<PAGE>
<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 25, 1999
REGISTRATION NOS. 2-14025
811-805
________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM N-1A
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
[x]
PRE-EFFECTIVE AMENDMENT NO. [ ]
POST-EFFECTIVE AMENDMENT NO. 67 [x]
AND
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940 [x]
AMENDMENT NO. 25 [x]
------------------------
SALOMON BROTHERS INVESTORS FUND INC
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
------------------------
7 WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (800) 725-6666
------------------------
ROBERT A. VEGLIANTE, ESQ.
SALOMON BROTHERS INVESTORS FUND INC
7 WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
(NAME AND ADDRESS OF AGENT FOR SERVICE)
------------------------
COPY TO:
GARY S. SCHPERO, ESQ.
SIMPSON THACHER & BARTLETT
425 LEXINGTON AVENUE
NEW YORK, NEW YORK 10017-3954
------------------------
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after
this Registration Statement becomes effective.
It is proposed that this filing will become effective (check appropriate box):
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[x] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
________________________________________________________________________________
<PAGE>
<PAGE>
Salomon Brothers
INVESTMENT SERIES
PROSPECTUS
Asia Growth Fund
Capital Fund
Cash Management Fund
High Yield Bond Fund
Investors Fund
National Intermediate Municipal Fund
New York Municipal Money Market Fund
Small Cap Growth Fund
Strategic Bond Fund
Total Return Fund
U.S. Government Income Fund
April 30, 1999
[LOGO] SALOMON
BROTHERS
ASSET
MANAGEMENT
The Securities and Exchange Commission has not approved the funds' shares as
an investment or determined whether this prospectus is accurate or complete.
Any statement to the contrary is a crime.
<PAGE>
<PAGE>
CONTENTS
<TABLE>
<S> <C>
Fund goals, strategies and risks:
Asia Growth Fund....................................................... 3
Capital Fund........................................................... 6
Cash Management Fund................................................... 8
High Yield Bond Fund................................................... 10
Investors Fund......................................................... 12
National Intermediate Municipal Fund................................... 14
New York Municipal Money Market Fund................................... 16
Small Cap Growth Fund.................................................. 19
Strategic Bond Fund.................................................... 21
Total Return Fund...................................................... 25
U.S. Government Income Fund............................................ 28
More on the funds' investments.............................................. 30
Management.................................................................. 36
Choosing a class of shares to buy........................................... 39
Buying shares and exchanging shares......................................... 45
Redeeming Shares............................................................ 48
Other things to know about share transactions............................... 50
Valuation of Shares......................................................... xx
Dividends, distributions and taxes.......................................... 52
Financial highlights........................................................ 53
</TABLE>
THINGS YOU SHOULD KNOW BEFORE INVESTING
ABOUT THE FUNDS
<TABLE>
<CAPTION>
Equity Funds Fixed Income Funds Money Market Funds
<S> <C> <C>
Asia Growth Fund High Yield Bond Fund Cash Management Fund
Small Cap Growth Fund Strategic Bond Fund New York Municipal Money
Capital Fund National Intermediate Market Fund
Investors Fund Municipal Fund
Total Return Fund U.S. Government Income Fund
</TABLE>
ABOUT THE MANAGER
The funds' investment manager is Salomon Brothers Asset Management Inc. Salomon
Brothers Asset Management Inc is a subsidiary of Citigroup Inc.
ABOUT MUTUAL FUND RISKS
An investment in any of the funds is not a bank deposit and is not insured or
guaranteed by the FDIC or any other government agency.
Salomon Brothers Investment Series - 2
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ASIA GROWTH FUND
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<S> <C>
INVESTMENT The fund seeks long-term capital appreciation.
OBJECTIVE
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KEY INVESTMENTS The fund invests primarily in equity and equity-related securities of 'Asian companies'. The
fund considers Asian companies to include companies that are organized under the laws of any
country in the Asian region other than Japan, Australia and New Zealand. The fund also
considers companies to be 'Asian companies' if Salomon Brothers Assets Management Asia
Pacific Limited, the fund's subadviser, determines that they: (i) 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; (ii) maintain at least 50% of their assets in one
or more of the Asian countries; or (iii) have securities which are traded principally on the
stock exchange in an Asian country. The fund is not limited in its allocation of assets
among Asian countries. More than 25% of the fund's assets may be invested in each of Hong
Kong, Malaysia, Singapore and Thailand and their currencies.
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HOW THE The subadviser employs a bottom-up selection process in which the subadviser seeks to
SUBADVISER identify specific industries and companies which offer the best relative potential for
SELECTS THE long-term capital appreciation across Asian markets. Individual country weights compared to
FUND'S the benchmark are managed tactically using fundamental and quantitative analysis. In seeking
INVESTMENTS to identify individual companies within Asian industries, the subadviser tends to focus on
companies that have the greatest growth potential and have strong cash flows.
In evaluating specific industries and country weighting, the subadviser considers macro
economic factors such as government policies, market liquidity, industry competitiveness and
business trends in an effort to identify an optimal allocation of assets among sectors and
countries. The subadviser then employs a combination of quantitative and traditional
fundamental analysis to identify individual companies within these industries which exhibit
strong returns on equity, positive cash flows and favorable price-earnings ratios.
- ---------------------------------------------------------------------------------------------------------------------
PRINCIPAL RISKS Investors could lose money on their investment in the fund, or the fund may not perform as
OF INVESTING IN well as other investments, if any of the following occurs.
THE FUND
The Asian securities markets decline.
Economic, political or social instabilities significantly disrupt the principal financial
Investments in Asian markets in the Asian Region.
companies involves a Factors creating volatility in one Asian country or emerging market negatively impact
substantial risk of securities values or trading in countries in the region.
loss. The U.S. dollar appreciates against the Asian currencies.
One or more governments in the region imposes restrictions on currency conversion or
trading.
Asian economies grow at a slower rate than expected or experience a downturn or recession.
In changing markets the fund may not be able to sell securities in desired amounts or at
prices it considers reasonable.
The manager's judgment about the attractiveness, relative value or potential appreciation
of a particular sector or stock proves to be incorrect.
</TABLE>
Salomon Brothers Investment Series - 3
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<TABLE>
<S> <C>
The Asian countries in which the fund invests have securities markets that are less liquid
and more volatile than markets in the U.S. and other developed countries. In Asian countries
there is generally less information available about issuers and markets because of less
rigorous disclosure and accounting standards and regulatory practices than in the U.S. These
risks are significantly increased in the case of those Asian countries which have emerging
markets. To the extent the fund concentrates its investments in one or more Asian countries,
such as Hong Kong, the fund will be subject to greater risks than if its assets were not so
concentrated.
The fund is not diversified, which means that it can invest a higher percentage of its
assets in any one issuer than a diversified fund. Being non-diversified may magnify the
fund's losses from events affecting a particular issuer.
</TABLE>
Salomon Brothers Investment Series - 4
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<TABLE>
<S> <C> <C>
Past performance does not [CHART] TOTAL RETURN
necessarily indicate how the fund The bar chart shows the
will perform in the future. performance of the
fund's Class A shares
QUARTERLY RETURNS: Highest: for each of the
xx% in quarter 199X; calendar years
Lowest: xx% in quarter 199X indicated. Class B, 2
and O shares would have
YEAR TO DATE: % (through 3/31/99) different performance
because of their
different expenses. The
performance information
in the chart does not
reflect sales charges,
which would reduce your
return.
</TABLE>
<TABLE>
<CAPTION>
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THIS TABLE ASSUMES REDEMPTION OF SHARES AT THE END OF THE PERIOD, AND THE REINVESTMENT OF COMPARATIVE
DISTRIBUTIONS AND DIVIDENDS. PERFORMANCE
<S> <C> <C> <C> <C>
AVERAGE ANNUAL TOTAL RETURNS (CALENDAR YEARS ENDED DECEMBER 31, 1998) The table indicates the
risk of investing in
Class Inception Date 1 Year Since Inception the fund by comparing
the average annual
Class A 5/6/96 total return of the
Class B 5/6/96 fund for the periods
Class 2* 5/6/96 shown to that of the
Class O 5/6/96 Morgan Stanley Capital
MSCI Index n/a International All
Country Asia Free Ex-
Japan Index.
*formerly Class C
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SHAREHOLDER FEES (PAID DIRECTLY FROM YOUR
INVESTMENT) CLASS A CLASS B CLASS 2 CLASS O FEES AND EXPENSES
<S> <C> <C> <C> <C> <C>
Maximum sales charge on purchases 5.75%* None 1.00% None This table sets forth
Maximum deferred sales charge on redemptions None 5.00% 1.00% None the fees and expenses
you will pay if you
ANNUAL FUND OPERATING EXPENSES (PAID BY THE FUND AS invest in shares of the
A % OF NET ASSETS) fund. Because the
Management fees 0.80% 0.80% 0.80% 0.80% manager has agreed to
Distribution and service (12b-1) fee 0.25% 1.00% 1.00% None waive a portion of its
Other expenses management fee, the
Total annual fund operating expenses actual management fee
and total operating
*If you buy Class A Shares in amounts of $50,000 or more the sales charge is lower. expenses for each class
were:
Class A: %, %
Class B: %, %
Class 2: %, %
Class O: %, %
The manager may
discontinue this waiver
at any time.
- -----------------------------------------------------------------------------------------------------------------------------
NUMBER OF YEARS YOU OWN YOUR SHARES 1 YEAR 3 YEARS 5 YEARS 10 YEARS This example helps you
Class A $ $ $ $ compare the cost of
Class B (redemption at end of period) investing in the fund
Class B (no redemption) with other mutual
Class 2 (redemption at end of period) funds. Your actual cost
Class 2 (no redemption) may be higher or lower.
Class O
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The example assumes: You invest $10,000 for the period shown
You reinvest all distributions and dividends without
a sales charge
The fund's operating expenses remain the same
Your investment has a 5% return each year
Redemption of your shares at the end of the period
Salomon Brothers Investment Series - 5
<PAGE>
<PAGE>
CAPITAL FUND
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<S> <C>
INVESTMENT The fund seeks capital appreciation through investment in securities which the manager
OBJECTIVE believes have above-average capital appreciation potential.
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KEY INVESTMENTS The fund invests primarily in equity securities of U.S. companies. These companies may range
in size from established large capitalization companies to small capitalization companies at
the beginning of their life cycles.
- ---------------------------------------------------------------------------------------------------------------------
HOW THE The manager emphasizes individual security selection while diversifying the fund's
MANAGER investments across industries, which may help to reduce risk. The manager seeks to identify
SELECTS THE those companies which offer the greatest potential for capital appreciation through careful
FUND'S fundamental analysis of each company and its financial characteristics. The manager
INVESTMENTS evaluates companies of all sizes.
In selecting individual companies for investment, the manager looks for the following:
Share prices which appear to undervalue the company's assets or do not adequately reflect
factors such as favorable industry trends, lack of investor recognition or the short-term
nature of earnings declines.
Special situations such as existing or possible changes in management, corporate policies,
capitalization or regulatory environment which may boost earnings or the market price of the
company's shares.
Growth potential due to technological advances, new products or services, new methods of
marketing or production, changes in demand or other significant new developments which may
enhance future earnings.
- ---------------------------------------------------------------------------------------------------------------------
PRINCIPAL RISKS While investing in equity securities historically has produced greater average returns than
OF INVESTING IN investments in fixed income securities, equity investments may also involve added risks.
THE FUND Investors could lose money on their investment in the fund, or the fund may not perform as
well as other investments, if any of the following occurs:
The U.S. stock market declines.
Investing in An adverse event, such as negative press reports about a company in the fund's portfolio,
small depresses the value of the company's stock.
capitalization The manager's judgment about the attractiveness, relative value or potential appreciation
companies of a particular sector or stock proves to be incorrect.
involves a Greater volatility of share price because of the fund's ability to invest in small cap
substantial companies. Compared to large cap companies, small cap companies and the market for their
risk of loss equity securities are more likely to:
be more sensitive to changes in earnings results and investor expectations.
have more limited product lines, capital resources and management depth.
experience sharper swings in market values.
be harder to sell at the times and prices the manager believes appropriate.
offer greater potential for gain and loss.
The fund is not diversified, which means that it can invest a higher percentage of its
assets in any one issuer than a diversified fund. Being non-diversified may magnify the
fund's losses from events affecting a particular issuer.
</TABLE>
Salomon Brothers Investment Series - 6
<PAGE>
<PAGE>
<TABLE>
<S> <C>. <C>
Past performance does not [CHART] TOTAL RETURN
necessarily indicate how the fund
will perform in the future. The bar chart shows the
performance of the
QUARTERLY RETURNS: Highest: fund's Class O shares
xx% in quarter 199X; for each of the past 10
Lowest: xx% in quarter 199X calendar years. Class
A, B and 2 shares would
YEAR TO DATE: % (through 3/31/99) have different
performance because of
their different
expenses. The
performance information
in the chart does not
reflect sales charges,
which would reduce your
return.
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
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<S> <C> <C> <C> <C> <C> <C>
THIS TABLE ASSUMES REDEMPTION OF SHARES AT THE END OF THE PERIOD, AND THE REINVESTMENT COMPARATIVE
OF DISTRIBUTIONS AND DIVIDENDS. PERFORMANCE
AVERAGE ANNUAL TOTAL RETURNS (CALENDAR YEARS ENDED DECEMBER 31, 1998) The table indicates the
risk of investing in
Inception Since the fund by comparing
Class Date 1 Year 5 Years 10 Years Inception the average annual
total return of the
Class A 11/1/96 n/a n/a fund for the periods
Class B 11/1/96 n/a n/a shown to that of the
Class 2* 11/1/96 n/a n/a Standard and Poor's 500
Class O Stock Index.
S&P 500 Index n/a
*formerly Class C
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
SHAREHOLDER FEES (PAID DIRECTLY FROM YOUR FEES AND EXPENSES
INVESTMENT) CLASS A CLASS B CLASS 2 CLASS O
Maximum sales charge on purchases 5.75%* None 1.00% None This table sets forth
Maximum deferred sales charge on redemptions None 5.00% 1.00% None the fees and expenses
you will pay if you
ANNUAL FUND OPERATING EXPENSES (PAID BY THE FUND AS invest in shares of the
A % OF NET ASSETS) fund. Because the
Management fees 0.90% 0.90% 0.90% 0.90% manager has agreed to
Distribution and service (12b-1) fee 0.25% 1.00% 1.00% None waive a portion of its
Other expenses management fee, the
Total annual fund operating expenses actual management fee
and total operating
*If you buy Class A Shares in amounts of $50,000 or more the sales charge is lower. expenses for each class
were:
Class A: %, %
Class B: %, %
Class 2: %, %
Class O: %, %
The manager may
discontinue this waiver
at any time.
- ---------------------------------------------------------------------------------------------------------------------------
NUMBER OF YEARS YOU OWN YOUR SHARES 1 YEAR 3 YEARS 5 YEARS 10 YEARS This example helps you
Class A $ $ $ $ compare the cost of
Class B (redemption at end of period) investing in the fund
Class B (no redemption) with other mutual
Class 2 (redemption at end of period) funds. Your actual cost
Class 2 (no redemption) may be higher or lower.
Class O
</TABLE>
The example assumes: You invest $10,000 for the period shown
You reinvest all distributions and dividends without
a sales charge
The fund's operating expenses remain the same
Your investment has a 5% return each year
Redemption of your shares at the end of the period
Salomon Brothers Investment Series - 7
<PAGE>
<PAGE>
CASH MANAGEMENT FUND
<TABLE>
<S> <C>
INVESTMENT The fund seeks as high a level of current income as is consistent with liquidity and
OBJECTIVE stability of principal.
- ---------------------------------------------------------------------------------------------------------------------
KEY The fund invests in high quality, U.S. dollar denominated short-term debt securities. The
INVESTMENTS fund may invest in all types of money market instruments including U.S. government
securities, short-term debt securities, commercial paper, variable rate demand notes,
obligations, mortgage-backed and asset-backed securities and repurchase agreements. While
the fund invests primarily in securities of U.S. issuers, the fund may also invest in U.S.
dollar denominated obligations of foreign governmental and corporate issuers. The debt
instruments in which the fund invests may have fixed or variable rates of interest. The fund
normally maintains at least 25% of its assets in bank obligations.
MINIMUM CREDIT QUALITY: The fund invests primarily in securities rated in the highest short
term rating category, or if unrated, of equivalent quality.
MAXIMUM MATURITY: The fund invests in securities having, or are deemed to have, remaining
maturities of 397 days or less. The fund maintains a dollar-weighted average portfolio
maturity of 90 days or less.
- ---------------------------------------------------------------------------------------------------------------------
HOW THE In selecting investments for the funds, the manager looks for:
MANAGER Eligible issuers with the most desirable credit quality
SELECTS THE The best relative values based on an analysis of yield, price, interest rate sensitivity
FUND'S and credit quality
INVESTMENTS Maturities consistent with the manager's outlook for interest rates
---------------------------------------------------------------------------------------------------------------------
PRINCIPAL RISKS Although the fund seeks to preserve the value of an investment at $1 per share, it is
OF INVESTING IN possible to lose money by investing in the fund, or the fund could underperform other short
THE FUND term debt instruments or money market funds if any of the following occurs:
There is no Interest rates rise sharply.
assurance that An issuer or guarantor of the fund's securities defaults, or has its credit rating
Cash Management downgraded.
Fund will be able The manager's judgment about the relative value or credit quality of a particular security
to maintain a proves to be incorrect.
stable net asset The value of the fund's foreign securities go down because of unfavorable government
value of $1.00 actions or political instability.
per share.
Over time, a money market fund is likely to underperform other fixed income or equity
investment options.
</TABLE>
Salomon Brothers Investment Series - 8
<PAGE>
<PAGE>
<TABLE>
<S> <C> <C>
Past performance does not [CHART] TOTAL RETURN
necessarily indicate how the fund
will perform in the future. The bar chart shows the
performance of the
QUARTERLY RETURNS: Highest: fund's Class O shares
xx% in quarter 199X; for each of the
Lowest: xx% in quarter 199X calendar years
indicated. Class A, B
YEAR TO DATE: % (through 3/31/99) and 2 shares would have
different performance
because of their
different expenses. The
performance information
in the chart does not
reflect sales charges,
which would reduce your
return.
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
THIS TABLE ASSUMES REDEMPTION OF SHARES AT THE END OF THE PERIOD, AND THE REINVESTMENT OF COMPARATIVE
DISTRIBUTIONS AND DIVIDENDS. PERFORMANCE
AVERAGE ANNUAL TOTAL RETURNS (CALENDAR YEARS ENDED DECEMBER 31, 1998) The table indicates the
risk of investing in
Class Inception Date 1 Year 5 Years Since Inception the fund by comparing
the average annual
Class A 1/3/95 n/a total return of the
Class B 1/3/95 n/a fund for the periods
Class 2* 1/3/95 n/a shown to that of the
Class O 10/2/90 Morgan Stanley Capital
90 day T-bill n/a International All
Country Asia Free Ex-
Japan Index.
*formerly Class C
The fund's 7-day yield as of December 31, 1998 was [ ]%. Call 1-800-xxx-xxxx for the fund's current 7-day yield.
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
SHAREHOLDER FEES (PAID DIRECTLY FROM YOUR
INVESTMENT) CLASS A CLASS B CLASS 2 CLASS O FEES AND EXPENSES
Maximum sales charge on purchases None None None None
Maximum deferred sales charge on redemptions None None None None This table sets forth
the fees and expenses
ANNUAL FUND OPERATING EXPENSES (PAID BY THE FUND AS you will pay if you
A % OF NET ASSETS) invest in shares of the
Management fees 0.20% 0.20% 0.20% 0.20% fund. Because the
Distribution and service (12b-1) fee None None None None manager has agreed to
Other expenses waive a portion of its
Total annual fund operating expenses management fee, the
actual management fee
and total operating
expenses for each class
were:
Class A: %, %
Class B: %, %
Class 2: %, %
Class O: %, %
The manager may
discontinue this waiver
at any time.
- ----------------------------------------------------------------------------------------------------------------------------
NUMBER OF YEARS YOU OWN YOUR SHARES 1 YEAR 3 YEARS 5 YEARS 10 YEARS This example helps you
Class A $ $ $ $ compare the cost of
Class B investing in the fund
Class 2 with other mutual
Class O funds. Your actual cost
may be higher or lower.
</TABLE>
The example assumes: You invest $10,000 for the period shown
You reinvest all distributions and dividends without
a sales charge
The fund's operating expenses remain the same
Your investment has a 5% return each year
Redemption of your shares at the end of the period
Salomon Brothers Investment Series - 9
<PAGE>
<PAGE>
HIGH YIELD BOND FUND
<TABLE>
<S> <C>
INVESTMENT The fund seeks to maximize current income. As a secondary objective, the fund seeks capital
OBJECTIVE appreciation.
- ---------------------------------------------------------------------------------------------------------------------
KEY INVESTMENTS The fund invests primarily in high yield fixed income securities issued by U.S. and foreign
governments, their agencies and instrumentalities, supranational entities, and U.S. and
foreign corporations. The fund may invest up to 35% of its assets in securities of foreign
issuers, including issuers in emerging markets.
CREDIT QUALITY: The fund invests primarily in fixed income securities rated below investment
grade or, if unrated, of equivalent quality as determined by the manager. Below investment
grade securities are commonly referred to as 'junk bonds.'
MATURITY: The fund normally maintains an average portfolio maturity of between 6 and 12
years. However, the fund may invest in individual securities of any maturity.
- ---------------------------------------------------------------------------------------------------------------------
HOW THE Individual security selection is driven by the manger's economic view, industry outlook and
MANAGER rigorous credit analysis. The manager then selects those individual securities that appear
SELECTS THE to be most undervalued and to offer the highest potential returns relative to the amount of
FUND'S credit, interest rate, liquidity and other risk presented by these securities. The manager
INVESTMENTS allocates the fund's investments across a broad range of issuers and industries, which can
help to reduce risk.
In evaluating the issuer's creditworthiness, the manager employs fundamental analysis and
considers the following factors:
The strength of the issuer's financial resources.
The issuer's sensitivity to economic conditions and trends.
The issuer's operating history.
Experience and track record of issuer's management.
- ---------------------------------------------------------------------------------------------------------------------
PRINCIPAL RISKS Investors could lose money on their investment in the fund, or the fund may not perform as
OF INVESTING well as other investments, if any of the following occurs:
IN THE FUND
The issuer of a security owned by the fund defaults on its obligation to pay principal
and/or interest or has its credit rating downgraded.
Investments in high Interest rates increase, causing the prices of fixed income securities to decline and
yield securities reducing the value of the fund's portfolio.
involves a substantial The manager's judgment about the attractiveness, value or credit quality of a particular
risk of loss security proves to be incorrect.
High yield securities are considered speculative and, compared to investment grade
securities, tend to have more volatile prices and are more susceptible to the following
risks:
Increased price sensitivity to changing interest rates and to adverse economic and
business developments
Greater risk of loss due to default or declining credit quality
Greater likelihood that adverse economic or company specific events will make the
issuer unable to make interest and/or principal payments
Negative market sentiment towards high yield securities depresses the price and
liquidity of high yield securities
</TABLE>
Salomon Brothers Investment Series - 10
<PAGE>
<PAGE>
<TABLE>
<S> <C> <C>
Past performance does not [CHART] TOTAL RETURN
necessarily indicate how the fund
will perform in the future. The bar chart shows the
performance of the
QUARTERLY RETURNS: Highest: fund's Class A shares
xx% in quarter 199X; for each of the
Lowest: xx% in quarter 199X calendar years
indicated. Class B, 2
YEAR TO DATE: % through 3/31/99 and O shares would have
different performance
because of their
different expenses. The
performance information
in the chart does not
reflect sales charges,
which would reduce your
return.
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
THIS TABLE ASSUMES REDEMPTION OF SHARES AT THE END OF THE PERIOD, AND THE REINVESTMENT OF COMPARATIVE
DISTRIBUTIONS AND DIVIDENDS. PERFORMANCE
AVERAGE ANNUAL TOTAL RETURNS (CALENDAR YEARS ENDED DECEMBER 31, 1998) The table indicates the
risk of investing in
Class Inception Date 1 Year Since Inception the fund by comparing
the average annual
Class A 2/22/95 total return of the
Class B 2/22/95 fund for the periods
Class 2* 2/22/95 shown to that of the
Class O 2/22/95 Salomon Brothers Broad
Salomon Index n/a Investment Grade Bond
Index
*formerly Class C
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
SHAREHOLDER FEES (PAID DIRECTLY FROM YOUR
investment) CLASS A CLASS B CLASS 2 CLASS O FEES AND EXPENSES
Maximum sales charge on purchases 4.75% * None 1.00% None This table sets forth
Maximum deferred sales charge on redemptions None 5.00% 1.00% None the fees and expenses
you will pay if you
ANNUAL FUND OPERATING EXPENSES (PAID BY THE FUND invest in shares of the
AS A % OF NET ASSETS) fund. Because the
Management fees 0.75% 0.75% 0.75% 0.75% manager has agreed to
Distribution and service (12b-1) 0.25% 1.00% 0.75% None waive a portion of its
fee management fee, the
Other expenses actual management fee
Total annual fund operating expenses and total operating
expenses for each class
*If you buy Class A Shares in amounts of $50,000 or more the sales charge is lower. were:
Class A: %, %
Class B: %, %
Class 2: %, %
Class O: %, %.
The manager may
discontinue this waiver
at any time.
- -----------------------------------------------------------------------------------------------------------------------------
NUMBER OF YEARS YOU OWN YOUR SHARES 1 YEAR 3 YEARS 5 YEARS 10 YEARS This example helps you
Class A $ $ $ $ compare the cost of
Class B (redemption at end of period) investing in the fund
Class B (no redemption) with other mutual
Class 2 (redemption at end of period) funds. Your actual cost
Class 2 (no redemption) may be higher or lower.
Class O
</TABLE>
The example assumes: You invest $10,000 for the period shown
You reinvest all distributions and dividends without
a sales charge
The fund's operating expenses remain the same
Your investment has a 5% return each year
Redemption of your shares at the end of the period.
Salomon Brothers Investment Series - 11
<PAGE>
<PAGE>
INVESTORS FUND
<TABLE>
<S> <C>
INVESTMENT The primary investment objective of the fund is to seek long-term growth of capital. Current
OBJECTIVE income is a secondary objective.
- ---------------------------------------------------------------------------------------------------------------------
KEY The fund invests primarily in common stocks of established U.S. companies. The fund may also
INVESTMENTS invest in other equity securities. To a lesser degree, the fund invests in income producing
securities such as debt securities.
- ---------------------------------------------------------------------------------------------------------------------
HOW THE The manager emphasizes individual security selection while diversifying the fund's
MANAGER investments across industries, which may help to reduce risk. The manager focuses on
SELECTS THE established large capitalization companies, seeking to identify those companies with solid
FUND'S growth potential at reasonable values. The manager employs fundamental analysis to analyze
INVESTMENTS each company in detail, ranking its management, strategy and competitive market position.
In selecting individual companies for investment, the manager looks for:
Long-term history of performance
Competitive market position
Competitive products and services
Strong cash flow
High return on equity
Strong financial condition
Experienced and effective management
Global scope
- ---------------------------------------------------------------------------------------------------------------------
PRINCIPAL While investing in equity securities historically has produced greater average returns than
RISKS OF investments in fixed income securities, equity investments may also involve added risks.
INVESTING IN Investors could lose money on their investment in the fund, or the fund may not perform as
THE FUND well as other investments, if any of the following occurs:
U.S. stock markets declines.
An adverse event, such as an unfavorable earnings report, negatively affects the stock
price of a company in which the fund invests.
Large capitalization stocks fall out of favor with investors.
The manager's judgment about the attractiveness, growth prospects or potential
appreciation of a particular sector or stock proves to be incorrect.
</TABLE>
Salomon Brothers Investment Series - 12
<PAGE>
<PAGE>
<TABLE>
<S> <C> <C>
Past performance does not [CHART] TOTAL RETURN
necessarily indicate how the fund
will perform in the future. The bar chart shows the
performance of the
QUARTERLY RETURNS: Highest: fund's Class O shares
xx% in quarter 199X; for each of the past 10
Lowest: xx% in quarter years. Class A, B and 2
199X shares would have
different performance
YEAR TO DATE: % through 3/31/99 because of their
different expenses. The
performance information
in the chart does not
reflect sales charges,
which would reduce your
return.
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
THIS TABLE ASSUMES REDEMPTION OF SHARES AT THE END OF THE PERIOD, AND THE REINVESTMENT COMPARATIVE
OF DISTRIBUTIONS AND DIVIDENDS. PERFORMANCE
AVERAGE ANNUAL TOTAL RETURNS (CALENDAR YEARS ENDED DECEMBER 31, 1998) The table indicates the
risk of investing in
Inception Since the fund by comparing
Class Date 1 Year 5 Years 10 Years Inception the average annual
total return of the
Class A n/a n/a fund for the periods
Class B n/a n/a shown to that of the
Class 2* n/a n/a Standard & Poor's 500
Class O Stock Index.
S&P 500 Index n/a
*formerly Class C
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
SHAREHOLDER FEES (PAID DIRECTLY FROM YOUR
INVESTMENT) CLASS A CLASS B CLASS 2 CLASS O FEES AND EXPENSES
Maximum sales charge on purchases 5.75%* None 1.00% None This table sets forth
Maximum deferred sales charge on redemptions None 5.00% 1.00% None the fees and expenses
you will pay if you
ANNUAL FUND OPERATING EXPENSES (PAID BY THE FUND AS invest in shares of the
A % OF NET ASSETS) fund. Because the
manager has agreed to
Management fees 0.52% 0.52% 0.52% 0.52% waive a portion of its
Distribution and service (12b-1) fee 0.25% 1.00% 1.00% None management fee, the
Other expenses actual management fee
Total annual fund operating expenses and total operating
expenses for each class
*If you buy Class A Shares in amounts of $50,000 or more the sales charge is lower. were:
Class A: %, %
Class B: %, %
Class 2: %, %
Class O: %, %
The manager may
discontinue this waiver
at any time.
- -----------------------------------------------------------------------------------------------------------------------------
NUMBER OF YEARS YOU OWN YOUR SHARES 1 YEAR 3 YEARS 5 YEARS 10 YEARS This example helps you
compare the cost of
Class A $ $ $ $ investing in the Fund
Class B (redemption at end of period) with other mutual
Class B (no redemption) funds. Your actual cost
Class 2 (redemption at end of period) may be higher or lower.
Class 2 (no redemption)
Class O
</TABLE>
The example assumes: You invest $10,000 for the period shown
You reinvest all distributions and dividends without
a sales charge
The fund's operating expenses remain the same
Your investment has a 5% return each year
Redemption of your shares at the end of the period
Salomon Brothers Investment Series - 13
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
NATIONAL INTERMEDIATE MUNICIPAL FUND
<TABLE>
<S> <C>
INVESTMENT The fund seeks a high level of income which is exempt from regular federal income taxes.
OBJECTIVE
- ---------------------------------------------------------------------------------------------------------------------
KEY INVESTMENTS The fund invests primarily in 'municipal securities,' which are debt obligations issued by
any state and its political subdivisions, agencies and public authorities (together with
certain other governmental issuers such as Puerto Rico, the Virgin Islands and Guam). The
interest on these bonds is exempt from federal income tax. As a result, the interest rate on
these bonds normally is lower than it would be if the bonds were subject to federal
taxation. The fund may invest more than 25% of its assets in obligations whose payments are
from revenues of similar projects (such as utilities or hospitals) or whose issuers share
the same geographic locations.
CREDIT QUALITY: The fund invests exclusively in municipal obligations rated in one of the
four highest rating categories by a national rating organization at the time of purchase,
or, if unrated, of equivalent quality as determined by the manager.
MATURITY: The fund normally maintains a market weighted average portfolio maturity of three
to ten years. However, the fund may invest in individual securities of any maturity.
- ---------------------------------------------------------------------------------------------------------------------
HOW THE In selecting securities for the fund, the manager focuses upon developing a portfolio that
MANAGER is diversified among states and types of municipal securities and also the appropriate
SELECTS THE maturity allocation for the fund within a given market environment. The manager:
FUND'S
INVESTMENTS Emphasizes investments in revenue bonds for essential services (i.e., water, electric,
power, sewer and select transportation authority) and in general obligation bonds of
high-quality issuers.
Uses credit analysis to evaluate the relative attractiveness of various securities and
sectors.
Seeks geographic and issuer diversification.
- ---------------------------------------------------------------------------------------------------------------------
PRINCIPAL RISKS Investors could lose money on their investment in the fund, or the fund may not perform as
OF INVESTING IN well as other investments, if any of the following occurs:
THE FUND
Interest rates rise, causing the value of the fund's portfolio to decline.
The issuer of a security owned by fund defaults on its obligation to pay principal and/or
interest or has its credit rating downgraded.
Municipal securities fall out of favor with investors.
New federal or state legislation adversely affects the tax-exempt status of securities
held by the fund or the financial ability of the municipalities to repay these obligations.
The issuer of municipal obligations may not be able to make timely payments because of
general economic downturns or increased governmental costs.
The manager's judgment about the attractiveness, relative value or income potential of a
particular security proves to be incorrect.
It is possible that some of the fund's income distributions may be, and distributions of the
fund's realized capital gains will be, subject to federal taxation. The fund may realize
taxable gains on the sale of its securities or other transactions, and some of the fund's
income distributions may be subject to the federal alternative minimum tax. In addition,
distributions of the fund's income and gains generally will be subject to state taxation.
</TABLE>
Salomon Brothers Investment Series - 14
<PAGE>
<PAGE>
<TABLE>
<S> <C> <C>
Past performance does not [CHART] TOTAL RETURN
necessarily indicate how the fund
will perform in the future. The bar chart shows the
performance of the
QUARTERLY RETURNS: Highest: fund's Class A shares
xx% in quarter 199X; for each of the full
Lowest: xx% in quarter 199X calendar years
indicated. Class B, 2
YEAR TO DATE: % through 3/31/1999 and O shares would have
different performance
because of their
different expenses. The
performance information
in the chart does not
reflect sales charges,
which would reduce your
return.
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
THIS TABLE ASSUMES REDEMPTION OF SHARES AT THE END OF THE PERIOD, AND THE REINVESTMENT OF COMPARATIVE
DISTRIBUTIONS AND DIVIDENDS. PERFORMANCE
AVERAGE ANNUAL TOTAL RETURNS (CALENDAR YEARS ENDED DECEMBER 31, 1998) The table indicates the
risk of investing in
Class Inception Date 1 Year Since Inception the fund by comparing
the average annual
Class A 2/22/95 total return of the
Class B 2/22/95 fund for the periods
Class 2* 2/22/95 shown to that of the
Class O 2/22/95 Lehman Brothers 1-10
Lehman Index n/a Year Municipal Bond
Index.
*formerly Class C
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
SHAREHOLDER FEES (PAID DIRECTLY FROM YOUR
INVESTMENT) CLASS A CLASS B CLASS 2 CLASS O FEES AND EXPENSES
Maximum sales charge on purchases 4.75%* None 1.00% None This table sets forth
Maximum deferred sales charge on redemptions None 5.00% 1.00% None the fees and expenses
you will pay if you
ANNUAL FUND OPERATING EXPENSES (PAID BY THE FUND AS invest in shares of the
A % OF NET ASSETS) fund. Because the
manager has agreed to
Management fees 0.50% 0.50% 0.50% 0.50% waive a portion of its
Distribution and service (12b-1) fee 0.25% 1.00% 0.75% None management fee, the
Other expenses actual management fee
Total annual fund operating expenses and total operating
expenses for each class
*If you buy Class A shares in amounts of $50,000 or more the sales charge is lower. were:
Class A: %, %
Class B: %, %
Class 2: %, %
Class O: %, %
The manager may
discontinue this waiver
at any time.
- ---------------------------------------------------------------------------------------------------------------------------
NUMBER OF YEARS YOU OWN YOUR SHARES 1 YEAR 3 YEARS 5 YEARS 10 YEARS This example helps you
compare the cost of
Class A $ $ $ $ investing in the fund
Class B (redemption at end of period) with other mutual
Class B (no redemption) funds. Your actual cost
Class 2 (redemption at end of period) may be higher or lower.
Class 2 (no redemption)
Class O
</TABLE>
The example assumes: You invest $10,000 for the period shown
You reinvest all distributions and dividends without
a sales charge
The fund's operating expenses remain the same
Your investment has a 5% return each year
Redemption of your shares at the end of the period
Salomon Brothers Investment Series - 15
<PAGE>
<PAGE>
NEW YORK MUNICIPAL MONEY MARKET FUND
<TABLE>
<S> <C>
INVESTMENT The fund seeks as high a level of current income exempt from federal income tax and New York
OBJECTIVE State and New York City personal income taxes as is consistent with liquidity and the
stability of principal.
- ---------------------------------------------------------------------------------------------------------------------
KEY The fund invests primarily in high-quality, short-term 'New York municipal securities,'
INVESTMENTS which are debt obligations issued by the State of New York and its political subdivisions,
agencies and public authorities (or certain other governmental issuers such as Puerto Rico,
the Virgin Islands, and Guam.) The interest on these obligations is exempt from federal
income tax and New York State and New York City personal income tax. As a result, the
interest rate on these obligations normally is lower than it would be if the obligations
were subject to taxation.
MINIMUM CREDIT QUALITY: The fund invests primarily in securities rated in the two highest
short-term rating categories, or if unrated, of equivalent quality.
MAXIMUM MATURITY: The fund invests in securities having remaining maturities of 397 days or
less. The fund maintains a dollar-weighted average portfolio maturity of 90 days or less.
- ---------------------------------------------------------------------------------------------------------------------
HOW THE The manager selects securities primarily by identifying undervalued sectors and individual
MANAGER securities, while also selecting securities that it believes will benefit from changes in
SELECTS THE market conditions. In selecting individual securities, the manager:
FUND'S
INVESTMENTS Uses fundamental credit analysis to estimate the relative value and attractiveness of
various opportunities in the New York municipal bond market.
Identifies eligible issuers with the most desirable credit quality.
Trades between general obligations and revenue bonds and among various revenue bond sectors
such as housing, hospital and industrial development, based on their apparent relative
values.
Considers a security's maturity in light of the outlook for the issuer and its sector and
interest rates.
- ---------------------------------------------------------------------------------------------------------------------
PRINCIPAL RISKS Although the fund seeks to preserve the value of an investment at $1 per share, it is
OF INVESTING possible to lose money by investing in the fund, or the fund could underperform other
IN THE FUND short-term debt instruments or money market funds if any of the following occurs:
There is no The fiscal condition of New York State or New York City weakens. New York State and City
assurance that have experienced significant fiscal problems in the past.
New York Interest rates rise sharply.
Municipal An issuer or guarantor of the fund's securities defaults, has its credit rating downgraded
Money Market or is unable to make timely payments because of general economic downturns or increased
Fund will be governmental costs.
able to maintain New federal or state legislation adversely affects the tax-exempt status of securities held
a stable net by the fund or the financial ability of the municipalities to repay these obligations.
asset value of The manager's judgment about the attractiveness, value or income potential of a particular
$1.00 per share. security proves to be incorrect.
</TABLE>
Salomon Brothers Investment Series - 16
<PAGE>
<PAGE>
<TABLE>
<S> <C>
It is possible that some of the fund's income distributions may be, and distributions of the
fund's realized capital gains will be, subject to federal taxation. The fund may realize
taxable gains on the sale of its securities or other transaction, and some of the fund's
income distribution may be subject to the federal alternative minimum tax. In addition, some
of the fund's income distribution and all of the fund's realized capital gains generally
will be subject to state and local taxation.
The fund is not diversified, which means that it can invest a higher percentage of its
assets in any one issuer than a diversified fund. However, the fund complies with the
Securities and Exchange Commission's rule for money market funds, including the
diversification requirement of that rule.
</TABLE>
Salomon Brothers Investment Series - 17
<PAGE>
<PAGE>
<TABLE>
<S> <C> <C>
Past performance does not [CHART] TOTAL RETURN
necessarily indicate how the fund
will perform in the future. The bar chart shows the
performance of the
QUARTERLY RETURNS: Highest: fund's Class O shares
xx% in quarter 199X; for the calendar years
Lowest: xx% in quarter 199X indicated. Class A, B
and 2 shares would have
YEAR TO DATE: % through 3/31/99 different performance
because of their
different expenses. The
performance information
in the chart does not
reflect sales charges,
which would reduce your
return.
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
THIS TABLE ASSUMES REDEMPTION OF SHARES AT THE END OF THE PERIOD, AND THE REINVESTMENT OF COMPARATIVE PERFORMANCE
DISTRIBUTIONS AND DIVIDENDS.
The table indicates the
AVERAGE ANNUAL TOTAL RETURNS (CALENDAR YEARS ENDED DECEMBER 31, 1998) risk of investing in
the fund by comparing
Class Inception Date 1 Year 5 Years 10 Years Since Inception the average annual
total return of the
Class A 11/1/96 n/a n/a fund for the periods
Class B 11/1/96 n/a n/a shown to that of the
Class 2* 11/1/96 n/a n/a 90 day Treasury bill.
Class O 10/2/90 n/a
90 day T-bill n/a *formerly Class C
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
SHAREHOLDER FEES (PAID DIRECTLY FROM YOUR
INVESTMENT) CLASS A CLASS B CLASS 2 CLASS O FEES AND EXPENSES
Maximum sales charge on purchases None None None None This table sets forth
Maximum deferred sales charge on redemptions None None None None the fees and expenses
you will pay if you
ANNUAL FUND OPERATING EXPENSES (PAID BY THE FUND AS invest in shares of the
A % OF NET ASSETS) fund. Because the
manager has agreed to
Management fees 0.20% 0.20% 0.20% 0.20% waive a portion of its
Distribution and service (12b-1) fee None None None None management fee, the
Other expenses actual management fee
Total annual fund operating expenses and total operating
expenses for each class
were:
Class A: %, %
Class B: %, %
Class 2: %, %
Class O: %, %
The manager may
discontinue this waiver
at any time.
- ----------------------------------------------------------------------------------------------------------------------------
NUMBER OF YEARS YOU OWN YOUR SHARES 1 YEAR 3 YEARS 5 YEARS 10 YEARS This example helps you
compare the cost of
Class A $ $ $ $ investing in the fund
Class B with other mutual
Class 2 funds. Your actual cost
Class O may be higher or lower.
</TABLE>
The example assumes: You invest $10,000 for the period shown
You reinvest all distributions and dividends without
a sales charge
The fund's operating expenses remain the same
Your investment has a 5% return each year
Redemption of your shares at the end of the period
Salomon Brothers Investment Series - 18
<PAGE>
<PAGE>
SMALL CAP GROWTH FUND
<TABLE>
<S> <C>
INVESTMENT The fund seeks long-term growth of capital.
OBJECTIVE
- ---------------------------------------------------------------------------------------------------------------------
KEY INVESTMENTS The fund invests primarily in equity securities of companies with market capitalizations at
the time of purchase similar to that of the companies included in the Russell 2000 Index.
The Russell 2000 Index includes companies with market capitalizations below the top 1000
stocks of the equity market. As of December 31, 1998, the market capitalization of companies
included in the Russell 2000 Index ranged from $4.4 million to $3.1 billion.
- ---------------------------------------------------------------------------------------------------------------------
HOW THE The manager emphasizes companies which it believes have favorable growth prospects and
MANAGER potential for significant capital appreciation. In selecting individual companies for
SELECTS THE investment, the manager looks for:
FUND'S
INVESTMENTS Companies that either occupy a dominant position in an emerging industry or a growing
market share in larger, fragmented industries.
Favorable nearterm earnings trends.
High return on equity.
Strong financial condition
Experienced and effective management.
- ---------------------------------------------------------------------------------------------------------------------
PRINCIPAL While investing in equity securities historically has produced greater average returns than
RISKS OF investments in fixed income securities, equity securities may also involve added risks.
INVESTING IN Investors can lose money on their investment in the fund, or the fund may not perform as
THE FUND well as other investments, if any of the following occurs:
Small capitalization stocks fall out of favor with investors.
Investing in Recession or adverse economic trends adversely affects the earnings or financial condition
small of small companies.
capitalization The manager's judgment about the attractiveness, growth prospects or potential
companies appreciation of the fund's investments proves to be incorrect.
involves a Greater volatility of share price because of the fund's focus on small cap companies.
substantial risk Compared to large cap companies, small cap companies and the market for their equity
of loss securities are more likely to:
be more sensitive to changes in earnings results and investor expectations.
have more limited product lines, capital resources and management depth.
experience sharper swings in market values.
be harder to sell at the times and prices the manager believes appropriate.
offer greater potential for gain and loss.
</TABLE>
Salomon Brothers Investment Series - 19
<PAGE>
<PAGE>
<TABLE>
<S> <C>
BECAUSE THE FUND COMMENCED OPERATIONS IN 1998, THE FUND DOES NOT HAVE A SUFFICIENT OPERATING
HISTORY TO DEPICT ITS PERFORMANCE IN THE GRAPHIC AND TABLE FORM WHICH THE OTHER FUNDS USE.
The manager served as an investment adviser for a private proprietary account for the period
October , 1997 through July 1, 1998, which is the date the Small Cap Growth Fund commenced
operations. The private account was managed according to the same investment objective and
substantially similar policies and strategies as have been adopted for the Small Cap Growth
Fund. As of [July 1], 1998, the private account had $ million in assets. The private
account generated a total return for the period October , 1997 to [July 1], 1998 of
%. This total return figure has been computed in accordance with the Securities and
Exchange Commission's standardized formula and reflects advisory fees paid to the manager
and transaction costs and other expenses. The fees and expenses paid by the private account
differ in type and amount from the fees and expenses paid by the Small Cap Growth Fund.
Also, the private account was not subject to the same types of expenses as the Small Cap
Growth Fund and was not subject to the same diversification requirements, tax restrictions
and other investment limitations imposed on the Small Cap Growth Fund by the Investment
Company Act of 1940 or Subchapter M of the Internal Revenue Code of 1986.
The total return figure for the private account is intended to provide investors with
information about the historical experience of the manager in managing a small cap growth
portfolio. The performance of the private account is not that of the Small Cap Growth Fund
and is not necessarily indicative of the Small Cap Growth Fund's future performance.
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
SHAREHOLDER FEES (PAID DIRECTLY FROM YOUR
INVESTMENT) CLASS A CLASS B CLASS 2* CLASS O FEES AND EXPENSES
Maximum sales charge on purchases 5.75%* None 1.00% None This table sets forth
Maximum deferred sales charge on redemptions None 5.00% 1.00% None the fees and expenses
you will pay if you
ANNUAL FUND OPERATING EXPENSES (PAID BY THE FUND AS invest in shares of the
A % OF NET ASSETS) fund. Because the
manager has agreed to
Management fees 0.80% 0.80% .080% 0.80% waive a portion of its
Distribution and service (12b-1) fee 0.25% 1.00% 1.00% None management fee, the
Other expenses actual management fee
Total Annual fund operating expenses and total operating
expenses for each class
*If you buy Class A Shares in amounts of $50,000 or more the sales charge is lower. were:
Class A: %, %
Class B: %, %
Class 2: %, %
Class O: %, %
The manager may
discontinue this waiver
at any time.
- ---------------------------------------------------------------------------------------------------------------------------
NUMBER OF YEARS YOU OWN YOUR SHARES 1 YEAR 3 YEARS 5 YEARS 10 YEARS This example helps you
compare the cost of
Class A $ $ $ $ investing in the fund
Class B (redemption at end of period) with other mutual
Class B (no redemption) funds. Your actual cost
Class 2 (redemption at end of period) may be higher or lower.
Class 2 (no redemption)
Class 0 (redemption at end of period)
</TABLE>
The example assumes: You invest $10,000 for the period shown
You reinvest all distributions and dividends without
a sales charge
The fund's operating expenses remain the same
Your investment has a 5% return each year
Redemption of your shares at the end of the period
Salomon Brothers Investment Series - 20
<PAGE>
<PAGE>
STRATEGIC BOND FUND
<TABLE>
<S> <C>
INVESTMENT The fund seeks a high level of current income. As a secondary objective, the fund seeks
OBJECTIVE capital appreciation.
- ---------------------------------------------------------------------------------------------------------------------
KEY The fund invests primarily in a globally diverse portfolio of fixed income securities. The
INVESTMENTS manager has broad discretion to allocate the fund's assets among the following segments of
the international market for fixed income securities:
U.S. government obligations
Investment grade U.S. corporate debt
Non-investment grade U.S. corporate debt
Mortgage and asset-backed securities
Sovereign debt
Brady Bonds
Investment and non-investment grade foreign corporate obligations
CREDIT QUALITY: The fund invests in fixed income securities across a range of credit
qualities and may invest a substantial portion of the fund's assets in obligations rated
below investment grade, or, if unrated, of equivalent quality as determined by the manager.
Below investment grade securities are commonly referred to as 'junk bonds'.
MATURITY: The fund has no specific average portfolio maturity requirement, but generally
anticipates maintaining a range of 4.5 to 10 years. The fund may hold individual securities
of any maturity.
- ---------------------------------------------------------------------------------------------------------------------
HOW THE The manager uses a combination of quantitative models which seek to measure the relative
MANAGER risks and opportunities of each market segment based upon economic, market, political,
SELECTS THE currency and technical data and its own assessment of economic and market conditions to
FUND'S create an optimal risk/return allocation of the fund's assets among various segments of the
INVESTMENTS fixed income market. After the manager makes its segment allocations, the manager uses
traditional credit analysis to identify individual securities for the fund's portfolio.
In selecting corporate debt for investment, the manager considers the issuer's:
Financial condition.
Sensitivity to economic conditions and trends.
Operating history.
Experience and track record of management.
In selecting foreign government debt for investment, the manager considers the issuer's:
Economic and political conditions within the issuer's country.
Overall and external debt levels and debt service ratios.
Access to capital markets.
Debt service payment history.
</TABLE>
Salomon Brothers Investment Series - 21
<PAGE>
<PAGE>
<TABLE>
<S> <C>
In selecting U.S. government and agency for investment obligations and mortgage-backed
securities for investment, the manager considers the following factors:
yield curve shifts.
credit quality.
changing prepayment patterns.
- ---------------------------------------------------------------------------------------------------------------------
PRINCIPAL RISKS Investors could lose money on their investment in the fund, or the fund may not perform as
OF INVESTING IN well as other investments, if any of the following occurs:
THE FUND
Interest rates go up, causing the prices of fixed-income securities to decline and reducing
the value of the fund's investments.
The issuer of a security owned by the fund defaults on its obligation to pay principal
and/or interest or has its credit rating downgraded.
During periods of declining interest rates, the issuer of a security may exercise its option
to prepay principal earlier than scheduled, forcing the fund to reinvest in lower yielding
securities. This is known as call or prepayment risk.
During periods of rising interest rates, the average life of certain types of securities may
be extended because of slower than expected principal payments.
This may lock in a below market interest rate, increase the security's duration and reduce
the value of the security. This is known as extension risk.
The manager's judgment about the attractiveness, relative value or potential appreciation of
a particular sector or security proves to be incorrect.
To the extent the fund invests significantly in asset-backed and mortgage-related
securities, its exposure to prepayment and extension risks may be greater than other
investments in fixed income securities. Mortgage derivatives held by the fund may have
especially volatile prices and may have a disproportionate effect on the fund's share price.
</TABLE>
Salomon Brothers Investment Series - 22
<PAGE>
<PAGE>
<TABLE>
<S> <C>
Investments in Investment in high yield securities involves substantial risk of loss. These securities are
high yield considered speculative with respect to the issuer's ability to pay interest and principal
securities and are susceptible to default or decline in market value due to adverse economic and
involves a business developments. The market values for high yield securities tends to be very
substantial risk volatile, and these securities are less liquid than investment grade debt securities. For
of loss. these reasons, your investment in the fund is subject to the following specific risks:
Increased price sensitivity to changing interest rates and to adverse economic and business
developments
Greater risk of loss due to default or declining credit quality
Greater likelihood that adverse economic or company specific events will make the
issuer unable to make interest and/or principal payments
Negative market sentiment towards high yield securities depresses the price and
liquidity of high yield securities. This negative perception could last for a
significant period of time.
Investing in non-U.S. issuers may involve unique risks compared to investing in the
securities of U.S. issuers. Some of these risks do not apply to larger, more developed
countries. These risks are more pronounced to the extent the fund invests in issuers in
countries with emerging markets or if the fund invests significantly in one country. These
risks may include:
Less information about non-U.S. issuers or markets may be available due to less rigorous
disclosure and accounting standards or regulatory practices
Many non-U.S. markets are smaller, less liquid and more volatile than U.S. markets. In a
changing market, the manager may not be able to sell the fund's portfolio securities in
amounts and at prices the manager considers reasonable
The U.S. dollar may appreciate against non-U.S. currencies or a foreign government may
impose restrictions on currency conversion or trading
The economies of non-U.S. countries may grow at a slower rate than expected or may
experience a downturn or recession
Economic, political and social developments that significantly disrupt the financial markets
Foreign governmental obligations involve the risk of debt moratorium, repudiation or
renegotiation and the fund may be unable to enforce its rights against the issuers
</TABLE>
Salomon Brothers Investment Series - 23
<PAGE>
<PAGE>
<TABLE>
<S> <C> <C>
Past performance does not [CHART] TOTAL RETURN
necessarily indicate how the fund
will perform in the future. The bar chart shows the
performance of the
QUARTERLY RETURNS: Highest: fund's Class A shares
xx% in quarter 199X; for each of the
Lowest: xx% in quarter 199X calendar years
indicated. Class B, 2
YEAR TO DATE: % (through 3/31/99) and O shares would have
different performance
because of their
different expenses. The
performance information
in the chart does not
reflect sales charges,
which would reduce your
return.
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
THIS TABLE ASSUMES REDEMPTION OF SHARES AT THE END OF THE PERIOD, AND THE REINVESTMENT OF COMPARATIVE
DISTRIBUTIONS AND DIVIDENDS. PERFORMANCE
AVERAGE ANNUAL TOTAL RETURNS (CALENDAR YEARS ENDED DECEMBER 31, 1998) The table indicates the
risk of investing in
Class Inception Date 1 Year Since Inception the fund by comparing
the average annual
Class A 2/22/95 total return of the
Class B 2/22/95 fund for the periods
Class 2* 2/22/95 shown to that of the
Class O 2/22/95 Salomon Brothers Broad
Salomon Index n/a Investment Grade Bond
Index
*formerly Class C
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
SHAREHOLDER FEES (PAID DIRECTLY FROM YOUR
INVESTMENT) CLASS A CLASS B CLASS 2 CLASS O FEES AND EXPENSES
Maximum sales charge on purchases 4.75%* None 1.00% None This table sets forth
Maximum deferred sales charge on redemptions None 5.00% 1.00% None the fees and expenses
you will pay if you
ANNUAL FUND OPERATING EXPENSES (PAID BY THE FUND AS invest in shares of the
A % OF NET ASSETS) fund. Because the
manager has agreed to
Management fees 0.75% 0.75% 0.75% 0.75% waive a portion of its
Distribution and service (12b-1) fee 0.25% 1.00% 0.75% None management fee, the
Other expenses actual management fee
Total annual fund operating expenses and total operating
expenses FOR each class
*If you buy Class A Shares in amounts of $50,000 or more the sales charge is lower. were:
Class A: %, %
Class B: %, %
Class 2: %, %
Class O: %, %
The manager may
discontinue this waiver
at any time.
- ----------------------------------------------------------------------------------------------------------------------------
NUMBER OF YEARS YOU OWN YOUR SHARES 1 YEAR 3 YEARS 5 YEARS 10 YEARS This example helps you
compare the cost of
Class A $ $ $ $ investing in the fund
Class B (redemption at end of period) with other mutual
Class B (no redemption) funds. Your actual cost
Class 2 (redemption at end of period) may be higher or lower.
Class 2 (no redemption)
Class O
</TABLE>
The example assumes: You invest $10,000 for the period shown
You reinvest all distributions and dividends without
a sales charge
The fund's operating expenses remain the same
Your investment has a 5% return each year
Redemption of your shares at the end of the period.
Salomon Brothers Investment Series - 24
<PAGE>
<PAGE>
TOTAL RETURN FUND
<TABLE>
<S> <C>
INVESTMENT The fund seeks to obtain above average income (compared to a portfolio invested in equity
OBJECTIVE securities). The fund's secondary objective is to take advantage of opportunities for growth
of capital and income.
- ---------------------------------------------------------------------------------------------------------------------
KEY INVESTMENTS The fund invests in a broad range of equity and fixed income securities of both U.S. and
foreign issuers. The fund varies its allocations between equity and fixed income securities
depending on the manager's view of economic and market conditions, fiscal and monetary
policy and security values. However, under normal market conditions at least 40% of the
fund's assets are allocated to equity securities.
Credit Quality: The fund's investments in fixed-income securities are primarily investment
grade but the fund may invest up to 20% of its assets in nonconvertible fixed income
securities rated below investment grade or in unrated securities of equivalent quality.
Securities rated below investment grade are commonly referred to as 'junk bonds.'
Maturity: The fund's investments in fixed-income securities may be of any maturity.
- ---------------------------------------------------------------------------------------------------------------------
HOW THE In selecting stocks for investment, the manager applies a bottom-up analysis, focusing on
MANAGER companies with:
SELECTS THE
FUND'S Large market capitalizations
INVESTMENTS Favorable dividend yields and price to earnings ratios
Stocks that are less volatile than the market as a whole
Strong balance sheets
A catalyst for appreciation and restructuring potential, product innovation or new
development
The manager considers both macroeconomic and issuer specific factors in selecting debt
securities for its portfolio. In assessing the appropriate maturity, rating and sector
weighing of the fund's portfolio, the manager considers a variety of macroeconomic factors
that are expected to influence economic activity and interest rates. These factors include
fundamental economic indicators, Federal Reserve monetary policy and the relative value of
the U.S. dollar compared to other currencies. Once the manager determines the preferable
portfolio characteristic, the manager selects individual securities based upon the terms of
the securities (such as yields compared to U.S. Treasuries or comparable issuers), liquidity
and rating, sector and issuer diversification. The manager also employs fundamental research
and due diligence to assess an issuer's:
credit quality taking into account financial condition and profitability
future capital needs
potential for change in rating and industry outlook
the competitive environment and management ability
</TABLE>
Salomon Brothers Investment Series - 25
<PAGE>
<PAGE>
<TABLE>
<S> <C>
PRINCIPAL While investing in a mix of equity and debt securities can bring added benefits, it may also
RISKS OF involve additional risks. Investors could lose money in the fund or the fund's performance
INVESTING IN could fall below other possible investments if any of the following occurs:
THE FUND
U.S. stock markets declines.
An adverse event, such as an unfavorable earnings report, negatively affects the stock
price of a company in which the fund invests.
Large capitalization stocks fall out of favor with investors.
The manager's judgment about the attractiveness, growth prospects or potential
appreciation of a particular sector or stock proves to be incorrect.
The fund also has risks associated with investing in bonds. The fund could underperform
other investments if:
Interest rates go up, causing the prices of fixed-income securities to decline and
reducing the value of the fund's investments.
The issuer of a debt security owned by the fund defaults on its obligation to pay
principal or interest or has its credit rating downgraded.
During periods of declining interest rates, the issuer of a security may exercise its
option to prepay earlier than scheduled, forcing the fund to reinvest in lower yielding
securities. This is known as call or prepayment risk.
During periods of rising interest rates, the average life of certain types of securities
may be extended because of slower than expected principal payments. This may lock in a below
market interest rate, increase the security's duration and reduce the value of the security.
This is known as extension risk.
</TABLE>
Salomon Brothers Investment Series - 26
<PAGE>
<PAGE>
<TABLE>
<S> <C> <C>
Past performance does not [CHART] TOTAL RETURN
necessarily indicate how the fund
will perform in the future. The bar chart shows the
performance of the
QUARTERLY RETURNS: Highest: fund's Class A shares
xx% in quarter 199X; for each of the
Lowest: xx% in quarter 199X calendar years
indicated. Class B, 2,
YEAR TO DATE: % (through 3/31/99) D and O shares would
have different
performance because of
their different
expenses. The
performance information
in the chart does not
reflect sales charges,
which would reduce your
return.
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
THIS TABLE ASSUMES REDEMPTION OF SHARES AT THE END OF THE PERIOD, AND THE COMPARATIVE
REINVESTMENT OF DISTRIBUTIONS AND DIVIDENDS. PERFORMANCE
AVERAGE ANNUAL TOTAL RETURNS (CALENDAR YEARS ENDED DECEMBER 31, 1998) The table indicates the
risk of investing in
Class Inception Date 1 Year Since Inception the fund by comparing
the average annual
Class A 9/11/95 total return of the
Class B 9/11/95 fund for the periods
Class 2* 9/11/95 shown to that of a
Class O 9/11/95 composite index which
Composite Index n/a is comprised of 50%
Salomon Brothers Broad
Investment Grade Bond
Index and 50% the S&P
500 Index.
*formerly Class C
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
SHAREHOLDER FEES (PAID DIRECTLY FROM YOUR
INVESTMENT) CLASS A CLASS B CLASS 2 CLASS O FEES AND EXPENSES
Maximum sales charge on purchases 5.75%* None 1.00% None This table sets forth
Maximum deferred sales charge on redemptions None 5.00% 1.00% None the fees and expenses
you will pay if you
ANNUAL FUND OPERATING EXPENSES (PAID BY THE FUND AS invest in shares of the
A % OF FUND NET ASSETS) fund. Because the
manager has agreed to
Management fees 0.55% 0.55% 0.55% 0.55% waive a portion of its
Distribution and service (12b-1) fee 0.25% 1.00% 1.00% None management fee, the
Other expenses actual management fee
Total annual fund operating expenses and total operating
expenses for each class
*If you buy Class A Shares in amounts of $50,000 or more the sales charge is lower. were:
Class A: %, %
Class B: %, %
Class 2: %, %
Class O: %, %
The manager may
discontinue this waiver
at any time.
- ----------------------------------------------------------------------------------------------------------------------------
NUMBER OF YEARS YOU OWN YOUR SHARES 1 YEAR 3 YEARS 5 YEARS 10 YEARS This example helps you
compare the cost of
Class A $ $ $ $ investing in the fund
Class B (redemption at end of period) with other mutual
Class B (no redemption) funds. Your actual cost
Class 2 (redemption at end of period) may be higher or lower.
Class 2 (no redemption)
Class O
</TABLE>
The example assumes: You invest $10,000 for the period shown
You reinvest all distributions and dividends without
a sales charge
The fund's operating expenses remain the same
Your investment has a 5% return each year
Redemption of your shares at the end of the period
Salomon Brothers Investment Series - 27
<PAGE>
<PAGE>
U.S. GOVERNMENT INCOME FUND
<TABLE>
<S> <C>
INVESTMENT The fund seeks to obtain a high level of current income.
OBJECTIVE
- ---------------------------------------------------------------------------------------------------------------------
KEY Under normal circumstances, the fund invests in debt securities and mortgage-backed
INVESTMENTS securities issued or guaranteed by the U.S. government, its agencies or instrumentalities.
The fund may also invest in private pools of mortgages the payment of principal and interest
on which is guaranteed by the U.S. government, its agencies or instrumentalities. Agency and
instrumentality securities may be backed by the full faith and credit of the U.S. Treasury,
by the right of the issuer to borrow from the U.S. government or only by the credit of the
issuer itself.
DURATION: The fund normally maintains an average portfolio effective duration of two to four
years. Duration is an approximate measure of the sensitivity of the market value of the
fund's portfolio to changes in interest rates.
- ---------------------------------------------------------------------------------------------------------------------
HOW THE The manager focuses on identifying undervalued sectors and securities. Specifically, the
MANAGER manager:
SELECTS THE Monitors the spread between U.S. Treasury and Government agency or instrumentality issuers
FUND'S and purchases agency and instrumentality issues that it believes will provide a total return
INVESTMENTS advantage
Determines sector or maturity weightings based on intermediate and long-term assessments
of the economic environment and relative value factors based on interest rate outlook
Uses research to uncover inefficient sectors of the government and mortgage markets and
adjusts portfolio positions to take advantage of new information
Measures the potential impact of supply/demand imbalances, yield curve shifts and changing
prepayment patterns to identify individual securities that balance potential return and risk
- ---------------------------------------------------------------------------------------------------------------------
PRINCIPAL Investors could lose money on their investment in the fund or the fund's performance could
RISKS OF fall below other possible investments if any of the following occurs:
INVESTING IN Interest rates increase, causing the prices of fixed-income securities to decline and
THE FUND reducing the value of the funds investments.
As interest rates decline, the issuers of mortgage-related securities held by the fund may
pay principal earlier than scheduled, forcing the fund to reinvest in lower yielding
securities. This is called prepayment or call risk.
As interest rates increase, slower than expected principal payments may extend the average
life of fixed income securities, locking in below-market interest rates and reducing the
value of these securities. This is called extension risk.
Increased volatility in share price to the extent the fund holds mortgage derivative
securities because of their imbedded leverage or unusual interest rate reset terms.
The manager's judgment about interest rates or the attractiveness, value or income
potential of a particular security proves incorrect.
Payments of principal and interest on mortgage pools issued by government related
organizations are not guaranteed by the U.S. government. Although mortgage pools issued by
U.S. agencies are guaranteed with respect to payments of principal and interest, such
guarantee does not apply to losses resulting from declines in the market value of such
securities.
</TABLE>
Salomon Brothers Investment Series - 28
<PAGE>
<PAGE>
<TABLE>
<S> <C> <C>
Past performance does not [CHART] TOTAL RETURN
necessarily indicate how the fund
will perform in the future. The bar chart shows the
performance of the
QUARTERLY RETURNS: Highest: fund's Class A shares
xx% in quarter 199X; for each of the
Lowest: xx% in quarter 199X calendar years
indicated. Class B, 2
YEAR TO DATE: % through and O shares would have
3/31/99 different performance
because of their
different expenses. The
performance information
in the chart does not
reflect sales charges,
which would reduce your
return.
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
THIS TABLE ASSUMES REDEMPTION OF SHARES AT THE END OF THE PERIOD, AND THE REINVESTMENT OF COMPARATIVE
DISTRIBUTIONS AND DIVIDENDS. PERFORMANCE
AVERAGE ANNUAL TOTAL RETURNS (CALENDAR YEARS ENDED DECEMBER 31, 1998) The table indicates the
risk of investing in
Class Inception Date 1 Year Since Inception the fund by comparing
the average annual
Class A 2/22/95 total return of the
Class B 2/22/95 fund for the periods
Class 2* 2/22/95 shown to that of the
Class O 2/22/95 Lipper Short-
Lipper Avg n/a n/a Intermediate U.S.
Government Bond Fund.
*formerly Class C
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
SHAREHOLDER FEES (PAID DIRECTLY FROM YOUR
INVESTMENT) CLASS A CLASS B CLASS 2 CLASS O FEES AND EXPENSES
Maximum sales charge on purchases 4.75%* None None None This table sets forth
Maximum deferred sales charge on redemptions None 5.00% 1.00% None the fees and expenses
you will pay if you
ANNUAL FUND OPERATING EXPENSES (PAID BY THE FUND AS invest in shares of the
A % OF NET ASSETS) fund. Because the
manager has agreed to
Management fees 0.60% 0.60% 0.60% 0.60% waive a portion of its
Distribution and service (12b-1) fee 0.25% 1.00% 0.75% None management fee, the
Other expenses actual management fee
Total annual fund operating expenses and total operating
expenses for each class
*If you buy Class A Shares in amounts of $50,000 or more the sales charge is lower. were:
Class A: %, %
Class B: %, %
Class 2: %, %
Class O: %, %
The manager may
discontinue this waiver
at any time.
- ----------------------------------------------------------------------------------------------------------------------------
NUMBER OF YEARS YOU OWN YOUR SHARES 1 YEAR 3 YEARS 5 YEARS 10 YEARS This example helps you
compare the cost of
Class A $ $ $ $ investing in the fund
Class B (redemption at end of period) with other mutual
Class B (no redemption) funds. Your actual cost
Class 2 (redemption at end of period) may be higher or lower.
Class 2 (no redemption)
Class O
</TABLE>
The example assumes: You invest $10,000 for the period shown
You reinvest all distributions and dividends without
a sales charge
The fund's operating expenses remain the same
Your investment has a 5% return each year
Redemption of your shares at the end of the period
Salomon Brothers Investment Series - 29
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
MORE ON THE FUNDS' INVESTMENTS
ADDITIONAL INVESTMENTS AND INVESTMENT TECHNIQUES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Each fund's ASIA GROWTH FUND
investment objective Although the fund intends to be fully invested in
and its principal equity securities of Asian companies, the fund may
investment also invest up to 35% of its assets in fixed income
strategies and risks securities issued by U.S. and foreign governments,
are described under their agencies or instrumentalities and supranational
'Fund Goals and entities. The fund may invest up to 10% of its assets
Strategies.' in non-convertible debt securities rated below
investment grade, or, if unrated, of equivalent
This section quality as determined by the subadvisor.
provides additional
information about CAPITAL FUND
the funds' The fund may invest in investment grade fixed-income
investments and securities and may invest up to 20% of its net assets
certain portfolio in non-convertible debt securities rated below
management investment grade or, if unrated, of equivalent
techniques the funds quality as determined by the manager. The fund
may use. More emphasizes non-convertible debt securities that offer
information about the appreciation potential of common stocks. The fund
the funds' may invest without limit in convertible debt
investments and securities. The fund may also invest up to 20% of its
portfolio management assets in securities of foreign issuers.
techniques, some of
which entail risks, HIGH YIELD BOND FUND
is included in the Although the fund invests primarily in high yield
statement of securities, the fund may also invest up to 20% of its
additional assets in equity and equity related securities.
information (SAI).
INVESTORS FUND
Any policy or The fund may invest up to 5% of its net assets in
limitation for a non-convertible debt securities rated below
fund that is investment grade or, if unrated, of equivalent
expressed as a quality as determined by the manager. The fund may
percentage of assets invest without limit in convertible debt securities.
is considered only The fund may also invest up to 20% of its assets in
at the time of securities of foreign issuers.
purchase of
portfolio NEW YORK MUNICIPAL MONEY MARKET FUND
securities. The The fund may invest up to 35% of its assets in
policy will not be securities that pay interest which is not exempt from
violated if these New York State or city personal income tax and up to
limitations are 20% of its assets in securities that pay interest
exceeded because of which is not exempt from federal income tax.
changes in the
market value of the NATIONAL INVESTMENT MUNICIPAL FUND
fund's assets or for The fund may invest up to 20% of its assets in
any other reason. securities that pay interest which is not exempt from
regular federal income tax.
SMALL CAP GROWTH FUND
The fund may invest up to 35% of its assets in equity
securities of companies whose market capitalizations
exceed $1 billion. The fund may also invest up to 25%
of its assets in non-convertible bonds, notes and
debt securities when the manager believes that their
total return potential equals or exceeds the
potential return of equity securities. The fund may
invest up to 20% of its total assets in equity
securities of foreign issuers.
</TABLE>
Salomon Brothers Investment Series - 30
<PAGE>
<PAGE>
<TABLE>
<S> <C>
STRATEGIC BOND FUND
Although the fund invests primarily in fixed-income
securities, the fund may also invest up to 20% of its
assets in equity and equity related securities. The
fund may invest up to 100% of its assets in foreign
currency denominated securities, including securities
of issuers located in emerging markets.
TOTAL RETURN FUND
The fund may invest up to 20% of its assets in
securities of foreign issuers.
EQUITY INVESTMENTS Subject to its particular investment policies, each
of these funds may invest in all types of equity
Asia Growth Fund, securities. Equity securities include common stocks
Capital Fund, traded on an exchange or in the over the counter
Investors Fund, market, preferred stocks, warrants, rights,
Small Cap Growth convertible securities, depositary receipts, trust
Fund and Total certificates, limited partnership interests,
Return Fund equity-linked debt securities, shares of other
investment companies, real estate investment trusts
and equity participations. The principal and/or
interest payments from equity-linked debt securities
are determined by reference to the price of equity
securities or securities indices.
- --------------------------------------------------------------------------------
FIXED INCOME Subject to its particular investment policies, each
INVESTMENTS fund may invest in fixed income securities. Fixed
income investments include bonds, notes (including
All funds, but the structured notes), mortgage-related securities,
following funds only asset-backed securities, convertible securities,
to a limited extent: Eurodollar and Yankee dollar instruments, loan
Asia Growth Fund, participation and assignments, preferred stocks and
Capital Fund, money market instruments. Fixed income securities may
Investors Fund and be issued by U.S. and foreign corporations or
Small Cap Growth entities; U.S. and foreign banks; the U.S.
Fund government, its agencies, authorities,
instrumentalities or sponsored enterprises; state and
municipal governments; supranational organizations;
and foreign governments and their political
subdivisions. Only certain of the funds may invest in
fixed income securities of foreign issuers. See
'Foreign and emerging markets investments' below.
Fixed income securities may have all types of
interest rate payment and reset terms, including
fixed rate, adjustable rate, zero coupon, contingent,
deferred, payment in kind and auction rate features.
Cash Management Each of these funds may invest in mortgage-backed and
Fund, High Yield asset-backed securities. Mortgage-related securities
Bond Fund, Strategic may be issued by private companies or by agencies of
Bond Fund, Total the U.S. government and represent
Return Fund and U.S. direct or indirect participations in, or
Government Income are collateralized by and payable from, mortgage
Fund loans secured by real property. Asset-backed
securities represent participations in, or are
secured by and payable from, assets such as
installment sales or loan contracts, leases, credit
card receivables and other categories of receivables.
Certain debt instruments may only pay principal at
maturity or may only represent the right to receive
payments of principal or payments of interest on
underlying pools of mortgages or government
securities, but not both. The value of these types of
instruments may change more drastically than debt
securities that pay both principal and interest
during periods of changing interest rates. Principal
only mortgage backed securities are particularly
subject to prepayment risk. The fund may obtain a
below market yield or incur a loss on such
instruments during periods of declining interest
rates. Interest only instruments are particularly
</TABLE>
Salomon Brothers Investment Series - 31
<PAGE>
<PAGE>
<TABLE>
<S> <C>
subject to extension risk. For mortgage derivatives
and structured securities that have imbedded leverage
features, small changes in interest or prepayment
rates may cause large and sudden price movements.
Mortgage derivatives can also become illiquid and
hard to value in declining markets.
Strategic Bond Fund, Each of these funds may also enter into mortgage
Total Return Fund dollar roll transactions to earn additional income.
and U.S. Government In these transactions, the fund sells a U.S. agency
Income Fund. mortgage-backed security and simultaneously agrees to
repurchase at a future date another U.S. agency
mortgage-backed security with the same interest rate
and maturity date, but generally backed by a
different pool of mortgages. The fund loses the right
to receive interest and principal payments on the
security it sold. However, the fund benefits from the
interest earned on investing the proceeds of the sale
and may receive a fee or a lower repurchase price.
The benefits from these transactions depend upon the
manager's ability to forecast mortgage prepayment
patterns on different mortgage pools. The fund may
lose money if, during the period between the time it
agrees to the forward purchase of the mortgage
securities and the settlement date, these securities
decline in value due to market conditions or
prepayments on the underlying mortgages.
- --------------------------------------------------------------------------------
CREDIT QUALITY If a security receives different ratings, a fund will
treat the securities as being rated in the highest
rating category. Credit rating criteria are applied
at the time a fund purchases a fixed income security.
A fund may choose not to sell securities that are
downgraded after their purchase below the fund's
minimum acceptable credit rating. Each fund's credit
standards also apply to counterparties to OTC
derivatives contracts.
INVESTMENT GRADE SECURITIES
Securities are investment grade if:
They are rated in one of the top four long-term
rating categories of a nationally recognized
statistical rating organization.
They have received a comparable short-term or other
rating.
They are unrated securities that the manager
believes are of comparable quality to investment
grade securities.
- --------------------------------------------------------------------------------
HIGH YIELD, LOWER Each of these funds may invest in fixed income
QUALITY SECURITIES securities that are high yield, lower quality
securities rated by a rating organization below its
High Yield Fund, top four long-term rating categories or unrated
Strategic Bond Fund securities determined by the manager to be of
and Total Return equivalent quality. The issuers of lower quality
Fund. Each of the bonds may be highly leveraged and have difficulty
following funds only servicing their debt, especially during prolonged
to a limited extent: economic recessions or periods of rising interest
Asia Growth Fund, rates. The prices of lower quality securities are
Capital Fund and volatile and may go down due to market perceptions of
Investors Fund deteriorating issuer creditworthiness or economic
conditions. Lower quality securities may become
illiquid and hard to value in down markets.
</TABLE>
Salomon Brothers Investment Series - 32
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
MUNICIPAL OBLIGATIONS Each of these funds invests primarily in municipal
obligations, which are debt obligations issued by or
New York Municipal on behalf of states, cities, municipalities and other
Money Market Fund public authorities. The interest on these securities
and National is exempt from regular federal income tax and, in
Intermediate some cases, state and local personal income tax. The
Municipal Fund two principal classifications of municipal
obligations 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. Private activity 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.
The secondary market for municipal obligations may be
less liquid than for most taxable fixed income
securities which may limit the fund's ability to buy
and sell these obligations at times and prices the
manager believes would be advantageous. There may be
less information available about the financial
condition of an issuer of municipal obligations than
about issuers of other publicly traded securities.
Also, state and federal bankruptcy laws could hinder
the fund's ability to recover interest or principal
in the event of a default by the issuer.
- --------------------------------------------------------------------------------
FOREIGN AND EMERGING Each of these funds may invest in foreign securities,
MARKET INVESTMENTS although the foreign investments of Cash Management
Fund are limited to U.S. dollar denominated
All funds except investments issued by foreign branches of U.S. banks
National and by U.S. and foreign branches of foreign banks.
Intermediate
Municipal Fund, New Investing in foreign issuers may involve unique risks
York Municipal Money compared to investing in the securities of U.S.
Market Fund and U.S. issuers. Some of these risks do not apply to larger
Government Fund more developed countries. These risks are more
pronounced to the extent the fund invests in issuers
in countries with emerging markets or if the fund
invests significantly in one country. These risks may
include:
Less information about non-U.S. issuers or markets
may be available due to less rigorous disclosure and
accounting standards or regulatory practices.
Asia Growth Fund, Many non-U.S. markets are smaller, less liquid and
High Yield Bond more volatile than U.S. markets. In a changing
Fund, Strategic Bond market, the manager may not be able to sell the
Fund and Total fund's portfolio securities in amounts and at prices
Return Fund may the manager considers reasonable.
invest in emerging
issuers. The U.S. dollar may appreciate against non-U.S.
currencies or a foreign government may impose
restrictions on currency conversion or trading.
The economies of non-U.S. countries may grow at a
slower rate than expected or may experience a
downturn or recession.
</TABLE>
Salomon Brothers Investment Series - 33
<PAGE>
<PAGE>
<TABLE>
<S> <C>
Economic, political and social developments that
adversely affect the securities markets.
Foreign governmental obligations involve the risk
of debt moratorium, repudiation or renegotiation and
the fund may be unable to enforce its rights against
the issuers.
- --------------------------------------------------------------------------------
SOVEREIGN GOVERNMENT Each of these funds may invest in all types of fixed
AND SUPRANATIONAL DEBT income securities of governmental issuers in all
countries, including emerging markets. These
sovereign debt securities may include:
All funds except
Cash Management Fixed income securities issued or guaranteed by
Fund, National governments, governmental agencies or
Intermediate instrumentalities and political subdivisions located
Municipal Fund, New in emerging market countries.
York Municipal Money
Market Fund, Small Fixed income securities issued by government owned,
Cap Growth Fund and controlled or sponsored entities located in emerging
U.S. Government Fund market countries.
Interests in entities organized and operated for
the purpose of restructuring the investment
characteristics of instruments issued by any of the
above issuers.
Brady Bonds, which are debt securities issued under
the framework of the Brady Plan as a means for debtor
nations to restructure their outstanding external
indebtedness.
Fixed income securities issued by corporate
issuers, banks and finance companies located in
emerging market countries.
Participations in loans between emerging market
governments and financial institutions.
Fixed income securities issued by supranational
entities such as the World Bank or the European
Economic Community. A supranational entity is a bank,
commission or company established or financially
supported by the national governments of one or more
countries to promote reconstruction or development.
- --------------------------------------------------------------------------------
DERIVATIVES AND HEDGING Each of these funds may, but need not, use derivative
TECHNIQUES contracts, such as futures and options on securities,
securities indices or currencies; options on these
All funds except futures; forward currency contracts; and interest
Cash Management rate or currency swaps for any of the following
Fund. National purposes:
Intermediate
Municipal Fund, New To hedge against the economic impact of adverse
York Municipal Money changes in the market value of its securities, due
Market Fund and U.S. to changes in stock market prices, currency exchange
Government Fund rates or interest rates
As a substitute for buying or selling securities
To enhance the fund's return
A derivative contract will obligate or entitle a fund
to deliver or receive an asset or cash payment that
is based on the change in value of one or more
securities, currencies or indices. Even a small
investment in derivative contracts can have a big
impact on a fund's stock market, currency and
interest rate exposure. Therefore, using derivatives
can disproportionately increase losses and reduce
opportunities for gains when stock prices, currency
rates or interest rates are changing. A fund may not
fully benefit from or may lose money on derivatives
if changes in their value do not correspond
</TABLE>
Salomon Brothers Investment Series - 34
<PAGE>
<PAGE>
<TABLE>
<S> <C>
accurately to changes in the value of the fund's
holdings. The other parties to certain derivative
contracts present the same types of credit risk as
issuers of fixed income securities. Derivatives can
also make a fund less liquid and harder to value,
especially in declining markets.
- --------------------------------------------------------------------------------
TEMPORARY DEFENSIVE Each fund may depart from its principal investment
INVESTING strategies in response to adverse market, economic or
political conditions by taking temporary defensive
positions in all types of money market and short-term
debt securities. If a fund takes a temporary
defensive position, it may be unable to achieve its
investment goal.
------------------------------------------------------------------------------
PORTFOLIO TURNOVER Each fund may engage in active and frequent trading
to achieve its principal investment strategies.
Frequent trading also increases transaction costs,
which could detract from a fund's performance.
</TABLE>
Salomon Brothers Investment Series - 35
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
MANAGEMENT
Salomon Brothers Asset Management Inc. is the investment manager for each fund.
Together with its affiliates, the manager provides a broad range of fixed income
and investment advisory services to various individuals located throughout the
world. The manager's principal address is 7 World Trade Center, New York, New
York 10048. It is a wholly-owned subsidiary of Citigroup, Inc. Citigroup
businesses produce a broad range of financial services -- asset management,
banking and consumer finance, credit and charge cards, insurance, investments,
investment banking and trading -- and use diverse channels to make them
available to consumer and corporate customers around the world. Salomon Brothers
Asset Management Limited, an affiliate of the manager, provides advisory
services to the manager in connection with Strategic Income Fund's transactions
in currencies and non-dollar denominated debt securities. Its principal address
is Victoria Plaza, 111 Buckingham Palace Row, London SW1W 0SB England. Salomon
Brothers Asia Pacific Limited is subadviser to the Asia Growth Fund and manages
the Asia Growth Fund's assets under the supervision of the manager. Its
principal address is Three Exchange Square, Hong Kong. Neither Salomon Brothers
Asset Management Limited or Salomon Brothers Asia Pacific Limited is compensated
by the funds for its services.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
FUND PORTFOLIO MANAGER PAST 5 YEARS' BUSINESS EXPERIENCE
SINCE
<S> <C>
Asia Growth Giampaolo G. director of Salomon Brothers Asset Management THE PORTFOLIO
Fund Guarnieri Asia Pacific Limited since April 1995; senior MANAGERS
portfolio investment manager at Credit The portfolio managers
Agricole Asset are primarily
Management Limited responsible for the
Capital Fund Ross S. Margolies managing director of the manager the funds indicated
Robert M. Donahue, Jr. vice president and equity analyst with the beside their names and
manager since [February], 1997; analyst at business experience.
Gabelli & Company prior to 1997
Cash Nancy A. Noyes director of the manager
Management
Fund
High Yield Peter J. Wilby managing director of the manager
Fund
Investors Fund Ross S. Margolies managing director of the manager
John B. Cunningham director of the manager
National Thomas A. Croak vice president of the manager
Intermediate Robert E. Amadeo vice president of the manager
Municipal Fund
New York Charles K. Bardes vice president of the manager
Municipal Money Thomas A. Croak vice president of the manager
Market Fund
Small Cap Pamela P. Milunovich director of the manager
Growth Fund
Strategic Bond Peter J. Wilby managing director of the manager
Fund Roger Lavan director of the manager
Total Return George J. Williamson vice president of the manager
Fund
U.S. Government Roger Lavan director of the manager
Income Fund
</TABLE>
Salomon Brothers Investment Series - 36
<PAGE>
<PAGE>
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------------------------- MANAGEMENT FEES
ACTUAL ACTUAL SBAM was established in
MANAGEMENT MANAGEMENT 1987 and together with
FEE PAID DURING THE FEE PAID DURING THE MOST SBAM affiliates in
MOST RECENT FISCAL YEAR* RECENT FISCAL YEAR* London, Frankfurt,
- -------------------------------------------------------------------------------------------------- Tokyo and Hong Kong,
provides a broad range
Asia Growth 0.xx% New York Municipal 0.xx% of fixed income and
Fund Money Market Fund equity investment
services to individuals
Capital Fund 0.xx% Small Cap Growth Fund 0.xx% and institutional
clients throughout the
Cash 0.xx% Strategic Bond Fund 0.xx% world. As of January
Management 31, 1999, SBAM and its
Fund affiliates managed
approximately $ of
High Yield Fund 0.xx% Total Return Fund 0.xx% assets.
Investors Fund 0.xx% U.S. Government 0.xx%
Income Fund
National 0.xx%
Intermediate
Municipal Fund
</TABLE>
*Fee may be less than contractual rate due to expense limitations.
The Investors Fund pays the manager a fee that varies based upon the investment
performance of the fund compared to the Standard and Poor's 500 Index. The base
fee is determined as follows:
<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>
At the end of each calendar quarter for each percentage point of difference
between the investment performance of the class of shares of the Investors Fund
which has the lowest performance for the period and the S&P 500 Index over the
last prior 12 month period this base fee is 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 12 month period. 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 will 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 0.025%, which would occur
if the Investor Fund's performance exceeds or is exceeded by the S&P 500 Index
by ten or more percentage points.
Salomon Brothers Investment Series - 37
<PAGE>
<PAGE>
<TABLE>
<S> <C>
CFBDS, Inc. a registered broker-dealer, serves as each fund's distributor. DISTRIBUTOR
- ----------------------------------------------------------------------------------------------------------------
SSBC Fund Management Inc. ('SSBC') serves as administrator for each fund. For its services as ADMINISTRATOR
administrator, each fund pays SSBC a fee at an annual rate of 0.05% of the applicable fund's
average daily net assets. Capital Fund, Investors Fund and Small Cap Fund pay this fee to the
manager, who in turns pays SSBC.
- ----------------------------------------------------------------------------------------------------------------
Information technology experts are concerned about computer systems' ability to process YEAR 2000
date-related information on and after January 1, 2000. This situation, commonly known as the ISSUE
'Year 2000' issue, could have an adverse impact on the funds. The manager and distributor are
addressing the Year 2000 issue for their systems. The manager considers, when appropriate, the
Year 2000 readiness of issuers of securities held by the funds. Each fund has been informed by
other service providers that they are taking similar measures. Although the funds do not
expect the Year 2000 issue to adversely affect them, the funds cannot guarantee that the
efforts of each fund (limited to requesting and receiving reports from its service providers)
or their service providers to correct the problem will be successful.
</TABLE>
Salomon Brothers Investment Series - 38
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
CHOOSING A SHARE CLASS TO BUY
<TABLE>
<S> <C>
SHARE You can choose between three classes of shares: Class A, B or 2. If you already own Class O
CLASSES shares of a fund, you may also be eligible to purchase additional Class O shares. The
classes have different sales charges and expenses, allowing you to choose the class that
best meets your needs. When choosing which class of shares to buy, you should consider:
How much you plan to invest
How long you expect to own the shares
The expenses paid by each class
Whether you qualify for any reduction or waiver of sales charges
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT Minimum initial investment amounts vary depending on the nature of your investment account.
MINIMUMS
</TABLE>
<TABLE>
<CAPTION>
INITIAL INVESTMENT ADDITIONAL INVESTMENTS
CLASSES A, B AND 2 ALL CLASSES
<S> <C> <C>
General $250 $50
Individual Retirement Accounts, Self Employed Retirement $50 $50
Plans, Uniform Gift to Minor Accounts
Qualified Retirement Plans $50 $50
Monthly Systematic Investment Plans $25 $50
Pre-authorized Check Plan $25 $50
</TABLE>
Qualified Retirement Plans are qualified under Section 403(b)(7) or Section
401(a) of the Internal Revenue Code, including 401(k) plans
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------
COMPARING Your Financial Consultant can help you decide which
CLASSES class meets your goals. Your Financial Consultant may
receive different compensation depending upon which
class you choose.
- --------------------------------------------------------------------------------
DISTRIBUTION The funds each have adopted Rule 12b-1 distribution
PLANS plans for their Class A, B and 2 shares. Under each
plan, the fund pays distribution and service fees.
These fees are an ongoing expense and over time, may
cost you more than other types of sales charges.
</TABLE>
Salomon Brothers Investment Series - 39
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS 2 CLASS O
<S> <C> <C> <C> <C>
KEY FEATURES Initial sales No initial sales Initial sales Only available to
charge charge charge is lower existing Class O
You may qualify for Deferred sales charge than Class A shareholders
reduction or waiver declines over time Deferred sales No initial or
of initial sales Converts to Class A charge for only 1 deferred sales charge
charge after 7 years 1 year Lower annual
Lower annual Higher annual Higher annual expenses than the
expenses than Class B expenses than Class A expenses than Class A other classes
and Class 2
INITIAL SALES Up to 5.75%/4.75%*, None 1.00% None
CHARGE reduced or waived for
large purchases and
certain investors. No
charge for purchases
of $1 million or more
DEFERRED SALES 1%** on purchases of Up to 5.00%** charged 1%** if you redeem None
CHARGE $1 million or more if when you redeem within 1 year of
you redeem within 1 shares. The charge is purchase
year of purchase reduced over time and
there is no deferred
sales charge after 6
years
ANNUAL 0.25%*** of average 1.00%*** of average 0.75%/1.00%*** of None
DISTRIBUTION AND daily net assets daily net assets average daily net
SERVICE FEES assets
EXCHANGEABLE Class A shares of any Class B shares of any Class 2 shares of any Class O shares of any
INTO** of the other funds of the other funds of the other funds of the other funds
</TABLE>
- --------------------------------------------------------------------------------
* Class A shares of all of the funds except for the money market funds (Cash
Management Fund and New York Municipal Money Market Fund) are offered either
with a 5.75% (Total Return, Small Cap Growth, Asia Growth, Investors and Capital
Funds) or 4.75% (National Intermediate Municipal, U.S. Government Income, High
Yield Bond and Strategic Bond Funds) initial sales charge.
** Class A shares of the money market funds are not subject to a sales charge at
the time of purchase. If you subsequently exchange shares of either of the money
market funds for shares of another fund, a sales charge may be payable on Class
A shares. Class B and Class 2 shares of the money market funds are not subject
to a deferred sales charge unless the shares are obtained by exchange of shares
from another fund which was acquired subject to a deferred sales charge. If you
subsequently exchange Class B or Class 2 shares of a money market fund for
shares of another fund, a deferred sales charge may become applicable in the
case of Class B and an initial and a deferred sales charge may become applicable
in the case of Class 2 shares. The period during which the shares are held in
the money market funds are excluded from the holding period for determining the
deferred sales charge and conversion to Class A shares.
*** All of the funds except for the money market funds pay a service fee with
respect to Class A shares of 0.25% of average daily net assets and a service and
distribution fee with respect to Class B shares of 1.00% of average daily net
assets. All of the funds except for the money market funds pay a service and
distribution fee with respect to Class 2 shares of either 0.75% (High Yield
Bond, National Intermediate Municipal, Strategic Bond and U.S. Government Income
Funds) or 1.00% (Asia Growth, Capital, Investors, Small Cap Growth and Total
Return Funds) of average daily net assets.
Salomon Brothers Investment Series - 40
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
CLASS A SALES CHARGE
No sales charge is imposed on the sale of Class A shares of Cash Management Fund
or New York Municipal Money Market Fund. The table below indicates the sales
charge on Class A shares of Asia Growth Fund, Capital Fund, Investors Fund,
SmallCap Growth Fund and Total Return Fund.
<TABLE>
<CAPTION>
- ------------------------------------------
<S> <C> <C> <C>
sales charge as sales charge as CLASS A SALES
Amount of investment % of offering price % of net amount CHARGE
Less than $50,000 5.75% 6.10%
You buy Class A
$50,000 but less than $100,000 4.50% 4.71% shares at the
offering price,
$100,000 but less than 4.00% 4.17% which is the net
asset value plus a
$250,000 but less than 2.75% 2.83% sales charge. You
pay a lower sales
$500,000 but less than 2.25% 2.30% charge as the size
of your investment
$1 million or more* -0- -0- increases to certain
levels called
breakpoints. You do
* You do not pay an initial sales charge when you buy $1 million or more of not pay a sales
Class A shares. However, if you redeem these Class A shares within one year of charge on the fund's
purchase, you will pay a deferred sales charge of 1%. distributions or
dividends that you
The following table indicates the sales change on Class A Shares of High Yield reinvest in
Fund, National Intermediate Municipal Fund, Strategic Bond Fund and U.S. additional Class A
Government Income Fund. shares.
To learn more about
- ------------------------------------------ the accumulation
sales charge as sales charge as of intent, waivers
Amount of investment % of offering price % of net amount for certain
investors and other
Less than $50,000 4.75% 4.99% options to reduce
$50,000 but less than $100,000 4.50% 4.71% your sales charge,
ask your Financial
$100,000 but less than 4.00% 4.17% Consultant or
consult the SAI.
$250,000 but less than 2.75% 2.83%
$500,000 but less than $1 2.25% 2.30%
$1 million or more*
</TABLE>
*You do not pay an initial sales charge when you buy $1 million or more of
Class A shares. However, if you redeem these Class A shares within one year of
purchase, you will pay a deferred sales charge of 1%.
QUALIFYING FOR REDUCED CLASS A SALES CHARGES. There are several ways you can
combine multiple purchases of Class A shares of the funds (excluding shares of
the Cash Management Fund or the New York Municipal Money Market Fund) to take
advantage of the breakpoints in the sales charge schedule.
Accumulation privilege -- lets you add the current value of Class A shares of
the funds already owned by you or your spouse and your children under the age of
21 (except for Cash Management Fund and New York Municipal Money Market Fund) to
the amount of your next purchase of Class A shares for purposes of calculating
the sales charge. You must notify the transfer agent in writing of all share
accounts to be considered in exercising this right of accumulation.
Group purchase -- lets you combine the current value of Class A shares
purchased by employees (and partners) of the same employer as a group for
Salomon Brothers Investment Series - 41
<PAGE>
<PAGE>
purposes of calculating the initial sales charge. To be eligible, all purchases
must be made pursuant to an employer or partnership sanctioned plan meeting
certain requirements set forth in the SAI.
Letter of intent -- lets you purchase Class A shares of the funds over a
13-month period and pay the same sales charge, if any, as if all shares had been
purchased at once. All Class A shares (excluding Class A shares of the Cash
Management Fund and New York Municipal Money Market Fund) previously purchased
and still beneficially owned by you or your 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 sales charge reduction. The effective date of
a letter of intent may be back-dated up to 90 days so 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.
WAIVERS FOR CERTAIN CLASS A INVESTORS. Class A initial sales charges are waived
for certain types of investors, including:
directors and officer of any fund sponsored by Citigroup or any of its
subsidiaries and their immediate families (i.e., spouse, children, mother or
father).
employees of the manager and their immediate families, or any full-time
employee or registered representative of the distributor or of broker-dealers
having dealer agreements with the distributor ('Selling Broker') and their
immediate families (or any trust, pension, profit sharing or other benefit plan
for the benefit of such persons).
any full-time employee of a bank, savings and loan, credit union or other
financial institution that utilizes a Selling Broker to clear purchases of the
funds' shares and their immediate families.
participants in certain 'wrap-fee,' or asset allocation programs or other fee
based arrangements sponsored by broker-dealers and other financial institutions
that have entered into agreements with Salomon Smith Barney.
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 Smith Barney.
separate accounts used to fund certain unregistered variable annuity contracts
or Section 403(b) or 401(a) or (k) accounts.
Salomon Brothers Investment Series - 42
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
CLASS B SALES CHARGE
<TABLE>
<S> <C>
CLASS B DEFERRED You buy Class B shares at net asset value without
SALES CHARGE paying an initial sales charge. However, if you
redeem your Class B shares within six years of
purchase, you will pay a deferred sales charge. Class
B shares of the Cash Management Fund and New York
Municipal Money Market Fund are not subject to a
deferred sales charge if they were not acquired upon
exchange for Class B shares of another fund.
The deferred sales CLASS B CDSC TABLE
charge decreases as
the number of years
since your purchase
increases. DEFERRED SALES CHARGE AS A
PERCENTAGE OF DOLLAR
AMOUNT SUBJECT TO CHARGE
YEAR(S) SINCE PURCHASE ORDER 5%
1st year 4%
1 year or more but less than 2 years 3%
2 years or more but less than 4 years 2%
4 years or more but less than 5 years 1%
5 years or more but less than 6 years 0%
6 or more years
CALCULATION OF DEFERRED SALES CHARGE. The deferred sales
charge is based on the net asset value at the time of purchase
or redemption, whichever is less, and therefore you do not pay
a sales charge on amounts representing appreciation. In
addition, you do not pay a deferred sales charge on shares
exchanged for shares of another fund, shares representing
reinvested distributions and dividends or shares no longer
subject to the deferred sales charge. All purchases during a
month are deemed to have been made on the last day of that
month for purposes of determining the contingent deferred
sales charge.
If you want to learn Shares are redeemed in this order:
more about Shares that represent appreciation
additional deferred Shares representing reinvested distributions and dividends
sales charges and Other shares that are not subject to the deferred sales
waivers of deferred charge
sales charges, Class B shares held longest
contact your Deferred sales charges are not imposed at the time you
Financial Consultant exchange shares for shares of another fund.
or consult the SAI. DEFERRED SALES CHARGE WAIVERS. The deferred sales charge for
each share class will generally be waived in connection with:
Redemptions made following the death or disability (as
defined in the Internal Revenue Code) of a shareholder.
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.
A tax-free return of an excess contribution to any retirement
plan.
Exchanges.
Automatic cash withdrawals in amounts equal to or less than
12% annually or 2% monthly of their initial account balances
(see automatic withdrawal plan in the SAI).
Redemptions of shares in connection with mandatory
post-retirement distributions and withdrawals from retirement
plans or IRAs.
Redemption proceeds from other funds that are reinvested within
60 days of
</TABLE>
Salomon Brothers Investment Series - 43
<PAGE>
<PAGE>
<TABLE>
<S> <C>
the redemption (see reinstatement privilege in the SAI).
Certain redemptions of shares of a fund in connection with
lump-sum or other distributions made by eligible retirement
plans.
Redemption of shares by participants in certain 'wrap-fee' or
asset allocation programs sponsored by broker-daealers and
other financial institutions that have entered into
agreements with Salomon Smith Barney or the manager.
CLASS B CONVERSION. After seven years, Class B shares
automatically convert into Class A shares. This helps you
because Class A shares have lower annual expenses. Class B
shares of the Cash Management Fund and New York Municipal
Money Market Fund do not convert to Class A shares because
they have the same annual expenses. Your Class B shares will
convert to Class A shares as follows:
SHARES ISSUED AT INITIAL SHARES ISSUED ON SHARES ISSUED UPON EXCHANGE
PURCHASE REINVESTMENT OF FROM ANOTHER FUND
DISTRIBUTIONS AND
DIVIDENDS
Seven years after the date of In same proportion that the On the date the shares
purchase number of Class B shares originally acquired would
converting is to total Class have converted into Class A
B shares you own shares
MONEY MARKET FUNDS. The periods of time that your shares are
held in the Cash Management Fund or the New York Municipal
Money Market Fund are excluded for determining the holding
period for conversion and calculation of the deferred sales
charge.
PURCHASES PRIOR TO SEPTEMBER 14, 1998. Class B shares of a
fund purchased prior to September 14, 1998 will continue to be
subject to the deferred sales charge schedules and conversion
features in effect at the time such purchase was made. Shares
purchased with reinvested dividend or capital gain
distributions relating to shares purchased prior to September
14, 1998 will be subject to the deferred sales charge
schedules and conversion features in effect at the time the
original shares were purchased. Shares of a fund acquired as a
result of an exchange of shares purchased prior to September
14, 1998 will also be subject to the deferred sales charge
schedules and conversion features in effect at the time the
original shares were purchased.
</TABLE>
- -------------------------------------------------------------------------------
CLASS 2 SALES CHARGE
You buy Class 2 shares at the offering price, which is the net asset value plus
a sales charge of 1% (1.01% of the net amount invested). In addition, if you
redeem your Class 2 shares within one year of purchase, you will pay a deferred
sales charge of 1%. The periods of time that your shares are held in the Cash
Management Fund or the New York Municipal Money Market Fund are excluded for
purposes of determining your holding period for the deferred sales charge.
Effective September 14, 1998, Class C shares were renamed Class 2 shares.
PURCHASES PRIOR TO SEPTEMBER 14, 1998. Class 2 shares of a fund purchased prior
to September 14, 1998 will continue to be subject to the deferred sales charge
schedules in effect at the time such purchase was made. Shares purchased with
reinvested dividend or capital gain distributions relating to shares purchased
prior to September 14, 1998 will be subject to the deferred sales charge
schedules in effect at the time the original shares were purchased. Shares of a
fund acquired as a result of an exchange of shares purchased prior to September
14, 1998 will also be subject to the deferred sales charge schedules in effect
at the time the original shares were purchased.
Salomon Brothers Investment Series - 44
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
BUYING SHARES AND EXCHANGING SHARES
<TABLE>
<S> <C>
BUYING SHARES Shares of each fund may be initially purchased through First
BY MAIL Data Investor Services Group, Inc. ('FDISG' or the 'transfer
agent') by completing a Purchase Application and forwarding it
to the transfer agent. Shares may also be purchased from
You may make selected dealers in accordance with procedures established by
subsequent purchases the dealer.
by mail or, if you Subsequent investments may be made by mailing a check to the
elect, by telephone transfer agent, along with the detachable stub from your
Statement of Account (or a letter providing the account
number) or through a selected dealer. If an investor's
purchase check is not collected, the purchase will be
cancelled and the transfer agent will charge a $10 fee to the
shareholder's account. There is a ten day hold on all checks
and no redemptions are allowed until the proceeds from the
check clears.
Write the transfer agent at the following address:
[name of fund]
c/o FDISG
P.O. Box 5127
Westboro, MA 01581-5127
- --------------------------------------------------------------------------------
BUYING SHARES Subsequent investments may also be made by wiring funds to the
BY WIRE transfer agent. Prior notification by telephone is not
required. You should instruct the wiring bank to transmit the
specified amount in federal funds to:
Boston Safe Deposit and Trust Company
Boston, MA
ABA No. 011-001-234
Account #142743
Attn: [name of fund]
Name of Account:
Account # (as assigned):
To ensure prompt credit to their accounts, investors or their
dealers should call (800) 446-1013 with a reference number for
the wire. Shareholders should note that their bank may charge
a fee in connection with transferring money by bank wire.
</TABLE>
Salomon Brothers Investment Series - 45
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
------------------------------------------------------------------------------------------------------------------
ALL FUNDS EXCEPT CASH PURCHASE IS EFFECTIVE
MANAGEMENT FUND AND
NEWYORK MUNICIPAL MONEYMARKET FUND
If order and federal funds or check
received by fund or its agent before
4:00 p.m. Eastern time: On that day
Payment wired in federal
funds or check received If order and federal funds or check
received by fund or its agent after
the close of New York Stock Exchange: On the business day following receipt
- --------------------------------------------------------------------------------------------------------------------
CASH MANAGEMENT FUND PURCHASE IS EFFECTIVE DIVIDENDS BEGIN
AND NEW YORK MUNICIPAL
MONEY MARKET FUND
If order and federal
funds or check received
by fund or its agent
before noon, Eastern
time:
Payment wired in federal At noon, Eastern time on,
funds or check received that day On that day
If order and federal
funds or check received
by fund or its agent At close of New York On the next business day
after noon, Eastern time: Stock Exchange on the after effectiveness
next day
</TABLE>
<TABLE>
<S> <C>
SYSTEMATIC You may authorize the transfer agent to automatically transfer
INVESTMENT funds on a periodic basis (monthly, alternative months,
PLAN quarterly) from a regular bank account or other financial
institution to buy shares of a fund. On or about the 10th 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 order to set up a plan, your bank
must be a member of the Automated Clearing House.
Amounts transferred should be at least $25 monthly.
If you do not have sufficient funds in your bank account on a
transfer date, the transfer agent may charge you a fee.
For more information, contact your Financial Consultant or
consult the SAI.
- --------------------------------------------------------------------------------
EXCHANGE You may exchange shares of any fund for shares of the same
PRIVILEGE class of another fund.
Your fund may suspend or terminate your exchange privilege if you
engage in an excessive pattern of exchanges.
Shares are eligible for exchange commencing 30 days after
purchase.
Generally, your Class A shares will not be subject to an
initial sales charge at the time of the exchange. A sales charge,
if applicable, will be imposed upon Class A shares of a fund
issued upon exchange for Class A shares of Cash Management Fund
or New York Municipal Money Market Fund unless you acquired the
shares of the Cash Management Fund or New York Municipal Money
Market Fund through an exchange of shares with respect to which
you had previously paid a sales charge.
</TABLE>
Salomon Brothers Investment Series - 46
<PAGE>
<PAGE>
<TABLE>
<S> <C>
If you exchange Class B shares of a fund, those shares will not
be subject to a contingent deferred sales charge at the time of
the exchange but those shares will be subject to any applicable
contingent deferred sales charge upon ultimate redemption. Your
deferred sales charge (if any) will continue to be measured from
the date of original purchase. In the case of Class B shares of
Cash Management Fund or New York Municipal Money Market Fund that
are not subject to a deferred sales charge at the time of
exchange, these shares will be subject to the contingent deferred
sales charge of the acquired fund. Any deferred sales charge and
conversion period excludes the time the shares were held in the
Cash Management Fund or the New York Municipal Money Market Fund.
Generally, if you exchange Class 2 shares of a fund, those shares
will not be subject to an initial or deferred sales charge at the
time of exchange but those shares will be subject to any
applicable contingent deferred sales charge upon ultimate
redemption. Your deferred sales charge (if any) will continue to
be measured from the date of original purchase. In the case of
Class 2 shares of Cash Management Fund or New York Municipal
Money Market Fund with respect to which a sales charge has not
been applicable, those shares will be subject to an initial sales
charge of 1.00% at the time of exchange and will be subject to
the contingent deferred sales charge of the acquired fund. Any
deferred sales charges exclude the time the shares were held in
the Cash Management Fund and the New York Municipal Money Market
Fund.
You may exchange shares by telephone if you elect telephone
exchanges on your Purchase Application. Telephone exchanges are
subject to the same limitations as telephone redemptions.
- --------------------------------------------------------------------------------
SYSTEMIC You may request that shares of any class of a fund be exchanged
EXCHANGE 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 instruction provided in your Purchase Application or in the
Systematic Investing Application.
</TABLE>
Salomon Brothers Investment Series - 47
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
REDEEMING SHARES
<TABLE>
<S> <C>
You may redeem some or all of your shares by sending your redemption request in proper form REDEMPTIONS BY MAIL
to:
First Data Investor Services Group, Inc.
c/o FDISG
P.O. Box 5127
Westboro, MA 01581-5127.
The written request for redemption must be in good order. This means that you have provided Generally, a properly
the following information. Your request will not be processed without this information. completed Redemption
Name of the fund Form with any required
Account number signature guarantee is
Dollar amount or number of shares to redeem all that is required
Signature of each owner exactly as account is registered for a redemption. In
Other documentation required by the transfer agent some cases, however,
To be in good order, your request must include a signature guarantee if: other documents may be
The proceeds of the redemption exceed $50,000 necessary.
The proceeds are not paid to the record owner(s) at the record address
The shareholder(s) has had an address change in the past 45 days
The shareholder(s) is a corporation, sole proprietor, partnership, trust or fiduciary
You can obtain a signature guarantee from most banks, dealers, brokers, credit unions and
federal savings and loans, but not from a notary public.
- ---------------------------------------------------------------------------------------------------------------------
You may redeem shares by fax only if a signature guarantee or other documentary evidence is REDEMPTIONS BY
not required. Redemption requests should be properly signed by all owners of the account FAX
and faxed to the transfer agent at (800) 446-1013. If fax redemptions are not available for
any reason, you may use the fund's redemption by mail procedure described above.
- ---------------------------------------------------------------------------------------------------------------------
In all cases, your redemption price is the net asset value next determined after your REDEMPTION PAYMENTS
request is received in good order. Redemption proceeds normally will be sent within seven ANY REQUEST THAT YOUR
days. However, if you recently purchased your shares by check, your redemption proceeds REDEMPTION PROCEEDS BE
will not be sent to you until your original check clears. Your redemption proceeds can be SENT TO A DESTINATION
sent by check to your address of record or by wire transfer to a bank account designated on OTHER THAN YOUR BANK
your application. ACCOUNT OR ADDRESS OF
If shares of Cash Management Fund or New York Municipal Money Market Fund are redeemed RECORD MUST BE IN
before noon, Eastern time, you will not receive that day's dividends. You will receive that WRITING AND MUST
day's dividends if you redeem after noon, Eastern time. INCLUDE SIGNATURE
GUARANTEES
- ---------------------------------------------------------------------------------------------------------------------
You may transmit your redemption request to selected dealers with which the distributor has REDEMPTIONS THROUGH
entered into sales agreements for the purchase of shares of the funds. Redemption orders SELECTED DEALERS
received by these dealers before the New York Stock Exchange closes and which are
transmitted to the transfer agent prior to the close of its business day are effective that
day. With respect to the Cash Management Fund and the New York Municipal Money Market Fund,
redemption requests received by the dealer and transmitted to the transfer agent by 12:00
noon, eastern time, on any day the New York Stock Exchange is open, will generally be
effected on that same day. It is the responsibility of the dealer to transmit orders on a
timely basis to the transfer agent. The dealer may charge you a fee for executing your
order.
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Salomon Brothers Investment Series - 48
<PAGE>
<PAGE>
<TABLE>
<S> <C>
You may redeem shares by wire in amounts of $500 or more if redemption by wire has been REDEMPTIONS BY
elected on your Purchase Application. A signature guarantee is not required on this type of WIRE
redemption request. To elect this service after opening your account, call the transfer
agent at (800) 446-1013 for more information. To redeem by wire, you may either:
Telephone the redemption request to the transfer agent at (800) 446-1013
Mail the request to the transfer agent at the address listed above.
Proceeds of wire redemptions of $500 or more will be wired to the bank which is indicated
on your Purchase Application or by letter which has been properly guaranteed. With respect
to the Cash Management Fund and New York Municipal Money Market Fund, if the transfer agent
receives the wire request by 12:00 noon, eastern time, on any day the New York Stock
Exchange is open, the redemption proceeds generally will be transmitted to your bank that
same day. Checks for redemption proceeds of less of $500 will be mailed to your address of
record. You should note that your bank may charge you a fee in connection with money by
wire.
- ---------------------------------------------------------------------------------------------------------------------
You may redeem shares by telephone if you elect the telephone redemption option on your REDEMPTIONS BY
Purchase Application, and the proceeds must be mailed to your address of record. In TELEPHONE
addition, you must be able to provide proper identification information. You may not redeem
by telephone if your address has changed within the past 45 days or if your shares are in
certificate form. Telephone redemption requests may be made by calling the transfer agent
at (800) 446-1013 between 9:00 a.m. and 4:00 p.m. eastern time on any day the New York
Stock Exchange is open. If telephone redemptions are not available for any reason, you may
use the fund's regular redemption procedure described above.
- ---------------------------------------------------------------------------------------------------------------------
You can arrange for the automatic redemption of a portion of your shares on a monthly or AUTOMATIC CASH
quarterly basis. To qualify, you must own shares of the fund with a value of at least WITHDRAWAL PLAN
$10,000 for monthly withdrawals and $5,000 for quarterly withdrawals ($7,500 in the case of
the Investors Fund and the Capital Fund) and each automatic redemption must be at least
$250 if made monthly.
- ---------------------------------------------------------------------------------------------------------------------
Check writing is available for Class A and Class O shareholders of the Cash Management Fund CHECKWRITING
and the New York Municipal Money Market Fund only. You must elect the redemption by check PRIVILEGE
option on your Purchase Application. The redemption of shares may be made using redemption
checks provided by the transfer agent. There is no charge for this service. The check must
be for amounts of $500 or more. You will continue to earn dividends on the shares redeemed
until the check clears the banking system. A fee of $10 will be charged if there are
insufficient funds to cover the amount of the check.
</TABLE>
Salomon Brothers Investment Series - 49
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
OTHER THINGS TO KNOW ABOUT SHARE TRANSACTIONS
<TABLE>
<S> <C>
SMALL ACCOUNT BALANCES If your account falls below $500 ($250 in the case of an IRA or self-employed retirement
plan) due to redemption of fund shares, the fund may ask you to bring your account up to the
minimum requirement. If your account is still below $500 after 30 days, the fund may close
your account and send you the redemption proceeds.
- -----------------------------------------------------------------------------------------------------------------------
SHARE PRICE You may buy, exchange or redeem fund shares at the net asset value, adjusted for any
applicable sales charge, next determined after receipt of your request in good order. Each
fund's net asset value is the value of its assets minus its liabilities. Net asset value is
calculated separately for each class of shares. Each fund calculates its net asset value
every day the New York Stock Exchange is open. All of the funds except Cash Management Fund
and New York Municipal Money Market Fund calculates its net asset value when regular trading
closes on the Exchange (normally 4:00 p.m., Eastern time). Cash Management Fund and New York
Municipal Money Market Fund each calculates its net asset value at 12:00 noon, Eastern time.
The funds generally value their securities based on market prices or quotations. The funds'
currency conversions are done when the London stock exchange closes, which is 12 noon
eastern time. When market prices are not available, or when the manager believes they are
unreliable or that the value of a security has been materially affected by events occurring
after a foreign exchange closes, the funds may price those securities at fair value. Fair
value is determined in accordance with procedures approved by the funds' board. A fund that
uses fair value to price securities may value those securities higher or lower than another
fund that uses market quotations to price the same securities. International markets may be
open on days when U.S. markets are closed and the value of foreign securities owned by a
fund could change on days when you cannot buy or redeem shares.
Cash Management Fund and New York Municipal Money Market Fund each uses the amortized cost
method to value its portfolio securities. Using this method, the fund constantly amortizes
over the remaining life of a security the difference between the principal amount due at
maturity and the cost of the security to the fund.
In order to buy, redeem or exchange shares at that day's price, you must place your order
with the transfer agent before the New York Stock Exchange closes. If the New York Stock
Exchange closes early, you must place your order prior to the actual closing time.
Otherwise, you will receive the next business day's price.
Members of the funds' selling group must transmit all orders to buy, exchange or redeem
shares to the funds' transfer agent before the agent's close of business.
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
Salomon Brothers Investment Series - 50
<PAGE>
<PAGE>
<TABLE>
<S> <C>
Each fund has the right to:
Suspend the offering of shares
Waive or change minimum and additional investment amounts
Reject any purchase or exchange order
Change, revoke or suspend the exchange privilege
Suspend telephone transactions
Suspend or postpone redemptions of shares on any day when trading on the New York Stock
Exchange is restricted, or as otherwise permitted by the Securities and Exchange Commission
- -----------------------------------------------------------------------------------------------------------------------
REDEMPTIONS IN KIND Each fund may make payment for fund shares wholly or in part by distributing portfolio
securities to the shareholders. The redeeming shareholder must pay transaction costs to sell
these securities.
</TABLE>
Salomon Brothers Investment Series - 51
<PAGE>
<PAGE>
- -------------------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES
<TABLE>
<CAPTION>
The funds normally pay dividends and distribute capital gains, if any, as DIVIDENDS
follows: AND
DISTRIBUTIONS
<S> <C> <C> <C> <C> <C>
DIVIDENDS INCOME DIVIDEND CAPITAL GAIN DISTRIBUTIONS Annual distributions of
FUND DECLARED DISTRIBUTIONS DISTRIBUTIONS MOSTLY FROM income and capital gain
normally take place at
Asia Growth annually annually annually gain the end of the year in
Fund which the income or
Capital Fund annually annually annually gain gain is realized or the
beginning of the next
Cash daily monthly annually* income year.
Management (to share-
Fund holders of
record at
12:00 noon)
High Yield daily monthly annually income
Fund
Investors Fund annually quarterly annually gain
National daily monthly annually income
Intermediate
Municipal Fund
New York daily monthly annually* income
Municipal (to share-
Money Market holders of
Fund record at
12:00 noon)
Small Cap annually annually annually gain
Growth Fund
Strategic Bond daily monthly annually income
Fund
Total Return daily monthly annually both
Fund
U.S. Government daily monthly annually income
Income Fund
</TABLE>
*Each money market fund anticipates that it will normally not earn or
distribute any long-term capital gains.
The funds may pay additional distributions and dividends at other times if
necessary for a fund to avoid a federal tax. Capital gains distributions and
dividends are reinvested in additional fund shares of the same class that you
hold. You do not pay a sales charge on reinvested distributions or dividends.
Alternatively, you can instruct your Financial Consultant, dealer
representative or the transfer agent to have your distributions and/or
dividends paid in cash. You can change your choice at any time to be effective
as of the next distribution or dividend, except that any change given to the
transfer agent less than five days before the payment date will not be
effective until the next distribution or dividend is made.
Salomon Brothers Investment Series - 52
<PAGE>
<PAGE>
<TABLE>
<S> <C> <C>
TRANSACTION FEDERAL INCOME TAX STATUS TAXES
Redemption or exchange of shares Usually capital gain or loss (except for a money In general, redeeming
market fund, no gain, and loss only to the extent shares, exchanging shares
of any deferred sales charge); long-term only if and receiving distributions
shares owned more than one year (whether in cash or additional
shares) are all taxable events.
Long-term capital gain distributions Long-term capital gain
Short-term capital gain distributions Ordinary income
Dividends Ordinary income (for all funds except the
municipal bond funds)*
</TABLE>
*National Intermediate Municipal Fund and New York Municipal Money Market Fund
intend to distribute the interest they earn on tax-exempt municipal bonds as
'exempt-interest' dividends. These dividends are excludable from gross income
for federal income tax purposes but may be subject to state and local income
tax, except that the latter fund's exempt-interest dividends paid from interest
on New York municipal securities will be exempt from New York State and New
York City personal income taxes. Their distributions from other sources, if
any, would be taxable as described above.
Long-term capital gain distributions are taxable to you as long-term capital
gain regardless of how long you have owned your shares. You may want to avoid
buying shares when a fund is about to declare a capital gain distribution or a
taxable dividend, because it will be taxable to you even though it may actually
be a return of a portion of your investment.
After the end of each year, the funds will provide you with information about
the distributions and dividends that you received and any redemptions of shares
during the previous year. If you do not provide a fund with your correct
taxpayer identification number and any required certifications, you may be
subject to back-up withholding of 31% of your distributions, dividends (other
than exempt-interest dividends), and, except for a money market fund,
redemption proceeds. Because each shareholder's circumstances are different and
special tax rules may apply, you should consult your tax adviser about your
investment in a fund.
FINANCIAL HIGHLIGHTS
The financial highlights tables are intended to help you understand the
performance of each share for the past 5 years (or since inception if less than
5 years). Certain information reflects financial results for a single share.
Total return represents the rate that a shareholder would have earned (or lost)
on a fund share assuming reinvestment of all dividends and distributions. The
information in the following tables was audited by PricewaterhouseCoopers LLP,
independent auditors, whose report, along with the funds' financial statements,
are included in the annual report (available upon request). 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. As
of the close of business on September 14, 1998, all existing Class C shares of
all of the funds were reclassified as Class 2 shares.
Salomon Brothers Investment Series - 53
<PAGE>
<PAGE>
ASIA GROWTH FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
-----------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------
1998 1997 1996(1) 1998 1997 1996(1)
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $10.32 $10.00 $10.31 $10.00
------- ------- ------- -------
Net investment income (loss)(3) 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(4) -25.6% +5.2% -26.1% +4.7%
Ratios to average net assets:
Expenses 1.24% 1.24%(5) 1.99% 1.99%(5)
Net investment income 0.27% 0.90%(5) -0.48% 0.20%(5)
Portfolio turnover rate 294% 119% 294% 119%
Before applicable waiver of
management fee, expenses absorbed
by SBAM and credits earned on 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%(5) 4.56% 6.25%(5)
</TABLE>
---------------------------------------------------------------
CAPITAL FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
----------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------
1998 1997 1996(2) 1998 1997 1996(2)
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $19.88 $21.98 $19.90 $21.98
------- ------- ------- -------
Net investment income (loss) 0.00 0.01(3) (0.07) (0.02)(3)
Net gain (loss) on investments (both
realized and unrealized) 5.10 1.54 5.01 1.56
------- ------- ------- -------
Total from investment operations 5.10 1.55 4.94 1.54
------- ------- ------- -------
Dividends from net investment income -- (0.15) -- (0.12)
Distributions from net realized gain on
investments (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)
------- ------- ------- -------
Net asset value, end of period $21.15 $19.88 $21.01 $19.90
------- ------- ------- -------
------- ------- ------- -------
Net assets, end of period (thousands) $5,589 $ 344 $3,820 $ 219
Total return(4) +26.4% +7.7% +25.6% +7.6%
Ratios to average net assets:
Expenses 1.46% 1.88%(5) 2.20 2.73%(5)
Net investment income -0.10% 0.18%(5) -0.94 -0.66%(5)
Portfolio turnover rate 159% 191% 159% 191%
</TABLE>
---------------------------------------------------------------
(1) May 6, 1996, commencement of investment operations, through December 31,
1996.
(2) November 1, 1996, commencement of investment operations, through December
31, 1996.
(3) Per share information calculated using the average shares outstanding
method.
(4) 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.
(5) Annualized.
Salomon Brothers Investment Series - 54
<PAGE>
<PAGE>
ASIA GROWTH FUND
<TABLE>
<CAPTION>
CLASS 2 CLASS O
- ---------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
- ---------------------------------------------------------------------------
1998 1997 1996(1) 1998 1997 1996(1)
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$10.30 $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% +4.65% -25.3% +5.3%
1.99% 2.00%(5) 0.99% 0.99%(5)
-0.47% 0.08%(5) 0.51% 1.21%(5)
294% 119% 294% 119%
$10.00
-------
($0.30) ($0.20) ($0.20) ($0.18)
4.56% 6.26%(5) 3.56% 5.25%(5)
</TABLE>
---------------------------------------------------------------
CAPITAL FUND
<TABLE>
<CAPTION>
CLASS 2 CLASS O
- -----------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
- -----------------------------------------------------------------------------------------------
1998 1997 1996(2) 1998 1997 1996(2) 1995 1994
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$19.91 $21.98 $ 19.88 $ 18.67 $ 15.62 $20.80
------- ------- -------- -------- -------- -------
(0.06) (0.02)(3) 0.05 0.13(2) 0.14 0.08
5.00 1.57 5.13 5.70 5.27 (2.87)
------- ------- -------- -------- -------- -------
4.94 1.55 5.18 5.83 5.41 (2.84)
------- ------- -------- -------- -------- -------
-- (0.12) -- (0.15) (0.14) (0.03)
(3.83) (3.50) (3.83) (4.47) (2.22) (1.51)
------- ------- -------- -------- -------- -------
-- -- -- -- -- (0.80)
------- ------- -------- -------- -------- -------
(3.83) (3.62) (3.83) (4.62) (2.36) (2.34)
$21.02 $19.91 $ 21.23 $ 19.88 $ 18.67 $ 15.62
------- ------- -------- -------- -------- -------
------- ------- -------- -------- -------- -------
$2,385 $ 130 $175,470 $135,943 $102,429 $86,704
+25.6% +7.7% +26.8% +33.3% +34.9% -14.2%
2.21% 2.45% (5) 1.22% 1.38% 1.36% 1.30%
-0.91% -0.50% (5) 0.26% 0.67% 0.74% 0.12%
159% 191% 159% 191% 217% 152%
--------------------------------------------------------------------------------------------
</TABLE>
Salomon Brothers Investment Series - 55
<PAGE>
<PAGE>
CASH MANAGEMENT FUND
<TABLE>
CLASS A CLASS B
--------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------
1998 1997 1996 1995 1998 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(2) +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>
---------------------------------------------------------------
(1) 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.
HIGH YIELD BOND FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
--------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------
1998 1997 1996 1995(1) 1998 1997 1996 1995(1)
--------------------------------------------------------------------------------------
<S> <C> <C> <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 investment (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(2) +13.0% +21.9% +16.6% +12.2% +21.2% +15.7%
Ratios to average net assets:
Expenses 1.24% 1.24% 1.24%(3) 1.99% 1.99% 1.965%(3)
Net investment income 8.66% 9.38% 10.58%(3) 7.90% 8.49% 9.53%(3)
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%(3) 2.09% 2.24% 2.51%(3)
</TABLE>
---------------------------------------------------------------
(1) February 22, 1995, commencement of investment operations, through December
31, 1995.
(2) Total return is calculated assuming a $1,000 investment on the first day of
each period reported, reinvestment of all dividends at the net asset value
on the payable date, and a sale at net asset value on the last day of each
period 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.
(3) Annualized.
Salomon Brothers Investment Series - 56
<PAGE>
<PAGE>
CASH MANAGEMENT FUND
<TABLE>
<CAPTION>
CLASS 2 CLASS O
- -----------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
- -----------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 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
(0.051) (0.050) (0.043) (0.051) (0.050) (0.055) (0.038)
------- ------- ------- ------- ------- ------- -------
$ 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
+5.2% +5.1% +4.4% +5.2% +5.1% +5.6% +3.9%
0.55% 0.55% 0.55% 0.55% 0.55% 0.55% 0.61%
5.16% 4.95% 5.40% 5.10% 4.95% 5.46% 3.79%
$ 0.049 $ 0.047 $ 0.036 $ 0.049 $ 0.047 $ 0.047 $ 0.036
0.70% 0.82% 1.34% 0.70% 0.82% 1.34% 0.81%
</TABLE>
---------------------------------------------------------------
HIGH YIELD BOND FUND
<TABLE>
<CAPTION>
CLASS 2 CLASS O
- ---------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
- ---------------------------------------------------------------------------------------------
1998 1997 1996 1995(1) 1998 1997 1996 1995(1)
- ---------------------------------------------------------------------------------------------
<S> <C> <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 2.12 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%(3) 0.99% 0.99% 1.00%(3)
7.87% 8.43% 9.61%(3) 8.93% 10.64% 10.59%(3)
79% 85% 109% 79% 85% 109%
$ 0.98 $ 1.01 $ 0.80 $ 1.07 $ 1.13 $ 0.90
2.08% 2.24% 2.54%(3) 1.09% 1.24% 1.55%(3)
</TABLE>
---------------------------------------------------------------
Salomon Brothers Investment Series - 57
<PAGE>
<PAGE>
INVESTORS FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
--------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
1998 1997 1996 1995 1998 1997 1996 1995
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 18.89 $ 16.62 $ 13.61 $ 18.86 $16.61 $13.61
------- ------- ------- ------- ------ ------
Net investment income 0.16 0.19 0.19 0.04 0.08 0.10
Net gain (loss) on investments (both realized and
unrealized) 4.64 4.63 4.55 4.58 4.60 4.54
------- ------- ------- ------- ------ ------
Total from investment operations 4.80 4.82 4.74 4.62 4.68 4.64
------- ------- ------- ------- ------ ------
Dividends from net investment income (0.21) (0.22) (0.23) (0.11) (0.10) (0.14)
Distributions from net realized gain on investments (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)
------- ------- ------- ------- ------ ------
Net asset value, end of year $ 21.11 $ 18.89 $ 16.62 $ 21.00 $18.86 $16.61
------- ------- ------- ------- ------ ------
------- ------- ------- ------- ------ ------
Net assets, end of year (thousands) $57,105 $10,905 $ 441 $49,786 $9,433 $ 716
Total return(2) +26.2% +30.3% +35.3% +25.3% +29.2% +34.5%
Ratios to average net assets
Expenses 0.95% 1.06% 0.94% 1.70% 1.82% 1.71%
Net investment income 0.86% 0.94% 1.41% 0.12% 0.21% 0.63%
Portfolio turnover rate 62% 58% 86% 62% 58% 86%
</TABLE>
---------------------------------------------------------------
NATIONAL INTERMEDIATE MUNICIPAL FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
--------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1998 1997 1996 1995(1) 1998 1997 1996 1995(1)
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $10.35 $10.43 $10.43 $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 investment (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(2) +7.5% +4.2% +8.7% +6.7% +3.4% +8.0%
Ratios to average net assets:
Expenses 0.75% 0.75% 0.75%(3) 1.50% 1.50% 1.50%(3)
Net investment income 4.53% 4.62% 4.63%(3) 3.75% 3.88% 3.85%(3)
Portfolio turnover rate
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%(3) 2.57% 2.77% 2.45%(3)
</TABLE>
---------------------------------------------------------------
(1) February 22, 1995, commencement of investment operations, through December
31, 1995.
(2) Total return is calculated assuming a $1,000 investment on the first day of
each period reported, reinvestment of all dividends at the net asset value
on the payable date, and a sale at net asset value on the last day of each
period 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.
(3) Annualized.
Salomon Brothers Investment Series - 58
<PAGE>
<PAGE>
INVESTORS FUND
<TABLE>
<CAPTION>
CLASS 2 CLASS O
- ------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
- -------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1998 1997 1996 1995(1) 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 18.86 $16.61 $13.61 $ 18.90 $ 16.61 $ 13.63 $ 15.60
------- ------ ------ -------- -------- -------- --------
0.04 0.07 0.09 0.24 0.25 0.27 0.27
4.59 4.60 4.55 4.60 4.62 4.48 (0.48)
------- ------ ------ -------- -------- -------- --------
4.63 4.67 4.64 4.84 4.87 4.75 (0.21)
------- ------ ------ -------- -------- -------- --------
(0.11) (0.09) (0.14) (0.24) (0.25) (0.27) (0.27)
(2.37) (2.33) (1.50) (2.37) (2.33) (1.50) (1.49)
------- ------ ------ -------- -------- -------- --------
(2.48) (2.42) (1.64) (2.61) (2.58) (1.77) (1.76)
------- ------ ------ -------- -------- -------- --------
$ 21.01 $18.86 $16.61 $ 21.13 $ 18.90 $ 16.61 $ 13.63
------- ------ ------ -------- -------- -------- --------
------- ------ ------ -------- -------- -------- --------
$11,701 $1,959 $ 306 $608,401 $518,361 $428,950 $348,214
+25.2% +29.3% +34.5% +26.5% +30.6% +35.4% -1.3%
1.70% 1.80% 1.68% 0.69% 0.76% 0.69% 0.69%
0.13% 0.23% 0.66% 1.15% 1.36% 1.67% 1.75%
62% 58% 86% 62% 58% 86% 166%
</TABLE>
---------------------------------------------------------------
NATIONAL INTERMEDIATE MUNICIPAL FUND
<TABLE>
<CAPTION>
CLASS 2 CLASS O
- -----------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
- -----------------------------------------------------------------------------------------------
1998 1997 1996 1995(1) 1998 1997 1996 1995(1)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$10.33 $10.42 $10.00 $ 10.34 $10.34 $10.43
------ ------ ------ ------- ------ -------
0.40 0.40 0.34 0.50 0.50 0.042
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%(3) 0.50% 0.50% 0.50% (3)
3.81% 3.88% 3.85%(3) 4.79% 4.88% 4.86% (3)
1.00% 1.00% 29.0% 1.00% 1.00% 29.0%
$ 0.28 $ 0.27 $ 0.25 $ 0.39 $ 0.37 $ 0.34
2.57% 2.77% 2.46%(3) 1.57% 1.77% 1.46% (3)
</TABLE>
---------------------------------------------------------------
Salomon Brothers Investment Series - 59
<PAGE>
<PAGE>
NEW YORK MUNICIPAL MONEY MARKET FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
--------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1998 1997 1996(1) 1998 1997
--------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period $ 1.000 $ 1.000 $ 1.000
------- ------- -------
Net investment income 0.034 0.006 0.034
Dividends from net investment income (0.034) (0.006) (0.034)
------- ------- -------
Net asset value, end of period $ 1.000 $ 1.000 $ 1.000
------- ------- -------
------- -------
Net assets, end of period (thousands) $3,808 $360 $25
Total return(2) +3.5% +0.6% +3.5%
Ratios to average net assets:
Expenses 0.50% 0.38%(3) 0.43%
Net investment income 3.39% 3.56%(3) 3.32%
Before applicable waiver of management fee,
expenses absorbed by SBAM and credits earned
on custodian cash balances, net investment
income per share and expense ratios would have
been:
Net investment income per share -- $ 0.006 --
Expense ratio -- 0.39%(3) --
</TABLE>
<TABLE>
<CAPTION>
1996(1)
<S> <C>
Net asset value, beginning of period $ 1.000
-------
Net investment income 0.006
Dividends from net investment income (0.006)
-------
Net asset value, end of period $ 1.000
-------
-------
Net assets, end of period (thousands) $ 25
Total return(2) +0.6%
Ratios to average net assets:
Expenses 0.40%(3)
Net investment income 3.40%(3)
Before applicable waiver of management fee,
expenses absorbed by SBAM and credits earned
on custodian cash balances, net investment
income per share and expense ratios would have
been:
Net investment income per share $ 0.006
Expense ratio 0.41%(3)
</TABLE>
------------------------------------------------------
(1) November 1, 1996, commencement of investment operations, through December
31, 1996.
(2) Total return is calculated assuming a $1,000 investment on the first day of
each period reported, reinvestment of all dividends at the net asset value
on the payable date, and a sale at net asset value on the last day of each
period reported. Total return calculated for a period of less than one year
is not annualized.
(3) Annualized.
SMALL CAP GROWTH FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
--------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1998(1) 1998(1)
--------------------------------------------------
<S> <C> <C>
Net asset value, beginning of period
Net investment income (loss)
Net gain on investments (both realized and
unrealized)
Total from investment operations
Dividends from net investment income
Distributions from net realized gain on
investments
Total dividends and distributions
Net asset value, end of period
Net assets, end of period (thousands)
Total return(2)
Ratios to average net assets:
Expenses
Net investment income
Portfolio turnover rate
Before applicable waiver of management fee,
expenses absorbed by SBAM and credits earned
on cash balances, net investment income per
share and expense ratios would have been:
Net investment income per share
Expense ratio
</TABLE>
------------------------------------------------------
(1) commencement of investment operations, through December
31, 1998.
(2) Total return is calculated assuming a $1,000 investment on the first day of
each period reported, reinvestment of all dividends at the net asset value
on the payable date, and a sale at net asset value on the last day of each
period 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.
Salomon Brothers Investment Series - 60
<PAGE>
<PAGE>
NEW YORK MUNICIPAL MONEY MARKET FUND
<TABLE>
<CAPTION>
CLASS 2 CLASS O
- -----------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
- -----------------------------------------------------------------------------------------------
1998 1997 1996(1) 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
------- ------- -------- -------- -------- --------
0.034 0.006 0.034 0.032 0.037 0.027
(0.034) (0.006) (0.034) (0.032) (0.037) (0.027)
------- ------- -------- -------- -------- --------
$ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
------- ------- -------- -------- -------- --------
------- ------- -------- -------- -------- --------
$ 25 $25 $305,419 $273,734 $226,549 $269.788
+3.5% +0.6% +3.5% +3.3% +3.2% +2.7%
0.47% 0.40%(3) 0.47% 0.53% 0.43% 0.41%
3.40% 3.40%(3) 3.39% 3.25% 3.67% 2.63%
-- $ 0.006 -- $ 0.032 $ 0.037 --
-- 0.41%(3) -- 0.53% 0.45% --
</TABLE>
------------------------------------------------------
SMALL CAP GROWTH FUND
<TABLE>
<CAPTION>
CLASS 2 CLASS O
- ------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
- ------------------------------------------------------------------------------------
1998(1) 1998(1)
- ------------------------------------------------------------------------------------
<S> <C> <C>
</TABLE>
------------------------------------------------------
Salomon Brothers Investment Series - 61
<PAGE>
<PAGE>
STRATEGIC BOND FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------
1998 1997 1996 1995(1) 1998 1997 1996 1995(1)
------------------------------------------------------------------------------
<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(3) 0.87(3) 0.84 0.67(3) 0.79(3) 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) -- -- (0.10) --
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(4) +11.2% +14.1% +16.8% +10.4% +13.0% +16.1%
Ratios to average net assets:
Expenses 1.24% 1.24% 1.23%(5) 1.99% 1.98% 1.97%(5)
Net investment income 6.99% 8.09% 9.51%(5) 6.12% 7.34% 8.75%(5)
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%(5) 2.28% 2.73% 2.85%(5)
</TABLE>
---------------------------------------------------------------
TOTAL RETURN BOND FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
---------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
1998 1997 1996 1995(2) 1998 1997 1996 1995(2)
---------------------------------------------------------------------------
<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(3) 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(4) +19.1% +18.3% +6.7% +18.2% +17.4% +6.4%
Ratios to average net assets
Expenses 0.77% 0.75% 0.74%(5) 1.52% 1.50% 1.49%(5)
Net investment income 4.29% 4.81% 4.82%(5) 3.54% 4.06% 4.06%(5)
Portfolio turnover rate 70% 76% 16% 70% 76% 16%
Before applicable waiver of management fee,
expenses absorbed by SBAM and credits earned
on custodian cash balances, net investment
income per share and expense ratios would
have been:
Net investment income per share $ 0.49 $ 0.44 0.13 $ 0.39 $ 0.36 $ 0.11
Expense ratio 1.24% 1.61% 1.45%(5) 1.99% 2.36% 2.19%(5)
</TABLE>
---------------------------------------------------------------
(1) February 22, 1995, commencement of investment operations through December
31, 1995.
(2) September 11, 1995, commencement of investment operations, through December
31, 1995.
(3) Per share information calculated using the average shares outstanding
method.
(4) 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.
(5) Annualized.
Salomon Brothers Investment Series - 62
<PAGE>
<PAGE>
STRATEGIC BOND FUND
<TABLE>
<CAPTION>
CLASS 2 CLASS O
- ---------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
- ---------------------------------------------------------------------------------------------------
1998 1997 1996 1995(1) 1998 1997 1996 1995(1)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 10.82 $ 10.53 $ 10.00 $ 10.82 $ 10.53 $ 10.00
------- ------- ------- ------- ------- -------
0.66(3) 0.78(3) 0.77 0.78(3) 0.92(3) 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%(5) 0.96% 1.00% 0.99%(5)
6.09% 7.26% 8.77%(5) 7.22% 8.65% 9.74%(5)
184% 122% 161% 184% 122% 161%
$ 0.63 $ 0.70 $ 0.70 $ 0.75 $ 0.84 $ 0.79
2.28% 2.72% 2.87%(4) 1.25% 1.74% 1.87%(4)
</TABLE>
---------------------------------------------------------------
TOTAL RETURN BOND FUND
<TABLE>
<CAPTION>
CLASS 2 CLASS O
- ----------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------------------
1998 1997 1996 1995(1) 1998 1997 1996 1995(1)
- ----------------------------------------------------------------------------------------------------
<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%(5) 0.52% 0.50% 0.51%(5)
3.52% 4.07% 4.26%(5) 4.60% 5.13% 5.30%(5)
70% 76% 16% 70% 76% 16%
$0.0596 $0.0534 N/A $0.0596 $0.0534 $ 0.79
</TABLE>
Salomon Brothers Investment Series - 63
<PAGE>
<PAGE>
U.S. GOVERNMENT INCOME FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------
1998 1997 1996 1995(1) 1998 1997 1996 1995(1)
------------------------------------------------------------------------------
<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 investment (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 in excess of net investment
income (0.10) (0.06) (0.10) (0.10) (0.06) (0.10)
Distributions from 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(2) +7.9% +3.6% +9.5% +7.2% +2.7% +8.8%
Ratios to average net assets:
Expenses 0.85% 0.84% 0.85% (3) 1.60% 1.59% 1.60% (3)
Net investment income 5.77% 5.22% 5.67% (3) 4.96% 4.51% 4.85% (3)
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 $ 0.25
Expense ratio 2.02% 2.21% 1.90% (3) 2.77% 2.96% 2.64% (3)
</TABLE>
---------------------------------------------------------------
(1) February 22, 1995, commencement of investment operations, through December
31, 1995.
(2) Total return is calculated assuming a $1,000 investment on the first day of
each period reported, reinvestment of all dividends at the net asset value
on the payable date, and a sale at net asset value on the last day of each
period 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.
(3) Annualized.
Salomon Brothers Investment Series - 64
<PAGE>
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U.S. GOVERNMENT INCOME FUND
<TABLE>
<CAPTION>
CLASS 2 CLASS O
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YEAR ENDED DECEMBER 31,
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1998 1997 1996 1995(1) 1998 1997 1996 1995(1)
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<S> <C> <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%(3) 0.60% 0.60% 0.60%(3)
4.94% 4.51% 4.92%(3) 6.01% 5.53% 5.92%(3)
261% 365% 230% 261% 365% 230%
$ 0.39 $ 0.31 $ 0.34 $ 0.49 $ 0.41 $ 0.42
2.76% 2.97% 2.64%(3) 1.77% 1.97% 1.64%(3)
</TABLE>
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Salomon Brothers Investment Series - 65
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SALOMON BROTHERS INVESTMENT SERIES
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Asia Growth Fund
Capital Fund
Cash Management Fund
High Yield Bond Fund
Investors Fund
National Intermediate Municipal Fund
New York Municipal Money Market Fund
Small Cap Growth Fund
Strategic Bond Fund
Total Return Fund
U.S. Government Income Fund
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ADDITIONAL INFORMATION ABOUT THE FUNDS
SHAREHOLDER REPORTS. Annual and semiannual reports to shareholders provide
additional information about the funds' investments. These reports discuss the
market conditions and investment strategies that significantly affected each
fund's performance during its last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION. The statement of additional information
provides more detailed information about each fund. It is incorporated by
reference into (is legally a part of) this combined prospectus.
The funds send only one report to a household if more than one account has the
same address. Contact the transfer agent if you do not want this policy to apply
to you.
HOW TO OBTAIN ADDITIONAL INFORMATION.
You can make inquiries about the fund or obtain shareholder reports or the
statement of additional information (without charge) by contacting the transfer
agent, by calling 1-800-446-1013 or writing the funds at Seven World Trade
Center, New York, NY, 10048 or calling your financial consultant.
You can also review the funds' shareholder reports, prospectus and statement of
additional information at the Securities and Exchange Commission's Public
Reference Room in Washington, D.C. The Commission charges a fee for this
service. Information about the public reference room may be obtained by calling
1-800-SEC-0330. You can get the same reports and information free from the
Commission's Internet web site -- http://www.sec.gov
If someone makes a statement about the funds that is not in this prospectus, you
should not rely upon that information. Neither the funds nor the distributor is
offering to sell shares of the funds to any person to whom the funds may not
lawfully sell their shares.
(Investment Company Act file no.
811-06087, 811-02667, 811-14025)
[FD 00000 4/99]
[Logo]
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STATEMENT OF ADDITIONAL INFORMATION
SALOMON BROTHERS INVESTMENT SERIES
7 WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
(800) SALOMON
(800) 725-6666
Salomon Brothers Investment Series consists of Salomon Brothers Asia Growth Fund
(the 'Asia Growth Fund'), Salomon Brothers Capital Fund Inc (the 'Capital
Fund'), Salomon Brothers Cash Management Fund (the 'Cash Management Fund'),
Salomon Brothers High Yield Bond Fund (the 'High Yield Bond Fund'), Salomon
Brothers Investors Fund Inc (the 'Investors Fund'), Salomon Brothers National
Intermediate Municipal Fund (the 'National Intermediate Municipal Fund'),
Salomon Brothers New York Municipal Money Market Fund (the 'New York Municipal
Money Market Fund'), Salomon Brothers Small Cap Growth Fund (the 'Small Cap
Growth Fund'), Salomon Brothers Strategic Bond Fund (the 'Strategic Bond Fund'),
Salomon Brothers Total Return Fund (the 'Total Return Fund'), and Salomon
Brothers U.S. Government Income Fund (the 'U.S. Government Income 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 April 30, 1999, (the 'Prospectus'). This SAI
supplements and should be read in conjunction with the Prospectus. Additional
information about the Funds' investments is available in the Fund's Annual and
Semi-Annual Reports to shareholders. The Prospectus and copies of the Reports
may be obtained without charge by writing the Funds at the address, or by
calling the toll-free telephone numbers, listed above.
TABLE OF CONTENTS
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Additional Information on Fund Investments and Investment Policies........................................ 2
Additional Investment Activities and Risk Factors......................................................... 19
Investment Restrictions and Limitations................................................................... 51
Management................................................................................................ 60
Principal Holders of Securities........................................................................... 64
Investment Manager........................................................................................ 65
Portfolio Transactions.................................................................................... 71
Net Asset Value........................................................................................... 72
Additional Purchase Information........................................................................... 74
Additional Redemption Information......................................................................... 77
Additional Information Concerning Taxes................................................................... 77
Performance Information and Data.......................................................................... 84
Shareholder Services...................................................................................... 91
Account Services.......................................................................................... 94
Capital Stock............................................................................................. 94
Custodian and Transfer Agent.............................................................................. 95
Independent Accountants................................................................................... 96
Counsel................................................................................................... 96
Financial Statements...................................................................................... 96
Special Investment Considerations Relating To New York Municipal Obligations.............................. A-1
Description of Ratings.................................................................................... B-1
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ADDITIONAL INFORMATION ON PORTFOLIO INVESTMENTS
AND INVESTMENT POLICIES
The Prospectus describes each Fund's investment objective and key investment
policies. The discussion below provides additional information about each Fund's
investment policies and the types of securities and other instruments in which
each Fund may invest. 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').
ASIA GROWTH FUND
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 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').
More than 25% of the Fund's total assets may be denominated or quoted in the
currencies of Hong Kong, Malyasia, Singapore and Thailand. 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.
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 Standard & Poor's Rating Group ('S&P') and Moody's Investors
Service, Inc. ('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.'
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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 below, the Fund may purchase Rule 144A securities. The
Fund's holdings of Rule 144A securities which are liquid securities will not be
subject to the 15% limitation on investments in illiquid securities.
The Asia Growth Fund is currently authorized and intends to use the various
investment strategies referred to under 'Additional Investment Activities and
Risk Factors -- Derivatives.' The Fund's ability to pursue certain of these
strategies may be limited by applicable regulations of the SEC, the CFTC and the
federal income tax requirements applicable to regulated investment companies.
Descriptions of these strategies and of certain risks associated therewith are
contained herein.
The foregoing investment policies and activities are not fundamental policies
and may be changed by vote of the Fund's Board of Directors without the approval
of shareholders.
CAPITAL FUND
In seeking capital appreciation, the Capital Fund may purchase securities of
seasoned issuers, relatively smaller and newer companies as well as in new
issuers 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.
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 B: 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.
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.'
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 below, 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 Restrictions and 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 Restrictions and Limitations,' the Capital
Fund may invest in repurchase agreements in an amount up to 25% of its total
assets. The Fund enters into
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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.
CASH MANAGEMENT FUND
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. The Fund will invest in such obligations only
where SBAM determines that the credit risk with respect to the issuer is
minimal;
(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.'
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 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
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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.
The Fund will purchase obligations of supranational entities 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 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.
For a description of supranational obligations and their associated risks, see
'Additional Investment Activities and Risk Factors -- Obligations of
Supranational Entities.'
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 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. 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 Investment Activities and
Risk Factors -- Asset-Backed Securities.'
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
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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 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.
HIGH YIELD BOND FUND
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. 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.' The Fund may also invest up to 35% of its total assets in foreign
fixed-income securities.
The High Yield Bond Fund may also invest in zero coupon securities and
pay-in-kind bonds, which involve special risk considerations. See 'Additional
Investment Activities and Risk Factors -- Zero Coupon Securities, Pay-in-Kind
Bonds and Deferred Payment Securities.'
The High Yield Bond Fund may invest in fixed and floating rate loans ('Loans')
arranged through private negotiations between a corporate borrower or a foreign
sovereign entity and one or more financial institutions ('Lenders'). The Fund
may invest in such Loans in the form of participations in Loans
('Participations') and assignments of all or a portion of Loans from third
parties ('Assignments'). See 'Additional Investment Activities and Risk
Factors -- Loan Participations and Assignments.'
The High Yield Bond Fund may invest up to 20% of its assets in common stock,
convertible securities, warrants, preferred stock or other equity securities
when consistent with the Fund's objectives. The Fund will generally hold such
equity investments as a result of purchases of unit offerings of fixed-income
securities which include such securities or in connection with an actual or
proposed conversion or exchange of fixed-income securities, but may also
purchase equity securities not associated with fixed-income securities when, in
the opinion of the investment manager, such purchase is appropriate.
There may be times when, in SBAM's judgment, conditions in the securities
markets would make pursuing the Fund's 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
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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 herein, 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 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.
INVESTORS FUND
The Investors Fund from time to time may invest up to 5% of its net assets in
non-convertible debt securities rated below investment grade by S&P and Moody's
with no minimum rating required or comparable unrated securities. There is no
limit on the amount of Investors Fund's assets that can be invested in
convertible securities rated below investment grade. For additional information
on these high yield debt securities, which involve a high degree of risk, see
the description above of investment objectives and polices for the High Yield
Bond Fund and 'Additional Investment Activities and Risk Factors -- High Yield
Securities.'
The Investors Fund maintains a carefully selected portfolio of securities
diversified among industries and companies. The Fund may invest up to 25% of its
net assets in any one industry. The Fund generally purchases marketable
securities, primarily those traded on the New York Stock Exchange ('NYSE') or
other national securities exchanges, but also issues traded in the over-the-
counter market. The Fund will not invest more than 10% of the value of its total
assets in illiquid securities, such as 'restricted securities' which are
illiquid, and securities that are not readily marketable. As more fully
described below, 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 Restrictions and Limitations' below, the
Investors Fund may invest in repurchase agreements in an amount up to 25% of its
total assets. For a description of
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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. Descriptions of these
strategies and of certain risks are contained herein.
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.
NATIONAL INTERMEDIATE MUNICIPAL FUND
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 'Additional
Information Concerning Taxes.'
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 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
below under '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 IBCA, Inc.
('Fitch'), or determined by SBAM to be of comparable quality to bonds so rated.
A description of the ratings used by Moody's, S&P and Fitch is included in
Appendix B to this SAI.
The 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 Fund currently intends to invest substantially all of its assets in
obligations the interest on which is exempt from regular federal income taxes.
See 'Additional Information Concerning Taxes.' 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
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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 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'.
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.
NEW YORK MUNICIPAL MONEY MARKET FUND
The types of obligations in which the New York Municipal Money Market Fund may
invest include (see 'Description of Ratings' in Appendix B):
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(1) Municipal commercial paper that is rated 'P-1' or 'P-2' by Moody's or
'A-1' or 'A-2' by 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 B);
(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.
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 'Additional Information Concerning Taxes.' 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 under 'Cash Management Fund' in this section of the SAI. 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
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should prevail, the Fund may temporarily invest more than 20% of its assets in
cash reserves or in taxable money market instruments in order to maintain a
defensive posture. To the extent that the 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.
Municipal bonds at the time of issuance are generally long-term securities with
maturities of as much as thirty years or more, but may have remaining maturities
of shorter duration at the time of purchase by the Fund. Municipal commercial
paper that may be purchased by the New York Municipal Money Market Fund consists
of short-term obligations of a municipality. Such paper is likely to be issued
to meet seasonal working capital needs of a municipality or 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.
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 the
state or municipality that created the issuer.
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
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issuer, an investment in the Fund may be riskier than an investment in other
types of money market funds.
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 Appendix A for further information.
From time to time the New York Municipal Money Market Fund may invest 25% or
more of its assets in municipal obligations that are related in other ways such
that an economic, business or political development or change affecting one such
obligation could also affect the other obligations; for example, municipal
obligations the interest on which is paid from revenues of similar types of
projects. In addition, from time to time, the Fund may invest 25% or more of its
assets in industrial development bonds, which, although issued by industrial
development authorities, may be backed only by those assets and revenues of
non-governmental users.
Opinions relating to the validity of municipal obligations and to the exemption
of interest thereon from federal income tax and New York State and New York 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.
Certain of the obligations that the New York Municipal Money Market Fund may
purchase may have a floating or variable rate of interest. For a description of
these obligations, see 'Additional Investment Activities and Risk
Factors -- Floating and Variable Rate Instruments.'
The New York Municipal Money Market Fund may purchase participation certificates
issued by a bank, insurance company or other financial institution in
obligations that may otherwise be purchased by the Fund. For a further
discussion of participation certificates, see 'Additional Investment Activities
and Risk Factors -- Participation Certificates.'
The New York Municipal Money Market Fund may invest in municipal lease
obligations. See 'Additional Investment Activities and Risk Factors -- Municipal
Lease Obligations.' Certain investments in lease obligations may be illiquid.
The Fund may not invest in illiquid lease obligations if such investments,
together with all other illiquid investments, would exceed 10% of the Fund's net
assets. The Fund may, however, invest without regard to such limitation in lease
obligations which SBAM, pursuant to guidelines which have been adopted by the
Board of Directors and subject to the supervision of the Board, determines to be
liquid.
The New York Municipal Money Market Fund may purchase securities on a firm
commitment basis, including when-issued securities. See 'Additional Investment
Activities and Risk Factors -- Firm Commitments and When-Issued Securities' for
a description of such securities and their associated risks.
The New York Municipal Money Market Fund may enter into standby commitments with
respect to securities held in its portfolio. Such transactions entitle the Fund
to 'put' its securities at an agreed upon price within a specified period of
time prior to their maturity date.
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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.
See Appendix B for a description of special investment considerations relating
to New York Municipal Obligations.
SMALL CAP GROWTH FUND
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) within the range of market
capitalizations of companies included within the Russell 2000 Growth Index
('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 the capitalization of a Small Cap
Company subsequent to purchase if the company continues to satisfy the other
investment policies of the Small Cap Growth Fund. Up to 35% of the Small Cap
Growth Fund's total assets may be invested in securities of companies whose
market capitalizations the capitalization of a Small Cap Company.
The Small Cap Growth Fund will limit its purchases of non-convertible debt
securities to investment grade obligations. For long-term debt obligations, this
includes securities that are rated Baa or better by Moody's or BBB or better by
S&P or Fitch or that are not rated but are considered by SBAM to be of
equivalent quality. See Appendix B to this Prospectus for a description of such
ratings.
To meet operating expenses, to serve as collateral in connection with certain
investment techniques and to meet anticipated redemption requests, the Small Cap
Growth Fund will generally hold a portion of its assets in short-term
fixed-income securities (government obligations or investment grade debt
securities) or cash or cash equivalents. As described below, short-term
investments may include repurchase agreements with banks or broker/dealers. When
SBAM deems it appropriate, during temporary defensive periods due to economic or
market conditions, the Small Cap Growth Fund may invest without limitation in
fixed-income securities or hold assets in cash or cash equivalents. To the
extent the Small Cap Growth Fund assumes a defensive position, it will not be
pursuing its investment objective of capital growth.
The Small Cap Growth Fund may enter into repurchase agreements, reverse
repurchase agreements, may purchase securities on a firm commitment basis,
including when-issued securities, and may lend portfolio securities. The Small
Cap Growth Fund may engage in short sales of securities if it contemporaneously
owns or has the right to obtain at no additional cost securities identical to
those being sold short. The Small Cap Growth Fund may also invest in investment
funds. For a description of these investment practices and the risks associated
therewith, see '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.' 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.
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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 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.
STRATEGIC BOND FUND
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. Certain of the debt securities in which the Strategic Bond
Fund may invest may be rated as low as 'C' by Moody's or 'D' by S&P or may be
considered comparable to securities having such ratings. See 'Additional
Investment Activities and Risk Factors -- High Yield Securities.'
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' and 'Brady Bonds.' SBAM anticipates that the Fund's investments in
sovereign debt will be concentrated in Latin American countries, including
Central and South American and Caribbean countries. SBAM also expects to take
advantage of additional opportunities for investment in the debt of North
African countries, such as Nigeria and Morocco, Eastern European countries, such
as Poland and Hungary, and Southeast Asian countries, such as the Philippines.
Sovereign governments may include national, provincial, state, municipal or
other foreign governments with taxing authority. Governmental entities may
include the agencies and instrumentalities of such governments, as well as
state-owned enterprises. For a more detailed discussion of high yield sovereign
debt securities, see 'Additional Investment Activities and Risk Factors -- High
Yield Securities.'
The Strategic Bond Fund will be subject to special risks as a result of its
ability to invest up to 100% of its assets in foreign securities (including
emerging market securities). Such securities may be non-U.S. dollar denominated
and there is no limit on the percentage of the Fund's assets that can be
invested in non-dollar denominated securities. SBAM anticipates that under
current market conditions, a significant portion of the Fund's assets will be
invested in foreign securities. These risks are described under the captions
'Additional Investment Activities and Risk Factors -- Foreign Securities.'
Moreover, substantial investments in foreign securities may have adverse tax
implications as described under 'Additional Information Concerning Taxes.' 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 also 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. The
Strategic Bond Fund will not invest more than 10% of its total assets in issuers
located in any one country (other than
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issuers located in the United States). For a further description of these
investments, see 'Additional Investment Activities and Risk Factors.'
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 types and characteristics of the U.S. government obligations and mortgage
backed securities to be purchased by the Strategic Bond Fund are set forth under
'U.S. Government Income Fund' in this section of the SAI. 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.'
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
under 'Cash Management Fund' in this section of the SAI.
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. The Fund may purchase Rule 144A securities for
which there is a secondary market of qualified institutional buyers as
contemplated by Rule 144A under the 1933 Act. The Fund's holdings of Rule 144A
securities which are liquid securities will not be subject to the 15% limitation
on investments in illiquid securities. For further discussion of illiquid
securities and their associated risks, see 'Additional Investment Activities and
Risk Factors -- Restricted Securities and Securities with Limited Trading
Markets.'
The Strategic Bond Fund is currently authorized to use all of the various
investment strategies referred to under 'Additional Investment Activities and
Risk Factors -- Derivatives.' With the exception of currency transactions,
however, it is not presently anticipated that any of these strategies will be
used to a significant degree by the Fund. The Fund's ability to pursue certain
of these strategies may be limited by applicable regulations of the SEC, the
CFTC and the federal income tax requirements applicable to regulated investment
companies.
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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
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 below in the discussion under 'U.S.
Government Income Fund' in this section of the SAI. The Fund may also purchase
privately issued mortgage securities which are not guaranteed by the U.S.
government or its agencies or instrumentalities. For a description of these
securities and the risks associated therewith see 'Additional Investment
Activities and Risk Factors.' The Total Return Fund may invest in corporate
asset-backed securities, the characteristics and risks of which are described
above under 'Cash Management Fund' in this section of the SAI.
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 herein, 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.'
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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 foregoing investment policies, other than the Total Return Fund's investment
objectives, are not fundamental policies and may be changed by vote of the Board
of Directors without the approval of shareholders.
U.S. GOVERNMENT INCOME FUND
The Fund seeks to attain its objective by investing under normal circumstances
100% of its assets in debt obligations and mortgage-backed securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities. The
securities in which the U.S. Government Income Fund may invest are:
(1) U.S. Treasury obligations;
(2) obligations issued or guaranteed by agencies or instrumentalities of the
U.S. government which are backed by their own credit and may not be backed
by the full faith and credit of the U.S. government;
(3) mortgage-backed securities guaranteed by the Government National
Mortgage Association ('GNMA'), popularly known as 'Ginnie Maes,' that are
supported by the full faith and credit of the U.S. government. Such
securities entitle the holder to receive all interest and principal payments
due whether or not payments are actually made on the underlying mortgages;
(4) mortgage-backed securities guaranteed by agencies or instrumentalities
of the U.S. government which are supported by their own credit but not the
full faith and credit of the U.S. government, such as the Federal Home Loan
Mortgage Corporation ('FHLMC') and the Federal National Mortgage Association
('FNMA'), commonly known as 'Fannie Maes'; and
(5) collateralized mortgage obligations issued by private issuers for which
the underlying mortgage-backed securities serving as collateral are backed:
(i) by the credit alone of the U.S. government agency or instrumentality
which issues or guarantees the mortgage-backed securities; or (ii) by the
full faith and credit of the U.S. government.
Any guarantee of the securities in which the U.S. Government Income Fund invests
runs only to principal and interest payments on the securities and not to the
market value of such securities or the principal and interest payments on the
underlying mortgages. In addition, the guarantee only runs to the portfolio
securities held by the U.S. Government Income Fund and not to the purchase of
shares of the Fund.
The U.S. Government Income Fund currently expects that it will maintain an
average portfolio effective duration of two to 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.
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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'.
While the U.S. Government Income Fund seeks a high level of current income, it
cannot invest in instruments such as lower grade corporate obligations which
offer higher yields but are subject to greater credit risks. Shares of the Fund
are neither insured nor guaranteed by the U.S. government, its agencies or
instrumentalities. Neither the issuance by nor the guarantee of a U.S.
government agency for a security constitutes assurance that the security will
not significantly fluctuate in value or that the U.S. Government Income Fund
will receive the originally anticipated yield on the security.
The U.S. Government Income Fund may enter into repurchase agreements and reverse
repurchase agreements, may purchase securities on a firm commitment basis,
including when-issued securities and may lend portfolio securities. The Fund
does not currently intend to make loans of portfolio securities with a value in
excess of 33% of the value of its total assets. The Fund may also enter into
mortgage 'dollar rolls.' For a description of these 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 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.
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ADDITIONAL INVESTMENT ACTIVITIES AND RISK FACTORS
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.
In addition, there may be less publicly-available information about a foreign
issuer than about a U.S. issuer, and foreign issuers may not be subject to the
same accounting, auditing and financial record-keeping standards and
requirements as U.S. issuers. In particular, the assets and profits appearing on
the financial statements of an emerging market country issuer may not reflect
its financial position or results of operations in the way they would be
reflected and the financial statements been prepared in accordance with U.S.
generally accepted accounting principles. In addition, for an issuer that keeps
accounting records in local currency, inflation accounting rules may require,
for both tax and accounting purposes, that certain assets and liabilities be
restated on the issuer's balance sheet in order to express items in terms of
currency of constant purchasing power. Inflation accounting may indirectly
generate losses or profits. Consequently, financial data may be materially
affected by restatements for inflation and may not accurately reflect the real
condition of those issuers and securities markets. 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.
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
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private sector. In certain cases, the government owns or controls many
companies. Accordingly, government actions in the future could have a
significant effect on economic conditions in developing countries which could
affect private sector companies and consequently, the value of certain
securities held in a Fund's portfolio.
Certain markets are in only the earliest stages of development. There is also a
high concentration of market capitalization and trading volume in a small number
of issuers representing a limited number of industries, as well as a high
concentration of investors and financial intermediaries. Many of such markets
also may be affected by developments with respect to more established markets in
the region. Brokers in emerging market countries typically are fewer in number
and less capitalized than brokers in the United States. These factors, combined
with the U.S. regulatory requirements for open-end investment companies and the
restrictions on foreign investment, result in potentially fewer investment
opportunities for a Fund and may have an adverse impact on the investment
performance of a Fund.
There generally is less governmental supervision and regulation of exchanges,
brokers and issuers in foreign countries than there is in the United States. For
example, there may be no comparable provisions under certain foreign laws to
insider trading and similar investor protection securities laws that apply with
respect to securities transactions consummated in the United States. Further,
brokerage commissions and other transaction costs on foreign securities
exchanges generally are higher than in the United States.
With respect to investments in certain emerging market countries, different
legal standards may have an adverse impact on a Fund. For example, while the
potential liability of a shareholder in a U.S. corporation with respect to acts
of the corporation is generally limited to the amount of the shareholder's
investment, the notion of limited liability is less clear in certain emerging
market countries. Similarly, the rights of investors in emerging market
companies may be more limited than those of shareholders of U.S. corporations.
In some countries, banks or other financial institutions may constitute a
substantial number of the leading companies or companies with the most actively
traded securities. The Investment Company Act of 1940, as amended (the '1940
Act'), limits a Fund's ability to invest in any equity security of an issuer
which, in its most recent fiscal year, derived more than 15% of its revenues
from 'securities related activities,' as defined by the rules thereunder. These
provisions may also restrict a Fund's investments in certain foreign banks and
other financial institutions.
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
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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.
OBLIGATIONS OF SUPRANATIONAL ENTITIES
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. 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.
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. 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.
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.
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 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
National Intermediate Municipal Fund to buy and sell municipal obligations may,
at any particular time and
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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.
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, Capital Fund and 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 B. 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
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particular security, it will become more difficult to value such Fund's
portfolio securities, and a greater degree of judgment may be necessary in
making such valuations. Less liquid secondary markets may also affect the
ability of a Fund to sell securities at their fair value. If the secondary
markets for high yield securities contract due to adverse economic conditions or
for other reasons, certain liquid securities in a Fund's portfolio may become
illiquid and the proportion of the Fund's assets invested in illiquid securities
may significantly increase.
Prices for high yield securities may be affected by legislative and regulatory
developments. These laws could adversely affect a Fund's net asset value and
investment practices, the secondary market for high yield securities, the
financial condition of issuers of these securities and the value of outstanding
high yield securities. For example, federal legislation requiring the
divestiture by federally insured savings and loan associations of their
investments in high yield bonds and limiting the deductibility of interest by
certain corporate issuers of high yield bonds adversely affected the market in
recent years.
HIGH YIELD CORPORATE SECURITIES
While the market values of securities rated below investment grade and
comparable unrated securities tend to react less to fluctuations in interest
rate levels than do those of higher-rated securities, the 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 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
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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.
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.
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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 E. 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 S&P or 'Ba' or 'B' by
Moody's or, in cases in which a rating by S&P or Moody's has not been assigned,
are generally considered by the investment manager to be of comparable quality.
Agreements implemented under the Brady Plan to date are designed to achieve debt
and debt-service reduction through specific options negotiated by a debtor
nation with its creditors. As a result, the financial packages offered by each
country differ. The types of options have included the exchange of outstanding
commercial bank debt for bonds issued at 100% of face value of such debt which
carry a below-market stated rate of interest (generally known as par bonds),
bonds issued at a discount from the face value of such debt (generally known as
discount bonds), bonds bearing an interest rate which increases over time and
bonds issued in exchange for the advancement of new money by existing lenders.
Discount bonds issued to date under the framework of the Brady Plan have
generally borne interest computed semiannually at a rate equal to 13/16 of 1%
above the then current six month London Inter-Bank Offered Rate ('LIBOR') rate.
Regardless of the stated face amount and stated interest rate of the various
types of Brady Bonds, the applicable Funds will purchase Brady Bonds in
secondary markets, as described below, in which the price and yield to the
investor reflect market conditions at the time of purchase. Brady Bonds issued
to date have traded at a deep discount from their face value. Certain sovereign
bonds are entitled to 'value recovery payments' in certain circumstances, which
in effect constitute supplemental interest payments but generally are not
collateralized. Certain Brady Bonds have been collateralized as to principal due
at maturity (typically 30 years from the date of issuance) by U.S. Treasury zero
coupon bonds with a maturity equal to the final maturity of such Brady Bonds,
although the collateral is not available to investors until the final maturity
of the Brady Bonds. Collateral purchases are financed by the IMF, the World Bank
and the debtor nations' reserves. In addition, interest payments on certain
types of Brady Bonds may be collateralized by cash or high-grade securities in
amounts that typically represent between 12 and 18 months of interest accruals
on these instruments with the balance of the interest accruals being
uncollateralized. The applicable Funds may purchase Brady Bonds with no or
limited collateralization, and will be
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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.'
U.S. GOVERNMENT OBLIGATIONS
Securities issued or guaranteed by U.S. government agencies and
instrumentalities include obligations that are supported by: (a) the full faith
and credit of the U.S. Treasury (e.g., direct pass-through certificates of the
Government National Mortgage Association ('Ginnie Maes')); (b) the limited
authority of the issuer or guarantor to borrow from the U.S. Treasury (e.g.,
obligations of Federal Home Loan Banks); or (c) only the credit of the issuer or
guarantor (e.g., obligations of the Federal Home Loan Mortgage Corporation
('Freddie Macs')). In the case of obligations not backed by the full faith and
credit of the U.S. Treasury, the agency issuing or guaranteeing the obligation
is principally responsible for ultimate repayment.
Agencies and instrumentalities that issue or guarantee debt securities and that
have been established or sponsored by the U.S. government include, in addition
to those identified above, the Bank for Cooperatives, the Export-Import Bank,
the Federal Farm Credit System, the Federal Intermediate Credit Banks, the
Federal Land Banks, the Federal National Mortgage Association and the Student
Loan Marketing Association.
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.
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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 its investment restriction limiting investments in illiquid securities unless
the demand feature has a notice period of more than seven days in which case the
instrument will be characterized as 'not readily marketable' and therefore
illiquid.
A Fund's right to obtain payment at par on a demand instrument could be affected
by events occurring between the date such Fund elects to demand payment and the
date payment is due that may affect the ability of the issuer of the instrument
or third party providing credit support to make payment when due, except when
such demand instruments permit same day settlement. To facilitate settlement,
these same day demand instruments may be held in book entry form at a bank other
than a Fund's custodian subject to a sub-custodian agreement approved by such
Fund between that bank and the Fund's custodian.
ASSET-BACKED SECURITIES
Asset-backed securities are generally issued as pass through certificates, which
represent undivided fractional ownership interests in the underlying pool of
assets, or as debt instruments, which are generally issued as the debt of a
special purpose entity organized solely for the purpose of owning such assets
and issuing such debt. The pool of assets generally represents the obligations
of a number of different parties. Asset-backed securities frequently carry
credit protection in the form of extra collateral, subordinated certificates,
cash reserve accounts, letters of credit or other enhancements. For example,
payments of principal and interest may be guaranteed up to certain amounts and
for a certain time period by a letter of credit or other enhancement issued by a
financial institution unaffiliated with the entities issuing the securities.
Assets which, to date, have been used to back asset-backed securities include
motor vehicle installment sales contracts or installment loans secured by motor
vehicles, and receivables from revolving credit (credit card) agreements.
Asset-backed securities present certain risks which are, generally, related to
limited interests, if any, in related collateral. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. Most issuers of automobile receivables permit the servicers to
retain possession of the underlying obligations. If the servicer were to sell
these obligations to another party, there is a risk that the purchaser would
acquire an interest superior to that of the holders of the related
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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.
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 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 shares of the Fund. Such securities,
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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 guarantee of
collection of principal at any time after default on an underlying mortgage
loan, but not later than 30 days following: (i) foreclosure
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sale; (ii) payment of a claim by any mortgage insurer; or (iii) the expiration
of any right of redemption, whichever occurs later, but in any event no later
than one year after demand has been made upon the mortgagor for accelerated
payment of principal. The obligations of Freddie Mac under its guarantee are
obligations solely of Freddie Mac and are not backed by the full faith and
credit of the U.S. government.
Freddie Mac Certificates represent a pro rata interest in a group of mortgage
loans (a 'Freddie Mac Certificate group') purchased by Freddie Mac. The mortgage
loans underlying the Freddie Mac Certificates will consist of fixed rate or
adjustable rate mortgage loans with original terms to maturity of between ten
and thirty years, substantially all of which are secured by first liens on one-
to four-family residential properties or multifamily projects. Each mortgage
loan must meet the applicable standards set forth in the FHLMC Act. A Freddie
Mac Certificate group may include whole loans, participation interests in whole
loans and undivided interests in whole loans and participations comprising
another Freddie Mac Certificate group.
PRIVATELY-ISSUED MORTGAGE SECURITIES
The Strategic Bond Fund and Total Return Fund may also purchase mortgage-backed
securities issued by private issuers which may entail greater risk than
mortgage-backed securities that are guaranteed by the U.S. government, its
agencies or instrumentalities. Privately-issued mortgage securities are issued
by private originators of, or investors in, mortgage loans, including mortgage
bankers, commercial banks, investment banks, savings and loan associations and
special purpose subsidiaries of the foregoing. Since privately-issued mortgage
certificates are not guaranteed by an entity having the credit status of GNMA or
FHLMC, such securities generally are structured with one or more types of credit
enhancement. Such credit support falls into two categories: (i) liquidity
protection; and (ii) protection against losses resulting from ultimate default
by an obligor on the underlying assets. Liquidity protection refers to the
provision of advances, generally by the entity administering the pool of assets,
to ensure that the pass-through of payments due on the underlying pool occurs in
a timely fashion. Protection against losses resulting from ultimate default
enhances the likelihood of ultimate payment of the obligations on at least a
portion of the assets in the pool. Such protection may be provided through
guarantees, insurance policies or letters of credit obtained by the issuer or
sponsor from third parties, through various means of structuring the transaction
or through a combination of such approaches.
The ratings of mortgage securities for which third-party credit enhancement
provides liquidity protection or protection against losses from default are
generally dependent upon the continued creditworthiness of the provider of the
credit enhancement. The ratings of such securities could be subject to reduction
in the event of deterioration in the creditworthiness of the credit enhancement
provider even in cases where the delinquency and loss experience on the
underlying pool of assets is better than expected. There can be no assurance
that the private issuers or credit enhancers of mortgage-backed securities can
meet their obligations under the relevant policies or other forms of credit
enhancement.
Examples of credit support arising out of the structure of the transaction
include 'senior-subordinated securities' (multiple class securities with one or
more classes subordinate to other classes as to the payment of principal thereof
and interest thereon, with the result that defaults on the underlying assets are
borne first by the holders of the subordinated class), creation of 'reserve
funds' (where cash or investments sometimes funded from a portion of the
payments on the underlying assets are held in reserve against future losses) and
'over-collateralization' (where the scheduled payments on, or the principal
amount of, the underlying assets exceed those required to make payment of the
securities and pay any servicing or other fees). The degree of credit support
provided for each issue is generally based on historical information with
respect to the level of credit risk associated with the underlying assets.
Delinquency or loss in excess of that which is anticipated could adversely
affect the return on an investment in such security.
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COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH SECURITIES
The U.S. Government Income Fund and 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 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 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
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subsidiaries of the foregoing. Stripped mortgage securities have greater
volatility than other types of mortgage securities. Although stripped mortgage
securities are purchased and sold by institutional investors through several
investment banking firms acting as brokers or dealers, the market for such
securities has not yet been fully developed. Accordingly, stripped mortgage
securities are generally illiquid.
Stripped mortgage securities are structured with two or more classes of
securities that receive different proportions of the interest and principal
distributions on a pool of mortgage assets. A common type of stripped mortgage
security will have at least one class receiving only a small portion of the
interest and a larger portion of the principal from the mortgage assets, while
the other class will receive primarily interest and only a small portion of the
principal. In the most extreme case, one class will receive all of the interest
('IO' or interest-only), while the other class will receive all of the principal
('PO' or principal-only class). The yield to maturity on IOs, POs and other
mortgage-backed securities that are purchased at a substantial premium or
discount generally are extremely sensitive not only to changes in prevailing
interest rates but also to the rate of principal payments (including
prepayments) on the related underlying mortgage assets, and a rapid rate of
principal payments may have a material adverse effect on such securities' yield
to maturity. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, a Fund may fail to fully recoup its
initial investment in these securities even if the securities have received the
highest rating by a nationally recognized statistical rating organizations.
In addition to the stripped mortgage securities described above, the Strategic
Bond Fund may invest in similar securities such as Super POs and Levered IOs
which are more volatile than POs, IOs and IOettes. Risks associated with
instruments such as Super POs are similar in nature to those risks related to
investments in POs. Risks connected with Levered IOs and IOettes are similar in
nature to those associated with IOs. The Strategic Bond Fund may also invest in
other similar instruments developed in the future that are deemed consistent
with its investment objective, policies and restrictions. POs may generate
taxable income from the current accrual of original issue discount, without a
corresponding distribution of cash to the Fund. See 'Additional Information
Concerning Taxes.'
MORTGAGE ROLLS
The U.S. Government Income Fund, Strategic Bond Fund and Total Return Fund may
enter into mortgage 'dollar rolls' in which a Fund sells mortgage-backed
securities for delivery in the current month and simultaneously contracts to
repurchase substantially similar (same type, coupon and maturity) securities on
a specified future date. 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.
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
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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.
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.
SMALL CAPITALIZATION COMPANIES
Investments in Small Capitalization Companies may involve greater risks and
volatility than investments in larger companies. Small Capitalization Companies
may be at an earlier stage of development, may be subject to greater business
risks, may have limited product lines, reduced market liquidity for, and more
abrupt or erratic price movements in, the trading of their shares, limited
financial resources and less depth in management than more established
companies. In addition, Small Capitalization Companies may have difficulty
withstanding competition from larger more established companies in their
industries.
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 (the 'Code'), and failing to
maintain exemption from the 1940 Act.
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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 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.
OTHER INVESTMENT COMPANIES
As indicated under 'Investment Restrictions and Limitations' below, a Fund may
from time to time invest in securities of other investment companies, subject to
the limits of the 1940 Act. Under the 1940 Act, a Fund may invest a maximum of
10% of its total assets in the securities of other investment companies. In
addition, not more than 5% of the Fund's total assets may be invested in the
securities of any one investment company and a Fund may not purchase more than
3% of the outstanding voting stock of such investment company.
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 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.
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.
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.
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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.
LOANS OF PORTFOLIO SECURITIES
Each of the Funds, except the Cash Management Fund, New York Municipal Money
Market Fund and 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 1998 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.
RULE 144A SECURITIES
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 resales under Rule 144A are liquid or illiquid. Pursuant to
those policies and procedures, each Board of Directors has delegated to the
investment manager the determination as to whether a particular security is
liquid or illiquid requiring that consideration be given to, among other things,
the frequency of trades and quotes for the security, the number of dealers
willing to sell the security and the number of potential purchasers, dealer
undertakings to make a market in the security, the nature of the security and
the time needed to dispose of the security. The Board of Directors periodically
reviews Fund purchases and sales of Rule 144A securities.
To the extent that liquid Rule 144A securities that a Fund holds become
illiquid, due to the lack of sufficient qualified institutional buyers or market
or other conditions, the percentage of a Fund's assets invested in illiquid
assets would increase. The investment manager, under the supervision of the
Boards of Directors, will monitor Fund investments in Rule 144A securities and
will consider
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appropriate measures to enable a Fund to maintain sufficient liquidity for
operating purposes and to meet redemption requests.
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.
FIRM COMMITMENTS AND WHEN-ISSUED SECURITIES
Each Fund may purchase securities on a firm commitment basis, including
when-issued securities. Securities purchased on a firm commitment basis are
purchased for delivery beyond the normal settlement date at a stated price and
yield. No income accrues to the purchaser of a security on a firm commitment
basis prior to delivery. Such securities are recorded as an asset and are
subject to changes in value based upon changes in the general level of interest
rates. Purchasing a security on a firm commitment basis can involve a risk that
the market price at the time of delivery may be lower than the agreed upon
purchase price, in which case there could be an unrealized loss at the time of
delivery. A Fund will only make commitments to purchase securities on a firm
commitment basis with the intention of actually acquiring the securities, but
may sell them before the settlement date if it is deemed advisable. A Fund will
establish a segregated account in which it will maintain liquid assets in an
amount at least equal in value to the Fund's commitments to purchase securities
on a firm commitment basis. If the value of these assets declines, the Fund will
place additional liquid assets in the account on a daily basis so that the value
of the assets in the account is equal to the amount of such commitments.
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
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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 SAI. Loan Participations typically will result in a Fund having
a contractual relationship only with the Lender, not with the borrower. A Fund
will have the right to receive payments of principal, interest and any fees to
which it is entitled only from the Lender selling the Participation and only
upon receipt by the Lender of the payments from the borrower. In connection with
purchasing Loan Participations, a Fund generally will have no right to enforce
compliance by the borrower with the terms of the Loan agreement relating to the
Loan, nor any rights of set-off against the borrower, and the Fund may not
benefit directly from any collateral supporting the Loan in which it has
purchased the Participation. As a result, a Fund will assume the credit risk of
both the borrower and the Lender that is selling the Participation. In the event
of the insolvency of the Lender selling a Participation, a Fund may be treated
as a general creditor of the Lender and may not benefit from any set-off between
the Lender and the borrower. A Fund will acquire Loan Participations only if the
Lender interpositioned between the Fund and the borrower is determined by SBAM
to be creditworthy. When a Fund purchases Assignments from Lenders, the Fund
will acquire direct rights against the borrower on the Loan, except that under
certain circumstances such rights may be more limited than those held by the
assigning Lender.
A Fund may have difficulty disposing of Assignments and Loan Participations. 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
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instruments of similar quality, rate, period until next interest rate reset and
maturity. See 'Net Asset Value.'
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.
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 herein, 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.
BORROWING
Each of the Funds may borrow in certain limited circumstances. See 'Investment
Restrictions and 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 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.
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NON-DIVERSIFICATION
The Asia Growth Fund, New York Municipal Money Market Fund and 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 'Additional Information on Portfolio Investments and Investment
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 SAI. 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 as 'Derivatives'). A Fund's
interest rate transactions may take the form of swaps, caps, floors and collars,
and a Fund's currency transactions may take the form of currency forward
contracts, currency futures contracts, currency swaps and options on currencies.
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. See 'Risk Factors' below. The degree of a Fund's use of Derivatives may be
limited by certain provisions of the Code. see 'Additional Information
Concerning Taxes.'
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Currency Transactions. A Fund may engage in currency transactions with
Counterparties to hedge the value of portfolio securities denominated in
particular currencies against fluctuations in relative value or to generate
income or gain. Currency transactions include currency forward contracts,
exchange-listed currency futures contracts and options thereon, exchange-listed
and OTC options on currencies, and currency swaps. A forward currency contract
involves a privately negotiated obligation to purchase or sell (with delivery
generally required) a specific currency at a future date, which may be any fixed
number of days from the date of the contract agreed upon by the parties, at a
price set at the time of the contract. A currency swap is an agreement to
exchange cash flows based on the notional difference among two or more
currencies and operates similarly to an interest rate swap, which is described
below under 'Swaps, Caps, Floors and Collars.' A Fund may enter into currency
transactions only with Counterparties that the investment manager deems to be
creditworthy.
A Fund may enter into forward currency exchange contracts when the investment
manager believes that the currency of a particular country may suffer a
substantial decline against the U.S. dollar. In those circumstances, a Fund may
enter into a forward contract to sell, for a fixed amount of U.S. dollars, the
amount of that currency approximating the value of some or all of the Fund's
portfolio securities denominated in such currency. Forward contracts may limit
potential gain from a positive change in the relationship between the U.S.
dollar and foreign currencies.
Transaction hedging is entering into a currency transaction with respect to
specific assets or liabilities of the Fund, which will generally arise in
connection with the purchase or sale of the Fund's portfolio securities or the
receipt of income from them. Position hedging is entering into a currency
transaction with respect to portfolio securities positions denominated or
generally quoted in that currency. A Fund will not enter into a transaction to
hedge currency exposure to an extent greater, after netting all transactions
intended wholly or partially to offset other transactions, than the aggregate
market value (at the time of entering into the transaction) of the securities
held by the Fund that are denominated or generally quoted in or currently
convertible into the currency, other than with respect to proxy hedging as
described below.
A Fund may cross-hedge currencies by entering into transactions to purchase or
sell one or more currencies that are expected to increase or decline in value
relative to other currencies to which the Fund has or in which the Fund expects
to have exposure. To reduce the effect of currency fluctuations on the value of
existing or anticipated holdings of its securities, a Fund may also engage in
proxy hedging. Proxy hedging is often used when the currency to which the Fund's
holdings is exposed is difficult to hedge generally or difficult to hedge
against the dollar. Proxy hedging entails entering into a forward contract to
sell a currency, the changes in the value of which are generally considered to
be linked to a currency or currencies in which some or all of the Fund's
securities are or are expected to be denominated, and to buy dollars. The amount
of the contract would not exceed the market value of the Fund's securities
denominated in linked currencies.
Currency transactions are subject to risks different from other portfolio
transactions, as discussed 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
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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.'
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. 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
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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 below.
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
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terms as the option it had purchased. A covered option writer unable to effect a
closing purchase transaction will not be able to sell the underlying security
until the option expires or the underlying security is delivered upon exercise,
with the result that the writer will be subject to the risk of market decline in
the underlying security during such period. Should a Fund choose to exercise an
option, the Fund will purchase in the open market the securities, commodities or
commodity futures contracts underlying the exercised option.
Exchange-listed options on securities and currencies, with certain exceptions,
generally settle by physical delivery of the underlying security or currency,
although in the future, cash settlement may become available. Frequently, rather
than taking or making delivery of the underlying instrument through the process
of exercising the option, listed options are closed by entering into offsetting
purchase or sale transactions that do not result in ownership of the new option.
Index options are cash settled for the net amount, if any, by which the option
is 'in-the-money' (that is, the amount by which the value of the underlying
instrument exceeds, in the case of a call option, or is less than, in the case
of a put option, the exercise price of the option) at the time the option is
exercised.
Put options and call options typically have similar structural characteristics
and operational mechanics regardless of the underlying instrument on which they
are purchased or sold. Thus, the following general discussion relates to each of
the particular types of options discussed in greater detail below. In addition,
many Derivatives involving options require segregation of Fund assets in special
accounts, as described below under 'Use of Segregated and Other Special
Accounts.'
A put option gives the purchaser of the option, upon payment of a premium, the
right to sell, and the writer of the obligation to buy, the underlying security,
index, currency or other instrument at the exercise price. A Fund's purchase of
a put option on a security, for example, might be designed to protect its
holdings in the underlying instrument (or, in some cases, a similar instrument)
against a substantial decline in the market value of such instrument by giving
the Fund the right to sell the instrument at the option exercise price. A call
option, upon payment of a premium, gives the purchaser of the option the right
to buy, and the seller the obligation to sell, the underlying instrument at the
exercise price. A Fund's purchase of a call option on a security, financial
futures contract, index, currency or other instrument might be intended to
protect the Fund against an increase in the price of the underlying instrument
that it intends to purchase in the future by fixing the price at which it may
purchase the instrument. An 'American' style put or call option may be exercised
at any time during the option period, whereas a 'European' style put or call
option may be exercised only upon expiration or during a fixed period prior to
expiration. Exchange-listed options are issued by a regulated intermediary such
as the Options Clearing Corporation ('OCC'), which guarantees the performance of
the obligations of the parties to the options. The discussion below uses the OCC
as an example, but is also applicable to other similar financial intermediaries.
OCC-issued and exchange-listed options, with certain exceptions, generally
settle by physical delivery of the underlying security or currency, although in
the future, cash settlement may become available. Index options are cash settled
for the net amount, if any, by which the option is 'in-the-money' (that is, the
amount by which the value of the underlying instrument exceeds, in the case of a
call option, or is less than, in the case of a put option, the exercise price of
the option) at the time the option is exercised. Frequently, rather than taking
or making delivery of the underlying instrument through the process of
exercising the option, listed options are closed by entering into offsetting
purchase or sale transactions that do not result in ownership of the new option.
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
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of an exchange or the OCC to handle current trading volume or (6) a decision by
one or more exchanges to discontinue the trading of options (or a particular
class or series of options), in which event the relevant market for that option
on that exchange would cease to exist, although any such outstanding options on
that exchange would continue to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours during
which the underlying financial instruments are traded. To the extent that the
option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that would not be reflected in the corresponding option
markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties (collectively referred to as 'Counterparties' and
individually referred to as a 'Counterparty') through a direct bilateral
agreement with the Counterparty. In contrast to exchange-listed options, which
generally have standardized terms and performance mechanics, all of the terms of
an OTC option, including such terms as method of settlement, term, exercise
price, premium, guaranties and security, are determined by negotiation of the
parties. It is anticipated that any Portfolio authorized to use OTC options will
generally only enter into OTC options that have cash settlement provisions,
although it will not be required to do so.
Unless the parties provide for it, no central clearing or guaranty function is
involved in an OTC option. As a result, if a Counterparty fails to make or take
delivery of the security, currency or other instrument underlying an OTC option
it has entered into with the Fund or fails to make a cash settlement payment due
in accordance with the terms of that option, the Fund will lose any premium it
paid for the option as well as any anticipated benefit of the transaction. Thus,
the investment manager must assess the creditworthiness of each such
Counterparty or any guarantor or credit enhancement of the Counterparty's credit
to determine the likelihood that the terms of the OTC option will be met. A Fund
will enter into OTC option transactions only with U.S. Government securities
dealers recognized by the Federal Reserve Bank of New York as 'primary dealers,'
or broker-dealers, domestic or foreign banks, or other financial institutions
that the investment 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.
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(a) Options on Stocks and Stock Indices. A Fund may purchase put and call
options and write covered put and call options on stocks and stock indices
listed on domestic and foreign securities exchanges in order to hedge against
movements in the equity markets or to increase income or gain to the Fund. In
addition, the Fund may purchase options on stocks that are traded over-the-
counter. Options on stock indices are similar to options on specific securities.
However, because options on stock indices do not involve the delivery of an
underlying security, the option represents the holder's right to obtain from the
writer cash in an amount equal to a fixed multiple of the amount by which the
exercise price exceeds (in the case of a put) or is less than (in the case of a
call) the closing value of the underlying stock index on the exercise date.
Currently, options traded include the Standard & Poor's 100 Index of Composite
Stocks, Standard & Poor's 500 Index of Composite Stocks (the 'S&P 500 Index'),
the New York Stock Exchange ('NYSE') Composite Index, the American Stock
Exchange ('AMEX') Market Value Index, the National Over-the-Counter Index and
other standard broadly based stock market indices. Options are also traded in
certain industry or market segment indices such as the Oil Index, the Computer
Technology Index and the Transportation Index. Stock index options are subject
to position and exercise limits and other regulations imposed by the exchange on
which they are traded.
If the investment manager expects general stock market prices to rise, a Fund
might purchase a call option on a stock index or a futures contract on that
index as a hedge against an increase in prices of particular equity securities
it wants ultimately to buy. If the stock index does rise, the price of the
particular equity securities intended to be purchased may also increase, but
that increase would be offset in part by the increase in the value of the Fund's
index option or futures contract resulting from the increase in the index. If,
on the other hand, the investment manager expects general stock market prices to
decline, it might purchase a put option or sell a futures contract on the index.
If that index does decline, the value of some or all of the 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
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decline in the value of the securities included in the Fund's portfolio, or
against an increase in the price of the securities which it plans to purchase,
or in order to preserve or maintain a return or spread on a particular
investment or portion of its portfolio or to achieve a particular return on cash
balances, or in order to increase income or gain. Interest rate and equity swaps
involve the exchange by a Fund with another party of their respective
commitments to make or receive payments based on a notional principal amount.
The purchase of an interest rate or equity cap entitles the purchaser, to the
extent that a specified index exceeds a predetermined level, to receive payments
on a contractually-based principal amount from the party selling the interest
rate or equity cap. The purchase of an interest rate or equity floor entitles
the purchaser, to the extent that a specified index falls below a predetermined
rate, to receive payments on a contractually-based principal amount from the
party selling the interest rate or equity floor. A collar is a combination of a
cap and a floor which preserve a certain return within a predetermined range of
values.
A Fund may enter into interest rate and equity swaps, caps, floors and collars
on either an asset-based or liability-based basis, depending on whether it is
hedging its assets or its liabilities, and will usually enter into interest rate
and equity swaps on a net basis (i.e., the two payment streams are netted out),
with the Fund receiving or paying, as the case may be, only the net amount of
the two payments. The net amount of the excess, if any, of a Fund's obligations
over its entitlements with respect to each interest rate or equity swap will be
accrued on a daily basis, and an amount of liquid assets having an aggregate net
asset value at least equal to the accrued excess will be maintained in a
segregated account by the Fund's custodian in accordance with procedures
established by the Board of Directors. If a Fund enters into an interest rate or
equity swap on other than a net basis, the Fund will maintain a segregated
account in the full amount accrued on 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
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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 transaction
that may be entered into by a Fund. These transactions do not involve the
delivery of securities or other underlying assets or principal. Accordingly, the
risk of loss with respect to interest rate and equity swaps is limited to the
net amount of payments that a Fund is contractually obligated to make, if any.
The effective use of swaps and related transactions by a Fund may depend, among
other things, on the Fund's ability to terminate the transactions at times when
the investment manager deems it desirable to do so. Because swaps and related
transactions are bilateral contractual arrangements between a Fund and
counterparties to the transactions, the Fund's ability to terminate such an
arrangement may be considerably more limited than in the case of an exchange
traded instrument. To the extent a Fund does not, or cannot, terminate such a
transaction in a timely manner, the Fund may suffer a loss in excess of any
amounts that it may have received, or expected to receive, as a result of
entering into the transaction. If the other party to a swap defaults, a Fund's
risk of loss is the net amount of payments that the Fund contractually is
entitled to receive, if any. A Fund may purchase and sell caps, floors and
collars without limitation, subject to the segregated account requirement
described above.
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
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instrument are greater than gains in the value of the Fund's position. In
addition, futures and options markets could be illiquid in some circumstances
and certain over-the-counter options could have no markets. As a result, in
certain markets, a Fund might not be able to close out a transaction without
incurring substantial losses. Although a Fund's use of futures and options
transactions for hedging should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time it will tend to
limit any potential gain to the Fund that might result from an increase in value
of the position. There is also the risk of loss by a Fund of margin deposits in
the event of bankruptcy of a broker with whom the Fund has an open position in a
futures contract or option thereon. Finally, the daily variation margin
requirements for futures contracts create a greater ongoing potential financial
risk than would purchases of options, in which case the exposure is limited to
the cost of the initial premium. However, because option premiums paid by a Fund
are small in relation to the market value of the investments underlying the
options, buying options can result in large amounts of leverage. The leverage
offered by trading in options could cause a Fund's net asset value to be subject
to more frequent and wider fluctuation than would be the case if the Fund did
not invest in options.
As is the case with futures and options strategies, the effective use of swaps
and related transactions by a Fund may depend, among other things, on a Fund's
ability to terminate the transactions at times when SBAM deems it desirable to
do so. To the extent a Fund does not, or cannot, terminate such a transaction in
a timely manner, a Fund may suffer a loss in excess of any amounts that it may
have received, or expected to receive, as a result of entering into the
transaction.
Currency hedging involves some of the same risks and considerations as other
transactions with similar instruments. Currency transactions can result in
losses to a Fund if the currency being hedged fluctuates in value to a degree or
in a direction that is not anticipated. Further, the risk exists that the
perceived linkage between various currencies may not be present or may not be
present during the particular time that the Fund is engaging in proxy hedging.
Currency transactions are also subject to risks different from those of other
portfolio transactions. Because currency control is of great importance to the
issuing governments and influences economic 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.
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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, 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 subcustodian 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.
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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-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 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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INVESTMENT RESTRICTIONS AND LIMITATIONS
Unless otherwise indicated, the investment restrictions described below are
fundamental investment policies which may be changed only when permitted by law,
if applicable, and approved by the holders of a majority of the applicable
Fund's outstanding voting securities, which, as defined by the 1940 Act means
the lesser of: (i) 67% of the shares represented at a meeting at which more than
50% of the outstanding shares are represented; or (ii) more than 50% of the
outstanding shares. Except for: (i) the investment restrictions set forth below
which are indicated as fundamental policies; and (ii) each Fund's investment
objective(s) as described in the Prospectus, the other policies and percentage
limitations referred to in this SAI and in the Prospectus are not fundamental
policies of the Funds and may be changed by vote of 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.
INVESTMENT RESTRICTIONS
ASIA GROWTH FUND, HIGH YIELD BOND FUND, NATIONAL INTERMEDIATE MUNICIPAL FUND,
SMALL CAP GROWTH FUND, STRATEGIC BOND FUND, TOTAL RETURN FUND, AND U.S.
GOVERNMENT INCOME FUND. Each of the Asia Growth Fund, High Yield Bond Fund,
National Intermediate Municipal Fund, Small Cap Growth Fund, Strategic Bond
Fund, Total Return Fund and U.S. Government Income 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 Asia Growth Fund, High Yield Bond Fund, National
Intermediate Municipal Fund, Strategic Bond Fund, Total Return Fund and
U.S. Government Income 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
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affiliated persons so owning 1/2 of 1% together own beneficially more than
5% of such securities;
(9) invest in oil, gas and other mineral leases, provided, however, that
this shall not prohibit a Fund from purchasing publicly traded securities
of companies engaging in whole or in part in such activities;
(10) except with respect to the Asia Growth Fund, purchase the securities
of any issuer if by reason thereof the value of its investment in all
securities of that issuer will exceed 5% of the value of the issuer's total
assets;
(11) except with respect to the Asia Growth Fund purchase securities of
issuers which it is restricted from selling to the public without
registration under the 1933 Act if by reason thereof the value of its
aggregate investment in such classes of securities will exceed 10% of its
total assets, provided, however, that this limitation shall not apply to
Rule 144A securities;
(12) invest more than 5% of its total assets in securities of unseasoned
issuers (other than securities issued or guaranteed by U.S. federal or
state or foreign governments or agencies, instrumentalities or political
subdivisions thereof) which, including their predecessors, have been in
operation for less than three years;
(13) purchase puts, calls, straddles, spreads and any combination thereof
if by reason thereof the value of its aggregate investment in such classes
of securities will exceed 5% of its total assets;
(14) invest in warrants (other than warrants acquired by a Fund as part of
a unit or attached to securities at the time of purchase) if, as a result,
the investments (valued at the lower of cost or market) would exceed 5% of
the value of the Fund's net assets or if, as a result, more than 2% of the
Fund's net assets would be invested in warrants that are not listed on AMEX
or NYSE; or
(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 Asia Growth Fund, High Yield Bond Fund, National Intermediate
Municipal Fund, Small Cap Growth Fund, Strategic Bond Fund and U.S. Government
Income Fund. Restrictions (6) through (15) are non-fundamental policies.
In addition to the above fundamental restrictions, the High Yield Bond Fund,
National Intermediate Municipal Fund, Small Cap Growth Fund, Strategic Bond
Fund, Total Return Fund, and U.S. Government Income Fund may not.
(1a) 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;
(2a) 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
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(3a) invest more than 25% of the total assets of each Fund in the
securities of issuers having their principal activities in any particular
industry, except for obligations issued or guaranteed by the U.S.
government, its agencies or instrumentalities or by any state, territory or
any possession of the United States or any of their authorities, agencies,
instrumentalities or political subdivisions, or with respect to repurchase
agreements collateralized by any of such obligations (for purposes of this
restriction, supranational issuers will be considered to comprise an
industry as will each foreign government that issues securities purchased
by a Fund), provided, however, that each Fund may invest all or
substantially all of its assets in another registered investment company
having substantially the same investment objective(s) and policies and
substantially the same investment restrictions as those with respect to
such Fund.
For purposes of investment limitations (1a) and (3a) 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.'
For the purposes of the investment restrictions 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.
In addition to the fundamental restrictions numbers (1) through (5) above, the
Asia Growth Fund may not:
(1b) 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
(2b) 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).
INVESTMENT RESTRICTIONS
CAPITAL FUND. The Capital Fund may not:
(1) hold more than 25% of the value of its total assets in the securities
of any single company or in the securities of companies in any one
industry. As to 50% of the value of its total assets, the Fund's investment
in any one security other than United States Government obligations will
not exceed 5% of the value of its total assets and as to this 50%, the Fund
will not invest in more than 10% of the outstanding voting securities of
any one issuer;
(2) borrow money or pledge or mortgage its assets, except as described
under 'Additional Information on the Fund's Investment 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;
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(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
Investment Activities and Risk Factors -- Loans of Portfolio Securities' in
this 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;
(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;
(6) 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.);
(7) 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);
(8) 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;
(9) 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.);
(10) 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;
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(11) 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;
(12) 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
(13) invest in interest in oil, gas or other mineral exploration or
development programs.
INVESTMENT RESTRICTIONS
CASH MANAGEMENT FUND. The Cash Management Fund may not:
(1) purchase the securities of any one issuer, other than the U.S.
government, its agencies or instrumentalities, if immediately after such
purchase, more than 5% of the value of the Fund's total assets would be
invested in such issuer; provided, however, that such 5% limitation shall
not apply to repurchase agreements collateralized by obligations of the
U.S. government, its agencies or 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;
(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;
(6) 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);
(7) 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);
(8) 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
55
<PAGE>
<PAGE>
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;
(9) 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);
(10) sell securities short;
(11) purchase or sell commodities or commodity contracts, including futures
contracts;
(12) invest for the purposes of exercising control over management of any
company;
(13) 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;
(14) 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;
(15) 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);
(16) invest directly in interests in oil, gas or other mineral exploration
development programs or mineral leases; or
(17) 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
above 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.
INVESTMENT RESTRICTIONS
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;
56
<PAGE>
<PAGE>
(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;
(5) 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;
(6) act as underwriter of securities of other issuers;
(7) 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;
(8) buy securities from, or sell securities to, any of its officers,
directors, employees, investment manager or distributor, as principals;
(9) 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;
(10) 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;
(11) 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;
(12) 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
(13) purchase or sell real property (including limited partnership
interests) except to the extent described in investment restriction number
6 above.
Investment restrictions (1) through (10) described above are fundamental
policies of the Investors Fund. Restrictions (11) through (13) are
non-fundamental policies of the Investors Fund.
INVESTMENT RESTRICTIONS
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;
57
<PAGE>
<PAGE>
(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);
(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;
(5) 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;
(6) 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);
(7) 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;
(8) 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);
(9) sell securities short;
(10) purchase or sell commodities or commodity contracts, including futures
contracts:
(11) invest for the purpose of exercising control over management of any
company;
(12) 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;
(13) 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;
(14) 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);
(15) invest directly in interests in oil, gas or other mineral exploration
development programs or mineral leases; or
(16) purchase warrants.
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
58
<PAGE>
<PAGE>
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.
* * * * *
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.
59
<PAGE>
<PAGE>
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.
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. [PLEASE UPDATE THE FOLLOWING AS NECESSARY.]
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 Board of
66 Glenwood Drive Chairman, Audit 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
Pfizer, Inc. Committee Member International Inc. Senior Assisting General Counsel
235 East 42nd Street of Pfizer, Inc.
New York, NY 10017
Age: 52
Heath B. McLendon* ................. Director and Managing Director, Salomon 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 SBAM AP
Salomon Brothers Asset President from January 1997 to present. Director of SBAM AP
Management Asia Pacific since July 1996. Vice President and Senior Portfolio
Limited Manager of SBAM AP from April 1995 to June 1996.
Three Exchange Square, From April 1995 to January 1996, Vice President and
Hong Kong Senior Vice President of Salomon Brothers Hong Kong
Age: 34 Limited. From January 1992 to March 1995, Senior
Portfolio Investment Manager of Credit Agricole
Asset Management (South East Asia) Limited.
</TABLE>
60
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION(S) HELD PRINCIPAL OCCUPATION(S) PAST 5 YEARS
- ------------------------------------ ------------------- ----------------------------------------------------
<S> <C> <C>
Peter J. Wilby ..................... Executive Vice Managing Director of SBAM and SBI since January
Age: 39 President 1996. Prior to January 1996, Director of SBAM and
SBI.
Beth A. Semmel ..................... Executive Vice Director of SBAM and SBI since January 1996. From
Age: 37 President 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 1998. Vice
Age: 34 President President of SBAM and SBI from October 1988 to
December 1997.
James E. Craige .................... Executive Vice Director, SBAM and SBI since January 1998. Vice
Age: 30 President President, SBAM and Salomon Brothers Inc from 1992
to December 1997.
Thomas K. Flanagan ................. Executive Vice Director, SBAM and Salomon Brothers Inc since 1991.
Age: 45 President
Pamela P. Milunovich ............... Executive Vice Director of SBAM and SBI since January 1997. Vice
Age: 35 President President of SBAM and SBI from June 1992 to December
1996.
Nancy Noyes ........................ Vice President Director of SBAM and SBI since January 1996. From
Age: 39 August 1992 to January 1996, Vice President of SBAM
and SBI.
Janet S. Tolchin ................... Assistant Treasurer Investment Accounting Manager of SBAM.
Age: 39
</TABLE>
INVESTORS FUND AND CAPITAL FUND
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION(S) HELD PRINCIPAL OCCUPATION(S) PAST 5 YEARS
- ------------------------------------ ------------------- ----------------------------------------------------
<S> <C> <C>
Charles F. Barber .................. Director and Consultant. Formerly, Chairman of the Board of
66 Glenwood Drive Chairman, Audit ASARCO Incorporated.
Greenwich, CT 06830 Committee
Age: 81
Andrew L. Breech ................... Director and President of Dealer Operating Control Service, Inc.
2120 Wilshire Boulevard Chairman, Proxy
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; formerly,
25 Birch Lane of Nominating President, Anna Maria College; Consultant.
Cumberland Foreside, ME 07110 Committee
Age: 67
</TABLE>
61
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION(S) HELD PRINCIPAL OCCUPATION(S) PAST 5 YEARS
- ------------------------------------ ------------------- ----------------------------------------------------
<S> <C> <C>
Clifford M. Kirtland, Jr. .......... Director and Member Member of Advisory Committee, Noro- Moseley
9 North Parkway Square of the Proxy Partners. Formerly, Director of Oxford Industries,
4200 Northside Pkwy, N.W. Committee Shaw Industries, Inc. and Graphic Industries, Inc.
Atlanta, GA 30327 Formerly, Chairman and President of Cox
Age: 74 Communications Inc.
Robert W. Lawless .................. Director and Member President and Chief Executive Officer, University of
2877 East 35th Street of Proxy Committee Tulsa. Formerly, President and Chief Executive
Tulsa, OK 74105 Officer of Texas Tech University and Texas Tech
Age: 61 University Health Sciences Center.
Heath B. McLendon* ................. Director and Managing Director, Salomon 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 President of
P.O. Box #6535 of Nominating Sterling Winthrop Inc., a pharmaceutical company.
SnowMass Village, CO 81615 Committee
Age: 56
Thomas F. Schlafly ................. Director, Audit Of counsel to Peper, Martin, Jensen, Maichel &
8 Portland Place Committee Member Hetlage (law firm) and President of The Saint Louis
St. Louis, MO 63108 and Nominating Brewery, Inc.
Age: 49 Committee Member
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 1997. Vice
Age: 35 (Investors Fund President of SBAM and SBI from June 1992 to December
only) 1996.
Janet Tolchin ...................... Assistant Treasurer Investment Accounting Manager of SBAM.
Age: 39
</TABLE>
COMPENSATION TABLE
The following table provides information concerning the compensation paid during
the fiscal year ended December 31, 1998 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,
1998 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.
62
<PAGE>
<PAGE>
SERIES FUNDS
<TABLE>
<CAPTION>
AGGREGATE TOTAL COMPENSATION
COMPENSATION FROM OTHER FUNDS
NAME FROM THE FUNDS ADVISED BY SBAM(A) TOTAL COMPENSATION(A)
- -------------------------------------------------- --------------- ------------------ ---------------------
<S> <C> <C> <C>
Charles F. Barber................................. $ $ $
Carol L. Colman...................................
Daniel P. Cronin..................................
</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>
AGGREGATE TOTAL COMPENSATION
COMPENSATION FROM OTHER FUNDS
NAME FROM THE FUNDS ADVISED BY SBAM(A) TOTAL COMPENSATION(A)
- -------------------------------------------------- --------------- ------------------ ---------------------
<S> <C> <C> <C>
Charles F. Barber................................. $ $ $
Andrew L. Breech..................................
Carol L. Colman...................................
William R. Dill...................................
Clifford M. Kirtland, Jr..........................
Robert W. Lawless.................................
Louis P. Mattis...................................
Thomas F. Shlafly.................................
</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.
CAPITAL FUND
<TABLE>
<CAPTION>
TOTAL COMPENSATION
AGGREGATE PAID TO DIRECTORS
COMPENSATION FROM OTHER FUNDS
NAME FROM THE FUNDS ADVISED BY SBAM(A) TOTAL COMPENSATION(A)
- -------------------------------------------------- --------------- ------------------ ---------------------
<S> <C> <C> <C>
Charles F. Barber................................. $ $ $
Andrew L. Breech..................................
Carol L. Colman...................................
William R. Dill...................................
Clifford M. Kirtland, Jr..........................
Robert W. Lawless.................................
Louis P. Mattis...................................
Thomas F. Shlafly.................................
</TABLE>
- ------------
(A) The number in parenthesis 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
63
<PAGE>
<PAGE>
attended and are reimbursed for all out-of-pocket expenses relating to
attendance at such meetings. The Directors who are 'interested persons,' as
defined in the 1940 Act, do not receive compensation from their respective Funds
but are reimbursed for all out-of-pocket expenses relating to attendance at such
meetings.
As of February 12, 1999 the officers and Directors of the Funds owned [ %] of
the outstanding Class O shares of the Total Return Fund, owned [ %] of the
outstanding Class O shares of the Asia Growth Fund and [ %] of the outstanding
Class O shares of the Strategic Bond Fund.
[As of February 12, 1999 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, 1999. 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>
Asia Growth Fund.............................
Capital Fund.................................
Cash Management Fund.........................
High Yield Bond Fund.........................
Investors Fund...............................
[Please Insert 5%
shareholder info for
National Intermediate Managerial Fund........ each fund]
New York Municipal Money Market Fund.........
Small Cap Growth Fund........................
Strategic Bond Fund..........................
Total Return Fund............................
U.S. Government Income Fund..................
</TABLE>
64
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<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 an indirect wholly owned subsidiary of Salomon Smith Barney
Holdings Inc, which in turn was a wholly owned subsidiary of Citigroup Inc
('Citigroup').
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, 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 Citigroup. 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
Citigroup. 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 Munic-
65
<PAGE>
<PAGE>
ipal 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, 1998, 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>
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
Year Ended December 31, 1998......................................... $ $ $
CAPITAL FUND
Year Ended December 31, 1996......................................... $1,143,084 $ 0 $ 0
Year Ended December 31, 1997......................................... $1,505,753 $ 0 $ 0
Year Ended December 31, 1998......................................... $ $ $
CASH MANAGEMENT FUND
Year Ended December 31, 1996......................................... $ 36,898 $ 36,898 $ 13,646
Year Ended December 31, 1997......................................... $ 60,655 $ 44,023 $ 0
Year Ended December 31, 1998......................................... $ $ $
HIGH YIELD BOND FUND
Year Ended December 31, 1996......................................... $ 565,248 $191,119 $ 0
Year Ended December 31, 1997......................................... $2,878,280 $371,931 $ 0
Year Ended December 31, 1998......................................... $ $ $
NATIONAL INTERMEDIATE MUNICIPAL FUND
Year Ended December 31, 1996......................................... $ 56,186 $ 56,186 $ 83,959
Year Ended December 31, 1997......................................... $ 64,592 $ 64,592 $ 71,682
Year Ended December 31, 1998......................................... $ $ $
NEW YORK MUNICIPAL MONEY MARKET FUND
Year Ended December 31, 1996......................................... $ 393,078 $ 0 $ 0
Year Ended December 31, 1997......................................... $ 490,138 $ 0 $ 0
Year Ended December 31, 1998......................................... $ $ $
SMALL CAP GROWTH FUND
Year Ended December 31, 1998......................................... $ $ $
STRATEGIC BOND FUND
Year Ended December 31, 1996......................................... $ 146,387 $144,551 $ 0
Year Ended December 31, 1997......................................... $ 430,840 $167,097 $ 0
Year Ended December 31, 1998......................................... $ $ $
TOTAL RETURN FUND
Year Ended December 31, 1996......................................... $ 184,118 $184,118 $102,651
Year Ended December 31, 1997......................................... $ 585,841 $505,682 $ 0
Year Ended December 31, 1998......................................... $ $ $
U.S. GOVERNMENT INCOME FUND
Year Ended December 31, 1996......................................... $ 66,682 $ 66,682 $ 85,462
Year Ended December 31, 1997......................................... $ 77,327 $ 77,327 $ 73,598
Year Ended December 31, 1998......................................... $ $ $
</TABLE>
The Investors Fund pays SBAM a quarterly fee (the 'Base Fee') at the end of each
calendar quarter based on the following rates:
66
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<PAGE>
<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 1/4 is of .10%, which
would occur if the Investors Fund's performance exceeds or is exceeded by the
S&P 500 Index by ten or more percentage points. The performance adjustment will
be paid quarterly based on a rolling one year period.
For purposes of determining the performance adjustment, the investment
performance of the Investors Fund for any one year period shall mean the sum of:
(i) the change in the Fund's net asset value per share during such period; (ii)
the value of cash distributions per share accumulated to the end of such period;
and (iii) the value of capital gains taxes per share (if any) paid or payable on
undistributed realized long-term capital gains accumulated to the end of such
period; expressed as a percentage of its net asset value per share at the
beginning of such period. For this purpose, the value of distributions per share
of realized capital gains and of dividends per share paid from investment income
shall be treated as reinvested in shares of the Investors Fund at the net asset
value per share in effect at the close of business on the record date for the
payment of such distributions and dividends, after giving effect to such
distributions and dividends. In addition, while the Investors Fund does not
anticipate paying any taxes, the value of any capital gains taxes per share paid
or payable on undistributed realized long-term capital gains shall be treated as
reinvested in shares of the Fund at the net asset value per share in effect at
the close of business on the date on which provision is made for such taxes,
after giving effect to such taxes.
For purposes of calculating the performance adjustment, the investment record of
the S&P 500 Index for any one year period shall mean the sum of: (i) the change
in the level of the index during such period; and (ii) the value, computed
consistently with the index, of cash distributions made by companies whose
securities comprise the index accumulated to the end of such period; expressed
as a percentage of the index level at the beginning of such period. For this
purpose, cash distributions on the securities which comprise the index shall be
treated as reinvested in the index at least as frequently as the end of each
calendar quarter following the payment of the dividend.
Prior to 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 and $2,455,501 in management fees for the years ended December 31,
1998, 1997 and 1996, 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
67
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<PAGE>
each of the Investors Fund and the Capital Fund provides that it will continue
for successive annual periods; provided that, with respect to each such
contract, such continuance is specifically approved at least annually: (a) by
the vote of a majority of the directors not parties to the management contract
or 'interested persons' of such parties, as defined in the 1940 Act, cast in
person at a meeting called for the specific purpose of voting on such management
contract and (b) either by the Board of Directors or a majority of the
outstanding voting securities. The management contract may be terminated on 60
days' written notice by either party and will terminate automatically if
assigned.
Under the terms of the management contract between each Fund and SBAM, neither
SBAM nor its affiliates shall be liable for losses or damages incurred by the
Fund (including, with respect to the Asia Growth Fund, the imposition of certain
Hong Kong tax liabilities on the Fund), unless such losses or damages are
attributable to the wilful misfeasance, bad faith or gross negligence on either
the part of SBAM or its affiliate or from reckless disregard by it of its
obligations and duties under the Management Contract ('disabling conduct'). In
addition, the Asia Growth Fund will indemnify SBAM and its affiliates and hold
each of them harmless against any losses or damages, including the imposition of
certain Hong Kong tax liabilities on the Fund, not resulting from disabling
conduct.
Rule 17j-1 under the 1940 Act requires all registered investment companies and
their investment advisers and principal underwriters to adopt written codes of
ethics and institute procedures designed to prevent 'access persons' (as defined
in Rule 17j-1) from engaging in any fraudulent, deceptive or manipulative
trading practices. The Board of Directors for the Series Fund, the Investors
Fund and the Capital Fund have each adopted a code of ethics (the 'Fund Code')
that incorporates personal trading policies and procedures applicable to access
persons of each Fund, which includes officers, directors and other specified
persons who may make, participate in or otherwise obtain information concerning
the purchase or sale of securities by the Fund. In addition, the Fund Code
attaches and incorporates personal trading policies and procedures applicable to
access persons of the investment manager and if applicable, any sub-adviser to
each Fund, which policies serve as such adviser's code of ethics (the 'Adviser
Code'). The Fund and Adviser Codes have been designed to address potential
conflict of interests that can arise in connection with the personal trading
activities of investment company and investment advisory personnel.
Pursuant to the Fund and Adviser Codes, access persons are generally permitted
to engage in personal securities transactions, provided that a transaction does
not involve securities that are being purchased or sold, are being considered
for purchase or sale, or are being recommended for purchase or sale by or for a
Fund. In addition, the Adviser Code contains specified prohibitions and blackout
periods for certain categories of securities and transactions, including a
prohibition on short-term trading and purchasing securities during an initial
public offering. The Adviser Code, with certain exceptions, also requires that
access persons obtain preclearance to engage in personal securities
transactions. Finally, the Fund and Adviser Codes require access persons to
report all personal securities transactions periodically.
68
<PAGE>
<PAGE>
ADMINISTRATOR
SSBC Fund Management, Inc. ('SSBC'), located at 388 Greenwich Street, New York,
New York 10013, provides certain administrative services to each Fund except the
Small Cap Growth Fund for which SBAM (in its capacity as administrator, together
with SSBC, the 'Administrator'), provides certain administrative services. For
the last three fiscal years ended December 31, 1998, 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>
ASIA GROWTH FUND
May 6, 1996 (commencement of operations) to
December 31, 1996....................................................................... $ 24,167
Year Ended December 31, 1997............................................................ $ 60,000
Year Ended December 31, 1998............................................................ $
CASH MANAGEMENT FUND
Year Ended December 31, 1996............................................................ $ 14,400
Year Ended December 31, 1997............................................................ $ 24,396
Year Ended December 31, 1998............................................................ $
HIGH YIELD BOND FUND
Year Ended December 31, 1996............................................................ $ 34,645
Year Ended December 31, 1997............................................................ $307,163
Year Ended December 31, 1998............................................................ $
NATIONAL INTERMEDIATE MUNICIPAL FUND
Year Ended December 31, 1996............................................................ $ 8,145
Year Ended December 31, 1997............................................................ $ 10,335
Year Ended December 31, 1998............................................................ $
NEW YORK MUNICIPAL MONEY MARKET FUND
Year Ended December 31, 1996............................................................ $162,833
Year Ended December 31, 1997............................................................ $196,133
Year Ended December 31, 1998............................................................ $
SMALL CAP GROWTH FUND
Year Ended December 31, 1998............................................................ $
STRATEGIC BOND FUND
Year Ended December 31, 1996............................................................ $
Year Ended December 31, 1997............................................................ $ 45,981
Year Ended December 31, 1998............................................................ $
TOTAL RETURN FUND
Year Ended December 31, 1996............................................................ $ 45,981
Year Ended December 31, 1997............................................................
Year Ended December 31, 1998............................................................ $ 18,789
U.S. GOVERNMENT INCOME FUND
Year Ended December 31, 1996............................................................ $ 7,918
Year Ended December 31, 1997............................................................ $ 10,312
Year Ended December 31, 1998............................................................ $
</TABLE>
DISTRIBUTOR
CFBDS, located at , serves as each Fund's
distributor pursuant to a distribution contract. CFBDS is a wholly owned
subsidiary of Signature Financial Group, Inc.
Rule 12b-1 promulgated under the 1940 Act (the 'Rule') provides, among other
things, that an investment company may bear expenses of distributing its shares
only pursuant to a plan adopted in accordance with the Rule. The Board of
Directors of each Fund (other than the Cash Management Fund and the New York
Municipal Money Market Fund) has adopted a services and distribution plan with
respect to each class of shares (other than Class O) of each Fund pursuant to
the Rule (the 'Plan'). The Board of Directors of each Fund has determined that
there is a reasonable likelihood that the Plan will benefit such Fund and its
shareholders.
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
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<PAGE>
<PAGE>
other material amendments of the Plan must be approved by the Board of
Directors, and by the Directors who are neither 'interested persons,' as defined
in the 1940 Act, nor have any direct or indirect financial interest in the
operation of the Plan or any related agreements, by vote cast in person at a
meeting called for the purpose of considering such amendments. Each Plan and any
related agreements are subject to annual approval by such vote cast in person at
a meeting called for the purpose of voting on the Plan. Each Plan may be
terminated with respect to a Fund or any class thereof at any time by vote of a
majority of the Directors who are not 'interested persons' and have no direct or
indirect financial interest in the operation of the Plan or in any related
agreement or by vote of a majority of the shares of a Fund or class, as the case
may be. For the year ended December 31, 1998, the aggregate amount spent by the
various classes of each Fund under the applicable Plan was as follows:
<TABLE>
<CAPTION>
AMOUNT
SPENT ON
AMOUNTS PRINTING AMOUNT
AMOUNTS PAID TO COMPENSATION AMOUNT AND SPENT ON TOTAL
PAID 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>
ASIA GROWTH FUND
Class A........................ $ $ $ $ $ $ $
Class B........................ $ $ $ $ $ $ $
Class 2........................ $ $ $ $ $ $ $
CAPITAL FUND
Class A........................ $ $ $ $ $ $ $
Class B........................ $ $ $ $ $ $ $
Class 2........................ $ $ $ $ $ $ $
HIGH YIELD BOND FUND
Class A........................ $ $ $ $ $ $ $
Class B........................ $ $ $ $ $ $ $
Class 2........................ $ $ $ $ $ $ $
INVESTORS FUND
Class A........................ $ $ $ $ $ $ $
Class B........................ $ $ $ $ $ $ $
Class 2........................ $ $ $ $ $ $ $
NATIONAL INTERMEDIATE FUND
Class A........................ $ $ $ $ $ $ $
Class B........................ $ $ $ $ $ $ $
Class 2........................ $ $ $ $ $ $ $
SMALL CAP GROWTH FUND
Class A........................ $ $ $ $ $ $ $
Class B........................ $ $ $ $ $ $ $
Class 2........................ $ $ $ $ $ $ $
STRATEGIC BOND FUND
Class A........................ $ $ $ $ $ $ $
Class B........................ $ $ $ $ $ $ $
Class 2........................ $ $ $ $ $ $ $
TOTAL RETURN FUND
Class A........................ $ $ $ $ $ $ $
Class B........................ $ $ $ $ $ $ $
Class 2........................ $ $ $ $ $ $ $
U.S. GOVERNMENT INCOME FUND
Class A........................ $ $ $ $ $ $ $
Class B........................ $ $ $ $ $ $ $
Class 2........................ $ $ $ $ $ $ $
</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
71
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<PAGE>
ended December 31, 1996, 1997 and 1998, the Funds paid aggregate brokerage
commissions, including affiliated brokerage commissions, as follows:
<TABLE>
<CAPTION>
BROKERAGE
AGGREGATE COMMISSIONS PAID
BROKERAGE BY THE FUNDS TO
COMMISSIONS PAID SALOMON, SMITH BARNEY
---------------- ---------------------
<S> <C> <C>
CAPITAL FUND
Year Ended December 31, 1996....................... $621,777 $29,772***
Year Ended December 31, 1997....................... $730,485 $34,728***
Year Ended December 31, 1998....................... $ $
INVESTORS FUND
Year Ended December 31, 1996....................... $619,781 $59,316'D'
Year Ended December 31, 1997....................... $923,728 $68,538'D'
Year Ended December 31, 1998....................... $ $
TOTAL RETURN FUND
Year Ended December 31, 1996....................... $ 42,520 $ 1,758**
Year Ended December 31, 1997....................... $ 91,615 $ 300**
Year Ended December 31, 1998....................... $ $
</TABLE>
- ------------
** Represents 4.1% and 0.3% of total brokerage commissions paid by the Total
Return Fund, and CFBDS executed 4.2% and 0.5% of the aggregate dollar amount
of transactions involving commissions during the fiscal years ended 1996 and
1997, respectively.
*** Represents 4.8% and 4.8% of total brokerage commissions paid by the Capital
Fund, and CFBDS executed 6.3% and 5.4% of the aggregate dollar amount of
transactions involving commissions during the fiscal years ended 1996 and
1997, respectively.
'D' Represents 9.6% and 7.4% of total brokerage commissions paid by the
Investors Fund, and CFBDS executed 9.8% and 7.6% of the aggregate dollar
amount of transactions involving commissions during the fiscal years ended
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. 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.
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
72
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<PAGE>
converted to U.S. dollar equivalents at the current exchange rate. Securities
may be valued by independent pricing services which use prices provided by
market-makers or estimates of market values obtained from yield data relating to
instruments or securities with similar characteristics. Short-term obligations
with maturities of 60 days or less are valued at amortized cost, which
constitutes fair value as determined by the Board of Directors. Amortized cost
involves valuing an instrument at its original cost to a Fund and thereafter
assuming a constant amortization to maturity of any discount or premium,
regardless of the impact of fluctuating interest rates on the market value of
the instrument. All other securities and other assets of a Fund will be valued
at fair value as determined in good faith pursuant to procedures adopted by the
Board of Directors of each Fund.
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.
73
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ADDITIONAL PURCHASE INFORMATION
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 Smith Barney by the close of its business day (normally 5:00 p.m., New
York time) or transmitted by dealers to First Data Investor Services Group, Inc.
('FDISG' or the 'Transfer Agent'), 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 'Buying Shares and Exchanging Shares' in the Prospectus. It is the dealers'
responsibility to ensure that orders are transmitted on a timely basis to
Salomon Smith Barney 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.
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
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.
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 in the Prospectus 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
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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 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.
Right of Accumulation. Reduced sales charges, in accordance with the schedule in
the Prospectus relating to Class A shares, apply to any purchase of Class A
shares if the aggregate investment in Class A shares of all Funds in the Salomon
Brothers Investment Series, excluding holdings in Class B and Class 2 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.
Letter of Intent. For the purposes of determining which sales charge level set
forth in the Prospectus 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 in the Prospectus.
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.
DISTRIBUTION FEES
Each class of each Fund (other than the Cash Management Fund and the New York
Municipal Money Market Fund) is authorized, pursuant to a services and
distribution plan applicable to that class of shares (the 'Class A Plan,' the
'Class B Plan' and the 'Class 2 Plan,' collectively, the 'Plans') adopted
pursuant to Rule 12b-1 promulgated under the 1940 Act, to pay Salomon Smith
Barney an annual service fee with respect to Class A, Class B and Class 2 shares
of the applicable
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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 Smith Barney is also paid an annual distribution
fee with respect to Class B 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. Salomon Smith
Barney is also paid an annual distribution fee at the rate of .50% and .75% of
the value of the average daily net assets of the Bond Fund's Class 2 shares and
the Equity Fund's Class 2 shares, respectively. For this purpose, the Total
Return, Small Cap Growth, Asia Growth, Investors and Capital Funds shall
constitute 'Equity Funds,' while the National Intermediate Municipal, U.S.
Government Income, High Yield Bond and Strategic Bond Funds shall constitute
'Bond Funds.' 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 Smith Barney to selected securities dealers. The
distribution fees are paid to Salomon Smith Barney to compensate for activities
primarily intended to result in the sale of Class B and Class 2 shares.
The expenses incurred in connection with these activities include: costs of
printing and distributing the Funds' Prospectus, SAI and sales literature to
prospective investors; an allocation of overhead and other Salomon Smith Barney
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 Salomon Smith Barney. Under the Plans, Salomon Smith Barney 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, CFBDS will pay broker-dealers at the time of
sale a commission of 5% 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 2 shares of the Bond Funds, CFBDS will pay
broker-dealers at the time of sale a commission of 1.75% of the purchase price
and a quarterly trail fee at an annual rate of .75% which will begin to accrue
one year after settlement. For this purpose, the Total Return, Small Cap Growth,
Asia Growth, Investors and Capital Funds shall constitute 'Equity Funds', while
the National Intermediate Municipal, U.S. Government Income, High Yield Bond and
Strategic Bond Funds shall constitute 'Bond Funds.' In addition, with respect to
Class A shares, CFBDS will pay broker-dealers at the time of sale a commission
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 Salomon Smith Barney and dealers in connection with the sale of shares will
be paid, in the case of Class A and Class 2 shares, from the proceeds of front
end sales charges and the ongoing service fees; and in the cases of Class B and
Class 2 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 shares.
The Plans provide that Salomon Smith Barney may make payments to assist in the
distribution of a Fund's shares out of the other fees received by it or its
affiliates from such Fund, its past profits or any other sources available to
it. From time to time, Salomon Smith Barney may waive receipt of fees under a
Plan while retaining the ability to be paid under such Plan thereafter. The fees
payable to Salomon Smith Barney under the Plans and payments by Salomon Smith
Barney to selected securities dealers are payable without regard to actual
expenses incurred.
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Salomon Smith Barney 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, Salomon Smith Barney 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
Salomon Smith Barney, any applicable Plan payments or Salomon Smith Barney's
other resources. Other than Plan payments, the Funds do not bear distribution
expenses.
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
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the end of each quarter of each taxable year: (i) at least 50% of the market
value of a Fund's assets is represented by cash, cash items, U.S. government
securities, securities of other RICs and other securities with such other
securities limited, in respect of any one issuer, to an amount not greater than
5% of the value of a Fund's assets and 10% of the outstanding voting securities
of such issuer; and (ii) not more than 25% of the value of its assets is
invested in the securities of any one issuer (other than U.S. government
securities or the securities of other RICs).
As a RIC, a Fund will not be subject to federal income tax on its 'net
investment income' (i.e., its investment company taxable income, as that term is
defined in the Code, determined without regard to the deduction for dividends
paid) and 'net capital gain' (the excess of the Fund's net 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, 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
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.
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
withholding or other taxes to foreign governments on dividends and interest. The
investment yield of a Fund investing
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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.
Each Fund may be required to withhold federal income tax at a rate of 31%
('backup withholding') from dividends (other than exempt-interest dividends) and
redemption proceeds paid to non-corporate shareholders. This tax may be withheld
from dividends if (i) the payee fails to furnish the Fund with the payee's
correct taxpayer identification number (e.g., an individual's social security
number), (ii) the Internal Revenue Service ('IRS') notifies the Fund that the
payee has failed to report properly certain interest and dividend income to the
IRS and to respond to notices to that effect, or (iii) when required to do so,
the payee fails to certify that he or she is not subject to backup withholding.
Redemption proceeds may be subject to withholding under the circumstances
described in (i) above. Backup withholding is not an additional tax and any
amounts withheld may be credited against the shareholder's federal income tax
liability.
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.
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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 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 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.
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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 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
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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. 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.
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.
Because the New York Municipal Money Market Fund and the National Intermediate
Municipal Fund will primarily invest in municipal obligations, dividends from
these Funds will generally be exempt from regular federal income tax in the
hands of shareholders. A portion may be subject to the alternative minimum tax,
however. Federal tax law imposes an alternative minimum tax with respect to both
corporations and individuals based on certain items of tax preference. Interest
on certain municipal obligations, such as bonds issued to make loans for housing
purposes or to private entities (but not to certain tax-exempt organizations
such as universities and non-profit hospitals) is included as an item of tax
preference in determining the amount of a taxpayer's alternative minimum taxable
income. To the extent the New York Municipal Money Market Fund or the National
Intermediate Municipal Fund makes such an investment, a portion of the exempt-
interest dividends paid, although otherwise exempt from federal income tax, will
be taxable to shareholders to the extent that their tax liability will be
determined under the alternative minimum tax. The New York Municipal Money
Market Fund and the National Intermediate Municipal Fund will annually supply
shareholders with a report indicating the percentage of Fund income attributable
to municipal obligations which may be subject to the alternative minimum tax.
Additionally, taxpayers must disclose to the Internal Revenue Service on their
tax returns the entire amount of tax-exempt interest (including exempt-interest
dividends on shares of the Fund) received or accrued during the year.
In addition, for corporations, the alternative minimum taxable income is
increased by a percentage of the amount by which an alternative measure of
income ('adjusted current earnings,' referred to as 'ACE') exceeds the amount
otherwise determined to be the alternative minimum taxable income. Interest on
all municipal obligations, and therefore all exempt-interest dividends paid by
the New York Municipal Money Market Fund or the National Intermediate Municipal
Fund, is included in calculating ACE.
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,
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<PAGE>
<PAGE>
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.
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.
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.
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<PAGE>
<PAGE>
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.
PERFORMANCE INFORMATION AND DATA
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 and Class 2 Shares (except
for the Cash Management Fund and the New York Municipal Money Market Fund, which
have no sales charge) include the maximum initial sales charge and for Class B
and Class 2 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.
Total return figures will be given for the most current one-, five- and ten-year
periods, or the life of the relevant class of a Fund to the extent it has not
been in existence for any such periods, and may be given for other periods as
well, such as on a year-by-year basis. When considering average total return
figures for periods longer than one year, it is important to note that the total
return for any one year in the period might have been greater or less than the
average for the entire period. 'Aggregate total return' figures may be used for
various periods, representing the cumulative change in value of an investment in
Fund shares for the specific period (again reflecting changes in share prices
and assuming reinvestment of dividends and distributions). Aggregate total
return may be calculated either with or without the effect of the maximum sales
charge for the Class A shares or Class 2 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 2 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.
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.
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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.
Yield and total return figures are calculated separately for Class A, Class B,
Class 2 and Class O shares of a Fund. In the examples below, 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.
A Fund's performance will vary from time to time depending upon market
conditions, the composition of its portfolio and operating expenses.
Consequently, any given performance quotation should not be considered
representative of the performance of Fund shares for any specified period in the
future. Because performance will vary, it may not provide a basis for comparing
an investment in Fund shares with certain bank deposits or other investments
that pay a fixed return for a stated period of time. Investors comparing a
Fund's performance with that of other mutual funds should give consideration to
the nature, quality and maturity of the respective investment companies'
portfolio securities and market conditions. An investor's principal is not
guaranteed by any Fund.
AVERAGE ANNUAL TOTAL RETURN
A Fund's 'average annual total return' figures, as described and shown in the
Prospectus, are computed according to a formula prescribed by the Commission.
The formula can be expressed as follows:
P(1+T)'pp'n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = Ending Redeemable Value of a hypothetical $1,000 payment made at the
beginning of a 1-5 or 10-year period at the end of such period (or
fractional portion thereof), assuming reinvestment of all dividends and
distributions.
In calculating the ending redeemable value, for Class A and Class 2 shares, the
current maximum front end sales charge (as a percentage of the offering price)
is deducted from the initial $1,000 payment, and for Class B and Class 2 shares,
the applicable CDSC imposed on redemption is deducted. The schedules of front
end sales charges and CDSCs due upon redemption are described under 'Choosing a
Class of Shares to Buy' in the Prospectus.
The Cash Management Fund, New York Municipal Money Market Fund, Investors Fund
and 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. Effective September 14,
1998, Class C shares of each Fund were renamed Class 2 shares.
85
<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 the Prospectus.
The following tables set forth the average annual total returns for each class
of shares of each of the Asia Growth Fund, High Yield Bond Fund, National
Intermediate Fund, Strategic Bond Fund, Total Return Fund, U.S. Government
Income Fund, (in each case, after management fee waiver and reimbursement of
certain expenses), for certain periods of time ending December 31, 1998 and
reflect the effects of the maximum applicable front end sales charges and any
applicable CDSCs payable by an investor under the Multiple Pricing System.
ASIA GROWTH FUND
<TABLE>
<CAPTION>
FROM MAY 6, 1996
(COMMENCEMENT OF
OPERATIONS) THROUGH YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1998
------------------- -----------------
<S> <C> <C>
Class A.................................................................. % %
Class B.................................................................. % %
Class 2.................................................................. % %
Class O.................................................................. % %
</TABLE>
CAPITAL FUND
<TABLE>
<CAPTION>
FROM NOVEMBER 1, 1996
(COMMENCEMENT OF
OPERATIONS OF CLASS A, B
AND 2) THROUGH
DECEMBER 31, 1998 1 YEAR 5 YEARS 10 YEARS
----------------------- ------ ------- --------
<S> <C> <C> <C> <C>
Class A............................................... % % N/A N/A
Class B............................................... % % N/A N/A
Class 2............................................... % % N/A N/A
Class O............................................... N/A % % %
</TABLE>
HIGH YIELD BOND FUND
<TABLE>
<CAPTION>
FROM FEBRUARY 22, 1995
(COMMENCEMENT OF
OPERATIONS) THROUGH YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1998
---------------------- -----------------
<S> <C> <C>
Class A.............................................................. % %
Class B.............................................................. % %
Class 2.............................................................. % %
Class O.............................................................. % %
</TABLE>
INVESTORS FUND
<TABLE>
<CAPTION>
FROM JANUARY 3, 1995
(COMMENCEMENT OF
OPERATIONS OF CLASS A, B
AND 2) THROUGH
DECEMBER 31, 1998 1 YEAR 5 YEARS 10 YEARS
----------------------- ------ ------- --------
<S> <C> <C> <C> <C>
Class A............................................... % % N/A N/A
Class B............................................... % % N/A N/A
Class 2............................................... % % N/A N/A
Class O............................................... N/A % % %
</TABLE>
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<PAGE>
<PAGE>
NATIONAL INTERMEDIATE MUNICIPAL FUND
<TABLE>
<CAPTION>
FROM FEBRUARY 22, 1995
(COMMENCEMENT OF
OPERATIONS) THROUGH YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1998
---------------------- -----------------
<S> <C> <C>
Class A.............................................................. % %
Class B.............................................................. % %
Class 2.............................................................. % %
Class O.............................................................. % %
</TABLE>
SMALL CAP GROWTH FUND
<TABLE>
<CAPTION>
FROM , 1998
(COMMENCEMENT OF
OPERATIONS) THROUGH
DECEMBER 31, 1998
-----------------------
<S> <C>
Class A................................................................................. %
Class B................................................................................. %
Class 2................................................................................. %
Class O................................................................................. %
</TABLE>
STRATEGIC BOND FUND
<TABLE>
<CAPTION>
FROM FEBRUARY 22, 1995
(COMMENCEMENT OF
OPERATIONS) THROUGH YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1998
---------------------- -----------------
<S> <C> <C>
Class A.............................................................. % %
Class B.............................................................. % %
Class 2.............................................................. % %
Class O.............................................................. % %
</TABLE>
TOTAL RETURN FUND
<TABLE>
<CAPTION>
FROM FEBRUARY 22, 1995
(COMMENCEMENT OF
OPERATIONS) THROUGH YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1998
---------------------- -----------------
<S> <C> <C>
Class A.............................................................. % %
Class B.............................................................. % %
Class 2.............................................................. % %
Class O.............................................................. % %
</TABLE>
U.S. GOVERNMENT INCOME FUND
<TABLE>
<CAPTION>
FROM FEBRUARY 22, 1995
(COMMENCEMENT OF
OPERATIONS) THROUGH YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1998
---------------------- -----------------
<S> <C> <C>
Class A.............................................................. % %
Class B.............................................................. % %
Class 2.............................................................. % %
Class O.............................................................. % %
</TABLE>
As described in the Prospectus, 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.
87
<PAGE>
<PAGE>
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
herein, represent the cumulative change in the value of an investment in Fund
shares of such class for the specified period and are computed by the following
formula:
AGGREGATE TOTAL RETURN = ERV-P
-----
P
Where: P = a hypothetical initial payment of $10,000.
ERV = Ending Redeemable Value of a hypothetical $10,000 investment made
at the beginning of a 1-, 5-, or 10-year period at the end of such
period (or fractional portion thereof), assuming reinvestment of
all dividends and distributions.
The following tables set forth the aggregate total return of each class of
shares of the Asia Growth Fund, Capital Fund, High Yield Bond Fund, Investors
Fund, National Intermediate Municipal Fund, Small Cap Growth Fund, Strategic
Growth Fund, Total Return Fund and U.S. Government Income Fund (after management
fee waiver and reimbursement of certain expenses) and Class A, B and 2 shares of
the Capital Fund and Investors Fund for certain periods of time ending December
31, 1998 and reflect the effects of the maximum applicable front end sales
charges and any applicable CDSCs payable by an investor under the Multiple
Pricing System.
ASIA GROWTH FUND
<TABLE>
<CAPTION>
FROM MAY 6, 1996
(COMMENCEMENT OF
OPERATIONS) THROUGH
DECEMBER 31, 1998
-------------------
<S> <C>
Class A...................................................................................... %
Class B...................................................................................... %
Class 2...................................................................................... %
Class O...................................................................................... %
</TABLE>
CAPITAL FUND
<TABLE>
<CAPTION>
FROM NOVEMBER 1, 1996
(COMMENCEMENT OF
OPERATIONS OF CLASS A, B
AND 2) THROUGH
DECEMBER 31, 1998
------------------------
<S> <C>
Class A................................................................................. %
Class B................................................................................. %
Class 2................................................................................. %
</TABLE>
HIGH YIELD BOND FUND
<TABLE>
<CAPTION>
FROM FEBRUARY 22, 1995
(COMMENCEMENT OF
OPERATIONS) THROUGH
DECEMBER 31, 1998
----------------------
<S> <C>
Class A................................................................................... %
Class B................................................................................... %
Class 2................................................................................... %
Class O................................................................................... %
</TABLE>
88
<PAGE>
<PAGE>
INVESTORS FUND
<TABLE>
<CAPTION>
FROM JANUARY 3, 1995
(COMMENCEMENT OF
OPERATIONS OF CLASS A, B
AND 2) THROUGH
DECEMBER 31, 1998
------------------------
<S> <C>
Class A................................................................................. %
Class B................................................................................. %
Class 2................................................................................. %
</TABLE>
NATIONAL INTERMEDIATE MUNICIPAL FUND
<TABLE>
<CAPTION>
FROM FEBRUARY 22, 1995
(COMMENCEMENT OF
OPERATIONS) THROUGH
DECEMBER 31, 1998
----------------------
<S> <C>
Class A................................................................................... %
Class B................................................................................... %
Class 2................................................................................... %
Class O................................................................................... %
</TABLE>
SMALL CAP GROWTH FUND
<TABLE>
<CAPTION>
FROM , 1998
(COMMENCEMENT OF
OPERATIONS) THROUGH
DECEMBER 31, 1998
-----------------------
<S> <C>
Class A................................................................................. %
Class B................................................................................. %
Class 2................................................................................. %
Class O................................................................................. %
</TABLE>
STRATEGIC BOND FUND
<TABLE>
<CAPTION>
FROM FEBRUARY 22, 1995
(COMMENCEMENT OF
OPERATIONS) THROUGH
DECEMBER 31, 1998
----------------------
<S> <C>
Class A................................................................................... %
Class B................................................................................... %
Class 2................................................................................... %
Class O................................................................................... %
</TABLE>
TOTAL RETURN FUND
<TABLE>
<CAPTION>
FROM SEPTEMBER 11, 1995
(COMMENCEMENT OF
OPERATIONS) THROUGH
DECEMBER 31, 1998
-----------------------
<S> <C>
Class A................................................................................. %
Class B................................................................................. %
Class 2................................................................................. %
Class O................................................................................. %
</TABLE>
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<PAGE>
U.S. GOVERNMENT FUND
<TABLE>
<CAPTION>
FROM FEBRUARY 22, 1995
(COMMENCEMENT OF
OPERATIONS) THROUGH
DECEMBER 31, 1998
----------------------
<S> <C>
Class A................................................................................... %
Class B................................................................................... %
Class 2................................................................................... %
Class O................................................................................... %
</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, 1998 the annualized yield and
effective yield for each class of shares of the Cash Management Fund were %
and %, respectively. For the seven-day period ended December 31, 1998 the
annualized yield and effective yield for each class of shares of the New York
Municipal Money Market Fund were % and %, 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:
Yield = 2[(a-b + 1)'pp'6 - 1]
--
cd
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends
d = the maximum offering price per share on the last day of the
period
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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,
1998 was % for Class A, % for Class B, % for Class 2 and %
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 Class O shares of the New York Municipal Money
Market Fund for the seven-day period ended December 31, 1998 was %. Because
Class A, B and 2 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 2 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, 1998 was % for Class
A, % for Class B, % for Class 2 and % 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.
SHAREHOLDER SERVICES
Exchange Privilege. Shareholders may exchange all or part of their Fund shares
for shares of the same class of other Funds in the Salomon Brothers Investment
Series, as indicated in the Prospectus, to the extent such shares are offered
for sale in the shareholder's state of residence.
The exchange privilege enables shareholders of a Fund to acquire shares in a
Fund with different investment objectives when they believe that a shift between
Funds is an appropriate investment decision. This privilege is available to
shareholders residing in any state in which the Fund shares being acquired may
legally be sold.
Exercise of the exchange privilege is treated as a sale and purchase for federal
income tax purposes and, depending on the circumstances, a short- or long-term
capital gain or loss may be realized. The price of the shares of the fund into
which shares are exchanged will be the new cost basis for tax purposes.
Upon receipt of proper instructions and all necessary supporting documents,
shares submitted for exchange are redeemed at the then-current net asset value
and the proceeds immediately invested in shares of the Fund being acquired at a
price equal to the then current net asset value of such shares plus any
applicable sales charge.
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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
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.
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 2
shares, if an investor redeems Class B or Class 2 shares and pays a CDSC upon
redemption, and then uses those proceeds to purchase Class B or Class 2 shares
of any Fund within 60 days, the Class B or Class 2 shares purchased will be
credited with any CDSC paid in connection with the prior redemption. There are
no restrictions on the number of times a shareholder may use the Reinstatement
Privilege.
Any gain recognized on a redemption or repurchase is taxable despite the
reinstatement in the Fund. Any loss realized as a result of the redemption or
repurchase may not be allowed as a deduction for federal income tax purposes but
may be applied, depending on the amount reinstated, to adjust the cost basis of
the shares acquired upon reinstatement. In addition, if the shares redeemed or
repurchased had been acquired within the 60 days preceding the redemption or
repurchase, the amount of any gain or loss on the redemption or repurchase may
have to be computed without regard to any sales charges incurred on the redeemed
or repurchased shares (except to the extent those sales charges exceed the sales
charges waived in connection with the reinstatement).
Self Employed Retirement Plans. The Funds offer a prototype retirement plan for
self-employed individuals. Under such plan, self-employed individuals may
contribute out of earned income to purchase Fund shares.
Boston Safe Deposit and Trust Company ('Boston Safe') has agreed to serve as
custodian and furnish the services provided for in the plan and the related
custody agreement. Boston Safe will charge individuals adopting a self employed
retirement plan an application fee as well as certain additional fees for its
services under the custody agreement.
For information required for adopting a self employed retirement plan, including
information on fees, obtain the form of the plan and custody agreement available
from a Fund. Because application of particular tax provisions will vary
depending on each individual's situation, consultation with a financial adviser
regarding a self employed retirement plan is recommended.
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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.
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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.
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,
Asia Growth Fund, Cash Management Fund, High Yield Bond Fund, Institutional
Money Market Fund (formerly, the U.S. Treasury Securities Money Market Fund),
National Intermediate Municipal Fund, New York Municipal Money Market Fund,
Small Cap Growth Fund, Strategic Bond Fund, Total Return Fund, and the U.S.
Government Income 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 February 12, 1999, Northstar Advantage Funds own more than 25% of the
outstanding voting securities of Cash Management Fund and Citigroup 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 the Prospectus and the SAI 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 and the SAI.
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.
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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.
As used in this SAI and the Prospectus, the term 'majority', when referring to
the approvals to be obtained from shareholders in connection with matters
affecting a particular Fund or any other single portfolio (e.g., approval of
investment management contracts) 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.
CUSTODIAN AND TRANSFER AGENT
PNC Bank, N.A. ('PNC'), located at Airport Business Center, International Court
2, 200 Stevens Drive, Lester, Pennsylvania 19133, currently serves as custodian
for each Fund except the Asia Growth Fund. The Chase Manhattan Bank, N.A.,
located at Chase Metrotech Center, Brooklyn, NY, serves as custodian for Asia
Growth Fund and together with PNC in its capacity as custodian, the
'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,
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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
PricewaterhouseCoopers LLP ('PricewaterhouseCoopers') 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 the Prospectus and SAI have been so incorporated by
reference in reliance on the report of PriceWaterhouseCoopers, independent
accountants, given on the authority of that firm as experts in auditing and
accounting. PricewaterhouseCoopers' address is 1177 Avenue of the Americas, New
York, New York 10036.
COUNSEL
Simpson Thacher & Bartlett serves as counsel to each Fund, and is located at 425
Lexington Avenue, New York, New York 10017-3954.
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 Asia Growth Fund, Capital Fund, Cash
Management Fund, High Yield Bond Fund, Investors Fund, National Intermediate
Municipal Fund, New York Municipal Money Market Fund, Strategic Bond Fund, Total
Return Fund and U.S. Government Income Fund for the fiscal year ended December
31, 1998 contained in the 1998 Annual Report of the Investment Series, are
incorporated by reference into this SAI.
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APPENDIX A:
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 State borrowings for the 1997-98 fiscal year is subject to
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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 ('SDOB') 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 approved by the federal
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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 State to
account
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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 CRE 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 and 1995. General Fund disbursements totaled $32.68
billion for the 1995-96 fiscal year, a decrease of 2.2 percent
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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 CRE.
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.
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
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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 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
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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, 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
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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
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
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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
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.
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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 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
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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+ 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
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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 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
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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 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
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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 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.
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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, 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
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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 fi
scal 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.
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, there can be no assurance
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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 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.
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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 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
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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 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
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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.
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
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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 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
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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 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;
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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 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
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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 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.
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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
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.
A-27
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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.
A-28
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APPENDIX B:
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.
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.
B-1
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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 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.
B-2
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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.
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.
B-3
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A -- Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB -- Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.
The ratings set forth above may be modified by the addition of a plus or minus
to show relative standing within the major rating categories.
MOODY'S RATINGS OF STATE AND MUNICIPAL NOTES
MIG-1/VMIG-1 -- Notes rated MIG-1/VMIG-1 are of the best quality. There is
present strong protection by established cash flows, superior liquidity support
or broad-based access to the market for refinancing.
MIG-2/VMIG-2 -- Notes which are rated MIG-2/VMIG-2 are of high-quality. Margins
of protection are ample though not so large as in the preceding group.
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.
B-4
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The short-term rating places greater emphasis than a long-term rating on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.
FITCH'S SHORT-TERM RATINGS ARE AS FOLLOWS:
F-1+ -- Issues assigned this rating are regarded as having the strongest degree
of assurance for timely payment.
F-1 -- Issues assigned this rating reflect an assurance of timely payment only
slightly less in degree than issues rated F-1+.
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
Statement of Additional Information and in the Prospectus.
B-5
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ITEM 22. FINANCIAL STATEMENTS
Registrant's Annual Report for the fiscal year ended December 31, 1998 will
be filed by amendment.
SALOMON BROTHERS INVESTORS FUND INC
PART C. OTHER INFORMATION
ITEM 23. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------------------------------------------------------------------------------------------------------
<C> <S>
(a)1 -- Registrant's Articles of Incorporation, as amended, are incorporated by reference to Exhibit 1 of
Post-Effective Amendment No. 40 to the Registration Statement on Form N-1A.
(a)2 -- Registrant's Articles of Incorporation, as amended, on April 24, 1989, are incorporated by reference to
Exhibit 1(b) of Post-Effective Amendment No. 50 to the Registration Statement on Form N-1A.
(a)3 -- Registrant's Articles of Incorporation, as amended on April 30, 1990, are incorporated by reference to
Exhibit 1(c) of Post-Effective Amendment No. 52 to the Registration Statement on Form N-1A.
(a)4 -- Form of Amended and Restated Articles of Incorporation of Registrant are incorporated by reference to
Exhibit 1(d) of Post-Effective Amendment No. 60 to the Registration Statement on Form N-1A.
(b)1 -- Registrant's By-Laws, as amended, are incorporated by reference to Exhibit 2 of Post-Effective Amendment
No. 46 to the Registration Statement on Form N-1A.
(b)2 -- Registrant's By-Laws, as amended as of May 1, 1994, are incorporated by reference to Exhibit 2(a) of
Post-Effective Amendment No. 58 to the Registration Statement on Form N-1A.
(c) -- Not applicable.
(d) -- Management Contract between Registrant and Salomon Brothers Asset Management Inc dated November 28, 1997
incorporated by reference to Exhibit 5 of Post-Effective Amendment No. 67 to the Registration Statement
on Form N-1A.
(e) -- Distribution Agreement between Registrant and CFBDS, Inc dated September 1, 1998 is filed herein.
(f) -- Not applicable.
(g) -- Custodian Agreement between Registrant and PNC Bank, National Association will be filed by amendment.
(h)1 -- Form of Amendment to Transfer Agency Agreement between Registrant and The Shareholders Services Group,
Inc is incorporated herein by reference to Exhibit 9(b) of Post-Effective Amendment No. 60 to the
Registration Statement on Form N-1A.
(h)2 -- Form of Administration Agreement between the Registrant and Salomon Brothers Asset Management Inc is
filed herein.
(i) -- Legal opinion is incorporated by reference to Rule 24f-2 Notice as filed with the SEC on February 28,
1998.
(j) -- Consent of PricewaterhouseCoopers LLP will be filed by amendment.
(k) -- Not applicable.
(l)1 -- Letter Agreement re: initial capital is incorporated by reference to Exhibit 13 of Post-Effective
Amendment No. 40 to the Registration Statement on Form N-1A.
(l)2 -- Form of Share Purchase Agreement re: purchase of Class A, Class B and Class C shares is incorporated
herein by reference to Exhibit 13(b) of Post-Effective Amendment No. 60 to the Registration Statement on
Form N-1A.
(m) -- Form of Amended Services and Distribution Plan will be filed by amendment.
(n) -- Financial Data Schedule will be filed by amendment.
(o) -- Form of Multiclass Plan Pursuant to Rule 18f-3 under the Investment Company Act of 1940 for the Salomon
Brothers Investors Fund Inc is incorporated by reference to Exhibit 18(b) to Post-Effective Amendment
No. 61 to the Registration Statement on Form N-1A.
</TABLE>
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ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Certain portfolios of the Registrant may be deemed to be under common
control with Salomon Brothers Capital Fund Inc because the same (or an
affiliated) entity owns greater than 25% of the outstanding shares of one or
more classes of shares of such portfolios and such fund.
ITEM 25. INDEMNIFICATION
Reference is made to Article Seventh of Registrant's Article of
Incorporation, and Section 4 of the Distribution Contract.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the 'Securities Act') may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant understands that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
The list required by this Item 28 of officers and directors of Salomon
Brothers Asset Management Inc ('SBAM'), together with information as to any
other business, profession, vocation or employment of a substantial nature
engaged in by such officers and directors during the past two years, is
incorporated by reference to Schedules A and D of Form ADV filed by SBAM
pursuant to the Advisers Act (SEC File No. 801-32046).
ITEM 27. PRINCIPAL UNDERWRITERS
(a) CFBDS, Inc., ('CFBDS') the Registrant's Distributor, is also the
distributor for the following Smith Barney funds: Concert Investment Series,
Consulting Group Capital Markets Funds, Greenwich Street Series Fund, Smith
Barney Adjustable Rate Government Income Fund, Smith Barney Aggressive Growth
Fund Inc., Smith Barney Appreciation Fund, Inc., Smith Barney Arizona Municipals
Fund Inc., Smith Barney California Municipals Fund Inc., Smith Barney Concert
Allocation Series Inc., Smith Barney Equity Funds, Smith Barney Fundamental
Value Fund Inc., Smith Barney Funds, Inc., Smith Barney Income Funds, Smith
Barney Institutional Cash Management Fund, Inc., Smith Barney Investment Funds
Inc., Smith Barney Investment Trust, Smith Barney Managed Governments Fund Inc.,
Smith Barney Managed Municipals Fund Inc., Smith Barney Massachusetts Municipals
Fund, Smith Barney Money Funds, Inc., Smith Barney Muni Funds, Smith Barney
Municipal Money Market Fund, Inc., Smith Barney Natural Resources Fund Inc.,
Smith Barney New Jersey Municipals Fund Inc., Smith Barney Oregon Municipals
Fund Inc., Smith Barney Principal Return Fund, Smith Barney Small Cap Blend
Fund, Inc., Smith Barney Telecommunications Trust, Smith Barney Variable Account
Funds, Smith Barney World Funds, Inc., Travelers Series Fund Inc., and various
series of unit investment trusts.
CFBDS also serves as the distributor for the following funds: The Travelers
Fund UL for Variable Annuities, The Travelers Fund VA for Variable Annuities,
The Travelers Fund BD for Variable Annuities, The Travelers Fund BD II for
Variable Annuities, The Travelers Fund BD III for Variable Annuities, The
Travelers Fund BD IV for Variable Annuities, The Travelers Fund ABD for Variable
Annuities, The Travelers Fund ABD II for Variable Annuities, The Travelers
Separate Account PF for Variable Annuities, The Travelers Separate Account PF II
for Variable Annuities, The Travelers Separate Account QP for Variable
Annuities, The Travelers Separate Account TM for Variable Annuities, The
Travelers Separate Account TM II for Variable Annuities, The Travelers Separate
Account Five for Variable Annuities, The Travelers Separate Account Six for
Variable Annuities, The
C-2
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Travelers Separate Account Seven for Variable Annuities, The Travelers Separate
Account Eight for Variable Annuities, The Travelers Fund UL for Variable
Annuities, The Travelers Fund UL II for Variable Annuities, The Travelers
Variable Life Insurance Separate Account One, The Travelers Variable Life
Insurance Separate Account Two, The Travelers Variable Life Insurance Separate
Account Three, The Travelers Variable Life Insurance Separate Account Four, The
Travelers Separate Account MGA, The Travelers Separate Account MGA II, The
Travelers Growth and Income Stock Account for Variable Annuities, The Travelers
Quality Bond Account for Variable Annuities, The Travelers Money Market Account
for Variable Annuities, The Travelers Timed Growth and Income Stock Account for
Variable Annuities, The Travelers Timed Short-Term Bond Account for Variable
Annuities, The Travelers Timed Aggressive Stock Account for Variable Annuities,
The Travelers Timed Bond Account for Variable Annuities.
In addition, CFBDS, the Registrant's Distributor, is also the distributor
for CitiFunds Multi-State Tax Free Trust, CitiFunds Premium Trust, CitiFunds
Institutional Trust, CitiFunds Tax Free Reserves, CitiFunds Trust I, CitiFunds
Trust II, CitiFunds Trust III, CitiFunds International Trust, CitiFunds Fixed
Income Trust, CitiSelect VIP Folio 200, CitiSelect VIP Folio 300, CitiSelect VIP
Folio 400, CitiSelect VIP Folio 500, CitiFunds Small Cap Growth VIP Portfolio.
CFBDS is also the placement agent for Large Cap Value Portfolio, Small Cap Value
Portfolio, International Portfolio, Foreign Bond Portfolio, Intermediate Income
Portfolio, Short-Term Portfolio, Growth & Income Portfolio, U.S. Fixed Income
Portfolio, Large Cap Growth Portfolio, Small Cap Growth Portfolio, International
Equity Portfolio, Balanced Portfolio, Government Income Portfolio, Tax Free
Reserves Portfolio, Cash Reserves Portfolio and U.S. Treasury Reserves
Portfolio.
In addition, CFBDS is also the distributor for the following Salomon
Brothers funds: Salomon Brothers Opportunity Fund Inc., Salomon Brothers
Investors Fund Inc., Salomon Brothers Capital Fund Inc., Salomon Brothers Series
Funds Inc., Salomon Brothers Institutional Series Funds Inc., Salomon Brothers
Variable Series Funds Inc.
In addition, CFBDS is also the distributor for the Centurion Funds, Inc.
(b) The information required by this Item 27 with respect to each director
and officer of CFBDS is incorporated by reference to Schedule A of Form 8D filed
by CFBDS pursuant to the Securities and Exchange Act of 1934 (File No. 8-32417).
(c) Not applicable.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
(1) SBAM
7 World Trade Center
New York, New York 10048
(2) PNC Bank, National Associates
Airport Business Center
International Court 2
200 Stevens Drive
Lester, PA 19113
(3) First Data Investor Services Group, Inc.
P.O. Box 5127
Westborough, Massachusetts 01581-5127
ITEM 29. MANAGEMENT SERVICES
Not applicable.
ITEM 30. UNDERTAKINGS
The Registrant hereby undertakes to furnish each person to whom a
Prospectus is delivered with a copy of the Registrant's latest Annual Report to
shareholders upon request and without charge.
C-3
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, and
the Investment Company Act of 1940, as amended, the Registrant has duly caused
this Post-Effective Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York,
and State of New York, on the 24th day of February, 1999.
SALOMON BROTHERS INVESTORS FUND INC
(Registrant)
By /s/ HEATH B. MCLENDON
...................................
HEATH B. MCLENDON
PRESIDENT
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Post-Effective Amendment to the Registration Statement has been signed
below by the following persons in the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ -------------------------------------------- -------------------
<C> <S> <C>
/s/ HEATH B. MCLENDON President and Director (Principal Executive February 24, 1999
......................................... Officer)
(HEATH B. MCLENDON)
/s/ LEWIS E. DAIDONE Executive Vice President and Treasurer February 24, 1999
......................................... (Principal Financial and Accounting
(LEWIS E. DAIDONE) Officer)
* Director February 24, 1999
.........................................
(CHARLES F. BARBER)
* Director February 24, 1999
.........................................
(ANDREW L. BREECH)
* Director February 24, 1999
.........................................
(CAROL L. COLMAN)
* Director February 24, 1999
.........................................
(WILLIAM R. DILL)
* Director February 24, 1999
.........................................
(CLIFFORD M. KIRTLAND, JR.)
* Director February 24, 1999
.........................................
(ROBERT W. LAWLESS)
* Director February 24, 1999
.........................................
(LOUIS P. MATTIS)
</TABLE>
C-4
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ -------------------------------------------- -------------------
<C> <S> <C>
* Director February 24, 1999
.........................................
(THOMAS F. SCHLAFLY)
*By: /s/ LEWIS E. DAIDONE February 24, 1999
...............................
(LEWIS E. DAIDONE, AS
ATTORNEY-IN-FACT)
</TABLE>
C-5
<PAGE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------------------------------------------------------------------------------------------------------
<S> <C>
(e) -- Distribution Agreement
(h)(2) -- Form of Administration Agreement
</TABLE>
C-6
<PAGE>
<PAGE>
FORM OF
DISTRIBUTION AGREEMENT
September 1, 1998
CFBDS, Inc.
21 Milk Street
Boston, MA 02109
Dear Sirs:
This is to confirm that, in consideration of the agreements hereinafter
contained, the above-named investment company (the "Fund") has agreed that you
shall be, for the period of this Agreement, the non-exclusive principal
underwriter and distributor of shares of the Fund. For purposes of this
Agreement, the term "Shares" shall mean shares of the Fund.
1. Services as Principal Underwriter and Distributor
1.1 You will act as agent for the distribution of Shares covered by,
and in accordance with, the registration statement, prospectus and statement of
additional information then in effect under the Securities Act of 1933, as
amended (the "1933 Act"), and the Investment Company Act of 1940, as amended
(the "1940 Act"), and will transmit or cause to be transmitted promptly any
orders received by you or those with whom you have sales or servicing agreements
for purchase or redemption of Shares to the Transfer and Dividend Disbursing
Agent for the Fund of which the Fund has notified you in writing.
1.2 You agree to use your best efforts to solicit orders for the
sale of Shares. It is contemplated that you will enter into sales or servicing
agreements with registered securities brokers and banks and into servicing
agreements with financial institutions and other industry professionals, such as
investment advisers, accountants and estate planning firms. In entering into
such agreements, you will act only on your own behalf as principal underwriter
and distributor. You will not be responsible for making any distribution plan or
service fee payments pursuant to any plans the Fund may adopt or agreements it
may enter into.
1.3 You shall act as the non-exclusive principal underwriter and
distributor of Shares in compliance with all applicable laws, rules, and
regulations, including, without limitation, all rules and regulations made or
adopted from time to time by the Securities and Exchange Commission (the "SEC")
pursuant to the 1933 Act or the 1940 Act or by any securities association
registered under the Securities Exchange Act of 1934, as amended.
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<PAGE>
1.4 Whenever in their judgment such action is warranted for any
reason, including, without limitation, market, economic or political conditions,
the Fund's officers may decline to accept any orders for, or make any sales of,
any Shares until such time as those officers deem it advisable to accept such
orders and to make such sales and the Fund shall advise you promptly of such
determination.
2. Duties of the Fund
2.1 The Fund agrees to pay all costs and expenses in connection with
the registration of Shares under the 1933 Act, and all expenses in connection
with maintaining facilities for the issue and transfer of Shares and for
supplying information, prices and other data to be furnished by the Fund
hereunder, and all expenses in connection with the preparation and printing of
the Fund's prospectuses and statements of additional information for regulatory
purposes and for distribution to shareholders; provided however, that nothing
contained herein shall be deemed to require the Fund to pay any costs of
advertising or marketing the sale of Shares.
2.2 The Fund agrees to execute any and all documents and to
furnish any and all information and otherwise to take any other actions that may
be reasonably necessary in the discretion of the Fund's officers in connection
with the qualification of Shares for sale in such states and other U.S.
jurisdictions as the Fund may approve and designate to you from time to time,
and the Fund agrees to pay all expenses that may be incurred in connection with
such qualification. You shall pay all expenses connected with your own
qualification as a securities broker or dealer under state or Federal laws and,
except as otherwise specifically provided in this Agreement, all other expenses
incurred by you in connection with the sale of Shares as contemplated in this
Agreement.
2.3 The Fund shall furnish you from time to time, for use in
connection with the sale of Shares, such information reports with respect to the
Fund and the Shares as you may reasonably request, all of which shall be signed
by one or more of the Fund's duly authorized officers; and the Fund warrants
that the statements contained in any such reports, when so signed by the Fund's
officers, shall be true and correct. The Fund also shall furnish you upon
request with (a) the reports of the annual audits of the financial statements of
the Fund made by independent certified public accountants retained by the Fund
for such purpose; (b) semi-annual unaudited financial statements pertaining to
the Fund; (c) quarterly earnings statements prepared by the Fund; (d) a monthly
itemized list of the securities in the Fund's portfolio; (e) monthly balance
sheets as soon as practicable after the end of each month; (f) the current net
asset value and offering price per share for the Fund on each day such net asset
value is computed; and (g) from time to time such additional information
regarding the financial condition of the Fund as you may reasonably request.
3. Representations and Warranties
The Fund represents to you that all registration statements,
prospectuses and statements of additional information filed by the Fund with the
SEC under the 1933 Act and the 1940 Act with respect to the Shares have been
prepared in conformity with the requirements of said Acts and the rules and
regulations of the SEC thereunder. As used in this Agreement, the terms
"registration statement", "prospectus" and "statement of additional information"
shall mean any registration statement, prospectus and statement of additional
information filed by the Fund with the SEC and any amendments and supplements
thereto filed by the Fund with the SEC. The Fund represents
2
<PAGE>
<PAGE>
and warrants to you that any such registration statement, prospectus and
statement of additional information, when such registration statement becomes
effective and as such prospectus and statement of additional information are
amended and supplemented, includes at the time of such effectiveness, amendment
or supplement all statements required to be contained therein in conformance
with the 1933 Act, the 1940 Act and the rules and regulations of the SEC; that
all statements of material fact contained in any registration statement,
prospectus or statement of additional information will be true and correct when
such registration statement becomes effective; and that neither any registration
statement nor any prospectus or statement of additional information when such
registration statement becomes effective will include an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading to a purchaser of the
Fund's Shares. The Fund may, but shall not be obligated to, propose from time to
time such amendment or amendments to any registration statement and such
supplement or supplements to any prospectus or statement of additional
information as, in the light of future developments, may, in the opinion of the
Fund, be necessary or advisable. If the Fund shall not propose such amendment
or amendments and/or supplement or supplements within fifteen days after receipt
by the Fund of a written request from you to do so, you may, at your option,
terminate this Agreement or decline to make offers of the Fund's Shares until
such amendments are made. The Fund shall not file any amendment to any
registration statement or supplement to any prospectus or statement of
additional information without giving you reasonable notice thereof in advance;
provided, however, that nothing contained in this Agreement shall in any way
limit the Fund's right to file at any time such amendments to any registration
statement and/or supplements to any prospectus or statement of additional
information, of whatever character, as the Fund may deem advisable, such right
being in all respects absolute and unconditional.
4. Indemnification
4.1 The Fund authorizes you to use any prospectus or statement of
additional information furnished by the Fund from time to time, in connection
with the sale of Shares. The Fund agrees to indemnify, defend and hold you, your
several officers and directors, and any person who controls you within the
meaning of Section 15 of the 1933 Act, free and harmless from and against any
and all claims, demands, liabilities and expenses (including the cost of
investigating or defending such claims, demands or liabilities and any such
counsel fees incurred in connection therewith) which you, your officers and
directors, or any such controlling person, may incur under the 1933 Act or under
common law or otherwise, arising out of or based upon any untrue statement, or
alleged untrue statement, of a material fact contained in any registration
statement, any prospectus or any statement of additional information or arising
out of or based upon any omission, or alleged omission, to state a material fact
required to be stated in any registration statement, any prospectus or any
statement of additional information or necessary to make the statements in any
of them not misleading; provided, however, that the Fund's agreement to
indemnify you, your officers or directors, and any such controlling person shall
not be deemed to cover any claims, demands, liabilities or expenses arising out
of any statements or representations made by you or your representatives or
agents other than such statements and representations as are contained in any
prospectus or statement of additional information and in such financial and
other statements as are furnished to you pursuant to paragraph 2.3 of this
Agreement; and further provided that the Fund's agreement to indemnify you and
the Fund's representations and warranties herein before set forth in paragraph 3
of this Agreement shall not be deemed to cover any liability to the Fund or its
shareholders to which you would otherwise be subject by reason of willful
misfeasance, bad faith or gross negligence in the performance of your duties, or
by reason of your
3
<PAGE>
<PAGE>
reckless disregard of your obligations and duties under this Agreement. The
Fund's agreement to indemnify you, your officers and directors, and any such
controlling person, as aforesaid, is expressly conditioned upon the Fund's being
notified of any action brought against you, your officers or directors, or any
such controlling person, such notification to be given by letter or by telegram
addressed to the Fund at its principal office in New York, New York and sent to
the Fund by the person against whom such action is brought, within ten days
after the summons or other first legal process shall have been served. The
failure so to notify the Fund of any such action shall not relieve the Fund from
any liability that the Fund may have to the person against whom such action is
brought by reason of any such untrue, or alleged untrue, statement or omission,
or alleged omission, otherwise than on account of the Fund's indemnity agreement
contained in this paragraph 4.1. The Fund will be entitled to assume the defense
of any suit brought to enforce any such claim, demand or liability, but, in such
case, such defense shall be conducted by counsel of good standing chosen by the
Fund. In the event the Fund elects to assume the defense of any such suit and
retains counsel of good standing, the defendant or defendants in such suit shall
bear the fees and expenses of any additional counsel retained by any of them;
but if the Fund does not elect to assume the defense of any such suit, the Fund
will reimburse you, your officers and directors, or the controlling person or
persons named as defendant or defendants in such suit, for the reasonable fees
and expenses of any counsel retained by you or them. The Fund's indemnification
agreement contained in this paragraph 4.1 and the Fund's representations and
warranties in this Agreement shall remain operative and in full force and effect
regardless of any investigation made by or on behalf of you, your officers and
directors, or any controlling person, and shall survive the delivery of any of
the Fund's Shares. This agreement of indemnity will inure exclusively to your
benefit, to the benefit of your several officers and directors, and their
respective estates, and to the benefit of the controlling persons and their
successors. The Fund agrees to notify you promptly of the commencement of any
litigation or proceedings against the Fund or any of its officers or Board
members in connection with the issuance and sale of any of the Fund's Shares.
4.2 You agree to indemnify, defend and hold the Fund, its several
officers and Board members, and any person who controls the Fund within the
meaning of Section 15 of the 1933 Act, free and harmless from and against any
and all claims, demands, liabilities and expenses (including the costs of
investigating or defending such claims, demands or liabilities and any counsel
fees incurred in connection therewith) that the Fund, its officers or Board
members or any such controlling person may incur under the 1933 Act, or under
common law or otherwise, but only to the extent that such liability or expense
incurred by the Fund, its officers or Board members, or such controlling person
resulting from such claims or demands shall arise out of or be based upon any
untrue, or alleged untrue, statement of a material fact contained in information
furnished in writing by you to the Fund and used in the answers to any of the
items of the registration statement or in the corresponding statements made in
the prospectus or statement of additional information, or shall arise out of or
be based upon any omission, or alleged omission, to state a material fact in
connection with such information furnished in writing by you to the Fund and
required to be stated in such answers or necessary to make such information not
misleading. Your agreement to indemnify the Fund, its officers or Board members,
and any such controlling person, as aforesaid, is expressly conditioned upon
your being notified of any action brought against the Fund, its officers or
Board members, or any such controlling person, such notification to be given by
letter or telegram addressed to you at your principal office in Boston,
Massachusetts and sent to you by the person against whom such action is brought,
within ten days after the summons or other first legal process shall have been
served. You shall have the right to control the defense of such action, with
counsel of your own choosing, satisfactory to the Fund, if such action is based
solely upon such alleged misstatement or omission on your part or with the
Fund's
4
<PAGE>
<PAGE>
consent, and in any other event the Fund, its officers or Board members
or such controlling person shall each have the right to participate in the
defense or preparation of the defense of any such action with counsel of its own
choosing reasonably acceptable to you but shall not have the right to settle any
such action without your consent, which will not be unreasonably withheld. The
failure to so notify you of any such action shall not relieve you from any
liability that you may have to the Fund, its officers or Board members, or to
such controlling person by reason of any such untrue, or alleged untrue,
statement or omission, or alleged omission, otherwise than on account of your
indemnity agreement contained in this paragraph 4.2. You agree to notify the
Fund promptly of the commencement of any litigation or proceedings against you
or any of your officers or directors in connection with the issuance and sale of
any of the Fund's Shares.
5. Effectiveness of Registration
No Shares shall be offered by either you or the Fund under any of the
provisions of this Agreement and no orders for the purchase or sale of such
Shares under this Agreement shall be accepted by the Fund if and so long as the
effectiveness of the registration statement then in effect or any necessary
amendments thereto shall be suspended under any of the provisions of the 1933
Act, or if and so long as a current prospectus as required by Section 5(b) (2)
of the 1933 Act is not on file with the SEC; provided, however, that nothing
contained in this paragraph 5 shall in any way restrict or have any application
to or bearing upon the Fund's obligation to repurchase its Shares from any
shareholder in accordance with the provisions of the Fund's prospectus,
statement of additional information or charter documents, as amended from time
to time.
6. Offering Price
Shares of any class of the Fund offered for sale by you shall be offered
for sale at a price per share (the "offering price") equal to (a) their net
asset value (determined in the manner set forth in the Fund's charter documents
and the then-current prospectus and statement of additional information) plus
(b) a sales charge, if applicable, which shall be the percentage of the offering
price of such Shares as set forth in the Fund's then-current prospectus. In
addition to or in lieu of any sales charge applicable at the time of sale,
Shares of any class of the Fund offered for sale by you may be subject to a
contingent deferred sales charge as set forth in the Fund's then-current
prospectus and statement of additional information. You shall be entitled to
receive any sales charge levied at the time of sale in respect of the Shares
without remitting any portion to the Fund. Any payments to a broker or dealer
through whom you sell Shares shall be governed by a separate agreement between
you and such broker or dealer and the Fund's then-current prospectus and
statement of additional information. Any payments to any provider of services to
you shall be governed by a separate agreement between you and such service
provider.
7. Notice to You
The Fund agrees to advise you immediately in writing:
(a) of any request by the SEC for amendments to the registration
statement, prospectus or statement of additional information then in
effect or for additional information;
5
<PAGE>
<PAGE>
(b) in the event of the issuance by the SEC of any stop order
suspending the effectiveness of the registration statement, prospectus
or statement of additional information then in effect or the initiation
of any proceeding for that purpose;
(c) of the happening of any event that makes untrue any statement
of a material fact made in the registration statement, prospectus or
statement of additional information then in effect or that requires the
making of a change in such registration statement, prospectus or
statement of additional information in order to make the statements
therein not misleading; and
(d) of all actions of the SEC with respect to any amendment to
the registration statement, or any supplement to the prospectus or
statement of additional information which may from time to time be filed
with the SEC.
8. Term of the Agreement
This Agreement shall become effective on the date hereof, shall have an
initial term of one year from the date hereof, and shall continue for successive
annual periods thereafter so long as such continuance is specifically approved
at least annually by (a) the Fund's Board or (b) by a vote of a majority (as
defined in the 1940 Act) of the Fund's outstanding voting securities, provided
that in either event the continuance is also approved by a majority of the Board
members of the Fund who are not interested persons (as defined in the 1940 Act)
of any party to this Agreement, by vote cast in person at a meeting called for
the purpose of voting on such approval. This Agreement is terminable with or
without cause, without penalty, on 60 days' notice by the Fund's Board or by
vote of holders of a majority of the Fund's outstanding voting securities, or on
90 days' notice by you. This Agreement will also terminate automatically in the
event of its assignment (as defined in the 1940 Act and the rules and
regulations thereunder).
9. Arbitration
Any claim, controversy, dispute or deadlock arising under this Agreement
(collectively, a "Dispute") shall be settled by arbitration administered under
the rules of the American Arbitration Association ("AAA") in New York, New York.
Any arbitration and award of the arbitrators, or a majority of them, shall be
final and the judgment upon the award rendered may be entered in any state or
federal court having jurisdiction. No punitive damages are to be awarded.
10. Miscellaneous
So long as you act as a principal underwriter and distributor of Shares,
you shall not perform any services for any entity other than investment
companies advised or administered by Citigroup Inc. or its subsidiaries. The
Fund recognizes that the persons employed by you to assist in the performance of
your duties under this Agreement may not devote their full time to such service
and nothing contained in this Agreement shall be deemed to limit or restrict the
persons employed by you or any of your affiliates right to engage in and devote
time and attention to other businesses or to render services of whatever kind or
nature, provided, however, that in conducting such business or rendering such
services your employees and affiliates would take reasonable steps to assure
that the other parties involved are put on notice as to the legal entity with
which they are dealing. This Agreement and the terms and conditions set forth
herein shall be governed by, and
6
<PAGE>
<PAGE>
construed in accordance with, the laws of the
State of New York without giving effect to its conflict of interest principles.
If the foregoing is in accordance with your understanding, kindly
indicate your acceptance of this Agreement by signing and returning to us the
enclosed copy, whereupon this Agreement will become binding on you.
Very truly yours,
[Name of Fund]
By: _____________________
Accepted:
CFBDS, INC.
By: __________________________
Authorized Officer
7
<PAGE>
<PAGE>
ADMINISTRATION AGREEMENT
[DATE]
SALOMON BROTHERS ASSET MANAGEMENT INC
7 WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
Dear Sirs:
[NAME OF FUND] (the "Company") a corporation organized under the laws of
the state of Maryland, confirms its agreement with Salomon Brothers Asset
Management Inc ("SBAM") with respect to the portfolios listed on Exhibit A
attached hereto (each a "Fund" and collectively the "Funds") as follows:
1. INVESTMENT DESCRIPTION; APPOINTMENT
The Funds desire to employ their capital by investing and reinvesting in
investments of the kind and in accordance with the limitations specified in the
Company's Articles of Incorporation, as amended from time to time, in the
Company's Prospectus(es) and Statement(s) of Additional Information as from time
to time in effect, and in such manner and to the extent as may from time to time
be approved by the Board of Directors of the Company. Copies of the Company's
Prospectus, Statement of Additional Information and the Articles of
Incorporation have been submitted to SBAM. The Funds employ SBAM (in such
capacity, the "Adviser") as its investment adviser and desires to employ and
hereby appoints SBAM as its administrator. SBAM accepts this appointment and
agrees to furnish services for the compensation set forth below. SBAM is hereby
authorized to retain third parties and is hereby authorized to delegate some or
all of its duties and obligations hereunder to such persons provided that such
persons shall remain under the general supervision of SBAM.
2. SERVICES AS ADMINISTRATOR
Subject to the supervision and direction of the Board of Directors of the
Company, SBAM will (a) assist in supervising all aspects of the Funds'
operations except those performed by the Funds' Adviser under their investment
advisory agreements; (b) supply the Funds with office facilities (which may be
SBAM's own offices) for providing its services under this agreement, statistical
and research data, data processing services, clerical, accounting and
bookkeeping services, including but not limited to, the calculation of the net
asset value of shares of the Funds, the calculation of applicable contingent
deferred sales charges and similar fees and charges, the calculation of
distribution fees, internal auditing and legal services, internal executive and
<PAGE>
<PAGE>
administrative services, and stationary and office supplies; and (c) prepare
Board materials reports to the shareholders of the Funds, tax returns and
reports to and filings with the Securities and Exchange Commission and state
blue sky authorities.
3. COMPENSATION
In consideration of services rendered pursuant to this Agreement, the Funds will
pay SBAM on the first business day of each month a fee for the previous month at
an annual rate of .05% of the Funds' average daily net assets. Upon any
termination of this Agreement before the end of any month, the fee for such part
of the month shall be prorated according to the proportion which such period
bears to the full monthly period and shall be payable upon the date of
termination of this Agreement. For the purpose of determining fees payable to
SBAM, the value of the Funds' net assets shall be computed at the times and in
the manner specified in the Prospectus and Statement of Additional Information
as from time to time in effect.
4. EXPENSES
SBAM will bear all expenses in connection with the performance of its services
under this Agreement. The Funds will bear certain other expenses to be incurred
in its operation, including: taxes, interest, brokerage fees and commissions, if
any; fees of Directors of the Company who are not officers, directors, or
employees of Salomon Smith Barney Inc. or SBAM; Securities and Exchange
Commission fees and state blue sky qualification fees; charges of custodians and
transfer and dividend disbursing agents; the Funds' and Board members'
proportionate share of insurance premiums, professional association dues and/or
assessments; outside auditing and legal expenses; costs of maintenance of
corporate existence; costs attributable to investor services, including without
limitation, telephone and personnel expenses; costs of preparing and printing
prospectuses and statements of additional information for regulatory purposes
and for distribution to existing shareholders; costs of shareholders' reports
and meetings, and meetings of the officers or Board of Directors of the Company;
and any extraordinary expenses.
5. STANDARD OF CARE
SBAM shall exercise its best judgment in rendering the services listed in
paragraph 2 above. SBAM shall not be liable for any error of judgment or mistake
of law or for any loss suffered by the Fund in connection with the matters to
which this Agreement relates provided that nothing in this Agreement shall be
deemed to protect or purport to protect SBAM against liability to the Fund or to
its shareholders to which SBAM would otherwise be subject by reason of willful
misfeasance, bad faith or gross negligence on its part in the performance of its
duties or by reason of SBAM's reckless disregard of its obligations and duties
under this Agreement.
6. TERM OF AGREEMENT
<PAGE>
<PAGE>
This Agreement shall continue automatically (unless terminated as provided
herein)for two years from the date hereof for successive annual periods provided
that such continuance is specifically approved at least annually by the Board of
Directors of the Company. This Agreement is terminable, without penalty, on 60
days' written notice, by the Board of Directors of the Company or, with respect
to any Fund, by vote of holders of a majority of such Fund's shares, or upon 90
days' written notice, by SBAM.
7. SERVICE TO OTHER COMPANIES OR ACCOUNTS
The Company understands that SBAM now acts, will continue to act and may act in
the future as administrator to one or more other investment companies, and the
Company has no objection to SBAM's so acting. The Company understands that the
persons employed by SBAM to assist in the performance of SBAM's duties hereunder
will not devote their full time to such service and nothing contained herein
shall be deemed to limit or restrict the right of SBAM or any affiliate of SBAM
to engage in and devote time and attention to other businesses or to render
services of whatever kind or nature.
<PAGE>
<PAGE>
If the foregoing is in accordance with your understanding, kindly indicate your
acceptance hereof by signing and returning to us the enclosed copy hereof.
Very truly yours,
[Name of Fund]
By: ___________________________
Title:_________________________
Accepted:
Salomon Brothers Asset Management Inc
By: __________________________________
Title:________________________________
<PAGE>
