<PAGE>
<PAGE>
SALOMON BROTHERS
INVESTMENT SERIES
[COVER GRAPHIC]
PROSPECTUS & APPLICATION
MAY 1, 1998 ASIA GROWTH FUND
SMALL CAP GROWTH FUND
CAPITAL FUND
INVESTORS FUND
TOTAL RETURN FUND
HIGH YIELD BOND FUND
STRATEGIC BOND FUND
NATIONAL INTERMEDIATE
MUNICIPAL FUND
U.S. GOVERNMENT INCOME FUND
NEW YORK MUNICIPAL
MONEY MARKET FUND
CASH MANAGEMENT FUND
<PAGE>
<PAGE>
- ------------------------------------------------------
Salomon Brothers
Investment Series
7 WORLD TRADE CENTER NEW YORK, NEW YORK 10048 (800) 446-1013
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
SMALL CAP GROWTH FUND (THE 'SMALL CAP GROWTH FUND'), SALOMON BROTHERS ASIA
GROWTH FUND (THE 'ASIA GROWTH FUND'),
continued on next page
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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 MAY INVEST UP TO 100% OF THEIR ASSETS 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 May 1, 1998,
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. THE SEC MAINTAINS A WEB SITE AT
HTTP:/WWW.SEC.GOV THAT CONTAINS THE STATEMENT OF ADDITIONAL INFORMATION,
MATERIAL INCORPORATED BY REFERENCE AND OTHER INFORMATION REGARDING SALOMON
BROTHERS INVESTMENT SERIES.
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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
MAY 1, 1998
PAGE 1
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continued from previous page
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 15
Investment Objectives and Policies 30
Additional Investment Activities and Risk
Factors 61
Multiple Pricing System 80
Investment Limitations 84
Management 89
Determination of Net Asset Value 95
Purchase of Shares 96
Redemption of Shares 102
Performance Information 107
Dividends and Distributions 109
Taxation 111
Shareholder Services 115
Account Services 118
Capital Stock 119
Appendix A A-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 397 days 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
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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.
SMALL CAP GROWTH FUND. The Small Cap Growth Fund seeks to obtain long-term
growth of capital. The Fund seeks to achieve its objective by investing
primarily in securities of U.S. issuers with market capitalizations of less
than $1 billion at the time of initial purchase.
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') is the Funds' investment
manager. SBAM also serves as investment manager to other investment companies
and numerous individuals and institutions. See 'Management.'
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SALOMON BROTHERS INVESTMENT SERIES
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
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, smaller capitalized companies, 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, engaging in short sales,
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
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SALOMON BROTHERS INVESTMENT SERIES
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 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
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SALOMON BROTHERS INVESTMENT SERIES
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.'
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 and the
Small Cap 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.'
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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.'
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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, and, unless otherwise indicated is based on each Fund's operating
expenses for the fiscal year ended December 31, 1997.
<TABLE>
<CAPTION>
FUND CLASS A CLASS B CLASS C CLASS O
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CASH MANAGEMENT
Management fees (after waiver)'D' .05% .05% .05% .05%
Rule 12b-1 fees -- -- -- --
Other expenses* .50% .50% .50% .50%
---- ---- ---- ----
Total fund operating expenses (after waiver)'D' .55% .55% .55% .55%
NEW YORK MUNICIPAL MONEY MARKET
Management fees .20% .20% .20% .20%
Rule 12b-1 fees -- -- -- --
Other expenses* .30% .23% .27% .27%
---- ---- ---- ----
Total fund operating expenses .50% .43% .47% .47%
NATIONAL INTERMEDIATE MUNICIPAL
Management fees (after waiver)'D' -- -- -- --
Rule 12b-1 fees** .25% 1.00% 1.00% --
Other expenses (after reimbursement)*'D' .50% .50% .50% .50%
---- ---- ---- ----
Total fund operating expenses (after waiver and
reimbursement)'D' 0.75% 1.50% 1.50% 0.50%
U.S. GOVERNMENT INCOME
Management fees (after waiver)'D' -- -- -- --
Rule 12b-1 fees** .25% 1.00% 1.05% --
Other expenses (after reimbursement)*'D' .60% .60% .59% .60%
---- ---- ---- ----
Total fund operating expenses (after waiver and
reimbursement)'D' 0.85% 1.60% 1.59% 0.60%
HIGH YIELD BOND
Management fees (after waiver)'D' .65% .65% .65% .65%
Rule 12b-1 fees** .25% 1.00% 1.00% --
Other expenses* .34% .34% .34% .34%
---- ---- ---- ----
Total fund operating expenses (after waiver)'D' 1.24% 1.99% 1.99% 0.99%
STRATEGIC BOND
Management fees (after waiver)'D' .46% .46% .46% .46%
Rule 12b-1 fees** .25% 1.00% 1.00% --
Other expenses* .53% .53% .53% .50%
---- ---- ---- ----
Total fund operating expenses (after waiver)'D' 1.24% 1.99% 1.99% .96%
TOTAL RETURN
Management fees (after waiver)'D' .16% .16% .16% .16%
Rule 12b-1 fees** .25% 1.00% 1.00% --
Other expenses* .44% .44% .44% .44%
---- ---- ---- ----
Total fund operating expenses (after waiver)'D' .85% 1.60% 1.60% .60%
SMALL CAP GROWTH
Management fees*** .80% .80% .80% .80%
Rule 12b-1 fees** .25% 1.00% 1.00% --
Other expenses (after reimbursement)*, *** .45% .45% .45% .45%
---- ---- ---- ----
Total fund operating expenses (after reimbursement)*** 1.50% 2.25% 2.25% 1.25%
ASIA GROWTH
Management fees (after waiver)'D' -- -- -- --
Rule 12b-1 fees** .25% 1.00% 1.00% --
Other expenses (after reimbursement)*'D' .99% .99% .99% .99%
---- ---- ---- ----
Total fund operating expenses (after waiver and
reimbursement)'D' 1.24% 1.99% 1.99% .99%
INVESTORS
Management fees .52% .52% .52% .52%
Rule 12b-1 fees** .25% 1.00% 1.00% --
Other expenses* .18% .18% .18% .17%
---- ---- ---- ----
Total fund operating expenses .95% 1.70% 1.70% .69%
CAPITAL
Management fees .90% .90% .90% .90%
Rule 12b-1 fees** .25% 1.00% 1.00% --
Other expenses* .31% .30% .31% .32%
---- ---- ---- ----
Total fund operating expenses 1.46% 2.20% 2.21% 1.22%
</TABLE>
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SALOMON BROTHERS INVESTMENT SERIES
<TABLE>
<S> <C>
'D' Reflects the voluntary waiver of management fees and, with respect to certain Funds, reimbursement
of certain expenses by SBAM. With respect to the Total Return Fund, management fees and total fund
operating expenses are based on estimated amounts for the fiscal year ending December 31, 1998.
The chart below shows what the ratio of management fees, other expenses and total fund operating
expenses to average daily net assets would have been for each class absent such waiver and
reimbursement.
</TABLE>
<TABLE>
<CAPTION>
FUND CLASS A CLASS B CLASS C CLASS O
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CASH MANAGEMENT
Management fees 0.20% 0.20% 0.20% 0.20%
12b-1 fees -- -- -- --
Other expenses 0.50% 0.50% 0.50% 0.50%
----- ----- ----- -----
Total fund operating expenses 0.70% 0.70% 0.70% 0.70%
NATIONAL INTERMEDIATE MUNICIPAL
Management fees 0.50% 0.50% 0.50% 0.50%
12b-1 fees 0.25% 1.00% 1.00% --
Other expenses 1.07% 1.07% 1.07% 1.07%
----- ----- ----- -----
Total fund operating expenses 1.82% 2.57% 2.57% 1.57%
U.S. GOVERNMENT INCOME
Management fees 0.60% 0.60% 0.60% 0.60%
12b-1 fees 0.25% 1.00% 1.00% --
Other expenses 1.17% 1.17% 1.16% 1.17%
----- ----- ----- -----
Total fund operating expenses 2.02% 2.77% 2.76% 1.77%
HIGH YIELD BOND
Management fees 0.75% 0.75% 0.75% 0.75%
12b-1 fees 0.25% 1.00% 1.00% --
Other expenses 0.34% 0.34% 0.33% 0.34%
----- ----- ----- -----
Total fund operating expenses 1.34% 2.09% 2.08% 1.09%
STRATEGIC BOND
Management fees 0.75% 0.75% 0.75% 0.75%
12b-1 fees 0.25% 1.00% 1.00% --
Other expenses 0.53% 0.53% 0.53% 0.50%
----- ----- ----- -----
Total fund operating expenses 1.53% 2.28% 2.28% 1.25%
TOTAL RETURN
Management fees 0.55% 0.55% 0.55% 0.55%
12b-1 fees 0.25% 1.00% 1.00% --
Other expenses 0.44% 0.44% 0.44% 0.45%
----- ----- ----- -----
Total fund operating expenses 1.24% 1.99% 1.99% 1.00%
ASIA GROWTH
Management fees 0.80% 0.80% 0.80% 0.80%
12b-1 fees 0.25% 1.00% 1.00% --
Other expenses 2.76% 2.76% 2.76% 2.76%
----- ----- ----- -----
Total fund operating expenses 3.81% 4.56% 4.56% 3.56%
</TABLE>
<TABLE>
<S> <C>
* 'Other expenses' include fees for shareholder services, administrative fees, custodial fees, legal
and accounting fees, printing costs and registration fees and except as indicated elsewhere, are
based on the Fund's operating expenses for the fiscal year ended December 31, 1997.
** 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.'
*** Reflects the voluntary agreement by SBAM to impose an expense cap for the fiscal year ending
December 31, 1998 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 through the reimbursement of expenses. Absent such reimbursements, the ratio of other
expenses to average daily net assets would be 1.77% for each Class and the ratio of total fund
operating expenses to average daily net assets would be 2.82%, 3.57%, 3.57% and 2.57% for Class A,
Class B, Class C and Class O shares, respectively.
</TABLE>
PAGE 11
<PAGE>
<PAGE>
SALOMON BROTHERS INVESTMENT SERIES
Class A shares of a Fund purchased through a commission replacement program
sponsored by certain selected dealers will be subject to an annual asset-based
fee, payable quarterly, in lieu of the initial sales charge. The fee will vary
to a maximum of 1.50%, depending on the amount of assets held through the
program.
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 $ 5 $ 15 $ 26 $ 59
Class B Shares $ 5 $ 15 $ 26 $ 59
Class C Shares $ 5 $ 15 $ 26 $ 59
Class O Shares $ 5 $ 15 $ 26 $ 59
NATIONAL INTERMEDIATE MUNICIPAL
Class A Shares* $60 $ 85 $113 $192
Class B Shares** $70 $103 $128 $196***
Class B No redemption $20 $ 63 $108 $196***
Class C Shares** $30 $ 63 $108 $233
Class O Shares $10 $ 32 $ 55 $122
U.S. GOVERNMENT INCOME
Class A Shares* $60 $ 85 $113 $192
Class B Shares** $70 $103 $128 $196***
Class B No redemption $20 $ 63 $108 $196***
Class C Shares** $30 $ 63 $108 $233
Class O Shares $10 $ 32 $ 55 $122
HIGH YIELD BOND
Class A Shares* $60 $ 85 $113 $192
Class B Shares** $70 $103 $128 $196***
Class B No redemption $20 $ 63 $108 $196***
Class C Shares** $30 $ 63 $108 $233
Class O Shares $10 $ 32 $ 55 $122
</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* $60 $ 85 $113 $192
Class B Shares** $70 $103 $128 $196***
Class B No redemption $20 $ 63 $108 $196***
Class C Shares** $30 $ 63 $108 $233
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
SMALL CAP GROWTH
Class A Shares* $62 $ 93 $126 $218
Class B Shares** $73 $110 $140 $222***
Class B No redemption $23 $ 70 $120 $222***
Class C Shares** $33 $ 70 $120 $258
Class O Shares $13 $ 40 $ 69 $151
ASIA GROWTH
Class A Shares* $62 $ 93 $126 $218
Class B Shares** $73 $110 $140 $222***
Class B No redemption $23 $ 70 $120 $222***
Class C Shares** $33 $ 70 $120 $258
Class O Shares $13 $ 40 $ 69 $151
INVESTORS
Class A Shares* $57 $ 76 $ 98 $159
Class B Shares** $67 $ 94 $112 $163***
Class B No redemption $17 $ 54 $ 92 $163***
Class C Shares** $27 $ 54 $ 92 $201
Class O Shares $ 7 $ 22 $ 38 $ 86
CAPITAL FUND
Class A Shares* $62 $ 92 $124 $214
Class B Shares** $72 $109 $138 $218***
Class B No redemption $22 $ 69 $118 $218***
Class C Shares** $32 $ 69 $118 $254
Class O Shares $12 $ 39 $ 67 $148
</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>
(THIS PAGE INTENTIONALLY LEFT BLANK)
PAGE 14
<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 Annual Report to Shareholders. 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, 1997, have been audited by Price Waterhouse LLP, whose unqualified report
thereon appears in the 1997 Annual Report of Salomon Brothers Investment Series,
which is incorporated by reference 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 15
<PAGE>
<PAGE>
SALOMON BROTHERS INVESTMENT SERIES
CASH MANAGEMENT FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
-------------------------------- --------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1997 1996 1995 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
-------- ------- ------- ------- ------- -------
Net investment income 0.051 0.050 0.044 0.051 0.050 0.043
Dividends from net investment income (0.051) (0.050) (0.044) (0.051) (0.050) (0.043)
-------- ------- ------- ------- ------- -------
Net asset value, end of period $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
-------- ------- ------- ------- ------- -------
-------- ------- ------- ------- ------- -------
Net assets, end of period (thousands) $ 18,246 $ 8,175 $ 1,756 $ 4,151 $ 3,920 $ 2,238
Total return* +5.2% +5.1% +4.5% +5.2% +5.1% +4.4%
Ratios to average net assets:
Expenses 0.55% 0.55% 0.55% 0.55% 0.55% 0.55%
Net investment income 5.11% 4.95% 5.42% 5.10% 4.95% 5.38%
Before applicable waiver of management
fee, expenses absorbed by SBAM and
credits earned on custodian cash
balances, net investment income per
share and expense ratios would have
been:
Net investment income per share $ 0.049 $ 0.047 $ 0.037 $ 0.049 $ 0.047 $ 0.037
Expense ratio 0.70% 0.82% 1.35% 0.70% 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. 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
---------------------------------- -------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------------------------------
1997 1996 1995 1997 1996 1995 1994 1993 1992
----------------------------------------------------------------------------------------------------------------
<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
-------- -------- -------- -------- -------- -------- -------- -------- --------
0.051 0.050 0.043 0.051 0.050 0.055 0.038 0.027 0.033
(0.051) (0.050) (0.043) (0.051) (0.050) (0.055) (0.038) (0.027) (0.033)
-------- -------- -------- -------- -------- -------- -------- -------- --------
$ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
-------- -------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- -------- --------
$ 1,806 $ 435 $ 183 $ 19,872 $ 14,225 $6,684 $19,127 $ 15,049 $ 11,613
+5.2% +5.1% +4.4% +5.2% +5.1% +5.6% +3.9% +2.7% +3.4%
0.55% 0.55% 0.55% 0.55% 0.55% 0.55% 0.61% 0.65% 0.65%
5.16% 4.95% 5.40% 5.10% 4.95% 5.46% 3.79% 2.68% 3.41%
$ 0.049 $ 0.047 $ 0.036 $ 0.049 $ 0.047 $ 0.047 $ 0.036 $ 0.025 $ 0.030
0.70% 0.82% 1.34% 0.70% 0.82% 1.34% 0.81% 0.85% 0.85%
<CAPTION>
CLASS O
-------------------------
YEAR PERIOD
ENDED ENDED
DECEMBER 31, DECEMBER 31,
1991 1990(a)
-------------------------
<S> <C>
$ 1.000 $ 1.000
-------- ------------
0.055 0.019
(0.055) (0.019)
-------- ------------
$ 1.000 $ 1.000
-------- ------------
-------- ------------
$ 22,982 $ 10,293
+5.7% +1.9%
0.65% 0.65%**
5.43% 7.46%**
$ 0.053 $ 0.018
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
------------------------- -------------------------- --------------------------
YEAR ENDED PERIOD ENDED YEAR ENDED PERIOD ENDED YEAR ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996(a) 1997 1996(a) 1997 1996(a)
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
------ ------ ------ ------ ------ ------
Net investment income 0.034 0.006 0.034 0.006 0.034 0.006
Dividends from net investment income (0.034) (0.006) (0.034) (0.006) (0.034) (0.006)
------ ------ ------ ------ ------ ------
Net asset value, end of period $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
Net assets, end of period (thousands) $3,808 $ 360 $ 25 $ 25 $ 25 $ 25
Total return* +3.5% +0.6% +3.5% +0.6% +3.5% +0.6%
Ratios to average net assets:
Expenses 0.50% 0.38%** 0.43% 0.40%** 0.47% 0.40%**
Net investment income 3.39% 3.56%** 3.32% 3.40%** 3.40% 3.40%**
Before applicable waiver of management
fee, expenses absorbed by SBAM and
credits earned on custodian cash
balances, net investment income per
share and expense ratios would have
been:
Net investment income per share -- $0.006 -- $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 payable date, and a sale at net asset
value on the last day of each period reported. 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
--------------------------------------------------------------------------------------- DECEMBER 31,
1997 1996 1995 1994 1993 1992 1991 1990(b)
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
-------- -------- -------- -------- -------- --------- -------- -------
0.034 0.032 0.037 0.027 0.023 0.031 0.047 0.014
(0.034) (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 $ 1.000
-------- -------- -------- -------- -------- --------- -------- -------
-------- -------- -------- -------- -------- --------- -------- -------
$305,419 $273,734 $226,549 $269,788 $262,413 $ 263,685 $154,782 $34,529
+3.5% +3.3% +3.7% +2.7% +2.3% +3.1% +4.8% +1.4%
0.47% 0.53% 0.43% 0.41% 0.41% 0.42% 0.60% 0.64%**
3.39% 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 YEAR ENDED ENDED YEAR ENDED YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995(a) 1997 1996 1995(a)
----------------------------------------- ------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period $10.35 $10.43 $10.00 $10.33 $10.42 $10.00
------ ------ ------ ----- ------ ------
Net investment income 0.48 0.48 0.40 0.40 0.40 0.34
Net gain (loss) on investments
(both realized and unrealized) 0.28 (0.06) 0.46 0.28 (0.06) 0.45
------ ------ ------ ----- ------ ------
Total from investment operations 0.76 0.42 0.86 0.68 0.34 0.79
------ ------ ------ ----- ------ ------
Dividends from net investment
income (0.48) (0.48) (0.40) (0.40) (0.41) (0.34)
Distributions in excess of net
investment income -- -- -- (0.01) -- --
Distributions from net realized
gain on investments (0.01) (0.02) (0.03) (0.01) (0.02) (0.03)
------ ----- ------ ----- ------ ------
Total dividends and distributions (0.49) (0.50) (0.43) (0.42) (0.43) (0.37)
------ ------ ------ ----- ------ ------
Net asset value, end of period $10.62 $10.35 $10.43 $10.59 $10.33 $10.42
------ ------ ------ ----- ------ ------
------ ------ ------ ----- ------ ------
Net assets, end of period
(thousands) $1,063 $ 696 $ 569 1,$295 $ 702 $ 432
Total return* +7.5% +4.2% +8.7% +6.7 % +3.4% +8.0%
Ratios to average net assets:
Expenses 0.75% 0.75% 0.75%** 1.50% 1.50% 1.50%**
Net investment income 4.53% 4.62% 4.63%** 3.75% 3.88% 3.85%**
Portfolio turnover rate 1% 19% 29% 1% 19% 29%
Before applicable waiver of
management fee, expenses absorbed
by SBAM and credits earned on
custodian cash balances, net
investment income per share and
expense ratios would have been:
Net investment income per share $0.36 $0.35 $0.32 $0.28 $0.27 $0.25
Expense ratio 1.82% 2.02% 1.71%** 2.57% 2.77% 2.45%**
U.S. GOVERNMENT INCOME FUND
<CAPTION>
CLASS A CLASS B
----------------------------------------- ------------------------------------------
PERIOD PERIOD
YEAR ENDED YEAR ENDED ENDED YEAR ENDED YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995(a) 1997 1996 1995(a)
----------------------------------------- ------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period $10.07 $10.32 $10.00 $10.06 $10.32 $10.00
------ ------ ------ ------ ------ ------
Net investment income 0.58 0.54 0.49 0.51 0.46 0.43
Net gain (loss) on investments
(both realized and unrealized) 0.19 (0.19) 0.43 0.19 (0.20) 0.43
------ ------ ------ ------ ------ ------
Total from investment operations 0.77 0.35 0.92 0.70 0.26 0.86
------ ------ ------ ------ ------ ------
Dividends from net investment
income (0.54) (0.54) (0.49) (0.46) (0.46) (0.43)
Distributions from net realized
gain on investments (0.10) (0.06) (0.10) (0.10) (0.06) (0.10)
Distributions in excess of net
realized gain on investments -- -- (0.01) -- -- (0.01)
------ ------ ------ ------ ------ ------
Total dividends and distributions (0.64) (0.60) (0.60) (0.56) (0.52) (0.54)
------ ------ ------ ------ ------ ------
Net asset value, end of period $10.20 $10.07 $10.32 $10.20 $10.06 $10.32
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
Net assets, end of period
(thousands) $1,320 $1,188 $ 278 $2,531 $1,266 $ 572
Total return* +7.9% +3.6% +9.5% +7.2% +2.7% +8.8%
Ratios to average net assets:
Expenses 0.85% 0.84% 0.85%** 1.60% 1.59% 1.60%**
Net investment income 5.77% 5.22% 5.67%** 4.96% 4.51% 4.85%**
Portfolio turnover rate 261% 365% 230% 261% 365% 230%
Before applicable waiver of
management fee, expenses absorbed
by SBAM and credits earned on
custodian cash balances, net
investment income per share and
expense ratios would have been:
Net investment income per share $0.47 $0.38 $0.40 $0.39 $0.30 $0.34
Expense ratio 2.02% 2.21% 1.90%** 2.77% 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 YEAR ENDED ENDED YEAR ENDED YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995(a) 1997 1996 1995(a)
---------------------------------------------- ----------------------------------------------
<S> <C> <C> <C> <C> <C>
$10.33 $10.42 $10.00 $ 10.34 $10.43 $10.00
------ ------ ------ ------- ------ ------
0.40 0.40 0.34 0.50 0.50 0.42
0.28 (0.06) 0.45 0.28 (0.07) 0.46
------ ------ ------ ------- ------ ------
0.68 0.34 0.79 0.78 0.43 0.88
------ ------ ------ ------- ------ ------
(0.40) (0.41) (0.34) (0.50) (0.50) (0.42)
(0.01) -- -- -- -- --
(0.01) (0.02) (0.03) (0.01) (0.02) (0.03)
------ ------ ------ ------- ------ ------
(0.42) (0.43) (0.37) (0.51) (0.52) (0.45)
------ ------ ------ ------- ------ ------
$10.59 $10.33 $10.42 $ 10.61 $10.34 $10.43
------ ------ ------ ------- ------ ------
------ ------ ------ ------- ------ ------
$ 514 $ 468 $ 271 $11,286 $9,786 $9,675
+6.7% +3.4% +8.0% +7.8% +4.3% +9.0%
1.50% 1.50% 1.50%** 0.50% 0.50% 0.50%**
3.81% 3.88% 3.85%** 4.79% 4.88% 4.86%**
1% 19% 29% 1% 19% 29%
$ 0.28 $ 0.27 $ 0.25 $ 0.39 $ 0.37 $ 0.34
2.57% 2.77% 2.46%** 1.57% 1.77% 1.46%**
<CAPTION>
CLASS C CLASS O
---------------------------------------------- ----------------------------------------------
PERIOD PERIOD
YEAR ENDED YEAR ENDED ENDED YEAR ENDED YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995(a) 1997 1996 1995(a)
---------------------------------------------- ----------------------------------------------
<S> <C> <C> <C> <C> <C>
$10.05 $10.32 $10.00 $10.06 $10.32 $10.00
------ ------ ------ ------ ------ ------
0.51 0.46 0.43 0.61 0.56 0.52
0.19 (0.21) 0.43 0.18 (0.20) 0.42
------ ------ ------ ------ ------ ------
0.70 0.25 0.86 0.79 0.36 0.94
------ ------ ------ ------ ------ ------
(0.46) (0.46) (0.43) (0.56) (0.56) (0.52)
(0.10) (0.06) (0.10) (0.10) (0.06) (0.10)
-- -- (0.01) -- -- --
------ ------ ------ ------ ------ ------
(0.56) (0.52) (0.54) (0.66) (0.62) (0.62)
------ ------ ------ ------ ------ ------
$10.19 $10.05 $10.32 $10.19 $10.06 $10.32
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
$ 751 $ 422 $ 273 $9,553 $9,375 $9,552
+7.0% +2.7% +8.8% +8.1% +3.7% +9.7%
1.59% 1.60% 1.60%** 0.60% 0.60% 0.60%**
4.94% 4.51% 4.92%** 6.01% 5.53% 5.92%**
261% 365% 230% 261% 365% 230%
$ 0.39 $ 0.31 $ 0.34 $ 0.49 $ 0.41 $ 0.42
2.76% 2.97% 2.64%** 1.77% 1.97% 1.64%**
</TABLE>
PAGE 21
<PAGE>
<PAGE>
SALOMON BROTHERS INVESTMENT SERIES
HIGH YIELD BOND FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
----------------------------------------- ------------------------------------------
YEAR YEAR PERIOD YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995(a) 1997 1996 1995(a)
----------------------------------------- ------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period $ 11.54 $ 10.53 $ 10.00 $ 11.53 $ 10.53 $ 10.00
-------- -------- ------- -------- -------- -------
Net investment income 1.06 1.10 0.92 0.98 1.02 0.85
Net gain on investments (both
realized and unrealized) 0.38 1.11 0.67 0.37 1.11 0.68
-------- -------- ------- -------- -------- -------
Total from investment operations 1.44 2.21 1.59 1.35 2.13 1.53
-------- -------- ------- -------- -------- -------
Dividends from net investment
income (1.05) (1.10) (0.91) (0.98) (1.03) (0.85)
Distributions from net realized
gain on investments (0.19) (0.10) (0.15) (0.19) (0.10) (0.15)
-------- -------- ------- -------- -------- -------
Total dividends and
distributions (1.24) (1.20) (1.06) (1.17) (1.13) (1.00)
-------- -------- ------- -------- -------- -------
Net asset value, end of period $ 11.74 $ 11.54 $ 10.53 $ 11.71 $ 11.53 $ 10.53
-------- -------- ------- -------- -------- -------
-------- -------- ------- -------- -------- -------
Net assets, end of period
(thousands) $169,721 $65,935 $10,789 $329,672 $106,797 $10,108
Total return* +13.0% +21.9% +16.6% +12.2% +21.2% +15.7%
Ratios to average net assets:
Expenses 1.24% 1.24% 1.24%** 1.99% 1.99% 1.96%**
Net investment income 8.66% 9.38% 10.58%** 7.90% 8.49% 9.53%**
Portfolio turnover rate 79% 85% 109% 79% 85% 109%
Before applicable waiver of
management fee, expenses
absorbed by SBAM and credits
earned on custodian cash
balances, net investment income
per share and expense ratios
would have been:
Net investment income per share $ 1.04 $ 1.09 $ 0.87 $ 0.97 $ 1.01 $ 0.80
Expense ratio 1.34% 1.50% 1.80%** 2.09% 2.24% 2.51%**
STRATEGIC BOND FUND
<CAPTION>
CLASS A CLASS B
----------------------------------------- ------------------------------------------
YEAR YEAR PERIOD YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995(a) 1997 1996 1995(a)
----------------------------------------- ------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period $ 10.83 $ 10.53 $ 10.00 $ 10.82 $ 10.53 $ 10.00
-------- -------- ------- -------- -------- -------
Net investment income 0.76'SS' 0.87'SS' 0.84 0.67'SS' 0.79'SS' 0.76
Net gain on investments (both
realized and unrealized) 0.41 0.55 0.78 0.41 0.53 0.79
-------- -------- ------- -------- -------- -------
Total from investment operations 1.17 1.42 1.62 1.08 1.32 1.55
-------- -------- ------- -------- -------- -------
Dividends from net investment
income (0.89) (0.94) (0.85) (0.80) (0.85) (0.78)
Dividends in excess of net
investment income -- (0.01) -- -- (0.01) --
Distributions from net realized
gain on investments (0.17) (0.17) (0.24) (0.17) (0.17) (0.24)
-------- -------- ------- -------- -------- -------
Total dividends and
distributions (1.06) (1.12) (1.09) (0.97) (1.03) (1.02)
-------- -------- ------- -------- -------- -------
Net asset value, end of period $ 10.94 $ 10.83 $ 10.53 $ 10.93 $ 10.82 $ 10.53
-------- -------- ------- -------- -------- -------
-------- -------- ------- -------- -------- -------
Net assets, end of period
(thousands) $ 17,150 $ 8,345 $ 513 $ 47,921 $ 14,291 $ 1,879
Total return* +11.2% +14.1% +16.8% +10.4% +13.0% +16.1%
Ratios to average net assets:
Expenses 1.24% 1.24% 1.23%** 1.99% 1.98% 1.97%**
Net investment income 6.99% 8.09% 9.51%** 6.12% 7.34% 8.75%**
Portfolio turnover rate 184% 122% 161% 184% 122% 161%
Before applicable waiver of
management fee, expenses
absorbed by SBAM and credits
earned on custodian cash
balances, net investment income
per share and expense ratios
would have been:
Net investment income per share $ 0.73 $ 0.79 $ 0.76 $ 0.64 $ 0.71 $ 0.69
Expense ratio 1.53% 1.98% 2.11%** 2.28% 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 YEAR PERIOD YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995(a) 1997 1996 1995(a)
---------------------------------------------- ----------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 11.52 $ 10.53 $ 10.00 $ 11.53 $ 10.54 $ 10.00
------- ------- ------- ------- ------- -------
0.99 1.02 0.85 1.08 1.16 0.95
0.36 1.10 0.68 0.40 1.05 0.67
------- ------- ------- ------- ------- -------
1.35 2.12 1.53 1.48 2.21 1.62
------- ------- ------- ------- ------- -------
(0.98) (1.03) (0.85) (1.07) (1.12) (0.93)
(0.19) (0.10) (0.15) (0.19) (0.10) (0.15)
------- ------- ------- ------- ------- -------
(1.17) (1.13) (1.00) (1.26) (1.22) (1.08)
------- ------- ------- ------- ------- -------
$ 11.70 $ 11.52 $ 10.53 $ 11.75 $ 11.53 $ 10.54
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
$76,042 $13,773 $ 1,274 $ 2,386 $ 393 $ 7,854
+12.2% +21.1% +15.8% +13.4% +22.0% +16.8%
1.99% 1.99% 1.98%** 0.99% 0.99% 1.00%**
7.87% 8.43% 9.61%** 8.93% 10.64% 10.59%**
79% 85% 109% 79% 85% 109%
$ 0.98 $ 1.01 $ 0.80 $ 1.07 $ 1.13 $ 0.90
2.08% 2.24% 2.54%** 1.09% 1.24% 1.55%**
<CAPTION>
CLASS C CLASS O
---------------------------------------------- ----------------------------------------------
YEAR YEAR PERIOD YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995(a) 1997 1996 1995(a)
---------------------------------------------- ----------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 10.82 $ 10.53 $ 10.00 $ 10.82 $ 10.53 $ 10.00
------- ------- ------- ------- ------- -------
0.66'SS' 0.78'SS' 0.77 0.78'SS' 0.92'SS' 0.87
0.43 0.54 0.78 0.41 0.51 0.77
------- ------- ------- ------- ------- -------
1.09 1.32 1.55 1.19 1.43 1.64
------- ------- ------- ------- ------- -------
(0.80) (0.85) (0.78) (0.91) (0.96) (0.87)
-- (0.01) -- -- (0.01) --
(0.17) (0.17) (0.24) (0.17) (0.17) (0.24)
------- ------- ------- ------- ------- -------
(0.97) (1.03) (1.02) (1.08) (1.14) (1.11)
------- ------- ------- ------- ------- -------
$ 10.94 $ 10.82 $ 10.53 $ 10.93 $ 10.82 $ 10.53
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
$20,220 $ 4,575 $ 411 $ 649 $ 3,817 $ 9,763
+10.5% +13.1% +16.1% +11.5% +14.2% +17.0%
1.99% 1.98% 1.99%** 0.96% 1.00% 0.99%**
6.09% 7.26% 8.77%** 7.22% 8.65% 9.74%**
184% 122% 161% 184% 122% 161%
$ 0.63 $ 0.70 $ 0.70 $ 0.75 $ 0.84 $ 0.79
2.28% 2.72% 2.87%** 1.25% 1.74% 1.87%**
</TABLE>
PAGE 23
<PAGE>
<PAGE>
SALOMON BROTHERS INVESTMENT SERIES
TOTAL RETURN FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
---------------------------------------- ----------------------------------------
YEAR YEAR PERIOD YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995(a) 1997 1996 1995(a)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $11.82 $10.55 $10.00 $11.82 $10.54 $10.00
------ ------ ------ ------ ------ ------
Net investment income'SS' 0.55 0.54 0.15 0.45 0.45 0.13
Net gain on investments
(both realized and unrealized) 1.65 1.35 0.52 1.65 1.35 0.51
------ ------ ------ ------ ------ ------
Total from investment operations 2.20 1.89 0.67 2.10 1.80 0.64
------ ------ ------ ------ ------ ------
Dividends from net investment income (0.53) (0.52) (0.11) (0.44) (0.42) (0.09)
Distributions from net realized gain on
investments (0.36) (0.10) (0.01) (0.36) (0.10) (0.01)
------ ------ ------ ------ ------ ------
Total dividends and distributions (0.89) (0.62) (0.12) (0.80) (0.52) (0.10)
------ ------ ------ ------ ------ ------
Net asset value, end of period $13.13 $11.82 $10.55 $13.12 $11.82 $10.54
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
Net assets, end of period (thousands) $53,024 $21,109 $3,658 $87,549 $28,043 $5,378
Total return* +19.1% +18.3% +6.7% +18.2% +17.4% +6.4%
Ratios to average net assets:
Expenses 0.77% 0.75% 0.74%** 1.52% 1.50% 1.49%**
Net investment income 4.29% 4.81% 4.82%** 3.54% 4.06% 4.06%**
Portfolio turnover rate 70% 76% 16% 70% 76% 16%
Average broker commission rate $0.0596 $0.0534 N/A $0.0596 $0.0534 N/A
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 $ 0.49 $ 0.44 $ 0.13 $ 0.39 $ 0.36 $ 0.11
Expense ratio 1.24% 1.61% 1.45%** 1.99% 2.36% 2.19%**
</TABLE>
INVESTORS FUND
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
-------------------------- ------------------------- ------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------
1997 1996 1995 1997 1996 1995 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
year $18.89 $16.62 $13.61 $18.86 $16.61 $13.61 $18.86 $16.61 $13.61
------ ------ ------ ------ ------ ------ ------ ------ ------
Net investment income 0.16 0.19 0.19 0.04 0.08 0.10 0.04 0.07 0.09
Net gain (loss) on investments
(both realized and unrealized) 4.64 4.63 4.55 4.58 4.60 4.54 4.59 4.60 4.55
------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment operations 4.80 4.82 4.74 4.62 4.68 4.64 4.63 4.67 4.64
------ ------ ------ ------ ------ ------ ------ ------ ------
Dividends from net investment
income (0.21) (0.22) (0.23) (0.11) (0.10) (0.14) (0.11) (0.09) (0.14)
Distributions from net realized
gain on investments (2.37) (2.33) (1.50) (2.37) (2.33) (1.50) (2.37) (2.33) (1.50)
------ ------ ------ ------ ------ ------ ------ ------ ------
Total dividends and distributions (2.58) (2.55) (1.73) (2.48) (2.43) (1.64) (2.48) (2.42) (1.64)
------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end of year $21.11 $18.89 $16.62 $21.00 $18.86 $16.61 $21.01 $18.86 $16.61
------ ------ ------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------ ------ ------
Net assets, end of year
(thousands) $57,105 $10,905 $441 $49,786 $9,433 $716 $11,701 $1,959 $306
Total return* +26.2% +30.3% +35.3% +25.3% +29.2% +34.5% +25.2% +29.3% +34.5%
Ratios to average net assets:
Expenses 0.95% 1.06% 0.94% 1.70% 1.82% 1.71% 1.70% 1.80% 1.68%
Net investment income 0.86% 0.94% 1.41% 0.12% 0.21% 0.63% 0.13% 0.23% 0.66%
Portfolio turnover rate 62% 58% 86% 62% 58% 86% 62% 58% 86%
Average broker commission rate $0.0601 $0.0593 N/A $0.0601 $0.0593 N/A $0.0601 $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.
*** Includes $.05 per share of non-cash income and special dividends received
in 1989.
'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 24
<PAGE>
<PAGE>
SALOMON BROTHERS INVESTMENT SERIES
<TABLE>
<CAPTION>
CLASS C CLASS O
-------------------------------------------------- --------------------------------------------------
YEAR YEAR PERIOD YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995(a) 1997 1996 1995(a)
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 11.85 $10.56 $10.00 $11.88 $10.57 $10.00
------- ------ ------ ------ ------ ------
0.45 0.46 0.14 0.59 0.57 0.17
1.65 1.35 0.51 1.65 1.39 0.52
------- ------ ------ ------ ------ ------
2.10 1.81 0.65 2.24 1.96 0.69
------- ------ ------ ------ ------ ------
(0.44) (0.42) (0.08) (0.56) (0.55) (0.11)
(0.36) (0.10) (0.01) (0.36) (0.10) (0.01)
------- ------ ------ ------ ------ ------
(0.80) (0.52) (0.09) (0.92) (0.65) (0.12)
------- ------ ------ ------ ------ ------
$ 13.15 $11.85 $10.56 $13.20 $11.88 $10.57
------- ------ ------ ------ ------ ------
------- ------ ------ ------ ------ ------
$21,085 $3,445 $ 445 $1,227 $213 $4,494
+18.1% +17.5% +6.5% +19.3% +19.0% +6.9%
1.52% 1.50% 1.51%** 0.52% 0.50% 0.51%**
3.52% 4.07% 4.26%** 4.60% 5.13% 5.30%**
70% 76% 16% 70% 76% 16%
$0.0596 $0.0534 N/A $0.0596 $0.0534 N/A
$ 0.39 $ 0.36 $ 0.11 $ 0.53 $ 0.47 $ 0.15
1.99% 2.36% 2.22%** 1.00% 1.36% 1.22%**
</TABLE>
<TABLE>
<CAPTION>
CLASS O
--------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990'D' 1989 1988
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$18.90 $16.61 $13.63 $15.60 $16.10 $17.10 $14.54 $16.65 $15.55 $14.77
------ ------ ------ ------ ------ ------ ------ ------- ------ -------
0.24 0.25 0.27 0.27 0.32 0.41 0.44 0.49 0.66*** 0.52
4.60 4.62 4.48 (0.48) 2.03 0.79 3.68 (1.555) 2.66 1.885
------ ------ ------ ------ ------ ------ ------ ------- ------ -------
4.84 4.87 4.75 (0.21) 2.35 1.20 4.12 (1.065) 3.32 2.405
------ ------ ------ ------ ------ ------ ------ ------- ------ -------
(0.24) (0.25) (0.27) (0.27) (0.33) (0.41) (0.46) (0.55) (.63) (.525)
(2.37) (2.33) (1.50) (1.49) (2.52) (1.79) (1.10) (0.495) (1.59) (1.10)
------ ------ ------ ------ ------ ------ ------ ------- ------ -------
(2.61) (2.58) (1.77) (1.76) (2.85) (2.20) (1.56) (1.045) (2.22) (1.625)
------ ------ ------ ------ ------ ------ ------ ------- ------ -------
$21.13 $18.90 $16.61 $13.63 $15.60 $16.10 $17.10 $14.54 $16.65 $15.55
------ ------ ------ ------ ------ ------ ------ ------- ------ -------
------ ------ ------ ------ ------ ------ ------ ------- ------ -------
$608,401 $518,361 $428,950 $348,214 $386,147 $370,350 $378,615 $330,814 $393,747 $362,742
+26.5% +30.6% +35.4% -1.3% +15.1% +7.4% +29.3% -6.5% +21.8% +16.9%
0.69% 0.76% 0.69% 0.69% 0.68% 0.68% 0.70% 0.68% 0.63% 0.67%
1.15% 1.36% 1.67% 1.75% 1.90% 2.47% 2.67% 3.13% 3.76% 3.32%
62% 58% 86% 66% 79% 48% 44% 22% 36% 54%
$0.0601 $0.0593 N/A N/A N/A 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
------------------------- ---------------------------
YEAR PERIOD YEAR PERIOD
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996(a) 1997 1996(a)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $ 10.32 $ 10.00 $ 10.31 $ 10.00
------- ------- ------- -------
Net investment income (loss)'SS' 0.03 0.05 (0.05) 0.01
Net gain on investments
(both realized and unrealized) (2.59) 0.47 (2.57) 0.46
------- ------- ------- -------
Total from investment operations (2.56) 0.52 (2.62) 0.47
------- ------- ------- -------
Dividends from net investment income (0.03) (0.05) 0.00 (0.01)
Distributions from net realized gain on investments (0.25) (0.15) (0.25) (0.15)
------- ------- ------- -------
Total dividends and distributions (0.28) (0.20) (0.25) (0.16)
------- ------- ------- -------
Net asset value, end of period $ 7.48 $ 10.32 $ 7.44 $ 10.31
------- ------- ------- -------
------- ------- ------- -------
Net assets, end of period (thousands) $ 6,491 $ 3,693 $ 5,738 $ 3,163
Total return* -25.6% +5.2% -26.1% +4.7%
Ratios to average net assets:
Expenses 1.24% 1.24%** 1.99% 1.99%**
Net investment income 0.27% 0.90%** -0.48% 0.20%**
Portfolio turnover rate 294% 119% 294% 119%
Average broker commission rate $0.0052 $0.0052 $0.0052 $0.0052
Before applicable waiver of management fee,
expenses absorbed by SBAM and credits earned on
custodian cash balances, net investment income per
share and expense ratios would have been:
Net investment income per share ($ 0.23) ($ 0.18) ($ 0.30) ($ 0.23)
Expense ratio 3.81% 5.50%** 4.56% 6.25%**
</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>
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,
1997 1996(a) 1997 1996(a)
--------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 10.30 $ 10.00 $ 10.32 $ 10.00
------- ------- ------- -------
(0.05) 0.01 0.05 0.07
(2.56) 0.45 (2.59) 0.46
------- ------- ------- -------
(2.61) 0.46 (2.54) 0.53
------- ------- ------- -------
0.00 (0.01) (0.03) (0.06)
(0.25) (0.15) (0.25) (0.15)
------- ------- ------- -------
(0.25) (0.16) (0.28) (0.21)
------- ------- ------- -------
$ 7.44 $ 10.30 $ 7.50 $ 10.32
------- ------- ------- -------
------- ------- ------- -------
$ 1,643 $ 246 $ 412 $ 124
-26.0% +4.6% -25.3% +5.3%
1.99% 2.00%** 0.99% 0.99%**
-0.47% 0.08%** 0.51% 1.21%**
294% 119% 294% 119%
$0.0052 $0.0052 $0.0052 $0.0052
($ 0.30) ($ 0.20) ($ 0.20) ($ 0.18)
4.56% 6.26%** 3.56% 5.25%**
</TABLE>
PAGE 27
<PAGE>
<PAGE>
SALOMON BROTHERS INVESTMENT SERIES
CAPITAL FUND
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
-------------------------- -------------------------- ---------------------------
YEAR PERIOD YEAR PERIOD YEAR PERIOD
ENDED ENDED ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996(a) 1997 1996(a) 1997 1996(a)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $ 19.88 $ 21.98 $ 19.90 $ 21.98 $ 19.91 $ 21.98
-------- -------- -------- -------- -------- --------
Net investment income
(loss) 0.00 0.01'SS' (0.07) (0.02)'SS' (0.06) (0.02)'SS'
Net gain (loss) on
investments (both
realized and
unrealized) 5.10 1.54 5.01 1.56 5.00 1.57
-------- -------- -------- -------- -------- --------
Total from investment
operations 5.10 1.55 4.94 1.54 4.94 1.55
-------- -------- -------- -------- -------- --------
Dividends from net
investment income -- (0.15) -- (0.12) -- (0.12)
Distributions from net
realized gain on
investments (3.83) (3.50) (3.83) (3.50) (3.83) (3.50)
Distributions in excess
of net realized gains -- -- -- -- -- --
-------- -------- -------- -------- -------- --------
Total dividends and
distributions (3.83) (3.65) (3.83) (3.62) (3.83) (3.62)
-------- -------- -------- -------- -------- --------
Net asset value, end of
period $ 21.15 $ 19.88 $ 21.01 $ 19.90 $ 21.02 $ 19.91
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
Net assets, end of
period (thousands) $ 5,589 $ 344 $ 3,820 $ 219 $ 2,385 $ 130
Total return* +26.4% +7.7% +25.6% +7.6% +25.6% +7.7%
Ratios to average net assets:
Expenses'DD' 1.46% 1.88%** 2.20% 2.73%** 2.21% 2.45%**
Net investment income -0.10% 0.18%** -0.94% -0.66%** -0.91% -0.50%**
Portfolio turnover rate 159% 191% 159% 191% 159% 191%
Average broker
commission rate $0.0644 $0.0586 $0.0644 $0.0586 $0.0644 $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.
* 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.
'DD' Net of reimbursement for the year 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,
------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990'D' 1989 1988
-------- -------- -------- ------- -------- -------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 19.88 $ 18.67 $ 15.62 $ 20.80 $ 19.64 $ 19.06 $14.86 $16.75 $ 15.58 $16.58
-------- -------- -------- ------- -------- -------- ------- ------- ------- -------
0.05 0.13'SS' 0.14 0.03 0.028 0.10 0.33 0.20 0.05 0.01'SS'
5.13 5.70 5.27 (2.87) 3.242 0.80 4.56 (1.715) 6.25 (.775)
-------- -------- -------- ------- -------- -------- ------- ------- ------- -------
5.18 5.83 5.41 (2.84) 3.27 0.90 4.89 (1.515) 6.30 (.765)
-------- -------- -------- ------- -------- -------- ------- ------- ------- -------
-- (0.15) (0.14) (0.03) (0.035) (0.105) (.325) (.285) -- --
(3.83) (4.47) (2.22) (1.51) (2.075) (0.215) (.365) (.09) (5.13) (.235)
-- -- -- (0.80) -- -- -- -- -- --
-------- -------- -------- ------- -------- -------- ------- ------- ------- -------
(3.83) (4.62) (2.36) (2.34) (2.11) (0.32) (0.69) (.375) (5.13) (.235)
-------- -------- -------- ------- -------- -------- ------- ------- ------- -------
$ 21.23 $ 19.88 $ 18.67 $ 15.62 $ 20.80 $ 19.64 $19.06 $14.86 $ 16.75 $15.58
-------- -------- -------- ------- -------- -------- ------- ------- ------- -------
-------- -------- -------- ------- -------- -------- ------- ------- ------- -------
$175,470 $135,943 $102,429 $86,704 $113,905 $103,356 $89,829 $75,815 $72,621 $64,267
+26.8% +33.3% +34.9% -14.2% +17.2% +4.7% +33.4% -9.1% +39.7% - 4.6%
1.22% 1.38% 1.36% 1.30% 1.31% 1.34% 1.48% 1.44% 1.48% 1.27%
0.26% 0.67% 0.74% 0.12% 0.13% 0.58% 1.87% 1.59% 0.33% 0.03%
159% 191% 217% 152% 104% 41% 94% 156% 362% 270%
$ 0.0644 $ 0.0586 N/A N/A N/A N/A N/A N/A N/A N/A
</TABLE>
PAGE 29
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- ----------------------------------------------------
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 397 days 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 397 days, the
term of the repurchase agreement will always be less than 397 days. 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
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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 397 days 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 397 days 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 397 days. 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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SALOMON BROTHERS INVESTMENT SERIES
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 397 days 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
PAGE 32
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SALOMON BROTHERS INVESTMENT SERIES
investment strategies referred to under 'Additional Investment Activities and
Risk Factors -- Derivatives.'
Except with respect to the Cash Management Fund's investment objective and the
Fund's policy to invest 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 397
days 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
PAGE 33
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SALOMON BROTHERS INVESTMENT SERIES
likely to be issued to meet seasonal working capital needs of a municipality or
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 an item of tax preference for purposes of
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
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SALOMON BROTHERS INVESTMENT SERIES
the state or municipality that created the issuer.
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
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SALOMON BROTHERS INVESTMENT SERIES
reserves or in taxable money market instruments in order to maintain a
defensive posture. To the extent that the 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, beginning July 1, 1998, in accordance with Rule 2a-7 of
the 1940 Act, the Fund will limit its investments so that with regard to 75% of
total assets, no more than 5% of assets are invested in the securities of a
single issuer, and with respect to the remaining 25% of total assets, no more
than 5% of total assets are invested in the securities of a single issuer,
unless such securities meet certain credit quality requirements of Rule 2a-7.
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 City and other State localities continue to require significant
financial assistance from the State. In recent years, however, S&P upgraded the
State's rating from 'A-' to 'A,' and changed the outlook on the City's 'BBB+'
rating from 'stable' to 'positive.' New York City's rating was upgraded from
'Baa1' to 'A3' by Moody's in February of 1998. Both the State and the City face
fiscal challenges, including declining federal subsidization and a cyclical
economic base. 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
PAGE 36
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SALOMON BROTHERS INVESTMENT SERIES
of interest thereon from federal income tax and New York State and New York
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 397 days 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.
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SALOMON BROTHERS INVESTMENT SERIES
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 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 the New York Municipal Money Market Fund's investment
objective and the Fund's policy to invest 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. ('Fitch'), 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
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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 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 the following taxable high-quality short-term money market
instruments: 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 the opinion of
the investment manager, is 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
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. 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
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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. 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' 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.
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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 four 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 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
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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 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. The Statement of Additional Information contains 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
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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 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, primarily of issuers located in emerging market
countries, 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
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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 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 make 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
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CFTC and the federal income tax requirements applicable to regulated investment
companies. The Statement of Additional Information contains 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 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
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Fund are domestic and foreign debt securities rated within the four highest
bond ratings of either Moody's or S&P, or, if unrated, deemed by SBAM to be of
equivalent quality. While debt securities carrying the fourth highest quality
rating ('Baa' by Moody's or 'BBB' by S&P) are considered investment grade and
are viewed to have adequate capacity for payment of principal and interest,
investments in such securities involve a higher degree of risk than that
associated with investments in debt securities in the higher rating categories
and such debt securities lack outstanding investment characteristics and in
fact have speculative characteristics as well. For example, changes in economic
conditions or other circumstances are more likely to lead to a weakened
capacity to make principal and interest payments than is the case with higher
grade debt securities.
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
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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 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
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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
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 (except that the short-term investment in
securities for the forward settlement of trades shall not count for purposes of
this policy). 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
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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. The
Statement of Additional Information contains 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.
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. The Fund may also invest in equity real estate investment trusts
('REITs'). See 'Additional Investment Activites and Risk Factors -- Real Estate
Investment Trusts.'
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
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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
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 The Fund may
also enter into mortgage 'dollar rolls.' 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. The Statement of Additional Information contains descriptions of
these strategies and of certain risks associated therewith.
The foregoing investment policies, other than the Total Return Fund's investment
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objectives, are not fundamental policies and may be changed by vote of the Board
of Directors without the approval of shareholders.
SMALL CAP GROWTH FUND
The investment objective of the Small Cap Growth Fund is long-term growth of
capital. The Small Cap Growth Fund will seek to meet its objective by investing
primarily in securities of U.S. issuers with market capitalizations (total
current market value of a company's outstanding common stock) of less than $1
billion ('Small Cap Companies') at the time of initial purchase. Under normal
market conditions the Small Cap Growth Fund will invest at least 65% of its
total assets in equity securities of Small Cap Companies. The Small Cap Growth
Fund also may invest up to 20% of its total assets in equity securities of
foreign issuers. The Small Cap Growth Fund may continue to hold securities of a
company whose market capitalization grows above $1 billion subsequent to
purchase if the company continues to satisfy the other investment policies of
the Small Cap Growth Fund. Up to 35% of the Small Cap Growth Fund's total
assets may be invested in securities of companies whose market capitalizations
exceed $1 billion.
The investment objective of the Small Cap Growth Fund is deemed to be a
fundamental policy 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 the Small Cap Growth Fund will achieve its
investment objective.
In selecting portfolio securities, SBAM will emphasize companies which it
believes have favorable growth prospects and potential for significant capital
appreciation. SBAM will seek to identify Small Cap Companies that either occupy
a dominant position in an emerging industry or a growing market share in larger
fragmented industries. While these companies may present above average risk,
the investment manager believes that they may have the potential to achieve
long-term earnings growth rates substantially in excess of the growth of
earnings of other companies.
In making decisions whether to continue to hold or sell portfolio securities,
SBAM will evaluate a variety of things including near-term earnings trends of
the applicable companies and, accordingly, portfolio turnover can be expected
to be fairly high and the Small Cap Growth Fund will likely have greater
volatility than the stock market in general.
Investments in Small Cap Companies may involve greater risks and volatility than
investments in larger companies. See 'Additional Investment Activities and Risk
Factors.' Accordingly, the Small Cap Growth Fund is not intended as a complete
investment vehicle but rather as an investment for persons who are in a
financial position to assume above-average risk and share price volatility over
time. Since realizing the full potential of Small Cap Companies frequently
takes time, the Small Cap Growth Fund should be considered as a long-term
investment vehicle.
Equity securities in which the Small Cap Growth Fund may invest include common
and preferred stocks (including convertible preferred stock), bonds, notes and
debentures convertible into common and preferred stock (without any minimum
required rating), equity REITs, stock purchase warrants and rights,
equity-linked debt securities, equity interests in trusts, partnerships, joint
ventures or similar enterprises, American, Global or other types of Depositary
Receipts and other equity securities. Other equity securities include: (i)
securities that permit the Small Cap Growth Fund to receive: (a) an equity
interest in an issuer; (b) the opportunity to acquire an equity interest in an
issuer; and (c) the opportunity to receive a return on its investment that
permits the Small Cap
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Growth Fund to benefit from the growth over time in the equity of an issuer; and
(ii) securities whose value or return is derived from the value of return of a
different security.
SBAM expects that most of the equity securities purchased by the Small Cap
Growth Fund will be traded on a stock exchange or in an over-the-counter
market. The Small Cap Growth Fund may invest up to 25% of its total assets in
non-convertible bonds, notes and debt securities when SBAM believes that their
total return potential equals or exceeds the potential return of equity
securities.
The Small Cap Growth Fund will limit its purchases of non-convertible debt
securities to investment grade obligations. For long-term debt obligations, this
includes securities that are rated Baa or better by Moody's or BBB or better by
S&P or Fitch or that are not rated but are considered by SBAM to be of
equivalent quality. See Appendix A to this Prospectus for a description of such
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.
Notwithstanding the Small Cap Growth Fund's investment objective of capital
growth, to meet operating expenses, to serve as collateral in connection with
certain investment techniques and to meet anticipated redemption requests, the
Small Cap Growth Fund will generally hold a portion of its assets in short-term
fixed-income securities (government obligations or investment grade debt
securities) or cash or cash equivalents. As described below, short-term
investments may include repurchase agreements with banks or broker/dealers.
When SBAM deems it appropriate, during temporary defensive periods due to
economic or market conditions, the Small Cap Growth Fund may invest without
limitation in fixed-income securities or hold assets in cash or cash
equivalents. To the extent the Small Cap Growth Fund assumes a defensive
position, it will not be pursuing its investment objective of capital growth.
The Small Cap Growth Fund may enter into repurchase agreements, reverse
repurchase agreements, may purchase securities on a firm commitment basis,
including when-issued securities, and may lend portfolio securities. The Small
Cap Growth Fund may engage in short sales of securities if it contemporaneously
owns or has the right to obtain at no additional cost securities identical to
those being sold short. The Small Cap Growth Fund may also invest in investment
Small Cap Growth Funds. For a description of these investment practices and the
risks associated therewith, see 'Additional Investment Activities and Risk
Factors.'
The Small Cap Growth Fund may purchase securities for which there is a limited
trading market or which are subject to restrictions on resale to the public.
The Small Cap Growth Fund will not invest more than 15% of the value of its
total assets in illiquid securities, such as 'restricted securities' which are
illiquid, and securities that are not readily marketable. For further
discussion of illiquid securities and their associated risks, see '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 Small Cap Growth Fund may purchase Rule 144A
securities. The Small Cap Growth Fund's holdings of Rule 144A securities which
are liquid securities will not be subject to the 15% limitation on investments
in illiquid securities.
The Small Cap Growth Fund is currently authorized to use the various investment
strategies referred to under '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 Small Cap Growth Fund.
The Small Cap Growth
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Fund's ability to pursue certain of these strategies may be limited by
applicable regulations of the SEC, the Commodity Futures Trading Commission
('CFTC') and the federal income tax requirements applicable to regulated
investment companies. The Statement of Additional Information contains
descriptions of these strategies and of certain risks associated therewith.
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 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 passed Hong Kong's sovereignty to China effective July 1, 1997. 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
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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.
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
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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 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
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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.'
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
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be limited by applicable regulations of the SEC, the CFTC and the federal income
tax requirements applicable to regulated investment companies. The Statement of
Additional Information contains 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 secondary objective. The Fund seeks to
achieve its objectives primarily through investments in common stocks of well-
known companies.
The Investors 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
also invest in equity REITs. See 'Additional Investment Activities and Risk
Factors -- Real Estate Investment Trusts.' 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.'
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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 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. The Statement of
Additional Information contains 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
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SALOMON BROTHERS INVESTMENT SERIES
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 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. The Fund may also, subject to
certain limitations, invest in equity REITs. See 'Additional Investment
Activities and Risk Factors -- Real Estate Investment Trusts.' 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. 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.
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
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SALOMON BROTHERS INVESTMENT SERIES
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 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 for temporary or emergency purposes an aggregate amount which may
not exceed 5% of the value of its total assets at the time of borrowing. The
Fund shall borrow only from banks. Borrowings may be unsecured, or may be
secured by not more than 15% of the value of the Fund's total assets. As a
matter of operating policy, however, the Fund will not secure borrowings by
more than 10% of the value of the Fund's total assets. 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.
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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 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.
SMALL CAP COMPANIES. Investments in Small Cap Companies may involve greater
risks and volatility than investments in larger companies. Small Cap Companies
may be at an earlier stage of development, may be subject to greater business
risks, may have limited product lines, reduced market liquidity for, and more
abrupt or erratic price movements in, the trading of their shares, limited
financial resources and less depth in management than more established
companies. In addition, Small Cap Companies may have difficulty withstanding
competition from larger more established companies in their industries.
REAL ESTATE INVESTMENT TRUSTS. The Total Return Fund, Small Cap Growth Fund,
Investors Fund and Capital Fund may invest in equity REITs. REITs are entities
which either own properties or make construction or mortgage loans. Equity
REITs may also include operating or finance companies. Equity REITs own real
estate directly and the value of, and income earned by, the trust depends upon
the income of the underlying properties and the rental income they earn. Equity
REITs can also realize capital gains by selling properties that have
appreciated in value. The Capital Fund may only invest in equity REITs that are
registered under the 1933 Act and are readily marketable. The value of
securities issued by REITs are affected by tax and regulatory requirements and
by perceptions of management skill. The are also subject to heavy cash flow
dependency, defaults by borrowers or tenants, self-liquidation, the possibility
of failing to qualify for tax-free status under the Internal Revenue Code of
1986, as amended, and failing to maintain exemption from the 1940 Act.
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
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SALOMON BROTHERS INVESTMENT SERIES
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 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
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SALOMON BROTHERS INVESTMENT SERIES
repurchase agreements. Reverse repurchase agreements are considered to be
borrowings by a Fund.
SHORT SALES. The Small Cap Growth Fund may from time to time sell securities
short 'against the box.' If the Small Cap Growth Fund enters into a short sale
against the box, it will be required to set aside securities equivalent in kind
and amount to the securities sold short (or securities convertible or
exchangeable into such securities at no additional cost to the Small Cap Growth
Fund) and will be required to hold such securities while the short sale is
outstanding. The Small Cap Growth Fund will incur transaction costs, including
interest expense, in connection with opening, maintaining, and closing short
sales against the box. If the Small Cap Growth Fund engages in any short sales
against the box, it will incur the risk that the security sold short will
appreciate in value after the sale, with the result the Small Cap Growth Fund
will lose the benefit of any such appreciation. The Small Cap Growth Fund may
make short sales both as a form of hedging to offset potential declines in long
positions in similar securities and in order to maintain portfolio flexibility.
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. Each Fund may purchase securities
on a firm commitment basis, including when-issued securities. Securities
purchased on a firm commitment basis are purchased for delivery beyond the
normal settlement date at a stated price and yield. No income accrues to the
purchaser of a security on a firm commitment basis prior to delivery. Such
securities are recorded as an asset and are subject to changes in value based
upon changes in the general level of interest rates. Purchasing a security on a
firm commitment basis can involve a risk that the market price at the time of
delivery may be lower than the agreed upon purchase price, in which case
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SALOMON BROTHERS INVESTMENT SERIES
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 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
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Salomon Brothers Investment Series
ACCOUNT APPLICATION Please Note: A separate application must be used to open an
IRA account.
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<TABLE>
<S> <C>
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 ______________________________
</TABLE>
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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 10.
[ ] 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
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
________ ________ ________ Asia Growth Fund $ ___________________
________ ________ ________ Small Cap Growth Fund $ ___________________
________ ________ ________ Capital Fund $ ___________________
________ ________ ________ Investors Fund $ ___________________
________ ________ ________ Total Return Fund $ ___________________
________ ________ ________ High Yield Bond Fund $ ___________________
________ ________ ________ Strategic Bond Fund $ ___________________
________ ________ ________ U.S. Government Income Fund $ ___________________
________ ________ ________ National Intermediate Municipal Fund $ ___________________
________ ________ ________ New York Municipal Money Market Fund $ ___________________
________ ________ ________ Cash Management Fund $ ___________________
TOTAL INVESTMENT AMOUNT $ ___________________
</TABLE>
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<PAGE>
<PAGE>
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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.
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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 establish an Automatic Withdrawal in the amount of $_______ to
be executed on the ___ day of the month (or the next business day if the
selected day falls on a weekend or holiday).
[ ] Monthly [ ] Quarterly [ ] Startup Month/Year:_____________________
Automatic Withdrawals will be made on or near the 10th day of the month if no
Date is selected.
A minimum account value of $10,000 in a single account is required to establish
a monthly withdrawal plan. For quarterly 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 the _________ day 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 ________
- -------------------------------------------------------------------------------
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:
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
- --------------------------------------------------------------------------------
CUSTOMER SERVICE
For customer service, including account information, transfers and Fund prices,
you may call
1-800-446-1013
between 9:00 a.m. and 5:00 p.m. Eastern Standard Time.
- --------------------------------------------------------------------------------
MAILING INSTRUCTIONS
Mail your completed account application and check
made payable to Salomon Brothers Funds to:
SALOMON BROTHERS INVESTMENT SERIES
C/O FIRST DATA INVESTOR SERVICES GROUP, INC.
P.O. BOX 5127
WESTBOROUGH, MA 01581 - 5127
OR
(for overnight and express mail delivery)
SALOMON BROTHERS INVESTMENT SERIES
C/O FIRST DATA INVESTOR SERVICES GROUP, INC.
4400 COMPUTER DRIVE
WESTBOROUGH MA 01581-5120
Salomon Brothers Inc SBAPP-5/98
<PAGE>
<PAGE>
SIGNATURE CARD
CASH MANAGEMENT FUND
NEW YORK MUNICIPAL MONEY MARKET FUND
Boston Safe Deposit and Trust Company
ACCOUNT NUMBER
- --------------------------------------------------------------------------------
ACCOUNT NAME(S) AS REGISTERED
________________________________________________________________________________
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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SALOMON BROTHERS INVESTMENT SERIES
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. In
certain cases, the market for such instruments is not highly liquid, and
therefore the Funds anticipate that in such cases 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 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.'
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SALOMON BROTHERS INVESTMENT SERIES
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 relatively
recent development and there is no assurance that a liquid market in Rule 144A
securities will develop or be maintained. To the extent that the number of
qualified institutional buyers is reduced, a 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 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
PAGE 66
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SALOMON BROTHERS INVESTMENT SERIES
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 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
PAGE 67
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SALOMON BROTHERS INVESTMENT SERIES
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 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.
PAGE 68
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SALOMON BROTHERS INVESTMENT SERIES
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 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-
PAGE 69
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SALOMON BROTHERS INVESTMENT SERIES
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 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
PAGE 70
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SALOMON BROTHERS INVESTMENT SERIES
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 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
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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, the Strategic Bond Fund and
the 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. 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 as by the interest earned on the cash proceeds of the initial sale. 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 assets equal in value to its obligations
in respect of dollar rolls, and accordingly, such dollar rolls will not be
considered borrowings. Mortgage dollar rolls involve the risk that the market
value of the securities the Fund is obligated to repurchase under the agreement
may decline below the repurchase price. In the event the buyer of securities
under a mortgage dollar roll files for bankruptcy or becomes insolvent, the
Fund's use of proceeds of the dollar roll may be restricted pending a
determination by the other party, or its trustee or receiver, whether to
enforce the Fund's obligation to repurchase the securities.
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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 may have poor prospects of ever
attaining any real investment standing, may have a current identifiable
vulnerability to default or are in default, may 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 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 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
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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 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
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-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, especially in emerging market
countries, 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 or in which the issuers are located. 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. Certain countries which a Fund may invest, especially
emerging market
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countries, 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, especially in emerging market
countries, 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 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. The risks
enumerated above are particularly heightened with regard to issuers in emerging
market countries.
As a result of the foregoing, a governmental obligor, especially in an emerging
market country, 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,
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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. A
significant amount of the Brady Bonds that the Funds may purchase have no or
limited collateralization, and a Fund 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.'
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
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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.
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.
In addition, beginning July 1, 1998, the New York Municipal Money Market Fund
will be required to comply with the diversification requirements imposed by
Rule 2a-7 of the 1940 Act. See 'Investment Objectives and Policies -- New York
Municipal Money Market Fund.' 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 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
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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
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 or other liquid 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
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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 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).
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Like the service fee applicable to Class A shares, the Class B service fee is
compensation for ongoing services provided by Salomon Brothers to 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
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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 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
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SALOMON BROTHERS INVESTMENT SERIES
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
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.
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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 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
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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 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) 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); or
(4) 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 (3) above.
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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, TOTAL RETURN FUND AND SMALL CAP GROWTH FUND.
The National Intermediate Municipal Fund, the U.S. Government Income Fund, the
High Yield Bond Fund, the Strategic Bond Fund, the Total Return Fund and the
Small Cap Growth Fund may not:
(1) purchase securities of any issuer if the purchase would cause more than 5%
of the value of each Fund's total assets to be invested in the securities of
any one issuer (excluding securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities and bank obligations) or cause
more than 10% of the voting securities of the issuer to be held by a Fund,
except that up to 25% of the value of each Fund's total assets may be invested
without regard to this restriction and provided that each Fund may invest all
or substantially all of its assets in another registered investment company
having substantially the same investment objective(s) and policies and
substantially the same investment restrictions as those with respect to such
Fund;
(2) borrow money (including entering into reverse repurchase agreements),
except for temporary or emergency purposes and then not in excess of 10% of the
value of the total assets of the applicable Fund at the time the borrowing is
made, except that for the purpose of this restriction, short-term credits
necessary for settlement of securities transactions are not considered
borrowings (a Fund will not purchase additional securities at any time its
borrowings exceed 5% of total assets, provided, however, that a Fund may
increase its interest in another registered investment company having
substantially the same investment objective(s) and policies and substantially
the same investment restrictions as those with respect to such Fund while such
borrowings are outstanding); or
(3) invest more than 25% of the total assets of each Fund in the securities of
issuers having their principal activities in any particular industry, except for
obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities or by any state, territory or any possession of the United
States or any of their authorities, agencies, instrumentalities or political
subdivisions, or with respect to repurchase agreements collateralized by any of
such obligations (for purposes of this restriction, supranational issuers will
be considered to comprise an industry as will each foreign government that
issues securities purchased by a Fund), provided, however,
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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.
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
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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 the
Board of Directors. The Board of Directors approves all significant agreements
between the Funds and the persons or companies that furnish services to the
Fund, including agreements with its distributor, investment manager,
administrator, custodian and transfer agent. The Funds' day-to-day operations
are delegated to the investment manager and administrator. The Statement of
Additional Information contains general background information regarding the
director and executive officers of each Fund.
INVESTMENT MANAGER
Each Fund retains SBAM, a wholly-owned subsidiary of Salomon Brothers Holding
Company Inc, which is wholly-owned by Salomon Smith Barney Holdings Inc.
('SSBHI') which is, in turn, wholly-owned by Travelers Group, Inc.
('Travelers'), as its investment manager under an investment management
contract. SBAM was incorporated in 1987 and together with SBAM 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. As of March 31, 1998, SBAM and such affiliates
managed approximately $27 billion of assets. Michael S. Hyland serves as
President of SBAM. SBAM's business offices are located at 7 World Trade Center,
New York, New York 10048.
On April 6, 1998, Travelers announced that it had entered into a Merger
Agreement with Citicorp. The transaction, which is expected to be completed
during the third quarter of 1998, is subject to various regulatory approvals,
including approval by the Federal Reserve Board. The transaction is also subject
to approval by the stockholders of each of Travelers and Citicorp. Upon
consummation of the merger, it is anticipated that SBAM and its affiliates would
be wholly-owned subsidiaries of the merged corporation. The surviving
corporation would be a bank holding company subject to regulation under the Bank
Holding Company Act of 1956 ('BHCA'), the requirements of the Glass-Steagall Act
and certain other laws and regulations. Although the effects of the merger of
Travelers and Citicorp and compliance with the requirements of the BHCA and the
Glass-Steagall Act are still under review, SBAM has informed the Funds that it
does not believe that its compliance with applicable law following the merger of
Travelers and Citicorp will have a material adverse effect on its ability to
continue to provide the Funds with the same level of investment advisory
services that they currently receive.
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
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SALOMON BROTHERS INVESTMENT SERIES
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 Brothers Holding Company 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 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.
Nancy A. Noyes is primarily responsible for the day-to-day management of the
Cash Management Fund and has served as a Director of SBAM since January 1996.
Prior to joining SBAM in August 1992, Ms. Noyes was a member of Salomon Brothers
Hedge Management Group and has served in Salomon Brothers' London and Tokyo
offices.
Steven Guterman is primarily responsible for the day-to-day management of the
U.S. Government Income Fund and the Strategic Bond Fund. Mr. Guterman is
assisted by Roger Lavan in the management of the two foregoing Funds. Mr.
Guterman, who joined SBAM in 1990, is a Managing Director of SBAM and Salomon
Brothers Inc and is currently a Senior Portfolio Manager, responsible for SBAM's
investment company and institutional portfolios which invest primarily in
investment grade securities, including Salomon Brothers Variable U.S. Government
Income Fund and Salomon Brothers Variable Strategic Bond Fund, each a portfolio
of Salomon Brothers Variable Series Funds ('Variable Series'). 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 SBAM and Salomon Brothers Inc and a Senior Portfolio Manager of SBAM,
responsible for SBAM's investment company and institutional portfolios which
invest in high
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SALOMON BROTHERS INVESTMENT SERIES
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'), Salomon Brothers Variable High
Yield Bond Fund, a portfolio of Variable Series, 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, the high yield and
sovereign bond portions of Salomon Brothers Variable Strategic Bond Fund, a
portfolio of Variable Series, 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 manager since 1992 and as head of direct
investment activities prior to that. Mr. Guarnieri is the portfolio manager for
Salomon Brothers Variable Asia Growth Fund, a portfolio of Variable Series.
Pamela P. Milunovich is primarily responsible for the day-to-day management of
the Small Cap Growth Fund. Ms. Milunovich has been a Director of SBAM since
January 1997, and a portfolio manager since joining SBAM in June 1992.
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 January 1996, Mr. White
has been a Managing Director of SBAM and Salomon Brothers Inc, prior to which he
was a Vice President of SBAM. Mr. White is also Executive Vice President and
portfolio manager for The Salomon Brothers Fund Inc and Salomon Brothers
Variable Investors Fund, a portfolio of Variable Series. Mr. White is assisted
in the management of the Investors Fund by John B. Cunningham. Mr. Cunningham
has been a Vice President of SBAM since 1995. Prior to that time, Mr. Cunningham
was an associate in the Investment Banking Group of Salomon Brothers.
Richard E. Dahlberg is primarily responsible for the day-to-day management of
the Total Return Fund. Mr. Dahlberg is also the portfolio manager of Salomon
Brothers Variable Total Return Fund, a portfolio of Variable Series. 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 also the portfolio manager of Salomon Brothers
Variable Capital Fund, a portfolio of Variable Series. Mr. Margolies is a
Managing Director of 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
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SALOMON BROTHERS INVESTMENT SERIES
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 Small Cap Growth Fund pays SBAM a monthly fee at an annual rate of
.80% 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 Small Cap Growth Fund, for the 1998 fiscal year,
SBAM has voluntarily agreed to impose an expense cap on 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
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SALOMON BROTHERS INVESTMENT SERIES
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 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 affiliated broker/dealers 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.
YEAR 2000. The investment management services provided to the Funds by SBAM
depend in large part on the smooth functioning of their computer systems. Many
computer software systems in use today cannot recognize the year 2000, but
revert to 1900 or some other date, due to the manner in which dates were encoded
or calculated. The capability of these systems to recognize the year 2000 could
have a negative impact on SBAM's provision of investment advisory services,
including the handling of securities trades, pricing and account services. SBAM
has advised the Funds that it has been reviewing all of their computer systems
and actively working on necessary changes to its systems to prepare for the year
2000 and expects that given the extensive testing which it is undertaking its
systems will be year 2000 compliant before such date. In addition, SBAM has been
advised by certain of the Funds' service providers that they are also in the
process of modifying their systems with the same goal. There can, however, be no
assurance that SBAM or any other service provider will be
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SALOMON BROTHERS INVESTMENT SERIES
successful in achieving year 2000 compliance, or that interaction with other
non-complying computer systems will not impair services to the Funds at that
time.
DISTRIBUTOR
Salomon Brothers Inc, 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. It is also one of the largest
securities dealers in the world and a registered broker/dealer. Salomon
Brothers, along with other broker/dealer subsidiaries of Travelers, 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 (except the Small Cap Growth Fund) currently employs Investors Bank &
Trust Company ('Investors Bank') and Small Cap Growth employs SBAM, in each case
as administrator under an administration agreement to provide certain
administrative services. SBAM has delegated its responsibilities under the
administration agreement with the Small Cap Growth Fund to one of its
affiliates, Mutual Management Corp. ('MMC'). Commencing in June of 1998, it is
anticipated that each other Fund currently employing Investors Bank will employ
MMC as administrator. No administrator is or will be involved in the Funds'
investment decisions.
The services provided by the administrators under the applicable administration
agreements include certain accounting, clerical and bookkeeping services, Blue
Sky reports, 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. It is expected that each Fund will pay MMC the same fees for its
services as are currently being paid to Investors Bank. For its services, the
Small Cap Growth Fund pays SBAM, who in turn pays MMC, a fee calculated daily
and payable monthly, at an annual rate of .05% of the Small Cap Growth Fund's
aggregate average daily net assets.
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.
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- -------------------------------------------------------------------------
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,
Martin Luther King, Jr. 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.
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- --------------------------------------------------------------------------------
Purchase of Shares
Shares of each Fund may be purchased through First Data Investor Services Group,
Inc. ('FDISG') or (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.
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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
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SALOMON BROTHERS INVESTMENT SERIES
determine the class 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>
From time to time, at its discretion, on a Fund by Fund basis, the Distributor
may reallow concessions to selected dealers and retain the balance over such
concessions or 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.
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
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,
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SALOMON BROTHERS INVESTMENT SERIES
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 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
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SALOMON BROTHERS INVESTMENT SERIES
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) a Director or officer of any fund sponsored by
Travelers or any of its subsidiaries and to their immediate families (i.e., the
spouse, children, mother or father of such persons); (b) 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);
(c) 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; (d) participants in certain
'wrap-fee,' or asset allocation programs or other fee based arrangements
sponsored by broker-dealers and other financial institutions that have entered
into agreements with Salomon Brothers; (e) 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; and
(f) separate accounts used to fund certain unregistered variable annuity
contracts or Section 403(b) or 401(a) or (k) accounts.
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 only to existing Class O shareholders
for sale at net asset value and are not subject to any sales charges. Only Class
O 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
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SALOMON BROTHERS INVESTMENT SERIES
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 1.00% 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; 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
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SALOMON BROTHERS INVESTMENT SERIES
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 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
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SALOMON BROTHERS INVESTMENT SERIES
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 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
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SALOMON BROTHERS INVESTMENT SERIES
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
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
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SALOMON BROTHERS INVESTMENT SERIES
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 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
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SALOMON BROTHERS INVESTMENT SERIES
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).
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.
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SALOMON BROTHERS INVESTMENT SERIES
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,' 'distribution rate' 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 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
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SALOMON BROTHERS INVESTMENT SERIES
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, which period will be stated in the advertisement. 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, Money, Morningstar Mutual Fund
Values, The New York Times, USA Today and The Wall Street Journal. 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. 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, 1997 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 of the Prospectus. 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 Small Cap
Growth Fund and 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 for purposes of the discussion under this heading, excludes
any net realized capital gains.
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
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).
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Net realized short-term capital gain 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 gain 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 gain.
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 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, 1997 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 capital gain. 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 gains over net realized long-term capital losses, are taxable
to shareholders as ordinary income. A portion of such dividends may qualify for
the dividends received deduction available to corporations.
Distributions of net capital gain designated by a Fund as 'capital gain
dividends' will be taxable as long-term capital gain, 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. In general, the maximum federal income tax rate imposed on
long-term capital gain of individuals with respect to capital assets held for
more than one year but less than 18 months is 28% and with respect to capital
assets held for more than 18 months is 20%. The maximum federal income tax rate
imposed on individuals with respect to ordinary income (and short-term capital
gain, which currently is taxed at the same rates as ordinary income) will be
39.6%. With respect to corporate taxpayers, long-term capital gain currently is
taxed at the same federal income tax rates as ordinary income and short-term
capital gain. 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
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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
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. 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
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SALOMON BROTHERS INVESTMENT SERIES
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 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
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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.
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.
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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. For
a further discussion of tax considerations affecting a Fund and its
shareholders, see 'Additional Information Concerning Taxes' in the Statement of
Additional Information.
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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.
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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 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
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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 or quarterly, or at other regular 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 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 a maximum lump sum of 12% annually of their account
balances or no more than 2% monthly, up to a maximum of 12% annually without
incurring a CDSC. With respect to the Investors Fund and the Capital Fund, a
Withdrawal Plan 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 the date selected by the shareholder on the
account application (or the next business day if the selected day falls on a
weekend or holiday) 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
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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 ten series of shares, each representing shares in one of ten
separate Funds; namely, the National Intermediate Municipal Fund, U.S.
Government Income Fund, High Yield Bond Fund, Strategic Bond Fund, Total Return
Fund, the Small Cap Growth Fund, Asia Growth Fund, the Cash Management Fund, the
New York Municipal Money Market Fund and the Institutional 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.
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 25,000,000 shares having a par value of $.001
per share.
As of the date of this Prospectus, Northstar Advantage Funds own more than 25%
of the outstanding voting securities of Cash Management Fund and Salomon
Brothers Holding Company Inc and its affiliates own a significant percentage of
the outstanding shares of certain classes of each Fund, except the Investors
Fund, and consequently, each may be deemed to be a 'control person,' as defined
in the 1940 Act, of such Funds.
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. 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 Funds, 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. They
carry the smallest degree of investment risk and are generally referred to as
'gilt edged.' 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 risk appear somewhat larger than the Aaa
securities.
A -- Bonds which are rated 'A' possess many favorable investment attributes 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 some time 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 the desirable
investment. Assurance of interest and principal payments or of maintenance of
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' in each generic rating
classification from Aa to Caa. 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 short-term debt obligations. 'Prime-1'
repayment ability will often be evidenced by: leading market positions in
well-established industries, high rates of return on funds employed,
conservative capitalization structures with moderate reliance on debt and ample
asset protection, broad margins in earnings coverage of fixed financial charges
and high internal cash generation, and well-established access to a range of
financial markets and assured sources of alternate liquidity.
PRIME-2 -- Issuers (or related supporting institutions) rated 'Prime-2' have a
strong ability for repayment of short-term debt obligations. This will normally
be evidenced by
PAGE A-2
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SALOMON BROTHERS INVESTMENT SERIES
many of the characteristics cited above but to a lesser degree. Earnings trends
and coverage ratio, 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 debt 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 may require relatively high
financial leverage. Adequate alternate liquidity is maintained.
NOT PRIME -- Issuers rated 'Not Prime' do not fall within any of the Prime
rating categories.
S&P's COMMERCIAL PAPER RATINGS
An 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 categories are as follows:
A-1 -- A short-term obligation rated 'A-1' is rated in the highest category by
Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is strong. Within this category, certain obligations are
designated with a plus sign (+). This indicates that the obligor's capacity to
meet its financial commitment on these obligations is extremely strong.
A-2 -- A short-term obligation rated 'A-2' is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to
meet its financial commitment on the obligation is satisfactory.
A-3 -- A short-term obligation rated 'A-3' exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
B -- A short-term obligation rated 'B' is regarded as having significant
speculative characteristics. The obligor currently has the capacity to meet its
financial commitment on the obligation; however, it faces major ongoing
uncertainties which could lead to the obligor's inadequate capacity to meet its
financial commitment on the obligation.
C -- A short-term obligation rated 'C' is currently vulnerable to nonpayment
and is dependent upon favorable business, financial, and economic conditions
for the obligor to meet its financial commitment on the obligation.
D -- A short-term obligation rated 'D' is in payment default. the 'D' rating
category is used when payments on an obligation are not made on the date due
even if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The 'D'
rating also will be used upon the filing of a bankruptcy petition or the taking
of a similar action if payments on an obligation are jeopardized.
PAGE A-3
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SALOMON BROTHERS INVESTMENT SERIES
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.
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.
PAGE A-4
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SALOMON BROTHERS INVESTMENT SERIES
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.
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.
PAGE A-5
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SALOMON BROTHERS INVESTMENT SERIES
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+.
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.
PAGE A-6
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FOR CUSTOMER SERVICE
(800) 446-1013
FOR BROKERAGE/DEALER INFORMATION
(800) SALOMON
(800) 725-6666
DISTRIBUTOR
Salmon Brothers Inc
Seven World Trade Center
New York, New York 10048
INVESTMENT MANAGER
Salomon Brothers Asset Management Inc
Seven World Trade Center
New York, New York 10048
No dealer, salesman or other person has been authorized to give any information
or to make any representations, other than those contained in this Prospectus,
in connection with the offer contained in this Prospectus, and, if given or
made, such other information or representations must not be relied upon as
having been authorized by 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.
[LOGO] SALOMON BROTHERS ASSET MANAGEMENT
SEVEN WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
1-800-SALOMON
WWW.SBAM.COM
MEMBER OF SIPC
INVPRO-5/98
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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 Small Cap Growth Fund (the 'Small Cap Growth 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
Funds' current Prospectus, dated May 1, 1998, (the 'Prospectus'). This SAI
supplements and should be read in conjunction with the Prospectus, copies of
which may be obtained without charge by writing the Funds at the address, or by
calling the toll-free telephone numbers, listed above.
May 1, 1998
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TABLE OF CONTENTS
<TABLE>
<S> <C>
Additional Information on Portfolio Instruments and Investment Policies......................... 3
Special Investment Considerations Relating to New York Municipal Obligations.................... 24
Investment Limitations.......................................................................... 52
Management...................................................................................... 57
Investment Manager.............................................................................. 69
Portfolio Transactions.......................................................................... 76
Net Asset Value................................................................................. 77
Additional Purchase Information................................................................. 78
Additional Redemption Information............................................................... 79
Additional Information Concerning Taxes......................................................... 79
Performance Data................................................................................ 84
Shareholder Services............................................................................ 90
Capital Stock................................................................................... 91
Custodian and Transfer Agent.................................................................... 92
Independent Accountants......................................................................... 92
Counsel......................................................................................... 92
Financial Statements............................................................................ 92
</TABLE>
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ADDITIONAL INFORMATION ON PORTFOLIO INSTRUMENTS
AND INVESTMENT POLICIES
The applicable 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.' 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
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thereunder. These provisions may also restrict a Fund's investments in certain
foreign banks and other financial institutions.
The manner in which foreign investors may invest in companies in certain
emerging market countries, as well as limitations on such investments, also may
have an adverse impact on the operations of a Fund. For example, the Fund may be
required in some countries to invest initially through a local broker or other
entity and then have the shares purchased re-registered in the name of the Fund.
Re-registration may in some instances not occur on a timely basis, resulting in
a delay during which the Fund may be denied certain of its rights as an
investor.
Foreign markets have different clearance and settlement procedures, and in
certain markets there have been times when settlements have failed to keep pace
with the volume of securities transactions, making it difficult to conduct such
transactions. Further, satisfactory custodial services for investment securities
may not be available in some countries having smaller, emerging capital markets,
which may result in a Fund incurring additional costs and delays in transporting
and custodying such securities outside such countries. Delays in settlement or
other problems could result in periods when assets of a Fund are uninvested and
no return is earned thereon. The inability of a Fund to make intended security
purchases due to settlement problems or the risk of intermediary counterparty
failures could cause a Fund to forego attractive investment opportunities. The
inability to dispose of a portfolio security due to settlement problems could
result either in losses to a Fund due to subsequent declines in the value of
such portfolio security or, if the Fund has entered into a contract to sell the
security, could result in possible liability to the purchaser.
Rules adopted under the 1940 Act permit a Fund to maintain its foreign
securities and cash in the custody of certain eligible non-U.S. banks and
securities depositories. Certain banks in foreign countries may not be 'eligible
sub-custodians,' as defined in the 1940 Act, for a Fund, in which event the Fund
may be precluded from purchasing securities in certain foreign countries in
which it otherwise would invest or which may result in the Fund's incurring
additional costs and delays in 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
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System, the Federal Intermediate Credit Banks, the Federal Land Banks, the
Federal National Mortgage Association and the Student Loan Marketing
Association.
BANK OBLIGATIONS
Banks are subject to extensive governmental regulations which may limit
both the amounts and types of loans and other financial commitments which may be
made and interest rates and fees which may be charged. The profitability of this
industry is largely dependent upon the availability and cost of capital funds
for the purpose of financing lending operations under prevailing money market
conditions. Also, general economic conditions play an important part in the
operations of this industry and exposure to credit losses arising from possible
financial difficulties of borrowers might affect a bank's ability to meet its
obligations.
Investors should also be aware that securities issued or guaranteed by
foreign banks, foreign branches of U.S. banks, and foreign government and
private issuers may involve investment risks in addition to those relating to
domestic obligations. See ' -- Foreign Securities' above. None of the Funds will
purchase bank obligations which the investment manager 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.
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
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. The investment manager will monitor on an ongoing basis the
ability of an issuer of a demand instrument to pay principal and interest on
demand.
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
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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.
FIXED-INCOME SECURITIES
Many fixed-income securities contain call or buy-back features that permit
their issuers to call or repurchase the securities from their holders. Such
securities may present risks based on payment expectations. Although a Fund
would typically receive a premium if an issuer were to redeem a security, if an
issuer exercises such a 'call option' and redeems the security during a time of
declining interest rates, a Fund may realize a capital loss on its investment if
the security was purchased at a premium and a Fund may have to replace the
called security with a lower yielding security, resulting in a decreased rate of
return to the Fund.
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 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.
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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 1997 and with the exception
of the Capital Fund and the Investors Fund, each of these Funds has no present
intention to do so. The Small Cap Growth Fund has no present intention to lend
any of its portfolio securities.
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 each 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 (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
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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 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
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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 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
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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.
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
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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 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.
OTHER INVESTMENT COMPANIES
As indicated under 'Investment Restrictions' below, a Fund may from time to
time invest in securities of other investment companies, subject to the limits
of the 1940 Act. The return on such investments will be reduced by the operating
expenses, including investment advisory and administration fees, of such
investment funds, and will be further reduced by Fund expenses, including
management fees; that is, there will be a layering of certain fees and expenses.
Investment in investment companies also may involve the payment of substantial
premiums above the value of such companies' portfolio securities. The Funds do
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not intend to invest in such vehicles or funds unless the investment manager
determines that the potential benefits of such investment justify the payment of
any applicable premiums.
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 the Prospectus 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 the Prospectus and
this Statement of Additional Information, refers to interest rate, currency or
stock or bond index futures contracts, currency forward contracts and currency
swaps, the purchase and sale (or writing) of exchange listed and
over-the-counter ('OTC') put and call options on debt and equity securities,
currencies, interest rate, currency or stock index futures and fixed-income and
stock indices and other financial instruments, entering into various interest
rate transactions such as swaps, caps, floors, collars, entering into equity
swaps, caps, floors, the purchase and sale of indexed debt securities or trading
in other similar types of instruments.
Derivatives may be used to attempt to protect against possible changes in
the market value of securities held or to be purchased for a Fund's portfolio
resulting from securities markets or currency exchange rate fluctuations, to
protect a Fund's unrealized gains in the value of its securities, to facilitate
the sale of those securities for investment purposes, to manage the effective
maturity or duration of a Fund's portfolio or to establish a position in the
derivatives markets as a temporary substitute for purchasing or selling
particular securities or to seek to enhance a Fund's income or gain. A Fund may
use any or all types of Derivatives which it is authorized to use at any time;
no particular strategy will dictate the use of one type of transaction rather
than another, as use of any authorized Derivative will be a function of numerous
variables, including market conditions. The ability of a Fund to utilize
Derivatives successfully will depend on numerous factors including the
investment manager's ability to predict pertinent market movements, which cannot
be assured. These skills are different from those needed to select a Fund's
portfolio securities.
A Fund's ability to pursue certain of these strategies may be limited by
the Commodity Exchange Act, as amended, applicable regulations of the Commodity
Futures Trading Commission ('CFTC') thereunder and the federal income tax
requirements applicable to regulated investment companies which are not operated
as commodity pools.
Currency Transactions. A Fund may engage in currency transactions with
Counterparties to hedge the value of portfolio securities denominated in
particular currencies against fluctuations in relative value or to generate
income or gain. Currency transactions include currency forward contracts,
exchange-listed currency futures contracts and options thereon, exchange-listed
and OTC options on currencies, and currency swaps. A forward currency contract
involves a privately negotiated obligation to purchase or sell (with delivery
generally required) a specific currency at a future date, which may be any fixed
number of days from the date of the contract agreed upon by the parties, at a
price set at the time of the contract. A currency swap is an agreement to
exchange cash flows based on the notional difference among two or more
currencies and operates similarly to an interest rate swap, which is described
below under 'Swaps, Caps, Floors and Collars.' A Fund may enter into currency
transactions only with Counterparties that the investment manager deems to be
creditworthy.
A Fund may enter into forward currency exchange contracts when the
investment manager believes that the currency of a particular country may suffer
a substantial decline against the U.S. dollar. In those circumstances, a Fund
may enter into a forward contract to sell, for a fixed amount of U.S. dollars,
the amount of that currency approximating the value of some or all of the Fund's
portfolio securities denominated in such currency. Forward contracts may limit
potential gain from a positive change in the relationship between the U.S.
dollar and foreign currencies.
Transaction hedging is entering into a currency transaction with respect to
specific assets or liabilities of the Fund, which will generally arise in
connection with the purchase or sale of
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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.'
Futures Contracts. A Fund may trade futures contracts: (1) on domestic and
foreign exchanges on currencies, interest rates and bond indices; and (2) on
domestic and, to the extent permitted by the CFTC, foreign exchanges on stock
indices. Futures contracts are generally bought and sold on the commodities
exchanges on which they are listed with payment of initial and variation margin
as described below. The sale of a futures contract creates a firm obligation by
the Fund, as seller, to deliver to the buyer the specific type of financial
instrument called for in the contract at a specific future time for a specified
price (or, with respect to certain instruments, the net cash amount). None of
the Funds is a commodity pool, and each Fund, where permitted, will use futures
contracts and options thereon solely: (i) for bona fide hedging purposes; and
(ii) for other purposes in amounts permitted by the rules and regulations
promulgated by the CFTC. A Fund's use of financial futures contracts and options
thereon will in all cases be consistent with applicable regulatory requirements
and in particular the rules and regulations of the CFTC. Maintaining a futures
contract or selling an option on a futures contract will typically require the
Fund to deposit with a financial intermediary, as security for its obligations,
an amount of cash or other specified assets ('initial margin') that initially is
from 1% to 10% of the face amount of the contract (but may be higher in some
circumstances). Additional cash or assets ('variation margin') may be required
to be deposited thereafter daily as the mark-to-market value of the futures
contract fluctuates. A Fund will not enter into a futures contract or option
thereon other than for bona fide hedging purposes if, immediately thereafter,
the sum of the amount of its initial margin and premiums required to maintain
permissible non-bona fide hedging positions in futures contracts and options
thereon would exceed 5% of the liquidation value of the Fund's portfolio, after
taking into account unrealized profits and losses on existing contracts;
however, in the case of an option that is in-the-money at the time of the
purchase, the in-the-money amount may be excluded in calculating the 5%
limitation. The value of all futures contracts sold by the Fund (adjusted for
the historical volatility relationship between the Fund and the contracts) will
not exceed the total market value of the Fund's securities. In addition, the
value of a Fund's long futures and options positions (futures contracts on stock
or bond indices, interest rates or foreign currencies and call options on such
futures contracts) will not exceed the sum of: (a) liquid assets segregated for
this purpose; (b) cash proceeds on existing investments due within thirty days;
and (c) accrued profits on the particular futures or options positions. The
segregation requirements with respect to futures contracts and options thereon
are described below under 'Use of Segregated and Other Special Accounts.'
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Interest Rate Futures Contracts. A Fund may enter into interest rate
futures contracts in order to protect it from fluctuations in interest rates
without necessarily buying or selling fixed income securities. An interest rate
futures contract is an agreement to take or make delivery of either: (i) an
amount of cash equal to the difference between the value of a particular index
of debt securities at the beginning and at the end of the contract period; or
(ii) a specified amount of a particular debt security at a future date at a
price set at time of the contract. For example, if a Fund owns bonds, and
interest rates are expected to increase, the Fund might sell futures contracts
on debt securities having characteristics similar to those held in the
portfolio. Such a sale would have much the same effect as selling an equivalent
value of the bonds owned by the Fund. If interest rates did increase, the value
of the debt securities in the portfolio would decline, but the value of the
futures contracts to the Fund would increase at approximately the same rate,
thereby keeping the net asset value of each class of the Fund from declining as
much as it otherwise would have. A Fund could accomplish similar results by
selling bonds with longer maturities and investing in bonds with shorter
maturities when interest rates are expected to increase. However, since the
futures market may be more liquid than the cash market, the use of futures
contracts as a risk management technique allows a Fund to maintain a defensive
position without having to sell its portfolio securities.
Similarly, when the investment manager expects that interest rates may
decline, a Fund may purchase interest rate futures contracts in an attempt to
hedge against having to make subsequently anticipated purchases of bonds at the
higher prices subsequently expected to prevail. Since the fluctuations in the
value of appropriately selected futures contracts should be similar to that of
the bonds that will be purchased, a Fund could take advantage of the anticipated
rise in the cost of the bonds without actually buying them until the market had
stabilized. At that time, a Fund could make the intended purchase of the bonds
in the cash market and the futures contracts could be liquidated.
At the time of delivery of securities pursuant to an interest rate futures
contract, adjustments are made to recognize differences in value arising from
the delivery of securities with a different interest rate from that specified in
the contract. In some (but not many) cases, securities called for by a futures
contract may have a shorter term than the term of the futures contract and,
consequently, may not in fact have been issued when the futures contract was
entered.
Options. As indicated in the Prospectus, in order to hedge against adverse
market shifts or to increase income or gain, certain Funds may purchase put and
call options or write 'covered' put and call options on futures contracts on
stock indices, interest rates and currencies. In addition, in order to hedge
against adverse market shifts or to increase its income, a Fund may purchase put
and call options and write 'covered' put and call options on stocks, stock
indices and currencies. A Fund may utilize options on currencies in order to
hedge against currency exchange rate risks. A call option is 'covered' if, so
long as the Fund is obligated as the writer of the option, it will own: (i) the
underlying investment subject to the option; (ii) securities convertible or
exchangeable without the payment of any consideration into the securities
subject to the option; or (iii) a call option on the relevant security or
currency with an exercise price no higher than the exercise price on the call
option written. A put option is 'covered' if, to support its obligation to
purchase the underlying investment if a put option that a Fund writes is
exercised, the Fund will either (a) deposit with its custodian in a segregated
account cash, cash equivalents, U.S. government securities or other high grade
liquid debt obligations having a value at least equal to the exercise price of
the underlying investment or (b) continue to own an equivalent number of puts of
the same 'series' (that is, puts on the same underlying investment having the
same exercise prices and expiration dates as those written by the Fund), or an
equivalent number of puts of the same 'class' (that is, puts on the same
underlying investment) with exercise prices greater than those that it has
written (or, if the exercise prices of the puts it holds are less than the
exercise prices of those it has written, it will deposit the difference with its
custodian in a segregated account). Parties to options transactions must make
certain payments and/or set aside certain amounts of assets in connection with
each transaction, as described in the Prospectus.
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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 exceeds, in the case of a call option, or is
less than, in the case of a put option, the exercise price of the option) at the
time the option is exercised.
Put options and call options typically have similar structural
characteristics and operational mechanics regardless of the underlying
instrument on which they are purchased or sold. Thus, the following general
discussion relates to each of the particular types of options discussed in
greater detail below. In addition, many Derivatives involving options
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require segregation of Fund assets in special accounts, as described below under
'Use of Segregated and Other Special Accounts.'
A put option gives the purchaser of the option, upon payment of a premium,
the right to sell, and the writer of the obligation to buy, the underlying
security, index, currency or other instrument at the exercise price. A Fund's
purchase of a put option on a security, for example, might be designed to
protect its holdings in the underlying instrument (or, in some cases, a similar
instrument) against a substantial decline in the market value of such instrument
by giving the Fund the right to sell the instrument at the option exercise
price. A call option, upon payment of a premium, gives the purchaser of the
option the right to buy, and the seller the obligation to sell, the underlying
instrument at the exercise price. A Fund's purchase of a call option on a
security, financial futures contract, index, currency or other instrument might
be intended to protect the Fund against an increase in the price of the
underlying instrument that it intends to purchase in the future by fixing the
price at which it may purchase the instrument. An 'American' style put or call
option may be exercised at any time during the option period, whereas a
'European' style put or call option may be exercised only upon expiration or
during a fixed period prior to expiration. Exchange-listed options are issued by
a regulated intermediary such as the Options Clearing Corporation ('OCC'), which
guarantees the performance of the obligations of the parties to the options. The
discussion below uses the OCC as an example, but is also applicable to other
similar financial intermediaries.
OCC-issued and exchange-listed options, with certain exceptions, generally
settle by physical delivery of the underlying security or currency, although in
the future, cash settlement may become available. Index options are cash settled
for the net amount, if any, by which the option is 'in-the-money' (that is, the
amount by which the value of the underlying instrument exceeds, in the case of a
call option, or is less than, in the case of a put option, the exercise price of
the option) at the time the option is exercised. Frequently, rather than taking
or making delivery of the underlying instrument through the process of
exercising the option, listed options are closed by entering into offsetting
purchase or sale transactions that do not result in ownership of the new option.
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.
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Unless the parties provide for it, no central clearing or guaranty function
is involved in an OTC option. As a result, if a Counterparty fails to make or
take delivery of the security, currency or other instrument underlying an OTC
option it has entered into with the Fund or fails to make a cash settlement
payment due in accordance with the terms of that option, the Fund will lose any
premium it paid for the option as well as any anticipated benefit of the
transaction. Thus, the investment manager must assess the creditworthiness of
each such Counterparty or any guarantor or credit enhancement of the
Counterparty's credit to determine the likelihood that the terms of the OTC
option will be met. A Fund will enter into OTC option transactions only with
U.S. Government securities dealers recognized by the Federal Reserve Bank of New
York as 'primary dealers,' or broker-dealers, domestic or foreign banks, or
other financial institutions that the investment manager deems to be
creditworthy. In the absence of a change in the current position of the staff of
the SEC, OTC options purchased by a Fund and the amount of a Fund's obligation
pursuant to an OTC option sold by the Fund (the cost of the sell-back plus the
in-the-money amount, if any) or the value of the assets held to cover such
options will be deemed illiquid.
If a Fund sells a call option, the premium that it receives may serve as a
partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments held by the Fund or will
increase the Fund's income. Similarly, the sale of put options can also provide
gains for a Fund.
A Fund may purchase and sell call options on securities that are traded on
U.S. and foreign securities exchanges and in the OTC markets, and on securities
indices, currencies and futures contracts. All calls sold by a Fund must be
'covered' (that is, the Fund must own the securities or futures contract subject
to the call), or must otherwise meet the asset segregation requirements
described below for so long as the call is outstanding. Even though the Fund
will receive the option premium to help protect it against loss, a call sold by
a Fund will expose the Fund during the term of the option to possible loss of
opportunity to realize appreciation in the market price of the underlying
security or instrument and may require the Fund to hold a security or instrument
that it might otherwise have sold.
A Fund reserves the right to purchase or sell options on instruments and
indices which may be developed in the future to the extent consistent with
applicable law, the Fund's investment objective and the restrictions set forth
herein.
A Fund may purchase and sell put options on securities (whether or not it
holds the securities in its portfolio) and on securities indices, currencies and
futures contracts. In selling put options, a Fund faces the risk that it may be
required to buy the underlying security at a disadvantageous price above the
market price.
(a) Options on Stocks and Stock Indices. A Fund may purchase put and call
options and write covered put and call options on stocks and stock indices
listed on domestic and foreign securities exchanges in order to hedge against
movements in the equity markets or to increase income or gain to the Fund. In
addition, the Fund may purchase options on stocks that are traded
over-the-counter. Options on stock indices are similar to options on specific
securities. However, because options on stock indices do not involve the
delivery of an underlying security, the option represents the holder's right to
obtain from the writer cash in an amount equal to a fixed multiple of the amount
by which the exercise price exceeds (in the case of a put) or is less than (in
the case of a call) the closing value of the underlying stock index on the
exercise date. Currently, options traded include the Standard & Poor's 100 Index
of Composite Stocks, Standard & Poor's 500 Index of Composite Stocks (the 'S&P
500 Index'), the New York Stock Exchange ('NYSE') Composite Index, the American
Stock Exchange ('AMEX') Market Value Index, the National Over-the-Counter Index
and other standard broadly based stock market indices. Options are also traded
in certain industry or market segment indices such as the Oil Index, the
Computer Technology Index and the Transportation Index. Stock index options are
subject to position and exercise limits and other regulations imposed by the
exchange on which they are traded.
If the investment manager expects general stock market prices to rise, a
Fund might purchase a call option on a stock index or a futures contract on that
index as a hedge against an increase in prices of particular equity securities
it wants ultimately to buy. If the stock index does rise, the price of the
particular equity securities intended to be purchased may
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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.'
(c) Options on Futures Contracts. A Fund may purchase put and call options
and write covered put and call options on futures contracts on stock indices,
interest rates and currencies traded on domestic and, to the extent permitted by
the CFTC, foreign exchanges, in order to hedge all or a portion of its
investments or to increase income or gain and may enter into closing
transactions in order to terminate existing positions. There is no guarantee
that such closing transactions can be effected. An option on a stock index
futures contract, interest rate futures contract or currency futures contract,
as contrasted with the direct investment in such a contract, gives the purchaser
the right, in return for the premium paid, to assume a position in the
underlying contract at a specified exercise price at any time on or before the
expiration date of the option. Upon exercise of an option, the delivery of the
futures position by the writer of the option to the holder of the option will be
accompanied by delivery of the accumulated balance in the writer's futures
margin account. The potential loss related to the purchase of an option on a
futures contract is limited to the premium paid for the option (plus transaction
costs). While the price of the option is fixed at the point of sale, the value
of the option does change daily and the change would be reflected in the net
asset value of the Fund.
The purchase of an option on a financial futures contract involves payment
of a premium for the option without any further obligation on the part of the
Fund. If the Fund exercises an option on a futures contract it will be obligated
to post initial margin (and potentially variation margin) for the resulting
futures position just as it would for any futures position. Futures contracts
and options thereon are generally settled by entering into an offsetting
transaction, but no assurance can be given that a position can be offset prior
to settlement or that delivery will occur.
Interest Rate and Equity Swaps and Related Transactions. Certain Funds may
enter into interest rate and equity swaps and may purchase or sell (i.e., write)
interest rate and equity caps, floors and collars. A Fund expects to enter into
these transactions in order to hedge against either a decline in the value of
the securities included in the Fund's portfolio, or against an increase in the
price of the securities which it plans to purchase, or in order to preserve or
maintain a return or spread on a particular investment or portion of its
portfolio or to achieve a particular return on cash balances, or in order to
increase income or gain. Interest rate and equity swaps involve the exchange by
a Fund with another party of their respective commitments to make or receive
payments based on a notional principal amount. The purchase of an interest rate
or equity cap entitles the purchaser, to the extent that a specified index
exceeds a predetermined level, to receive payments on a contractually-based
principal amount from the party selling the interest rate or equity cap. The
purchase of an interest rate or equity floor entitles the purchaser, to the
extent that a specified index falls below a predetermined rate, to receive
payments on a contractually-based principal amount from the party selling the
interest rate or equity floor. A collar is a combination of a cap and a floor
which preserve a certain return within a predetermined range of values.
A Fund may enter into interest rate and equity swaps, caps, floors and
collars on either an asset-based or liability-based basis, depending on whether
it is hedging its assets or its liabilities, and will usually enter into
interest rate and equity swaps on a net basis (i.e., the two payment streams are
netted out), with the Fund receiving or paying, as the case may be, only the net
amount of the two payments. The net amount of the excess, if any, of a Fund's
obligations over its entitlements with respect to each interest rate or equity
swap will be
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accrued on a daily basis, and an amount of liquid assets having an aggregate net
asset value at least equal to the accrued excess will be maintained in a
segregated account by the Fund's custodian in accordance with procedures
established by the Board of Directors. If a Fund enters into an interest rate or
equity swap on other than a net basis, the Fund will maintain a segregated
account in the full amount accrued on 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 has 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 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.
The liquidity of swap agreements will be determined by the investment
manager based on various factors, including (1) the frequency of trades and
quotations, (2) the number of dealers and prospective purchasers in the
marketplace, (3) dealer undertakings to make a market, (4) the nature of the
security (including any demand or tender features), and (5) the nature of the
marketplace for trades (including the ability to assign or offset the Fund's
rights and obligations relating to the investment). Such determination will
govern whether a swap will be deemed within the percentage restriction on
investments in securities that are not readily marketable.
A Fund will maintain liquid assets in a segregated custodial account to
cover its current obligations under swap agreements. If a Fund enters into a
swap agreement on a net basis, it will segregate assets with a daily value at
least equal to the excess, if any, of the Fund's accrued obligations under the
swap agreement over the accrued amount the Fund is entitled to receive under the
agreement. If a Fund enters into a swap agreement on other than a net basis, it
will segregate assets with a value equal to the full amount of the Fund's
accrued obligations under the agreement. See 'Use of Segregated and Other
Special Accounts' below.
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
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and sell caps, floors and collars without limitation, subject to the segregated
account requirement described above.
Indexed Securities. A Fund may purchase securities whose prices are indexed
to the prices of other securities, securities indices, currencies, or other
financial indicators. Indexed securities typically, but not always, are debt
securities or deposits whose value at maturity or coupon rate is determined by
reference to a specific instrument or statistic. Currency-indexed securities
typically are short-term to intermediate-term debt securities whose maturity
values or interest rates are determined by reference to the values of one or
more specified foreign currencies, and may offer higher yields than U.S.
dollar-denominated securities of equivalent issuers. Currency-indexed securities
may be positively or negatively indexed; that is, their maturity value may
increase when the specified currency value increases, resulting in a security
that performs similarly to a foreign currency-denominated instrument, or their
maturity value may decline when foreign currencies increase, resulting in a
security whose price characteristics are similar to a put on the underlying
currency. Currency-indexed securities may also have prices that depend on the
values of a number of different foreign currencies relative to each other.
Combined Transactions. A Fund may enter into multiple transactions,
including multiple options transactions, multiple futures transactions, multiple
currency transactions (including forward currency contracts), multiple interest
rate transactions and any combination of futures, options, currency and interest
rate transactions, instead of a single Derivative, as part of a single or
combined strategy when, in the judgment of the investment manager, it is in the
best interests of the Fund to do so. A combined transaction will usually contain
elements of risk that are present in each of its component transactions.
Although combined transactions will normally be entered into by a Fund based on
the investment manager's judgment that the combined strategies will reduce 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.
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
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transactions at times when SBAM deems it desirable to do so. To the extent a
Fund does not, or cannot, terminate such a transaction in a timely manner, a
Fund may suffer a loss in excess of any amounts that it may have received, or
expected to receive, as a result of entering into the transaction.
Currency hedging involves some of the same risks and considerations as
other transactions with similar instruments. Currency transactions can result in
losses to a Fund if the currency being hedged fluctuates in value to a degree or
in a direction that is not anticipated. Further, the risk exists that the
perceived linkage between various currencies may not be present or may not be
present during the particular time that the Fund is engaging in proxy hedging.
Currency transactions are also subject to risks different from those of other
portfolio transactions. Because currency control is of great importance to the
issuing governments and influences economic 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 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 liquid assets
with its custodian, or a designated sub-custodian, to the extent the Fund's
obligations are not otherwise 'covered' through ownership of the underlying
security, financial instrument or currency. In general,
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either the full amount of any obligation by a Fund to pay or deliver securities
or assets must be covered at all times by the securities, instruments or
currency required to be delivered, or, subject to any regulatory restrictions,
an amount of liquid assets at least equal to the current amount of the
obligation must be segregated with the custodian or sub-custodian in accordance
with procedures established by the Board of Directors. The segregated assets
cannot be sold or transferred unless equivalent assets are substituted in their
place or it is no longer necessary to segregate them. A call option on
securities written by a Fund, for example, will require the Fund to hold the
securities subject to the call (or securities convertible into the needed
securities without additional consideration) or to segregate liquid high grade
debt obligations sufficient to purchase and deliver the securities if the call
is exercised. A call option sold by a Fund on an index will require the Fund to
own portfolio securities that correlate with the index or to segregate liquid
high grade debt obligations equal to the excess of the index value over the
exercise price on a current basis. A put option on securities written by a Fund
will require the Fund to segregate liquid high grade debt obligations equal to
the exercise price. Except when a Fund enters into a forward contract in
connection with the purchase or sale of a security denominated in a foreign
currency or for other non-speculative purposes, which requires no segregation, a
currency contract that obligates the Fund to buy or sell a foreign currency will
generally require the Fund to hold an amount of that currency or liquid
securities denominated in that currency equal to the Fund's obligations or to
segregate liquid high grade debt obligations equal to the amount of the Fund's
obligations.
OTC options entered into by a Fund, including those on securities,
currency, financial instruments or indices, and OCC-issued and exchange-listed
index options will generally provide for cash settlement, although the Fund will
not be required to do so. As a result, when a Fund sells these instruments it
will segregate an amount of assets equal to its obligations under the options.
OCC-issued and exchange-listed options sold by a Fund other than those described
above generally settle with physical delivery, and the Fund will segregate an
amount of assets equal to the full value of the option. OTC options settling
with physical delivery or with an election of either physical delivery or cash
settlement will be treated the same as other options settling with physical
delivery.
In the case of a futures contract or an option on a futures contract, a
Fund must deposit initial margin and, in some instances, daily variation margin
in addition to segregating liquid assets sufficient to meet its obligations to
purchase or provide securities or currencies, or to pay the amount owed at the
expiration of an index-based futures contract. A Fund will accrue the net amount
of the excess, if any, of its obligations relating to swaps over its
entitlements with respect to each swap on a daily basis and will segregate with
its custodian, or designated sub-custodian, an amount of liquid assets having an
aggregate value equal to at least the accrued excess. Caps, floors and collars
require segregation of liquid assets with a value equal to the Fund's net
obligation, if any.
Derivatives may be covered by means other than those described above when
consistent with applicable regulatory policies. A Fund may also enter into
offsetting transactions so that its combined position, coupled with any
segregated assets, equals its net outstanding obligation in related Derivatives.
A Fund could purchase a put option, for example, if the strike price of that
option is the same or higher than the strike price of a put option sold by the
Fund. Moreover, instead of segregating assets if it holds a futures contract or
forward contract, a Fund could purchase a put option on the same futures
contract or forward contract with a strike price as high or higher than the
price of the contract held. Other Derivatives may also be offset in
combinations. If the offsetting transaction terminates at the time of or after
the primary transaction, no segregation is required, but if it terminates prior
to that time, assets equal to any remaining obligation would need to be
segregated.
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-
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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.'
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 397 days 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 INVESTMENT CONSIDERATIONS RELATING TO
NEW YORK MUNICIPAL OBLIGATIONS
Some of the significant financial considerations relating to the
investments of the New York Municipal Money Market 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
State-guaranteed bonds of the Port Authority of New York and New Jersey were
fully retired on December 31, 1996. State-guaranteed bonds issued by the Thruway
Authority were fully retired on July 1, 1995.
In February 1997, the Job Development Authority ('JDA') issued
approximately $85 million of State-guaranteed bonds to refinance certain of its
outstanding bonds and notes in order to restructure and improve JDA's capital
structure. Due to concerns regarding the economic viability of its programs,
JDA's loan and loan guarantee activities had been suspended since the Governor
took office in 1995. As a result of the structural imbalances in JDA's capital
structure, and defaults in its loan portfolio and loan guarantee program
incurred between 1991 and 1996, JDA would have experienced a debt service cash
flow shortfall had it not completed its recent refinancing. JDA anticipates that
it will transact additional refinancings in 1999, 2000 and 2003 to complete its
long-term plan of finance and further alleviate cash flow imbalances which are
likely to occur in future years. The State does not anticipate that it will be
called upon to make any payments pursuant to the State guarantee in the 1997-98
fiscal year. JDA recently resumed its lending activities under a revised set of
lending programs and underwriting guidelines.
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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 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 State 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 obligation 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 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 anticipated that its capital programs would be financed, in part,
through borrowings by the State and public authorities in the 1997-98 fiscal
year. The State expected to issue $605 million in general obligation bonds
(including $140 million for purposes of redeeming outstanding BANs) and $140
million in general obligation commercial paper. The Legislature also authorized
the issuance of up to $311 million in COPs during the State's 1997-98 fiscal
year for equipment purchases.
The proposed 1997-98 through 2002-2003 Capital Program and Financing Plan
was released with the 1998-99 Executive Budget on January 20, 1998. As part of
the Plan, changes were proposed to the State's 1997-98 borrowing plan,
including: delay of the issuance of Certificates of Participation ('COPs') to
finance welfare information systems through 1998-99 to permit a thorough
assessment of needs; and the elimination of issuances for the CEFAP to reflect
the proposed conversion of that bond-financed program to pay-as-you-go
financing.
As a result of these changes, the State's 1997-98 borrowing plan now
reflects: $501 million in general obligation bonds (including $140 million for
the purposes of redeeming outstanding BANs) and $140 million in general
obligation paper; the issuance of $83 million in COPs for equipment purchases;
and approximately $1.8 billion in borrowings by public authorities pursuant to
lease-purchase and contractual-obligation financings for capital programs of the
State, including costs of issuance, reserve funds, and other costs, net of
anticipated refundings and other adjustments for 1997-98 capital projects. The
projection of
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State borrowings for the 1997-98 fiscal year is subject to change as market
conditions, interest rates and other factors vary through the end of the fiscal
year.
Borrowings by other public authorities pursuant to lease-purchase and
contractual-obligation financings for capital programs of the State are
projected to total $1.9 billion, including costs of issuances, reserve funds,
and other costs, net of anticipated refundings and other adjustments for 1997-98
capital projects. Included therein are borrowings by (i) DASNY for the State
University of New York ('SUNY'), The City University of New York ('CUNY'),
health facilities, and mental health facilities; (ii) the 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') and other authorities. In addition, in the 1997 legislative session, the
Legislature also approved two new authorizations for lease-purchase and
contractual obligation financings. An aggregate $425 million was authorized for
four public authorities (Thruway Authority, DASNY, UDC and HFA) for the
Community Enhancement Facility Program for economic development purposes,
including sports facilities, cultural institutions, transportation,
infrastructure and other community facility projects. DASNY was also authorized
to issue up to $40 million to finance the expansion and improvement of
facilities at the Albany County airport.
In addition to the arrangements described above, State law provides for the
creation of State municipal assistance corporations, which are public
authorities established to aid financially troubled localities. The Municipal
Assistance Corporation for The City of New York ('MAC') was created to provide
financing assistance to New York City (the 'City'). 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 issued by Troy MAC, however, do not include moral obligation
provisions.
The 1997-1998 State Financial Plan. The State's budget for the State's
1997-98 fiscal year, commencing on April 1, 1997 and ending on March 31, 1998,
was enacted by the Legislature on August 4, 1997. The State Financial Plan for
the 1997-98 fiscal year (the 'State Financial Plan') was formulated on August
11, 1997 and was 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 Financial Plan is updated in October and
January. The State Financial Plan was projected to be balanced on a cash basis;
however there can be no assurance that the State Financial Plan will continue to
be in balance. Total General Fund receipts and transfers from other funds were
projected to be $35.09 billion, while total General Fund disbursements and
transfers to other funds were projected to be $34.60 billion. After adjustments
for comparability, the adopted 1997-98 budget projected a year-over-year
increase in General Fund disbursements of 5.2 percent. As compared to the
Governor's proposed budget as revised in February 1997, the State's adopted
budget for 1997-98 increased General Fund spending by $1.70 billion, primarily
from increases for local assistance ($1.3 billion). Resources used to fund these
additional expenditures included $540 million in increased revenues projected
for 1997-98, increased resources produced in the 1996-1997 fiscal year that were
to be utilized in 1997-1998, reestimates of social service, fringe benefit and
other spending, and certain non-recurring resources.
The State Financial Plan included actions that would have an effect on the
budget outlook for State fiscal year 1997-98 and beyond. The State Division of
the Budget ('DOB') estimated that the 1997-98 State Financial Plan contained
actions that provide non-recurring resources or savings totaling approximately
$270 million. These included the use of $200 million in federal reimbursement
funds available from retroactive social service claims
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approved by the federal government in April 1997. The balance is composed of
various other actions, primarily the transfer of unused special revenue fund
balances to the General Fund.
The State closed projected budget gaps of $5.0 billion, $3.9 billion and
$2.3 billion for its 1995-96 through 1997-98 fiscal years, respectively. The
1998-99 gap was projected at $1.68 billion, in the outyear projections submitted
to the legislature in February 1997. As a result of changes made in the enacted
budget, that gap is now expected to be about the same or smaller than the amount
previously projected, after application of the $530 million reserve for future
needs. The expected gap is smaller than the three previous budget gaps closed by
the State.
The outyear projection will be impacted by a variety of factors. Certain
actions taken in the State's 1997-98 fiscal year, such as medicaid and welfare
reforms, are expected to provide recurring savings in future fiscal years.
Continued controls on State agency spending will also provide recurring savings.
The availability of $530 million in reserves created as a part of the 1997-98
adopted budget and included in the State Financial Plan is expected to benefit
the 1998-99 fiscal year. Sustained growth in the State's economy and continued
declines in welfare case load and health care costs would also produce
additional savings in the State Financial Plan. Finally, various federal
actions, including the potential benefit effect on State tax receipts from
changes to the federal tax treatment of capital gains, would potentially provide
significant benefits to the State over the next several years.
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.
Uncertainties with regard to the economy, as well as the outcome of certain
litigation now pending against the State, could produce adverse effects on the
State's projections of receipts and disbursements. For example, changes to
current levels of interest rates or deteriorating world economic conditions
could have an adverse effect on the State economy and produce results in the
current fiscal year that are worse than predicted. Similarly, adverse judgments
in legal proceedings against the State could exceed amounts reserved in the
1997-98 Financial Plan for payment of such judgments and produce additional
unbudgeted costs to the State.
In recent years, the State has failed to adopt a budget prior to the
beginning of its fiscal year. A delay in the adoption of the State's budget
beyond the statutory April 1 deadline could delay the projected receipt by the
City of State aid, and there can be no assurance that State budgets in future
fiscal years will be adopted by the April 1 statutory deadline.
The following discussion summarizes the 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 1997-98 fiscal year, the General Fund was expected by the
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State to account for approximately 48 percent of total governmental-funds
disbursements 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 was projected to be balanced on a cash basis for the
1997-98 fiscal year; however there can be no assurance that the General Fund
will remain balanced for the entire fiscal year. Total receipts are projected to
be $35.09 billion, an increase of $2 billion over total receipts in the prior
fiscal year. Total General Fund disbursements are projected to be $34.60
billion, an increase of $2.05 billion over the total amount disbursed and
transferred in the prior fiscal 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 was expected to comprise more than 42
percent of total governmental funds receipts and disbursements in the 1997-98
fiscal year, about three-quarters of that activity relates to Federally-funded
programs.
Projected receipts in this fund type totaled $28.22 billion, an increase of
$2.51 billion over the prior year. Projected disbursements in this fund type
totaled $28.45 billion, an increase of $2.43 billion over 1996-97 levels.
Disbursements from Federal funds, primarily the Federal share of Medicaid and
other social services programs, were projected to total $21.19 billion in the
1997-98 fiscal year. Remaining projected spending of $7.26 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 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 various other
capital funds established to distinguish specific capital construction purposes
supported by other revenues. In the 1997-98 fiscal year, activity in these funds
was expected to comprise 5 percent of total governmental receipts and
disbursements.
Total receipts in this fund type were projected at $3.30 billion. Bond and
note proceeds were expected to provide $605 million in other financing sources.
Disbursements from this fund type were projected to be $3.70 billion, a decrease
of $154 million (4.3 percent) over prior-year levels. The Dedicated Highway and
Bridge Trust Fund is the single largest dedicated fund, comprising an estimated
$982 million (27 percent) of the activity in this fund type. Total spending for
capital projects would be financed through a combination of sources: federal
grants (29 percent), public authority bond proceeds (31 percent), general
obligation bond proceeds (15 percent), and pay-as-you-go revenues (25 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 was expected to comprise 4 percent of total governmental fund receipts and
disbursements in the 1997-98 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 1997-98 fiscal year, total disbursements in this fund type were projected at
$3.17 billion, an increase of $64 million or 25 percent, most of which is
explained by increases in the General Fund transfer. The projected transfer from
the General Fund of $2.07 billion was expected to finance 65 percent of these
payments.
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Prior Fiscal years. A narrative description of cash-basis results in the
General Fund is presented below 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 five fiscal years,
however, the State has recorded balanced budgets on a cash basis, with positive
fund balances as described below. There can be no assurance, however, that such
trends will continue.
Fiscal year 1996-97. The State ended its 1996-97 fiscal year on March 31,
1997 in balance on a cash basis, with a General Fund cash surplus as reported by
DOB of approximately $1.4 billion. The cash surplus was derived primarily from
higher-than-expected revenues and lower-than-expected spending for social
services programs. The Governor in his Executive Budget applied $1.05 billion of
the cash surplus amount to finance the 1997-98 Financial Plan, and the
additional $373 million is available for use in financing the 1997-98 Financial
Plan when enacted by the State Legislature.
The General Fund closing fund balance was $433 million. Of that amount,
$317 million was in the TSRF, after a required deposit of $15 million and an
additional deposit of $65 million in 1996-97. The TSRF can 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 remains on deposit in the CRF. This
fund assists the State in financing any extraordinary litigation costs during
the fiscal year. The remaining $75 million reflects amounts on deposit in the
Community Projects Fund. This fund was created to fund certain legislative
initiatives. The General Fund closing fund balance does not include $1.86
billion in the tax refund reserve account, of which $521 million was made
available as a result of the Local Government Assistance Corporation ('LGAC')
financing program and was required to be on deposit as of March 31, 1997.
General Fund receipts and transfers from other funds for the 1996-97 fiscal
year totaled $33.04 billion, an increase of 0.7 percent from the previous fiscal
year (excluding deposits into the tax refund reserve account). General Fund
disbursements and transfers to other funds totaled $32.90 billion for the
1996-97 fiscal year, an increase of 0.7 percent from the 1995-96 fiscal year.
Fiscal Year 1995-96. The State ended its 1995-96 fiscal year on March 31,
1996 with a General Fund cash surplus. The DOB 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 $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
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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.
Fiscal Year 1994-95. 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.
Other Funds. 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 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.
In the Special Revenue Funds, disbursements increased from $24.38 billion
to $26.02 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 declined from $3.62 billion to
$3.54 billion over the last three years, as spending for miscellaneous capital
programs decreased, partially offset by increases for mental hygiene, health 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.
State Financial Plan Considerations. 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.
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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. 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 DOB 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 State Financial Plan was based upon a July 1997 projection by DOB of
national and State economic activity. The information below summarizes the
national and State economic situation and outlook upon which projections of
receipts and certain disbursements were made for the 1997-98 Financial Plan.
On August 22, 1996 the President signed the Personal Responsibility and
Work Opportunity Reconciliation Act of 1996 (the '1996 Welfare Act'). This new
law made significant changes to welfare and other benefit programs. Major
changes included conversion of AFDC into the TANF block grant to states, new
work requirements and
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durational limits on recipients of TANF, and limits on assistance provided to
immigrants. City expenditures as a result of welfare reform are estimated in the
Financial Plan at $49 million in fiscal year 1998, $45 million in fiscal year
1999, $38 million in fiscal year 2000 and $44 million in fiscal year 2001. In
addition, the City's naturalization initiative, CITIZENSHIP NYC, will assist
immigrants made ineligible under Federal law to regain eligibility for benefits,
by helping them through the application process for citizenship. The Financial
Plan assumes that 75% of those immigrants who otherwise would have lost benefits
will become citizens, resulting in projected savings to the City in public
assistance expenditures of $6 million in fiscal year 1999, $24 million in fiscal
year 2000 and $25 million in fiscal year 2001. Federal legislation enacted
August 5, 1997, reinstated eligibility for even more immigrants currently on the
rolls than projected. The outyear estimates made by OMB are preliminary and
depend on a variety of factors, which are impossible to predict, including the
implementation of workfare and child care programs modified by newly enacted
State law, the impact of possible litigation challenging the law, and the impact
of adverse economic developments on welfare and other benefit programs. In
accordance with the Federal welfare reform law, the Governor submitted a State
plan to the Federal government and such plan was deemed complete as of December
2, 1996. New York State's welfare reform, bringing the State into compliance
with the 1996 Welfare Act and making changes to the Home Relief program, was
signed into law on August 20, 1997. The Governor submitted an amended State plan
to the Federal government, reflecting these changes, on September 20, 1997.
Implementation of the changes at the State level will in part determine the
possible costs or savings to the City. It is expected that OMB's preliminary
estimates of potential costs will change, based on new policies to be developed
by the State and City with respect to benefits no longer funded as Federal
entitlements.
The Governor is required to submit a balanced budget to the State
Legislature and has indicated that he will close any potential imbalance in the
State Financial Plan primarily through General Fund expenditure reductions and
without increases in taxes or deferrals of scheduled tax reductions. It is
expected by the State DOB that the State Financial Plan will reflect a
continuing strategy of substantially reduced State spending, including agency
consolidations, reductions in the State work force, and efficiency and
productivity initiatives. The division of the Budget intends to update the State
Financial Plan and provide an update to the Annual Information Statement upon
release of the 1997-98 Executive Budget.
U.S. Economy. The national economy has resumed a more robust rate of growth
after a 'soft landing' in 1995, with approximately 14 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 300,000 jobs since late 1992, employment growth in the State has
bee 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.
DOB forecasts that national economic growth will continue in 1998 and 1999,
it is expected to be substantially slower than is was in 1997. Real Gross
Domestic Product ('GDP') is projected to increase 2.6 percent in 1998, which is
a full percentage point lower than the estimated 1997 growth rate. In 1999, the
GDP is expected to fall to 2.0 percent. The growth of nominal GDP is projected
to decline from 5.8 percent in 1997 to 4.8 percent in 1998 and to 4.3 percent in
1999. The inflation rate is expected to drop to 2.2 percent in 1998, before
rising to 2.5 percent in 1999. The annual rate of job growth is expected to be
2.3 percent in 1998, equaling the strong growth rate experienced in 1997. In
1999, however, employment growth is forecast to slow markedly to 1.3 percent.
Growth in personal income and wages is expected to slow in 1998 and 1999.
New York Economy. The DOB forecast of the State's economy projects
continued moderate growth in 1998 and 1999 for employment, wages, and personal
income. The growth is projected to lessen, however, during the course of the two
years. Personal income is estimated to be 5.4 percent in 1997, 4.8 percent in
1998, and 4.3 percent in 1999. Increases in 1998 year end bonus payments are
projected to be modest, a substantial change from the rate of increase of recent
years. Overall employment is expected to continue at a modest rate,
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reflecting the slowing growth in the national economy, continued spending
restraint in government, and restructuring in the health, social service, and
banking sectors.
Current forecasts for continued growth, and any resultant impact on the
State's financial plans, contain some uncertainties. Stronger-than-expected
gains in employment could lead to a significant improvement in consumer
spending. Investments could also remain robust. Conversely, hints of
accelerating inflation 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 declines in banking employment and the direction of
employment change that is likely to accompany telecommunications and energy
deregulation.
New York is the third most populous state in the nation and has a
relatively high level of personal wealth. The State's economy is diverse, with a
comparatively large share of the nation's finance, insurance, transportation,
communications and services employment, and a very small share of the nation's
farming and mining activity. The State's location and its excellent air
transport facilities and natural harbors have made it an important link in
international commerce. Travel and tourism constitute an important part of the
economy. Like the rest of the nation, New York has a declining proportion of its
work force engaged in manufacturing, and an increasing proportion engaged in
service industries. The following paragraphs summarize the state of major
sectors of the New York economy:
Services: The services sector, which includes entertainment, personal
services, such as health care and auto repairs, and business-related
services, such as information processing, law and accounting, is the
State's leading economic sector. The services sector accounts for more than
three of every ten nonagricultural jobs in New York and has a noticeably
higher proportion of total jobs than does the rest of the nation.
Manufacturing: Manufacturing employment continues to decline in
importance in New York, as in most other states, and New York's economy is
less reliant on this sector than is the nation. The principal manufacturing
industries in recent years produced printing and publishing materials,
instruments and related products, machinery, apparel and finished fabric
products, electronic and other electric equipment, food and related
products, chemicals and allied products, and fabricated metal products.
Trade: Wholesale and retail trade is the second largest sector in
terms of nonagricultural jobs in New York but is considerably smaller when
measured by income share. Trade consists of wholesale businesses and retail
businesses, such as department stores and eating and drinking
establishments.
Finance, Insurance and Real Estate: New York City is the nation's
leading center of banking and finance and, as a result, this is a far more
important sector in the State than in the nation as a whole. Although this
sector accounts for under one-tenth of all nonagricultural jobs in the
State, it contributes over one-sixth of all non-farm labor and proprietors'
income.
Agriculture: Farming is an important part of the economy of large
regions of the State, although it constitutes a very minor part of total
State output. Principal agricultural products of the State include milk and
dairy products, greenhouse and nursery products, apples and other fruits,
and fresh vegetables. New York ranks among the nation's leaders in the
production of these commodities.
Government: Federal, State and local government together are the third
largest sector in terms of nonagricultural jobs, with the bulk of the
employment accounted for by local governments. Public education is the
source of nearly one-half of total state and local government employment.
Relative to the nation, the State has a smaller share of manufacturing and
construction and a larger share of service-related industries. The State's
finance, insurance, and real estate share, as measured by income, is
particularly large relative to the nation. The State is likely to be less
affected than the nation as a whole during an economic recession that is
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concentrated in manufacturing and construction, but likely to be more affected
during a recession that is concentrated in the service-producing sector.
In the calendar years 1987 through 1996, 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, total personal income in the
State has risen more slowly than the national average since 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.
Financial Plan Updates. The State is required to issue Financial Plan
updates to the cash-basis State Financial Plan in July, October, and January,
respectively. These quarterly updates reflect analysis of actual receipts and
disbursements for each respective period and revised estimates of receipts and
disbursements for the then current fiscal year. The First Quarter Update was
incorporated into the cash-basis State Financial Plan of August 15, 1997 (the
'August Financial Plan').
The Mid-Year Update. The State issued its first update to the cash-basis
1997-98 State Financial Plan (the 'Mid-Year Update') on October 30, 1997. No
revisions were made to the estimates of receipts and disbursements based on the
current economic forecasts for both the nation and the State. The Mid-Year
Update continues to reflect a balanced 1997-98 State Financial Plan, with a
projected General Fund reserve for future needs of $530 million. This projected
surplus is now considered to be at the low end of the range of possible outcomes
for the 1997-98 fiscal year.
The forecast of the State economy also remains unchanged from the one
formulated with the August Financial Plan. Steady growth was projected to
continue through the second half of 1997. Personal income was projected to
increase by 6.1 percent in 1997 and 4.5 percent in 1998, reflecting projected
wage growth fueled in part by financial sector bonus payments. The forecast
projected employment increases of 1.4 percent in 1997 and 1.0 percent in 1998.
The projected 1997-98 closing fund balance in the General Fund of $927
million reflects a reserve for future needs of $530 million, a balance of $332
million in the Tax Stabilization Reserve Fund (following a payment of $15
million during the current fiscal year) and a balance of $65 million in the
Contingency Reserve Fund (following a deposit of $24 million during the current
fiscal year). These two reserves remain available to help offset potential risks
to the Financial Plan. Based upon experience to date, it is likely that the
closing fund balance will be larger, providing additional resources for the
1998-99 fiscal year.
All governmental funds receipts and disbursements are also unchanged. The
projected closing fund balance for all governmental funds remains $1.43 billion.
The annual increase in spending for all governmental funds remains approximately
7 percent. Total projected receipts in all governmental funds (excluding
transfers) are approximately $67.31 billion. All funds disbursements (excluding
transfers) are $67.37 billion. Total net other financing sources across all
governmental funds are projected at $505 million.
On September 11, 1997, the State Comptroller released a report entitled
'The 1997-98 Budget: Fiscal Review and Analysis' in which he identified several
risks to the State Financial Plan and estimated that the State faces a potential
imbalance in receipts and disbursements of approximately $1.5 billion for the
State's 1998-99 fiscal year and approximately $3.4 billion for the State's
1999-00 fiscal year. The 1998-99 fiscal year estimate by the State Comptroller
is within the range discussed by the Division of the Budget in the section
entitled 'Outyear Projections of Receipts and Disbursements' in the Annual
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Information Statement of August 15, 1997. Any increase in the 1997-98 reserve
for future needs would reduce this imbalance further and, based upon results to
date, such an outcome is considered possible. In addition, the Comptroller
identified risks in future years from an economic slowdown and from spending and
revenue actions enacted as a part of the 1997-98 budget that will add pressure
to future budget balance. The Governor is required to submit a balanced budget
each year to the State Legislature.
On August 11, 1997 President Clinton exercised his line item veto powers to
cancel a provision in the Federal Balanced Budget Act of 1997 that would have
deemed New York State's health care provider taxes to be approved by the federal
government. New York and several other states have used hospital rate
assessments and other provider tax mechanisms to finance various Medicaid and
health insurance programs since the early 1980s. The State's process of taxation
and redistribution of health care dollars was sanctioned by federal legislation
in 1987 and 1991. However, the federal Health Care Financing Administration
(HCFA) regulations governing the use of provider taxes require the State to seek
waivers from HCFA that would grant explicit approval of the provider taxing
system now in place. The State filed the majority of these waivers with HCFA in
1995 but has yet to receive final approval.
The Balanced Budget Act of 1997 provision passed by Congress was intended
to rectify the uncertainty created by continued inaction on the State's waiver
requests. A federal disallowance of the State's provider tax system could
jeopardize up to $2.6 billion in Medicaid reimbursement received through
December 31, 1998. The President's veto message valued any potential
disallowance at $200 million. The 1997-98 Financial Plan does not anticipate any
provider tax disallowance.
On October 9, 1997 the President offered a corrective amendment to the HCFA
regulations governing such taxes. The Governor has stated that this proposal
does not appear to address all of the State's concerns, and negotiations are
ongoing between the State and HCFA. In addition, the City of New York and other
affected parties in the health care industry have filed a lawsuit challenging
the constitutionality of the President's line item veto.
On July 31, 1997, the New York State Tax Appeals Tribunal delivered a
decision involving the computation of itemized deductions and personal income
taxes of certain high income taxpayers. By law, the State cannot appeal the
Tribunal's decision. The decision will lower income tax liability attributable
to such taxpayers for the 1997 and earlier open tax years, as well as on a
prospective basis.
The January Update. The State revised its 1997-98 Financial Plan on January
20, 1998 (the 'January Update'), in conjunction with the release of its
Executive Budget Forecast for the 1998-99 fiscal year. The State predicted that
the 1997-98 General Fund Financial Plan would continue to be balanced, with a
projected cash surplus of $1.83 billion, an increase of $1.32 billion from the
State's Mid-Year Update. The General Fund closing balance is projected to be
$465 million at the end of the 1997-98 fiscal year, a decline of $462 million
from the Mid-Year Update. This decline reflects the application of $530 million
in undesignated reserve and additional surplus money projected in the January
Update to pay for certain one-time accelerated payments.
Personal income tax collections for 1997-98 are projected at $18.5 billion,
a $363 million decrease from the Mid-Year Update. Business tax receipts are
projected to increase by $158 million, for a total of $4.98 billion. User tax
estimates increased $52 million to $7.06 billion. Other tax receipts are
projected to increase by $103 million over the Mid-Year Update to total $1.09
billion for the fiscal year.
The State projected that disbursements would increase by $565 million over
the Mid-Year Update. The State attributed the majority of the increase to a
one-time dispersement of a $561 million pre-payment of expenditures previously
scheduled for 1998-99. Outside of this accelerated payment the projected General
Fund spending for the 1997-98 year remained essentially unchanged from the
Mid-Year Update.
The 1998-99 Executive Budget. The Governor presented the 1998-99 Executive
Budget (the 'Executive Budget') to the Legislature on January 20, 1998. The
Executive Budget contains financial projections for the State's 1997-98 through
2000-01 fiscal years, detailed
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estimates of receipts, and a proposed Capital Program and Financing Plan. The
State expects that the Governor will prepare amendments to the Executive Budget
as permitted under applicable law and that these amendments will be reflected in
a revised financial plan. There can be no assurance that the Legislature will
enact into law the Executive Budget as proposed by the Governor or that the
State's budget projections will not differ materially or adversely from
projections set forth in any of its updates.
Under the Executive Budget, the 1998-99 Financial Plan is projected to be
balanced on a cash basis in the General Fund. Total General Fund receipts
(including transfers from other funds) are projected to be $36.22 billion, an
increase of $1.02 billion over the estimated 1997-98 level. The State General
Fund tax base is projected to increase approximately six percent during 1998-99,
after adjusting for tax law and administrative changes. Personal income tax
collections in the General Fund are projected to increase to $19.82 billion, a
$1.32 billion increase over 1997-98. User tax collections and fee receipts are
projected to reach $7.2 billion, an increase of $144 million over the previous
year. Business tax receipts are projected to decline in 1998-99 from $4.98 to
$4.96 billion largely due to scheduled tax reductions. Receipts from other taxes
are also projected to decline from $1.79 billion to $1.01 billion in 1998-99.
Miscellaneous receipts are projected to decline from $1.57 billion in 1997-98 to
$1.4 billion in the 1998-99 fiscal year.
General Fund distributions, including transfers to other funds, are
projected to be $36.18 billion in 1998-99, an increase of $1.02 billion over
projected expenditures (including prepayments) for the 1997-98 fiscal year. The
Executive Budget proposes a year-to-year growth in General Fund spending of 2.89
percent, a growth in State Funds spending of 8.5 percent, and an increase in All
Government Funds spending of 7.6 percent. Dispersements from the category of
Grants to Local Governments (which constitute 67.9 percent of all General Fund
spending) are projected to increase by $931 million to $24.55 billion in
1998-99, or 3.9 percent above 1997-98. Support of State operations is projected
to increase by $524 million to $6.73 billion, or 8.4 percent higher than
1997-98. Total spending in General State charges is projected to decline
slightly in 1998-99 to $2.23 billion. Transfers in support of debt services are
projected to grow 5.8 percent in 1998-99, from $2.03 billion to $2.15 billion.
The Division of Budget believes that the economic assumptions and
projections of receipts and disbursements accompanying the 1998-99 Executive
Budget are reasonable. However, 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, can vary from fiscal year to fiscal
year, and are frequently the result of actions taken not only by the State but
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. For example, there can be no assurance that the Legislature
will enact the Governor's proposals or the State's actions will be sufficient to
preserve budgetary balance or align recurring receipts and disbursements in
either 1998-99 or future fiscal years.
Uncertainties with regard to the economy present the largest potential risk
to future budget balance in New York State. The risk includes whether the
financial market changes or broader economic 'correction' occurs during the
period and is heightened by the relatively lengthy expansions in the market that
are currently underway. The securities industry is more important to the New
York economy than the national economy and a significant deterioration in stock
market performance could ultimately produce adverse changes in wage and
employment levels. Additionally, a normal 'forecast error' of one percentage
point in the expected growth rate could cumulatively raise or lower receipts by
over $1 billion by the last year of the 1998-2001 projection period. On the
other hand, the national or State economy may continue to perform better than
projected, which could produce beneficial results in State receipts.
Ratings Agencies. On August 28, 1997, Standard & Poor's ('S&P') revised its
ratings on the State's general obligation bonds to A from A-, and, in addition,
revised its ratings on the State's moral obligation, lease purchase, guaranteed
and contractual obligation debt. S&P rated the State's general obligation bonds
AA- from August 1987 to March 1990 and A+
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from November 1982 to August 1987. In March 1990, S&P lowered its rating of all
of the State's general obligation bonds from AA- to AA- to A. On January 13,
1992, 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. On April 26, 1993 S&P
revised the rating outlook assessment to stable. On February 14, 1994, S&P
revised its outlook on the State's general obligation bonds to positive and, on
August 5, 1996, confirmed its A- rating.
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. On January 6, 1992, Moody's reduced its ratings on
outstanding limited-liability State lease purchase and contractual obligations
from A to Baa1.
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, 1996 there were 17 public
authorities that had outstanding debt of $100 million or more each, and the
aggregate outstanding debt, including refunding bonds, of all state public
authorities was $75.4 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.
The State's experience has been that if an Authority suffers serious
financial difficulties, both the ability of the State and the Authorities to
obtain financing in the public credit markets and the market price of the
State's outstanding bonds and notes may be adversely affected. The New York
State HFA, the New York State Urban Development Corporation and certain other
Authorities have in the past required and continue to require substantial
amounts of assistance from the State to meet debt service costs or to pay
operating expenses. Further assistance, possibly in increasing amounts, may be
required for these, or other, Authorities in the future. In addition, certain
other statutory arrangements provide for State local assistance payments
otherwise payable to localities to be made under certain circumstances to
certain Authorities. The State has no obligation to provide additional
assistance to localities whose local assistance payments have been paid to
Authorities under these arrangements. However, in the event that such local
assistance payments are so diverted, the affected localities could seek
additional State funds.
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
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Commuter Railroad Company and the Metropolitan Suburban Bus Authority. In
addition, 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 1997-98 fiscal year, total State assistance to the MTA is projected to total
approximately $1.2 billion, an increase of $76 million over the 1996-97 fiscal
year.
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 $12.17 billion MTA capital plan for the 1995 through 1999
calendar years (the '1995-99 Capital Program'). In July 1997, the Capital
Program Review Board approved the 1995-99 Capital Program. This plan supersedes
the overlapping portion of the MTA's 1992-96 Capital Program. 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
future capital programs 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 1997-98
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 Troy avoid default on certain obligations. The
legislation creating Troy MAC prohibits the
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City of Troy from seeking federal bankruptcy protection while Troy MAC bonds are
outstanding.
Eighteen 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 1995, the total indebtedness
of all localities in the State other than the City was approximately $19.0
billion. A small portion (approximately $102.3 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. Eighteen
localities had outstanding indebtedness for deficit financing at the close of
their fiscal year ending in 1995.
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)
employee welfare benefit plans where plaintiffs are seeking a declaratory
judgment nullifying on the ground of federal preemption provisions of Section
2807-c of the Public Health Law and implementing regulations which impose a bad
debt and charity care allowance on all hospital bills and a 13 percent surcharge
on inpatient bills paid by employee welfare benefit plans; (ii) several
challenges to provisions of Chapter 81 of the Laws of 1995 which alter 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) alleged responsibility of State officials to
assist in remedying racial segregation in the City of Yonkers; (vii) 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; (viii) challenges to the
promulgation of the State's proposed procedure to determine the eligibility for
and nature of home care services for Medicaid recipients; (ix) a challenge to
the constitutionality of petroleum business tax assessments authorized by Tax
Law SS 301; (x) 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; (xi) a challenge to the constitutionality of the Clean
Water/Clean Air Bond Act of 1996 and its implementing regulations; (xii) two
challenges to regulations promulgated by the Superintendent of Insurance that
established excess medical malpractice premium rates for the 1986-87 through
1996-97 fiscal years; and (xiii) an action to compel the State to enforce sales
and excise taxes imposed on tobacco products and motor fuel sold to non-Indian
customers on Indian reservations.
Adverse developments in the proceedings described above or the initiation
of new proceedings could affect the ability of the State to maintain balanced
1997-98 and 1998-99 State Financial Plans. In its Notes to its General Purpose
Financial Statements for the fiscal year ended March 31, 1997, the State reports
its estimated liability for awards and anticipated unfavorable judgments at $364
million. There can be no assurance that an
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adverse decision in any of the above cited proceedings would not exceed the
amount that the 1997-98 and 1998-99 State Financial Plans reserve for the
payment of judgments and, therefore, could affect the ability of the State to
maintain balanced plans.
NEW YORK CITY
The fiscal health of the State may also be particularly affected by the
fiscal health of 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. Current law requires the City to prepare four-year
annual financial plans, which are reviewed and revised on a quarterly basis and
includes capital, revenue, and expense projections and outlines proposed
gap-closing for the years with projected budget gaps. An 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 Municipal Assistance Corporation for the City of New York
('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 (the 'City 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 projections set forth in the City
Financial Plan 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.
Although the City has balanced its budget since 1981, estimates of the
City's revenues and expenditures, which are based on numerous assumptions, are
subject to various uncertainties. If, for example, expected federal or State aid
is not forthcoming, if unforeseen developments in the economy significantly
reduce revenues derived from economically sensitive taxes or necessitate
increased expenditures for public assistance, if the City should negotiate wage
increases for its employees greater than the amounts provided for in the City's
financial plan or if other uncertainties materialize that reduce expected
revenues or increase projected expenditures, then, to avoid operating deficits,
the City may be required to implement additional actions, including increases in
taxes and reductions in essential City services. The City might also seek
additional assistance from the State. 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.
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,
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cash flow, and debt service requirements for, and financial plan compliance by,
the City and its Covered Organizations. According to recent staff reports, while
economic recovery in New York City has been slower than in other regions of the
country, a surge in Wall Street profitability resulted in increased tax revenues
and generated a substantial surplus for the City in fiscal year 1996-97.
Although several sectors of the City's economy have expanded recently,
especially tourism and business and professional services, City tax revenues
remain heavily dependent on the continued profitability of the securities
industries and the course of the national economy. These reports have also
indicated that recent City budgets have been balanced in part through the use of
non-recurring resources; that the City 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 gaps between forecast revenues
and expenditures in future years that must be closed with reduced expenditures
and/or increased revenues. In addition to these monitoring agencies, the
Independent Budget Office ('IBO') has been established pursuant to the City
Charter to provide analysis to elected officials and the public on relevant
fiscal and budgetary issues affecting the City.
The 1998-2002 Financial Plan. On January 29, 1998, the City published the
Financial Plan for the 1998 through 2002 fiscal years, which relates to the City
and certain entities which receive funds from the City. The Financial Plan is a
modification to the four-year financial plan submitted to the Control Board on
June 10, 1997 (the 'June Financial Plan').
The 1998-2002 Financial Plan reflects actual receipts, expenditure, and
changes in forecast revenues and disbursements since the June Financial Plan.
The 1998-2002 Financial Plan projects revenues and expenditures for the 1998 and
1999 fiscal years to be balanced in accordance with GAAP. Gaps are projected,
however, of $1.8 billion, $2.0 billion, and $1.9 billion for the 2000, 2001, and
2002 years, respectively. Changes since the June Financial Plan include: (i) an
increase in projected tax revenue in 1998 ($841 million), 1999 ($738 million),
2000 ($808 million), and 2001 ($802 million), including an increase in sales tax
revenues resulting from the state adopting a smaller than expected sales tax
reduction; (ii) a reduction in assumed State aid of $283 million in the 1998
fiscal year and between $134-142 million in each year from 1999-2001; (iii) a
reduction in the projected debt service expenditures totaling $164 million, $291
million, $127 million, and $145 million in the 1998 through 2001 fiscal years,
respectively; (iv) an increase in Board of Education (the 'BOE') spending of $70
million, $182 million, $59 million, and $61 million in the 1998 through 2001
fiscal years, respectively; and (v) an increase in expenditures totaling $71
million in the 1998 fiscal year and between $214 million and $273 million in
each of the 1999 and 2001 fiscal years, reflecting additional spending for the
City's proposed drug initiative and other agency spending. The 1998-2002
Financial Plan also includes a proposed discretionary transfer in the 1998
fiscal year of an additional $920 million in debt service due in the 1999 fiscal
year, and a proposed discretionary transfer in the 1999 fiscal year of $210
million of debt service due in fiscal year 2000, included in the Budget
Stabilization Account for 1998 and 1999 fiscal years, respectively, raising the
total in the Budget Stabilization Account for the 1998 fiscal year to $1.2
billion.
Additionally, the 1998-2002 Financial Plan sets forth gap-closing actions
to eliminate a previously projected budget gap for the 1999 fiscal year and to
reduce projected gaps for fiscal years 2000 through 2002. Gap-closing actions
for 1998 through 2002 fiscal years include: (i) additional agency actions
totaling $122 million, $429 million, $354 million, $303 million, and $311
million in fiscal years 1998 through 2002, respectively; (ii) assumed additional
Federal aid of $250 million in each of fiscal years 1999 through 2002, which
could include funds to be distributed from the tobacco settlement, increased
Medicaid assistance, unrestricted Federal revenue sharing aid or increased funds
for school construction; and (iii) assumed additional State aid of $200 million
in each of fiscal years 1999 through 2002, including an increase in revenue
sharing payments and reimbursement of inmate costs proposed by the City. The
gap-closing actions are partially offset by proposed new tax reduction programs
totalling $237 million, $537 million, $610 million, and $774 million in fiscal
years 1999 through 2002, respectively.
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The City's projected budget gap for the 2001 and 2002 fiscal years does not
reflect the savings expected to result from prior years' programs to close the
gaps set forth in the Financial Plan. Thus, for example, recurring savings
anticipated from the actions which the City proposes to take to balance the
fiscal year 2000 budget are not taken into account in projecting budget gaps for
the 2001 and 2002 fiscal years.
Although the City has maintained balanced budgets in each of its last
seventeen fiscal years and is projected to achieve a balanced operating results
for the 1998 fiscal year, thee 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 also adversely affect the City's
economic base.
Assumptions. 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, 1999 and the extension of which is
projected to provide revenue of $168 million, $507 million, and $530 million in
the 2000, 2001, and 2002 fiscal years, respectively, and of the extension of the
12.5% personal income tax surcharge, which is scheduled to expire on December
31, 1998 the extension of which is projected to provide revenue of $187 million,
$531 million and $554 million, and $579 million in the 1999 through 2002 fiscal
years, respectively; (ii) collection of the projected rent payments for the
City's airports, totaling $365 million, $175 million, $170 million, and $70
million in the 1999 through 2002 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; and (iii) State approval of the repeal of the Wicks law relating to
contracting requirements for City construction projects and the additional State
funding assumed in the Financial Plan, and State and Federal approval of the
State and Federal gap-closing actions proposed by the City in the Financial
Plan. It is expected that the Financial Plan will engender public debate which
will continue through the time the budget is scheduled to be adopted in June
1998, and that there will be alternative proposals to reduce taxes (including
the 12.5% personal income tax surcharge) and increase in spending. Accordingly,
the Financial Plan may be changed by the time the budget for the 1999 fiscal
year is adopted. Moreover, the Financial Plan provides no additional wage
increases for City employees after their contracts expire in fiscal years 2000
and 2001. 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 Plan is based on numerous additional 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 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 1998 through 2002 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 City 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 City Financial Plan; the impact on the
City revenues and expenditures of Federal and State welfare reform and any
future legislation affecting Medicare or other entitlement programs; 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
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City's infrastructure. Certain of these assumptions have been questioned by the
City Comptroller and other public officials.
The Governor presented his 1998-1999 Executive Budget to the Legislature on
January 20, 1998. In recent years, however, the State has failed to adopt a
budget prior to the beginning of the fiscal year. A prolonged delay in the
adoption of the State's budget beyond the statutory April 1 deadline without
interim appropriations could delay the projected receipt of State aid, and there
can be no assurance that State budgets in future fiscal years will be adopted by
the April 1 statutory deadline.
City Employees. 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 1998-2002 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 or water and sewer funds, will decrease from
an estimated level of 204,685 on June 30, 1998 to an estimated level of 203,987
by June 30, 2002, before implementation of the gap closing program outlined in
the City 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 86% of the City's work force. The City 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 City's pension expenditures for the 1998 fiscal year are expected to
approximate $1.5 billion. In each of fiscal years 1999 through 2002, these
expenditures are expected to approximate $1.4 billion, $1.4 billion, $1.4
billion, and $1.3 billion, respectively. Certain of the systems may provide
pension benefits of 50% to 55% of 'final pay' after 20 to 25 years of service
without additional benefits for subsequent years of service. For the 1997 fiscal
year, the City's total annual pension costs, including the City's pension costs
not associated with the five major actuarial systems, plus Federal Social
Security tax payments by the City for the year, were approximately 19.04% of
total payroll costs. In addition, contributions are also made by certain
component units of the City and government units directly to the three cost
sharing multiple employer actuarial systems. The State Constitution provides
that pension rights of public employees are contractual and shall not be
diminished or impaired.
Reports on the City Financial Plan. From time to time, 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
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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, and it is expected that the staff
of the Control Board will issue a report on the 1998-2002 Financial Plan in the
near future.
On February 26, 1998, the City Comptroller issued a report on the 1998
fiscal year and the preliminary budget for the 1999 fiscal year, as reflected in
the 1997-2001 Financial Plan. With respect to the 1998 fiscal year, the report
identified a possible surplus of between $71 million and $293 million above the
level projected in the City's plan. The report stated that the additional
surplus reflects the possibility of the receipt of an additional $225 million of
tax revenues, and that the size of the possible surplus depends primarily on
whether the sale of the New York Coliseum for $200 million is completed. With
respect to the 1999 fiscal year, the report identified a possible gap of $153
million or a possible surplus of $269 million, depending upon whether the State
approves the extension of 12.5% personal income tax surcharge and the amount of
surplus for the 1998 fiscal year available for debt service in the 1999 fiscal
year.
The potential risks identified in the City Comptroller's report for the
1999 fiscal year include: (i) assumed payments from the Port Authority relating
to the City's claims for back rentals and an increase in future rentals, part of
which are the subject of the arbitration, totaling $335 million; (ii) State
approval of the 12.5% personal income tax surcharge beyond December 1, 1998,
which would generate $188 million in the 1999 fiscal year and which the Speaker
of the City Counsel has opposed; and (iii) the receipt of an additional $450
million of State and Federal aid assumed in the financial plan. The potential
risks are offset by potential additional resources for the 1999 fiscal year,
including the potential for an additional $150 million of State educational aid,
$150 million of additional debt service savings, $176 million in tax revenues if
the proposed sales tax reduction on clothing is not approved, $294 million of
higher than projected tax revenues and the availability in the 1999 fiscal year
of an additional $71 million to $293 million surplus from the 1998 fiscal year.
The report also noted that the City Comptroller will begin writing off
outstanding education-aid receivables that are 10 years past due, which are
estimated to be approximately $4 million in the 1998 fiscal year and $39 million
in the 1999 fiscal year, and which total $914 million for fiscal years 1989
through 1997. In addition, the report noted that City-funded expenditures for
the 1998 fiscal year are expected to exceed the ceiling established in the May
1996 agreement between the City and MAC, which would permit MAC to recover from
the City in the 1999 fiscal year an amount equal to such excess spending, up to
$125 million. Finally, the report noted that, while the City is in a relatively
strong financial position, its reliance on State and Federal aid to close its
budget gap for the 1999 fiscal year raises concerns, and that the City's
spending will again be under pressure in the event of an economic downturn. The
City Comptroller also noted (in a separate report on the City's capital debt)
that debt burden measures, such as annual debt service as a percentage of tax
revenues, debt per capita, and debt assessed value of real property, are
approaching historically high post-fiscal crises levels, which calls for
restraint in the City's capital program, while the City's infrastructure
requires additional resources.
Also on February 26, 1998, the staff of OSDC issued a report on the
Financial Plan. With respect to the 1998 fiscal year, the OSCD report noted that
the City's revenues could be $200 million greater than projected in the
Financial Plan. While noting a potential delay in the receipt of proceeds from
the sale of the New York Coliseum, the report projects that it is not likely
that those resources will be needed in the 1998 fiscal year. The report
projected potential budget gaps of $462 million, $2.6 billion, $2.7 billion, and
$2.3 billion for the 1999 through 2002 fiscal years, respectively, which include
the gaps projected in the Financial Plan for fiscal years 2000 through 2002 and
the additional net risks identified in the report totaling $762 million, $1.012
billion, $913 million, and $774 million for the 1999 through 2002 fiscal years,
respectively, which are reduced by the potential for greater than forecast
revenues and lower than forecast pension costs for fiscal years 2000 through
2002. The largest risks identified in the report relate to (i) the receipt of
projected Port Authority lease payments which are the subject of arbitration and
lease negotiations; (ii) City gap-closing proposals for additional State and
Federal assistance; and (iii) State approval of a three-year extension of
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the City's 12.5% personal income tax surcharge. Additional risks identified in
the report include unfunded expenditures for project READ totaling $125 million
for each of the 2000 through 2002 fiscal years and the potential for additional
funding needs for the City's labor reserve, which total $104 million in the 1999
fiscal year and exceed $200 million in each of the 2000 through 2002 years, to
pay for collective bargaining increases for the Covered Organizations, which the
Plan assumes the Covered Organizations will pay instead of the City. The report
noted that these risks could be reduced if the Tax Reduction Program proposed in
the Financial Plan is not approved by the City Counsel and the State. The report
also noted that: (i) HHC faces potential budget gaps starting in the 1999 fiscal
year and reflecting the expected loss of revenues associated with the
implementation of Medicaid mandatory managed care; (ii) the Financial Plan
assumes that the State will extend the 14% personal income tax surcharge; (iii)
the City faces potential liability for State education aid owed from prior years
which the City could be required to write off if a plan is not reached to fund
these claims; and (iv) the City might be required to reimburse MAC up to $125
million on the 1999 fiscal year if the City spending limits set forth in the May
1996 agreement with MAC are exceeded in the 1998 fiscal year. However, the
report noted that actual fiscal year 1998 spending will not be determined until
October 1998, and in the interim, City and MAC officials are discussing
solutions to the reimbursement problem.
The OSDC report noted also that, while the City's financial outlook has
improved because of actions taken by the City, Federal, and State governments
and record securities industry performance, the staff remained concerned about
the City's dependence on the securities industry and whether the City will be
able to sustain a relatively high level of spending. The report noted that
City-funded spending is projected to grow by 7.2% in fiscal year 1998 and by
4.5% in fiscal year 1999, while revenues are projected to grow by only 1.8% in
fiscal year 1999. Moreover, the report noted that while the budget gaps for
fiscal years 2000 through 2002 have been reduced, they are still large by
historical standards, and the budget makes no provisions for wage increases
after the expiration of current contacts, which, at the projected inflation
rate, would increase costs by $375 million in fiscal year 2001 and by $725
million in fiscal year 2002. Finally, the report noted that the Asian financial
and economic crises could intensify and create greater impact on financial
markets in the U.S. economy than currently anticipated, or that the Federal
Reserve Board could raise interest rates, which could adversely affect the
financial markets and the City's financial condition.
On January 13, 1998, the IBO released a report setting forth its forecast
for the City's revenues and expenditures for the 1998 through 2001 fiscal years,
assuming continuation of current spending policies and tax laws. In the report,
the IBO forecasts that the City will end the 1998 fiscal year with a surplus of
$120 million, in addition to $514 million in the Budget Stabilization Account.
Additionally, the report forecasts that the City will face gaps of $1.4 billion,
$2.6 billion, and $2.8 billion in the 1999 through 2001 fiscal years,
respectively, resulting from 4.8% annual growth in spending form 1998 through
2001, compared with 2.2% annual revenue growth. The report noted that slow
revenue growth is attributable to a variety of factors, including a gradual
deceleration in economic growth through the first half of calendar year 1999,
the impact of recently enacted tax cuts and constraints on increases in the real
property tax, as well as uncertain back rent payments from the Port Authority,
while future costs for existing programs will increase to reflect inflation and
scheduled pay increases for the City employees during the term of existing labor
agreements. The report also noted that debt service and education spending will
increase rapidly, while spending for social services rise more slowly due to
lower projected caseloads.
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.
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Previous Reports. On September 18, 1997, the City Comptroller issued a
report commenting on developments with respect to the 1998 fiscal year. The
report noted that the City's adopted budget, which is reflected in the City
Financial Plan, had assumed additional State resources of $612 million in the
1998 fiscal year, and that the approved State budget provided resources of only
$216 million for gap-closing purposes. The report further noted that, while the
City will receive $322 million more in education aid in the 1998 fiscal year
than assumed in the City's adopted budget, it is unlikely that the funding will
be entirely available for gap-closing purposes. In addition, the report noted
that the City's financial statements currently contain approximately $643
million in uncollected State education aid receivables from prior years as a
result of the failure of the State to appropriate funds to pay these claims, and
that the staff of BOE has indicated that an additional $302 million in prior
year claims is available for accrual. The report stated that the City
Comptroller maintains the position that no further accrual of prior year aid
will take place, including $75 million in aid assumed in the City's adopted
budget for the 1998 fiscal year, unless the State makes significant progress to
retire the outstanding prior year receivables. On October 28, 1997, the City
Comptroller issued a subsequent report commenting on recent developments. With
respect to the 1997 fiscal year, the report noted that the City ended the 1997
fiscal year with an operating surplus of $1.367 billion, before certain
expenditures and discretionary transfers, of which $1.362 billion was used for
expenditures due in the 1998 fiscal year. With respect to tax revenues for the
1998 fiscal year, the report noted that total tax revenues in the first quarter
of the 1998 fiscal year were $244.3 million above projections in the City
Financial Plan, excluding audit collections which were $31.2 million less than
projected. The report stated that the increased tax revenues included $110.3
million of greater than projected general property tax receipts, which resulted,
in part, from a prepayment discount program, and increased revenues from the
personal income, banking corporation, general corporation and unincorporated
business taxes. The report noted that Wall Street profits exceeded expectations
in the first half of the 1997 calendar year. However, the report noted that the
stock market in the last two weeks of October has declined as a result of
currency turmoil in Southeast Asia. The report noted that, while tax revenues in
the 1998 fiscal year should not be significantly affected by the recent stock
market decline, since there is a lag between activity on Wall Street and City
tax revenues, if the current stock market decline persists, tax revenue
forecasts for subsequent years will have to be revised downward. The report
noted that the City was not affected by the October 1987 stock market crash
until the 1990 fiscal year, when revenues from the City's business and real
estate taxes fell by 20% over the 1989 fiscal year. The report also noted that
expenditures for short-term and long-term debt issued during the first half of
the 1998 fiscal year are estimated to be between approximately $53.9 million and
$58.8 million below levels anticipated in the City's adopted budget for the 1998
fiscal year, approximately $20 million below anticipated levels in the 1999
fiscal year and approximately $30 million below anticipated levels in each of
fiscal years 2000 and 2001 due to less borrowing and lower interest rates than
assumed.
On August 25, 1997, the IBO issued a report relating to recent developments
regarding welfare reform. The report noted that Federal legislation adopted in
August 1997, modified certain aspects of the 1996 Welfare Act, by reducing SSI
eligibility restrictions for certain legal aliens residing in the country as of
August 22, 1996, resulting in the continuation of Federal benefits, by providing
funding to the states to move welfare recipients from public assistance and into
jobs and by providing continued Medicaid Coverage for those children who lose
SSI due to stricter eligibility criteria. In addition, the report noted that the
State had enacted the Welfare Reform Act of 1997 which, among other things,
requires the City to achieve work quotas and other work requirements and
requires all able-bodied recipients to work after receiving assistance for two
years. The report noted that this provision could require the City to spend
substantial funds over the next several years for workfare and day care in
addition to the funding reflected in the City Financial Plan. The report also
noted that the State Welfare Reform Act of 1997 established a Food Assistance
Program designed to replace Federal food stamp benefits for certain classes of
legal aliens denied eligibility for such benefits by the 1996 Welfare Act. The
report noted that if the City elects to participate in the Food Assistance
Program, it will be responsible for 50% of the costs for the elderly
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and disabled. The IBO has stated that it will release an updated report to
provide a detailed analysis of these developments and their likely impact on the
City.
On July 16, 1997, the City Comptroller issued a report on the City
Financial Plan. With respect to the 1998 fiscal year, the report identified a
possible $112 million surplus or a possible total net budget gap of up to $440
million, depending primarily on whether the tax reduction program proposed in
the City Financial Plan is implemented and the 14% personal income tax surcharge
is extended beyond December 31, 1997. The risks identified in the report for the
1998 fiscal year include (i) $178 million related to BOE, resulting primarily
from unidentified expenditure reductions and prior year State aid receivables;
(ii) State aid totaling $115 million which is assumed in the City Financial Plan
but not provided for in the Governor's Executive Budget; (iii) State approval of
the extension of the 14% personal income tax surcharge beyond December 31, 1997,
which would generate $169 million in the 1998 fiscal year; (iv) City proposals
for State aid totaling $271 million, including 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 (v) the assumed sale of the Coliseum for $200 million, which
may be delayed. The report noted that these risks could be partially offset by
between $597 million and $765 million in potentially available resources,
including $200 million of higher projected tax revenues, $150 million of
possible additional State education aid and the possibility that the proposed
sales tax reduction will not be enacted, which would result in $157 million of
additional tax revenues in the 1998 fiscal year. With respect to the 1998 fiscal
year, the report stated that the City has budgeted $200 million in the General
Reserve and included in the City Financial Plan a $300 million surplus to be
used in the 1999 fiscal year, making the potential $440 million budget gap
manageable. However, the report also expressed concern as to the sustainability
of profits in the securities industry.
With respect to the 1999 and subsequent fiscal years, the report identified
total net budget gaps of between $1.9 billion and $2.8 billion, $2.6 billion and
$4.0 billion, and $2.4 billion and $3.8 billion for the 1999 through 2001 fiscal
years, respectively, which include the gaps set forth in the City Financial
Plan. The potential risks and potential available resources identified in the
report for the 1999 through 2001 fiscal years include most of the risks and
resources identified for the 1998 fiscal year, except that the additional risks
for the 1999 through 2001 fiscal years include (i) 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, totaling $350
million, $140 million and $135 million in the 1999-2001 fiscal years,
respectively; and (ii) State approval of the extension of the 12.5% personal
income tax surcharge beyond December 31, 1998, which would generate $190
million, $527 million and $554 million in the 1999 through 2001 fiscal years,
respectively.
On July 15, 1997, the staff of the Control Board issued a report commenting
on the City Financial Plan. The report stated that, while the City should end
the 1998 fiscal year with its budget in balance, the City Financial Plan still
contains large gaps beginning in the 1999 fiscal year, reflecting revenues which
are not projected to grow during the Financial Plan Period and expenditures
which are projected to grow at about the rate of inflation. The report
identified net risks totaling $485 million, $930 million, $1.2 billion and $1.4
billion for 1998 through 2001 fiscal years, respectively, in addition to the
gaps projected in the City Financial Plan for fiscal years 1999 through 2001.
The principal risks identified in the report included (i) potential tax revenues
shortfalls totaling $150 million, $300 million and $400 million for the 1999
through 2001 fiscal years, respectively, based on historical average trends;
(ii) BOE's structural gap, uncertain State funding of BOE and implementation by
BOE of various unspecified actions, totaling $163 million, $209 million, $218
million and $218 million in the 1998 through 2001 fiscal years, respectively;
(iii) the proposed sale of certain assets in the 1998 fiscal year totaling $248
million, which could be delayed; (iv) assumed additional State actions totaling
$271 million, $121 million, $125 million and $129 million in the 1998 through
2001 fiscal years, respectively; (v) revenues from the extension of the 12.5%
personal income tax surcharge beyond December 31, 1998, totaling $188 million,
$527 million and $554 million in the 1999 through 2001 fiscal years,
respectively, which requires State legislation; and (vi) the receipt of $350
million, $140 million and $135 million from the Port Authority in the 1999
through 2001 fiscal years, respectively, which is the subject of arbitration.
Taking
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into account the risks identified in the report and the gaps projected in the
City Financial Plan, the report projected a gap of $485 million for the 1998
fiscal year, which could be offset by available reserves, and gaps $2.7 billion,
$4.1 billion and $4.0 billion for the 1999 through 2001 fiscal years,
respectively. The report also noted that (i) if the securities industry or
economy slows down to a greater extent than projected, the City could face
sudden and unpredictable changes to its forecast; (ii) the City's entitlement
reduction assumptions require a decline of historic proportions in the number of
eligible welfare recipients; (iii) the City has not yet shown how the City's
projected debt service, which would consume 20% of tax revenues by the 1999
fiscal year, can be accommodated on a recurring basis; (iv) the City is
deferring recommended capital maintenance; and (v) continuing growth in
enrollment at BOE has helped create projected gaps of over $100 million annually
at BOE. However, the report noted that if proposed tax reductions are not
approved, additional revenue will be realized, ranging from $272 million in the
1998 fiscal year to $481 million in the 2001 fiscal year.
On July 2, 1997, the staff of the OSDC issued a report on the City
Financial Plan. The report projected a potential surplus for the 1998 fiscal
year of $190 million, due primarily to the potential for greater than forecast
tax revenues, and projected budget gaps for the 1999 through 2001 fiscal years
which are slightly less than the gaps set forth in the City Financial Plan for
such years. The report also identified risks of $518 million, $1.1 billion, $1.3
billion and $1.4 billion for the 1998 through 2001 fiscal years, respectively.
The additional risks identified in the report relate to: (i) the receipt of Port
Authority lease payments totaling $350 million, $140 million and $135 million in
the 1999 through 2001 fiscal years, respectively; (ii) City proposals for State
aid totaling $271 million, $121 million, $125 million and $129 million in the
1998 through 2001 fiscal years, respectively, including 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; (iii) the receipt of $200 million in the 1998 fiscal year in
connection with the proposed sale of the New York Coliseum; (iv) the receipt of
$47 million in the 1998 fiscal year from the sale of certain other assets; (v)
uncertain State education aid and expenditure reductions relating to BOE
totaling $325 million in each of the 1999 through 2001 fiscal years; (vi) State
approval of a three-year extension to the City's 12.5% personal income tax
surcharge, which is scheduled to expire on December 31, 1998 and which would
generate revenues of $230 million, $525 million and $550 million in the 1999
through 2001 fiscal years, respectively; and (vii) the potential for additional
funding needs for the City's labor reserve totaling $104 million, $225 million
and $231 million in the 1999 through 2001 fiscal years, respectively, to pay for
collective bargaining increases for the Covered Organizations, which the City
Financial Plan assumes will be paid for by the Covered Organizations, rather
than the City. The report also noted that the City Financial Plan assumes that
the State will extend the 14% personal income tax that is scheduled to expire in
December 1997, which would generate revenues of $200 million in the 1998 fiscal
year and $500 million annually in subsequent fiscal years, and that the City
Financial Plan makes no provision for wage increases after the expiration of
current contracts in fiscal year 2000, which would add $430 million to the 2001
fiscal year budget gap if employees receive wage increases at the projected rate
of inflation. The report noted that the City Financial Plan includes an annual
General Reserve of $200 million and sets aside an additional $300 million in the
1998 fiscal year to reduce the budget gap for the 1999 fiscal year if such funds
are not needed in the 1998 fiscal year. With respect to the gap-closing program
for the 1999 through 2001 fiscal years, the report noted that the City has
broadly outlined a program that relies heavily on unspecified agency actions,
savings from reinvention and other unspecified initiatives and uncertain State
aid and entitlement program reductions which depend on the cooperation of
others.
The report concluded that while 1997 was an unexpectedly good fiscal year
for City revenues, the City projects that the rate of spending for the 1998
fiscal year will grow substantially faster than the rate of revenues, reflecting
increasing costs for labor, debt service, Medicaid and education, and that the
gaps for the subsequent fiscal years continue to present a daunting challenge.
With respect to the economy, the report noted that the major risks to the City's
economic and revenue forecasts continue to relate to the pace of both the
national economy and activity on Wall Street, that the potential exists for a
national
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recession over the next four years, and that Wall Street volatility can have a
negative effect, as was apparent in 1994 when the Federal Reserve repeatedly
raised interest rates and the profits of securities firms fell. Other concerns
identified in the report include: (i) $76 million in retroactive claims for
State education aid included in the City Financial Plan for the 1998 fiscal year
which may not be realized; (ii) a potential risk of $698 million in State
education aid owed to the City by the State for prior years, all or a portion of
which the City could be forced to write-off if further delays occur in the State
agreeing to fund these claims; and (iii) the potential adverse impact on HHC
over the long-term of the planned expansion of managed care which emphasizes
out-patient services with fixed monthly fees, uncertainty covering projected
savings from a proposal that most Medicaid recipients be required to enroll in
managed care, which is subject to approval by the Federal Government, and the
possibility that the recent Federal budget agreement could substantially reduce
aid to hospitals which serve a large number of medically indigent patients.
On May 27, 1997, the IBO released a report analyzing the financial plan
published on May 8, 1997 (the 'May Financial Plan'). In its report, the IBO
estimated gaps of $27 million, $91 million, $2.1 billion, $2.9 billion and $2.9
billion for the 1997 through 2001 fiscal years, respectively, which include the
gaps set forth in the May Financial Plan for fiscal years 1999 through 2001. The
gaps estimated in the IBO report 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; and (ii) additional funding needs for
the City's labor reserve totaling $104 million, $224 million and $231 million in
the 1999 through 2001 fiscal years, respectively, to pay for collective
bargaining increases for the Covered Organizations, which the May Financial Plan
assumes will be paid for by the Covered Organizations, rather than the City.
These reduced revenues and increased expenditures identified in the IBO report
are substantially offset by tax revenue forecasts which exceed those in the May
Financial Plan. However, the report noted that the May Financial Plan assumes
continued strong revenue growth and that, in the event of an economic downturn,
the City will be required to increase taxes in a slow economy or reduce spending
when it is most needed. With respect to the tax reductions proposed in the May
Financial Plan, the IBO stated that the principal question is whether the City
will be able to afford the tax reductions. In addition, the report discussed
various issues with implications for the City's 1998 budget. These issues
include the reliance in the budget on a number of State legislative actions,
including (i) $294 million from legislation the City has requested to increase
State aid; (ii) $128 million in savings attributable to both a larger City share
of Federal welfare grant funds and State reforms to Medicaid; and (iii) $115
million to restore expenditure reductions proposed in the Governor's Executive
Budget. The report also noted that the City's claim for $900 million of State
reimbursement of prior year education expenditures remains unresolved, that
proposals affecting the MTA, including proposals to eliminate two-fare zones for
bus and subway riders, will result in a significant reduction in revenues for
the MTA, and that the implementation of changes in the City's computer system,
resulting from the inability of the current computer system to recognize the
year 2000, could cost the City up to $150 million to $200 million over the next
three years. In a subsequent report released on June 16, 1997, the IBO noted
that in the City Financial Plan the City had deferred to fiscal years 1999
through 2001 the assumed receipt of back airport rents, and that the tax revenue
forecasts for the 1998 fiscal year in the City Financial Plan are closer than
the forecasts in the May Financial Plan to the IBO's forecast of City tax
revenues in its May 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. The report
noted that if the requirement that all recipients work after two years of
receiving benefits is enforced, these additional costs could be substantial
starting in 1999, reflecting 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
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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.
Seasonal Financing. 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 $1.075
billion of short-term obligations for the fiscal year 1998 to finance the City's
projected cash flow needs for the 1998 fiscal year. The City issued $2.4 billion
of short-term obligations in fiscal year 1997. 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 in the 1993 fiscal year. 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.
Litigation. 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 City 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, 1997 amounted to approximately $3.5 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.
Ratings Agencies. On February 3, 1998, S&P raised its credit outlook for
New York City's outstanding general obligation bonds from stable to positive but
maintained its BBB-plus rating. The City has held this rating since July 10,
1995, when S&P lowered its rating 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 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 City 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 bonds downward to
BBB+, as discussed above. On November 25, 1996, S&P 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.
On February 24, 1998 Moody's raised its rating for City general obligation
bonds from Baa1 to A3, based on improvement in its financial condition and
economy. Previously, on July 17, 1997, Moody's had changed its outlook on City
bonds to positive from stable. 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
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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.
On February 3, 1998, Fitch Investors Service, Inc. ('Fitch') announced its
rating of City general obligation bonds at A-, which it has maintained 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. Since then Fitch has revised the
outlook to stable. 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.
On October 9, 1995, Standard & Poor's issued a report which concluded that
proposals to replace the graduated Federal income tax system with a 'flat' tax
could be detrimental to the creditworthiness of certain municipal bonds. The
report noted that the elimination of Federal income tax deductions currently
available, including residential mortgage interest, property taxes and state and
local income taxes, could have a severe impact on funding methods under which
municipalities operate. With respect to property taxes, the report noted that
the total valuation of a municipality's tax base is affected by the
affordability of real estate and that elimination of mortgage interest deduction
would result in a significant reduction in affordability and, thus, in the
demand for, and the valuation of, real estate. The report noted that rapid
losses in property valuations would be felt by many municipalities, hurting
their revenue raising abilities. In addition, the report noted that the loss of
the current deduction for real property and state and local income taxes from
Federal income tax liability would make rate increases more difficult and
increase pressures to lower existing rates, and that the cost of borrowing for
municipalities could increase if the tax-exempt status of municipal bond
interest is worth less to investors. Finally, the report noted that tax
anticipation notes issued in anticipation of property taxes could be hurt by the
imposition of a flat tax, if uncertainty is introduced with regard to their
repayment revenues, until property values fully reflect the loss of mortgage and
property tax deductions.
51
<PAGE>
<PAGE>
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 in 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;
52
<PAGE>
<PAGE>
(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) 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, its 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;
(2) 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);
(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 purpose 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;
(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.
National Intermediate Municipal Fund, U.S. Government Income Fund,
High Yield Bond Fund, Strategic Bond Fund, Total Return Fund, Small Cap
Growth Fund and Asia
53
<PAGE>
<PAGE>
Growth Fund. Each of the National Intermediate Municipal Fund, U.S.
Government Income Fund, High Yield Bond Fund, Strategic Bond Fund, Total
Return Fund, Small Cap Growth 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 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;
In addition, 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:
(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;
54
<PAGE>
<PAGE>
(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
(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, Small
Cap Growth Fund and Asia Growth Fund. Restrictions (6) through (15) are
non-fundamental policies.
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;
55
<PAGE>
<PAGE>
(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.
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.
56
<PAGE>
<PAGE>
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 FUNDS
<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: 81
Carol L. Colman .................... Director and Audit President of Colman Consulting Co., Inc.
Colman Consulting Co., Inc. Committee Member
278 Hawley Road
North Salem, NY 10560
Age: 52
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: 52
Heath B. McLendon* ................. Director and Managing Director, Smith Barney, Inc.;
Age: 64 President President and Director, Mutual
Management Corp. and Travelers
Investment Adviser, Inc.; Chairman of
Smith Barney Strategy Advisers Inc.
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: 34 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: 44 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: 39 President January 1996. Prior to January 1996,
Director of SBAM and SBI.
</TABLE>
57
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION(S) HELD PRINCIPAL OCCUPATION(S) PAST 5 YEARS
- ------------------------------------ ------------------- -----------------------------------------
<S> <C> <C>
Marybeth Whyte ..................... Executive Vice Director of SBAM and SBI since January
Age: 42 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.
Richard E. Dahlberg ................ Executive Vice Managing Director of SBAM and SBI since
Age: 58 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: 37 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'Callaghan ................ Executive Vice Director, SBAM and SBI since January
Age: 34 President 1998. Vice President of SBAM and SBI
from October 1988 to December 1997.
James E. Craige .................... Executive Vice Director, SBAM and SBI since January
Age: 30 President 1998. Vice President, SBAM and Salomon
Brothers Inc from 1992 to December
1997.
Thomas K. Flanagan ................. Executive Vice Director, SBAM and Salomon Brothers Inc
Age: 45 President since 1991.
Pamela P. Milunovich ............... Executive Vice Director of SBAM and SBI since January
Age: 35 President 1997. Vice President of SBAM and SBI
from June 1992 to December 1996.
Nancy Noyes ........................ Vice President Director of SBAM and SBI since January
Age: 39 1996. From August 1992 to January 1996,
Vice President of SBAM and SBI.
Noel B. Daugherty .................. Secretary Employee of SBAM since November 1996.
Age: 32 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: 40 January 1995. Prior to January 1995,
Chief Financial Officer and Vice
President of Hyperion Capital
Management Inc.
Janet S. Tolchin ................... Assistant Treasurer Investment Accounting Manager of SBAM.
Age: 39
</TABLE>
58
<PAGE>
<PAGE>
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: 81
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: 45
Carol L. Colman .................... Director and Audit President of Colman Consulting Co., Inc.
Colman Consulting Co., Inc. Committee Member
278 Hawley Road
North Salem, NY 10560
Age: 52
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: 67
Clifford M. Kirtland, Jr. .......... Director and Member Member of Advisory Committee,
9 North Parkway Square of the Proxy Noro-Moseley Partners. Formerly,
4200 Northside Pkwy, N.W. Committee Director of Oxford Industries, Shaw
Atlanta, GA 30327 Industries, Inc. and Graphic
Age: 74 Industries, Inc. Formerly, Chairman and
President 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 President and Chief Executive Officer
Age: 61 of Texas Tech University and Texas Tech
University Health Sciences Center.
Heath B. McLendon* ................. Director and Managing Director, Smith Barney, Inc.;
Age: 64 President President and Director, Mutual
Management Corp. and Travelers
Investment Adviser, Inc.; Chairman of
Smith Barney Strategy Advisers Inc.
Louis P. Mattis .................... Director and Member Consultant. Formerly, Chairman and
P.O. Box #6535 of Nominating President of Sterling Winthrop Inc., a
SnowMass Village, CO 81615 Committee pharmaceutical company.
Age: 56
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: 49 Committee Member Inc.
Richard E. Dahlberg ................ Executive Vice Managing Director of SBAM and SBI since
Age: 58 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: 38 President January 1996. Prior to January 1996,
Director of SBAM and SBI.
</TABLE>
59
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION(S) HELD PRINCIPAL OCCUPATIONS DURING PAST 5 YEARS
- ------------------------------------ ------------------- -----------------------------------------
<S> <C> <C>
Ross S. Margolies .................. Executive Vice Director of SBAM and SBI since June 1992.
Age: 39 President
(Capital Fund Only)
Pamela P. Milunovich ............... Vice President Director of SBAM and SBI since January
Age: 35 (Investors Fund 1997. Vice President of SBAM and SBI
Only) from June 1992 to December 1996.
Noel B. Daugherty .................. Secretary Employee of SBAM since November 1996.
Age: 32 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: 40 January 1995. Prior to January 1995,
Chief Financial Officer and Vice
President of Hyperion Capital
Management Inc.
Janet Tolchin ...................... Assistant Treasurer Investment Accounting Manager of SBAM.
Age: 39
</TABLE>
60
<PAGE>
<PAGE>
COMPENSATION TABLE
The following table provides information concerning the compensation paid
during the fiscal year ended December 31, 1997 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, 1997 by the Companies to officers of any Company, including to
Mr. McClendon, who is affiliated with SBAM, or to Michael S. Hyland or to
Thomas W. Brock. Mr. Hyland, former President and Chairman of Series Funds,
Investors Fund and Capital Fund, is an employee of SBAM. Mr. Brock, former
director of Investors Fund and Capital Fund, is a former employee of SBAM.
Accordingly, Messrs. McClendon, Hyland and Brock are 'interested persons,' as
defined in the 1940 Act.
SERIES FUNDS
<TABLE>
<CAPTION>
TOTAL COMPENSATION
AGGREGATE FROM OTHER FUNDS
COMPENSATION ADVISED BY TOTAL
NAME FROM THE FUND SBAM(A) COMPENSATION(A)
- --------------------------------------------- ------------- ------------------ ---------------
<S> <C> <C> <C>
Charles F. Barber............................ $9,000 $107,750(14) $139,437(22)*
Carol L. Colman.............................. $9,000 $ 27,250(5) $ 36,250(6)
Daniel P. Cronin............................. $9,500 $ 29,700(5) $ 39,200(6)
</TABLE>
- ------------
(A) The numbers in parenthesis indicate the applicable number of investment
company directorships held by that director.
* Includes compensation from investment companies advised by affiliates
of SBAM.
INVESTORS FUND
<TABLE>
<CAPTION>
TOTAL COMPENSATION
AGGREGATE FROM OTHER FUNDS
COMPENSATION ADVISED BY TOTAL
NAME FROM THE FUND SBAM(A) COMPENSATION(A)
- --------------------------------------------- ------------- ------------------ ---------------
<S> <C> <C> <C>
Charles F. Barber............................ $6,750 $110,000(14) $139,437(22)*
Andrew L. Breech............................. 7,500 17,000(2) 24,500(3)
Carol L. Colman.............................. 6,750 29,500(5) 36,250(6)
William R. Dill.............................. 6,000 14,000(2) 20,000(3)
Clifford M. Kirtland, Jr..................... 7,500 17,000(2) 24,500(3)
Robert W. Lawless............................ 7,500 17,000(2) 24,500(3)
Louis P. Mattis.............................. 5,250 12,500(2) 17,750(3)
Thomas F. Schlafly........................... 6,750 15,500(2) 22,250(3)
</TABLE>
- ------------
(A) The numbers in parenthesis indicate the applicable number of investment
company directorships held by that director.
* Includes compensation from investment companies advised by affiliates
of SBAM.
61
<PAGE>
<PAGE>
CAPITAL FUND
<TABLE>
<CAPTION>
TOTAL COMPENSATION
PAID TO DIRECTORS
AGGREGATE FROM OTHER FUNDS
COMPENSATION ADVISED BY TOTAL
NAME FROM THE FUND SBAM(A) COMPENSATION(A)
- --------------------------------------------- ------------- ------------------ ---------------
<S> <C> <C> <C>
Charles F. Barber............................ $5,750 $111,000(14) $139,437(22)*
Andrew L. Breech............................. 6,500 18,000(2) 24,500(3)
Carol L. Colman.............................. 5,750 30,500(5) 36,250(6)
William R. Dill.............................. 5,000 15,000(2) 20,000(3)
Clifford M. Kirtland, Jr..................... 6,500 18,000(2) 24,500(3)
Robert W. Lawless............................ 6,500 18,000(2) 24,500(3)
Louis P. Mattis.............................. 4,250 13,500(2) 17,750(3)
Thomas F. Schlafly........................... 5,750 16,500(2) 22,250(3)
</TABLE>
- ------------
(A) The number in parentheses indicates the applicable number of investment
company directorships held by that director.
* Includes compensation from investment companies advised by affiliates
of SBAM.
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 9are '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 April 1, 1998, the officers and Directors of the Funds owned 3.61%
of the outstanding Class O shares of the Total Return Fund owned 1.20% of the
outstanding Class O shares of the Asia Growth Fund and 1.78% of the outstanding
Class O shares of the Strategic Bond Fund.
As of April 1, 1998 directors and officers of 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, 1998. 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 State Street Bank & Trust Co. 37.92%
Attn: Christine Removitz
108 Myrtle Street-AH3
North Quincy, MA 02171
Salomon Brothers Inc 19.16%
7 World Trade Center 40th Floor
Attn: Peter Hegel
New York, NY 10048
Salomon Brothers Inc A/C V0300 11.03%
7 World Trade Center 40th Floor
New York, NY 10048
Attn: Peter Krzystek
Salomon Brothers Inc A/C V0347 7.76%
7 World Trade Center 40th Floor
New York, NY 10048
Attn: Peter Krzystek
Salomon Brothers Inc 5.91%
7 World Trade Center 40th Floor
New York, NY 10048
Attn: Peter Hegel
</TABLE>
62
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
FUND CLASS SHAREHOLDER PERCENTAGE HELD
- ------------------------------- ----- --------------------------------------------- ---------------
<S> <C> <C> <C>
A Northstar Advantage Funds 72.55%
FBO Class A Shareholders
2 Pickwick Plaza
Greenwich, CT 06830
Smith Barney Inc. 6.03%
00113817416
388 Greenwich Street
New York, NY 10013
B Northstar Advantage Funds 59.05%
FBO Class B Shareholders
2 Pickwick Plaza
Greenwich, CT 06830
Northstar Advantage Funds 17.70%
FBO Class T Shareholders
2 Pickwick Plaza
Greenwich, CT 06830
C Northstar Advantage Funds 73.29%
FBO Class C Shareholders
2 Pickwick Plaza
Greenwich, CT 06830
New York Municipal Money Market
Fund......................... O Les J. Lieberman 9.76%
360 East 88th Street, Apt 35A
New York, NY 10128
Salomon Brothers Inc A/C V0349 7.47%
Attn: Peter Krzystek 40th Floor
7 World Trade Center
New York, NY 10048
A Mark Finestone 20.58%
PO Box 18034
Rochester, NY 14618
James S. Peterson 19.37%
45 Sutton Place South, Apt. 5B
New York, NY 10022
Robert J. King 12.64%
40 Misty Pine Road
Fairport, NY 14450
Mitchell Tanzman 8.97%
67 East 61st Street
Apt #9A
New York, NY 10021
Joseph Victor Lipschutz and 8.18%
Madeline Lipschutz JTWROS
32 Carling Drive
New Hyde Park, NY 11040-3721
Marvin Finestone 6.26%
194 Roby Lane
Rochester, NY 14618
B Salomon Brothers Holding Co Inc 100.00%
Attn: Marc Peckman 38th Floor
7 World Trade Center
New York, NY 10048
C Salomon Brothers Holding Co Inc 100.00%
Attn: Marc Peckman 38th Floor
7 World Trade Center
New York, NY 10048
U.S. Government Income Fund.... O Salomon Brothers Holding Co Inc 98.50%
Attn: Marc Peckman 38th Floor
7 World Trade Center
New York, NY 10048
</TABLE>
63
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
FUND CLASS SHAREHOLDER PERCENTAGE HELD
- ------------------------------- ----- --------------------------------------------- ---------------
<S> <C> <C> <C>
A Everen Clearing Corp. 20.81%
A/C 8115-8939
Louise Tatum and Stacey Lynn
111 East Kilbourn Avenue
Milwaukee, WI 53202
Donaldson Lufkin Jenrette 7.92%
Securities Corporation Inc.
P.O. Box 2052
Jersey City, NJ 07303-9998
Donaldson Lufkin Jenrette 7.46%
Securities Corporation Inc.
P.O. Box 2052
Jersey City, NJ 07303-9998
MLPF&S for the Sole Benefit of its 5.22%
Customers
Attn: Fund Administration
4800 Deer Lake Drive East
3rd Floor
Jacksonville, FL 32246-0000
B MLPF&S for the Sole Benefit of its 9.23%
Customers
Attn: Fund Administration
4800 Deer Lake Drive East
3rd Floor
Jacksonville, FL 32246-0000
C MLPF&S for the Sole Benefit of its 23.20%
Customers
Attn: Fund Administration
4800 Deer Lake Drive East
3rd Floor
Jacksonville, FL 32246-0000
Smith Barney Inc. 9.57%
00151333458
388 Greenwich Street
New York, NY 10013
Smith Barney Inc. 6.47%
00151365963
388 Greenwich Street
New York, NY 10013
Smith Barney Inc. 6.43%
00119364133
388 Greenwich Street
New York, NY 10013
Smith Barney Inc. 5.61%
00119364146
388 Greenwich Street
New York, New York 10013
High Yield Bond Fund........... O Salomon Brothers Inc A/C V0410 23.88%
7 World Trade Center 40th Floor
New York, NY 10048
Attn: Peter Hegel
Salomon Brothers Inc V0407 14.11%
Attn: Peter Hegel
7 World Trade Center 40th Floor
New York, NY 10048
Salomon Brothers Inc A/C V0288 13.97%
7 World Trade Center 40th Floor
New York, NY 10048
Attn: Peter Krzystek
Salomon Brothers A/C V0276 12.06%
7 World Trade Center 40th Floor
Attn: Peter Krzystek
New York, NY 10048
</TABLE>
64
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
FUND CLASS SHAREHOLDER PERCENTAGE HELD
- ------------------------------- ----- --------------------------------------------- ---------------
<S> <C> <C> <C>
BSD&T Cust 5.81%
FBO George Betzios IRA-RO
102 Dubois Avenue
Sea Cliff, NY 11579-1302
A CITIBANK N A TTEE 5.92%
FBO Salomon Brothers Inc Ret Plan
U/A DTD 9/1/90
111 Wall Street, 20th Floor, Zone 1
New York, NY 10043
B MLPF&S for the Sole Benefit of its 7.95%
Customers
Attn: Fund Administration
4800 Deer Lake Drive East
3rd Floor
Jacksonville, FL 32246-0000
C MLPF&S for the Sole Benefit of its 17.16%
Customers
Attn: Fund Administration
4800 Deer Lake Drive East
3rd Floor
Jacksonville, FL 32246-0000
Strategic Bond Fund............ O BSDT Custodian for 44.93%
Walter G. Chandoha
HR 10 Ret Plan
50 Springhill Road
Annandale, NJ 08801
Salomon Brothers Holding Co Inc 42.03%
Attn: Marc Peckman 38th Floor
7 World Trade Center
New York, NY 10048
Maurice Michiels 5.88%
8 Navigator
Salem, SC 29676
A N/A
B MLPF&S for the Sole Benefit of its 13.85%
Customers
Attn: Fund Administration
4800 Deer Lake Drive East
3rd Floor
Jacksonville, FL 32246-0000
C MLPF&S for the Sole Benefit of its 11.57%
Customers
Attn: Fund Administration
4800 Deer Lake Drive East
3rd Floor
Jacksonville, FL 32246-0000
National Intermediate Municipal
Fund......................... O Salomon Brothers Holding Co Inc 86.67%
Attn: Marc Peckman 38th Floor
7 World Trade Center
New York, NY 10048
Bertram M. Elgot 10.15%
146 West 10th Street, Apt. 1-C
New York, NY 10014
A Salomon Brothers Holding Co Inc 18.57%
Attn: Marc Peckman 38th Floor
7 World Trade Center
New York, NY 10048
Maureen Torsney-Weir 7.30%
686 Conestoga Road
Berwyn, PA 19312-1315
</TABLE>
65
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
FUND CLASS SHAREHOLDER PERCENTAGE HELD
- ------------------------------- ----- --------------------------------------------- ---------------
<S> <C> <C> <C>
Raymond James & Assoc Inc 7.14%
For Elite Acct# 50105047
FAO Alice C Aldrich
c/o Alan Aldrich
1080 Darby Rd
San Marino, Ca 91108-2425800
Betty L. Veit TTEE 5.65%
FBO Betty L. Veit Rev Living Trust
U/A DTD 06/21/90
712 Willowood Lane
Godfrey, IL 62035
Smith Barney Inc. 5.03%
00142724385
388 Greenwich Street
New York, New York 10013
B MLPF&S for the Sole Benefit 23.25%
of its Customers
Attn: Fund Administration
4800 Deer Lake Drive East
3rd Floor
Jacksonville, FL 32246-0000
Salomon Brothers Holding Co Inc 17.98%
Attn: Marc Peckman 38th Floor
7 World Trade Center
New York, NY 10048
Katherine G. Savidge 16.66%
4619 Groveland
Royal Oak, MI 48073
Diane J. Connors 12.14%
Kimball Farm Rd.
P.O. Box 493
Brownsville, VT 05037
Jeanette S. Toll 8.41%
c/o Mary Toll
1530 East Lasalle
South Bend, IN 46617-2606
Wexford Clearing Services Corp FBO Ronald 6.98%
Segal
Manya Segal CO-TTEES
Segal Family Trust
UA DTD 6/1/97
4760 Walnut St #100
Boulder, CO 80301-2561
C Salomon Brothers Holding Co Inc 49.56%
7 World Trade Center 38th Floor
New York, NY 10048
Attn: Marc Peckman
H R Lewis TTEE 25.21%
H R Lewis MD PA Corporation
Professional Plaza One
One Medical Parkway Ste 139
Dallas, TX 75234
James Omer Olson & 10.49%
Connie K. Olson JTWROS
502 Sixth Avenue
Hazen, ND 58545-4627
Total Return Fund.............. O Henry Owen Inc. Employees Pension 34.52%
5301 Wisconsin Avenue STE 300
c/o Bond Beebe
Attn: W. Caldwell
Washington, DC 20006
</TABLE>
66
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
FUND CLASS SHAREHOLDER PERCENTAGE HELD
- ------------------------------- ----- --------------------------------------------- ---------------
<S> <C> <C> <C>
BSDT IRA R/O Cust FBO 6.62%
Dean Betzios
147-30 46th Ave.
Flushing, NY 11535
Peter S. Blumberg 5.26%
Marilyn Rose Cane Co-execs
Est of Howard G. Blumberg
106 Siena Oaks Circle W
Palm Beach Gardens, FL 33410
A Smith Barney Inc. 6.81%
00113817416
388 Greenwich Street
New York, New York 10013
B N/A
C MLPF&S for the Sole Benefit 6.93%
of its Customers
Attn: Fund Administration
4800 Deer Lake Drive East 3rd Fl.
Jacksonville, FL 32246-0000
Asia Growth Fund............... O Thomas W. Brock 44.27%
Cricklewood Lane
Harrison, NY 10528
Salomon Brothers Inc A/C V0410 29.16%
7 World Trade Center 40th Floor
Attn: Peter Hegel
New York, NY 10048
Salomon Brothers Inc A/C V0387 6.00%
7 World Trade Center 40th Fl.
Attn. Peter Hegel
New York, NY 10048
Salomon Brothers A/C V0276 5.07%
7 World Trade Center 40th Floor
Attn: Peter Krzystek
New York, NY 10048
A Salomon Brothers Holding Co Inc 25.33%
7 World Trade Center 38th Floor
New York, NY 10048
B Salomon Brothers Holding Co Inc 27.14%
7 World Trade Center 38th Floor
New York, NY 10048
C MLPF&S for the Sole Benefit of 12.82%
its Customers
Attn: Fund Administration
4800 Deer Lake Drive East
3rd Floor
Jacksonville, FL 32246-0000
Wendel & Co. A/C 439857 12.05%
c/o The Bank of New York
Mutual Fund Reorg. Dept.
P.O. Box 1066
Wall Street Station
New York, NY 10268
Investors Fund................. O N/A
A Investors Fiduciary Trust Co. Cust 35.93%
FBO Centurion Trust Co.
127 W. 10th Street
4th Floor NW
Kansas City, MO 64105
Smith Barney Inc. 5.37%
00150345469
388 Greenwich Street
New York, NY 10013
B N/A
C N/A
</TABLE>
67
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
FUND CLASS SHAREHOLDER PERCENTAGE HELD
- ------------------------------- ----- --------------------------------------------- ---------------
<S> <C> <C> <C>
Capital Fund................... O Salomon Inc 56.03%
Attn: Michael Lachapella
Profit Sharing Plan
HR Accounting & Finance
388 Greenwich Street 7th Floor
New York, NY 10013
A N/A
B MLPF&S for the Sole Benefit 9.16%
of its Customers
Attn: Fund Administration
4800 Deer Lake Drive East 3rd Fl.
Jacksonville, FL 32246-0000
C MLPF&S for the Sole Benefit 10.41%
of its Customers
Attn: Fund Administration
4800 Deer Lake Drive East 3rd Fl.
Jacksonville, FL 32246-0000
Claude J. Autin 7.89%
DBA Ja-Bob Investment Co.
1423 Whitney Ave.
Gretna, LA 70053-2436
</TABLE>
68
<PAGE>
<PAGE>
INVESTMENT MANAGER
Each Fund retains SBAM to act as its investment manager. SBAM serves as the
investment manager to numerous individuals and institutions and other investment
companies. SBAM is a wholly-owned subsidiary of Salomon Brothers Holding Company
Inc, which in turn was a wholly-owned subsidiary of Salomon Inc ('Salomon'). On
November 28, 1997, Salomon, the ultimate parent company of SBAM and Salomon
Brothers Inc ('SBI'), the Funds' distributor, merged with and into Smith Barney
Holdings Inc., a subsidiary of Travelers Group Inc. ('Travelers'), to form a new
company called Salomon Smith Barney Holdings Inc. ('SSBHI') (the 'Transaction').
Upon consummation of the Transaction, Travelers became the ultimate parent of
SBAM and SBI, which continue to serve as the investment adviser and distributor,
respectively, to each of the Funds. Travelers is a diversified financial
services company engaged in investment services, asset management, consumer
finance and life and property casualty insurance services.
Under certain interpretations, the Transaction might be deemed to have
created an 'assignment,' as defined in the 1940 Act, of: (i) the Funds'
management contracts with SBAM; and (ii) the Funds' distribution agreements with
SBI, which, if so interpreted, would have resulted in the termination of such
contracts and agreements. Accordingly, the Funds' Boards approved new management
contracts and new distribution agreements for the Funds which are substantially
the same as the existing contracts and agreements and which became effective on
November 28, 1997. The new management contracts were most recently approved by
shareholders at a special meeting held on January 14, 1998.
On April 6, 1998, Travelers announced that it had entered into a Merger
Agreement with Citicorp. The transaction, which is expected to be completed
during the third quarter of 1998, is subject to various regulatory approvals,
including approval by the Federal Reserve Board. The transaction is also subject
to approval by the stockholders of each of Travelers Group and Citicorp. Upon
consummation of the merger, it is anticipated that SBAM and its SBAM affiliates,
would be wholly-owned subsidiaries of the merged corporation. The surviving
corporation would be a bank holding company subject to regulation under the Bank
Holding Company Act of 1956 ('BHCA'), the requirements of the Glass-Steagall Act
and certain other laws and regulations. Although the effects of the merger of
Travelers and Citicorp and compliance with the requirements of the BHCA and the
Glass-Steagall Act are still under review, SBAM has informed the Funds that it
does not believe that its compliance with applicable law following the merger of
Travelers and Citicorp will have a material adverse effect on its ability to
continue to provide the Funds with the same level of investment advisory
services that it currently receives.
The management contract between SBAM and each respective Fund provides that
SBAM shall manage the operations of the Fund, subject to policies 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,
69
<PAGE>
<PAGE>
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. SBAM Limited is an indirect,
wholly-owned subsidiary of Travelers. SBAM Limited is a member of the Investment
Management Regulatory Organization Limited in the United Kingdom and is
registered as an investment adviser in the United States pursuant to the
Advisers Act.
Pursuant to a sub-advisory agreement, SBAM has retained SBAM AP as
sub-adviser to the Asia Growth Fund (the 'Asia 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 a wholly-owned subsidiary of
Travelers. 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 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 Small Cap Growth Fund, and .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, 1997, 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, 1995........................ $ 25,505 $ 25,505 $ 75,716
Year Ended December 31, 1996........................ $ 36,898 $ 36,898 $ 13,646
Year Ended December 31, 1997........................ $ 60,655 $ 44,023 $ 0
NEW YORK MUNICIPAL MONEY MARKET FUND
Year Ended December 31, 1995........................ $ 449,809 $ 31,455 $ 0
Year Ended December 31, 1996........................ $ 393,078 $ 0 $ 0
Year Ended December 31, 1997........................ $ 490,138 $ 0 $ 0
NATIONAL INTERMEDIATE MUNICIPAL FUND
February 22, 1995 (commencement of operations) to
December 31, 1995................................. $ 44,953 $ 44,953 $ 35,803
Year Ended December 31, 1996........................ $ 56,186 $ 56,186 $ 83,959
Year Ended December 31, 1997........................ $ 64,592 $ 64,592 $ 71,682
</TABLE>
70
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
EXPENSES
GROSS FEES WAIVER REIMBURSED
---------- -------- ----------
<S> <C> <C> <C>
U.S. GOVERNMENT INCOME FUND
February 22, 1995 (commencement of operations) to
December 31, 1995................................. $ 53,073 $ 53,073 $ 39,324
Year Ended December 31, 1996........................ $ 66,682 $ 66,682 $ 85,462
Year Ended December 31, 1997........................ $ 77,327 $ 77,327 $ 73,598
HIGH YIELD BOND FUND
February 22, 1995 (commencement of operations) to
December 31, 1995................................. $ 108,535 $ 79,385 $ 0
Year Ended December 31, 1996........................ $ 565,248 $191,119 $ 0
Year Ended December 31, 1997........................ $2,878,280 $371,931 $ 0
STRATEGIC BOND FUND
February 22, 1995 (commencement of operations) to
December 31, 1995................................. $ 71,026 $ 71,026 $ 11,822
Year Ended December 31, 1996........................ $ 146,387 $144,551 $ 0
Year Ended December 31, 1997........................ $ 430,840 $167,097 $ 0
TOTAL RETURN FUND
September 11, 1995 (commencement of operations) to
December 31, 1995................................. $ 15,069 $ 15,069 $ 4,346
Year Ended December 31, 1996........................ $ 184,118 $184,118 $102,651
Year Ended December 31, 1997........................ $ 585,841 $505,682 $ 0
ASIA GROWTH FUND
May 6, 1996 (commencement of operations) to
December 31, 1996................................. $ 30,723 $ 30,723 $132,687
Year Ended December 31, 1997........................ $ 102,243 $102,243 $226,260
CAPITAL FUND
Year Ended December 31, 1995........................ $ 957,755 $ 0 $ 0
Year Ended December 31, 1996........................ $1,143,084 $ 0 $ 0
Year Ended December 31, 1997........................ $1,505,753 $ 0 $ 0
</TABLE>
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
71
<PAGE>
<PAGE>
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 April 30, 1997, the Investors Fund paid SBAM the following Base
Fee: based on the following annual percentages of the Fund's average daily net
assets .500% on the first $350 million, .400% on the next $150 million, .375% on
the next $250 million, .350% on the next $250 million and .300% on the amount in
excess of $1 billion. Prior to August 1, 1994, the Investors Fund paid the
following Base Fee based on the following annual percentages of the Fund's
average daily net assets: none on the first $25 million, .50% on the next $325
million, .30% on the next $150 million, .25% on the next $250 million and .20%
on the amount in excess of $750 million. SBAM was paid $3,360,670, $2,455,501
and $1,614,897 in management fees for the years ended December 31, 1997, 1996
and 1995, respectively.
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
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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 200 Clarendon Street,
Boston, Massachusetts 02116, provides certain administrative services to each
Fund except the Small Cap Growth Fund for which SBAM (in its capacity as
administrator, together with IBT, the 'Administrator'), provides certain
administrative services. In June of 1998, it is expected that each Fund will
employ Mutual Management Corp., an affiliate of SBAM, as administrator. Prior to
May 1995 for the Capital Fund, SBAM paid The Boston Company Advisors, ('Boston
Company'), the Funds' previous administrator, a fee each month at an annual rate
of .08% of the average daily net assets. For the last three fiscal years ended
December 31, 1997, the Funds have paid the amounts as administration fees
pursuant to each administration and sub-administration agreement as set forth
below.
<TABLE>
<CAPTION>
ADMINISTRATION
FEE PAID
--------------
<S> <C>
CASH MANAGEMENT FUND
Year Ended December 31, 1995................................................ $ 10,216
Year Ended December 31, 1996................................................ $ 14,400
Year Ended December 31, 1997................................................ $ 24,396
NEW YORK MUNICIPAL MONEY MARKET FUND
Year Ended December 31, 1995................................................ $180,146
Year Ended December 31, 1996................................................ $162,833
Year Ended December 31, 1997................................................ $196,133
NATIONAL INTERMEDIATE MUNICIPAL FUND
February 22, 1995 (commencement of operations) to December 31, 1995......... $ 5,570
Year Ended December 31, 1996................................................ $ 8,145
Year Ended December 31, 1997................................................ $ 10,335
U.S. GOVERNMENT INCOME FUND
February 22, 1995 (commencement of operations) to December 31, 1995......... $ 5,491
Year Ended December 31, 1996................................................ $ 7,918
Year Ended December 31, 1997................................................ $ 10,312
HIGH YIELD BOND FUND
February 22, 1995 (commencement of operations) to December 31, 1995......... $ 7,904
Year Ended December 31, 1996................................................ $ 34,645
Year Ended December 31, 1997................................................ $307,163
STRATEGIC BOND FUND
February 22, 1995 (commencement of operations) to December 31, 1995......... $ 5,778
Year Ended December 31, 1996................................................ $ 12,012
Year Ended December 31, 1997................................................ $ 45,981
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
ADMINISTRATION
FEE PAID
--------------
<S> <C>
TOTAL RETURN FUND
September 11, 1995 (commencement of operations) to December 31, 1995........ $ 1,841
Year Ended December 31, 1996................................................ $ 18,789
Year Ended December 31, 1997................................................ $ 85,240
ASIA GROWTH FUND
May 6, 1996 (commencement of operations) to December 31, 1996............... $ 24,167
Year Ended December 31, 1997................................................ $ 60,000
</TABLE>
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 SSBHI, which is in turn wholly-owned by Travelers.
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
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ended December 31, 1997, the aggregate amount spent by the various classes of
each Fund under the applicable Plan was as follows:
<TABLE>
<CAPTION>
AMOUNT
SPENT ON AMOUNT
AMOUNTS PAID COMPENSATION AMOUNT PRINTING AND SPENT ON TOTAL
AMOUNTS PAID TO TO SELECTED TO SALES SPENT ON MAILING OF MISCELLANEOUS AMOUNT
UNDERWRITERS DEALERS PERSONNEL ADVERTISING PROSPECTUS EXPENSES SPENT
--------------- ------------ ------------ ----------- ------------ ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
NATIONAL INTERMEDIATE FUND
Class A......................... $ 2,270 $ 2,084 $ 59,963 $ 54,748 $ 12,923 $ 83,703 $ 252,421
Class B......................... $ 10,023 $ 27,569 $ 72,446 $ 38,561 $ 9,338 $ 60,485 $ 209,389
Class C......................... $ 5,079 $ 3,773 $ 4,230 $ 2,328 $ 548 $ 3,551 $ 14,425
U.S. GOVERNMENT INCOME FUND
Class A......................... $ 9,977 $ 3,403 $ 16,620 $ 8,812 $ 2,080 $ 13,473 $ 44,388
Class B......................... $ 24,220 $ 49,277 $ 81,563 $ 43,824 $ 10,345 $ 87,002 $ 252,011
Class C......................... $ 5,912 $ 9,029 $ 52,606 $ 45,611 $ 10,787 $ 69,733 $ 217,740
HIGH YIELD BOND FUND
Class A......................... $ 322,101 $ 403,522 $432,748 $ 151,657 $ 35,800 $ 231,644 $ 1,255,589
Class B......................... $ 2,536,348 $9,061,113 $952,085 $ 279,458 $ 65,969 $ 427,258 $10,785,881
Class C......................... $ 429,712 $ 672,694 $240,125 $ 110,019 $ 25,971 $ 168,285 $ 1,226,014
STRATEGIC BOND FUND
Class A......................... $ 57,739 $ 93,276 $107,464 $ 47,216 $ 11,148 $ 72,187 $ 381,289
Class B......................... $ 358,545 $1,358,506 $214,949 $ 61,734 $ 19,284 $ 124,961 $ 1,799,444
Class C......................... $ 117,514 $ 169,231 $ 68,843 $ 31,169 $ 7,358 $ 47,854 $ 324,255
TOTAL RETURN FUND
Class A......................... $ 93,687 $ 139,956 $147,193 $ 59,419 $ 14,027 $ 90,844 $ 451,439
Class B......................... $ 644,206 $2,198,529 $331,491 $ 123,625 $ 29,183 $ 159,008 $ 2,471,838
Class C......................... $ 118,435 $ 186,480 $ 81,083 $ 87,285 $ 8,804 $ 57,019 $ 978,881
ASIA GROWTH FUND
Class A......................... $ 17,087 $ 18,148 $108,023 $ 54,528 $ 12,872 $ 83,387 $ 276,938
Class B......................... $ 63,988 $ 234,679 $ 60,564 $ 27,230 $ 6,428 $ 41,601 $ 370,532
Class C......................... $ 8,912 $ 22,283 $ 45,038 $ 24,555 $ 5,797 $ 37,542 $ 186,213
INVESTORS FUND
Class A......................... $ 69,287 $ 112,044 $143,688 $ 53,070 $ 12,528 $ 81,136 $ 402,466
Class B......................... $ 365,067 $1,443,428 $254,293 $ 101,110 $ 23,868 $ 154,585 $ 1,979,284
Class C......................... $ 77,887 $ 89,849 $ 48,460 $ 23,107 $ 5,455 $ 36,326 $ 212,199
CAPITAL FUND
Class A......................... $ 7,312 $ 9,480 $ 50,012 $ 24,727 $ 5,837 $ 37,805 $ 127,861
Class B......................... $ 31,756 $ 141,897 $121,850 $ 63,770 $ 15,040 $ 97,404 $ 439,901
Class C......................... $ 11,611 $ 21,975 $ 24,772 $ 12,789 $ 3,019 $ 19,554 $ 82,109
</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. The purchase by a Fund of
Participations or Assignments may be pursuant to privately negotiated
transactions pursuant to which a Fund may be required to pay fees to the seller
or forego a portion of payments in respect of the Participation Agreement.
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, 1995, 1996 and 1997, the
Funds paid aggregate brokerage commissions, including affiliated brokerage
commissions, as follows:
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<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) to December 31, 1995.......... $ 9,432 $ 210**
Year Ended December 31, 1996................ $ 42,520 $ 1,758**
Year Ended December 31, 1997................ $ 91,615 $ 300**
CAPITAL FUND
Year Ended December 31, 1995................ $ 629,443 $ 57,993***
Year Ended December 31, 1996................ $ 621,777 $ 29,772***
Year Ended December 31, 1997................ $ 730,485 $ 34,728***
INVESTORS FUND
Year Ended December 31, 1995................ $ 998,071 $ 95,179+
Year Ended December 31, 1996................ $ 619,781 $ 59,316+
Year Ended December 31, 1997................ $ 923,728 $ 68,538+
</TABLE>
- ------------
** Represents 2.2%, 4.1% and 0.3% of total brokerage commissions paid by the
Total Return Fund, and SBI executed 1.6%, 4.2% and 0.5% of the aggregate
dollar amount of transactions involving commissions during the fiscal years
ended 1995, 1996 and 1997, respectively.
*** Represents 9.0%, 4.8% and 4.8% of total brokerage commissions paid by the
Capital Fund, and SBI executed 7.0%, 6.3% and 5.4% of the aggregate dollar
amount of transactions involving commissions during the fiscal years ended
1995, 1996 and 1997, respectively.
+ Represents 9.5%, 9.6% and 7.4% of total brokerage commissions paid by the
Investors Fund, and SBI executed 9.9%, 9.8% and 7.6% of the aggregate dollar
amount of transactions involving commissions during the fiscal years ended
1995, 1996 and 1997, 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 may be determined by consideration of other factors by or
under the direction of the Board of Directors or its delegates. In valuing
assets, prices denominated in foreign currencies are 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 each 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 existence for at
least six months and was organized for a purpose other than the purchase of
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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 each 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, certain Funds have 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 intends to qualify and elect to be treated as a regulated
investment company (a 'RIC') under Subchapter M of the Internal Revenue Code of
1986, as amended (the 'Code'). Qualification as a RIC requires, among other
things, that a Fund: (a) derive at least 90% of its gross income in each taxable
year from dividends, interest, payments with respect to securities loans and
gains from the sale or other disposition of stock or securities, foreign
currencies or other income (including gains from options, futures or forward
contracts) derived with respect to its business of investing in such stock,
securities or currencies; and (b) diversify its holdings so that, at the end of
each quarter of each taxable year: (i) at least 50% of the market value of a
Fund's assets is represented by cash, cash items, U.S. government securities,
securities of other RICs and other securities with such other securities
limited, in respect of any one issuer, to an amount not greater than 5% of the
value of a
79
<PAGE>
<PAGE>
Fund's assets and 10% of the outstanding voting securities of such issuer; and
(ii) not more than 25% of the value of its assets is invested in the securities
of any one issuer (other than U.S. government securities or the securities of
other RICs).
As a RIC, a Fund will not be subject to federal income tax on its 'net
investment income' (i.e., its investment company taxable income, as that term is
defined in the Code, determined without regard to the deduction for dividends
paid) and 'net capital gain' (the excess of the Fund's net long-term capital
gain over net short-term capital loss), if any, that it distributes in each
taxable year to its shareholders, provided that it distributes 90% of its net
investment income for such taxable year, 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 gain. Each Fund expects
to designate amounts retained as undistributed net capital gain 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 gain, 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 gain 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 its capital gain
net income for the one-year period ending, as a general rule, on October 31 of
each year; and (c) 100% of the undistributed 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.
Certain Funds may engage in hedging or derivatives transactions involving
foreign currencies, forward contracts, options and futures contracts (including
options, futures and forward contracts on foreign currencies) and short sales.
See 'Additional Information on Portfolio Instruments and Investment
Policies -- Derivatives.' Such transactions will be subject to special
provisions of the Code that, among other things, may affect the character of
gains and losses realized by a Fund (that is, may affect whether gains or losses
are ordinary or capital), accelerate recognition of income of a Fund and defer
recognition of certain of a Fund's losses. These rules could therefore affect
the character, amount and timing of distributions to shareholders. In addition,
these provisions (1) will require a Fund to 'mark-to-market' certain types of
positions in its portfolio (that is, treat them as if they were closed out) and
(2) may cause a Fund to recognize income without receiving cash with which to
pay dividends or make distributions in amounts necessary to satisfy the
distribution requirement for RIC qualification and avoid both the corporate
level tax and the 4% excise tax. Each Fund intends to monitor its transactions,
will make the appropriate tax elections and will make the appropriate entries in
its books and records when it acquires any option, futures contract, forward
contract or hedged investment in order to mitigate the effect of these rules.
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
80
<PAGE>
<PAGE>
investment. Any such income would be treated as income earned by a Fund and
therefore would be subject to the distribution requirements of the Code. Because
such income may not be matched by a corresponding cash distribution to a Fund,
such Fund may be required to borrow money or dispose of other securities to be
able to make distributions to its investors. In addition, if an election is not
made to currently accrue market discount with respect to a market discount bond,
all or a portion of any deduction for any interest expense incurred to purchase
or hold such bond may be deferred until such bond is sold or otherwise disposed.
A Fund 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.
If the Fund purchases shares in a 'passive foreign investment company' (a
'PFIC'), the Fund may be subject to U.S. federal income tax on a portion of any
'excess distribution' or gain from the disposition of such shares even if such
income is distributed as a taxable dividend by the Fund to its shareholders.
Additional charges in the nature of interest may be imposed on the Fund in
respect of deferred taxes arising from such distributions or gains. If the Fund
were to invest in a PFIC and elected to treat the PFIC as a 'qualified electing
fund' under the Code (a 'QEF'), in lieu of the foregoing requirements, the Fund
would be required to include in income each year a portion of the ordinary
earnings and net capital gain of the qualified electing fund, even if not
distributed to the Fund. Alternatively, under recently enacted legislation, the
Fund can elect to mark-to-market at the end of each taxable year its shares in a
PFIC; in this case, the Fund would recognize as ordinary income any increase in
the value of such shares, and as ordinary loss any decrease in such value to the
extent it did not exceed prior increases included in income. Under either
election, the Fund might be required to recognize in a year income in excess of
its distributions from PFICs and its proceeds from dispositions of PFIC stock
during that year, and such income would nevertheless be subject to the 90% and
excise tax distribution requirements.
TAXATION OF U.S. SHAREHOLDERS
The Prospectus describes each Fund's policy with respect to distribution of
net investment income and any net capital gain. 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 shareholders 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. In the case of individuals, long-term
capital gain on securities held longer than one year, but not longer than 18
months, are taxed at a maximum rate of 28% and long-term gain on securities held
longer than 18 months are taxed at a maximum rate of 20%. Not later than 60 days
after the close of its taxable year the Fund will provide its shareholders with
a written notice designating the amounts of any ordinary income dividends or
capital gain dividends as well as the portions of its capital gain dividends
that will be eligible for the 28% and 20% rates. In the case of corporate
taxpayers, long-term capital gain is taxed at the same federal income tax rates
as ordinary income and short-term capital gain, 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
81
<PAGE>
<PAGE>
redemption or exchange will be (i) 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 or
(ii) disallowed to the extent of any exempt interest dividends received by the
shareholder 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 disallowed or 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) during the 90 day period beginning on the date which is 45 days before
the date on which such share becomes ex-dividend with respect to such dividend
(during the 180 day period beginning 90 days before such date in the case of
certain preferred stock) or (3) subject to certain forms of hedges or short
sales. Moreover, the dividends received deduction may be disallowed or reduced
(1) if the corporate shareholder fails to satisfy the foregoing requirements
with respect to its shares of a Fund or (2) by application of Code. 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.
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 of such
Fund 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 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.
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
82
<PAGE>
<PAGE>
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.
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.
83
<PAGE>
<PAGE>
STATE AND LOCAL TAX MATTERS
Most states provide that a RIC 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 RIC 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.
PERFORMANCE DATA
As indicated in each 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
each Prospectus, are computed according to a formula prescribed by the
Commission. The formula can be expressed as follows:
P(1+T)'pp'n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = Ending Redeemable Value of a hypothetical $1,000 payment made at the
beginning of a 1-5 or 10-year period at the end of such period (or
fractional portion thereof), assuming reinvestment of all dividends and
distributions.
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 each 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.
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<PAGE>
<PAGE>
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 -- Distribution Fees' in each 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, Asia
Growth Fund (in each case, after management fee waiver and reimbursement of
certain expenses), Investors Fund and the Capital Fund for certain periods of
time ending December 31, 1997 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
YEAR ENDED OPERATIONS) THROUGH
DECEMBER 31, 1997 DECEMBER 31, 1997
----------------- ----------------------
<S> <C> <C>
Class A.................................................. 2.38% 5.32%
Class B.................................................. 1.69% 5.03%
Class C.................................................. 5.69% 6.29%
Class O.................................................. 7.77% 7.35%
</TABLE>
U.S. GOVERNMENT INCOME FUND
<TABLE>
<CAPTION>
FROM FEBRUARY 22, 1995
(COMMENCEMENT OF
YEAR ENDED OPERATIONS) THROUGH
DECEMBER 31, 1997 DECEMBER 31, 1997
----------------- ----------------------
<S> <C> <C>
Class A.................................................. 2.76% 5.49%
Class B.................................................. 2.15% 5.23%
Class C.................................................. 6.04% 6.45%
Class O.................................................. 8.13% 7.52%
</TABLE>
HIGH YIELD BOND FUND
<TABLE>
<CAPTION>
FROM FEBRUARY 22, 1995
(COMMENCEMENT OF
YEAR ENDED OPERATIONS) THROUGH
DECEMBER 31, 1997 DECEMBER 31, 1997
----------------- ----------------------
<S> <C> <C>
Class A.................................................. 7.62% 16.03%
Class B.................................................. 7.18% 16.11%
Class C.................................................. 11.19% 17.14%
Class O.................................................. 13.40% 18.27%
</TABLE>
STRATEGIC BOND FUND
<TABLE>
<CAPTION>
FROM FEBRUARY 22, 1995
(COMMENCEMENT OF
YEAR ENDED OPERATIONS) THROUGH
DECEMBER 31, 1997 DECEMBER 31, 1997
----------------- -----------------------
<S> <C> <C>
Class A................................................. 5.95% 12.80%
Class B................................................. 5.39% 12.72%
Class C................................................. 9.49% 13.88%
Class O................................................. 11.48% 14.97%
</TABLE>
TOTAL RETURN FUND
<TABLE>
<CAPTION>
FROM SEPTEMBER 11, 1995
(COMMENCEMENT OF
YEAR ENDED OPERATIONS) THROUGH
DECEMBER 31, 1997 DECEMBER 31, 1997
----------------- -----------------------
<S> <C> <C>
Class A................................................. 13.39% 16.77%
Class B................................................. 13.15% 16.98%
Class C................................................. 17.11% 18.43%
Class O................................................. 19.31% 19.81%
</TABLE>
85
<PAGE>
<PAGE>
ASIA GROWTH FUND
<TABLE>
<CAPTION>
FROM MAY 6, 1996
(COMMENCEMENT OF
YEAR ENDED OPERATIONS) THROUGH
DECEMBER 31, 1997 DECEMBER 31, 1997
----------------- -------------------
<S> <C> <C>
Class A...................................................... -29.06% -16.20%
Class B...................................................... -29.65% -16.81%
Class C...................................................... -26.68% -14.25%
Class O...................................................... -25.33% -13.48%
</TABLE>
INVESTORS FUND
<TABLE>
<CAPTION>
FROM JANUARY 3, 1995
(COMMENCEMENT OF
OPERATIONS OF
CLASS A, B AND C)
THROUGH
DECEMBER 31, 1997 1 YEAR 5 YEARS 10 YEARS
--------------------- ------ ------- --------
<S> <C> <C> <C> <C>
Class A.......................................... 28.45% 20.21 % N/A N/A
Class B.......................................... 28.81% 20.28 % N/A N/A
Class C.......................................... 29.60% 24.20 % N/A N/A
Class O.......................................... N/A 26.47 % 20.52% 16.74%
</TABLE>
CAPITAL FUND
<TABLE>
<CAPTION>
FROM NOVEMBER 1, 1996
(COMMENCEMENT OF
OPERATIONS OF
CLASS A, B AND C)
THROUGH
DECEMBER 31, 1997 1 YEAR 5 YEARS 10 YEARS
---------------------- ------ ------- --------
<S> <C> <C> <C> <C>
Class A........................................ 24.89% 20.42 % N/A N/A
Class B........................................ 25.48% 20.61 % N/A N/A
Class C........................................ 29.44% 24.60 % N/A N/A
Class O........................................ N/A 26.76 % 18.05% 14.54%
</TABLE>
As described in each 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.
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 National Intermediate Fund, U.S. Government Income Fund, High
Yield Bond Fund, Strategic Bond Fund, Total Return Fund and Asia Growth Fund
(after management fee waiver and reimbursement of certain expenses) and Class A,
B and C shares of the Capital Fund and Investors Fund for certain periods of
time ending December 31, 1997 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.
86
<PAGE>
<PAGE>
NATIONAL INTERMEDIATE MUNICIPAL FUND
<TABLE>
<CAPTION>
FROM FEBRUARY 22, 1995
(COMMENCEMENT OF
OPERATIONS) THROUGH
DECEMBER 31, 1997
----------------------
<S> <C>
Class A....................................................................... 15.99%
Class B....................................................................... 15.07%
Class C....................................................................... 19.07%
Class O....................................................................... 22.50%
</TABLE>
U.S. GOVERNMENT INCOME FUND
<TABLE>
<CAPTION>
FROM FEBRUARY 22, 1995
(COMMENCEMENT OF
OPERATIONS) THROUGH
DECEMBER 31, 1997
----------------------
<S> <C>
Class A....................................................................... 16.51%
Class B....................................................................... 15.70%
Class C....................................................................... 19.59%
Class O....................................................................... 23.05%
</TABLE>
HIGH YIELD BOND FUND
<TABLE>
<CAPTION>
FROM FEBRUARY 22, 1995
(COMMENCEMENT OF
OPERATIONS) THROUGH
DECEMBER 31, 1997
----------------------
<S> <C>
Class A....................................................................... 52.98%
Class B....................................................................... 53.31%
Class C....................................................................... 57.21%
Class O....................................................................... 61.57%
</TABLE>
STRATEGIC BOND FUND
<TABLE>
<CAPTION>
FROM FEBRUARY 22, 1995
(COMMENCEMENT OF
OPERATIONS) THROUGH
DECEMBER 31, 1997
----------------------
<S> <C>
Class A....................................................................... 41.13%
Class B....................................................................... 40.82%
Class C....................................................................... 45.01%
Class O....................................................................... 49.02%
</TABLE>
TOTAL RETURN FUND
<TABLE>
<CAPTION>
FROM SEPTEMBER 11, 1995
(COMMENCEMENT OF
OPERATIONS) THROUGH
DECEMBER 31, 1997
-----------------------
<S> <C>
Class A..................................................................... 43.08%
Class B..................................................................... 43.66%
Class C..................................................................... 47.79%
Class O..................................................................... 51.81%
</TABLE>
INVESTORS FUND
<TABLE>
<CAPTION>
FROM JANUARY 3, 1995
(COMMENCEMENT OF
OPERATIONS OF CLASS
A,
B AND C) THROUGH
DECEMBER 31, 1997
---------------------
<S> <C>
Class A........................................................................ 111.93%
Class B........................................................................ 113.74%
Class C........................................................................ 117.66%
</TABLE>
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ASIA GROWTH FUND
<TABLE>
<CAPTION>
FROM MAY 6, 1996
(COMMENCEMENT OF
OPERATIONS) THROUGH
DECEMBER 31, 1997
-----------------------
<S> <C>
Class A..................................................................... -25.42%
Class B..................................................................... -26.33%
Class C..................................................................... -22.52%
Class O..................................................................... -21.37%
</TABLE>
CAPITAL FUND
<TABLE>
<CAPTION>
FROM NOVEMBER 1, 1996
(COMMENCEMENT OF OPERATIONS
OF CLASS A, B AND C)
THROUGH
DECEMBER 31, 1997
------------------------------
<S> <C>
Class A............................................................. 29.70%
Class B............................................................. 30.41%
Class C............................................................. 35.24%
</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, 1997 the annualized yield and
effective yield for each class of shares of the Cash Management Fund were 5.29%
and 5.43%, respectively. For the seven-day period ended December 31, 1997 the
annualized yield and effective yield for each class of shares of the New York
Municipal Money Market Fund were 3.66% and 3.72%, 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 charges or
service or distribution fees, the yield and effective yield figures for each
class of shares of these Funds would be the same.
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 [(cd + 1)'pp'6 - 1]
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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, 1997 was 3.68% for Class A, 3.12% for Class B, 3.12% for Class C
and 4.11% 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 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, 1997 was 6.85%. 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, 1997 was 6.09% for Class A, 5.17% for Class B,
5.17% for Class C and 6.80% 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 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
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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 each 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 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.
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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 each 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 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.
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CUSTODIAN AND TRANSFER AGENT
IBT, located at 200 Clarendon Street, Boston, Massachusetts 02116,
currently serves as custodian for each Fund except the Small Cap Growth Fund for
which PNC Bank, N.A. ('PNC' and, together with IBT in its capacity as custodian,
the 'Custodian'), located at Airport Business Center, International Court 2, 200
Stevens Drive, Lester, Pennsylvania 19113, serves as custodian. In June of 1998,
it is expected that each Fund, except for the Asia Growth Fund, will employ PNC
as its custodian. The Custodian, 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
incorporated by reference in each Prospectus and Statement of Additional
Information have been so incorporated by reference 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 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
Funds' Prospectuses.
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, Total Return
Fund, Asia Growth Fund, Investors Fund and Capital Fund for the fiscal year
ended December 31, 1997 contained in the 1997 Annual Report of the Investment
Series, are incorporated by reference into this SAI. Copies of such Annual
Report may be obtained by calling the number on the first page of this SAI.
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93
STATEMENT OF DIFFERENCES
------------------------
The section symbol shall be expressed as.............................. 'SS'
The dagger symbol shall be expressed as............................... 'D'
The double dagger symbol shall be expressed as........................ 'DD'
Characters normally expressed as superscript shall be preceded by..... 'pp'
<PAGE>
