0.75% 0.75% 1.50% 1.50%
Net investment income...................... 4.91% 5.12% 4.18% 4.30%
Portfolio turnover rate....................... 19% 22% 19% 22%
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............ $ 0.37 $ 0.24 $ 0.30 $ 0.17
Expense ratio.............................. 1.89% 2.96% 2.64% 3.74%
</TABLE>
NEW YORK MUNICIPAL MONEY FUND
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Class A Class B Class C
- ------------------------------------------------------------------------------------------------------
Period ended December 31, 1996(b)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period.......... $1.000 $1.000 $1.000
------ ------ ------
Net investment income......................... 0.006 0.006 0.006
Dividends from net investment income.......... (0.006) (0.006) (0.006)
------ ------ ------
Net asset value, end of period................ $1.000 $1.000 $1.000
====== ====== ======
Net assets, end of period (thousands)......... $ 360 $ 25 $ 25
Total return*................................. +0.6 % +0.6 % +0.6 %
Ratios to average net assets:
Expenses................................... 0.38 %** 0.40 %** 0.40 %**
Net investment income...................... 3.56 %** 3.40 %** 3.40 %**
Before applicable waiver of management fee
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 $0.006 $0.006
Expense ratio.............................. 0.39 %** 0.41 %** 0.41 %**
</TABLE>
(a) February 1, 1993, commencement of investment operations, through December
31, 1993.
(b) November 1, 1996, commencement of investment operations, through December
31, 1996.
* 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 ex-dividend date, and a sale at net asset value on the last day of
each period reported. Initial sales charge or contingent deferred sales
charge is not reflected in the calculation of total return. Total return
calculated for a period of less than one year is not annualized.
** Annualized.
See accompanying notes to financial statements
152
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Class C Class O
- -----------------------------------------------------------------------------------------------------
Period Ended
Year Ended December 31, December 31,
- -----------------------------------------------------------------------------------------------------
1996 1995 1996 1995 1994 1993(a)
- -----------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
$10.11 $ 8.96 $10.11 $ 8.98 $10.44 $10.00
------ ------ ------ ------ ------ ------
0.41 0.36 0.50 0.53 0.55 0.46
(0.19) 1.14 (0.18) 1.12 (1.46) 0.46
------ ------ ------ ------ ------ ------
0.22 1.50 0.32 1.65 (0.91) 0.92
------ ------ ------ ------ ------ ------
(0.41) (0.35) (0.50) (0.52) (0.55) (0.46)
-- -- -- -- -- (0.02)
------ ------ ------ ------ ------ ------
(0.41) (0.35) (0.50) (0.52) (0.55) (0.48)
------ ------ ------ ------ ------ ------
$ 9.92 $10.11 $ 9.93 $10.11 $ 8.98 $10.44
====== ====== ====== ====== ====== ======
$ 282 $ 266 $3,193 $2,494 $3,333 $8,364
+2.3 % +17.0 % +3.4 % +18.8 % -8.8 % +9.4 %
1.50% 1.50% 0.50% 0.50% 0.50% 0.50%**
4.19% 4.38% 5.19% 5.50% 5.72% 4.99%**
19% 22% 19% 22% 63% 24%
$ 0.30 $ 0.18 $ 0.40 $ 0.32 $ 0.49 $ 0.40
2.64% 3.71% 1.65% 2.71% 1.17% 1.24%**
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Class O
- ---------------------------------------------------------------------------------------------------
Year Ended December 31,
- ---------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
------- -------- -------- -------- --------
0.032 0.037 0.027 0.023 0.031
(0.032) (0.037) (0.027) (0.023) (0.031)
------- -------- -------- -------- --------
$ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
======= ======== ======== ======== ========
$273,734 $226,549 $269,788 $262,413 $263,685
+3.3 % +3.7 % +2.7 % +2.3 % +3.1 %
0.53 % 0.43 % 0.41 % 0.41 % 0.42 %
3.25 % 3.67 % 2.63 % 2.31 % 3.07 %
$ 0.032 $ 0.037 -- -- --
0.53 % 0.45 % -- -- --
</TABLE>
153
<PAGE>
<PAGE>
Financial Highlights (concluded)
Selected data per share of capital stock outstanding throughout each period:
CASH MANAGEMENT FUND
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Class A Class B
- ------------------------------------------------------------------------------------------------------
Year Ended December 31,
- ------------------------------------------------------------------------------------------------------
1996 1995 1996 1995
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period........... $1.000 $1.000 $1.000 $1.000
------ ------ ------ ------
Net investment income.......................... 0.050 0.044 0.050 0.043
Dividends from net investment income........... (0.050) (0.044) (0.050) (0.043)
------ ------ ------ ------
Net asset value, end of period................. $1.000 $1.000 $1.000 $1.000
====== ====== ====== ======
Net assets, end of period (thousands).......... $8,175 $1,756 $3,920 $2,238
Total return*.................................. +5.1 % +4.5 % +5.1 % +4.4 %
Ratios to average net assets:
Expenses................................... 0.55 % 0.55 % 0.55 % 0.55 %
Net investment income...................... 4.95 % 5.42 % 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............ $0.047 $0.037 $0.047 $0.037
Expense ratio............................... 0.82 % 1.35 % 0.82 % 1.34 %
</TABLE>
* 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 reported.
See accompanying notes to financial statements
154
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Class C Class O
- -------------------------------------------------------------------------------------------------
Year Ended December 31,
- -------------------------------------------------------------------------------------------------
1996 1995 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1.000 $1.000 $1.000 $1.000 $1.000 $ 1.000 $1.000
------ ------ ------- ------ ------- ------- -------
0.050 0.043 0.050 0.055 0.038 0.027 0.033
(0.050) (0.043) (0.050) (0.055) (0.038) (0.027) (0.033)
------ ------ ------- ------ ------- ------- -------
$1.000 $1.000 $1.000 $1.000 $1.000 $ 1.000 $1.000
====== ====== ======= ====== ======= ======= =======
$ 435 $ 183 $14,225 $6,684 $19,127 $15,049 $11,613
+5.1 % +4.4 % +5.1 % +5.6 % +3.9 % +2.7 % +3.4 %
0.55 % 0.55 % 0.55 % 0.55 % 0.61 % 0.65 % 0.65 %
4.95 % 5.40 % 4.95 % 5.46 % 3.79 % 2.68 % 3.41 %
$0.047 $0.036 $ 0.047 $0.047 $ 0.036 $ 0.025 $0.030
0.82 % 1.34 % 0.82 % 1.34 % 0.81 % 0.85 % 0.85 %
</TABLE>
155
<PAGE>
<PAGE>
Report of Independent Accountants
To the Boards of Directors and Shareholders of
Salomon Brothers Cash Management Fund
Salomon Brothers New York Municipal Money Market Fund
Salomon Brothers New York Municipal Bond Fund
Salomon Brothers National Intermediate Municipal Fund
Salomon Brothers U.S. Government Income Fund
Salomon Brothers High Yield Bond Fund
Salomon Brothers Strategic Bond Fund
Salomon Brothers Total Return Fund
Salomon Brothers Asia Growth Fund
Salomon Brothers Investors Fund Inc
Salomon Brothers Capital Fund Inc
In our opinion, the accompanying statements of assets and liabilities, including
the portfolios 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 Cash
Management Fund, Salomon Brothers New York Municipal Money Market Fund, Salomon
Brothers New York Municipal Bond Fund, Salomon Brothers National Intermediate
Municipal Fund, Salomon Brothers U.S. Government Income Fund, Salomon Brothers
High Yield Bond Fund, Salomon Brothers Strategic Bond Fund, Salomon Brothers
Total Return Fund, Salomon Brothers Asia Growth Fund (nine of the portfolios
constituting Salomon Brothers Series Funds Inc), Salomon Brothers Investors Fund
Inc and Salomon Brothers Capital Fund Inc (hereafter referred to as the "Funds")
at December 31, 1996, the results of each of their operations, the changes in
each of their net assets and the financial highlights for the periods indicated,
in conformity with generally accepted accounting principles. 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 audits of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 1996 by
correspondence with the custodian and brokers and the application of alternative
auditing procedures where confirmations from brokers were not received, provide
a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE, LLP
New York, New York
February 18, 1997
156
<PAGE>
<PAGE>
SALOMON BROTHERS CAPITAL FUND INC
PART C.
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
Financial Statements included in Part A:
Selected Per Share Data and Ratios for the specified periods for
the following are presented under the heading 'Financial Highlights' in
the Prospectus: Salomon Brothers Cash Management Fund ('Cash Management
Fund'), Salomon Brothers New York Municipal Money Market Fund ('New York
Municipal Money Market Fund'), Salomon Brothers National Intermediate
Municipal Fund ('National Intermediate Municipal Fund'), Salomon
Brothers U.S. Government Income Fund ('U.S. Government Income Fund'),
Salomon Brothers High Yield Bond Fund ('High Yield Bond Fund'), Salomon
Brothers Strategic Bond Fund ('Strategic Bond Fund'), Salomon Brothers
Total Return Fund ('Total Return Fund'), Salomon Brothers Asia Growth
Fund ('Asia Growth Fund'), Salomon Brothers Investors Fund Inc
('Investors Fund') and Salomon Brothers Capital Fund Inc ('Capital
Fund'):
Financial Statements included in Part B:
(1) For Cash Management Fund, New York Municipal Money Market Fund,
New York Municipal Bond Fund, National Intermediate Municipal Fund, U.S.
Government Income Fund, High Yield Bond Fund, Strategic Bond Fund, Total
Return Fund, Capital Fund and Investors Fund:
<TABLE>
<C> <S>
(i) Portfolio of Investments at December 31, 1996
(ii) Statement of Assets and Liabilities at December 31. 1996
(iii) Statement of Operations for each Fund (except Asia Growth Fund) for the fiscal year ended
December 31, 1996
Statement of Operations for Asia Growth Fund for the period May 6, 1996 (commencement of
operations) to December 31, 1996
(iv) Statement of Changes in Net Assets for each Fund (except Asia Growth Fund) for the fiscal year
ended December 31, 1996.
Statement of Changes in Net Assets for Asia Growth Fund for the period May 6, 1996 (commencement
of operations) to December 31, 1996
Statement of Changes in Net Assets for New York Municipal Money Market Fund, Cash Management Fund
and New York Municipal Bond Fund for the fiscal year ended December 31, 1995
Statement of Changes in Net Assets for Total Return Fund for the period September 11, 1995
(commencement of operations) to December 31, 1995
Statement of Changes in Net Assets for National Intermediate Municipal Fund, U.S. Government
Income Fund, Strategic Bond Fund and High Yield Bond Fund for the period February 22, 1995
(commencement of operations) to December 31, 1995
(v) Notes to Financial Statements
(vi) Financial Highlights
(vii) Report of Independent Accountants
</TABLE>
(b) Exhibits:
<TABLE>
<C> <S>
Description
1(a) -- Registrant's Articles of Incorporation are incorporated by reference to Exhibit 1 of the
Registration Statement on Form S-5.
1(b) -- Registrant's Articles of Incorporation, as amended, are incorporated by reference to Exhibit 1(1) of
Amendment No. 1 to the Registration Statement on Form S-5.
</TABLE>
C-1
<PAGE>
<PAGE>
<TABLE>
<C> <S>
1(c) -- Registrant's Articles of Incorporation, as amended, are incorporated by reference to its
Registration Statement on Form N-1A, filed for the quarter ended September 30, 1978.
1(d) -- Registrant's Articles of Incorporation, as amended, are incorporated by reference to Exhibit 1(d) of
Post-Effective No. 7 to the Registration Statement on Form N-1.
1(e) -- Registrant's Articles of Incorporation, as amended on April 24, 1989, are incorporated by reference
to Exhibit 1(e) of Post-Effective Amendment No. 13 to the Registration Statement on Form N-1A.
1(f) -- Registrant's Articles of Incorporation, as amended on April 20, 1990, are incorporated by reference
to Exhibit 1(f) of Post-Effective Amendment No. 15 to the Registration Statement on Form N-1A.
1(g) -- Form of Articles of Amendment and Restatement is incorporated by reference to Exhibit 1(g) to
Post-Effective Amendment No. 23 to the Registration Statement on Form N-1A.
2 -- Registrant's By-Laws, as amended, are incorporated by reference to Exhibit 2 of Post-Effective
Amendment No. 8 to the Registration Statement on Form N-1A.
3 -- Not applicable.
4(a) -- Specimen Certificate of Capital Stock is incorporated by reference to Exhibit 1(4)(a) of Amendment
No. 1 to the Registration Statement on Form S-5.
4(b) -- Forms of Specimen Stock Certificates for Class A, Class B, Class C and Class O of Registrant is
filed herein.
5 -- Management Contract between Registrant and Salomon Brothers Asset Management Inc ('SBAM') is
incorporated by reference to Exhibit 5(b) to Amendment No. 14 to the Registration Statement on Form
N-1A.
6(a) -- Distribution Agreement between Registrant and Salomon Brothers Inc is incorporated by reference to
Exhibit 6(a) of Post-Effective Amendment No. 15 to the Registration Statement on Form N-1A.
6(b) -- Form of Distribution Agreement between Registrant and Salomon Brothers Inc ('Salomon Brothers') is
incorporated by reference to Exhibit 6(b) of Post-Effective Amendment No. 23 to the Registration
Statement on Form N-1A.
7 -- Not applicable.
8(a) -- Custodian Agreement between Registrant and Boston Safe Deposit and Trust Company is incorporated by
reference to Exhibit 8 of Post-Effective Amendment No. 17 to the Registration Statement on Form N-1A.
8(b) -- Custodian Agreement between Registrant and Investors Bank & Trust Company is incorporated by
reference to Exhibit 8(b) of Post-Effective Amendment No. 23 to the Registration Statement on Form
N-1A.
9(a) -- Transfer Agency Agreement between Registrant and Boston Safe Deposit and Trust Company dated May 3,
1985 is incorporated by reference to Exhibit 9 of Post-Effective Amendment No. 10 to the Registration
Statement on Form N-1A.
9(b) -- Subadministration Agreement between SBAM and Investors Bank & Trust Company is incorporated by
reference to Exhibit 9(b) to Post-Effective Amendment No. 23 to the Registration Statement on Form
N-1A.
10 -- Opinion of Counsel as to the Legality of Securities Being Registered is incorporated by reference to
Exhibit 10 to Post-Effective Amendment No. 23 to the Registration Statement on Form N-1A.
11 -- Consent of Price Waterhouse LLP, Independent Accountants is filed herewith.
12 -- Not applicable.
13(a) -- Share Purchase Agreement between Registrant and Lehman Brothers Kuhn Loeb Incorporated is
incorporated by reference to Exhibit 1(3) of Amendment No. 3 to the Registration Statement on Form
N-1.
13(b) -- Form of Share Purchase Agreement between Registrant and SBAM is incorporated by reference to Exhibit
13(b) of Post-Effective Amendment No. 23 to the Registration Statement on Form N-1A.
14(a) -- Prototype Profit Sharing and Money Purchase Pension Plan are incorporated by reference to Exhibit
14(a) of Amendment No. 5 to the Registration Statement on Form N-1.
14(b) -- Prototype Individual Retirement Account Plan is incorporated by reference to Exhibit 14(b) of
Amendment No. 5 to the Registration Statement on Form N-1.
15 -- Form of Services and Distribution Plan is incorporated by reference to Exhibit 15 of Post-Effective
Amendment No. 23 to the Registration Statement on Form N-1A.
16 -- Performance Calculations incorporated by reference to Exhibit 16 of Amendment No. 12 to the
Registration Statement on Form N-1A.
</TABLE>
C-2
<PAGE>
<PAGE>
<TABLE>
<C> <S>
17 -- Financial Data Schedule is filed herewith.
18(a) -- Form of Multiclass Plan pursuant to Rule 18f-3 under the Investment Company Act of 1940 is
incorporated by reference to Exhibit 18(a) to Post-Effective Amendment No. 23 to the Registration
Statement on Form N-1A.
18(b) -- Form of Application and Signature Card for Salomon Brothers Investment Series is incorporated by
reference to Exhibit 18(b) to Post-Effective Amendment No. 23 to the Registration Statement on Form
N-1A.
18(c) -- Powers of Attorney for Michael S. Hyland, Charles F. Barber, Andrew L. Breech, Thomas W. Brock,
Carol L. Colman, William R. Dill, Clifford M. Kirkland, Jr., Robert W. Lawless, Louis P. Mathis and
Thomas F. Schlafly are incorporated by reference to Exhibit 18(c) to Post-Effective Amendment No. 23
to the Registration Statement on Form N-1A.
</TABLE>
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Entities within the Salomon Brothers group own greater than 25% of the
outstanding shares of (i) Class O shares of the Registrant, (ii) the Asia Growth
Fund portfolio of Salomon Brothers Institutional Series Funds Inc and (iii) the
classes of Salomon Brothers Series Funds Inc set forth below, and therefore may
be deemed to be control persons of such funds and classes. As a result, such
funds and classes may be deemed to be under common control.
New York Municipal Money Market Fund -- Class B and C
National Intermediate Municipal Fund -- Class O, A, B and C
U.S. Government Income Fund -- Class O and C
Strategic Bond Fund -- Class O
Asia Growth Fund -- Class O, A and B
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
<TABLE>
<CAPTION>
NUMBER OF RECORD HOLDERS
AT APRIL 1, 1997
----------------------------
TITLE OF CLASS
- -----------------------------------------------------
<S> <C> <C>
Shares of Salomon Brothers Capital Fund Inc par value
$1.00 per share.................................... Class A 163
Class B 33
Class C 39
Class O 1,967
</TABLE>
ITEM 27. INDEMNIFICATION
Reference is made to Article Seventh of Registrant's Article of
Incorporation, Article IV of Registrant's By-Laws and Section 4 of the
Distribution Agreement.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the 'Securities Act') may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant understands that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjucation of such issue.
C-3
<PAGE>
<PAGE>
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
SBAM, an indirect wholly owned subsidiary of Salomon Inc, is an investment
adviser registered under the Investment Advisers Act of 1940 (the 'Advisers
Act') and renders investment advice to a wide variety of individual,
institutional and investment advisory clients.
The list required by this Item 28 of officers and directors of SBAM,
together with information as to any other business, profession, vocation or
employment of a substantial nature engaged in by such officers and directors
during the past two years, is incorporated by reference to Schedules A and D of
FORM ADV filed by SBAM pursuant to the Advisers Act (SEC File No. 801-32046).
ITEM 29. PRINCIPAL UNDERWRITER
(a) Salomon Brothers currently acts as distributor for, in addition to the
Registrant, Investors Fund, Salomon Brothers Opportunity Fund Inc, Salomon
Brothers Series Funds Inc and Salomon Brothers Institutional Series Funds Inc.
(b) The information required by this Item 29 with respect to each director,
officer or partner of Salomon Brothers is incorporated by reference to Schedule
A of FORM BD filed by Salomon Brothers pursuant to the Securities Exchange Act
of 1934 (SEC File No. 8-26920).
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
(1) SBAM
7 World Trade Center
New York, New York 10048
(2) Investors Bank and Trust Company
89 South Street
Boston, Massachusetts 02111
(3) First Data Investor Services Group, Inc.
P.O. Box 5127
Westborough, Massachusetts 01581-5127
ITEM 31. MANAGEMENT SERVICES
Not applicable.
ITEM 32. UNDERTAKINGS
(a) Not applicable
(b) Not applicable
(c) The Registrant hereby undertakes to furnish each person to whom a
Prospectus is delivered with a copy of the Registrant's latest Annual Report to
shareholders upon request and without charge.
C-4
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, and
the Investment Company Act of 1940, as amended, the Registrant hereby certifies
that it meets all of the requirements for effectiveness of this Post-Effective
Amendment to the Registration Statement pursuant to Rule 485(b) under the
Securities Act of 1933, as amended, and has duly caused this Post-Effective
Amendment to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, and State of
New York, on the 29th day of April, 1997.
SALOMON BROTHERS CAPITAL FUND INC
(Registrant)
By /S/ MICHAEL S. HYLAND
..................................
MICHAEL S. HYLAND
CHAIRMAN OF THE BOARD AND PRESIDENT
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Post-Effective Amendment to this Registration Statement has been signed
below by the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ -------------------------------------------- -------------------
<C> <S> <C>
/s/ MICHAEL S. HYLAND Chairman of the Board, President and April 29, 1997
......................................... Director (principal executive officer)
MICHAEL S. HYLAND
/s/ ALAN M. MANDEL Treasurer April 29, 1997
.........................................
ALAN M. MANDEL
/s/ * Director April 29, 1997
.........................................
CHARLES F. BARBER
/s/ * Director April 29, 1997
.........................................
ANDREW L. BREECH
/s/ * Director April 29, 1997
.........................................
THOMAS W. BROCK
/s/ * Director April 29, 1997
.........................................
CAROL L. COLMAN
/s/ * Director April 29, 1997
.........................................
WILLIAM R. DILL
/s/ * Director April 29, 1997
.........................................
CLIFFORD M. KIRTLAND, JR.
/s/ * Director April 29, 1997
.........................................
ROBERT W. LAWLESS
/s/ * Director April 29, 1997
.........................................
LOUIS P. MATTIS
</TABLE>
C-5
<PAGE>
<PAGE>
<TABLE>
<C> <S> <C>
/s/ * Director April 29, 1997
.........................................
THOMAS F. SCHLAFLY
*By: /S/ ALAN M. MANDEL April 29, 1997
.........................................
ALAN M. MANDEL
AS ATTORNEY-IN-FACT
</TABLE>
C-6
STATEMENT OF DIFFERENCES
------------------------
The dagger symbol shall be expressed as.............................. `D'
The section symbol shall be expressed as............................. 'SS'
The paragraph symbol shall be expressed as........................... 'P'
The double dagger symbol shall be expressed as....................... `DD'
Characters normally expressed as superscript shall be preceded by.... 'pp'
The bullet symbol shall be expressed as.............................. 'b'
<PAGE>
<PAGE>
EXHIBIT 11
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 26 to the Registration
Statement on Form N-1A (the 'Registration Statement') of our report dated
February 18, 1997, relating to the financial statements and financial highlights
of Salomon Brothers Cash Management Fund, Salomon Brothers New York Municipal
Money Market Fund, Salomon Brothers New York Municipal Bond Fund, Salomon
Brothers National Intermediate Municipal Fund, Salomon Brothers U.S. Government
Income Fund, Salomon Brothers High Yield Bond Fund, Salomon Brothers Strategic
Bond Fund, Salomon Brothers Total Return Fund, Salomon Brothers Asia Growth Fund
(nine of the portfolios constituting Salomon Brothers Series Funds Inc), Salomon
Brothers Investors Fund Inc and Salomon Brothers Capital Fund Inc, which appears
in such Statement of Additional Information, and to the incorporation by
reference of our report into the Prospectus which constitutes part of this
Registration Statement. We also consent to the reference to us under the heading
'Independent Accountants' in such Statement of Additional Information and to the
reference to us under the heading 'Financial Highlights' in such Prospectus.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
April 28, 1997
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information
extracted from The Salomon Brothers Capital Fund Inc.
form N-SAR for the period ended December 31, 1996
and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<SERIES>
<NUMBER> 01
<NAME> Salomon Brothers Capital Fund Inc Class A
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 115,019,396
<INVESTMENTS-AT-VALUE> 136,761,625
<RECEIVABLES> 1,490,704
<ASSETS-OTHER> 969
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 138,253,298
<PAYABLE-FOR-SECURITIES> 1,382,706
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 235,222
<TOTAL-LIABILITIES> 1,617,928
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 112,317,524
<SHARES-COMMON-STOCK> 17,288
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> (333)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 2,575,978
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 21,742,201
<NET-ASSETS> 343,683
<DIVIDEND-INCOME> 292
<INTEREST-INCOME> 79
<OTHER-INCOME> 0
<EXPENSES-NET> 338
<NET-INVESTMENT-INCOME> 33
<REALIZED-GAINS-CURRENT> 3,871
<APPREC-INCREASE-CURRENT> 3,809
<NET-CHANGE-FROM-OPS> 7,713
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (233)
<DISTRIBUTIONS-OF-GAINS> (6,217)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 17,551
<NUMBER-OF-SHARES-REDEEMED> 384
<SHARES-REINVESTED> 121
<NET-CHANGE-IN-ASSETS> 343,683
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,143,084
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,634,833
<AVERAGE-NET-ASSETS> 107,939
<PER-SHARE-NAV-BEGIN> 21.98
<PER-SHARE-NII> 0.01
<PER-SHARE-GAIN-APPREC> 1.54
<PER-SHARE-DIVIDEND> (0.15)
<PER-SHARE-DISTRIBUTIONS> (3.50)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 19.88
<EXPENSE-RATIO> 1.88
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information
extracted from The Salomon Brothers Capital Fund Inc.
form N-SAR for the period ended December 31, 1996
and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<SERIES>
<NUMBER> 02
<NAME> Salomon Brothers Capital Fund Inc Class B
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 115,019,396
<INVESTMENTS-AT-VALUE> 136,761,625
<RECEIVABLES> 1,490,704
<ASSETS-OTHER> 969
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 138,253,298
<PAYABLE-FOR-SECURITIES> 1,382,706
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 235,222
<TOTAL-LIABILITIES> 1,617,928
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 112,317,524
<SHARES-COMMON-STOCK> 11,001
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> (333)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 2,575,978
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 21,742,201
<NET-ASSETS> 218,901
<DIVIDEND-INCOME> 171
<INTEREST-INCOME> 46
<OTHER-INCOME> 0
<EXPENSES-NET> 286
<NET-INVESTMENT-INCOME> (69)
<REALIZED-GAINS-CURRENT> 1,976
<APPREC-INCREASE-CURRENT> 1,977
<NET-CHANGE-FROM-OPS> 3,884
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (120)
<DISTRIBUTIONS-OF-GAINS> (3,992)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 11,001
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 218,901
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,143,084
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,634,833
<AVERAGE-NET-ASSETS> 63,038
<PER-SHARE-NAV-BEGIN> 21.98
<PER-SHARE-NII> (0.02)
<PER-SHARE-GAIN-APPREC> 1.56
<PER-SHARE-DIVIDEND> (0.12)
<PER-SHARE-DISTRIBUTIONS> (3.50)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 19.90
<EXPENSE-RATIO> 2.73
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information
extracted from The Salomon Brothers Capital Fund Inc.
form N-SAR for the period ended December 31, 1996
and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<SERIES>
<NUMBER> 03
<NAME> Salomon Brothers Capital Fund Inc Class C
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 115,019,396
<INVESTMENTS-AT-VALUE> 136,761,625
<RECEIVABLES> 1,490,704
<ASSETS-OTHER> 969
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 138,253,298
<PAYABLE-FOR-SECURITIES> 1,382,706
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 235,222
<TOTAL-LIABILITIES> 1,617,928
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 112,317,524
<SHARES-COMMON-STOCK> 6,531
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> (333)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 2,575,978
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 21,742,201
<NET-ASSETS> 130,007
<DIVIDEND-INCOME> 165
<INTEREST-INCOME> 44
<OTHER-INCOME> 0
<EXPENSES-NET> 264
<NET-INVESTMENT-INCOME> (55)
<REALIZED-GAINS-CURRENT> 1,898
<APPREC-INCREASE-CURRENT> 1,898
<NET-CHANGE-FROM-OPS> 3,741
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (120)
<DISTRIBUTIONS-OF-GAINS> (3,992)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 6,531
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 130,007
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,143,084
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,634,833
<AVERAGE-NET-ASSETS> 64,631
<PER-SHARE-NAV-BEGIN> 21.98
<PER-SHARE-NII> (0.02)
<PER-SHARE-GAIN-APPREC> 1.57
<PER-SHARE-DIVIDEND> (0.12)
<PER-SHARE-DISTRIBUTIONS> (3.50)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 19.91
<EXPENSE-RATIO> 2.45
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information
extracted from The Salomon Brothers Capital Fund Inc.
form N-SAR for the period ended December 31, 1996
and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<SERIES>
<NUMBER> 04
<NAME> Salomon Brothers Capital Fund Inc Class O
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 115,019,396
<INVESTMENTS-AT-VALUE> 136,761,625
<RECEIVABLES> 1,490,704
<ASSETS-OTHER> 969
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 138,253,298
<PAYABLE-FOR-SECURITIES> 1,382,706
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 235,222
<TOTAL-LIABILITIES> 1,617,928
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 112,317,524
<SHARES-COMMON-STOCK> 6,839,481
<SHARES-COMMON-PRIOR> 5,484,823
<ACCUMULATED-NII-CURRENT> (333)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 2,575,978
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 21,742,201
<NET-ASSETS> 135,942,779
<DIVIDEND-INCOME> 1,913,271
<INTEREST-INCOME> 513,858
<OTHER-INCOME> 0
<EXPENSES-NET> 1,634,134
<NET-INVESTMENT-INCOME> 792,995
<REALIZED-GAINS-CURRENT> 22,855,007
<APPREC-INCREASE-CURRENT> 10,593,926
<NET-CHANGE-FROM-OPS> 34,241,928
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (797,069)
<DISTRIBUTIONS-OF-GAINS> (25,587,085)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,669,366
<NUMBER-OF-SHARES-REDEEMED> 1,619,111
<SHARES-REINVESTED> 1,304,403
<NET-CHANGE-IN-ASSETS> 33,514,152
<ACCUMULATED-NII-PRIOR> 4,470
<ACCUMULATED-GAINS-PRIOR> 5,314,347
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,143,084
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,634,833
<AVERAGE-NET-ASSETS> 118,634,511
<PER-SHARE-NAV-BEGIN> 18.67
<PER-SHARE-NII> 0.13
<PER-SHARE-GAIN-APPREC> 5.70
<PER-SHARE-DIVIDEND> (0.16)
<PER-SHARE-DISTRIBUTIONS> (4.46)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 19.88
<EXPENSE-RATIO> 1.38
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
<PAGE>
