<PAGE> 1
As filed with the Securities and Exchange Commission
on March 29, 1996
Registration Nos. 333-00305
811-07497
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
Pre-Effective Amendment No. 1 /x/
Post-Effective Amendment No. ___ / /
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
/X/
Amendment No. 1 /X/
SALOMON BROTHERS INSTITUTIONAL SERIES FUNDS INC
- -------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
7 World Trade Center
New York, New York 10048
---------------------------------
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code:
(800) 725-6666
Lawrence H. Kaplan, Esq.
Salomon Brothers Asset Management Inc
7 World Trade Center
New York, New York 10048
---------------------------------
(Name and Address of Agent for Service)
Copies to:
Gary S. Schpero, Esq.
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, NY 10017
------------
<PAGE> 2
Approximate Date of Proposed Public Offering: As soon as practicable after this
Registration Statement becomes effective.
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, as amended,
the Registrant previously elected to register an indefinite number of shares of
common stock, $.001 par value per share, of all series of the Registrant, now
existing or hereafter created. The amount of the registration fee required by
Rule 24f-2 of $500 was previously paid.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
<PAGE> 3
3
SALOMON BROTHERS INSTITUTIONAL SERIES FUNDS INC
Registration Statement on Form N-1A
CROSS REFERENCE SHEET
Pursuant to Rule 495(b) under the Securities Act of 1933
<TABLE>
<CAPTION>
N-1A
Item No. Location Prospectus Caption
-------- -------- ------------------
<S> <C> <C>
Part A
Item 1. Cover Page Cover Page
Item 2. Synopsis Fee Table
Item 3. Condensed Financial Information Financial Highlights; Performance Information
Item 4. General Description of Registrant Highlights; Investment Objective and Policies;
Additional Investment Activities and Risk
Factors; Investment Limitations
Item 5. Management of the Fund Highlights; Fee Table; Management; Purchase and
Redemption of Shares
Item 5A. Management's Discussion of Not Applicable
Performance
Item 6. Capital Stock and Other Securities Highlights; Dividends, Distributions and Taxes;
Capital Stock; Account Services
Item 7. Purchase of Securities Being Offered Highlights; Purchase and Redemption of Shares;
Management; Dividends, Distributions and Taxes
Item 8. Redemption or Repurchase Highlights; Dividends, Distributions and Taxes;
Purchase and Redemption of Shares; Management
Item 9. Pending Legal Proceedings Not Applicable Statement of Additional
</TABLE>
<PAGE> 4
4
<TABLE>
<CAPTION>
Part B Location Information Caption
------ -------- -------------------
<S> <C> <C>
Item 10. Cover Page Cover Page
Item 11. Table of Contents Table of Contents
Item 12. General Information and History Not applicable
Item 13. Investment Objectives and Policies Additional Information on Portfolio Instruments
and Investment Policies; Investment Limitations
Item 14. Management of the Fund Management
Item 15. Control Persons and Principal Holders Management
of Securities
Item 16. Investment Advisory and Other Management; Custodian and Transfer Agent;
Services Independent Accountants
Item 17. Brokerage Allocation and Other Portfolio Transactions
Practices
Item 18. Capital Stock and Other Securities Capital Stock
Item 19. Purchase, Redemption and Pricing of Management; Net Asset Value; Additional
Securities Being Offered Purchase and Redemption Information
Item 20. Tax Status Additional Information Concerning Taxes
Item 21. Underwriters Management; Additional Purchase and
Redemption Information
Item 22. Calculation of Performance Data Performance Data
Item 23. Financial Statements Financial Statements
</TABLE>
PART C
Information required to be included in Part C is set forth
under the appropriate Item, so numbered, in Part C of this Registration
Statement.
<PAGE> 5
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED MARCH 29, 1996
SALOMON BROTHERS INSTITUTIONAL INVESTMENT SERIES
7 WORLD TRADE CENTER, NEW YORK, NEW YORK 10048
800-725-6666
Salomon Brothers Institutional Investment Series consists of Salomon Brothers
Institutional Money Market Fund (the "Money Market Fund"), Salomon Brothers
Institutional High Yield Bond Fund (the "High Yield Bond Fund"), Salomon
Brothers Institutional Emerging Markets Debt Fund (the "Emerging Markets Debt
Fund") and Salomon Brothers Institutional Asia Growth Fund (the "Asia Growth
Fund") (each, a "Fund" and collectively, the "Funds"). Each of the Funds,
except the Money Market Fund, is a no-load investment portfolio of Salomon
Brothers Institutional Series Funds Inc ("Institutional Series Funds"). The
Money Market Fund is a no-load investment portfolio of Salomon Brothers Series
Funds Inc ("Series Funds").
The MONEY MARKET FUND seeks as high a level of current income as is consistent
with liquidity and the stability of principal. The Fund seeks to achieve its
objective by investing in high-quality, short-term U.S. dollar denominated
money market instruments, and seeks to maintain a stable net asset value of
$1.00 per share. THERE IS NO ASSURANCE THAT A STABLE NET ASSET VALUE OF $1.00
PER SHARE WILL BE MAINTAINED. INVESTMENTS IN THE FUND ARE NOT GUARANTEED OR
INSURED BY THE U.S. GOVERNMENT.
The HIGH YIELD BOND FUND seeks to maximize total return. The Fund seeks to
achieve its objective by investing primarily in a portfolio of high yield
fixed-income securities that offer a yield above that generally available on
debt securities in the four highest rating categories of the recognized rating
services.
The EMERGING MARKETS DEBT FUND seeks to maximize total return. The Fund seeks
to achieve its objective by investing at least 80% of its total assets in debt
securities of government, government related and corporate issuers located in
emerging market countries, and of entities organized to restructure outstanding
debt of such issuers.
The ASIA GROWTH FUND seeks long-term capital appreciation. The Fund seeks to
achieve its objective by investing at least 65% of its total assets in equity
and equity-related securities of Asian Companies (as defined in this
Prospectus).
<PAGE> 6
THERE CAN BE NO ASSURANCE THAT ANY FUND WILL ACHIEVE ITS INVESTMENT OBJECTIVE
AND EACH OF THE FUNDS MAY EMPLOY CERTAIN INVESTMENT PRACTICES WHICH INVOLVE
SPECIAL RISK CONSIDERATIONS. CERTAIN FUNDS MAY INVEST IN HIGH YIELD SECURITIES,
COMMONLY REFERRED TO AS JUNK BONDS, WHICH PRESENT A HIGH DEGREE OF RISK.
HIGH-YIELDING, LOWER-QUALITY SECURITIES INVOLVE COMPARATIVELY GREATER RISKS,
INCLUDING PRICE VOLATILITY AND THE RISK OF DEFAULT IN THE TIMELY PAYMENT OF
INTEREST AND PRINCIPAL, THAN HIGHER-QUALITY SECURITIES. SEE "ADDITIONAL
INVESTMENT ACTIVITIES AND RISK FACTORS."
THIS PROSPECTUS SETS FORTH CONCISELY THE INFORMATION A PROSPECTIVE INVESTOR
SHOULD KNOW BEFORE INVESTING IN A FUND. THIS PROSPECTUS SHOULD BE READ AND
RETAINED FOR READY FUTURE REFERENCE TO INFORMATION ABOUT A FUND. A STATEMENT OF
ADDITIONAL INFORMATION DATED __________, 1996, CONTAINING ADDITIONAL
INFORMATION ABOUT EACH FUND HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION (THE "SEC") AND IS HEREBY INCORPORATED BY REFERENCE INTO THIS
PROSPECTUS. IT IS AVAILABLE WITHOUT CHARGE AND CAN BE OBTAINED BY WRITING OR
CALLING THE FUNDS AT THE ADDRESS AND TELEPHONE NUMBER PRINTED ABOVE.
- --------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
SALOMON BROTHERS ASSET MANAGEMENT INC - INVESTMENT MANAGER
SALOMON BROTHERS INC - DISTRIBUTOR
PROSPECTUS
________ __, 1996
<PAGE> 7
3
TABLE OF CONTENTS
<TABLE>
<S> <C>
FEE TABLE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
HIGHLIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
FINANCIAL HIGHLIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . 9
BENEFITS OF INVESTING IN THE FUNDS . . . . . . . . . . . . . . . . . . 11
PERFORMANCE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . 11
INVESTMENT OBJECTIVE AND POLICIES . . . . . . . . . . . . . . . . . . . 12
ADDITIONAL INVESTMENT ACTIVITIES AND RISK FACTORS . . . . . . . . . . . 27
INVESTMENT LIMITATIONS . . . . . . . . . . . . . . . . . . . . . . . . 39
PURCHASE AND REDEMPTION OF SHARES . . . . . . . . . . . . . . . . . . . 41
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
DIVIDENDS, DISTRIBUTIONS AND TAXES . . . . . . . . . . . . . . . . . . 51
ACCOUNT SERVICES . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
CAPITAL STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
APPENDIX A: DESCRIPTION OF RATINGS . . . . . . . . . . . . . . . . . . A-1
APPENDIX B: GENERAL CHARACTERISTICS
AND RISKS OF DERIVATIVES . . . . . . . . . . . . . . . . . . . . . . . B-1
</TABLE>
<PAGE> 8
4
FEE TABLE
Information in the table below is given as a percentage of average daily net
assets. Shares of each Fund are sold without imposition of any sales charge,
deferred sales charge or any other transaction fee.
<TABLE>
<CAPTION>
MONEY HIGH EMERGING ASIA
ANNUAL FUND OPERATING MARKET YIELD MARKETS GROWTH
EXPENSES FUND** BOND FUND*** DEBT FUND **** FUND*****
-------- ----- ----------- ------------- --------
<S> <C> <C> <C> <C>
Management Fee (after waiver*) . . . . . . . . . . . . .18% .50% .70% .75%
Other Expenses (after reimbursement) . . . . . . . . .00% + .05% + .05% + .25% +
------ ------- ------- -------
Total Fund Operating Expenses (after
waiver and reimbursement) . . . . . . . . . . . . . .18% .55% .75% 1.00%
==== ==== ==== =======
</TABLE>
EXAMPLE
- -------------------------
You would pay the following expenses on a $1,000 investment, assuming (i) a 5%
annual return, (ii) total annual operating expenses as shown in the fee table
set out above and (iii) redemption at the end of each time period:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Money Market Fund++ $2 $6 $10 $23
High Yield Bond Fund $ $ N/A N/A
Emerging Markets Debt Fund $ $ N/A N/A
Asia Growth Fund $ $ N/A N/A
</TABLE>
- ---------------------
* Only the Money Market Fund reflects any waiver of Management Fees.
** The information in the fee table set forth above has been restated to
reflect a new management fee as described below, and the voluntary agreement by
Salomon Brothers Asset Management Inc ("SBAM"), the Fund's investment manager,
to reduce or otherwise limit the expenses of the Money Market Fund (exclusive of
taxes, interest and extraordinary expenses such as litigation and
indemnification expenses), on an annualized basis, to .18% of the Fund's average
daily net assets for a period of at least one year from the date of this
Prospectus, and no more than .25% thereafter. For the year ended December 31,
1995, Other Expenses and Total Fund Operating Expenses (before partial waiver)
were, .60% and .70%, respectively. On November 16, 1995, the Board approved,
subject to shareholder approval, an increase in the management fee from .10% of
the Money Market Fund's average daily net assets to .20%. The shareholders
approved the amendment on March 26, 1996, to become effective as of the date of
this Prospectus.
*** SBAM has voluntarily agreed to reduce or otherwise limit the expenses of
the High Yield Bond Fund (exclusive of taxes, interest and extraordinary
expenses such as litigation and indemnification expenses), on an annualized
basis, to .55% of the Fund's average daily net assets. Without this agreement,
Other Expenses and Total Fund Operating Expenses are expected to be .56% and
1.06%, respectively.
<PAGE> 9
5
**** SBAM has voluntarily agreed to reduce or otherwise limit the expenses
of the Emerging Markets Debt Fund (exclusive of taxes, interest and
extraordinary expenses such as litigation and indemnification expenses), on an
annualized basis, to .75% of the Fund's average daily net assets. Without this
agreement, Other Expenses and Total Fund Operating Expenses are expected to be
..56%, and 1.26%, respectively.
***** SBAM has voluntarily agreed to reduce or otherwise limit the expenses
of the Asia Growth Fund (exclusive of taxes, interest and extraordinary expenses
such as litigation and indemnification expenses), on an annualized basis, to
1.00% of the Fund's average daily net assets. Without this agreement, Other
Expenses and Total Fund Operating Expenses are expected be .75%, .56%, and
1.31%, respectively.
+ As of the date of this Prospectus, the Fund had not yet commenced
investment operations. The amounts set forth for Other Expenses in the table
above and the preceding footnotes are, therefore, based on estimates for the
current fiscal year.
++ Assuming the expense cap of .18% discussed above is in effect
throughout the time period shown.
The purpose of the foregoing table is to assist an investor in understanding
the various costs and expenses that an investor in a Fund will incur either
directly or indirectly as a shareholder in a Fund. "Other Expenses" include
administrative fees, custodial fees, legal and accounting fees, printing costs
and registration fees. Expenses associated with distributing each Fund's shares
are borne by the Fund's distributor out of its own resources and are not borne
directly or indirectly by shareholders. THE EXAMPLE ABOVE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES FOR ANY
OF THE FUNDS MAY BE HIGHER OR LOWER THAN THE AMOUNTS SHOWN IN THE FEE TABLES.
Moreover, while the example assumes a 5% annual return, each Fund's performance
will vary and may result in a return greater or less than 5%. For more complete
descriptions of the various costs and expenses, see "Management" in this
Prospectus and the Statement of Additional Information.
HIGHLIGHTS
THE FUNDS
Each of the Funds, except the Money Market Fund, is a newly organized, no-load
investment portfolio of Salomon Brothers Institutional Series Funds Inc, an
open-end investment company incorporated in Maryland on January 19, 1996. The
High Yield Bond Fund is a diversified portfolio and the Emerging Markets Debt
Fund and the Asia Growth Fund are non-diversified portfolios of the
Institutional Series Funds. The Money Market Fund is a no-load, diversified
investment portfolio of Salomon Brothers Series Funds Inc, an open-end
investment company incorporated in Maryland on April 17, 1990.
<PAGE> 10
6
The MONEY MARKET FUND seeks as high a level of current income as is consistent
with liquidity and the stability of principal. The Fund seeks to achieve its
objective by investing in high-quality, short-term U.S. dollar denominated
money market instruments, and seeks to maintain a stable net asset value of
$1.00 per share. THERE IS NO ASSURANCE THAT A STABLE NET ASSET VALUE OF $1.00
PER SHARE WILL BE MAINTAINED. INVESTMENTS IN THE FUND ARE NOT GUARANTEED OR
INSURED BY THE U.S. GOVERNMENT.
The HIGH YIELD BOND FUND seeks to maximize total return. The Fund seeks to
achieve its objective by investing primarily in a portfolio of high yield
fixed-income securities that offer a yield above that generally available on
debt securities in the four highest rating categories of the recognized rating
services.
The EMERGING MARKETS DEBT FUND seeks to maximize total return. The Fund seeks
to achieve its objective by investing at least 80% of its total assets in debt
securities of government, government related and corporate issuers located in
emerging market countries, and of entities organized to restructure outstanding
debt of such issuers.
The ASIA GROWTH FUND seeks long-term capital appreciation. The Fund seeks to
achieve its objective by investing at least 65% of its total assets in equity
and equity-related securities of Asian Companies (as defined under "Investment
Objective and Policies").
There is no assurance that any particular Fund will achieve its investment
objective.
- - PURCHASE AND REDEMPTION OF SHARES
The minimum initial investment in the Money Market Fund is $250,000 and the
minimum initial investment in the other Funds is $1,000,000. The minimum
investment may be waived at the discretion of a Fund. There is no subsequent
investment minimum in any Fund. Settlement of purchases and redemptions is
effected by wire transfer of Federal funds or upon conversion to Federal funds
of a purchase payment effected by check or draft. See "Purchase and Redemption
of Shares."
- - MANAGEMENT SERVICES
Each Fund retains Salomon Brothers Asset Management Inc ("SBAM"), an indirect,
wholly-owned subsidiary of Salomon Inc, as its investment manager under an
investment management contract. SBAM has retained its affiliate, Salomon
Brothers Asset Management Asia Pacific Limited ("SBAM AP"), to serve as
sub-adviser to the Asia Growth Fund, subject to the supervision of SBAM. See
"Management."
- - DISTRIBUTOR
Salomon Brothers Inc ("Salomon Brothers") serves as each Fund's distributor.
Salomon Brothers is an indirect, wholly-owned subsidiary of Salomon Inc.
Salomon Brothers is one of the largest securities dealers in the world and a
registered broker-dealer.
- - RISK FACTORS
Prospective investors should consider certain risks associated with an
investment in each Fund.
The medium and low rated and comparable unrated securities in which the High
Yield Bond Fund will invest (commonly referred to as "junk bonds") involve
significantly greater risks than higher rated securities, including price
volatility and risk of default in payment of interest and principal. The
Emerging Markets Debt Fund's investments in securities of emerging market
countries involves certain considerations not typically associated with
investing in securities of U.S. issuers, including restrictions on foreign
investment and on repatriation of capital, currency fluctuations, price
volatility and lesser liquidity or lack of a secondary trading market, and
political and economic risks, including the risk of nationalization or
expropriation of assets. The Asia Growth Fund is subject to these same risks
and, concentration of the Fund's assets in one or a few of the Asian countries
and Asian currencies will subject the Fund, to a greater extent than if the
Fund's assets were less geographically concentrated, to the risks of adverse
changes in the securities and foreign exchange markets of such countries and
social, political or economic events which may occur in such countries.
Additionally, certain Funds may use various investment practices that involve
special considerations, including investing in illiquid securities, zero coupon
and deferred payment securities, loan participations and assignments and
warrants and engaging in repurchase and reverse repurchase agreements and
derivative transactions. See "Investment Objective and Policies"
and "Additional Investment Activities and Risk Factors."
<PAGE> 11
8
<PAGE> 12
9
FINANCIAL HIGHLIGHTS
The following information is provided with respect to the Money Market Fund
only. Financial highlights are not presented for the High Yield Bond Fund, the
Emerging Markets Debt Fund and the Asia Growth Fund since they have not yet
commenced investment operations. The following data per share of capital stock
outstanding throughout each period and ratios should be read in conjunction
with the financial statements included in the Fund's Statement of Additional
Information. The financial statements and financial highlights of the Money
Market Fund for each of the years in the period ended December 31, 1995, and
the period from December 7, 1990 (commencement of operations) through December
31, 1990 have been audited by Price Waterhouse LLP, whose unqualified report
thereon is included in the Statement of Additional Information. The Statement
of Additional Information may be obtained by shareholders by writing or calling
at the address or telephone number printed on the front cover. The Money Market
Fund changed its name from Salomon Brothers U.S. Treasury Securities Money
Market Fund to its current name on March 26, 1996. On that same date,
shareholders of the Money Market Fund approved a change in the Fund's
investment objective and policies and certain investment restrictions to those
described herein. Prior to such change, the Money Market Fund invested, under
normal market conditions, at least 65% of its assets in United States Treasury
bonds, notes and bills.
<PAGE> 13
10
<TABLE>
<CAPTION>
Year Ended December 31, Period Ended
---------------------------------------------------------------- December 31,
1995 1994 1993 1992 1991 1990**
------ ------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year . . . . $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
Net investment income . . . . . . . . . . . 0.049* .036 .028 .034 .054* .005*
Dividends from net investment income . . . (0.049) (.036) .028 (.034) (.054) (.005)
Net asset value, end of year . . . . . . . $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
Net assets end of year (thousands) . . . . $11,425 $27,667 $34,120 $50,554 $35,414 $4,596
Total investment return . . . . . . . . . . +5.0% +3.6% 2.9% 3.4% +5.5% +0.5%
Ratios to average net assets:
Expenses . . . . . . . . . . . . . 0.65%* .45% .35% .44% .54%* .74%*+
Net investment income . . . . . . . 4.89% 3.53% 2.83% 3.42% 5.23% 6.45%+
</TABLE>
- --------------
* Net investment income per share would have been $.049, $.052 and $.004 and
the expense ratios to average net assets would have been .70%, .64% and
1.72%, respectively, for the periods ended December 31, 1995, December 31,
1991 and December 31, 1990 before applicable waiver of management fee,
expenses absorbed by SBAM and credits earned on custodian cash balances.
** December 7, 1990, commencement of operations, through December 31, 1990.
+ Annualized.
<PAGE> 14
11
BENEFITS OF INVESTING IN THE FUNDS
Mutual funds, such as the Funds, are flexible investment tools that are
increasingly popular - for a variety of reasons. The Funds offer investors the
following important benefits:
- - FUNDS DESIGNED FOR INSTITUTIONS
The Funds are designed primarily for institutions as an economical and
convenient means for the investment of funds for their own account or which
they may manage for others. These institutions include corporations, banks,
trust companies, investment bankers and brokers, insurance companies,
investment counsellors, pension funds, employee benefit plans, law firms,
trusts, estates and educational, religious and charitable organizations. See
"Purchase and Redemption of Shares."
- - PROFESSIONAL MANAGEMENT
By pooling the funds of many investors, each Fund enables shareholders to
obtain the benefits of full-time professional management that is beyond the
means of most investors. As an active market participant on a day-to-day basis,
the Funds' investment manager or sub-adviser reviews the fundamental
characteristics of far more securities than a typical individual investor can
and may employ portfolio management techniques that frequently are not used by
individual or many institutional investors. Additionally, the larger
denominations of securities in which a Fund invests may result in better
overall prices for the investments than could be obtained independently by
individual investors.
- - DIVERSIFICATION
By pooling funds of exposure to individual issuers, industries and/or
geographical regions many investors, each Fund provides investors with a
degree of diversification of exposure to individual issuers, industries and/or
geographical regions, that would not be possible through the management of
smaller separate accounts.
- - TRANSACTION SAVINGS
By investing in a Fund, a shareholder is able to acquire ownership in a
portfolio of securities without paying the higher transaction costs associated
with a series of small securities purchases.
- - CONVENIENCE
Fund shareholders are relieved of the administrative and record keeping burdens
of securities settlements and interest payments and coordination of maturities
normally associated with direct ownership of securities.
- - DAILY LIQUIDITY
The Funds' convenient purchase and redemption procedures provide shareholders
with daily access to their money and reduce the delays frequently involved in
the direct purchase and sale of securities. See "Purchase and Redemption of
Shares."
- - EXCHANGE PRIVILEGE
Shareholders of a Fund may exchange all or part of their shares for shares of
any of the other Funds. The value of the shares exchanged must meet the
investment minimum of the Fund into which the investor is exchanging. See
"Purchase and Redemption of Shares--Exchange Privilege."
PERFORMANCE INFORMATION
From time to time, a Fund may advertise its "yield," "effective yield,"
"distribution rate" and/or standardized and nonstandardized "average annual
total return" over various periods of time. 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 the Fund.
Standardized total return is calculated in accordance with the SEC's formula.
Nonstandardized total return differs from the standardized total return only in
that it may relate to a nonstandard period or is presented in the aggregate
rather than as an annual average.
Total return figures will be given for the most current one-, five- and
ten-year periods, or the life of 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 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).
Yield is calculated in accordance with the SEC's formula. Yield differs from
total return in that it does not consider changes in net asset value.
From time to time, the Money Market Fund may make available information as to
its "yield" and "effective yield." Both yield figures are based on historical
earnings and are not intended to indicate future performance. The "yield" of
the Money Market Fund refers to income generated by an investment in the 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. The effective yield will be slightly
higher than the yield because of the compounding effect of this assumed
reinvestment.
Distribution rate differs from yield in that it is calculated by dividing the
annualization of the most recent month's distribution by the maximum offering
price at the end of the month.
Furthermore, in reports or other communications to shareholders or in
advertising materials, performance of Fund shares may be compared with that of
other mutual funds or classes of shares of other mutual funds, as listed in the
rankings prepared by Lipper Analytical Services, Inc. or similar independent
services that monitor the performance of mutual funds, financial
<PAGE> 15
12
indices such as the S&P 500 Index or other industry or financial publications
such as Bank Rate Monitor, Barron's, Business Week, CDA Investment
Technologies, Inc., Changing Times, Forbes, Fortune, ICB/Donoghue'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 Money Market Fund may also be compared to yields set forth in the weekly
statistical release H.15(519) or the monthly statistical release designated
G.13(415) published by the Board of Governors of the Federal Reserve System.
The annual report to shareholders of the Money Market Fund for the fiscal year
ended December 31, 1995 containing additional performance information is
available without charge and can be obtained by writing or calling the address
or telephone number printed on the front cover of this Prospectus. See
"Performance Data" in the Statement of Additional Information.
INVESTMENT OBJECTIVE AND POLICIES
MONEY MARKET FUND
The investment objective of the Money Market Fund is to seek as high a level of
current income as is consistent with liquidity and the stability of principal.
The Fund invests in high-quality, short-term U.S. dollar-denominated money
market instruments which are deemed to mature in thirteen months or less, and
is managed so that the average portfolio maturity of all portfolio instruments
(on a dollar-weighted basis) will not exceed 90 days. The Fund is diversified
within the meaning of the Investment Company Act of 1940, as amended (the "1940
Act"), and will seek to maintain a stable net asset value of $1.00 per share.
The instruments in which the Money Market Fund may invest include, but are not
limited to:
- - Securities issued or guaranteed by the U.S. government or by agencies or
instrumentalities thereof;
- - Obligations issued or guaranteed by U.S. and foreign banks ("Bank
Obligations");
- - Commercial paper;
- - Corporate debt obligations, including variable rate obligations;
- - Short-term credit facilities;
- - Asset-backed securities; and
<PAGE> 16
13
- - Other money market instruments.
The Money Market Fund will limit its portfolio investments to securities that
are determined by SBAM to present minimal credit risks pursuant to guidelines
established by the Fund's Board of Directors and which are "Eligible
Securities" at the time of acquisition by the Fund. The term "Eligible
Securities" includes securities rated by the "Requisite NRSROs" in one of the
two highest short-term rating categories, securities of issuers that have
received such ratings with respect to other short-term debt securities and
comparable unrated securities. "Requisite NRSROs" means (a) any two nationally
recognized statistical rating organizations ("NRSROs") that have issued a
rating with respect to a security or class of debt obligations of an issuer, or
(b) one NRSRO, if only one NRSRO has issued such a rating at the time that the
Fund acquires the security. The Fund may not invest more than 5% of its total
assets in Eligible Securities that have not received the highest rating from
the Requisite NRSROs and comparable unrated securities ("Second Tier
Securities") and may not invest more than the greater of 1% of its total assets
or $1 million in the Second Tier Securities of any one issuer.
The Money Market Fund may also enter into repurchase agreements with respect to
the obligations identified above. While the maturity of the underlying
securities in a repurchase agreement transaction may be more than thirteen
months, the term of the repurchase agreement will always be less than thirteen
months. For a description of repurchase agreements and their associated risks,
see "Additional Investment Activities and Risk Factors--Repurchase Agreements."
Securities issued or guaranteed by the U.S. government or by its agencies or
instrumentalities include obligations of several kinds. Such securities in
general include a wide variety of U.S. Treasury obligations consisting of
bills, notes and bonds, which principally differ only in their interest rates,
maturities and times of issuance. Securities issued or guaranteed by U.S.
government agencies and instrumentalities are debt securities issued by
agencies or instrumentalities established or sponsored by the U.S. government
and may be backed only by the credit of the issuing agency or instrumentality.
The Fund will invest in such obligations only where SBAM is satisfied that the
credit risk with respect to the issuer is minimal.
Bank Obligations that may be purchased by the Money Market Fund include
certificates of deposit, commercial paper, bankers' acceptances and fixed time
deposits. Fixed time deposits are obligations of branches of U.S. banks or
foreign banks which are payable at a stated maturity date and bear a fixed rate
of interest. Although fixed time deposits do not have a market, there are no
contractual restrictions on the right to transfer a beneficial interest in the
deposit to a third party. For a discussion of the risks associated with
investing in bank obligations, see "Additional Information on Portfolio
Instruments and Investment Policies--Bank Obligations" in the Statement of
Additional Information.
The Money Market Fund's investments in corporate debt securities consist of
non-convertible corporate debt securities such as bonds and debentures that
have thirteen months or less remaining to maturity.
<PAGE> 17
14
The Fund may invest in U.S. dollar-denominated securities of non-U.S. issuers,
including obligations of non-U.S. banks or non-U.S. branches of U.S. banks and
commercial paper and other corporate debt securities of non-U.S. issuers, where
SBAM deems the instrument to present minimal credit risks. Investments in
non-U.S. banks and non-U.S. issuers present certain risks. See "Additional
Investment Activities--Foreign Securities."
The Money Market Fund may invest in floating and variable rate obligations with
stated maturities in excess of thirteen months upon compliance with certain
conditions contained in Rule 2a-7 promulgated under the 1940 Act, in which case
such obligations will be treated, in accordance with Rule 2a-7, as having
maturities not exceeding thirteen months. 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
the 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. The Fund will limit its purchases of floating and variable rate
obligations to those of the same quality as it otherwise is allowed to
purchase. SBAM will monitor on an ongoing basis the ability of an issuer of a
demand instrument to pay principal and interest on demand.
The Money Market 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 Money Market Fund may enter into, or acquire participations in, short-term
borrowing arrangements with corporations, consisting of either a short-term
revolving credit facility or a master note agreement payable upon demand. Under
these arrangements, the borrower may reborrow funds during the term of the
facility. The Fund treats any commitments to provide such advances as a standby
commitment to purchase the borrower's notes.
The Money Market Fund may also purchase asset-backed securities. Asset-backed
securities represent defined interests in an underlying pool of assets. Such
securities may be issued as pass-through certificates, which represent
undivided fractional interests in the underlying pool of assets. Alternatively,
asset-backed securities may be issued as interests, generally in the form of
debt securities, in a special purpose entity organized solely for the purpose
of owning the underlying assets and issuing such securities. In the latter
case, such securities are secured by and payable from a stream of payments
generated by the underlying assets. The assets underlying asset-backed
securities are often a pool of assets similar to one another, such as motor
vehicle receivables or credit card receivables. Alternatively, the underlying
assets may be particular types of securities, various contractual rights to
receive payments and/or other types of assets. Asset-backed securities
frequently carry credit protection in the form of extra collateral,
subordinated certificates, cash reserve accounts, letters of credit or other
<PAGE> 18
15
enhancements. Any asset-backed securities held by the Fund must comply with its
portfolio maturity and credit quality requirements. See "Additional
Information on Portfolio Instruments and Investment Policies" in the Statement
of Additional Information.
The Money Market 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 Money Market Fund may purchase securities on a firm commitment basis,
including when-issued securities and the Fund may invest in other investment
funds. See "Additional Investment Activities and Risk Factors" for a
description of such securities and their associated risks. The Fund is not
currently authorized to use any of the various investment strategies referred
to under "Additional Investment Activities and Risk Factors--Derivatives."
The foregoing investment policies and activities, other than the Money Market
Fund's investment objective, are not fundamental and may be changed by the
Board of Directors of Series Funds without the approval of shareholders.
HIGH YIELD BOND FUND
The High Yield Bond Fund's investment objective is to maximize total return.
The Fund seeks to achieve its objective by investing primarily in a portfolio
of high yield fixed-income securities that offer a yield above that generally
available on debt securities in the four highest rating categories of the
recognized rating services and which generally entail increased credit and
market risks. To mitigate these risks, the Fund will diversify its holdings by
issuer, industry and credit quality. The Fund is diversified within the meaning
of the 1940 Act.
The High Yield Bond Fund intends to invest, under normal market conditions, at
least 80% of its total assets in non-investment grade fixed-income securities,
(e.g., bonds, debentures, notes, equipment lease certificates, equipment trust
certificates, conditional sales contracts, commercial paper and other
obligations and preferred stock). The lower-rated bonds in which the Fund will
invest are commonly referred to as "junk bonds."
The debt obligations in which the Fund will invest generally will be rated, at
the time of investment, "Ba" or "B" or lower by Moody's Investors Service
("Moody's") or "BB" or "B" or lower by Standard & Poor's Rating Services Group
("S&P"), or determined by SBAM to be of comparable quality. Debt securities
rated by both Moody's and S&P need only satisfy the foregoing ratings standards
with respect to either the Moody's or the S&P rating. The Fund is not required
to dispose of a debt security if its credit rating or credit quality declines.
Medium and low-rated and comparable unrated securities offer yields that
fluctuate over time, but generally are superior to the yields offered by higher
rated securities. However, such securities also involve significantly greater
risks, including price volatility and risk of default
<PAGE> 19
16
in the payment of interest and principal, than higher rated securities. Certain
of the debt securities purchased by the Fund may be rated as low as "C" by
Moody's or "D" by S&P or may be considered comparable to securities having such
ratings. An investment in the High Yield Bond Fund should not be considered as
a complete investment program for all investors. For further discussion of high
yield securities and the special risks associated therewith, see "Additional
Investment Activities and Risk Factors--High Yield Securities."
The High Yield Bond Fund may invest up to 10% of its total assets in securities
of foreign issuers and up to 5% of its total assets in foreign governmental
issuers in any one country. The foreign securities in which the High Yield Bond
Fund may invest, all or a portion of which may be non-U.S. dollar denominated,
include: (a) debt obligations issued or guaranteed by foreign national,
provincial, state, municipal or other governments with taxing authority or by
their agencies or instrumentalities, including Brady Bonds; (b) debt
obligations of supranational entities; (c) debt obligations of the U.S.
government issued in non-dollar securities; (d) debt obligations and other
fixed-income securities of foreign corporate issuers; and (e) U.S. corporate
issuers. There is no minimum rating criteria for the Fund's investments in such
securities. A description of Brady Bonds is set forth in the discussion of the
investment objective and policies of the Emerging Markets Debt Fund. The risks
associated with these investments are described under the captions "Additional
Investment Activities and Risk Factors--Foreign Securities" and "--High Yield
Securities." Moreover, investments in foreign securities may have adverse tax
implications as described under "Dividends, Distributions and Taxes."
In light of the risks associated with high yield corporate debt securities,
SBAM will take various factors into consideration in evaluating the
creditworthiness of an issuer. These will typically include the issuer's
financial resources, its sensitivity to economic conditions and trends, the
operating history of the issuer, and the experience and track record of the
issuer's management. SBAM will also review the ratings, if any, assigned to
the security by any recognized rating agencies, although SBAM's judgment as to
the quality of a debt security may differ from that suggested by the rating
published by a rating service. In addition to the foregoing credit analysis,
SBAM will evaluate the relative value of an investment compared with its
perceived credit risk. In selecting securities for the Fund, SBAM intends to
consider the correlation among securities represented in the Fund's portfolio
in an attempt to reduce the risk of exposure to market, industry and issuer
volatility. The High Yield Bond Fund's ability to achieve its investment
objective may be more dependent on SBAM's credit analysis than would be the
case if it invested in higher quality debt securities. A description of the
ratings used by Moody's and S&P is set forth in Appendix A to this Prospectus.
SBAM will be free to invest in high yield debt securities of any maturity and
may adjust the average maturity of the Fund's portfolio from time to time,
depending on SBAM's assessment of the relative yields available on securities
of different maturities and its expectations of future changes in interest
rates. Long-term debt securities generally provide a higher yield than
short-term debt securities, and therefore SBAM expects that, based upon current
market conditions, the Fund's high yield debt securities will initially have an
average maturity of 10 to 15 years.
<PAGE> 20
17
The High Yield Bond Fund may invest in zero coupon securities, pay-in-kind
bonds and deferred payment securities, each 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 Fund may also 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 ("Loan
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 Fund may invest up to 10% of its total assets in either (1)
equipment lease certificates, equipment trust certificates and conditional
sales contracts or (2) limited partnership interests. The Fund may invest up to
10% of its total assets in common stock, convertible securities, warrants or
other equity securities (other than preferred stock for which there is no
limit) when consistent with the Fund's objective. 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 SBAM, such purchase is appropriate.
In order to maintain liquidity, the Fund may hold and/or invest up to 20% of
its total assets in cash and/or U.S. dollar denominated debt securities
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 a developed 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; (3) obligations (including certificates of deposit, time deposits, demand
deposits and bankers' acceptances) of banks; and (4) repurchase agreements (as
discussed 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, adverse conditions
prevail in the securities markets which makes the High Yield Bond Fund's
investment strategy inconsistent with the best interests of the Fund's
shareholders, then for defensive purposes, the Fund may temporarily invest its
assets without limit in such 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. 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."
<PAGE> 21
18
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. See "Additional Investment
Activities and Risk Factors--Restricted Securities and Securities With Limited
Trading Markets." As more fully described in the Statement of Additional
Information, the Fund may purchase 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.
The High Yield Bond Fund is currently authorized to use all of the various
investment strategies referred to under "Additional Investment Activities and
Risk Factors--Derivatives." It is not presently anticipated that any of these
strategies will be used to a significant degree by the Fund. The Fund's ability
to pursue certain of these strategies may be limited by applicable regulations
of the SEC, the Commodity Futures Trading Commission (the "CFTC") and the
federal income tax requirements applicable to regulated investment companies.
Appendix B to this Prospectus and the Statement of Additional Information
contain descriptions of these strategies and of certain risks associated
therewith.
The foregoing investment policies and activities, other than the High Yield
Bond Fund's investment objective, are not fundamental and may be changed by the
Board of Directors of Institutional Series Funds without the approval of
shareholders.
EMERGING MARKETS DEBT FUND
The investment objective of the Emerging Markets Debt Fund is to maximize total
return. The Fund seeks to achieve its objective by investing at least 80% of
its total assets in debt securities of government, government related and
corporate issuers in emerging market countries and of entities organized to
restructure outstanding debt of such issuers. As used in this Prospectus, an
"emerging market country" is any country considered to be an emerging market
country by the World Bank at the time of investment. These countries generally
include every nation in the world except the United States, Canada, Japan,
Australia, New Zealand and most countries located in Western Europe. The Fund
is non-diversified within the meaning of the 1940 Act. See "Additional
Investment Activities and Risk Factors--Non-Diversification."
Initially, the Emerging Markets Debt Fund expects that its investments in
emerging market country debt securities will be made primarily in some or all
of the following emerging market countries:
<TABLE>
<S> <C> <C>
Algeria India Philippines
Argentina Indonesia Poland
Brazil Ivory Coast PortugaL
</TABLE>
<PAGE> 22
19
<TABLE>
<S> <C> <C>
Bulgaria Jamaica Russia
Chile Jordan Slovakia
China Lebanon Slovenia
Colombia Malaysia South Africa
Costa Rica Mexico Thailand
Czech Republic Morocco Trinidad & Tobago
Dominican Republic Nicaragua Tunisia
Ecuador Nigeria Turkey
Egypt Pakistan Uruguay
Greece Panama Venezuela
Hungary Paraguay Vietnam
Peru Zaire
</TABLE>
In selecting emerging market country debt securities for investment, SBAM will
apply a market risk analysis contemplating assessment of factors such as
liquidity, volatility, tax implications, interest rate sensitivity,
counterparty risks and technical market considerations. Currently, investing in
many emerging market country securities is not feasible or may involve
unacceptable political risks. As opportunities to invest in debt securities in
other countries develop, the Fund expects to expand and further diversify the
emerging market countries in which it invests. While the Fund generally is not
restricted in the portion of its assets which may be invested in a single
country or region, it is anticipated that, under normal conditions, the Fund's
assets will be invested in issuers in at least three countries.
Emerging market country debt securities in which the Emerging Markets Debt Fund
may invest are U.S. dollar-denominated and non-U.S. dollar-denominated debt
securities, including bonds, notes, bills, debentures, convertible securities,
warrants, bank debt obligations, short-term paper, mortgage and other
asset-backed securities, preferred stock, Loan Participations and Assignments
and interests issued by entities organized and operated for the purpose of
restructuring the investment characteristics of instruments issued by emerging
market country issuers. The Fund is subject to no restrictions on the
maturities of the emerging market country debt securities in which it will
invest and such maturities may range from overnight to thirty years. There is
no limit on the percentage of the Fund's assets that may be invested in
non-U.S. dollar denominated securities and a substantial portion of the Fund's
assets may be invested in non-U.S. dollar denominated securities. The amount of
assets invested in non-U.S. dollar denominated securities will vary depending
upon market conditions. The Fund may invest in Brady Bonds, which 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" herein and "Additional
Information on Portfolio Instruments and Investment Policies--Brady Bonds" in
the Statement of Additional Information. For a description of Loan
Participations and Assignments, see "Additional Investment Activities and Risk
Factors--Loan Participations and Assignments."
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
<PAGE> 23
20
and relative illiquidity of 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. See "Additional
Investment Activities and Risk Factors--Foreign Securities."
The Fund's investments in government, government-related and restructured debt
securities will consist of (i) debt securities or obligations issued or
guaranteed by governments, governmental agencies or instrumentalities and
political subdivisions located in emerging market countries (including
participations in loans between governments and financial institutions), (ii)
debt securities or obligations issued by government owned, controlled or
sponsored entities located in emerging market countries (including
participations in loans between governments and financial institutions), and
(iii) interests in issuers organized and operated for the purpose of
restructuring the investment characteristics of instruments issued by any of
the entities described above. Such type of restructuring involves the deposit
with or purchase by an entity of specific instruments and the issuance by that
entity of one or more classes of securities backed by, or representing
interests in, the underlying instruments. Certain issuers of such structured
securities may be deemed to be "investment companies" as defined in the 1940
Act. As a result, the Fund's investment in such securities may be limited by
certain investment restrictions contained in the 1940 Act. See "Additional
Information on Portfolio Instruments and Investment Policies--Structured
Investments" in the Statement of Additional Information. In addition to the
risks of investing in emerging market country debt securities, the Fund's
investment in government, government-related and restructured debt instruments
are subject to special risks, including the inability or unwillingness to repay
principal and interest, requests to reschedule or restructure outstanding debt,
and requests to extend additional loan amounts. The Fund may have limited
recourse in the event of default on such debt instruments. See "Additional
Investments Activities and Risk Factors--Foreign Securities" and "--High Yield
Securities".
The Emerging Market Debt Fund's investments in debt securities of corporate
issuers in emerging market countries may include debt securities or obligations
issued by (i) banks located in emerging market countries or by branches of
emerging market country banks located outside the home country or (ii)
companies organized under the laws of an emerging market country.
The securities in which the Fund will invest will not be required to meet a
minimum rating standard and may not be rated for creditworthiness by any
internationally recognized credit rating organization. In fact, the Fund's
investments are expected to be in the lower and lowest rating categories of
internationally recognized credit rating organizations or of comparable
quality. Such securities involve significantly greater risks, including price
volatility and risk of default of payment of interest and principal than higher
rated securities. An investment in the Emerging Markets Debt Fund should not be
considered as a complete investment program for all investors. See "Additional
Investment Activities and Risk Factors--Foreign Securities" and "--High Yield
Securities." Moreover, substantial investments in foreign securities may have
adverse tax implications as described under "Dividends, Distributions and
Taxes."
<PAGE> 24
21
In light of the risks associated with high yield corporate and sovereign debt
securities, SBAM will take various factors into consideration in evaluating the
creditworthiness of an issuer. For corporate debt securities, these will
typically include the issuer's financial resources, its sensitivity to economic
conditions and trends, the operating history of the issuer, and the experience
and track record of the issuer's management. For sovereign debt instruments,
these will typically include the economic and political conditions within the
issuer's country, the issuer's overall and external debt levels and debt
service ratios, the issuer's access to capital markets and other sources of
funding, and the issuer's debt service payment history. SBAM will also review
the ratings, if any, assigned to the security by any recognized rating
organizations, although SBAM's judgment as to the quality of a debt security
may differ from that suggested by the rating published by a rating service. In
addition to the foregoing credit analysis, SBAM will evaluate the relative
value of an investment compared with its perceived credit risk. In selecting
securities for the Emerging Markets Debt Fund, SBAM intends to consider the
correlation among securities represented in the Fund's portfolio in an attempt
to reduce the risk of exposure to market, industry and issuer volatility. The
Fund's ability to achieve its investment objective may be more dependent on
SBAM's credit analysis than would be the case if it invested in higher quality
debt securities. A description of the ratings used by Moody's and S&P is set
forth in Appendix A to this Prospectus.
The Emerging Markets Debt Fund may invest in zero coupon securities,
pay-in-kind bonds and deferred payment securities. The characteristics and
risks of these investments are described under "Additional Investment
Activities and Risk Factors--Zero Coupon Securities, Pay-in-Kind Bonds and
Deferred Payment Securities."
The Emerging Markets Debt Fund may invest up to 10% of its total assets in
common stock, convertible securities, warrants or other equity securities when
consistent with the Fund's objective. 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 SBAM, such purchase is appropriate.
In order to maintain liquidity, the Emerging Markets Debt Fund may hold and/or
invest up to 20% of its total assets in cash and/or U.S. dollar denominated
debt securities 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 a developed 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 the
SBAM; (3) obligations (including certificates of deposit, time deposits, demand
deposits and bankers' acceptances) of banks; and (4) repurchase agreements (as
discussed 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,
<PAGE> 25
22
in the opinion of SBAM, adverse conditions prevail in the securities markets
which makes the Fund's investment strategy inconsistent with the best interests
of the Fund's shareholders, then for defensive purposes, the Fund may
temporarily invest its assets without limit in such instruments.
The Emerging Markets Debt Fund may enter into repurchase agreements and reverse
repurchase agreements, may purchase securities on a firm commitment basis,
including when-issued securities and may lend portfolio securities. The Fund
may also invest in investment funds. For a description of these investment
practices and the risks associated therewith, see "Additional Investment
Activities and Risk Factors."
The Emerging Markets Debt 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. See "Additional Investment
Activities and Risk Factors--Restricted Securities and Securities with Limited
Trading Markets." 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 Emerging Markets Debt 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, including the ability to hedge against
currency exchange rate risks with respect to its holdings of non-U.S. dollar
denominated securities, may be limited by applicable regulations of the SEC,
the CFTC and the federal income tax requirements applicable to regulated
investment companies. Appendix B to this Prospectus and the Statement of
Additional Information contain descriptions of these strategies and of certain
risks associated therewith.
The foregoing investment policies and activities, other than the Emerging
Markets Debt Fund's investment objective, are not fundamental and may be
changed by the Board of Directors of Institutional Series Funds without the
approval of shareholders.
ASIA GROWTH FUND
The Asia Growth Fund's objective is to achieve long-term capital appreciation.
The Fund seeks to achieve its objective by investing at least 65% of its total
assets in equity and equity- related securities of Asian Companies. Asian
Companies include companies that (i) are organized under the laws of
Bangladesh, China, Hong Kong, India, Indonesia, Korea, Malaysia, Pakistan, the
Philippines, Singapore, Sri Lanka, Taiwan, Thailand or any other country in the
Asian region (other than Japan, Australia and New Zealand) that currently or in
the future permits foreign investment (collectively, "Asian Countries") or (ii)
regardless of where organized and as determined by SBAM AP, (a) derive at least
50% of their revenues from goods produced or sold, investments made, or
services performed in or with one or
<PAGE> 26
23
more of the Asian Countries, (b) maintain at least 50% of their assets in one
or more of the Asian Countries, or (c) have securities which are traded
principally on a stock exchange in an Asian Country. The Fund is
non-diversified within the meaning of the 1940 Act. See "Additional Investment
Activities and Risk Factors--Non-Diversification."
Equity securities in which the Asia Growth Fund may invest include common and
preferred stocks (including convertible preferred stock), bonds, notes and
debentures convertible into common and preferred stock, stock purchase warrants
and rights, equity interests in trusts, partnerships, joint ventures or similar
enterprises, and American, Global or other types of Depositary Receipts.
Equity-linked debt securities are debt instruments whose prices are indexed to
the prices of equity securities or securities indices. In other words, the
value at maturity or coupon rate of these equity-linked debt instruments is
determined by reference to a specific instrument or statistic. The performance
of equity-linked debt instruments depends to a great extent on the performance
of the security or index to which they are indexed, and may also be influenced
by interest rate changes in the United States and abroad. At the same time,
these instruments are subject to the credit risks associated with the issuer of
the security, and their values may decline substantially if the issuer's
creditworthiness deteriorates. Indexed instruments may be more volatile than
the underlying instruments.
There are no prescribed limits on geographic asset distributions among Asian
Countries and from time to time, SBAM AP expects to invest a significant
portion of the Asia Growth Fund's assets in Hong Kong, Malaysia, Singapore and
Thailand. Investments in each of these countries may from time to time exceed
25% of the Fund's total assets. In addition, more than 25% of the Fund's total
assets may be denominated or quoted in the currencies of any one or more of
such countries. In this connection, SBAM AP anticipates that up to 35% of the
Fund's initial investments will be in Hong Kong. Although SBAM AP expects that
most of the equity securities purchased by the Fund will be traded on a stock
exchange or in an over-the-counter market, most of the Asian securities markets
have substantially less volume than U.S. or other established markets and some
of the stock exchanges in the Asian Countries are in the early stages of their
development. Concentration of the Fund's assets in one or a few of the Asian
countries and Asian currencies will subject the Fund, to a greater extent than
if the Fund's assets were less geographically concentrated, to the risks of
adverse changes in the securities and foreign exchange markets of such
countries and social, political or economic events which may occur in those
countries. For a more detailed discussion of the special risks which the Fund
is subject to by virtue of its investment in foreign securities, see
"Additional Investment Activities and Risk Factors--Foreign Securities." An
investment in the Asia Growth Fund should not be considered as a complete
investment program for all investors.
In pursuing the Asia Growth Fund's investment objective, SBAM AP will combine a
traditional fundamental approach towards evaluating industry sectors and
individual securities of Asian Companies with a risk management driven approach
seeking to keep the Fund's volatility of return in line with or lower than that
currently experienced in the Asian markets.
SBAM AP expects to focus on certain industry groups across Asian Countries in
an attempt to identify and capture the relative value of such groups on a
pan-regional basis. SBAM AP
<PAGE> 27
24
will research individual companies in an effort to identify the investment
opportunities within these industry groups which will provide long-term capital
appreciation. In addition, SBAM AP intends to meet the management of individual
companies on a periodic basis. As part of the Asia Growth Fund's risk
management objective, SBAM AP will also concentrate on macroeconomic issues and
other variables influencing the direction of monetary policies followed by
Asian Central Banks.
The investment process to be implemented by SBAM AP will consist of the three
following principal (and potentially overlapping) types of approaches.
Pan-Regional Industry Group Decisions. SBAM AP will seek to identify the
pan-regional industrial sectors which are likely to exhibit attractive returns
over the long-term. In selecting such industrial sectors, SBAM AP will focus on
industry cycles and competitiveness as well as the industrial characteristics
of the Asian economies. In addition, SBAM AP will review government
regulations, industrial policies, access to technology and industrial research
reports provided by industrial companies or associations and securities dealers
in Asian Countries. SBAM AP will focus on those industries which represent
meaningful weightings in the total market capitalization of the Asian Countries
including, but not limited to, telecommunications, consumer durables and
nondurables, food and beverage, electronics, hotels, power engineering and
generation, basic industries, public utilities, property and financial sectors.
SBAM AP believes that an investment process that places emphasis on industry
groups is appropriate given the current state of economic and financial
integration being achieved by the Asian Countries and the relatively
significant concentration of market capitalization in Asian Countries toward
certain industrial sectors.
Fundamental Analysis: Individual Security Decisions. In order to identify the
most attractive investment opportunities within industry groups, SBAM AP will
employ extensive research to select investments in Asian Countries that offer
long-term growth potential for investors. While the Asia Growth Fund generally
seeks to invest in securities of larger companies within the particular Asian
market, it may also invest in the securities of medium and smaller companies
that, in the opinion of SBAM AP, have potential for growth. In particular, SBAM
AP will employ the following three-step process to evaluate particular
investment opportunities for the Fund.
Screening Process. SBAM AP will implement a systematic screening process in an
effort to identify individual securities it believes likely to exhibit
attractive returns over the long term. SBAM AP will screen companies according
to factors such as the perceived quality of their management and business,
overall sustainable competitiveness, historical earnings, dividend records over
at least a full business cycle, liquidity, trading volumes and historical and
expected volatility.
Financial Analysis Process. The financial analysis of selected companies will
focus on evaluating the fundamental value of the enterprise. SBAM AP will use a
value-driven process which will emphasize quantitative analysis based on return
on equity ("ROE") and its components, such as operating margins, financial
leverage, asset turnover and interest and tax burdens. In addition, the
company's cash flow generating capabilities and return on assets will
<PAGE> 28
25
be considered. SBAM AP believes that ROE and cash flow dynamics are appropriate
variables when analyzing companies which operate in high growth markets, such
as Asia, as the ability of such companies to capture this growth by using the
right allocation of resources and asset financing is of utmost importance.
Valuation Process and Volatility Analysis. The valuation process will focus on
Price Earnings Ratio ("PER") calculations and comparisons with historical
relative PER bands and local market conditions. SBAM AP will use measures such
as PER/growth, and will evaluate whether the security enjoys accelerating
earnings growth momentum due to management changes or the introduction of new
products and/or services. In addition, where appropriate, SBAM AP will conduct
specific dividend discount model and discount cash flow analyses for specific
securities with predictable cash flows or dividend streams. Through the use of
this analysis, SBAM AP will attempt to identify companies with strong potential
for appreciation relative to their downside exposure. Lastly, SBAM AP will
conduct a volatility analysis on selected securities in an effort to forecast
the expected risk of such securities and compare the results of such risk
analysis with these securities' expected returns. Investments may be made in
companies that do not have extensive operating experience provided that SBAM AP
believes such companies nevertheless have significant growth potential.
Risk Management and Macroeconomic/Top-Down Analysis. SBAM AP will also consider
macroeconomic variables, such as liquidity and capital flows, foreign equity
and industrial investments and the direction of monetary policies in the Asian
Countries in an effort to capture individual market movements as well as attain
an optimal asset allocation mix and to identify the appropriate risk management
parameters for the Asia Growth Fund. The macroeconomic data SBAM AP will
monitor and analyze includes, but is not limited to, gross domestic product
growth, balance of payments and current account balances, budget deficits or
surpluses, inflation and interest rates. SBAM AP intends to meet with central
bankers, regional economists and strategists on a regular basis to assess the
present and future direction of monetary policies and their likely impact on
the markets of the Asian Countries.
As part of the Fund's risk management approach and in an attempt to better
assess and control the Fund's overall risk level on an ongoing basis, SBAM AP
will employ a quantitative analysis at each stage of the investment process
which will consist of analyzing and forecasting volatilities of the Asian
markets and securities. SBAM AP will use a number of volatility-control
strategies, including derivative instruments (as discussed below), in an effort
to attain an optimal asset allocation mix, for hedging purposes in an attempt
to control the Fund's overall risk level and to obtain exposure to markets in
the Asian Countries which have restrictions on foreign investment.
The Asia Growth Fund from time to time may invest up to 10% of its total assets
in non-convertible debt securities, which may include securities rated below
investment grade by S&P and Moody's with no minimum rating required or
comparable unrated securities. 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."
<PAGE> 29
26
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, then for defensive purposes, the Fund may temporarily
invest its assets without limit in such instruments.
The Asia Growth Fund may enter into repurchase agreements and reverse
repurchase agreements, may purchase securities on a firm commitment basis,
including when-issued securities and may lend portfolio securities. The Fund
may also invest in investment funds. For a description of these investment
practices and the risks associated therewith, see "Additional Investment
Activities and Risk Factors."
The Asia Growth Fund may purchase securities for which there is a limited
trading market or which are subject to restrictions on resale to the public.
The Fund will not invest more than 15% of the value of its total assets in
illiquid securities, such as "restricted securities" which are illiquid, and
securities that are not readily marketable. For further discussion of illiquid
securities and their associated risks, see "Additional Investment Activities
and Risk Factors--Restricted Securities and Securities With Limited Trading
Markets." As more fully described in the Statement of Additional Information,
the Fund may purchase Rule 144A securities. The Fund's holdings of Rule 144A
securities which are liquid securities will not be subject to the 15%
limitation on investments in illiquid securities.
The Asia Growth Fund is currently authorized and intends to use the various
investment strategies referred to under "Additional Investment Activities and
Risk Factors--Derivatives." The Fund's ability to pursue certain of these
strategies may be limited by applicable regulations of the SEC, the CFTC and
the federal income tax requirements applicable to regulated investment
companies. Appendix B to this Prospectus and the Statement of Additional
Information contain descriptions of these strategies and of certain risks
associated therewith.
The foregoing investment policies and activities, other than the Asia Growth
Fund's investment objective, are not fundamental and may be changed by the
Board of Directors of Institutional Series Funds without the approval of
shareholders.
<PAGE> 30
27
The investment objective of each Fund is deemed to be a fundamental policy and
may not be changed without the affirmative vote of the holders of a majority of
its outstanding shares as defined in the 1940 Act. There is no assurance that a
Fund will achieve its investment objective.
ADDITIONAL INVESTMENT ACTIVITIES AND RISK FACTORS
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 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, banks or recognized
financial institutions which, in the opinion of the investment manager based on
guidelines established by the applicable Fund's Board of Directors, are deemed
creditworthy. The investment manager 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. In the
event of default by the seller under the repurchase agreement, a Fund could
experience losses and experience time delays in connection with the disposition
of the underlying security. To the extent that, in the meantime, the value of
the securities that a Fund has purchased has decreased, the Fund could
experience a loss. Repurchase agreements with maturities of more than seven
days will be treated as illiquid securities by a Fund.
REVERSE REPURCHASE AGREEMENTS. Certain of the Funds may enter into "reverse"
repurchase agreements to avoid selling securities during unfavorable market
conditions to meet redemptions. Pursuant to a reverse repurchase agreement, a
Fund will sell portfolio securities and agree to repurchase them from the buyer
at a particular date and price. Whenever a Fund enters into a reverse
repurchase agreement, it will establish a segregated account in which it will
maintain liquid assets in an amount at least equal to the repurchase price
marked to market daily (including accrued interest), and will subsequently
monitor the account to ensure that such equivalent value is maintained. A Fund
pays interest on amounts obtained pursuant to reverse repurchase agreements.
Reverse repurchase agreements are considered to be borrowings by a Fund.
LOANS OF PORTFOLIO SECURITIES. Certain of the Funds may lend portfolio
securities to generate income. In the event of the bankruptcy of the other
party to a securities loan, a Fund could experience delays in recovering the
securities it lent. To the extent that, in the meantime, the value of the
securities a Fund lent has increased, the Fund could experience a loss. The
value of securities loaned will be marked to market daily. Any securities that
a Fund may receive as collateral will not become a part of its portfolio at the
time of the loan and, in the event of a default by the borrower, the Fund will,
if permitted by law, dispose of such collateral except that the Fund may retain
any such part thereof that is a security in which the Fund is permitted to
invest. The Fund may invest the cash collateral and earn additional income or
receive an agreed-upon fee from a borrower that has delivered cash equivalent
collateral. Cash collateral received by a Fund may be invested in securities in
<PAGE> 31
28
which the Fund is permitted to invest. Portfolio securities purchased with cash
collateral are subject to possible depreciation. Voting rights may pass with
the lending of portfolio securities. Loans of securities by a Fund will be
subject to termination at the Fund's or the borrower's option. A Fund may pay
administrative and custodial fees in connection with a securities loan and may
pay a negotiated portion of the interest or fee earned with respect to the
collateral to the borrower or a placing broker.
FIRM COMMITMENTS AND WHEN-ISSUED SECURITIES. A Fund may purchase securities on
a firm commitment basis, including when-issued securities. Securities purchased
on a firm commitment basis are purchased for delivery beyond the normal
settlement date at a stated price and yield. No income accrues to the purchaser
of a security on a firm commitment basis prior 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, PAY-IN-KIND BONDS AND DEFERRED PAYMENT SECURITIES. The
High Yield Bond Fund and the Emerging Markets Debt Fund may invest in zero
coupon securities, pay-in-kind 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 pay-in-kind bonds. Pay-in-kind 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, pay-in-kind 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
<PAGE> 32
29
periods of rising interest rates than ordinary interest-paying debt securities
with similar maturities. Zero coupon securities, pay-in-kind 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 15% limitation on investments in illiquid securities discussed below.
Current federal income tax law requires the holder of a zero coupon security,
certain pay-in-kind bonds, deferred payment securities and certain other
securities acquired at a discount (such as Brady Bonds) to accrue income with
respect to these securities prior to the receipt of cash payments. Accordingly,
to avoid liability for federal income and excise taxes, a Fund may be required
to distribute income accrued with respect to these securities and may have to
dispose of portfolio securities under disadvantageous circumstances in order to
generate cash to satisfy these distribution requirements.
LOAN PARTICIPATIONS AND ASSIGNMENTS. The High Yield Bond Fund and the Emerging
Markets Debt Fund may invest in Loan Participations and Assignments. The Funds
consider these investments to be investments in debt securities for purposes of
this Prospectus. Loan Participations typically will result in a Fund having a
contractual relationship only with the Lender, not with the borrower. A Fund
will have the right to receive payments of principal, interest and any fees to
which it is entitled only from the Lender selling the Participation and only
upon receipt by the Lender of the payments from the borrower. In connection
with purchasing Loan Participations, a Fund generally will have no right to
enforce compliance by the borrower with the terms of the loan agreement
relating to the Loan, nor any rights of set-off against the borrower, and the
Fund may not benefit directly from any collateral supporting the Loan in which
it has purchased the Participation. As a result, a Fund will assume the credit
risk of both the borrower and the Lender that is selling the Participation. In
the event of the insolvency of the Lender selling a Participation, a Fund may
be treated as a general creditor of the Lender and may not benefit from any
set-off between the Lender and the borrower. A Fund will acquire Loan
Participations only if the Lender interpositioned between the Fund and the
borrower is determined by SBAM to be creditworthy. When a Fund purchases
Assignments from Lenders, the Fund will acquire direct rights against the
borrower on the Loan, except that under certain circumstances such rights may
be more limited than those held by the assigning Lender.
A Fund may have difficulty disposing of Assignments and Loan Participations.
Because the market for such instruments is not highly liquid, the Funds
anticipate that such instruments could be sold only to a limited number of
institutional investors. The lack of a highly liquid secondary market may have
an adverse impact on the value of such instruments and will have an adverse
impact on a Fund's ability to dispose of particular Assignments or Loan
Participations in response to a specific economic event, such as deterioration
in the creditworthiness of the borrower.
The Board of Directors of Institutional Series Funds has adopted policies and
procedures for the High Yield Bond Fund and the Emerging Markets Debt Fund for
the purpose of determining whether Assignments and Loan Participations are
liquid or illiquid for purposes
<PAGE> 33
30
of a Fund's limitation on investment in illiquid securities. Pursuant to those
policies and procedures, the Board of Directors has delegated to the investment
manager 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.
In valuing a Loan Participation or Assignment held by a Fund for which a
secondary trading market exists, the Fund will rely upon prices or quotations
provided by banks, dealers or pricing services. To the extent a secondary
trading market does not exist, a Fund's Loan Participations and Assignments will
be valued in accordance with procedures adopted by the Board of Directors,
taking into consideration, among other factors, (i) the creditworthiness of the
borrower under the Loan and the Lender, (ii) the current interest rate, period
until next rate reset and maturity of the Loan, (iii) recent prices in the
market for similar Loans and (iv) recent prices in the market for instruments of
similar quality, rate, period until next interest rate reset and maturity. See
"Net Asset Value."
To the extent that liquid Assignments and Loan Participations 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. The investment manager, under the supervision of the Board of
Directors, will monitor 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.
RESTRICTED SECURITIES AND SECURITIES WITH LIMITED TRADING MARKETS. Each Fund
may purchase securities for which there is a limited trading market or which
are subject to restrictions on resale to the public. 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. Rule 144A is a recent development and there is no assurance that a
liquid market in Rule 144A securities will develop or be maintained. To the
extent that the number of qualified institutional buyers is reduced, a
previously liquid Rule 144A security may be determined to be illiquid, thus
increasing the percentage of illiquid assets in a Fund's portfolio. The Board
of Directors of Institutional Series Funds will be responsible for monitoring
the liquidity of Rule 144A securities and the selection by the investment
manager of such securities.
[/R]
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.
FOREIGN SECURITIES. Investors should recognize that investing in the securities
of foreign issuers generally, and particularly in emerging market issuers,
involves special considerations which are not typically associated with
investing in securities of U.S. issuers. Investments in securities of foreign
issuers may involve risks arising from differences between U.S. and
<PAGE> 34
31
foreign securities markets, including less volume, much greater price
volatility in and relative illiquidity of foreign securities markets, different
trading and settlement practices and less 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 an emerging market 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 taxes on
certain amounts of a Fund's income which may reduce the net return on foreign
investments as compared to income received from a U.S. issuer, the possible
seizure or nationalization of foreign assets and the possible establishment of
exchange controls, expropriation, confiscatory taxation, other foreign
governmental laws or restrictions which might affect adversely payments due on
securities held by a Fund, the lack of extensive operating experience of
eligible foreign subcustodians and legal limitations on the ability of a Fund
to recover assets held in custody by a foreign subcustodian in the event of the
subcustodian's bankruptcy. Moreover, brokerage commissions and other
transactions costs on foreign securities exchanges are generally higher than in
the United States.
In addition, there may be less publicly-available information about a foreign
issuer than about a U.S. issuer, and foreign issuers may not be subject to the
same accounting, auditing and financial record-keeping standards and
requirements as U.S. issuers. In particular, the assets and profits appearing
on the financial statements of an emerging market country issuer may not
reflect its financial position or results of operations in the way they would
be reflected had 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
<PAGE> 35
32
and securities markets. Finally, in the event of a default of any such foreign
obligations, it may be more difficult for a Fund to obtain or enforce a
judgment against the issuers of such obligations. See "--High Yield
Securities."
For a further discussion of certain risks involved in investing foreign
securities, particularly of emerging market issuers, see "Additional
Information on Portfolio Instruments and Investment Policies--Foreign
Securities" in the Statement of Additional Information.
FIXED-INCOME SECURITIES. 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. Prices of
longer term securities generally increase or decrease more sharply than those
of shorter term securities in response to interest rate changes, particularly
if such securities were purchased at a discount. Because the High Yield Bond
Fund and the Emerging Markets Debt Fund will invest primarily in fixed-income
securities, the net asset value of these Funds' shares can be expected to
change as general levels of interest rates fluctuate. It should be noted that
the market values of securities rated below investment grade and comparable
unrated securities tend to react less to fluctuations in interest rate levels
than do those of higher-rated securities.
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.
HIGH YIELD SECURITIES. The High Yield Bond Fund and the Emerging Markets Debt
Fund may invest without limitation in high yield securities. The Asia Growth
Fund may invest without limitation in convertible non-U.S. high yield
securities and up to 10% of its total assets in non-convertible non-U.S. high
yield securities. Under rating agency guidelines, medium- and lower-rated
securities and comparable unrated securities will likely have some quality and
protective characteristics that are outweighed by large uncertainties or major
risk exposures to adverse conditions. Medium and lower rated securities are
considered to have extremely poor prospects of ever attaining any real
investment standing, to have a current identifiable vulnerability to default or
are in default, to be unlikely to have the capacity to pay interest and repay
principal when due in the event of adverse business, financial or economic
conditions, and/or to be in default or not current in the payment of interest
or principal. Such securities are considered speculative with respect to the
issuer's capacity to pay interest and repay principal in accordance with the
terms of the obligations. Accordingly, it is possible that these types of
factors could, in certain instances, reduce the value of securities held by a
Fund with a commensurate effect on the value of the Fund's shares.
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33
Changes by recognized rating services in their ratings of any fixed-income
security and in the ability of an issuer to make payments of interest and
principal may also affect the value of these investments. A description of the
ratings used by Moody's and S&P is set forth in Appendix A to this Prospectus.
The ratings of Moody's and S&P generally represent the opinions of those
organizations as to the quality of the securities that they rate. Such ratings,
however, are relative and subjective, are not absolute standards of quality,
are subject to change and do not evaluate the market risk or liquidity of the
securities. Ratings of a non-U.S. debt instrument, to the extent that those
ratings are undertaken, are related to evaluations of the country in which the
issuer of the instrument is located. Ratings generally take into account the
currency in which a non-U.S. debt instrument is denominated. Instruments
issued by a foreign government in other than the local currency, for example,
typically have a lower rating than local currency instruments due to the
existence of an additional risk that the government will be unable to obtain
the required foreign currency to service its foreign currency-denominated debt.
In general, the ratings of debt securities or obligations issued by a non-U.S.
public or private entity will not be higher than the rating of the currency or
the foreign currency debt of the central government of the country in which the
issuer is located, regardless of the intrinsic creditworthiness of the issuer.
The secondary markets for high yield securities are not as liquid as the
secondary markets for higher rated securities. The secondary markets for high
yield securities are concentrated in relatively few market makers and
participants in the market are mostly institutional investors, including
insurance companies, banks, other financial institutions and mutual funds.
These factors may have an adverse effect on the ability of a Fund holding such
securities to dispose of particular portfolio investments at fair value, may
adversely affect the Fund's net asset value per share and may limit the ability
of such a Fund to obtain accurate market quotations for purposes of valuing
securities and calculating net asset value. If a Fund is not able to obtain
precise or accurate market quotations for a particular security, it will become
more difficult for the Board of Directors to value such Fund's portfolio
securities, and the Directors may have to use a greater degree of judgment in
making such valuations. The secondary markets for high yield securities may
contract due to adverse economic conditions or for other reasons relating to or
independent of any specific adverse changes in the condition of a particular
issuer and, as a result, certain liquid securities in a Fund's portfolio may
become illiquid and the proportion of the Fund's assets invested in illiquid
securities may significantly increase.
Prices for high yield securities may be affected by legislative and regulatory
developments. These laws could adversely affect a Fund's net asset value and
investment practices, the secondary market for high yield securities, the
financial condition of issuers of these securities and the value of outstanding
high yield securities. For example, federal legislation requiring the
divestiture by federally insured savings and loan associations of their
investments in high yield bonds and limiting the deductibility of interest by
certain corporate issuers of high yield bonds adversely affected the market in
recent years.
HIGH YIELD CORPORATE SECURITIES. While the market values of securities rated
below investment grade and comparable unrated securities tend to react less to
fluctuations in interest rate levels than do those of higher-rated securities,
the market values of certain of
<PAGE> 37
34
these securities also tend to be more sensitive to individual corporate
developments and changes in economic conditions than higher-rated securities.
In addition, such securities present a higher degree of credit risk. Issuers of
these securities are often highly leveraged and may not have more traditional
methods of financing available to them, so that their ability to service their
debt obligations during an economic downturn or during sustained periods of
rising interest rates may be impaired. The risk of loss due to default by such
issuers is significantly greater than with investment grade securities because
such securities generally are unsecured and frequently are subordinated to the
prior payment of senior indebtedness. A Fund also may incur additional expenses
to the extent that it is required to seek recovery upon a default in the
payment of principal or interest on its portfolio holdings.
The development of a market for high yield corporate securities generally, and
non-U.S. securities in particular, is relatively new and may undergo
significant changes in the future.
High yield corporate securities in which the applicable Funds may invest will
generally be unsecured. Most of the debt securities will bear interest at fixed
rates but a Fund may also invest in securities with variable rates of interest
or which involve equity features, such as contingent interest or participations
based on revenues, sales or profits (i.e., interest or other payments, often in
addition to a fixed rate of return, that are based on the borrower's attainment
of specified levels of revenues, sales or profits and thus enable the holder of
the security to share in the potential success of the venture).
HIGH YIELD FOREIGN SOVEREIGN DEBT SECURITIES. Investing in fixed and floating
rate high yield foreign sovereign debt securities will expose a Fund to the
direct or indirect consequences of political, social or economic changes in the
countries that issue the securities. See "--Foreign Securities" above. The
ability and willingness of sovereign obligors in developing and emerging market
countries or the governmental authorities that control repayment of their
external debt to pay principal and interest on such debt when due may depend on
general economic and political conditions within the relevant country.
Countries such as those in which a Fund may invest have historically
experienced, and may continue to experience, high rates of inflation, high
interest rates, exchange rate trade difficulties and extreme poverty and
unemployment. Many of these countries are also characterized by political
uncertainty or instability. Additional factors which may influence the ability
or willingness to service debt include, but are not limited to, a country's
cash flow situation, the availability of sufficient foreign exchange on the
date a payment is due, the relative size of its debt service burden to the
economy as a whole, and its government's policy towards the International
Monetary Fund, the World Bank and other international agencies.
The ability of a foreign sovereign obligor to make timely payments on its
external debt obligations will also be strongly influenced by the obligor's
balance of payments, including export performance, its access to international
credits and investments, fluctuations in interest rates and the extent of its
foreign reserves. A country whose exports are concentrated in a few commodities
or whose economy depends on certain strategic imports could be vulnerable to
fluctuations in international prices of these commodities or imports. To the
extent that a country receives payment for its exports in currencies other than
dollars, its ability to make debt payments denominated in dollars could be
adversely affected. If a foreign sovereign
<PAGE> 38
35
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.
As a result of the foregoing or other factors, a governmental obligor may
default on its obligations. If such an event occurs, a Fund may have limited
legal recourse against the issuer and/or guarantor. Remedies must, in some
cases, be pursued in the courts of the defaulting party itself, and the ability
of the holder of foreign sovereign debt securities to obtain recourse may be
subject to the political climate in the relevant country. In addition, no
assurance can be given that the holders of commercial bank debt will not
contest payments to the holders of other foreign sovereign debt obligations in
the event of default under their commercial bank loan agreements.
Certain debt obligations, customarily referred to as "Brady Bonds," are created
through the exchange of existing commercial bank loans to foreign entities for
new obligations in connection with debt restructuring under a plan introduced
by former U.S. Secretary of the Treasury, Nicholas F. Brady (the "Brady Plan").
Brady Bonds have been issued only recently, and, accordingly, do not have a
long payment history. They may be fully or partially collateralized or
uncollateralized and issued in various currencies (although most are U.S.
dollar denominated) and they are actively traded in the over-the-counter
secondary market. U.S. dollar denominated, collateralized Brady Bonds, which
may be fixed rate par bonds or floating rate discount bonds, are generally
collateralized in full as to principal due at maturity by U.S. Treasury zero
coupon obligations which have the same maturity as the Brady Bonds. Certain
interest payments on these Brady Bonds may be collateralized by cash or
securities in an amount that, in the case of fixed rate bonds, is typically
equal to between 12 and 18 months of rolling interest payments or, in the case
of floating rate bonds, initially is typically equal to between 12 and 18
months rolling interest payments based on the applicable interest rate at that
time and is adjusted at regular intervals thereafter with the balance of
interest accruals in each case being uncollateralized. Payment of interest and
(except in the case of principal collateralized Brady Bonds) principal on Brady
Bonds with no or limited collateral depends on the willingness and ability of
the foreign government to make payment. In the event of a default on
collateralized Brady Bonds for which obligations are accelerated, the
collateral for the payment of principal will not be distributed to investors,
nor will such obligations be sold and the proceeds distributed. The collateral
will be held by the collateral
<PAGE> 39
36
agent to the scheduled maturity of the defaulted Brady Bonds, which will
continue to be outstanding, at which time the face amount of the collateral
will equal the principal payments which would have then been due on the Brady
Bonds in the normal course. Based upon current market conditions, a Fund would
not intend to purchase Brady Bonds which, at the time of investment, are in
default as to payments. However, in light of the residual risk of the Brady
Bonds and, among other factors, the history of default with respect to
commercial bank loans by public and private entities of countries issuing Brady
Bonds, investments in Brady Bonds are to be viewed as speculative. A
substantial portion of the Brady Bonds and other sovereign debt securities in
which the High Yield Bond Fund and Emerging Markets Debt Fund invest are likely
to be acquired at a discount, which involves certain considerations discussed
below under "Dividends, Distributions and Taxes."
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 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.
For a further discussion of certain risks involved in investing in foreign
securities, particularly of emerging market issuers, see "Additional
Information on Portfolio Instruments and Investment Policies--Foreign
Securities" in the Statement of Additional Information.
INVESTMENT FUNDS. Certain of the Funds may invest in unaffiliated investment
funds which invest principally in securities in which that Fund is authorized
to invest. Under the 1940 Act, the Fund may invest a maximum of 10% of its
total assets in the securities of other investment companies. In addition,
under the 1940 Act, not more than 5% of the Fund's total assets may be invested
in the securities of any one investment company. The Money Market Fund will
only invest in other money market funds which are subject to the requirements
of Rule 2a-7 under the 1940 Act and which are considered to present minimal
credit risks. To the extent a Fund invests in other investment funds, the
Fund's shareholders will incur certain duplicative fees and expenses, including
investment advisory fees. A Fund's investment in certain investment funds will
result in special U.S. Federal income tax consequences described below under
"Dividends, Distributions and Taxes."
BORROWING. Each of the Funds may borrow in certain limited circumstances. See
"Investment Limitations." Borrowing creates an opportunity for increased
return, but, at the
<PAGE> 40
37
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 SBAM's or SBAM AP's strategy and the ability of
the Fund to comply with certain provisions of the Internal Revenue Code of
1986, as amended (the "Code") in order to provide "pass through" tax treatment
to shareholders. Furthermore, if a Fund were to engage in borrowing, an
increase in interest rates could reduce the value of the Fund's shares by
increasing the Fund's interest expense.
NON-DIVERSIFICATION. The Emerging Markets Debt Fund and the Asia Growth Fund
are classified as non-diversified investment companies 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 for qualification as a regulated investment company. To the extent
a Fund invests a greater proportion of its assets in the securities of a
smaller number of issuers, the Fund may be more susceptible to any single
economic, political or regulatory occurrence than a more diversified fund and
may be subject to greater risk of loss with respect to its portfolio
securities. See "Dividends, Distributions and Taxes" and "Investment
Limitations."
DERIVATIVES. Certain of the Funds may be authorized to 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. The description in this Prospectus of each
Fund indicates which, if any, of these types of transactions may be used by that
Fund. Although these strategies are regularly used by some investment companies
and other institutional investors, it is not presently anticipated that any of
these strategies will be used to a significant degree by any Fund unless
otherwise specifically indicated in the description of the particular Fund
contained in this Prospectus. Over time, however, techniques and instruments may
change as new instruments and strategies are developed or regulatory changes
occur.
Subject to the constraints described above, a Fund may (if and to the extent so
authorized) purchase and sell interest rate, currency or stock or bond index
futures contracts and enter into currency forward contracts and currency swaps;
purchase and sell (or write) exchange listed and over-the-counter put and call
options on securities, Loan Participations and Assignments, currencies, futures
contracts, indices and other financial instruments, and a Fund may enter into
interest rate transactions, equity swaps and related transactions and other
similar transactions which may be developed to the extent the investment
manager determines that they are consistent with the applicable Fund's
investment objective and policies and applicable regulatory requirements
(collectively, these transactions are referred to in this Prospectus as
"Derivatives"). A Fund's interest rate transactions may take the form of swaps,
caps, floors and collars, and a Fund's currency transactions may take the form
of currency
<PAGE> 41
38
forward contracts, currency futures contracts, currency swaps and options on
currencies or currency futures contracts.
Derivatives may be used to attempt to protect against possible changes in the
market value of securities held or to be purchased for a Fund's portfolio
resulting from securities markets or currency exchange rate fluctuations, to
protect a Fund's unrealized gains in the value of its securities, to facilitate
the sale of those securities for investment purposes, to manage the effective
maturity or duration of a Fund's portfolio or to establish a position in the
derivatives markets as a temporary substitute for purchasing or selling
particular securities or to seek to enhance a Fund's income or gain. A Fund may
use any or all types of Derivatives which it is authorized to use at any time;
no particular strategy will dictate the use of one type of transaction rather
than another, as use of any authorized Derivative will be a function of
numerous variables, including market conditions. The ability of a Fund to
utilize Derivatives successfully will depend on, in addition to the factors
described above, the investment manager's ability to predict pertinent market
movements, which cannot be assured. These skills are different from those
needed to select a Fund's portfolio securities. None of the Funds is a
"commodity pool" (i.e., a pooled investment vehicle which trades in commodity
futures contracts and options thereon and the operator of which is registered
with the CFTC), and Derivatives involving futures contracts and options on
futures contracts will be purchased, sold or entered into only for bona fide
hedging purposes, provided that a Fund may enter into such transactions for
purposes other than bona fide hedging if, immediately thereafter, the sum of
the amount of its initial margin and premiums on open contracts and options
would not exceed 5% of the liquidation value of the Fund's portfolio, after
taking into account unrealized profits and losses on existing contracts
provided, further, that, in the case of an option that is in-the-money, the
in-the-money amount may be excluded in calculating the 5% limitation. The use
of certain Derivatives in certain circumstances will require that a Fund
segregate cash, liquid high grade debt obligations or other assets to the
extent a Fund's obligations are not otherwise "covered" through ownership of
the underlying security, financial instrument or currency. Derivatives involve
special risks, including possible default by the other party to the
transaction, illiquidity and, to the extent the investment manager's view as to
certain market movements is incorrect, the risk that the use of Derivatives
could result in significantly greater losses than if it had not been used. Use
of put and call options could result in losses to a Fund, force the purchase or
sale of portfolio securities at inopportune times or for prices higher or lower
than current market values, or cause a Fund to hold a security it might
otherwise sell. The use of currency transactions could result in a Fund
incurring losses as a result of the imposition of exchange controls, suspension
of settlements, or the inability to deliver or receive a specified currency in
addition to exchange rate fluctuations. The use of options and futures
transactions entails certain special risks. In particular, the variable degree
of correlation between price movements of futures contracts and price movements
in the related portfolio position of a Fund could create the possibility that
losses on the Derivative will be greater than gains in the value of the Fund's
position. In addition, futures and options markets could be illiquid in some
circumstances and certain over-the-counter options could have no markets. A
Fund might not be able to close out certain positions without incurring
substantial losses. To the extent a Fund utilizes futures and options
transactions for hedging, such transactions should tend to minimize the risk of
loss due to a decline in the value of the hedged position and, at the same
time, limit any potential
<PAGE> 42
39
gain to the Fund that might result from an increase in value of the position.
Finally, the daily variation margin requirements for futures contracts create a
greater ongoing potential financial risk than would purchases of options, in
which case the exposure is limited to the cost of the initial premium and
transaction costs. Losses resulting from the use of Derivatives will reduce a
Fund's net asset value, and possibly income, and the losses may be
significantly greater than if Derivatives had not been used. Additional
information regarding the risks and special considerations associated with
Derivatives appears in Appendix B to this Prospectus and the Statement of
Additional Information.
The degree of a Fund's use of Derivatives may be limited by certain provisions
of the Code. See "Dividends, Distributions and Taxes."
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.
The High Yield Bond Fund and the Emerging Markets Debt Fund each anticipates
that its annual portfolio turnover rate generally will not exceed 150% and the
Asia Growth Fund anticipates that its annual portfolio turnover rate generally
will not exceed 100%. However, the expected portfolio rates may be exceeded if
conditions warrant. 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.
With respect to the 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 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
SBAM's judgment as to a desirable portfolio maturity structure or if such
disposition is believed to be advisable due to other circumstances or
considerations. Subsequent to its purchase, a portfolio security may be
assigned a lower rating or cease to be rated. Such an event would not require
the disposition of the instrument, but SBAM will consider such an event in
determining whether the Fund should continue to hold the security. The policy
of the Money Market Fund regarding dispositions of portfolio securities and its
policy of investing in securities deemed to have maturities of thirteen months
or less will result in high portfolio turnover. A higher rate of portfolio
turnover results in increased transaction costs to the Fund in the form of
dealer spreads. See "Portfolio Transactions" in the Statement of Additional
Information.
INVESTMENT LIMITATIONS
The following investment restrictions and certain of those described in the
Statement of Additional Information are fundamental policies applicable to the
individual Funds which may be changed only when permitted by law and approved
by the holders of a majority of each Fund's outstanding voting securities, as
defined in the 1940 Act. Except for the investment
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40
restrictions set forth below and in the Statement of Additional Information and
each Fund's investment objective, the other policies and percentage limitations
referred to in this Prospectus and in the Statement of Additional Information
are not fundamental policies of the Funds and may be changed by the applicable
Fund's Board of Directors without shareholder approval.
If a percentage restriction on investment or use of assets set forth below is
adhered to at the time a transaction is effected, later changes in percentages
resulting from changing values will not be considered a violation.
MONEY MARKET FUND
The Money Market Fund may not:
(1) invest more than 5% of the current value of its total assets in
the securities of any one issuer, other than obligations issued or
guaranteed by the U.S. government, its agencies or instrumentalities;
however, up to 25% of the value of the total assets of the Fund may be
invested without regard to this limitation;
(2) 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;
(3) borrow money except as a temporary measure from banks for
extraordinary or emergency purposes, and in no event in excess of 15%
of the value of its total assets, except that for the purpose of this
restriction, short-term credits necessary for settlement of securities
transactions are not considered borrowings (the Fund will not purchase
any securities at any time while such borrowings exceed 5% of the
value of its total assets); or
(4) pledge, hypothecate, mortgage or otherwise encumber its assets in
excess of 20% of the value of its total assets, and then only to
secure borrowings permitted by (3) above.
With respect to investment limitation (1), the Fund intends (as a matter of
non-fundamental policy) to limit investments in the securities of any single
issuer (other than securities issued or guaranteed by the U.S. government, its
agencies or instrumentalities) to not more than 5% of the Fund's total assets
at the time of purchase, provided that the Fund may invest up to 25% of its
total assets in the securities of a single issuer for a period of up to three
Business Days.
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41
HIGH YIELD BOND FUND, EMERGING MARKETS DEBT FUND AND ASIA GROWTH FUND
The High Yield Bond Fund, Emerging Markets Debt Fund and Asia Growth Fund may
not:
(1) With respect to the High Yield Bond Fund only, 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
U.S. government, its agencies or instrumentalities; however, up to 25%
of the value of the total assets of the Fund may be invested without
regard to this limitation, so long as no more than 25% of its total
assets are invested in the securities of any one issuer;
(2) 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
(no Fund will purchase additional securities at any time its
borrowings exceed 5% of total assets); or
(3) invest more than 25% of the total assets of each Fund in
the securities of issuers having their principal activities in any
particular industry, except for obligations issued or guaranteed by
the U.S. government, its agencies or instrumentalities or by any
state, territory or any possession of the United States or any of
their authorities, agencies, instrumentalities or political
subdivisions, or with respect to repurchase agreements collateralized
by any of such obligations (for purposes of this restriction,
supranational issuers will be considered to comprise an industry as
will each foreign government that issues securities purchased by a
Fund).
For purposes of investment limitations (1) and (3) above, both the
borrower under a Loan and the Lender selling a Participation will be
considered an "issuer." See "Additional Investment Activities and
Risk Factors -- Loan Participants and Assignments."
PURCHASE AND REDEMPTION OF SHARES
NET ASSET VALUE
For the purpose of pricing purchase and redemption orders, the net asset value
per share of each Fund is calculated separately and is determined for each Fund
(other than the Money Market Fund) once daily as of the close of regularly
scheduled trading on the New York Stock Exchange ("NYSE") (normally 4:00 p.m.
(New York time)). The net asset value per share of the Money Market Fund is
determined twice daily, once at 12:00 noon (New York time) and again at 4:00
p.m. (New York time). With respect to each Fund, such calculation is determined
on each day that the NYSE is open for trading, i.e., Monday through Friday,
except for New Year's Day, President's Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day, and the
preceding Friday or subsequent Monday when one of those holidays falls on a
Saturday or Sunday, respectively.
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42
Net asset value per share of each Fund is calculated by dividing the value of
the Fund's securities and other assets, less liabilities, by the number of
shares outstanding. In calculating net asset value, all portfolio securities
will be valued at market value when there is a reliable market quotation
available for the securities and otherwise pursuant to procedures adopted by
the applicable Fund's Board of Directors. Securities that are primarily traded
on foreign exchanges generally are valued at the preceding closing values of
such securities on their respective exchanges, except that when an occurrence
subsequent to the time a value was so established is likely to have changed
such value, then the fair value of those securities will be determined by
consideration of other factors by or under the direction of the applicable
Fund's Board of Directors. Securities may be valued by independent pricing
services which use prices provided by market-makers or estimates of market
values obtained from yield data relating to instruments or securities with
similar characteristics. In valuing a Fund's assets, any assets or liabilities
initially expressed in terms of a foreign currency are converted to U.S. dollar
equivalents at the then current exchange rate. Corporate actions by issuers of
foreign securities held by the Fund, such as payment of dividends or
distributions, are reflected in the net asset value on the ex-dividend date
therefor, except that such actions will be so reflected on the date the Fund is
actually advised of the corporate action if subsequent to the ex-dividend date.
Further information regarding the Funds' valuation policies is contained in the
Statement of Additional Information.
The Money Market Fund uses the amortized cost method to value its portfolio
securities and seeks to maintain a stable net asset value of $1.00 per share.
Each of the other Funds values short-term investments that mature in 60 days or
less at amortized cost. If a Fund acquires securities with more than sixty days
remaining to maturity, they will be valued at current market value until the
60th day prior to maturity, and will then be valued on an amortized cost basis
based upon the value on such date unless the Board determines during such
60-day period that this amortized cost basis does not represent fair value. The
amortized cost method involves valuing a security at its cost and amortizing
any discount or premium over the period until maturity, regardless of the
impact of fluctuating interest rates on the market value of the security. See
the Statement of Additional Information for a more complete description of the
amortized cost method.
PURCHASE PROCEDURES
There is no sales charge imposed by the Funds on purchases of shares of the
Funds. The minimum initial investment in the Money Market Fund is $250,000 and
the minimum investment in the other Funds is $1,000,000. Subsequent purchases
may be in any amount. Each Fund reserves the right to waive the minimum initial
investment amount and to reject any purchase order in whole or in part.
Shares of each Fund may be made on any Business Day at the net asset value per
share next determined after receipt of a purchase order. Shares certificates
will not be issued.
Share purchase orders are effective on the date the Fund receives a completed
Account Application Form (and other required documents) and federal funds
become available to a
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43
Fund in such Fund's account with Investors Bank & Trust Company ("Investors
Bank"), the Funds' transfer agent and dividend-disbursing agent. Federal funds
will not necessarily become available to a Fund and consequently share purchase
orders may not be deemed received on the same date a check is received from the
shareholder.
Purchases of shares of Funds can be made by wire transfer, check or money order
through Investors Bank. The shareholder's bank may impose a charge to execute a
wire transfer. The wiring instructions are:
Investors Bank & Trust Company
ABA #011-001-438
Account Name: Salomon Brothers Institutional Series Funds
Attn: (Name of Fund)
Salomon DDA #: 456789123
Name of Account:
Account #:
Amount of Wire:
Share purchase orders made with a check or money order should be mailed to the
following address:
Investors Bank & Trust Company
P.O. Box 1537
Boston, Massachusetts 02205-1537
Attention: Transfer Agent
For a share purchase order for any Fund other than the Money Market Fund to
become effective on a particular Business Day, prior to 4:00 p.m. (New York
time) (i) in the case of a wire transfer payment, a purchaser must call
(800) 347-6028 to inform Investors Bank of an incoming wire transfer or (ii) in
the case of payment by check or money order, a complete share purchase order
must be actually received by Investors Bank, and, in either case, federal funds
must be received by a Fund. If federal funds are received by a Fund that same
day, the order will be effective on that day. If a Fund receives notification
of a wire transfer or a complete share purchase order after 4:00 p.m., or if
federal funds are not received by Investors Bank, such purchase order shall be
executed as of the date that federal funds are actually received. Purchase
orders for shares of the Money Market Fund placed by 12:00 noon (New York time)
on any Business Day will be executed and begin to earn dividends that same day
if payment is received in or converted into federal funds by 12:00 noon (New
York time) that day. Purchase orders received after 12:00 noon (New York time)
or for which payment is received in or converted into federal funds after 12:00
noon (New York time) will be executed and begin to earn dividends on the
following Business Day.
REDEMPTION PROCEDURES
Each Fund will redeem all full and fractional shares of the Fund upon request
of shareholders. The redemption price is the net asset value per share next
determined after receipt by
<PAGE> 47
44
Investors Bank of proper notice of redemption as described below. Shareholders
liquidating their holdings will receive upon redemption all dividends
reinvested through the date of redemption. If notice of redemption is received
on any Business Day, the redemption will be effective on the date of receipt.
Payment will ordinarily be made by wire on the next Business Day, but, in any
case, within no more than seven Business Days from the date of receipt. If the
notice is received on a day that is not a Business Day or after the close of
regularly scheduled trading on the NYSE, the redemption notice will be deemed
received as of the next Business Day. The value of shares at the time of
redemption may be more or less than the shareholder's cost depending on the
market value of the securities held by the Fund at such time.
A shareholder may elect to receive payment upon redemption of their shares in
the form of a wire or check. There is no charge imposed by a Fund to redeem
shares of the Fund; however, in the case of a redemption by wire, a
shareholder's bank may impose its own wire transfer fee for receipt of the
wire. Redemptions may be executed in any amount requested by the shareholder up
to the total amount such shareholder has invested in that Fund.
REDEMPTION BY MAIL
A shareholder wishing to redeem shares may do so by mailing proper notice of
redemption directly to Investors Bank. Proper notice of redemption may be
accomplished by written letter requesting redemption. The notice requires the
signature of all persons in whose names the shares are registered, signed
exactly as the shares are registered. In certain instances, Investors Bank may
require additional documents such as, but not limited to, trust instruments,
death certificates, appointments as executor or administrator or certificates
of corporate authority. For shareholders redeeming directly with Investors
Bank, payment will be mailed to the address of record within seven days of
receipt of a proper notice of redemption. Each Fund reserves the right to
reject any order for redemption.
REDEMPTION BY WIRE
To redeem shares by wire, a shareholder or any authorized agent (so designated
on the Account Application Form) must provide Investors Bank with the dollar or
share amount to be redeemed, the account to which the redemption proceeds
should be wired (which account shall have been previously designated by the
shareholder on its Account Application Form), the name of the shareholder and
the shareholder's account number.
A shareholder may change its authorized agent, the address of record or the
account designated to receive redemption proceeds at any time by writing to
Investors Bank with a signature guaranteed by a national bank which is a member
of the Federal Reserve System (not a savings bank) or by a member firm of any
national or regional securities exchange. Notarized signatures are not
sufficient. Further documentation may be required when deemed appropriate by
Investors Bank.
<PAGE> 48
45
TELEPHONE REDEMPTION
A shareholder may request redemption by calling Investors Bank at (800)
347-6028. Telephone redemption is made available to shareholders of each Fund
on the Account Application Form. Shareholders should realize that by making
redemption requests by telephone, they may be giving up a measure of security
that they may have if they were to redeem their shares in writing. Each Fund
reserves the right to refuse a telephone request for redemption if it is
believed advisable to do so. Procedures for redeeming shares by telephone may
be modified or terminated at any time by the Funds. Neither the Funds nor
Investors Bank will be liable for following redemption instructions received by
telephone, which are reasonably believed to be genuine, and the shareholder
will bear the risk of loss in the event of unauthorized or fraudulent telephone
instructions. Each Fund will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. Each Fund may be liable for
any losses due to unauthorized or fraudulent instructions in the absence of
following these procedures. Each Fund may require personal identification
codes. Checks will be made payable to the registered shareholders and sent to
the address of record on file with Investors Bank. Payments by wire will only
be made to the registered holders through pre-existing bank account
instructions. No bank instruction changes will be accepted via telephone.
SMALL ACCOUNTS
Under each Fund's present policy, it reserves the right to redeem upon not less
than 30 days' notice, the shares in an account which has a value of $10,000 or
less, if the reduction in value is the result of shareholder redemptions or
transfers and not as a result of a decline in the net asset value. However, any
shareholder affected by the exercise of this right will be allowed to make
additional investments prior to the date fixed for redemption to avoid
liquidation of the account.
EXCHANGE PRIVILEGE
Shareholders of any Fund may exchange all or part of their shares for shares of
any other Fund at the applicable relative net asset value per share. The value
of the shares exchanged must meet the investment minimum of the Fund into which
the investor is exchanging. Shares of a Fund are eligible for exchange 30 days
after purchase.
Each Fund reserves the right to refuse a telephone request for exchange if it
is believed advisable to do so. Procedures for exchanging shares by telephone
may be modified or terminated at any time by a Fund. None of the Funds,
Investors Bank and Salomon Brothers will be liable for following exchange
instructions received by telephone, which are reasonably believed to be
genuine, and the shareholder will bear the risk of loss in the event of
unauthorized or fraudulent telephone instructions. The Funds, Investors Bank
and Salomon Brothers may employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. The Funds, Investors Bank
and Salomon
<PAGE> 49
46
Brothers may be liable for any losses due to unauthorized or fraudulent
instructions in the absence of following these procedures. When requesting an
exchange by telephone, shareholders should have available the correct account
registration and account numbers or tax identification number.
The exchange of shares of one Fund for shares of another Fund is treated for
federal income tax purposes as a sale of the shares given in exchange by the
shareholder, and an exchanging shareholder may, therefore, realize a taxable
gain or loss in connection with an exchange. See "Dividends, Distributions and
Taxes."
The exchange privilege is available to shareholders residing in any state in
which the shares of the Fund being acquired may be legally sold. Investors Bank
and Salomon Brothers reserve the right to reject any exchange request. The
exchange privilege may be modified or terminated at any time after notice to
shareholders.
DISTRIBUTOR
Salomon Brothers is the Funds' distributor. Salomon Brothers, located at 7
World Trade Center, New York, New York 10048, is a wholly-owned subsidiary of
Salomon Brothers Holding Company Inc, which is in turn wholly-owned by Salomon
Inc. It is also one of the largest securities dealers in the world and a
registered broker-dealer. Salomon Brothers makes markets in securities and
provides a broad range of underwriting, research, and financial advisory
services to governments, international corporations, and institutional
investors. Salomon Brothers from time to time may receive fees from SBAM in
connection with processing and other services that it provides for certain
shareholder accounts.
MANAGEMENT
DIRECTORS AND OFFICERS
The business and affairs of each Fund are managed under the direction of its
Board of Directors. The Board of Directors approves all significant agreements
between a Fund and the persons or companies that furnish services to the Fund,
including agreements with its distributor, investment manager, administrator,
custodian and transfer agent. The day-to-day operations of the Fund are
delegated to the Fund's investment manager and administrator. The Statement of
Additional Information contains general background information regarding the
Directors and officers of each Fund.
INVESTMENT MANAGER
Each Fund retains SBAM as its investment manager under an investment management
contract. SBAM was incorporated in 1987 and together with affiliates in London,
Frankfurt
<PAGE> 50
47
and Hong Kong, SBAM provides a broad range of fixed-income and equity
investment advisory services to various individuals and institutional clients
located throughout the world, and serves as investment adviser to various
investment companies. As of January 31, 1996, SBAM had approximately $14
billion of assets under management of which approximately $1.15 million is
invested in high yield securities and approximately $459 million of which is
invested in emerging market debt securities. SBAM has access to Salomon Inc's
more than 250 economists, mortgage, bond, sovereign, and equity analysts. The
business address of SBAM is 7 World Trade Center, New York, New York 10048.
Pursuant to a Subadvisory Agreement, SBAM has retained Salomon Brothers Asset
Management Asia Pacific Limited to act as sub-adviser to the Asia Growth Fund,
subject to the supervision of SBAM. Like SBAM, SBAM AP is an indirect,
wholly-owned subsidiary of Salomon Inc. SBAM AP, which was formed in 1995, is a
member of the Hong Kong Securities and Futures Commission and is registered as
an investment adviser in the United States pursuant to the Investment Advisers
Act of 1940, as amended. The business address of SBAM AP is Three Exchange
Square, Hong Kong.
Peter J. Wilby is primarily responsible for the day-to-day management of the
High Yield Bond Fund and the Emerging Markets Debt Fund. Mr. Wilby, who joined
SBAM in 1989, is a Managing Director, responsible for SBAM's investment company
and institutional portfolios which invest in high yield non-U.S. and U.S.
corporate debt securities, high yield foreign sovereign debt securities and
emerging market debt securities. Mr. Wilby is the portfolio manager for Salomon
Brothers High Yield Bond Fund, a portfolio of Series Funds, Global Partners
Income Fund Inc., The Emerging Markets Income Fund Inc., The Emerging Markets
Income Fund II Inc., The Emerging Markets Floating Rate Fund Inc., Salomon
Brothers Worldwide Income Fund Inc, Salomon Brothers High Income Fund Inc, the
high yield and sovereign bond portions of the Salomon Brothers Strategic Bond
Fund, a portfolio of Series Funds and the foreign sovereign debt component of
Salomon Brothers 2008 Worldwide Dollar Government Term Trust Inc.
Giampaolo G. Guarnieri will be primarily responsible for the day-to-day
management of the Asia Growth Fund. Mr. Guarnieri has been employed by SBAM AP
as a Vice President and Senior Portfolio Manager since April 1995. Prior to
joining SBAM AP, Mr. Guarnieri spent five years at Credit Agricole Asset
Management (South East Asia) Limited in Hong Kong, a wholly-owned subsidiary of
the Credit Agricole Group as a senior portfolio manager since 1992 and as head
of direct investment activities prior to that. Mr. Guarnieri is also portfolio
manager of Salomon Brothers Asia Growth Fund, a portfolio of Series Funds.
Subject to policy established by the Board of Directors, which has overall
responsibility for the business and affairs of each Fund, SBAM manages the
investment and reinvestment of each Fund's assets pursuant to the applicable
management contract. SBAM also furnishes office space, personnel and certain
facilities required for the performance by SBAM of certain additional services
provided by it to each Fund under the applicable management contract, including
SEC compliance, supervision of Fund operations and certain administrative and
clerical services, and pays the compensation of the Funds' officers, employees
and directors
<PAGE> 51
48
affiliated with SBAM. Except for the expenses paid by SBAM that are described
herein, each Fund bears all costs of its operations.
As compensation for its services, the Money Market Fund pays SBAM a monthly
fee at an annual rate of .20% of the Fund's average daily net assets. On
November 16, 1995, the Board approved, subject to shareholder approval, an
increase in the management fee from .10% of the Money Market Fund's average
daily net assets to .20%. The shareholders approved the amendment on March 26,
1996, to become effective as of the date of this Prospectus. SBAM has
voluntarily agreed to reduce or otherwise limit expenses of the money market
Fund (exclusive of taxes, interest and extraordinary expenses such as
litigation and indemnification expenses), on an annualized basis, to .18% of
the Fund's average daily net assets for a period of at least one year from the
date of this Prospectus, and no more than .25% thereafter.
As compensation for its services, the High Yield Bond Fund pays SBAM a monthly
fee at an annual rate of .50% of the Fund's average daily net assets; the
Emerging Markets Debt Fund pays SBAM a monthly fee at an annual rate of .70% of
the Fund's average daily net assets; and the Asia Growth Fund pays SBAM a
monthly fee at an annual rate of .75% of the Fund's average daily net assets.
SBAM will pay SBAM AP, as full compensation for its services under the
Subadvisory Agreement, a portion of its investment management fee. SBAM has
voluntarily agreed to reduce or otherwise limit expenses of the High Yield Bond
Fund, the Emerging Markets Debt Fund and the Asia Growth Fund (exclusive of
taxes, interest and extraordinary expenses such as litigation and
indemnification expenses), on an annualized basis to .55%, .75% and 1.00%,
respectively, of the applicable Fund's average daily net assets.
The services of SBAM and SBAM AP are not deemed to be exclusive, and nothing in
the relevant agreements will prevent either of them or their affiliates from
providing similar services to other investment companies and other clients
(whether or not their investment objectives and policies are similar to those
of any of the Funds) or from engaging in other activities.
Consistent with the Rules of Fair Practice of the National Association of
Securities Dealers Inc. and subject to seeking the most favorable price and
execution available, SBAM and SBAM AP may consider sales of shares of the Funds
as a factor in the selection of brokers to execute portfolio transactions for
the Funds. The Funds may use Salomon Brothers to execute portfolio transactions
when SBAM or SBAM AP believe that the broker's charge for the transaction does
not exceed the usual and customary levels charged by other brokers in
connection with comparable transactions involving similar securities. See the
Statement of Additional Information for a more complete description of the
Funds' policies with respect to portfolio transactions.
PERFORMANCE OF ACCOUNTS
Set forth in the chart below is performance data provided by SBAM AP relating,
for the period from January 1, 1992 to February 28, 1995, to a non-U.S.
collective investment vehicle
<PAGE> 52
49
(the "Offshore Fund I") managed by the portfolio manager of the Asia Growth
Fund while he was employed by a different investment adviser unaffiliated with
SBAM and, for the period from September 1, 1995 to December 31, 1995, to a
non-U.S. collective investment vehicle managed by the portfolio manager after
commencement of employment with an affiliate of SBAM (the "Offshore Fund II").
Both Offshore Fund I and Offshore Fund II have substantially similar, though not
identical, investment objectives, policies and strategies as those of the Fund.
With respect to Offshore Fund I, the period shown reflects the period for which
the portfolio manager was primarily responsible for the day-to-day management
of the portfolio of Offshore Fund I. During the period shown for Offshore Fund
I, the size of the fund ranged from approximately $45 million to $95 million
and during the period shown for Offshore Fund II, the size of the fund ranged
from approximately $8 millon to $10 million.
The Morgan Stanley Capital International Combined Asia Ex-Japan Index is a
widely recognized market index of Asian country equity issues. The index is
composed of a sample of companies from the following ten countries: Hong Kong,
India, Indonesia, Korea, Malaysia, Pakistan, Philippines, Singapore, Sri Lanka
and Thailand. Constituent stocks are selected for the index on the basis of
industry representation, liquidity and sufficient float. The index is unmanaged
and accordingly, does not reflect the effect of operating expenses, including
advisory fees, transaction costs and other expenses but does reflect
reinvestment of dividends.
The performance data shown below should be read in conjunction with the notes
that follow.
<TABLE>
<CAPTION>
Average
Annual
Total
1/1/95- Return
1/1/92- 1/1/93- 1/1/94- 2/28/95 Total Return 1/1/92-
12/31/92 12/31/93 12/31/94 (annualized) 1/1/92-2/28/95 2/28/95
-------- -------- -------- ------------ -------------- --------
<S> <C> <C> <C> <C> <C> <C>
Offshore Fund I........................ 29.50% 95.05% (13.55)% (5.47)% 106.42% 25.72%
Morgan Stanley Capital International... 18.45 98.80 (18.38) (3.01) 86.42 21.74
Combined Asia Ex-Japan Index
<CAPTION>
9/1/95- [DATES]
12/31/95
(annualized)
------------
<S> <C>
Offshore Fund II.......................
Morgan Stanley Capital International...
Combined Asia Ex-Japan Index
</TABLE>
General. The performance results shown above are based on total returns
reflecting realized and unrealized gains and losses and income, including that
derived from cash positions. Returns are calculated monthly for Offshore Fund I
and Offshore Fund II and are compounded monthly. The investment results are
time-weighted based on market values determined as of the last business day of
each month. The performance results are net of transaction costs and advisory
and other fees incurred and reflect reinvestment of dividends and capital gains
distributions, if any.
The performance results shown above are not performance results for the Asia
Growth Fund, which has no history of operations. The results shown above should
not be deemed to be indicative of future results for the Asia Growth Fund owing
to differences in brokerage commissions and dealer spreads, expenses, including
investment advisory fees, the size of positions taken in relation to fund size,
timing of purchases and sales and market conditions at the time of a
transaction, timing of cash flows and availability of cash for new investments.
Although substantially similar, the investment objectives, policies and
strategies for Offshore Fund I and Offshore Fund II above differ in certain
respects from those of the Asia Growth Fund. Such accounts were managed without
regard to certain tax requirements applicable to U.S. registered investment
companies that limit the proportions of short-term
<PAGE> 53
50
gains that such companies may realize to maintain their tax status. See
"Dividends, Distributions and Taxes." Accordingly, the performance results
shown above and that of the Asia Growth Fund are expected to differ.
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. INVESTORS SHOULD ALSO BE
AWARE THAT THE USE OF METHODS OF DETERMINING PERFORMANCE DIFFERENT THAN THAT
USED BY SBAM AP WOULD RESULT IN DIFFERENT PERFORMANCE DATA. NO ADJUSTMENT HAS
BEEN MADE FOR ANY INCOME TAXES WHICH ARE PAYABLE ON INCOME DIVIDENDS OR CAPITAL
GAINS DISTRIBUTIONS. THE EFFECT OF TAXES ON ANY INVESTOR WILL DEPEND ON SUCH
INVESTOR'S TAX STATUS. SEE "DIVIDENDS, DISTRIBUTIONS AND TAXES."
ADMINISTRATOR
Each Fund employs Investors Bank, 89 South Street, Boston, Massachusetts 02111,
under an administration agreement to provide certain administrative services
to each Fund. Investors Bank is not involved in the investment decisions made
with respect to the Funds. The services provided by Investors Bank under the
administration agreements include certain accounting, clerical and bookkeeping
services, Blue Sky compliance, corporate secretarial services and assistance in
the preparation and filing of tax returns and reports to shareholders and the
SEC. For its services as administrator, transfer agent and custodian the High
Yield Bond Fund, Emerging Markets Debt Fund and Asia Growth Fund, each Fund
pays Investors Bank a fee at an annual rate of .10% of each Fund's average
daily net assets up to $500 million in net assets and .05% of each Fund's
average daily net assets in excess of $500 million. For its services as
administrator to the Money Market Fund, Investors Bank receives a fee at an
annual rate of .08% of the Fund's average daily net assets.
Investors Bank acts as transfer agent for the High Yield Bond Fund, Emerging
Markets Debt Fund and Asia Growth Fund pursuant to a transfer agency, dividend
disbursing agency and shareholder servicing agency agreement. First Data
Investors Services Group, Inc. ("FDISG"), a subsidiary of First Data
Corporation, which is located at One Exchange Place, Boston, Massachusetts
02109, serves as transfer agent for the Money Market Fund. Each of Investors
Bank and FDISG are responsible for the issuance, transfer and redemption of
shares and the opening and maintenance of shareholder accounts.
EXPENSES
Each Fund's expenses include taxes, interest, fees and salaries of the
directors and officers who are not directors, officers or employees of the
Fund's service contractors, SEC fees, state securities qualification fees,
costs of preparing and printing prospectuses for regulatory purposes and for
distribution to existing shareholders, advisory and administration fees,
charges of the custodian, transfer agent and dividend disbursing agent, certain
insurance premiums, outside auditing and legal expenses, costs of shareholder
reports and shareholder meetings and any extraordinary expenses. Each Fund also
pays for brokerage fees and commissions (if any) in connection with the
purchase and sale of portfolio securities.
<PAGE> 54
51
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Money Market Fund intends to declare as a dividend substantially all of its
net investment income at the close of each Business Day to the Fund's
shareholders of record at 12:00 noon (New York time) on that day, and will pay
such dividends monthly. The High Yield Bond Fund, the Emerging Markets Debt
Fund and the Asia Growth Fund will declare dividends from net investment income
annually and pay them annually.
Net investment income is a Fund's investment company taxable income, as that
term is defined in the Code, determined without regard to the deduction for
dividends paid and excluding any net realized capital gains. For the purpose of
calculating dividends, net investment income shall consist of interest earned,
which includes, where applicable, any discount accredited or premium amortized
to the date of maturity, minus estimated expenses.
Shares of a Fund (other than the Money Market Fund, as described below) are
entitled to dividends declared beginning on the day after the purchase order is
received in good order. Purchase orders for shares of the Money Market Fund for
which payment is received in or converted into federal funds by 12:00 noon (New
York time) on any Business Day will become effective that day and begin to earn
dividends on that day. Purchase orders for shares of the Money Market Fund for
which payment is received in or converted into federal funds after 12:00 noon
(New York time) on any Business Day will become effective that day and begin to
earn dividends on the following Business Day. With respect to the Money Market
Fund, shares redeemed by 12:00 noon (New York time) will accrue dividends
through the day prior to redemption, shares redeemed after 12:00 noon (New York
time) will accrue dividends on the day of redemption. The High Yield Bond Fund,
the Emerging Markets Debt Fund and the Asia Growth Fund will accrue dividends
on settled shares through the day of redemption. Net investment income for a
Saturday, Sunday or holiday will be declared as a dividend on the previous
Business Day.
Net realized short-term capital gains of each Fund, if any, will be distributed
whenever the Directors determine that such distributions would be in the best
interest of shareholders, but in any event at least once a year. Each Fund
distributes annually any net realized long-term capital gains from the sale of
securities (after deducting any net realized losses that may be carried forward
from prior years). The Money Market Fund does not expect to realize any
long-term capital gains.
If, for any full fiscal year, a Fund's total distributions exceed net
investment income and net realized capital gains, the excess distributions
generally will be treated as a tax-free return of capital (up to the amount of
the shareholder's tax basis in his or her shares). The amount treated as a
tax-free return of capital will reduce a shareholder's adjusted basis in his or
her shares. Pursuant to the requirements of the 1940 Act and other applicable
laws, a notice will accompany any distribution paid from sources other than net
investment income. In the event a Fund distributes amounts in excess of its net
investment income and net realized capital
<PAGE> 55
52
gains, such distributions may have the effect of decreasing the Fund's total
assets, which may increase the Fund's expense ratio.
Dividend and/or capital gain distributions will be reinvested automatically in
additional shares of a Fund at net asset value and such shares will be
automatically credited to a shareholder's account, unless a shareholder elects
to receive either dividends or capital gains distributions in cash. If such
distributions are to be sent to an address other than the address on record or
the account designated to receive redemption proceeds a signature guarantee is
required. See "Redemptions Procedures" above for instructions concerning
signature guarantees. Such signature must be signed exactly as registered with
Investors Bank. Shareholders may change the distribution option at any time by
notification to Investors Bank prior to the record date of any such dividend or
distribution.
If a shareholder elects to receive dividends and/or distributions in cash and
the check cannot be delivered to a shareholder due to an invalid address or
otherwise remains uncashed by the shareholder for a period of six months, each
Fund reserves the right to reinvest the dividend and/or distribution in a
shareholder's account at the then-current net asset value and to convert the
shareholder's election to automatic reinvestment in shares of that Fund.
TAXES
FEDERAL INCOME TAX MATTERS. Each Fund intends to qualify and elect to be
treated as a regulated investment company under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"). If it so qualifies, a Fund will
not be subject to U.S. federal income taxes on its net investment income (i.e.,
its investment company taxable income, as that term is defined in the Code,
determined without regard to the deduction for dividends paid) and net capital
gain (i.e., the excess of a Fund's net long-term capital gain over its net
realized short-term capital loss), if any, that it distributes to its
shareholders in each taxable year, provided that it distributes to its
shareholders at least 90% of its net investment income for such taxable year.
If in any year a Fund fails to qualify as a regulated investment company, the
Fund would incur regular corporate federal income tax on its taxable income for
that year and be subject to certain additional distribution requirements upon
requalification.
Each Fund will be subject to federal corporate income tax (currently at a
maximum rate of 35%) on any undistributed income other than tax-exempt income
from municipal obligations and to alternative minimum tax (currently at a
maximum rate of 28%) on alternative minimum taxable income, which includes
interest income on certain "private activity" obligations that is otherwise
exempt from tax.
Each Fund is subject to a nondeductible 4% excise tax calculated as a
percentage of certain undistributed amounts of ordinary income and net realized
capital gains. To the extent possible, each Fund intends to make sufficient
distributions to avoid the application of both the corporate income and excise
taxes.
<PAGE> 56
53
All dividends and distributions to shareholders of a Fund of investment company
taxable 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 realized over net long-term capital losses, are
taxable to shareholders as ordinary income.
Distributions of "net capital gains" designated by a Fund as "capital gain
dividends" will be taxable as long-term capital gains, whether paid in cash or
additional shares, regardless of how long the shares have been held by such
shareholders, and such distributions will not be eligible for the dividends
received deduction. A portion of a Fund's dividends may qualify for the
dividends received deduction available to corporations. In general, the maximum
federal income tax rate imposed on individuals with respect to capital gain
dividends will be limited to 28%, whereas the maximum federal income tax rate
imposed on individuals with respect to ordinary income (and short-term capital
gains, which currently are taxed at the same rates as ordinary income) will be
39.6%. With respect to corporate taxpayers, long-term capital gains currently
are taxed at the same federal income tax rates as ordinary income and
short-term capital gains. Investors should consider the tax implications of
buying shares shortly before the record date of a distribution because
distributions of net capital gain will be taxable even though the net asset
value of shares of a Fund is reduced by the distribution.
Funds investing in foreign securities or currencies may be required to pay
withholding or other taxes to foreign governments on dividends and interest.
The investment yield of a Fund investing in foreign securities or currencies
will be reduced by these foreign taxes. Shareholders will bear the cost of any
foreign taxes but may not be able to claim a foreign tax credit or deduction
for these foreign taxes. In addition, a Fund investing in securities of passive
foreign investment companies may be subject to U.S. federal income taxes (and
interest on such taxes) as a result of such investments. The investment yield
of a Fund making such investments will be reduced by these taxes and interest.
Shareholders will bear the cost of these taxes and interest, but will not be
able to claim a deduction for these amounts.
The redemption, sale or exchange of shares of one Fund for shares of another is
a taxable event and may result in a gain or loss. Gain or loss, if any,
recognized on the sale or other disposition of shares of a Fund will be taxed
as capital gain or loss if the shares are capital assets in the shareholder's
hands. Generally, a shareholder's gain or loss will be a long-term gain or loss
if the shares have been held for more than one year. If a shareholder sells or
otherwise disposes of shares of a Fund before holding them for more than six
months, any loss on the sale or other disposition of such shares shall be
treated as a long-term capital loss to the extent of any capital gain dividends
received by the shareholder with respect to such shares. A loss realized on a
sale or exchange of shares may be disallowed if other shares are acquired
within a 61-day period beginning 30 days before and ending 30 days after the
date that the shares are disposed 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
<PAGE> 57
54
following January, it will be deemed to have been received by the shareholders
and paid by the Fund no later than December 31 of the year in which the
dividend or distribution is declared.
A Fund may make investments that produce income that is not matched by a
corresponding cash distribution to the Fund, such as investments in Pay-In-Kind
bonds or in obligations such as certain Brady Bonds or zero coupon securities
having original issue discount (i.e., an amount equal to the excess of the
stated redemption price of the security at maturity over its issue price), or
market discount (i.e., an amount equal to the excess of the stated redemption
price of the security over the basis of such bond immediately after it was
acquired) if the Fund elects to accrue market discount on a current basis. In
addition, income may continue to accrue for federal income tax purposes with
respect to a non-performing investment. Any such income would be treated as
income earned by a Fund and therefore would be subject to the distribution
requirements of the Code. Because such income may not be matched by a
corresponding cash distribution to a Fund, such Fund may be required to borrow
money or dispose of other securities to be able to make distributions to its
investors. The extent to which a Fund may liquidate securities at a gain may be
limited by the requirement that less than 30% of its annual gross income be
derived from the sale or other disposition of securities and certain other
investments held for less than three months (the "short-short test"). In
addition, if an election is not made to currently accrue market discount with
respect to a market discount bond, all or a portion of any deduction or any
interest expense incurred to purchase or hold such bond may be deferred until
such bond is sold or otherwise disposed.
Each Fund may be required to withhold federal income tax at a rate of 31%
("backup withholding") from dividends (other than exempt-interest dividends)
and redemption proceeds paid to noncorporate shareholders. This tax may be
withheld from dividends if (i) the payee fails to furnish the Fund with the
payee's correct taxpayer identification number (e.g., an individual's social
security number), (ii) the Internal Revenue Service ("IRS") notifies the Fund
that the payee has failed to report properly certain interest and dividend
income to the IRS and to respond to notices to that effect, or (iii) when
required to do so, the payee fails to certify that he or she is not subject to
backup withholding. Redemption proceeds may be subject to withholding under the
circumstances described in (i) above. Backup withholding is not an additional
tax and any amounts withheld may be credited against the shareholder's federal
income tax liability.
HONG KONG TAX MATTERS. The Asia Growth Fund would be subject to Hong Kong
profits tax, which is currently charged at the rate of 16.5% for corporations
and 15% for individuals, if, by virtue of the fact that SBAM AP is located in
Hong Kong, (a) the Fund or its agents were deemed to carry on a trade,
profession or business in Hong Kong and (b) profits from that trade, profession
or business were to arise in or be derived from Hong Kong. Hong Kong profits
tax will not be payable in respect of profits from the sale of shares and other
securities transacted outside Hong Kong, interest arising or derived from
outside Hong Kong and profits in the nature of capital gains. The sale of
securities will not be treated as the sale of capital assets if the profit or
loss from such sale is regarded as attributable to a trade or business carried
on in Hong Kong. The Asia Growth Fund does not currently believe that it will
be subject to Hong Kong profits tax.
<PAGE> 58
55
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.
Depending on the residence of the shareholder for tax purposes, distributions
may also be subject to state and local taxes or withholding taxes. Statements
detailing the tax status of each shareholders' dividends and distributions will
be mailed annually.
The foregoing is intended to be general information to shareholders and
potential investors in a Fund and does not constitute tax advice. Shareholders
and potential investors should consult their own tax advisers regarding
federal, state, local and foreign tax consequences of ownership of shares in a
Fund.
ACCOUNT SERVICES
Shareholders of each Fund will be kept informed through semi-annual reports
showing diversification of investments and other financial data for such Fund.
Annual reports for all Funds will include audited financial statements.
Shareholders of each Fund will receive a Statement of Account following each
share transaction, except for shareholders of the Money Market 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 front cover of this Prospectus with any questions relating to their
investment in shares of such Fund.
CAPITAL STOCK
The Institutional Series Funds was incorporated in Maryland on January 19,
1996. The authorized capital stock of the Institutional Series Funds consists
of 10,000,000,000 shares of common stock having a par value of $.001 per share.
Pursuant to the Institutional Series Funds' Articles of Incorporation, the
Board of Directors has authorized the issuance of three series of shares, each
representing shares in one of three separate funds. The High Yield Bond Fund,
the Emerging Markets Debt Fund and the Asia Growth Fund are the currently
existing portfolios of the Institutional Series Funds. The assets of each Fund
are segregated and separately managed. The Institutional 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 Money Market Fund, a portfolio of the Series Funds, changed its name from
Salomon Brothers U.S. Treasury Securities Money Market Fund to its current name
on March 26, 1996. The Series Funds was incorporated in Maryland on April 17,
1990. On March 26, 1996, shareholders of the Money Market Fund approved a
change in the Fund's investment objective and policies and certain investment
restrictions to those described herein. The authorized capital stock of the
Series Funds consists of 10,000,000,000 shares of common
<PAGE> 59
56
stock having a par value of $.001 per share. Pursuant to the Series Funds'
Articles of Incorporation and Articles Supplementary, the Board of Directors
has authorized the issuance of ten series of shares, each representing shares
in one of ten separate funds. In addition to the Money Market Fund, the
portfolios of the Series Funds include Salomon Brothers National Intermediate
Municipal Fund, Salomon Brothers U.S. Government Income Fund, Salomon Brothers
High Yield Bond Fund, Salomon Brothers Strategic Bond Fund, Salomon Brothers
Total Return Fund, Salomon Brothers Asia Growth Fund, Salomon Brothers Cash
Management Fund, Salomon Brothers New York Municipal Bond Fund and Salomon
Brothers New York Municipal Money Market Fund. The assets of each fund are
segregated and separately managed. The Series Funds' Board of Directors may, in
the future, authorize the issuance of additional classes of capital stock
representing shares of additional investment portfolios. As of the date of this
Prospectus, Salomon Brothers Holding Company Inc, the parent company of SBAM,
owns a significant percentage of the outstanding shares of the High Yield Bond
Fund, the Emerging Markets Debt Fund and the Asia Growth Fund, and consequently
is a controlling person of such Funds.
Although each Fund is offering only its own shares, it is possible that a Fund
could become liable for a misstatement in this Prospectus about another Fund.
The Directors of the Institutional Series Funds and the Series Funds have
considered this factor in approving the use of a combined Prospectus.
All shares of each Fund have equal voting rights and will be voted in the
aggregate, and not by series or class, except where voting by series or class
is required by law or where the matter involved affects only one series or
class. Each shareholder is entitled to cast, at all meetings of shareholders,
such number of votes as is equal to the number of full and fractional shares
held by such shareholder. All shares of each Fund will, when issued, be fully
paid and nonassessable. None of the funds will issue any senior securities.
Under the corporate law of Maryland, the state of incorporation of the
Institutional Series Funds and the Series Funds, and the By-Laws of both the
Institutional Series Funds and the Series Funds, neither the Institutional
Series Funds nor the Series Funds is required and does not currently intend to
hold annual meetings of shareholders for the election of directors except as
required under the 1940 Act. A more complete statement of the voting rights of
shareholders is contained in the Statement of Additional Information.
<PAGE> 60
APPENDIX A:
DESCRIPTION OF RATINGS
A DESCRIPTION OF THE RATING POLICIES OF MOODY'S, S&P AND FITCH WITH RESPECT TO
BONDS AND COMMERCIAL PAPER APPEARS BELOW.
MOODY'S INVESTORS SERVICE'S CORPORATE BOND RATINGS
Aaa-Bonds which are rated "Aaa" are judged to be of the best quality and carry
the service fees 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 because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long-term risks appear
somewhat larger than in Aaa securities.
A-Bonds which are rated "A" possess many favorable investment qualities and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa-Bonds which are rated "Baa" are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba-Bonds which are rated "Ba" are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position,
characterizes bonds in this class.
B-Bonds which are rated "B" generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of maintenance and
other terms of the contract over any long period of time may be small.
Caa-Bonds which are rated "Caa" are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca-Bonds which are rated "Ca" represent obligations which are speculative to a
high degree. Such issues are often in default or have other marked
shortcomings. C-Bonds which are rated
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"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" to certain of its ratings
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.
STANDARD & POOR'S RATING GROUP CORPORATE BOND RATINGS
AAA-This is the highest rating assigned by Standard & Poor's 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
repay principal and interest is very strong, and differs from "AAA" issues only
in small degree.
A-Bonds rated "A" have a strong capacity to repay principal and pay interest,
although they are somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions than debt in higher-rated categories.
BBB-Bonds rated "BBB" are regarded as having an adequate capacity to repay
principal and pay interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to repay principal and pay interest for
bonds in this category than for higher rated categories.
BB-B-CCC-CC-C-Bonds rated "BB", "B", "CCC" 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 both above may be modified by the addition of a plus or minus
to show relative standing within the major rating categories.
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MOODY'S INVESTORS SERVICE'S COMMERCIAL PAPER RATINGS
PRIME-1-Issuers (or related supporting institutions) rated "Prime-1" have a
superior ability for repayment of senior short-term debt obligations. "Prime-1"
repayment ability will often be evidenced by many of the following
characteristics: leading market positions in well-established industries, high
rates of return on funds employed, conservative capitalization structures with
moderate reliance on debt and ample asset protection, broad margins in earnings
coverage of fixed financial charges and high internal cash generation, and
well-established access to a range of financial markets and assured sources of
alternate liquidity.
PRIME-2-Issuers (or related supporting institutions) rated "Prime-2" have a
strong ability for repayment of senior short-term 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 obligations. The effect
of industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and the requirement for relatively high financial
leverage. Adequate alternate liquidity is maintained.
NOT PRIME-Issuers rated "Not Prime" do not fall within any of the Prime rating
categories.
STANDARD & POOR'S RATINGS GROUP COMMERCIAL PAPER RATINGS
A-S&P commercial paper rating is a current assessment of the likelihood of
timely repayment of debt having an original maturity of no more than 365 days.
Ratings are graded into several categories, ranging from "A-1" for the highest
quality obligations to "D" for the lowest. The four categories are as follows:
A-1-This highest category indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus (+) sign designation.
A-2-Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1."
A-3-Issues carrying this designation have adequate capacity for timely payment.
They are, however, somewhat more vulnerable to the adverse effects of changes
in circumstances than obligations carrying the higher designations.
B-Issues rated "B" are regarded as having only speculative capacity for timely
payment.
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C-This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D-Debt Rated "D" is in payment default. The "D" rating category is used when
interest payments or principal payments are not made on the date due, even if
the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period.
MOODY'S INVESTORS SERVICE'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
pursuant 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.
STANDARD & POOR'S MUNICIPAL BOND RATING
AAA-is the highest rating assigned by S&P to a debt obligation and indicates an
extremely strong capacity to pay principal and interest.
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AA-Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong, and in the majority of instances
they differ from AAA issues only in small degrees.
A-Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB-Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds
in this category than for bonds in the A category.
The ratings set forth above may be modified by the addition of a plus or minus
to show relative standing within the major rating categories.
MOODY'S INVESTORS SERVICE'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.
STANDARD & POOR'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 RATING
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.
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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 short-term ratings apply, to debt obligations that are payable on demand
or have original maturities of, generally, up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal and
investment notes.
The short-term rating places greater emphasis than a long-term rating on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.
FITCH'S SHORT-TERM RATINGS ARE AS FOLLOWS:
F-1+-Issues assigned this rating are regarded as having the strongest degree of
assurance for timely payment.
F-1-Issues assigned this rating reflect an assurance of timely payment only
slightly less in degree than issues rated F-1+.
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.
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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, SBAM 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 or S&P may change as a
result of changes in such organizations or their rating systems, a Fund will
attempt to use comparable ratings as standards for investments in accordance
with the investment policies contained in this Prospectus and in the Statement
of Additional Information.
A-7
<PAGE> 67
APPENDIX B:
GENERAL CHARACTERISTICS
AND RISKS OF DERIVATIVES
A detailed discussion of Derivatives (as defined below) that may be used by the
investment manager on behalf of certain Funds follows below. The description in
this Prospectus of each Fund indicates which, if any, of these types of
transactions may be used by that Fund. A Fund will not be obligated, however,
to use any Derivatives and makes no representation as to the availability of
these techniques at this time or at any time in the future. "Derivatives," as
used in this Appendix B, refers to interest rate, currency or stock or bond
index futures contracts, currency forward contracts and currency swaps, the
purchase and sale (or writing) of exchange listed and over-the-counter ("OTC")
put and call options on debt and equity securities, currencies, interest rate,
currency or stock index futures and fixed-income and stock indices and other
financial instruments, entering into various interest rate transactions such as
swaps, caps, floors, collars, entering into equity swaps, caps, floors or
trading in other similar types of instruments.
A Fund's ability to pursue certain of these strategies may be limited by the
Commodity Exchange Act, as amended, applicable regulations of the Commodity
Futures Trading Commission ("CFTC") thereunder and the federal income tax
requirements applicable to regulated investment companies which are not
operated as commodity pools.
GENERAL CHARACTERISTICS OF OPTIONS
Put options and call options typically have 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
exercised 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
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<PAGE> 68
issued by a regulated intermediary such as the Options Clearing Corporation
("OCC"), which guarantees the performance of the obligations of the parties to
the options. The discussion below uses the OCC as an example, but is also
applicable to other similar financial intermediaries.
OCC-issued and exchange-listed options, with certain exceptions, generally
settle by physical delivery of the underlying security or (currency, although
in the future, cash settlement may become available. Index options are cash
settled for the net amount, if any, by which the option is "in-the-money" (that
is, the amount by which the value of the underlying instrument exceeds, in the
case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
A Fund's ability to close out its position as a purchaser or seller of an
OCC-issued or exchange-listed put or call option is dependent, in part, upon
the liquidity of the particular option market. Among the possible reasons for
the absence of a liquid option market on an exchange are: (1) insufficient
trading interest in certain options, (2) restrictions on transactions imposed
by an exchange, (3) trading halts, suspensions or other restrictions imposed
with respect to particular classes or series of options or underlying
securities, including reaching daily price limits, (4) interruption of the
normal operations of the OCC or an exchange, (5) inadequacy of the facilities
of an exchange or the OCC to handle current trading volume or (6) a decision by
one or more exchanges to discontinue the trading of options (or a particular
class or series of options), in which event the relevant market for that option
on that exchange would cease to exist, although any such outstanding options on
that exchange would continue to be exercisable in accordance with their terms.
The hours of trading for listed options may 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.
Over-the-counter ("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 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,
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<PAGE> 69
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 or 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, (whether or not it holds the securities in its portfolio) and on
securities indices, currencies and futures contracts. In selling put options, a
Fund faces the risk that it may be required to buy the underlying security at a
disadvantageous price above the market price.
A Fund may purchase and sell put options on securities (whether or not it holds
the securities in its portfolio) and on securities indices, currencies and
futures contracts. In selling put options, a Fund faces the risk that it may be
required to buy the underlying security at a disadvantageous price above the
market price.
GENERAL CHARACTERISTICS OF FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
A Fund may trade financial futures contracts or purchase or sell put and call
options on those contracts as a hedge against anticipated interest rate
currency or market changes, and for risk management purposes or a Fund may seek
to increase its income or gain. Futures contracts
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are generally bought and sold on the commodities exchange on which they are
listed with payment of initial and variation margin as described below. The
sale of a futures contract creates a firm obligation by the Fund, as seller, to
deliver to the buyer the specific type of financial instrument called for in
the contract at a specific future time for a specified price (or, with respect
to certain instruments, the net cash amount). Options on futures contracts are
similar to options on securities except that an option on a futures contract
gives the purchaser the right, in return for the premium paid, to assume a
position in a futures contract and obligates the seller to deliver that
position.
A Fund's use of financial futures contracts and options thereon will in all
cases be consistent with applicable regulatory requirements and in particular
the rules and regulations of the CFTC. Maintaining a futures contract or
selling an option on a futures contract will typically require the Fund to
deposit with a financial intermediary, as security for its obligations, an
amount of cash or other specified asset ("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. The purchase of an option on a financial futures contract
involves payment of a premium for the option without any further obligation on
the part of the Fund. If the Fund exercises an option on a futures contract it
will be obligated to post initial margin (and potentially variation margin) for
the resulting futures position just as it would for any futures position.
Futures contracts and options thereon are generally settled by entering into an
offsetting transaction, but no assurance can be given that a position can be
offset prior to settlement or that delivery will occur.
A Fund will not enter into a futures contract or option thereon if, immediately
thereafter, the sum of the amount of its initial margin and premiums required
to maintain permissible non-bona fide hedging positions in futures contracts
and options thereon would exceed 5% of the liquidation value of the Fund's
portfolio, after taking into account unrealized profits and losses on existing
contracts; however in the case of an option that is in-the-money at the time of
the purchase, the in-the-money amount may be excluded in calculating the 5%
limitation. The value of all futures contracts sold by the Fund (adjusted for
the historical volatility relationship between the Fund and the contracts) will
not exceed the total market value of the Fund's securities. The segregation
requirements with respect to futures contracts and options thereon are
described below under "Use of Segregated and Other Special Accounts."
OPTIONS ON SECURITIES INDICES AND OTHER FINANCIAL INDICES
A Fund may purchase and sell call and put options on securities indices and
other financial indices. In doing so, the Fund can achieve many of the same
objectives it would achieve through the sale or purchase of options on
individual securities or other instruments. Options on securities indices and
other financial indices are similar to options on a security or other
instrument except that, rather than settling by physical delivery of the
underlying instrument, options on indices settle by cash settlement; that is,
an option on an index gives the holder the right to receive, upon exercise of
the option, an amount of cash if the closing level of the index upon which the
option is based exceeds, in the case of a call, or is less than, in the case
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of a put, the exercise price of the option (except if in the case of an OTC
option, physical delivery is specified). This amount of cash is equal to the
excess of the closing price of the index over the exercise price of the option,
which also may be multiplied by a formula value. The seller of the option is
obligated, in return for the premium received, to make delivery of this amount.
The gain or loss on an option on an index depends on price movements in the
instruments comprising the market, market segment, industry or other composite
on which the underlying index is based, rather than price movements in
individual securities, as is the case with respect to options on securities.
CURRENCY TRANSACTIONS
A Fund may engage in currency transactions with Counterparties to hedge the
value of portfolio securities denominated in particular currencies against
fluctuations in relative value or to generate income or gain. Currency
transactions include currency forward contracts, exchange-listed currency
futures contracts and options thereon, exchange-listed and OTC options on
currencies, and currency swaps. A forward currency contract involves a
privately negotiated obligation to purchase or sell (with delivery generally
required) a specific currency at a future date, which may be any fixed number
of days from the date of the contract agreed upon by the parties, at a price
set at the time of the contract. A currency swap is an agreement to exchange
cash flows based on the notional difference among two or more currencies and
operates similarly to an interest rate swap, which is described below under
"Swaps, Caps, Floors and Collars." A Fund may enter into currency transactions
only with Counterparties that the investment manager deems to be creditworthy.
Transaction hedging is entering into a currency transaction with respect to
specific assets or liabilities of the Fund, which will generally arise in
connection with the purchase or sale of the Fund's portfolio securities or the
receipt of income from them. Position hedging is entering into a currency
transaction with respect to portfolio securities positions denominated or
generally quoted in that currency. A Fund will not enter into a transaction to
hedge currency exposure to an extent greater, after netting all transactions
intended wholly or partially to offset other transactions, than the aggregate
market value (at the time of entering into the transaction) of the securities
held by the Fund that are denominated or generally quoted in or currently
convertible into the currency, other than with respect to proxy hedging as
described below.
A Fund may cross-hedge currencies by entering into transactions to purchase or
sell one or more currencies that are expected to increase or decline in value
relative to other currencies to which the Fund has or in which the Fund expects
to have exposure. To reduce the effect of currency fluctuations on the value of
existing or anticipated holdings of its securities, a Fund may also engage in
proxy hedging. Proxy hedging is often used when the currency to which the
Fund's holdings is exposed is difficult to hedge generally or difficult to
hedge against the dollar. Proxy hedging entails entering into a forward
contract to sell a currency, the changes in the value of which are generally
considered to be linked to a currency or currencies in which some or all of the
Fund's securities are or are expected to be denominated, and to buy
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dollars. The amount of the contract would not exceed the market value of the
Fund's securities denominated in linked currencies.
Currency transactions are subject to risks different from other portfolio
transactions, as discussed below under "Risk Factors." If a Fund enters into a
currency hedging transaction, the Fund will comply with the asset segregation
requirements described below under "Use of Segregated and Other Special
Accounts."
COMBINED TRANSACTIONS
A Fund may enter into multiple transactions, including multiple options
transactions, multiple futures transactions, multiple currency transactions
(including forward currency contracts), multiple interest rate transactions and
any combination of futures, options, currency and interest rate transactions,
instead of a single Derivative, as part of a single or combined strategy when,
in the judgment of the investment manager, it is in the best interests of the
Fund to do so. A combined transaction will usually contain elements of risk
that are present in each of its component transactions. Although combined
transactions will normally be entered into by a Fund based on the investment
manager's judgment that the combined strategies will reduce risk or otherwise
more effectively achieve the desired portfolio management goal, it is possible
that the combination will instead increase the risks or hinder achievement of
the Fund management objective.
SWAPS, CAPS, FLOORS AND COLLARS
A Fund may enter into interest rate, currency and equity swap, the purchase or
sale of related caps, floors and collars and other similar arrangements. A Fund
will enter into these transactions primarily to seek to preserve a return or
spread on a particular investment or portion of its portfolio, to protect
against currency fluctuations, as a duration management technique, to protect
against any increase in the price of securities the Fund anticipates purchasing
or selling at a later date or to generate income or gain. Interest rate swaps
involve the exchange by the Fund with another party of their respective
commitments to pay or receive interest (for example, an exchange of floating
rate payments for fixed rate payments with respect to a notional amount of
principal). An equity swap is an agreement to exchange cash flows on a national
principal amount based on changes in the values of the reference index. A
currency swap is an agreement to exchange cash flows on a notional amount based
on changes in the values of the currency exchange rates. The purchase of a cap
entitles the purchaser to receive payments on a notional principal amount from
the party selling the cap to the extent that a specified interest rate,
currency exchange rate or index exceeds a predetermined rate or amount. The
purchase of a floor entitles the purchaser to receive payments on a notional
principal amount from the party selling the floor to the extent that a
specified interest rate currency exchange rate or index falls below a
predetermined rate or amount. A collar is a combination of a cap and a floor
that preserves a certain return with a predetermined range of rates or values.
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A Fund will usually enter into swaps on a net basis, that is, the two payment
streams are netted out in a cash settlement on the payment date or dates
specified in the instrument with the Fund receiving or paying, as the case may
be, only the net amount of the two payments.
Inasmuch as these swaps, caps, floors, collars and other similar types of
instruments are entered into for good faith hedging or other non-speculative
purposes, they do not constitute senior securities under the 1940 Act, and,
thus, will not be treated as being subject to the Fund's applicable borrowing
restrictions. A Fund will not enter into any swap, cap, floor, collar or other
similar type of transaction unless the investment manager deems the
Counterparty to be creditworthy. If a Counterparty defaults, the Fund may have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of
banks and investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. As a result, the swap market has
become relatively liquid. Caps, floors and collars are more recent innovations
for which standardized documentation has not yet been fully developed and, for
that reason, they are less liquid than swaps.
The liquidity of swap agreements will be determined by the investment manager
based on various factors, including (1) the frequency of trades and quotations,
(2) the number of dealers and prospective purchasers in the marketplace, (3)
dealer undertakings to make a market, (4) the nature of the security (including
any demand or tender features), and (5) the nature of the marketplace for
trades (including the ability to assign or offset the Fund's rights and
obligations relating to the investment). Such determination will govern whether
a swap will be deemed within the 10% restriction on investment in securities
that are not readily marketable.
A Fund will maintain cash and appropriate liquid assets (i.e., high grade debt
securities) in a segregated custodial account to cover its current obligations
under swap agreements. If a Fund enters into a swap agreement on a net basis,
it will segregate assets with a daily value at least equal to the excess, if
any, of the Fund's accrued obligations under the swap agreement over the
accrued amount the Fund is entitled to receive under the agreement. If a Fund
enters into a swap agreement on other than a net basis, it will segregate
assets with a value equal to the full amount of the Fund's accrued obligations
under the agreement. See "Use of Segregated and Other Special Accounts" below.
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.
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The use of futures and options transactions entails certain special risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related securities position of a
Fund could create the possibility that losses on the hedging instrument are
greater than gain 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 the investment manager
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 the investment manager 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.
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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.
RISK 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 dates 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 cash, liquid high grade debt obligations or other assets with
its custodian, or a designated sub-custodian, to the extent the Fund's
obligations are not otherwise "covered" through ownership of the underlying
security, financial instrument or currency. In general, either the full amount
of any obligation by a Fund to pay or deliver securities or assets must be
covered at all times by the securities, instruments or currency required to be
delivered, or, subject to any regulatory restrictions, an amount of cash or
liquid high grade debt obligations at least equal to the current amount of the
obligation must be segregated with the custodian or sub-custodian. The
segregated assets cannot be sold or transferred unless equivalent assets are
substituted in their place or it is no longer necessary to segregate them. A
call option on securities written by a Fund, for example, will require the Fund
to hold the securities subject to the call (or securities convertible into the
needed securities without additional consideration) or to segregate liquid high
grade debt obligations sufficient to purchase and deliver the securities if the
call is exercised. A call option sold by a Fund on an index will require the
Fund to own portfolio securities that correlate with the index or to segregate
liquid high grade debt obligations equal to the excess of the index value over
the exercise price on a current basis. A put option on securities written by a
Fund will require the Fund to segregate liquid high grade debt obligations
equal to the exercise price. Except when a Fund enters into a forward contract
in connection with the purchase or sale of a security denominated in a foreign
currency or for other non-speculative purposes, which requires no segregation,
a currency contract that obligates the fund to buy or sell a foreign currency
will generally require the Fund to hold an amount of that currency or liquid
securities denominated in that
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currency equal to the Fund's obligations or to segregate liquid high grade debt
obligations equal to the amount of the Fund's obligations.
OTC options entered into by a Fund, including those on securities, currency,
financial instruments or indices, and OCC-issued and exchange-listed index
options will generally provide for cash settlement, although the Fund will not
be required to do so. As a result, when a Fund sells these instruments it will
segregate an amount of assets equal to its obligations under the Options. OCC-
issued and exchange-listed options sold by a Fund other than those described
above generally settle with physical delivery, and the Fund will segregate an
amount of assets equal to the full value of the option. OTC options settling
with physical delivery or with an election of either physical delivery or cash
settlement will be treated the same as other options settling with physical
delivery.
In the case of a futures contract or an option on a futures contract, a Fund
must deposit initial margin and, in some instances, daily variation margin in
addition to segregating assets sufficient to meet its obligations to purchase
or provide securities or currencies, or to pay the amount owed at the
expiration of an index-based futures contract. These assets may consist of
cash, cash equivalents, liquid debt or equity securities or other acceptable
assets. A Fund will accrue the net amount of the excess, if any, of its
obligations relating to swaps over its entitlements with respect to each swap
on a daily basis and will segregate with its custodian, or designated
sub-custodian, an amount of cash or liquid high grade debt obligations having
an aggregate value equal to at least the accrued excess. Caps, floors and
collars require segregation of assets with a value equal to the Fund's net
obligation, if any.
Derivatives may be covered by means other than those described above when
consistent with applicable regulatory policies. A Fund may also enter into
offsetting transactions so that its combined position, coupled with any
segregated assets, equals its net outstanding obligation in related
Derivatives. A Fund could purchase a put option, for example, if the strike
price of that option is the same or higher than the strike price of a put
option sold by the Fund. Moreover, instead of segregating assets if it holds a
futures contract or forward contract, a Fund could purchase a put option on the
same futures contract or forward contract with a strike price as high or higher
than the price of the contract held. Other Derivatives may also be offset in
combinations. If the offsetting transaction terminates at the time of or after
the primary transaction, no segregation is required, but if it terminates prior
to that time, assets equal to any remaining obligation would need to be
segregated.
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SALOMON BROTHERS INSTITUTIONAL INVESTMENT SERIES
PROSPECTUS
, 1996
No dealer, salesman or other person has been authorized to give any information
or to make any representations, other than those contained in this Prospectus
and, if given or made, such other information or representations must not be
relied upon as having been authorized by a Fund, the distributor or the
investment manager. This Prospectus does not constitute an offering in any
state in which such offering may not lawfully be made.
<PAGE> 78
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This statement of additional information shall not constitute an
offer to sell or the solicitation of an offer to buy nor shall there be any
sale of these securities in any State in which such offer, solicitation or sale
would be unlawful prior to registration or qualification under the securities
laws of any such State.
SUBJECT TO COMPLETION
PRELIMINARY STATEMENT OF ADDITIONAL INFORMATION
DATED MARCH 29, 1996
SALOMON BROTHERS INSTITUTIONAL INVESTMENT SERIES
7 WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
(800) SALOMON
(800) 725-6666
STATEMENT OF ADDITIONAL INFORMATION
Salomon Brothers Institutional Investment Series consists of Salomon
Brothers Institutional Money Market Fund (the "Money Market Fund"), Salomon
Brothers Institutional High Yield Bond Fund (the "High Yield Bond Fund"),
Salomon Brothers Institutional Emerging Markets Debt Fund (the "Emerging
Markets Debt Fund") and Salomon Brothers Institutional Asia Growth Fund (the
"Asia Growth Fund") (each, a "Fund" and collectively, the "Funds"). Each of the
Funds, except the Money Market Fund, is a no-load investment portfolio of
Salomon Brothers Institutional Series Funds Inc, an open-end investment company
incorporated in Maryland on January 19, 1996 ("Institutional Series Funds").
The Money Market Fund is a no-load investment portfolio of Salomon Brothers
Series Funds Inc, an open-end investment company incorporated in Maryland on
April 17, 1990 ("Series Funds").
This Statement of Additional Information is not a Prospectus and is only
authorized for distribution when preceded or accompanied by the Prospectus
dated __________ __, 1996 (the "Prospectus"). This Statement of Additional
Information contains additional information to that set forth in the Prospectus
and should be read in conjunction with the Prospectus, additional copies of
which may be obtained without charge by writing or calling the Funds at the
address and telephone number printed above.
___________ __, 1996
<PAGE> 79
2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ADDITIONAL INFORMATION ON PORTFOLIO INSTRUMENTS AND INVESTMENT POLICIES . . . . . . . . . . . . . . . . . . . . . . . . . 3
INVESTMENT LIMITATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
PORTFOLIO TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
NET ASSET VALUE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
ADDITIONAL INFORMATION CONCERNING TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
PERFORMANCE DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
CAPITAL STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
CUSTODIAN AND TRANSFER AGENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
VALIDITY OF SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
INDEPENDENT ACCOUNTANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
COUNSEL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
</TABLE>
<PAGE> 80
3
ADDITIONAL INFORMATION ON PORTFOLIO INSTRUMENTS AND INVESTMENT POLICIES
The Prospectus indicates the extent to which each of the Funds may
purchase the instruments or engage in the investment activities described
below. The discussion below supplements the information set forth in the
Prospectus under "Investment Objective and Policies" and "Additional Investment
Activities and Risk Factors". References herein to the investment manager
means, with respect to the Money Market Fund, the High Yield Bond Fund and the
Emerging Markets Debt Fund, Salomon Brothers Asset Management Inc ("SBAM") and
with respect to the Asia Growth Fund, Salomon Brothers Asset Management Asia
Pacific Limited ("SBAM AP").
FOREIGN SECURITIES
As discussed in the Prospectus, investing in the securities of foreign
issuers generally, and particularly in emerging market issuers, involves
special considerations which are not typically associated with investing in
securities of U.S. issuers. The following discussion supplements the discussion
contained in the Prospectus under "Additional Investment Activities and Risk
Factors--Foreign Securities" and "--High Yield Securities--High Yield Foreign
Sovereign Debt Securities." See also "--Brady Bonds" below.
Certain of the risks associated with international investments and
investing in smaller capital markets are heightened for investments in emerging
market countries. For example, some of the currencies of emerging market
countries have experienced devaluations relative to the U.S. dollar, and major
adjustments have been made periodically in certain of such currencies. Certain
of such countries face serious exchange constraints. In addition, governments
of many emerging market countries have exercised and continue to exercise
substantial influence over many aspects of the private sector. In certain
cases, the government owns or controls many companies, including the largest in
the country. Accordingly, government actions in the future could have a
significant effect on economic conditions in developing countries which could
affect private sector companies and a Fund, as well as the value of securities
in the Fund.
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.
<PAGE> 81
4
With respect to investments in certain emerging market countries,
archaic legal systems 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 (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 certain of such 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 be able to
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 miss
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 for a Fund, in which event the Fund may be precluded from
purchasing securities in certain foreign countries in which it otherwise would
invest or which may result in the Fund's incurring additional costs and delays
in providing transportation and custody services for such securities outside of
such countries. A Fund may encounter difficulties in effecting on a timely
basis portfolio transactions with respect to any securities of issuers held
outside their countries. Other banks that are eligible foreign sub-custodians
may be recently organized or otherwise lack extensive operating experience. In
addition, in certain countries there may be legal restrictions or limitations
on the ability of a Fund to recover assets held in custody by foreign
sub-custodians in the event of the bankruptcy of the sub-custodian.
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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 "Additional Investment Activities and Risk
Factors--Foreign Securities" in the Prospectus and "--Foreign Securities"
above.
As stated in the Prospectus, bank obligations that may be purchased by
a Fund include certificates of deposit, banker's acceptances and fixed time
deposits. A certificate of deposit is a short-term negotiable certificate
issued by a commercial bank against funds deposited in the bank and is either
interest-bearing or purchased on a discount basis. A bankers' acceptance is a
short-term draft drawn on a commercial bank by a borrower, usually in
connection with an international commercial transaction. The borrower is liable
for payment as is the bank, which unconditionally guarantees to pay the draft
at its face amount on the maturity date. Fixed time deposits are obligations of
branches of U.S. banks or foreign banks which are payable at a stated maturity
date and bear a fixed rate of interest. Although fixed time deposits do not
have a market, there are no contractual restrictions on the right to transfer a
beneficial interest in the deposit to a third party.
Bank obligations may be general obligations of the parent bank or may
be limited to the issuing branch by the terms of the specific obligations or by
government regulation.
FLOATING AND VARIABLE RATE INSTRUMENTS
As stated in the Prospectus, certain of the floating or variable rate
obligations that may be purchased by a Fund may carry a demand feature that
would permit the holder to tender them back to the issuer of the instrument or
to a third party at par value prior to maturity. Some of the demand instruments
purchased by the Funds 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; if the notice period is greater than seven
days, the demand instrument will be characterized as "not readily marketable"
for such purpose.
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 a 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 the Fund between that bank and the Fund's custodian.
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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. Asset-backed securities are often
backed by a pool of assets representing the obligations of a number of
different parties. Asset-backed securities frequently carry credit protection
in the form of extra collateral, subordinated certificates, cash reserve
accounts, letters of credit or other enhancements. For example, payments of
principal and interest may be guaranteed up to certain amounts and for a
certain time period by a letter of credit or other enhancement issued by a
financial institution unaffiliated with the entities issuing the securities.
Assets which, to date, have been used to back asset-backed securities include
motor vehicle installment sales contracts or installment loans secured by motor
vehicles, and receivables from revolving credit (credit card) agreements.
Asset-backed securities present certain risks which are, generally,
related to limited interests, if any, in related collateral. Credit card
receivables are generally unsecured and the debtors are entitled to the
protection of a number of state and federal consumer credit laws, many of which
give such debtors the right to set off certain amounts owed on the credit
cards, thereby reducing the balance due. Most issuers of automobile receivables
permit the servicers to retain possession of the underlying obligations. If the
servicer were to sell these obligations to another party, there is a risk that
the purchaser would acquire an interest superior to that of the holders of the
related automobile receivables. In addition, because of the large number of
vehicles involved in a typical issuance and technical requirements under state
laws, the trustee for the holders of the automobile receivables may not have a
proper security interest in all of the obligations backing such receivables.
Therefore, there is the possibility that recoveries on repossessed collateral
may not, in some cases, be available to support payments on these securities.
Other types of asset-backed securities will be subject to the risks associated
with the underlying assets. If a letter of credit or other form of credit
enhancement is exhausted or otherwise unavailable, holders of asset-backed
securities may also experience delays in payments or losses if the full amounts
due on underlying assets are not realized. Because asset-backed securities are
relatively new, the market experience in these securities is limited and the
market's ability to sustain liquidity through all phases of the market cycle
has not been tested.
LOANS OF PORTFOLIO SECURITIES
Certain Funds may lend portfolio securities to brokers or dealers or
other financial institutions. 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 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
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shareholders and only in accordance with applicable rules and regulations. The
borrowers may not be affiliated, directly or indirectly, with a Fund.
RULE 144A SECURITIES
As indicated in the Prospectus, certain Funds may purchase certain
restricted securities ("Rule 144A securities") for which there is a secondary
market of qualified institutional buyers, as contemplated by Rule 144A 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 SEC stated that the board may delegate the
day-to-day function of determining liquidity to the fund's investment adviser,
provided that the board retains sufficient oversight. The Board of Directors of
Institutional Series Funds and Series Funds have adopted policies and
procedures for the purpose of determining whether securities that are eligible
for resale under Rule 144A are liquid or illiquid for purposes of a Fund's
limitation on investment in illiquid securities. 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. Each 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 Board of Directors, will monitor Fund investments in Rule 144A
securities and will consider appropriate measures to enable a Fund to maintain
sufficient liquidity for operating purposes and to meet redemption requests.
BRADY BONDS
Brady Bonds are debt securities, generally denominated in U.S.
dollars, issued under the framework of the Brady Plan. The Brady Plan is an
initiative announced by former U.S. Treasury Secretary Nicholas F. Brady in
1989 as a mechanism for debtor nations to restructure their outstanding
external commercial bank indebtedness. In restructuring its external debt under
the Brady Plan framework, a debtor nation negotiates with its existing bank
lenders as well as multilateral institutions such as the International Bank for
Reconstruction and Development (the "World Bank") and the International
Monetary Fund (the "IMF"). The Brady Plan framework, as it has developed,
contemplates the exchange of external commercial bank debt for newly issued
bonds (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
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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.
SBAM believes that economic reforms undertaken by countries in connection with
the issuance of Brady Bonds 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
one percent above the then current six month LIBOR rate. Regardless of the
stated face amount and stated interest rate of the various types of Brady
Bonds, the applicable Funds will purchase Brady Bonds in secondary markets, as
described below, in which the price and yield to the investor reflect market
conditions at the time of purchase. Brady Bonds issued to date have traded at a
deep discount from their face value. Certain sovereign bonds are entitled to
"value recovery payments" in certain circumstances, which in effect constitute
supplemental interest payments but generally are not collateralized. Certain
Brady Bonds have been collateralized as to principal due at maturity (typically
30 years from the date of issuance) by U.S. Treasury zero coupon bonds with a
maturity equal to the final maturity of such Brady Bonds, although the
collateral is not available to investors until the final maturity of the Brady
Bonds. Collateral purchases are financed by the IMF, the World Bank and the
debtor nations' reserves. In addition, interest payments on certain types of
Brady Bonds may be collateralized by cash or high-grade securities in amounts
that typically represent between 12 and 18 months of interest accruals on these
instruments with the balance of the interest accruals being uncollateralized.
The applicable Funds may purchase Brady Bonds with no or limited
collateralization, and will be relying for payment of interest and (except in
the case of principal collateralized Brady Bonds) principal primarily on the
willingness and ability of the foreign government to make payment in accordance
with the terms of the Brady Bonds. Brady Bonds issued to date are purchased and
sold in secondary markets through U.S. securities dealers and other financial
institutions and are generally maintained through European transnational
securities depositories. A substantial portion of the Brady Bonds and other
sovereign debt securities in which the Fund invests are likely to be acquired
at a discount, which involves certain considerations discussed below under
"Additional Information Concerning Taxes."
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STRUCTURED INVESTMENTS
Included among the issuers of emerging market country debt securities
in which the Emerging Markets Debt Fund may invest are entities organized and
operated solely for the purpose of restructuring the investment characteristics
of various securities. These entities are typically organized by investment
banking firms which receive fees in connection with establishing each entity
and arranging for the placement of its securities. This type of restructuring
involves the deposit with or purchase by an entity, such as a corporation or
trust, of specified instruments (such as Brady Bonds) and the issuance by that
entity of one or more classes of securities ("Structured Investments") backed
by, or representing interests in, the underlying instruments. The cash flow on
the underlying instruments may be apportioned among the newly issued Structured
Investments to create securities with different investment characteristics such
as varying maturities, payment priorities or interest rate provisions; the
extent of the payments made with respect to Structured Investments is dependent
on the extent of the cash flow on the underlying instruments. Because
Structured Investments of the type in which the Emerging Markets Debt Fund
anticipates investing typically involve no credit enhancement, their credit
risk will generally be equivalent to that of the underlying instruments.
The Emerging Markets Debt Fund is permitted to invest in a class of
Structured Investments that is either subordinated or unsubordinated to the
right of payment of another class. Subordinated Structured Investments
typically have higher yields and present greater risks than unsubordinated
Structured Investments. Although the Fund's purchase of subordinated Structured
Investments would have a similar economic effect to that of borrowing against
the underlying securities, the purchase will not be deemed to be borrowing for
purposes of the limitations placed on the extent of the Fund's assets that may
be used for borrowing. See "Additional Investment Activities and Risk
Factors--Borrowing" in the Prospectus.
Certain issuers of Structured Investments may be deemed to be
"investment companies" as defined in the 1940 Act. As a result, the Fund's
investment in these Structured Investments may be limited by the restrictions
contained in the 1940 Act described in the Prospectus under "Additional
Investment Activities and Risk Factors--Investment Funds." Structured
Investments are typically sold in private placement transactions, and there
currently is no active trading market for Structured Investments.
DERIVATIVES
The description in the Prospectus of each Fund indicates which, if
any, of these types of transactions may be used by that Fund.
FORWARD CURRENCY EXCHANGE CONTRACTS. As indicated in the Prospectus,
in order to hedge against currency exchange rate risks or to increase income,
certain Funds may enter into forward currency exchange contracts with
securities dealers, financial institutions or other parties, through direct
bilateral agreements with such counterparties. A Fund will enter into forward
currency exchange contracts only with counterparties which the investment
manager deems creditworthy. In connection with a Fund's forward currency
transactions, the Fund will set aside in a segregated account with its
custodian, cash, cash equivalents or high quality debt securities in an amount
equal to the amount of the contract, to be used to pay for the commitment. The
segregated account will be marked-to-market on a daily basis. In addition to
the circumstances set forth in the Prospectus, a Fund may enter into forward
currency exchange contracts when the investment manager believes that the
currency of a particular country may suffer a substantial decline against the
U.S. dollar. In those
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10
circumstances, a Fund may enter into a forward contract to sell, for a fixed
amount of U.S. dollars, the amount of that currency approximating the value of
some or all of the Fund's portfolio securities denominated in such currency.
Forward contracts may limit potential gain from a positive change in the
relationship between the U.S. dollar and foreign currencies.
FUTURES CONTRACTS. As indicated in the Prospectus, certain Funds may
trade futures contracts (1) on domestic and foreign exchanges on currencies,
interest rates and bond indices and (2) on domestic and, to the extent
permitted by the Commodity Futures Trading Commission ("CFTC"), foreign
exchanges on stock indices. None of the Funds is a commodity pool, and a Fund
will use futures contracts and options thereon solely (i) for bona fide hedging
purposes and (ii) for other purposes in amounts permitted by the rules and
regulations promulgated by the CFTC. A Fund may not enter into any futures
contract or related option other than for bona fide hedging purposes if,
immediately thereafter, the sum of the amount of aggregate initial margin
deposits on the Fund's existing futures contracts and premiums paid for options
on futures contracts would exceed 5% of the liquidation value of the Fund's
portfolio, after taking into account unrealized profits and losses on existing
contracts. In addition, the value of a Fund's long futures and options
positions (futures contracts on stock or bond indices, interest rates or
foreign currencies and call options on such futures contracts) will not exceed
the sum of (a) cash, cash equivalents or high quality debt securities
segregated for this purpose, (b) cash proceeds on existing investments due
within thirty days and (c) accrued profits on the particular futures or options
positions. Furthermore, with respect to the sale of futures contracts by a
Fund, the value of such contracts may not exceed the total market value of such
Fund's portfolio securities.
Interest Rate Futures Contracts. A Fund may enter into interest rate
futures contracts in order to protect it from fluctuations in interest rates
without necessarily buying or selling fixed income securities. An interest rate
futures contract is an agreement to take or make delivery of either (i) an
amount of cash equal to the difference between the value of a particular index
of debt securities at the beginning and at the end of the contract period or
(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 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
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rate from that specified in the contract. In some (but not many) cases,
securities called for by a futures contract may have a shorter term than the
term of the futures contract and, consequently, may not in fact have been
issued when the futures contract was entered.
OPTIONS. As indicated in the Prospectus, in order to hedge against
adverse market shifts or to increase income, certain Funds may purchase put and
call options or write "covered" put and call options on futures contracts on
stock indices, interest rates and currencies. In addition, in order to hedge
against adverse market shifts or to increase its income, a Fund may purchase
put and call options and write "covered" put and call options on stocks, Loan
Participations and Assignments (as defined in the Prospectus), 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, U.S. government securities or other high grade liquid debt
obligations having a value at least equal to the exercise price of the
underlying investment or (b) continue to own an equivalent number of puts of
the same "series" (that is, puts on the same underlying investment having the
same exercise prices and expiration dates as those written by the Fund), or an
equivalent number of puts of the same "class" (that is, puts on the same
underlying investment) with exercise prices greater than those that it has
written (or, if the exercise prices of the puts it holds are less than the
exercise prices of those it has written, it will deposit the difference with
its custodian in a segregated account). Parties to options transactions must
make certain payments and/or set aside certain amounts of assets in connection
with each transaction, as described in the Prospectus.
In all cases except for certain options on interest rate futures
contracts, by writing a call, 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
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price, in the case of a put, and must increase sufficiently above the exercise
price, in the case of a call, to cover the premium and transaction costs.
In the case of certain options on interest rate futures contracts, a
Fund may purchase a put option in anticipation of a rise in interest rates, and
purchase a call option in anticipation of a fall in interest rates. By writing
a covered call option on interest rate futures contracts, a Fund will limit its
opportunity to profit from a fall in interest rates. By writing a covered put
option on interest rate futures contracts, a Fund will limit its opportunity to
profit from a rise in interest rates.
A Fund may choose to exercise the options it holds, permit them to
expire or terminate them prior to their expiration by entering into closing
transactions. A Fund may enter into a closing purchase transaction in which the
Fund purchases an option having the same terms as the option it had written or
a closing sale transaction in which the Fund sells an option having the same
terms as the option it had purchased. A covered option writer unable to effect
a closing purchase transaction will not be able to sell the underlying security
until the option expires or the underlying security is delivered upon exercise,
with the result that the writer will be subject to the risk of market decline
in the underlying security during such period. Should a Fund choose to exercise
an option, the Fund will purchase in the open market the securities,
commodities or commodity futures contracts underlying the exercised option.
Exchange-listed options on securities and currencies, with certain
exceptions, generally settle by physical delivery of the underlying security or
currency, although in the future, cash settlement may become available.
Frequently, rather than taking or making delivery of the underlying instrument
through the process of exercising the option, listed options are closed by
entering into offsetting purchase or sale transactions that do not result in
ownership of the new option. Index options are cash settled for the net amount,
if any, by which the option is "in-the-money" (that is, the amount by which the
value of the underlying instrument exceeds, in the case of a call option, or is
less than, in the case of a put option, the exercise price of the option) at
the time the option is exercised.
A Fund's ability to close out its position as a purchaser or seller of
an exchange-listed put or call option is dependent upon the existence of a
liquid secondary market on option exchanges. Among the possible reasons for the
absence of a liquid secondary market on an exchange are: (i) insufficient
trading interest in certain options; (ii) restrictions on transactions imposed
by an exchange; (iii) trading halts, suspensions or other restrictions imposed
with respect to particular classes or series of options or underlying
securities; (iv) interruption of the normal operations on an exchange; (v)
inadequacy of the facilities of an exchange or the Options Clearing Corporation
("OCC") to handle current trading volume; or (vi) a decision by one or more
exchanges to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that exchange (or in
that class or series of options) would cease to exist, although outstanding
options on that exchange that had been listed by the OCC as a result of trades
on that exchange would generally continue to be exercisable in accordance with
their terms.
Over-the-counter options are purchased from or sold to securities
dealers, financial institutions or other parties, through direct bilateral
agreement with such counterparties. A Fund will purchase and sell
over-the-counter options only from and to counterparties which the investment
manager deems to be creditworthy.
The hours of trading for options on securities may not conform to the
hours during which the underlying securities are traded. To the extent that the
option markets close before the markets for the
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underlying securities, significant price and rate movements can take place in
the underlying markets that cannot be reflected in the options markets.
(a) Options on Stocks and Stock Indices. A Fund may purchase put and
call options and write covered put and call options on stocks and stock indices
listed on domestic and foreign securities exchanges in order to hedge against
movements in the equity markets or to increase income 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 in fact the stock index does rise,
the price of the particular equity securities intended to be purchased may also
increase, but that increase would be offset in part by the increase in the
value of the Fund's index option or futures contract resulting from the
increase in the index. If, on the other hand, 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 in fact 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, 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 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.
<PAGE> 91
14
INTEREST RATE AND EQUITY SWAPS AND RELATED TRANSACTIONS. Certain Funds
may enter into interest rate and equity swaps and may purchase or sell (i.e.,
write) interest rate and equity caps, floors and collars. A Fund expects to
enter into these transactions in order to hedge against either a decline in the
value of the securities included in the Fund's portfolio, or against an
increase in the price of the securities which it plans to purchase, or in order
to preserve or maintain a return or spread on a particular investment or
portion of its portfolio or to achieve a particular return on cash balances, or
in order to increase income. Interest rate and equity swaps involve the
exchange by a Fund with another party of their respective commitments to make
or receive payments based on a notional principal amount. The purchase of an
interest rate or equity cap entitles the purchaser, to the extent that a
specified index exceeds a predetermined level, to receive payments on a
contractually-based principal amount from the party selling the interest rate
or equity cap. The purchase of an interest rate or equity floor entitles the
purchaser, to the extent that a specified index falls below a predetermined
rate, to receive payments on a contractually-based principal amount from the
party selling the interest rate or equity floor. A collar is a combination of a
cap and a floor which preserve a certain return within a predetermined range of
values.
A Fund may enter into interest rate and equity swaps, caps, floors and
collars on either an asset-based or liability-based basis, depending on whether
it is hedging its assets or its liabilities, and will usually enter into
interest rate and equity swaps on a net basis (i.e., the two payment streams
are netted out), with the Fund receiving or paying, as the case may be, only
the net amount of the two payments. The net amount of the excess, if any, of a
Fund's obligations over its entitlements with respect to each interest rate or
equity swap will be accrued on a daily basis, and an amount of cash and/or
liquid high grade debt securities having an aggregate net asset value at least
equal to the accrued excess will be maintained in a segregated account by the
Fund's custodian. If a Fund enters into an interest rate or equity swap on
other than a net basis, the Fund will maintain a segregated account in the full
amount accrued on a daily basis of the Fund's obligations with respect to the
swap. A Fund will only enter into interest rate and equity swap, cap, floor or
collar transactions with counterparties the investment manager deems to be
creditworthy. The investment manager will monitor the creditworthiness of
counterparties to its interest rate and equity swap, cap, floor and collar
transactions on an ongoing basis. If there is a default by the other party to
such a transaction, a Fund will have contractual remedies pursuant to the
agreements related to the transaction. The swap market has grown substantially
in recent years with a large number of banks and investment banking firms
acting both as principals and agents utilizing standardized swap documentation.
The investment manager has determined that, as a result, the swap market has
become relatively liquid. Caps, floors and collars are more recent innovations
for which standardized documentation has not yet been 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 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.
There is no limit on the amount of interest rate and equity swap
transactions that may be entered into by a Fund. These transactions do not
involve the delivery of securities or other underlying assets or principal.
Accordingly, the risk of loss with respect to interest rate and equity swaps is
limited to the net amount of payments that a Fund is contractually obligated to
make, if any. The effective use of
<PAGE> 92
15
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.
OTHER INVESTMENT COMPANIES
As indicated under "Investment Restrictions" below, a Fund may from
time to time invest in securities of other investment companies. 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 LIMITATIONS
Except for (i) the investment limitations set forth below which are
indicated as fundamental policies, (ii) the investment restrictions set forth
in the Prospectus and (iii) each Fund's investment objective as described in
the Prospectus, the other policies and percentage limitations referred to in
this Statement of Additional Information and the Prospectus are not fundamental
policies of the Funds and may be changed by the applicable Board of Directors
without shareholder approval. The investment restrictions which are fundamental
policies may be changed only when permitted by law, if applicable, and approved
by the holders of a majority of a 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.
If a percentage restriction on investment or use of assets set forth
below is adhered to at the time a transaction is effected, later changes in
percentages resulting from changing values will not be considered a violation.
MONEY MARKET FUND. The Money Market Fund may not:
(1) invest more than 10% of the value of its net assets in
securities which are illiquid;
<PAGE> 93
16
(2) purchase shares of other investment companies (except as part
of a merger, consolidation or reorganization or purchase of
assets approved by the Fund's shareholders), provided that the
Fund may purchase shares of any registered open-end investment
company that determines its net asset value per share based on
the amortized cost or penny-rounding method, if immediately
after any such purchase the Fund does not (a) own more than 3%
of the outstanding voting stock of any one investment company,
(b) invest more than 5% of the value of its total assets in
any one investment company, or (c) invest more than 10% of the
value of its total assets in the aggregate in securities of
investment companies;
(3) purchase securities on margin (except for delayed delivery or
when-issued transactions or such short-term credits as are
necessary for the clearance of transactions);
(4) sell securities short;
(5) purchase or sell commodities or commodity contracts, including
futures contracts;
(6) invest for the purpose of exercising control over management
of any company;
(7) make loans, except that the Fund may (a) purchase and hold
debt instruments in accordance with its investment objective
and policies and (b) enter into repurchase agreements with
respect to portfolio securities;
(8) underwrite the securities of other issuers, except to the
extent that the purchase of investments directly from the
issuer thereof and later disposition of such securities in
accordance with the Fund's investment program may be deemed to
be an underwriting;
(9) purchase real estate or real estate limited partnership
interests (other than securities issued by companies that
invest in real estate or interests therein);
(10) invest directly in interests in oil, gas or other mineral
exploration development programs or mineral leases; or
(11) purchase warrants.
Each of the above restrictions are fundamental policies of the Money
Market Fund. For the purpose of applying the above percentage restrictions and
the percentage investment limitations set forth in the Prospectus to
receivables-backed obligations, both the special purpose entity issuing the
receivables-backed obligations and the issuer of the underlying receivables
will be considered an issuer.
<PAGE> 94
17
HIGH YIELD BOND FUND, EMERGING MARKETS FUND AND ASIA GROWTH FUND. Each of the
High Yield Bond Fund, Emerging Markets Fund and Asia Growth Fund may not:
(1) underwrite securities of other issuers, except to the extent that
the purchase of investments directly from the issuer thereof or from an
underwriter for an issuer and the later disposition of such securities in
accordance with a Fund's investment program may be deemed to be an
underwriting;
(2) purchase or sell real estate, although a Fund may purchase and
sell securities of companies which deal in real estate, may purchase and sell
marketable securities which are secured by interests in real estate and may
invest in mortgages and mortgage-backed securities;
(3) purchase or sell commodities or commodity contracts except that a
Fund may engage in derivative transactions to the extent permitted by its
investment policies as such policies are set forth from time to time 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 and policies, (b) a Fund
may enter into repurchase agreements with respect to portfolio securities,
subject to applicable limitations of its investment policies, (c) a Fund may
lend portfolio securities with a value not in excess of one-third of the value
of its total assets, provided that collateral arrangements with respect to
options, forward currency and futures transactions will not be deemed to
involve loans of securities, and (d) delays in the settlement of securities
transactions will not be considered loans;
(5) purchase the securities of other investment companies except as
permitted under the 1940 Act or in connection with a merger, consolidation,
acquisition or reorganization;
(6) purchase securities on margin (except for delayed delivery or
when-issued transactions or such short-term credits as are necessary for the
clearance of transactions, and except for initial and variation margin payments
in connection with purchases or sales of futures contracts);
(7) sell securities short; provided that short positions in a futures
contract or forward contract are permitted;
(8) purchase or retain any securities of an issuer if one or more
persons affiliated with a Fund owns beneficially more than 1/2 of 1% of the
outstanding securities of such issuer and such affiliated persons so owning 1/2
of 1% together own beneficially more than 5% of such securities;
<PAGE> 95
18
(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) with respect to the High Yield Bond Fund only, 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 its total assets;
(11) 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; or
(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.
Investment restrictions (1) through (5) described above are
fundamental policies of each of the High Yield Bond Fund, Emerging Markets Fund
and Asia Growth Fund. Restrictions (6) through (14) are non-fundamental
policies of such Fund.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Certificates representing shares of the Funds will not be issued to
shareholders. Investors Bank and Trust Company ("Investors Bank"), the Fund's
transfer agent, will maintain an account for each shareholder upon which the
registration and transfer of shares are recorded, and any transfers shall be
reflected by bookkeeping entry, without physical delivery. Detailed
confirmations of each purchase or redemption are sent to each shareholder.
Monthly statements of account are sent which include shares purchased as a
result of a reinvestment of Fund distributions.
Investors Bank will require that a shareholder provide requests in
writing, accompanied by a valid signature guarantee form, when changing certain
information in an account (i.e., wiring instructions, telephone privileges,
etc.).
<PAGE> 96
19
If the Board of Directors of each of Institutional Series Funds and
Series Funds shall determine that it is in the best interests of the remaining
shareholders of a Fund, the Fund may pay the redemption price in whole, or in
part, by a distribution in kind from the portfolio of the Fund, in lieu of
cash, taking such securities at their value employed for determining such
redemption price, and selecting the securities in such manner as such Board of
Directors may deem fair and equitable. However, each Fund has made an election
pursuant to Rule 18f-1 under the 1940 Act requiring that all redemptions be
effected in cash to each redeeming shareholder, during periods of 90 days, up
to the lesser of $250,000 or 1% of the net assets of such Fund. A shareholder
who receives a distribution in kind may incur a brokerage commission upon a
later disposition of such securities and may receive less than the redemption
value of such securities or property upon sale, particularly where such
securities are sold prior to maturity. Redemption in kind is not as liquid as
a cash redemption.
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 the NYSE 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.
EXCHANGE PRIVILEGE. Shareholders may exchange all or part of their
shares for shares of other Funds in the Salomon Brothers Institutional
Investment Series, as indicated in the Prospectus. The value of the shares
exchanged must meet the investment minimum of the Fund into which the investor
is exchanging.
The exchange privilege enables shareholders of a Fund to acquire
shares in a Fund with a different investment objective 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 repurchase
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.
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
<PAGE> 97
20
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.
PORTFOLIO TRANSACTIONS
Subject to policy established by the applicable Fund's Board of
Directors, the investment manager is primarily responsible for each Fund's
portfolio decisions and the placing of the Fund's portfolio transactions.
Fixed-income, certain short-term securities and certain equities
normally will be purchased or sold from or to issuers directly or to dealers
serving as market makers for the securities at a net price, which may include
dealer spreads and underwriting commissions. Equity securities may also be
purchased or sold through brokers who will be paid a commission.
The general policy of each Fund in selecting brokers and dealers is to
obtain the best results taking into account factors such as the general
execution and operational facilities of the broker or dealer, the type and size
of the transaction involved, the creditworthiness of the broker or dealer, the
stability of the broker or dealer, execution and settlement capabilities, time
required to negotiate and execute the trade, research services and the
investment manager's arrangements related thereto (as described below), overall
performance, the dealer's risk in positioning the securities involved, and the
broker's commissions and dealer's spread or mark-up. While the investment
manager generally seeks the best price in placing its orders, a Fund may not
necessarily be paying the lowest price available.
Notwithstanding the above, in compliance with Section 28(e) of the
Securities Exchange Act of 1934, the investment manager may select brokers who
charge a commission in excess of that charged by other brokers, if the
investment manager determines in good faith that the commission to be charged
is reasonable in relation to the brokerage and research services provided to
the investment manager by such brokers. Research services generally consist of
research or statistical reports or oral advice from brokers and dealers
regarding particular companies, industries or general economic conditions. The
investment manager may also have arrangements with brokers pursuant to which
such brokers provide research services to the investment manager in exchange
for a certain volume of brokerage transactions to be executed by such broker.
While the payment of higher commissions increases a Fund's costs, the
investment manager does not believe that the receipt of such brokerage and
research services significantly reduces its expenses as a Fund's investment
manager. Arrangements for the receipt of research services from brokers may
create conflicts of interest.
<PAGE> 98
21
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.
Affiliated persons of a Fund, or affiliated persons of such persons,
may from time to time be selected to execute portfolio transactions for such
Fund. Subject to the considerations discussed above and in accordance with
procedures adopted by the applicable Fund's Board of Directors, in order for
such an affiliated person to be permitted to effect any portfolio transactions
for a Fund, the commissions, fees or other remuneration received by such
affiliated person must be reasonable and fair compared to the commissions, fees
or other remuneration received by other brokers in connection with comparable
transactions. This standard would allow such an affiliated person to receive no
more than the remuneration which would be expected to be received by an
unaffiliated broker in a commensurate arm's-length transaction.
Each Fund's Board of Directors has determined that Salomon Brothers
may execute portfolio transactions for such Fund so long as the Fund is charged
commission rates consistent with those charged by other brokers in comparable
transactions with clients that are comparable to the Fund.
Under the 1940 Act, persons affiliated with 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, a
Fund may purchase securities from underwriting syndicates of which the
investment manager or any of their affiliates (including Salomon Brothers Inc)
is a member under certain conditions, in accordance with the provisions of Rule
10f-3 under the 1940 Act.
MANAGEMENT
DIRECTORS AND OFFICERS
The principal occupations of the directors and executive officers of
the Institutional Series Funds and the Series Funds for the past five years are
listed below. The board composition of Institutional Series Funds and Series
Funds is identical. Certain of the directors and officers are also directors and
officers of one or more other investment companies for which SBAM acts as
investment manager.
Except as indicated below, the address of Mr. Hyland and each
executive officer is Salomon Brothers Asset Management Inc, 7 World Trade
Center, New York, New York 10048.
<PAGE> 99
22
DIRECTORS OF SERIES FUNDS
<TABLE>
<CAPTION>
POSITION(S) Principal
HELD WITH Occupation(s)
NAME AND ADDRESS Series Funds Past 5 Years
---------------- ------------ ------------
<S> <C> <C>
Charles F. Barber Director Consultant; formerly Chairman
66 Glenwood Drive (Audit Committee of the Board, ASARCO
Greenwich, CT 06830 Member) Incorporated
Age 79
Carol L. Colman Director President, Colman Consulting
Colman Consulting (Audit Committee Co., Inc.; formerly Managing
Co., Inc. Member) Partner of Inferential Focus
P.O. Box 212
North Salem, NY 10560
Age 50
Daniel P. Cronin Director Vice President and General
Pfizer, Inc (Audit Committee Counsel,
253 East 42nd Street Member) Pfizer International Inc
New York, NY 10017 since 1987;
Age 50 Senior Assistant General
Counsel,
Pfizer, Inc since 1989
Michael S. Hyland* Director and President, SBAM and Managing
Age 50 President Director, Salomon Brothers
since 1989; formerly Managing
Director,
First Boston Asset Management
and Managing Director, The
First Boston Corporation
</TABLE>
<PAGE> 100
23
[Directors of Institutional Series Funds to be named]
* Interested Person as defined in the 1940 Act.
<PAGE> 101
24
EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
PRINCIPAL
POSITION(S) OCCUPATION(S)
NAME AND ADDRESS HELD PAST 5 YEARS
---------------- ----------- -------------
<S> <C> <C>
Giampaolo G. Guarnieri Executive Vice Vice President and Portfolio Manager,
Salomon Brothers Asset President SBAM AP since April 1995; formerly
Management Asia Senior Portfolio Investment Manager,
Pacific Limited Credit Agricole Asset Management
Three Exchange Square, (South East Asia) Limited since 1992
Hong Kong and head of direct investment
Age 32 activities from 1990-1992
Steven Guterman (Series Executive Vice Managing Director, SBAM and Salomon
Funds only) President Brothers Inc since January 1996;
Age 42 formerly Vice President, SBAM and
Salomon Brothers Inc.
Peter J. Wilby Executive Vice Managing Director, SBAM and Salomon
Age 37 President Brothers Inc since January 1996;
formerly Vice President, SBAM and
Salomon Brothers Inc.
Richard E. Dahlberg Executive Vice Managing Director, SBAM and Salomon
(Series Funds only) President Brothers Inc since January 1996;
Age 58 formerly Vice President SBAM since
June 1995; prior to that employed by
Massachusetts Financial Services
Company.
Lawrence H. Kaplan Executive Vice Vice President and Chief Counsel, SBAM
Age 39 President and General and Vice President, Salomon Brothers
Counsel Inc since May 1995; formerly Senior
Vice President, Director and General
Counsel, Kidder Peabody Asset
Management, Inc. and Senior Vice
President, Kidder, Peabody & Co.
Incorporated since November 1990
Eliza Lau Vice President Vice President, SBAM since 1995;
Age 33 previously research analyst, Salomon
Brothers Inc.
James E. Craige Vice President Vice President, SBAM and Salomon
(Institutional Series Brothers Inc since 1992; prior to that
Funds only) employed as an associate, Shearson
Age 28 Lehman Advisors.
Thomas K. Flanagan Vice President Director, SBAM and Salomon Brothers
(Institutional Series Inc since 1996; formerly Vice
Funds only) President, SBAM and Salomon Brothers
Age 43 Inc since 1991; prior to that employed
as a Director, Merrill Lynch & Co.
Nancy Noyes (Series Vice President Director, SBAM and Salomon Brothers
Funds officer only) Inc since January 1996; formerly Vice
Age 37 President, SBAM and Salomon Brothers
Inc.
Alan M. Mandel Treasurer Vice President, SBAM since January
Age 38 1995; formerly Chief Financial
Officer, Hyperion Capital Management
since 1991; prior to which he was Vice
President, Mitchell Hutchins Asset
Management ("MHAM".)
</TABLE>
<PAGE> 102
25
<TABLE>
<S> <C> <C>
Tana E. Tselepis Secretary Compliance Officer, SBAM since 1993
Age 60 and Senior Administrator since 1989;
Vice President, Salomon Brothers since
1991; formerly Vice President and
Senior Administrator at First Boston
Asset Management Corporation, 1985-
1989.
Reji Paul Assistant Treasurer Investment Accounting Manager, SBAM
Age 33 since 1995; formerly Assistant Vice
President, MHAM since 1994; prior to
which he was Supervisor at MHAM.
Janet Tolchin Assistant Treasurer Investment Accounting Manager, SBAM
(Series Funds officer only)
Age 37
Amy Yeung Assistant Treasurer Investment Accounting Manager, SBAM
(Institutional Series Only) since April 1995; formerly Manager of
Age 31 McGladrey & Pullen, LLP (accounting
firm).
Jennifer G. Muzzey Assistant Secretary Employee of SBAM since June 1994;
Age 36 formerly Vice President of SunAmerica
Asset Management Corporation.
</TABLE>
COMPENSATION TABLE
The following table provides information concerning the compensation
paid during the fiscal year ended December 31, 1995 to each director of the
Series Funds. It is estimated that each Director of Institutional Series Funds,
except Mr. Hyland will receive $5,000 for the 1996 fiscal year as compensation
for serving as director. Neither the Institutional Series Funds nor the Series
Funds provide any pension or retirement benefits to directors. In addition,
no remuneration was paid during the fiscal year ended December 31, 1995 by the
Series Funds or will be paid during the 1996 fiscal year by the Institutional
Series Funds to officers of the Series Funds or to Mr. Hyland, who as an
employee of SBAM may be defined as an "interested person" under the 1940 Act.
SERIES FUNDS
<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION TOTAL COMPENSATION
NAME OF PERSON, FROM THE FROM OTHER FUNDS
POSITION SERIES FUNDS ADVISED BY SBAM(A) TOTAL COMPENSATION
-------- ------------ ------------------ ------------------
<S> <C> <C> <C>
Charles F. Barber
Director $4,326 $110,149(12) $114,475
Daniel P. Cronin
Director $3,544 $26,399(3) $29,943
Carol L. Colman
Director $4,416 $28,250(3) $32,666
</TABLE>
- -----------------
(A) The numbers in parenthesis indicate the applicable number of
investment company directorships held by that director.
<PAGE> 103
26
PRINCIPAL HOLDERS OF SECURITIES
As of the date of this Statement of Additional Information, Salomon
Brothers Asset Management Inc, 7 World Trade Center, New York, NY 10048, owns
all of the outstanding shares of the High Yield Bond Fund, the Emerging Markets
Debt Fund and the Asia Growth Fund and, accordingly, is a control person of
each of these Funds.
<TABLE>
<CAPTION>
LARGEST SHAREHOLDERS % OF SHARES
<S> <C> <C>
1 SALOMON BROTHERS INC A/C NYS6734 24.34%
7 WORLD TRADE CENTER, 40TH FLOOR
NEW YORK, NY 10048
2 STATE STREET BANK & TRUST CO FBO 18.82%
SALOMON BROTHERS NY MUNICIPAL DEPT
7 WORLD TRADE CENTER, 38TH FLOOR
NEW YORK, NY 10048
3 SALOMON BROTHERS A/C VO263 7.60%
7 WORLD TRADE CENTER, 40TH FLOOR
NEW YORK, NY 10048
4 MARTIN L LEIBOWITZ 7.24%
ONE FIFTH AVENUE
APT. #13K
NEW YORK, NY 10005
</TABLE>
Directors of the Series Funds and Institutional Series Funds not
affiliated with SBAM receive from their respective Funds an annual fee and a
fee for each Board of Directors and Board committee meeting attended and are
reimbursed for all out-of-pocket expenses relating to attendance at meetings.
Directors who are affiliated with SBAM do not receive compensation but are
reimbursed for all out-of-pocket expenses relating to attendance at meetings.
As of December 31, 1995, directors and officers of the Series Funds as a
group beneficially owned less than 1% of the outstanding shares of any series
of the Series Fund.
INVESTMENT MANAGER
Each Fund retains SBAM to act as its investment manager. SBAM, an indirect
wholly-owned subsidiary of Salomon Inc, serves as the investment manager to
numerous individuals and institutions and other investment companies.
The management contract between SBAM and each respective Fund provides
that SBAM shall manage the operations of such Fund, subject to policy
established by the Board of Directors. Pursuant to the applicable management
contract, SBAM manages each Fund's investment portfolio, directs purchases and
sales of portfolio securities and reports thereon to the Fund's officers and
directors regularly. SBAM also provides the office space, facilities, equipment
and personnel necessary to perform the following services for each Fund: SEC
compliance, including record keeping, reporting requirements and registration
statements and proxies; supervision of Fund operations, including custodian,
accountants and 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,
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27
responding to shareholder inquiries and maintaining a flow of information to
shareholders. In addition, SBAM pays the compensation of each Fund's officers,
employees and directors affiliated with SBAM. Each Fund bears all other costs
of its operations, including the compensation of its directors not affiliated
with SBAM.
Pursuant to a sub-advisory agreement (the "Subadvisory Agreement"), SBAM
has retained Salomon Brothers Asia Pacific Limited ("SBAM AP") as sub-adviser to
the Asia Growth Fund. Subject to the supervision of SBAM, SBAM AP will have
responsibility for the day-to-day management of the Fund's portfolio. Pursuant
to a sub-administration agreement (the "Subadministration Agreement"), SBAM has
retained Salomon Brothers Asset Management Limited ("SBAM Limited") to provide
certain administrative services to SBAM relating to the Asia Growth Fund. Like
SBAM, SBAM AP and SBAM Limited are indirect, wholly-owned subsidiaries of
Salomon Inc. SBAM AP is a member of the Hong Kong Securities and Futures
Commission, SBAM Limited is a member of the Investment Management Regulatory
Organization in the United Kingdom and both SBAM AP and SBAM Limited are
registered as investment advisers in the United States pursuant to the
Investment Advisers Act of 1940, as amended.
As compensation for its services, the Money Market Fund pays SBAM a monthly
fee at an annual rate of .20% of the Fund's average daily net assets. On
November 16, 1995, the Board of Directors of the Series Funds approved an
amendment to the management contract of the Money Market Fund, subject to
shareholder approval, to increase the management fee from .10% of average daily
net assets to .20%. The shareholders approved the amendment on March 26, 1996,
to become effective as of the date of this Prospectus. As of the date of this
Statement of Additional Information, SBAM has voluntarily agreed to reduce or
otherwise limit the expenses of the Fund (exclusive of taxes, interest and
extraordinary expenses such as litigation and indemnification expenses), on an
annualized basis, to .25% of the Fund's average daily net assets and for a
period of at least one year from the date of the Prospectus such expenses shall
not exceed .18% of the Fund's average daily net assets. See "Fee Table" in the
Prospectus. For the fiscal years ended December 31, 1993, December 31, 1994 and
December 31, 1995, the Money Market Fund paid SBAM $39,189, $29,658 and $7,609
(which reflects a waiver of $7,609) respectively, for its services.
As compensation for its services, the High Yield Bond Fund pays SBAM a
monthly fee at an annual rate of .50% of the Fund's average daily net assets;
the Emerging Markets Debt Fund pays SBAM a monthly fee at an annual rate of .70%
of the Fund's average daily net assets and the Asia Growth Fund pays SBAM a
monthly fee at an annual rate of .75% of the Fund's average daily net assets.
Effective as of the date of the Prospectus, SBAM has voluntarily agreed to
reduce or otherwise limit the expenses of the High Yield Bond Fund, Emerging
Markets Debt Fund and Asia Growth Fund (exclusive of taxes, interest and
extraordinary expenses such as litigation and indemnification expenses) on an
annualized basis, to .55%, .75% and 1.00%, respectively, of the applicable
Fund's average daily net assets. See "Fee Table" in the Prospectus. For its
services under the Subsidiary Agreement, SBAM AP is compensated by SBAM at no
additional expense to the Asia Growth Fund. For its services under the
Subadministration Agreement, SBAM Limited is compensated by SBAM at no
additional cost to the Asia Growth Fund at an annual rate of [.10%] of the Asia
Growth Fund's daily net assets.
The management contract for the Money Market Fund was approved by the
Series Funds Board of Directors on November 29, 1990, by the Fund's sole
shareholder, SBAM, on December 7, 1990 and ratified by shareholders on
September 20, 1991. The management contract for each of the High Yield Bond
Fund, the Emerging Markets Debt Fund and the Asia Growth Fund was approved by
the Institutional Series Fund Board of Directors on March 19, 1996 and by the
sole shareholder of each Fund, SBAM, on March 22, 1996. The management
contract for each Fund provides that it will continue automatically for
successive annual periods provided that such continuance is 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, which votes are cast
in person at a meeting called for the purpose of voting on such management
contract and (b) either by the Board
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of Directors or a majority of the outstanding voting securities. Each
management contract may be terminated by either party on 60 days' written
notice, and will terminate immediately in the event of its assignment.
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
the part of either SBAM or its affiliates or from reckless disregard by it of
its obligations and duties under the Management Contract ("disabling conduct").
In addition, each of the High Yield Bond Fund, Emerging Markets Debt Fund and
Asia Growth Fund will indemnify SBAM and its affiliates and hold each of them
harmless against any losses or damages (including, with respect to the Asia
Growth Fund, the imposition of certain Hong Kong tax liabilities on the Fund),
not resulting from disabling conduct.
Investment decisions for a particular Fund are made independently from
those for other funds and accounts advised or managed by SBAM or SBAM AP. Such
other funds and 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.
If in any fiscal year expenses borne by a Fund (excluding interest, taxes,
brokerage commissions and other portfolio transaction expenses and any
extraordinary expenses, but including the management fee) exceed expense
limitations imposed by applicable state securities regulations, SBAM, in its
capacity as investment manager, will reimburse that Fund for any such excess to
the extent required by such regulations up to the amount of the fees payable to
it. California is the only state which currently imposes such an expense
limitation. The limitation is 2.5% of the first $30 million of the average net
assets, 2.0% of the next $70 million of the average net-assets and 1.5% of the
remaining average net assets. Such reimbursement, if any, will be estimated and
paid on a monthly basis. There was no reimbursement to the Money Market Fund
for the years ended December 31, 1995, 1994 or 1993.
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 Funds and
the Institutional Series Funds has 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 SBAM, as the investment adviser to each Fund, and, in the
case Asia Growth Fund, access persons of SBAM AP, as the Fund's sub-adviser,
which policies serve as SBAM's and SBAM AP's code of ethics, respectively (the
"Adviser Code"). The Fund and Adviser Codes have been designed to address
potential conflicts of interest 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
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29
addition, the Adviser Codes 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 Codes also require that access persons obtain
preclearance to engage in personal securities transactions with certain
exceptions. Finally, the Fund and Adviser Codes require access persons to
report all personal securities transactions periodically. The restrictions
contained in the Fund and Adviser Codes are generally inapplicable to
transactions in money market securities.
ADMINISTRATOR
Institutional Series Funds and Series Funds employ Investors Bank under
their applicable administration agreement to provide certain administrative
services to the respective Funds. For its services to the Money Market Fund,
Investors Bank receives a fee from the Fund, at an annual rate of .08% of
the Fund's average daily net assets. For its services as administrator,
custodian and transfer agent to the High Yield Bond Fund, Emerging Markets Debt
Fund and Asia Growth Fund, each Fund pays Investors Bank a fee of each Fund's
average daily net assets at an annual rate of .10% up to $500 million in net
assets and .05% of each Funds average daily net assets in excess of $500
million. The services provided by Investors Bank under the applicable
administration agreement include certain accounting, clerical and bookkeeping
services; Blue Sky compliance; corporate secretarial services and assistance in
the preparation and filing of tax returns and reports to shareholders and the
SEC. Investors Bank is located at 89 South Street, Boston, Massachusetts 02111.
The Series Funds paid the Boston Company Advisors, Inc., the Money Market
Fund's previous administrator ("Boston Company"), a fee calculated daily and
payable monthly, at annual rate of .08% of that Fund's average daily net
assets. For the fiscal years ended December 31, 1993 and 1994, Boston Company
received fees totaling $32,105 and $21,964. Investors Bank received fees
totaling $1,762 and $12,208 for the fiscal years ended December 31, 1994
and 1995 from the Money Market Fund.
DISTRIBUTOR
Salomon Brothers, located at 7 World Trade Center, New York, New York
10048, serves as each Fund's distributor. Salomon Brothers is an indirect
wholly-owned subsidiary of Salomon Inc.
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, SEC fees, state securities qualification fees,
costs of preparing and printing prospectuses for regulatory purposes and for
distribution to existing shareholders, advisory and administration fees,
charges of the custodian and of the transfer and dividend disbursing agent,
certain insurance premiums, outside auditing and legal expenses, costs of
shareholder reports and shareholder meetings and any extraordinary expenses.
Each Fund also pays for brokerage fees and commissions (if any) in connection
with the purchase and sale of portfolio securities.
NET ASSET VALUE
The Prospectus discusses the time at which the net asset value of a Fund
is determined for purposes of sales and redemptions. The following is a
description of the procedures used by each Fund in valuing its assets.
In calculating net asset value, portfolio securities listed or traded on
national securities exchanges, or reported by the NASDAQ National Market
reporting system, are valued at the last sale price, or, if there have
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30
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 preceding closing values of such securities on their respective
exchanges, except that when an occurrence subsequent to the time a value was so
established is likely to have changed such value, then the fair value of those
securities will be determined by consideration of other factors by or under the
direction of the applicable Fund's Board of Directors or its delegates. In
valuing assets, prices denominated in foreign currencies are converted to U.S.
dollar equivalents at the current exchange rate. Securities may be valued by
independent pricing services which use prices provided by market-makers or
estimates of market values obtained from yield data relating to instruments or
securities with similar characteristics. Short-term obligations with maturities
of 60 days or less are valued at amortized cost, which constitutes fair value
as determined by the Board of Directors. Amortized cost involves valuing an
instrument at its original cost to a Fund and thereafter assuming a constant
amortization to maturity of any discount or premium, regardless of the impact
of fluctuating interest rates on the market value of the instrument. All other
securities and other assets of a Fund will be valued at fair value as
determined in good faith pursuant to procedures adopted by the Board of
Directors of the applicable Fund.
As stated in the Prospectus, the Money Market Fund seeks to maintain a net
asset value of $1.00 per share with respect to the Fund and, in this
connection, values the Fund's instruments on the basis of amortized cost
pursuant to Rule 2a-7 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 of Series Funds has established procedures
applicable to the Money Market Fund, reasonably designed, taking into account
current market conditions and the Money Market Fund's investment objective, 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 Money Market Fund's
net asset value 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.
<PAGE> 108
31
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 ("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, or other income (including gains from
options, futures or forward contracts) derived with respect to its business of
investing in such stock, securities or currencies; (b) derive less than 30% of
its gross income in each taxable year from the sale or other disposition of any
of the following held for less than three months: stock, securities, and
certain options, futures or forward contracts; and (c) diversify its holdings
so that, at the end of each quarter of each taxable year, (i) at least 50% of
the market value of a Fund's assets is represented by cash, cash items, United
States government securities, securities of other regulated investment
companies 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 United States government securities or the
securities of other regulated investment companies).
As a RIC, a Fund will not be subject to Federal income tax on its net
investment income (i.e., its investment company taxable income, as that term is
defined in the Code, determined without regard to the deduction for dividends
paid) and "net capital gains" (the excess of the Funds net long-term capital
gains over net short-term capital losses), if any, that it distributes in each
taxable year to its shareholders, provided that the Fund distributes at least
90% of its net investment income for such taxable year. However, a Fund would
be subject to corporate income tax (currently at a maximum rate of 35%) on any
undistributed net investment income and net capital gains. Each Fund expects to
designate amounts retained as undistributed net capital gains in a notice to
its shareholders who (i) will be required to include in income for United
States federal income tax purposes, as long-term capital gains, their
proportionate shares of the undistributed amount, (ii) will be entitled to
credit their proportionate shares of the 35% tax paid by a Fund on the
undistributed amount, against their federal income tax liabilities and to claim
refunds to the extent such credits exceed their liabilities and (iii) will be
entitled to increase their tax basis, for federal income tax purposes, in their
shares by an amount equal to 65% of the amount of undistributed net capital
gains included in the shareholder's income.
A Fund will be subject to a nondeductible 4% excise tax to the extent that
it does not distribute by the end of each calendar year: (a) at least 98% of
its ordinary income for such calendar year; (b) at least 98% of the excess of
its capital gains over its capital losses for the one year period ending, as a
general rule, on October 31 of each year; and (c) 100% of the undistributed
income and gains from the preceding calendar year (if any) pursuant to the
calculations in (a) and (b). For this purpose any income or gain retained by a
Fund that is subject to corporate tax will be considered to have been
distributed by year-end.
A Fund's investment in options, swaps and related transactions, futures
contracts and forward contracts, options on futures contracts and stock indices
and certain other securities, including transactions involving actual or deemed
short sales or foreign exchange gains or losses are subject to many complex and
special tax rules. For example, over-the-counter options on debt securities and
equity options, including options on stock and on narrow-based stock indexes,
will be subject to tax under Section 1234 of the Code, generally producing
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32
a long-term or short-term capital gain or loss upon exercise, lapse or closing
out of the option or sale of the underlying stock or security. By contrast, a
Fund's treatment of certain other options, futures and forward contracts
entered into by a Fund is generally governed by Section 1256 of the Code. These
"Section 1256" positions generally include listed options on debt securities,
options on broad-based stock indexes, options on securities indexes, options on
futures contracts, regulated futures contracts and certain foreign currency
contracts and options thereon.
Absent a tax election to the contrary, each such Section 1256 position
held by a Fund will be marked-to-market (i.e., treated as if it were sold for
fair market value) on the last business day of a Fund's fiscal year, and all
gain or loss associated with fiscal year transactions and mark-to-market
positions at fiscal year end (except certain currency gain or loss covered by
Section 988 of the Code) will generally be treated as 60% long-term capital
gain or loss and 40% short-term capital gain or loss. The effect of Section
1256 mark-to-market rules may be to accelerate income or to convert what
otherwise would have been long-term capital gains into short-term capital gains
or short-term capital losses into long-term capital losses within a Fund. The
acceleration of income on Section 1256 positions may require a Fund to accrue
taxable income without the corresponding receipt of cash. In order to generate
cash to satisfy the distribution requirements of the Code, a Fund may be
required to dispose of portfolio securities that they otherwise would have
continued to hold or to use cash flows from other sources such as the sale of
Fund shares. In these ways, any or all of these rules may affect the amount,
character and timing of income earned and in turn distributed to shareholders
by a Fund.
When a Fund holds options or contracts which substantially diminish their
risk of loss with respect to other positions (as might occur in some hedging
transactions), this combination of positions could be treated as a "straddle"
for tax purposes, resulting in possible deferral of losses, adjustments in the
holding periods of Fund securities and conversion of short-term capital losses
into long-term capital losses. Certain tax elections exist for mixed straddles
i.e., straddles comprised of at least one Section 1256 position and at least
one non-Section 1256 position which may reduce or eliminate the operation of
these straddle rules.
As a RIC, a Fund is also subject to the requirement that less than 30% of
its annual gross income be derived from the sale or other disposition of
securities and certain other investment held for less than three months (the
"short-short test"). This requirement may limit a Fund's ability to engage in
options, spreads, straddles, hedging transactions, forward or futures contracts
or options on any of these positions because these transactions are often
consummated in less than three months, may require the sale of portfolio
securities held less than three months and may, as in the case of short sales
of portfolio securities reduce the holding periods of certain securities within
a Fund, resulting in additional short-short income for such Fund.
A Fund will monitor its transactions in such options and contracts and may
make certain other tax elections in order to mitigate the effect of the above
rules and to prevent disqualification of the Fund as a RIC under Subchapter M
of the Code.
A Fund may make investments that produce income that is not matched by a
corresponding cash distribution to the Fund, such as investments pay-in-kind
bonds or in obligations such as certain Brady Bonds or zero-coupon securities
having original issue discount (i.e., an amount equal to the excess of the
stated redemption price of the security at maturity over its issue price), or
market discount (i.e., an amount equal to the excess of the stated redemption
price of the security over the basis of such bond immediately after it was
acquired) if the Fund elects to accrue market discount on a current basis. In
addition, income may continue to accrue for federal income tax purposes with
respect to a non-performing investment. Any such income would be treated as
income earned by a Fund and therefore would be subject to the distribution
requirements of the Code. Because such income may not be matched by a
corresponding cash distribution to a Fund, the Fund may be required to borrow
money or dispose of other securities to be able to make distributions to its
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investors. The extent to which a Fund may liquidate securities at a gain may be
limited by the short-short test discussed above. In addition, if an election is
not made to currently accrue market discount with respect to a market discount
bond, all or a portion of any deduction for any interest expense incurred to
purchase or hold such bond may be deferred until such bond is sold or otherwise
disposed.
If a Fund purchases shares in certain foreign investment entities, called
"passive foreign investment companies" ("PFICs"), the Fund may be subject to
U.S. federal income tax on a portion of any "excess distribution" or gain from
the disposition of shares even if the income is distributed as a taxable
dividend by the Fund to its shareholders. Additional charges in the nature of
interest may be imposed on either a Fund or its shareholders with respect to
deferred taxes arising from the distributions or gains. If a Fund were to
invest in a PFIC and (if the Fund received the necessary information available
from the PFIC, which may be difficult to obtain) elected to treat the PFIC as a
"qualified electing fund" under the Code (a "QEF"), in lieu of the foregoing
requirements, the Fund might be required to include in income each year a
portion of the ordinary earnings and net capital gains of the PFIC, even if not
distributed to the Fund, and the amounts would be subject to the 90% and excise
tax distribution requirements described above. Because of the expansive
definition of a PFIC, it is possible that a Fund may invest a portion of its
assets in PFICs.
In the case of PFIC stock owned by a RIC, H.R. 2491, as passed by Congress
and vetoed by President Clinton, contained a provision that would have
permitted a RIC to elect to annually mark-to-market stock in the PFIC and
thereby avoid the need for a RIC to make a QEF election. It is unclear whether
similar legislation will be included as part of the 1996 budget compromise.
Moreover, on April 1, 1992 the Internal Revenue Service proposed regulations
providing a mark-to-market election for RICs that would have effects similar to
the proposed legislation. These regulations would be effective for taxable
years ending after promulgation of the regulations as final regulations.
A Fund may be subject to certain taxes, including without limitation,
taxes imposed by foreign countries with respect to its income and capital
gains. If a Fund qualifies as a RIC, certain distribution requirements are
satisfied and more than 50% of the value of the Fund's total assets at the
close of any taxable year consists of stock or securities of foreign
corporations, which for this purpose may include obligations of foreign
governmental issuers, the Fund may elect, for United States federal income tax
purposes, to treat any foreign country's income or withholding taxes paid by
the Fund that can be treated as income taxes under the United States income tax
principles, as paid by its shareholders.
The Asia Growth Fund and the Emerging Markets Debt Fund expect to qualify
for and make this election. For any year that either Fund makes such an
election, each shareholder in 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 such 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 such Funds 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. However, such shareholders should not be
disadvantaged either because the amount of additional income they are deemed to
receive equal to their allocable share of such foreign countries' income taxes
paid by such Funds generally will not be subject to United States federal
income tax.
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TAXATION OF UNITED STATES SHAREHOLDERS
The Prospectus describes each Fund's policy with respect to distribution
of net investment income and any net capital and long-term capital gains.
Shareholders should consider the tax implications of buying shares just prior
to a distribution. Although the price of shares purchased at that time may
reflect the amount of the forthcoming distribution, those purchasing just prior
to a distribution will receive a distribution which will nevertheless be
taxable to them.
Shareholders receiving a distribution in the form of additional shares
will be treated for federal income tax purposes as receiving a distribution in
an amount equal to the fair market value, determined as of the distribution
date, of the shares received and will have a cost basis in each share received
equal to the fair market value of a share of a Fund on the distribution date.
Shareholders will be notified annually as to the federal tax status of
distributions, and shareholders receiving distributions in the form of shares
will receive a report as to the fair market value of the shares received.
Gain or loss on the sale or other disposition of Fund shares will result
in capital gain or loss to shareholders. Generally, a shareholder's capital
gain or loss will be long-term gain or loss if the shares have been held for
more than one year. In general, the maximum federal income tax rate imposed on
individuals with respect to net realized long-term capital gains will be
limited to 28%, whereas the maximum federal income tax rate imposed on
individuals with respect to net realized short-term capital gains (which are
taxed at ordinary income rates) will be 39.6%. With respect to corporate
taxpayers, long-term capital gains are taxed at the same federal income tax
rates as short-term capital gains, the maximum being 35%. If a shareholder
redeems or exchanges shares of a Fund before he or she has held them for more
than six months, any short-term capital loss on such redemption or exchange
will be treated as a long-term capital loss to the extent of any capital gain
dividends received by the shareholder (or credited to the shareholder as an
undistributed capital gain) with respect to such shares. Under H.R. 2491, as
passed by Congress and vetoed by President Clinton, individual taxpayers would
have been permitted a 50 percent deduction for any capital gains that they
recognized, and corporations would have been taxed at a 28 percent rate on
capital gains, in lieu of the regular corporate rate. The provisions generally
were to have retroactive effect to January 1, 1995. It is unclear whether
similar legislation will be included as part of the 1996 budget compromise and,
if so, what the effective date will be.
It is expected that a portion of the dividends of net investment income
received by corporate shareholders from a Fund (other than the Money Market
Fund) will qualify for the federal dividends received deduction generally
available to corporations. The dividends received deduction for corporate
shareholders may be reduced if the securities with respect to which dividends
are received by a Fund are (1) considered to be "debt-financed" (generally,
acquired with borrowed funds), (2) held by a Fund for less than 46 days (91
days in the case of certain preferred stock) or (3) subject to certain forms of
hedges or short sales. The amount of any dividend distribution eligible for the
corporate dividends received deduction will be designated by a Fund in a
written notice within 60 days of the close of the taxable year.
PERFORMANCE DATA
As indicated in the Prospectus, from time to time, a Fund may quote its
"yield," "effective yield," "average annual total return" and/or "aggregate
total return" in advertisements or in reports and other communications to
shareholders and compare its performance figures to those of other funds or
accounts with similar objectives and to relevant indices. Such performance
information will be calculated as described below.
<PAGE> 112
35
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 SEC. The
formula can be expressed as follows:
P(1+T)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.
The performance data 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 a Fund, as described in the
Prospectus, represent the cumulative change in the value of an investment in
Fund shares of such class for the specified period and are computed by the
following formula:
AGGREGATE TOTAL RETURN ERV -
P
_______
P
WHERE: P = A HYPOTHETICAL INITIAL PAYMENT OF $10,000.
ERV = Ending Redeemable Value of a hypothetical $10,000 investment made at
the beginning of a 1-, 5-, or 10-year period at the end of such period (or
fractional portion thereof), assuming reinvestment of all dividends and
distributions.
YIELD
With respect to the Money Market Fund, yield quotations are expressed in
annualized terms and may be quoted on a compounded basis.
<PAGE> 113
36
The current yield for the 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 Money Market 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, 1995, the annualized yield and
effective yield of the Money Market Fund were 4.42% and 4.52%, respectively.
In periods of declining interest rates the Money Market Fund's yield will
tend to be somewhat higher than prevailing market rates on short-term
obligations, and in periods of rising interest rates the Fund's yield will tend
to be somewhat lower. Also, when interest rates are falling, the inflow of net
new money to the Money Market Fund from the continuous sale of shares will
likely be invested in portfolio instruments producing lower yields than the
balance of the Fund's portfolio, thereby reducing the Fund's current yield. In
periods of rising interest rates, the opposite can be expected to occur.
Any quotation of performance stated in terms of yield will be given no
greater prominence than the information prescribed under SEC 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.
Advertisements and communications may compare a Fund's performance with
that of other mutual funds, as reported by Lipper Analytical Services, Inc. or
similar independent services or financial publications. From time to time,
advertisements and other Fund materials and communications may cite statistics
to reflect a Fund's performance over time utilizing comparisons to indices.
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.
CAPITAL STOCK
As used in the Prospectus and this Statement of Additional Information,
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),
means the vote of the lesser of (i) 67% of the shares of the portfolio
represented at a meeting if the holders of more than 50% of the outstanding
shares of the portfolio are present in person or by proxy or (ii) more than 50%
of the outstanding shares of the portfolio. Shareholders are entitled to one
vote for each full share held and fractional votes for fractional shares held.
<PAGE> 114
37
Each share of a Fund is entitled to such dividends and distributions out
of the income earned on the assets belonging to that Fund as are declared in
the discretion of the Fund's Board of Directors.
In the event of the liquidation or dissolution of the Institutional Series
Funds or Series Funds, as the case may be, shares 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 a Fund, of
any general assets not attributable to a Fund 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.
CUSTODIAN AND TRANSFER AGENT
Investors Bank serves as custodian for each Fund. As each Fund's custodian,
Investors Bank, among other things, maintains a custody account or accounts in
the name of the Fund; receives and delivers all assets for the Fund upon
purchase and upon sale or maturity; collects and receives all income and other
payments and distributions on account of the assets of the Fund; and makes
disbursements on behalf of the Fund. The custodian does not determine the
investment policies of a Fund, nor decides which securities a Fund will buy or
sell. For its services as custodian, Investors Bank 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. The
assets of each Fund are held under bank custodianship in compliance with the
1940 Act. 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.
Investors Bank also serves as transfer agent for each Fund, other than the Money
Market Fund. First Data Investor Services Group, Inc. ("FDISG"), a subsidiary of
First Data Corporation, which is located at One Exchange Place, Boston,
Massachusetts 02109, serves as transfer agent for the Money Market Fund.
Investors Bank and FDISG registers and processes transfer of a Fund's stock,
process purchase and redemption orders, acts as dividend disbursing agent for
the Fund and maintains records and handles correspondence with respect to
shareholder accounts. For these services, Investors Bank and FDISG receive a
monthly fee. See "Administrator."
VALIDITY OF SHARES
The validity of the shares will be passed upon for the Company by Piper
and Marbury L.L.P., Baltimore, Maryland.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP ("Price Waterhouse") provides audit services, tax
return preparation and assistance and consultation in connection with review of
SEC filings. The financial statements and financial highlights included or
incorporated by reference in the Prospectus and included in this Statement of
Additional Information have been included in reliance upon the report of Price
Waterhouse, independent accountants, given on the authority of that firm as
experts in auditing and accounting. Price Waterhouse's address is 1177 Avenue
of the Americas, New York, New York 10036.
COUNSEL
Simpson Thacher & Bartlett (a partnership which includes professional
corporations) serves as counsel to each Fund, and is located at 425 Lexington
Avenue, New York, New York 10017-3954.
<PAGE> 115
38
OTHER INFORMATION
The Prospectus and this Statement of Additional Information do not contain
all the information included in the Registration Statement filed with the
Securities and Exchange Commission under the 1933 Act with respect to the
securities offered by the Prospectus. Certain portions of the Registration
Statement have been omitted from the Prospectus and this Statement of
Additional Information pursuant to the rules and regulations of the Securities
and Exchange Commission. The Registration Statement including the exhibits
filed therewith may be examined at the office of the Securities and Exchange
Commission in Washington, D.C.
Statements contained in the Prospectus or in this Statement of Additional
Information as to the contents of any contract or other document referred to
are not necessarily complete, and, in each instance, reference is made to the
copy of such contract or other document filed as an exhibit to the Registration
Statement of which the Prospectus and this Statement of Additional Information
form a part, each such statement being qualified in all respects by such
reference.
<PAGE> 116
39
SALOMON BROTHERS INSTITUTIONAL SERIES FUNDS INC (Note 1)
STATEMENTS OF ASSETS AND LIABILITIES
MARCH 21, 1996
<TABLE>
<CAPTION>
Emerging
High Yield Markets Asia Growth
Bond Fund Debt Fund Fund
---------- --------- -----------
<S> <C> <C> <C>
Assets:
Cash $33,330 $33,330 $ 33,340
Deferred organization expenses (Note 2) 57,668 57,668 72,859
-------- -------- --------
Total assets 90,998 90,998 108,009
-------- -------- --------
Liabilities:
Organization expenses payable 57,668 57,668 72,669
Commitments and contingencies (Notes 2 and 3) - - -
-------- -------- --------
Total Liabilities 57,668 57,668 72,669
-------- -------- --------
Net assets $33,330 $33,330 $ 33,340
======== ======== ========
Shares outstanding 3,333 3,333 3,334
======== ======== ========
Net asset value, offering price
and redemption price per share $ 10.00 $ 10.00 $ 10.00
======== ======== ========
</TABLE>
See accompanying notes to Statements of Assets and Liabilities
<PAGE> 117
NOTES TO STATEMENTS OF ASSETS AND LIABILITIES
NOTE 1
Salomon Brothers Institutional Series Funds Inc (the "Company") was
incorporated as a Maryland corporation on January 19, 1996 as an
open-end management investment company and currently operates as a series
company comprised of three portfolios. The Salomon Brothers Institutional High
Yield Bond Fund (the "High Yield Bond Fund"), Salomon Brothers Institutional
Emerging Markets Debt Fund (the "Emerging Markets Debt Fund") and Salomon
Brothers Institutional Asia Growth Fund (the "Asia Growth Fund") (each, a
"Fund" and collectively, the "Funds") were formed on March 21, 1996 and have
had no operations to date other than matters relating to their organization and
registration under the Investment Company Act of 1940, as amended, and the sale
and issuance to Salomon Brothers Asset Management Inc (the "Investment
Adviser") of 3,333 shares of common stock of the High Yield Bond Fund and and
Emerging Markets Debt Fund, and 3,334 shares of common stock of the Asia Growth
Fund for an aggregate purchase price of $100,000. The Company has authorized
capital stock of 10,000,000,000 shares having a par value of $0.001 per share.
NOTE 2
Organization expenses relating to the Funds incurred and to be incurred by
the Investment Adviser will be reimbursed by the Funds. Such expenses,
estimated at $57,668 for each of the High Yield Bond Fund and Emerging Markets
Debt Fund, and $72,669 for the Asia Growth Fund, will be deferred and amortized
on a straight-line basis for a five year period beginning with the commencement
of operations of the Funds.
NOTE 3
Each of the Funds will enter into a management agreement with the
Investment Adviser pursuant to which the Investment Adviser will provide
investment advisory services to the Funds and will be responsible for the
management of each Fund's portfolio in accordance with each Fund's investment
policies and for making decisions to buy, sell, or hold particular securities.
Investors Bank & Trust Company will serve as each Fund's Administrator (the
"Administrator") pursuant to an administration agreement entered into between
the Company and the Administrator.
Each Fund will pay the Investment Adviser a monthly fee for its advisory
services based on the following annual percentages of each Fund's average daily
net assets: .50% for the High Yield Bond Fund, .70% for the Emerging Markets
Debt Fund, and .75% for the Asia Growth Fund. Each Fund will pay the
Administrator a monthly fee for its custody, fund accounting, administration
and transfer agency services at an annual rate of .10% of each Fund's average
daily net assets up to $500 million in net assets and .05% of each Fund's
average daily net assets in excess of $500 million in net assets.
<PAGE> 118
Certain officers and/or directors of the Company are officers and/or
directors of the Investment Adviser.
<PAGE> 119
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholder and Board of Directors
of Salomon Brothers Institutional Series Funds Inc
In our opinion, the accompanying statements of assets and liabilities present
fairly, in all material respects, the financial position of Salomon Brothers
Institutional High Yield Bond Fund, Salomon Brothers Institutional Emerging
Markets Debt Fund and Salomon Brothers Institutional Asia Growth Fund
(constituting Salomon Brothers Institutional Series Funds Inc, hereafter
referred to as the "Fund") at March 21, 1996, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our
audit of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluting the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
March 21, 1996
<PAGE> 120
SALOMON BROTHERS MONEY MARKET FUNDS
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
December 31, 1995
SALOMON BROTHERS NEW YORK MUNICIPAL MONEY MARKET FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YIELD TO
MATURITY
PRINCIPAL ON DATE OF MATURITY VALUE
AMOUNT DESCRIPTION PURCHASE* DATE (NOTE 1A)
- ------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS AND NOTES -- 98.8%
NEW YORK -- 92.8%
$ 1,050,000 Albany County, New York
Industrial Development Agency PUT....................... 4.150% 12/01/96 $ 1,050,000
800,000 Albany County, New York
Industrial Development Agency VR........................ 5.250 01/04/96 800,000
1,139,000 Albany, New York
Housing Authority VR.................................... 3.900 01/03/96 1,139,000
2,410,000 Albany, New York
Industrial Development Agency PUT....................... 4.250 07/01/96 2,410,000
2,600,000 Amherst, New York
Industrial Development Agency VR........................ 5.300 01/04/96 2,600,000
400,000 Amherst, New York
Industrial Development Agency VR........................ 5.250 01/04/96 400,000
950,000 Auburn, New York
Industrial Development Agency VR........................ 5.450 01/03/96 950,000
875,000 Babylon, New York
Industrial Development Agency VR........................ 5.350 01/04/96 875,000
2,025,000 Broome County, New York
Industrial Development Agency VR........................ 5.250 01/04/96 2,025,000
650,000 Broome County, New York
Industrial Development Agency VR........................ 4.800 01/03/96 650,000
2,250,000 Chautaqua County, New York
Industrial Development Agency VR........................ 5.450 01/03/96 2,250,000
3,000,000 Chemung County, New York
Industrial Development Agency VR........................ 5.250 01/04/96 3,000,000
730,000 Colonie, New York
Housing Development Corporation VR...................... 3.900 01/03/96 730,000
3,525,000 Colonie, New York
Industrial Development Agency PUT....................... 4.150 12/01/96 3,525,000
585,000 Colonie, New York
Industrial Development Agency VR........................ 5.250 01/04/96 585,000
5,000,000 Connetquot Central School District, New York GO TAN....... 3.900 06/27/96 5,011,220
1,275,000 Dutchess County, New York
Industrial Development Agency VR........................ 5.250 01/04/96 1,275,000
1,210,000 Erie County, New York
Industrial Development Agency VR........................ 5.250 01/04/96 1,210,000
500,000 Erie County, New York
Industrial Development Agency VR........................ 5.250 01/04/96 500,000
400,000 Erie County, New York
Industrial Development Agency VR........................ 5.250 01/04/96 400,000
</TABLE>
See accompanying notes to financial statements.
PAGE 3
<PAGE> 121
SALOMON BROTHERS MONEY MARKET FUNDS
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
December 31, 1995
SALOMON BROTHERS NEW YORK MUNICIPAL MONEY MARKET FUND (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YIELD TO
MATURITY
PRINCIPAL ON DATE OF MATURITY VALUE
AMOUNT DESCRIPTION PURCHASE* DATE (NOTE 1A)
- ------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 388,400 Erie County, New York
Industrial Development Agency VR........................ 5.250% 01/04/96 $ 388,400
1,140,000 Fulton County, New York
Industrial Development Agency PUT....................... 4.150 12/01/96 1,140,000
1,860,000 Fulton County, New York
Industrial Development Agency VR........................ 5.150 01/04/96 1,860,000
3,000,000 Islip, New York
Industrial Development Agency VR........................ 5.225 01/04/96 3,000,000
500,000 Lewis County, New York
Development Agency VR .................................. 4.900 01/03/96 500,000
1,820,000 Monroe County, New York
Industrial Development Agency PUT....................... 4.000 06/01/96 1,820,000
700,000 Monroe County, New York
Industrial Development Agency PUT....................... 4.400 06/15/96 700,000
6,500,000 Monroe County, New York
Industrial Development Agency VR........................ 5.450 01/03/96 6,500,000
4,375,000 Monroe County, New York
Industrial Development Agency VR........................ 5.250 01/04/96 4,375,000
4,300,000 Monroe County, New York
Industrial Development Agency VR........................ 5.000 01/04/96 4,300,000
3,325,000 Monroe County, New York
Industrial Development Agency VR........................ 5.300 01/04/96 3,325,000
2,370,000 Monroe County, New York
Industrial Development Agency VR........................ 5.350 01/04/96 2,370,000
2,200,000 Monroe County, New York
Industrial Development Agency VR........................ 4.150 01/02/96 2,200,000
1,740,000 Monroe County, New York
Industrial Development Agency VR........................ 5.350 01/04/96 1,740,000
1,700,000 Monroe County, New York
Industrial Development Agency VR........................ 5.500 01/03/96 1,700,000
1,580,000 Monroe County, New York
Industrial Development Agency VR........................ 5.350 01/04/96 1,580,000
945,000 Monroe County, New York
Industrial Development Agency VR........................ 5.350 01/04/96 945,000
225,000 Monroe County, New York
Industrial Development Agency VR........................ 5.250 01/04/96 225,000
</TABLE>
See accompanying notes to financial statements.
PAGE 4
<PAGE> 122
SALOMON BROTHERS MONEY MARKET FUNDS
SALOMON BROTHERS NEW YORK MUNICIPAL MONEY MARKET FUND (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YIELD TO
MATURITY
PRINCIPAL ON DATE OF MATURITY VALUE
AMOUNT DESCRIPTION PURCHASE* DATE (NOTE 1A)
- ------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 4,475,000 Mount Pleasant, New York
Industrial Development Agency VR........................ 5.200% 01/02/96 $ 4,475,000
3,000,000 Nassau County, New York GO BAN............................ 3.450 08/15/96 3,014,478
2,000,000 Nassau County, New York GO TAN............................ 3.700 04/15/96 2,004,309
1,090,000 Nassau County, New York
Industrial Development Agency VR........................ 5.250 01/04/96 1,090,000
800,000 New York City, New York
Housing Development Corporation VR...................... 5.250 01/03/96 800,000
16,330,000 New York City, New York
Housing Development Corporation VR...................... 5.750 01/04/96 16,330,000
2,000,000 New York City, New York
Housing Development Corporation VR...................... 5.800 01/04/96 2,000,000
1,000,000 New York City, New York
Housing Development Corporation VR...................... 5.750 01/04/96 1,000,000
9,500,000 New York City, New York
Industrial Development Agency VR........................ 6.250 01/02/96 9,500,000
6,000,000 New York City, New York
Industrial Development Agency VR........................ 5.500 01/04/96 6,000,000
2,100,000 New York City, New York
Industrial Development Agency VR........................ 6.100 01/02/96 2,100,000
1,650,000 New York City, New York
Industrial Development Agency VR........................ 5.350 01/04/96 1,650,000
1,300,000 New York City, New York
Industrial Development Agency VR........................ 5.250 01/04/96 1,300,000
780,000 New York City, New York
Industrial Development Agency VR........................ 5.350 01/04/96 780,000
600,000 New York City, New York
Industrial Development Agency VR........................ 5.350 01/04/96 600,000
505,000 New York City, New York
Industrial Development Agency VR........................ 5.250 01/04/96 505,000
400,000 New York City, New York
Industrial Development Agency VR........................ 5.800 01/04/96 400,000
115,000 New York City, New York
Industrial Development Agency VR........................ 5.250 01/04/96 115,000
1,200,000 New York City, New York
Trust for Cultural Resources VR......................... 5.550 01/03/96 1,200,000
</TABLE>
See accompanying notes to financial statements.
PAGE 5
<PAGE> 123
SALOMON BROTHERS MONEY MARKET FUNDS
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
December 31, 1995
SALOMON BROTHERS NEW YORK MUNICIPAL MONEY MARKET FUND (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YIELD TO
MATURITY
PRINCIPAL ON DATE OF MATURITY VALUE
AMOUNT DESCRIPTION PURCHASE* DATE (NOTE 1A)
- ------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 5,000,000 New York City, New York GO VR............................. 6.100% 01/02/96 $ 5,000,000
8,000,000 New York City, New York GO VR............................. 6.250 01/02/96 8,000,000
6,900,000 New York City, New York GO VR............................. 5.500 01/03/96 6,900,000
3,800,000 New York City, New York GO VR............................. 6.250 01/02/96 3,800,000
1,100,000 New York City, New York GO VR............................. 5.350 01/03/96 1,100,000
1,050,000 New York State, Dormitory Authority FGIC.................. 3.800 07/01/96 1,063,100
13,674,000 New York State, Dormitory Authority TECP.................. 4.900 01/03/96 13,674,000
500,000 New York State,
Energy Research & Development VR........................ 3.550 01/02/96 500,000
3,390,000 New York State,
Job Development Authority VR............................ 4.400 01/02/96 3,390,000
1,620,000 New York State,
Job Development Authority VR............................ 4.400 01/02/96 1,620,000
925,000 New York State,
Job Development Authority VR............................ 4.300 01/02/96 925,000
420,000 New York State,
Job Development Authority VR............................ 4.300 01/02/96 420,000
125,000 New York State,
Job Development Authority VR............................ 4.300 01/02/96 125,000
100,000 New York State,
Job Development Authority VR............................ 4.300 01/02/96 100,000
1,000,000 New York State,
Urban Development Corporation BIG P/R................... 3.500 01/01/96 1,020,000
1,350,000 New York State,
Urban Development Corporation P/R....................... 3.500 01/01/96 1,377,000
1,000,000 New York State,
Urban Development Corporation P/R....................... 5.750 01/01/96 1,020,000
600,000 New York State,
Urban Development Corporation P/R....................... 5.750 01/01/96 612,000
1,600,000 Newburgh, New York
Industrial Development Agency VR........................ 4.800 01/03/96 1,600,000
1,180,000 Niagara County, New York
Industrial Development Agency VR........................ 5.350 01/04/96 1,180,000
2,050,000 Oneida County, New York
Industrial Development Agency VR........................ 5.350 01/04/96 2,050,000
</TABLE>
See accompanying notes to financial statements.
PAGE 6
<PAGE> 124
SALOMON BROTHERS MONEY MARKET FUNDS
SALOMON BROTHERS NEW YORK MUNICIPAL MONEY MARKET FUND (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YIELD TO
MATURITY
PRINCIPAL ON DATE OF MATURITY VALUE
AMOUNT DESCRIPTION PURCHASE* DATE (NOTE 1A)
- ------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 379,000 Oneida County, New York
Industrial Development Agency VR........................ 5.100% 01/04/96 $ 379,000
3,900,000 Onondaga County, New York
Industrial Development Agency VR........................ 5.400 01/03/96 3,900,000
1,300,000 Onondaga County, New York
Industrial Development Agency VR........................ 5.400 01/03/96 1,300,000
3,500,000 Ontario County, New York
Industrial Development Agency VR........................ 6.650 01/02/96 3,500,000
1,650,000 Rockland County, New York
Industrial Development Agency VR........................ 5.350 01/04/96 1,650,000
345,000 Schoharie County, New York
Industrial Development Agency VR........................ 5.100 01/04/96 345,000
75,000 St. Lawrence County, New York
Industrial Development Agency VR........................ 5.450 01/04/96 75,000
1,675,000 Suffolk County, New York GO AMBAC......................... 3.750 10/15/96 1,684,606
1,500,000 Syracuse, New York
Industrial Development Agency PUT....................... 4.400 06/15/96 1,500,000
3,550,000 Syracuse, New York
Industrial Development Agency VR........................ 5.500 01/03/96 3,550,000
2,000,000 Triborough Bridge & Tunnel Authority
New York P/R............................................ 4.000 01/01/96 2,040,000
6,660,000 Wyoming County, New York
Industrial Development Agency VR........................ 5.350 01/04/96 6,660,000
640,000 Wyoming County, New York
Industrial Development Agency VR........................ 5.250 01/04/96 640,000
1,440,000 Yates County, New York
Industrial Development Agency VR........................ 5.150 01/04/96 1,440,000
1,080,000 Yonkers, New York
Industrial Development Agency VR........................ 5.250 01/04/96 1,080,000
------------
210,137,113
</TABLE>
See accompanying notes to financial statements.
PAGE 7
<PAGE> 125
SALOMON BROTHERS MONEY MARKET FUNDS
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
December 31, 1995
SALOMON BROTHERS NEW YORK MUNICIPAL MONEY MARKET FUND (concluded)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YIELD TO
MATURITY
PRINCIPAL ON DATE OF MATURITY VALUE
AMOUNT DESCRIPTION PURCHASE* DATE (NOTE 1A)
- ------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
PUERTO RICO -- 6.0%
$13,600,000 Puerto Rico Industrial, Tourist, Educational,
Medical & Environmental Control Facilities VR........... 5.400% 01/03/96 $ 13,600,000
------------
TOTAL INVESTMENTS -- 98.8% (COST $223,737,113)............ 223,737,113
Other assets in excess of liabilities -- 1.2%............. 2,811,482
------------
NET ASSETS -- 100.0%...................................... $226,548,595
============
</TABLE>
*Yield to maturity on date of purchase, except in the case of Variable Rate
Demand Notes (VR) and Put Bonds, whose yields are determined on date of the
last interest rate change. For Variable Rate Demand Notes and Put Bonds,
maturity date shown is the date of next interest rate change.
Abbreviations used in this statement:
<TABLE>
<S> <C> <C>
AMBAC -- Insured as to principal and interest by the American Municipal Bond Assurance Corporation.
BAN -- Bond Anticipation Note
BIG -- Insured as to principal and interest by the Bond Investors Guaranty Insurance Company.
FGIC -- Insured as to principal and interest by the Financial Guaranty Insurance Company.
GO -- General Obligation
P/R -- Pre-refunded in U.S. Treasury Securities.
PUT -- Optional or mandatory put. Maturity date shown is the put date as well as the date of the
next interest rate change.
TAN -- Tax Anticipation Note
TECP -- Tax Exempt Commercial Paper
</TABLE>
See accompanying notes to financial statements.
PAGE 8
<PAGE> 126
SALOMON BROTHERS MONEY MARKET FUNDS
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1995
SALOMON BROTHERS NEW YORK MUNICIPAL MONEY MARKET FUND
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments, at value (cost $223,737,113).................................................... $223,737,113
Cash......................................................................................... 22,069
Receivable for Fund shares sold.............................................................. 1,934,480
Interest receivable.......................................................................... 1,210,552
------------
Total assets......................................................................... 226,904,214
------------
LIABILITIES
Payable for Fund shares redeemed............................................................. 266,863
Dividend payable............................................................................. 15,997
Management fee payable....................................................................... 35,265
Accrued expenses............................................................................. 37,494
------------
Total liabilities.................................................................... 355,619
------------
NET ASSETS (equivalent to $1.00 per share on 226,776,791 shares of $.001 par value
capital stock outstanding)................................................................. $226,548,595
============
</TABLE>
- -------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
Year Ended December 31, 1995
SALOMON BROTHERS NEW YORK MUNICIPAL MONEY MARKET FUND
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INCOME
Interest.................................................................................... $9,231,307
EXPENSES
Management fee................................................................. $ 449,809
Custody and administration fees................................................ 258,054
Shareholder services........................................................... 113,900
Audit and tax return preparation fees.......................................... 77,282
Legal.......................................................................... 40,000
Printing....................................................................... 27,718
Amortization of organization expenses.......................................... 9,071
Directors' fees and expenses................................................... 1,617
Other.......................................................................... 30,000
----------
1,007,451
Management fee waived by investment advisor.................................... (31,455)
Credits earned from custodian on cash balances................................. (6,021) 969,975
---------- ----------
Net investment income....................................................................... 8,261,332
NET REALIZED GAIN ON SECURITIES SOLD............................................................ 27,905
----------
NET INCREASE IN NET ASSETS FROM OPERATIONS...................................................... $8,289,237
==========
</TABLE>
See accompanying notes to financial statements.
PAGE 9
<PAGE> 127
SALOMON BROTHERS MONEY MARKET FUNDS
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
SALOMON BROTHERS NEW YORK MUNICIPAL MONEY MARKET FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1995 1994
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS
Net investment income.............................................. $ 8,261,332 $ 6,160,954
Net realized gain (loss) on securities sold........................ 27,905 (65,622)
------------- -------------
Net increase in net assets from operations......................... 8,289,237 6,095,332
------------- -------------
DIVIDENDS FROM NET INVESTMENT INCOME................................... (8,261,332) (6,160,954)
------------- -------------
CAPITAL SHARE TRANSACTIONS
Proceeds from sales of shares...................................... 298,776,320 424,692,601
Net asset value of shares issued in reinvestment of dividends...... 7,924,931 5,955,238
Payment for redemption of shares................................... (349,968,556) (423,206,832)
------------- -------------
Net increase (decrease) in net assets derived from share
transactions..................................................... (43,267,305) 7,441,007
------------- -------------
Net increase (decrease) in net assets.............................. (43,239,400) 7,375,385
NET ASSETS
Beginning of year.................................................. 269,787,995 262,412,610
------------- -------------
End of year........................................................ $ 226,548,595 $ 269,787,995
============= =============
</TABLE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED DATA PER SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR:
SALOMON BROTHERS NEW YORK MUNICIPAL MONEY MARKET FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1995 1994 1993 1992 1991
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year.................... $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
-------- -------- -------- -------- --------
Net investment income................................. 0.037* 0.027 0.023 0.031 0.047
Dividends from net investment income.................. (0.037) (0.027) (0.023) (0.031) (0.047)
-------- -------- -------- -------- --------
Net asset value, end of year.......................... $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
======== ======== ======== ======== ========
Net assets end of year (thousands).................... $226,549 $269,788 $262,413 $263,685 $154,782
Total investment return............................... +3.7% +2.7% +2.3% +3.1% +4.8%
Ratios to average net assets:
Expenses.......................................... 0.43%* 0.41% 0.41% 0.42% 0.60%
Net investment income............................. 3.67% 2.63% 2.31% 3.07% 4.63%
</TABLE>
* Net investment income per share would have been $.037 and the expense ratio
to average net assets would have been .45% before waiver of management fee
and credits earned on custodian cash balances.
See accompanying notes to financial statements.
PAGE 10
<PAGE> 128
SALOMON BROTHERS MONEY MARKET FUNDS
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
December 31, 1995
SALOMON BROTHERS U.S. TREASURY SECURITIES MONEY MARKET FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YIELD TO
MATURITY ON
PRINCIPAL DATE OF MATURITY VALUE
AMOUNT DESCRIPTION PURCHASE DATE (NOTE 1A)
- ------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
U.S. TREASURY BILLS -- 99.9%
$ 898,000 U.S. Treasury Bill......................................... 5.350% 01/11/96 $ 896,665
870,000 U.S. Treasury Bill......................................... 5.270 01/18/96 867,835
190,000 U.S. Treasury Bill......................................... 4.800 02/08/96 189,037
9,190,000 U.S. Treasury Bill......................................... 4.880 02/08/96 9,142,662
315,000 U.S. Treasury Bill......................................... 5.270 02/08/96 313,248
-----------
TOTAL INVESTMENTS -- 99.9% (COST $11,409,447)........................................ 11,409,447
Other assets in excess of liabilities -- 0.1%........................................ 16,021
-----------
NET ASSETS -- 100.0%................................................................. $11,425,468
===========
</TABLE>
See accompanying notes to financial statements.
PAGE 11
<PAGE> 129
SALOMON BROTHERS MONEY MARKET FUNDS
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1995
SALOMON BROTHERS U.S. TREASURY SECURITIES MONEY MARKET FUND
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments, at value (cost $11,409,447)...................................................... $11,409,447
Cash.......................................................................................... 7,304
Receivable from investment advisor............................................................ 5,394
Receivable for Fund shares sold............................................................... 28,974
-----------
Total assets.......................................................................... 11,451,119
-----------
LIABILITIES
Payable for Fund shares redeemed.............................................................. 8,000
Dividend payable.............................................................................. 10,635
Accrued expenses.............................................................................. 7,016
-----------
Total liabilities..................................................................... 25,651
-----------
NET ASSETS (equivalent to $1.00 per share on 11,425,379 shares of $.001 par value
capital stock outstanding).................................................................. $11,425,468
===========
</TABLE>
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
Year Ended December 31, 1995
SALOMON BROTHERS U.S. TREASURY SECURITIES MONEY MARKET FUND
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INCOME
Interest..................................................................................... $843,023
EXPENSES
Management fee.................................................................... $ 15,217
Custody and administration fees................................................... 26,631
Registration and filing fees...................................................... 13,359
Amortization of organization expenses............................................. 11,241
Shareholder services.............................................................. 11,079
Audit and tax return preparation fees............................................. 9,200
Legal............................................................................. 7,144
Printing.......................................................................... 6,000
Directors' fees and expenses...................................................... 1,618
Other............................................................................. 4,551
--------
106,040
Management fee waived by investment advisor....................................... (7,096)
Credits earned from custodian on cash balances.................................... (31) 98,913
-------- --------
Net investment income........................................................................ 744,110
NET REALIZED GAIN ON SECURITIES SOLD............................................................. 6,443
--------
NET INCREASE IN NET ASSETS FROM OPERATIONS....................................................... $750,553
========
</TABLE>
See accompanying notes to financial statements.
PAGE 12
<PAGE> 130
SALOMON BROTHERS MONEY MARKET FUNDS
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
SALOMON BROTHERS U.S. TREASURY SECURITIES MONEY MARKET FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1994
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS
Net investment income............................................... $ 744,110 $ 1,045,249
Net realized gain (loss) on securities sold......................... 6,443 (2,037)
------------ -------------
Net increase in net assets from operations.......................... 750,553 1,043,212
------------ -------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income................................ (744,110) (1,045,249)
Distributions from net realized gains............................... (959) --
------------ -------------
(745,069) (1,045,249)
CAPITAL SHARE TRANSACTIONS
Proceeds from sales of shares....................................... 79,773,668 127,781,043
Net asset value of shares issued in reinvestment of dividends....... 555,617 881,270
Payment for redemption of shares.................................... (96,624,438) (135,113,944)
------------ -------------
Net decrease in net assets derived from share transactions.......... (16,295,153) (6,451,631)
------------ -------------
Contribution from investment advisor (Note 2)....................... 48,447 --
------------ -------------
Net decrease in net assets.......................................... (16,241,222) (6,453,668)
NET ASSETS
Beginning of year................................................... 27,666,690 34,120,358
------------ -------------
End of year (including undistributed net investment income of $265
for 1995)......................................................... $ 11,425,468 $ 27,666,690
============ =============
</TABLE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED DATA PER SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR:
SALOMON BROTHERS U.S. TREASURY SECURITIES MONEY MARKET FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1995 1994 1993 1992 1991
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year........................ $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
------- ------- ------- ------- -------
Net investment income..................................... 0.049* 0.036 0.028 0.034 0.054*
Dividends from net investment income...................... (0.049) (0.036) (0.028) (0.034) (0.054)
------- ------- ------- ------- -------
Net asset value, end of year.............................. $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
======= ======= ======= ======= =======
Net assets end of year (thousands)........................ $11,425 $27,667 $34,120 $50,554 $35,414
Total investment return................................... +5.0% +3.6% +2.9% +3.4% +5.5%
Ratios to average net assets:
Expenses.............................................. 0.65%* 0.45% 0.35% 0.44% 0.54%*
Net investment income................................. 4.89% 3.53% 2.83% 3.42% 5.23%
</TABLE>
* Net investment income per share would have been $.049 and $.052 and the
expense ratios to average net assets would have been .70% and .64%,
respectively, for the years ended December 31, 1995 and 1991 before
applicable waiver of management fee, expenses absorbed by SBAM and credits
earned on custodian cash balances.
See accompanying notes to financial statements.
PAGE 13
<PAGE> 131
SALOMON BROTHERS MONEY MARKET FUNDS
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Salomon Brothers Series Funds Inc (the "Company") was incorporated in Maryland
on April 17, 1990 as an open-end management investment company, and currently
operates as a series company comprised of nine portfolios: Salomon Brothers Cash
Management Fund (the "Cash Management Fund"), Salomon Brothers New York
Municipal Money Market Fund, (the "New York Municipal Money Fund"), Salomon
Brothers U.S. Treasury Securities Money Market Fund (the "U.S. Treasury Fund"),
Salomon Brothers New York Municipal Bond Fund (the "New York Municipal Bond
Fund"), Salomon Brothers National Intermediate Municipal Fund (the "National
Intermediate Municipal Fund"), Salomon Brothers U.S. Government Income Fund (the
"U.S. Government Income Fund"), Salomon Brothers High Yield Bond Fund (the "High
Yield Bond Fund"), Salomon Brothers Strategic Bond Fund (the "Strategic Bond
Fund"), and Salomon Brothers Total Return Fund (the "Total Return Fund"). The
New York Municipal Money Fund and the U.S. Treasury Fund (individually, a
"Fund", collectively, the "Funds") are included in this report. The New York
Municipal Money Fund's objective is to seek as high a level of current income
exempt from federal, New York State and New York City personal income taxes as
is consistent with liquidity and the stability of principal. The U.S. Treasury
Fund's objective is to seek a high level of current income by investing only in
short-term United States government and government agency securities. The Cash
Management Fund, New York Municipal Bond Fund, National Intermediate Municipal
Fund, U.S. Government Income Fund, High Yield Bond Fund, Strategic Bond Fund,
and Total Return Fund are reported in a separate report and are not included
herein.
Following is a summary of significant accounting policies followed by each Fund
in the preparation of its financial statements. The policies are in conformity
with generally accepted accounting principles ("GAAP"). The preparation of
financial statements in accordance with GAAP requires management to make
estimates of certain reported amounts in the financial statements. Actual
amounts could differ from those estimates.
(A) SECURITIES VALUATION. Portfolio securities are valued using the
amortized cost method, which involves initially valuing an investment at
its cost and thereafter assuming a constant amortization to maturity of any
premium or discount. This method results in a value approximating market
value and does not include unrealized gains or losses.
(B) FEDERAL INCOME TAXES. Each Fund has complied and intends to
continue to comply with the requirements of the Internal Revenue Code
applicable to regulated investment companies, including the distribution
requirements of the Tax Reform Act of 1986, and to distribute all of its
income, including any net realized gains, to shareholders. Therefore, no
Federal income tax or excise tax provision is required.
PAGE 14
<PAGE> 132
SALOMON BROTHERS MONEY MARKET FUNDS
- --------------------------------------------------------------------------------
(C) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends on the
shares of each Fund are declared each business day to shareholders of
record that day, and paid on the last business day of the month.
Distributions of net realized gains to shareholders, if any, are declared
annually and recorded on the ex-dividend date. Dividends and distributions
are determined in accordance with income tax regulations, which may differ
from GAAP.
(D) EXPENSES. Direct expenses are charged to the Fund that incurred
them, and general expenses of the Company are allocated to the Funds based
on relative average net assets for the period the expense was incurred.
(E) OTHER. Investment transactions are recorded as of the trade date.
Interest income, including the accretion of discounts or the amortization
of premiums, is recognized when earned. Gains or losses on sales of
securities are calculated on the identified cost basis.
2. MANAGEMENT FEE AND OTHER AGREEMENTS
The Company retains Salomon Brothers Asset Management Inc ("SBAM"), an indirect
wholly owned subsidiary of Salomon Inc, to act as investment manager of each
Fund, subject to the supervision by the Board of Directors of the Company. SBAM
furnishes the Company with office space and certain services and facilities
required for conducting the business of the Company and pays the compensation of
its officers. The management fee for these services is payable monthly and is
based on the following annual percentages of the Funds' average daily net
assets: .20% for the New York Municipal Money Fund and .10% for the U.S.
Treasury Fund. For the year ended December 31, 1995, SBAM voluntarily waived
management fees of $31,455 and $7,096 for the New York Municipal Money Fund and
U.S. Treasury Fund, respectively.
If in any fiscal year total expenses of any Fund, excluding taxes, interest,
brokerage and extraordinary expenses, but including the management fee, exceed
the most stringent expense limitations imposed by state securities regulations
applicable to the Fund, SBAM will pay or reimburse the Fund for the excess.
Currently, the most restrictive of these limitations on an annual basis is 2.5%
of the first $30 million of average daily net assets, 2.0% of the next $70
million of average daily net assets and 1.5% of average daily net assets in
excess of $100 million. No such expense reimbursement was required for the year
ended December 31, 1995.
PAGE 15
<PAGE> 133
SALOMON BROTHERS MONEY MARKET FUNDS
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
The U.S. Treasury Fund incurred realized losses on the sale of certain
securities in current and previous years. In order to maintain a $1 net asset
value per share, SBAM contributed $48,447 to offset cumulative net realized
losses. For tax purposes, this contribution was applied against the realized
losses for the year ended December 31, 1995. Accordingly, such amount has been
reclassified from paid-in-capital to accumulated net realized loss on
investments in the composition of net assets detailed in Note 3.
Investors Bank & Trust Company serves as custodian and administrator for each
Fund, which includes performing custodial and certain administrative services in
connection with the operation of each Fund. During the year ended December 31,
1995, custodian fees were reduced by $6,021 and $31 for the New York Municipal
Money Fund and U.S. Treasury Fund, respectively, relating to credits earned on
cash balances held by the custodian.
Each Fund has an agreement with Salomon Brothers Inc to distribute its shares.
3. CAPITAL STOCK
At December 31, 1995, the Company had 10,000,000,000 shares of authorized
capital stock, par value $.001 per share, of which the New York Municipal Money
Fund and the U.S. Treasury Fund each had 1,111,111,112 shares authorized.
Net assets, after re-classification of book/tax differences, consist of:
<TABLE>
<CAPTION>
NEW YORK U.S.
MUNICIPAL TREASURY
MONEY FUND FUND
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Par value....................................................................... $ 226,777 $ 11,425
Paid-in capital in excess of par................................................ 226,549,157 11,413,954
Undistributed net investment income............................................. -- 265
Accumulated net realized loss on investments.................................... (227,339) (176)
------------ -----------
Net assets...................................................................... $226,548,595 $11,425,468
============ ===========
</TABLE>
PAGE 16
<PAGE> 134
SALOMON BROTHERS MONEY MARKET FUNDS
- --------------------------------------------------------------------------------
4. PORTFOLIO ACTIVITY
The New York Municipal Money Fund invests in money market instruments maturing
in thirteen months or less whose credit ratings are within the highest ratings
category of two nationally recognized statistical rating organizations
("NRSROs") or if rated by only one NRSRO, the highest rating of that NRSRO, or,
if not rated, are believed by the investment manager to be of comparable
quality. The U.S. Treasury Fund invests in U.S. Treasury Securities maturing in
thirteen months or less. The New York Municipal Money Fund pursues its
investment objectives by investing at least 65% of its net assets in obligations
that are exempt from regular Federal income tax and from personal income taxes
of the State and City of New York. Because the New York Municipal Money Fund
invests primarily in obligations of the State and City of New York, it is more
susceptible to factors adversely affecting issuers of such obligations than a
fund that is more diversified.
During the year ended December 31, 1995, the New York Municipal Money Fund and
U.S. Treasury Fund utilized $27,604 and $6,411, respectively, of capital loss
carry-forwards to offset net realized capital gains. At December 31, 1995, the
Funds had net capital loss carry-forwards available to offset future capital
gains as follows:
<TABLE>
<CAPTION>
NEW YORK U.S.
MUNICIPAL TREASURY
YEAR OF EXPIRATION MONEY FUND FUND
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1999.............................................................................. $ 67,240 --
2000.............................................................................. 94,778 --
2002.............................................................................. 65,321 $ 176
--------- -----
$ 227,339 $ 176
========= =====
</TABLE>
PAGE 17
<PAGE> 135
SALOMON BROTHERS MONEY MARKET FUNDS
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Salomon Brothers New York Municipal Money Market Fund and
Salomon Brothers U.S. Treasury Securities Money Market Fund
In our opinion, the accompanying statements of assets and liabilities, including
the portfolios of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Salomon Brothers New York Municipal
Money Market Fund and Salomon Brothers U.S. Treasury Securities Money Market
Fund (two of the portfolios constituting Salomon Brothers Series Funds Inc,
hereafter referred to as the "Funds") at December 31, 1995, the results of each
of their operations for the year then ended, the changes in each of their net
assets for each of the two years in the period then ended and the financial
highlights for each of the periods indicated, in conformity with generally
accepted accounting principles. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Funds' management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 1995 by
correspondence with the custodian, provide a reasonable basis for the opinion
expressed above.
PRICE WATERHOUSE LLP
New York, New York
February 16, 1996
PAGE 18
<PAGE> 136
SALOMON BROTHERS INSTITUTIONAL SERIES FUNDS INC
PART C. OTHER INFORMATION
ITEM 24. Financial Statements and Exhibits
(a) Financial Statements included in Part A:
For the Salomon Brothers U.S. Treasury Securities Money Market
Fund, Selected Per Share and Ratios for the specified periods are presented
under the heading "Financial Highlights" in the Prospectus.
Financial Statements included in Part B:
1. For Salomon Brothers Institutional High Yield Bond Fund, Salomon
Brothers Institutional Emerging Markets Debt Fund and Salomon Brothers
Institutional Asia Growth Fund:
(i) Statements of Assets and Liabilities at March 21,
1996
(ii) Notes to Statements of Assets and Liabilities
(iii) Report of Independent Accountants
2. For Salomon Brothers U.S. Treasury Securities Money Market Fund and
Salomon Brothers New York Municipal Money Market Fund:
(i) Portfolio of Investments at December 31, 1995
(ii) Statement of Assets and Liabilities at December 31,
1995
(iii) Statement of Operations for the year ended December
31, 1995
(iv) Statement of Changes in Net Assets for the years
ended December 31, 1995 and 1994
(v) Financial Highlights for the years ended December 31,
1995, 1994, 1993 , 1992 and 1991
(vi) Notes to Financial Statements
(vii) Report of Independent Accountants
<PAGE> 137
(B) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
1(a) -- Articles of Incorporation of Registrant.*
2(a) -- Registrant's By-Laws.*
3 -- None.
4(a) -- None.
5(a) -- Form of Management Contract between Registrant and Salomon Brothers Asset Management
Inc ("SBAM") relating to the Salomon Brothers Institutional High Yield Bond Fund.
5(b) -- Form of Management Contract between Registrant and SBAM relating to the
Salomon Brothers Institutional Emerging Markets Debt
Fund.
5(c) -- Form of Management Contract between Registrant and SBAM
relating to the Salomon Brothers Institutional Asia Growth Fund.
5(d) -- Form of Subadvisory Agreement between SBAM and Salomon Brothers Asset Management
Asia Pacific Limited ("SBAM AP") relating to the Salomon Brothers Institutional Asia
Growth Fund.
6 -- Form of Distribution Agreement between Registrant and Salomon Brothers Inc.
7 -- None.
8 -- Form of Custodian Agreement between Registrant and Investors Bank & Trust Company
("Investors Bank")
9(a) -- Form of Transfer Agency Agreement between Registrant and Investors Bank
9(b) -- Form of Administration Agreement between Registrant and Investors Bank
9(c) -- Form of Subadministration Agreement between SBAM and Salomon Brothers Asset
Management Limited.
10 -- Opinion and Consent of Counsel of Piper & Marbury, LLP as to the Legality of
Securities Being Registered.
11(a)-- Consent of Independent Accountants relating to the Salomon Brothers Institutional
High Yield Bond Fund, Salomon Brothers Institutional Emerging Markets Debt Fund
and Salomon Brothers Institutional Asia Growth Fund.
11(b)-- Consent of Independent Accountants relating to the Salomon Brothers New York
Municipal Money Market Fund and Salomon Brothers U.S. Treasury Securities
Money Market Fund.
12 -- None.
</TABLE>
C-2
<PAGE> 138
<TABLE>
<S> <C>
13 -- Share Purchase Agreement relating to Salomon Brothers Institutional High
Yield Bond Fund, Salomon Brothers Institutional Emerging Markets Debt Fund and
Salomon Brothers Institutional Asia Growth Fund.
14 -- None.
15 -- None.
16 -- None.
17 -- None.
18 -- None.
19 -- Power of Attorney.
</TABLE>
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
SBAM owns the outstanding shares of the Salomon Brothers
Institutional High Yield Bond Fund, Salomon Brothers Institutional Emerging
Markets Debt Fund and Salomon Brothers Institutional Asia Growth Fund. Salomon
Brothers Holding Company Inc ("SBH") owns the outstanding shares of SBAM and a
substantial number of shares of certain classes of certain portfolios of Salomon
Brothers Series Fund Inc.
- ---------------------
* Previously filed.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
As of March 22, 1996, Salomon Brothers Asset Management Inc
held 3,333 shares of common stock, par value $.001 per share ("Shares"), of each
of Salomon Brothers Institutional High Yield Bond Fund and Salomon Brothers
Institutional Emerging Markets Debt Fund and held 3,334 Shares of Salomon
Brothers Institutional Asia Growth Fund.
ITEM 27. INDEMNIFICATION.
Reference is made to Article VII of Registrant's Articles of
Incorporation, Article V of Registrant's By-Laws and Section 4 of the
Distribution Agreements between the Registrant and Salomon Brothers Inc.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended (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
C-3
<PAGE> 139
securities being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
The list required by this Item 28 of officers and directors of
SBAM and SBAM AP, 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 the FORM ADV filed by SBAM and SBAM AP, respectively,
pursuant to the Investment Advisers Act of 1940, as amended (SEC File Nos.
801-32046 and 801-51393, respectively).
ITEM 29. PRINCIPAL UNDERWRITER
(a) Salomon Brothers Inc ("Salomon Brothers") currently acts
as distributor for, in addition to the Registrant, Salomon Brothers Capital
Fund Inc, Salomon Brothers Investors Fund Inc, Salomon Brothers Opportunity
Fund Inc and Salomon Brothers Series Funds Inc.
(b) The information required by this Item 29 with respect to
each director, officer or partner of Salomon Brothers is incorporated by
reference to Schedule A of Form BD filed by Salomon Brothers pursuant to the
Securities Exchange Act of 1934 (SEC File No. 8-26920).
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
(1) Salomon Brothers Asset Management Inc 7 World Trade
Center New York, New York 10048
(2) Investor Bank & Trust Company, 89 South Street, Boston,
Massachusetts 02111
ITEM 31. MANAGEMENT SERVICES.
Not applicable.
C-4
<PAGE> 140
ITEM 32. UNDERTAKINGS.
(a) Not applicable.
(b) The Registrant undertakes to file a post-effective
amendment containing financial statements as of a reasonably current date,
which need not be certified, within four to six months from the date of
commencement of investment operations for each of Salomon Brothers
Institutional High Yield Bond Fund, Salomon Brothers Institutional Emerging
Markets Debt Fund and Salomon Brothers Institutional Asia Growth Fund.
(c) Not applicable.
(d) Registrant hereby undertakes to call a meeting of
shareholders for the purpose of voting upon the question of removal of one or
more of Registrant's directors when requested in writing to do so by the
holders of at least 10% of Registrant's outstanding shares of common stock and,
in connection with such meeting, to assist in communications with other
shareholders in this regard, as provided under Section 16(c) of the Investment
Company Act of 1940, as amended.
C-5
<PAGE> 141
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and
the Investment Company Act of 1940, the Registrant has duly caused this
Pre-Effective Amendment No. 1 of 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 28th day of March, 1996. SALOMON BROTHERS
INSTITUTIONAL SERIES FUNDS INC (Registrant)
By /s/ Michael S. Hyland
------------------------------
Michael S. Hyland
President
Pursuant to the requirements of the Securities Act of 1933,
this Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Michael S. Hyland Director and President (principal 3/28/96
------------------------------------------ executive officer)
Michael S. Hyland
* Director 3/28/96
------------------------------------------
Charles F. Barber
* Director 3/28/96
------------------------------------------
Carol L. Colman
* Director 3/28/96
------------------------------------------
Daniel P. Cronin
/s/ Alan M. Mandel Treasurer (principal financial and 3/28/96
------------------------------------------ accounting officer)
Alan M. Mandel
* By: /s/ Alan M. Mandel 3/28/96
-------------------------------------
Alan M. Mandel
Attorney-in-Fact
</TABLE>
C-6
<PAGE> 142
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
1(a) -- Articles of Incorporation of Registrant.*
2(a) -- Registrant's By-Laws.*
3 -- None.
4(a) -- None.
5(a) -- Form of Management Contract between Registrant and Salomon Brothers Asset Management
Inc ("SBAM") relating to the Salomon Brothers Institutional High Yield Bond Fund.
5(b) -- Form of Management Contract between Registrant and SBAM relating to the
Salomon Brothers Institutional Emerging Markets Debt
Fund.
5(c) -- Form of Management Contract between Registrant and SBAM
relating to the Salomon Brothers Institutional Asia Growth Fund.
5(d) -- Form of Subadvisory Agreement between SBAM and Salomon Brothers Asset Management
Asia Pacific Limited ("SBAM AP") relating to the Salomon Brothers Institutional Asia
Growth Fund.
6 -- Form of Distribution Agreement between Registrant and Salomon Brothers Inc.
7 -- None.
8 -- Form of Custodian Agreement between Registrant and Investors Bank & Trust Company
("Investors Bank")
9(a) -- Form of Transfer Agency Agreement between Registrant and Investors Bank
9(b) -- Form of Administration Agreement between Registrant and Investors Bank
9(c) -- Form of Subadministration Agreement between SBAM and Salomon Brothers Asset
Management Limited.
10 -- Opinion and Consent of Counsel of Piper & Marbury, LLP as to the Legality of
Securities Being Registered.
11(a)-- Consent of Independent Accountants relating to the Salomon Brothers Institutional
High Yield Bond Fund, Salomon Brothers Institutional Emerging Markets Debt Fund
and Salomon Brothers Institutional Asia Growth Fund.
11(b)-- Consent of Independent Accountants relating to the Salomon Brothers New York
Municipal Money Market Fund and Salomon Brothers U.S. Treasury Securities
Money Market Fund.
12 -- None.
13 -- Share Purchase Agreement relating to Salomon Brothers Institutional High
Yield Bond Fund, Salomon Brothers Institutional Emerging Markets Debt Fund and
Salomon Brothers Institutional Asia Growth Fund.
14 -- None.
15 -- None.
16 -- None.
17 -- None.
18 -- None.
19 -- Power of Attorney.
</TABLE>
<PAGE> 1
Exhibit 5(a)
MANAGEMENT CONTRACT
SALOMON BROTHERS INSTITUTIONAL SERIES FUNDS INC
7 World Trade Center
New York, New York 10048
April 1996
Salomon Brothers Asset Management Inc
7 World Trade Center
New York, New York 10048
Dear Sirs:
This will confirm the agreement between the
undersigned (the "Company") and you (the "Investment Manager") as follows:
1. The Company is an open-end investment company
which currently has three investment portfolios -- Salomon Brothers
Institutional High Yield Bond Fund, Salomon Brothers Institutional Emerging
Markets Debt Fund and Salomon Brothers Institutional Asia Growth Fund. The
Company proposes to engage in the business of investing and reinvesting the
assets of Salomon Brothers Institutional High Yield Bond Fund (the "High Yield
Bond Fund" or the "Fund") in the manner and in accordance with the investment
objective and limitations specified in the Company's Articles of Incorporation,
as amended (the "Articles") and the currently effective prospectus, including
the documents incorporated by reference therein (the "Prospectus"), relating to
the Company and the Fund, included in the Company's Registration Statement, as
amended from time to time (the "Registration Statement"), filed by the Company
under the Investment Company Act of 1940, as amended (the "1940 Act"), and the
Securities Act of 1933, as amended. Copies of the documents referred to in the
preceding sentence have been furnished to the Investment Manager. Any
amendments to these documents shall be furnished to the Investment Manager.
2. The Company employs the Investment Manager to
(a) make investment strategy decisions for the Fund, (b) manage the investing
and reinvesting of the Fund's assets as specified in paragraph 1, (c) place
purchase and sale orders on behalf of the Fund and (d) provide continuous
supervision of the Fund's investment portfolio.
3. (a) The Investment Manager shall, at its
expense, (i) provide the Fund with office space, office facilities and
personnel reasonably necessary for performance of the services to be provided
by the Investment Manager pursuant to this Agreement, (ii) provide the Fund
with persons satisfactory to the Company's Board of Directors to serve as
officers and employees of the Fund and (iii) provide the office space,
facilities, equipment and
<PAGE> 2
personnel necessary to perform the following services for the Fund: (A) review
purchases and sales of portfolio instruments and review the Fund's portfolio to
assess compliance with the Fund's stated investment objective and limitations
and compliance with the 1940 Act and other applicable laws and regulations, (B)
record keeping and reporting to the extent such records and reports are not
maintained or furnished by the Fund's transfer agent, custodian, administrative
and accounting services agent, or other agents employed by the Fund, (C)
supervision of Fund operations, including coordination of functions of
administrator, transfer agent, custodian, administrative and accounting
services agent, accountants, counsel and other parties performing services or
operational functions for the Fund; and (D) certain administrative and clerical
services not otherwise provided by the Fund's transfer agent, custodian,
administrative and accounting services agent, or other agents employed by the
Fund.
(b) Except as provided in subparagraph (a), the
Company shall be responsible for all of the Fund's expenses and liabilities,
including organizational expenses; taxes; interest; fees (including fees paid
to its directors who are not affiliated with the Investment Manager or any of
its affiliates); fees payable to the Securities and Exchange Commission; state
securities qualification fees; costs of preparing and printing prospectuses for
regulatory purposes and for distribution to existing shareholders; advisory and
administration fees; charges of the custodian, transfer agent; administrative
and accounting services agent and any other agent employed by the Fund;
insurance premiums; auditing and legal expenses; costs of shareholders' reports
and shareholders' meetings; charges and expenses of any entity used for pricing
the Fund's portfolio securities and calculating the net asset value of the
Fund's shares; any extraordinary expenses; and brokerage fees and commissions,
if any, in connection with the purchase or sale of portfolio securities; and
payments to the Fund's distributor for activities intended to result in the
sale of Fund shares.
4. As manager of the Fund's assets, the
Investment Manager shall make investments for the Fund's account in accordance
with the investment objective and limitations set forth in the Articles, the
Prospectus, the 1940 Act, the provisions of the Internal Revenue Code of 1986,
as amended, relating to regulated investment companies, applicable banking laws
and regulations, and policy decisions adopted by the Company's Board of
Directors from time to time. The Investment Manager shall advise the Company's
officers and Board of Directors, at such times as the Company's Board of
Directors may specify, of investments made for the Fund's account and shall,
when requested by the Company's officers or Board of Directors, supply the
reasons for making such investments.
5. The Investment Manager is authorized on
behalf of the Company, from time to time when deemed to be in the best
interests of the Company and to the extent permitted by
<PAGE> 3
3
applicable law, to purchase and/or sell securities in which the Investment
Manager or any of its affiliates underwrites, deals in and/or makes a market
and/or may perform or seek to perform investment banking services for issuers
of such securities. The Investment Manager is further authorized, to the
extent permitted by applicable law, to select brokers for the execution of
trades for the Company, which broker may be an affiliate of the Investment
Manager, provided that the best competitive execution price is obtained at the
time of the trade execution.
6. In consideration of the Investment Manager's
undertaking to render the services described in this agreement, the Company
agrees that the Investment Manager shall not be liable under this agreement for
any error of judgment or mistake of law or for any loss suffered by the Company
in connection with the performance of this agreement, provided that nothing in
this agreement shall be deemed to protect or purport to protect the Investment
Manager against any liability to the Company or its stockholders to which the
Investment Manager would otherwise be subject by reason of willful misfeasance,
bad faith or gross negligence in the performance of its duties under this
agreement or by reason of its reckless disregard of its obligations and duties
hereunder ("disabling conduct"). The Fund will indemnify the Investment
Manager against, and hold it harmless from, any and all losses, claims,
damages, liabilities or expenses, including reasonable counsel fees and
expenses and any amounts paid in satisfaction of judgments, in compromise or as
fines or penalties, not resulting from disabling conduct by the Investment
Manager. Indemnification shall be made only following: (i) a final decision
on the merits by a court or other body before whom the proceeding was brought
that the Investment Manager was not liable by reason of disabling conduct, or
(ii) in the absence of such a decision, a reasonable determination, based upon
a review of the facts, that the Investment Manager was not liable by reason of
disabling conduct by (a) the vote of a majority of a quorum of directors of the
Company who are neither "interested persons" of the Company nor parties to the
proceeding ("disinterested non-party directors"), or (b) an independent legal
counsel in a written opinion. The Investment Manager shall be entitled to
advances from the Fund for payment of the reasonable expenses incurred by it in
connection with the matter as to which it is seeking indemnification in the
manner and to the fullest extent permissible under law. The Investment Manager
shall provide to the Fund a written affirmation of its good faith belief that
the standard of conduct necessary for indemnification by the Fund has been met
and a written undertaking to repay any such advance if it should ultimately be
determined that the standard of conduct has not been met. In addition, at
least one of the following additional conditions shall be met: (a) the
Investment Manager shall provide security in form and amount acceptable to the
Fund for its undertaking; (b) the Fund is insured against losses arising by
reason of the advance; or (c) a majority of a quorum of disinterested non-party
directors, or independent legal counsel, in a written opinion, shall have
<PAGE> 4
4
determined, based on a review of facts readily available to the Fund at the
time the advance is proposed to be made, that there is reason to believe that
the Investment Manager will ultimately be found to be entitled to
indemnification. For purposes of this paragraph 6 only, the term "Investment
Manager" shall be deemed to include affiliates of the Investment Manager to
whom the Investment Manager has delegated the exercise of all or any of its
powers, discretion and duties under this agreement.
7. In consideration of the services to be
rendered by the Investment Manager under this agreement, the Company shall pay
the Investment Manager a monthly fee on the first business day of each month at
an annual rate of 0.50% of the average daily value (as determined on the days
and at the time set forth in the Prospectus for determining net asset value per
share) of the Fund's net assets during the preceding month. If the fee payable
to the Investment Manager pursuant to this paragraph 7 begins to accrue before
the end of any month or if this agreement terminates before the end of any
month, the fee for the period from such date to the end of such month or from
the beginning of such month to the date of termination, as the case may be,
shall be prorated according to the proportion which such period bears to the
full month in which such effectiveness or termination occurs. For purposes of
calculating each such monthly fee, the value of the Fund's net assets shall be
computed in the manner specified in the Prospectus and the Articles for the
computation of the value of the Fund's net assets in connection with the
determination of the net asset value of shares of the Fund's capital stock.
8. If the aggregate expenses incurred by, or
allocated to, the Fund in any fiscal year shall exceed the expense limitations
applicable to the Fund imposed by state securities laws or regulations
thereunder, as such limitations may be raised or lowered from time to time, the
Investment Manager shall reimburse the Fund for such excess. The Investment
Manager's reimbursement obligation will be limited to the amount of fees it
received under this agreement during the period in which such expense
limitations were exceeded, unless otherwise required by applicable laws or
regulations. With respect to portions of a fiscal year in which this contract
shall be in effect, the foregoing limitations shall be prorated according to
the proportion which that portion of the fiscal year bears to the full fiscal
year. Any payments required to be made by this paragraph 8 shall be made once
a year promptly after the end of the Company's fiscal year.
9. This agreement shall continue in effect until
two years from the date hereof and thereafter for successive annual periods,
provided that such continuance is specifically approved at least annually (a)
by the vote of a majority of the Fund's outstanding voting securities (as
defined in the 1940 Act) or by the Company's Board of Directors and (b) by the
vote, cast in person at a meeting called for the purpose, of a majority of the
<PAGE> 5
5
Company's directors who are not parties to this agreement or "interested
persons" (as defined in the 1940 Act) of any such party. This agreement may be
terminated at any time, without the payment of any penalty, by a vote of a
majority of the Fund's outstanding voting securities (as defined in the 1940
Act) or by a vote of a majority of the Company's entire Board of Directors on
60 days' written notice to the Investment Manager or by the Investment Manager
on 60 days' written notice to the Company. This agreement shall terminate
automatically in the event of its assignment (as defined in the 1940 Act). The
respective agreements, covenants, indemnities and other statements set forth in
Section 6 hereof shall remain in full force and effect regardless of any
termination or cancellation of this agreement. All property of the Fund shall
be returned to the Fund as soon as reasonably practicable after the termination
of this agreement.
10. Upon expiration or earlier termination of
this agreement, the Company shall, if reference to "Salomon Brothers" is made
in the corporate name of the Company or in the name of the Fund and if the
Investment Manager requests in writing, as promptly as practicable change its
corporate name and the name of the Fund so as to eliminate all reference to
"Salomon Brothers", and thereafter the Company and the Fund shall cease
transacting business in any corporate name using the words "Salomon Brothers"
or any other reference to the Investment Manager or "Salomon Brothers". The
foregoing rights of the Investment Manager and obligations of the Company shall
not deprive the Investment Manager, or any affiliate thereof which has "Salomon
Brothers" in its name, of, but shall be in addition to, any other rights or
remedies to which the Investment Manager and any such affiliate may be entitled
in law or equity by reason of any breach of this agreement by the Company, and
the failure or omission of the Investment Manager to request a change of the
Company's or the Fund's name or a cessation of the use of the name of "Salomon
Brothers" as described in this paragraph 10 shall not under any circumstances
be deemed a waiver of the right to require such change or cessation at any time
thereafter for the same or any subsequent breach.
11. Except to the extent necessary to perform the
Investment Manager's obligations under this agreement, nothing herein shall be
deemed to limit or restrict the right of the Investment Manager, or any
affiliate of the Investment Manager, or any employee of the Investment Manager,
to engage in any other business or to devote time and attention to the
management or other aspects of any other business, whether of a similar or
dissimilar nature, or to render services of any kind to any other corporation,
firm, individual or association.
12. This agreement shall be governed by the laws
of the State of New York.
<PAGE> 6
6
If the foregoing correctly sets forth the agreement
between the Company and the Investment Manager, please so indicate by signing
and returning to the Company the enclosed copy hereof.
Very truly yours,
SALOMON BROTHERS INSTITUTIONAL
SERIES FUNDS INC
By:
----------------------------
Name: Michael S. Hyland
Title: President
ACCEPTED:
SALOMON BROTHERS ASSET
MANAGEMENT INC
By:
-----------------------
Name: Michael S. Hyland
Title: President
<PAGE> 1
Exhibit 5(b)
MANAGEMENT CONTRACT
SALOMON BROTHERS INSTITUTIONAL SERIES FUNDS INC
7 World Trade Center
New York, New York 10048
April 1996
Salomon Brothers Asset Management Inc
7 World Trade Center
New York, New York 10048
Dear Sirs:
This will confirm the agreement between the
undersigned (the "Company") and you (the "Investment Manager") as follows:
1. The Company is an open-end investment company
which currently has three investment portfolios -- Salomon Brothers
Institutional High Yield Bond Fund, Salomon Brothers Institutional Emerging
Markets Debt Fund and Salomon Brothers Institutional Asia Growth Fund. The
Company proposes to engage in the business of investing and reinvesting the
assets of Salomon Brothers Institutional Emerging Markets Debt Fund (the
"Emerging Markets Debt Fund" or the "Fund") in the manner and in accordance
with the investment objective and limitations specified in the Company's
Articles of Incorporation, as amended (the "Articles") and the currently
effective prospectus, including the documents incorporated by reference therein
(the "Prospectus"), relating to the Company and the Fund, included in the
Company's Registration Statement, as amended from time to time (the
"Registration Statement"), filed by the Company under the Investment Company
Act of 1940, as amended (the "1940 Act"), and the Securities Act of 1933, as
amended. Copies of the documents referred to in the preceding sentence have
been furnished to the Investment Manager. Any amendments to these documents
shall be furnished to the Investment Manager.
2. The Company employs the Investment Manager to
(a) make investment strategy decisions for the Fund, (b) manage the investing
and reinvesting of the Fund's assets as specified in paragraph 1, (c) place
purchase and sale orders on behalf of the Fund and (d) provide continuous
supervision of the Fund's investment portfolio.
3. (a) The Investment Manager shall, at its
expense, (i) provide the Fund with office space, office facilities and
personnel reasonably necessary for performance of the services to be provided
by the Investment Manager pursuant to this Agreement, (ii) provide the Fund
with persons satisfactory to the Company's Board of Directors to serve as
officers and employees of the Fund and (iii) provide the office space,
facilities, equipment and
<PAGE> 2
2
personnel necessary to perform the following services for the Fund: (A) review
purchases and sales of portfolio instruments and review the Fund's portfolio to
assess compliance with the Fund's stated investment objective and limitations
and compliance with the 1940 Act and other applicable laws and regulations, (B)
record keeping and reporting to the extent such records and reports are not
maintained or furnished by the Fund's transfer agent, custodian, administrative
and accounting services agent, or other agents employed by the Fund, (C)
supervision of Fund operations, including coordination of functions of
administrator, transfer agent, custodian, administrative and accounting
services agent, accountants, counsel and other parties performing services or
operational functions for the Fund; and (D) certain administrative and clerical
services not otherwise provided by the Fund's transfer agent, custodian,
administrative and accounting services agent, or other agents employed by the
Fund.
(b) Except as provided in subparagraph (a), the
Company shall be responsible for all of the Fund's expenses and liabilities,
including organizational expenses; taxes; interest; fees (including fees paid
to its directors who are not affiliated with the Investment Manager or any of
its affiliates); fees payable to the Securities and Exchange Commission; state
securities qualification fees; costs of preparing and printing prospectuses for
regulatory purposes and for distribution to existing shareholders; advisory and
administration fees; charges of the custodian, transfer agent; administrative
and accounting services agent and any other agent employed by the Fund;
insurance premiums; auditing and legal expenses; costs of shareholders' reports
and shareholders' meetings; charges and expenses of any entity used for pricing
the Fund's portfolio securities and calculating the net asset value of the
Fund's shares; any extraordinary expenses; and brokerage fees and commissions,
if any, in connection with the purchase or sale of portfolio securities; and
payments to the Fund's distributor for activities intended to result in the
sale of Fund shares.
4. As manager of the Fund's assets, the
Investment Manager shall make investments for the Fund's account in accordance
with the investment objective and limitations set forth in the Articles, the
Prospectus, the 1940 Act, the provisions of the Internal Revenue Code of 1986,
as amended, relating to regulated investment companies, applicable banking laws
and regulations, and policy decisions adopted by the Company's Board of
Directors from time to time. The Investment Manager shall advise the Company's
officers and Board of Directors, at such times as the Company's Board of
Directors may specify, of investments made for the Fund's account and shall,
when requested by the Company's officers or Board of Directors, supply the
reasons for making such investments.
5. The Investment Manager is authorized on
behalf of the Company, from time to time when deemed to be in the best
interests of the Company and to the extent permitted by
<PAGE> 3
3
applicable law, to purchase and/or sell securities in which the Investment
Manager or any of its affiliates underwrites, deals in and/or makes a market
and/or may perform or seek to perform investment banking services for issuers
of such securities. The Investment Manager is further authorized, to the
extent permitted by applicable law, to select brokers for the execution of
trades for the Company, which broker may be an affiliate of the Investment
Manager, provided that the best competitive execution price is obtained at the
time of the trade execution.
6. In consideration of the Investment Manager's
undertaking to render the services described in this agreement, the Company
agrees that the Investment Manager shall not be liable under this agreement for
any error of judgment or mistake of law or for any loss suffered by the Company
in connection with the performance of this agreement, provided that nothing in
this agreement shall be deemed to protect or purport to protect the Investment
Manager against any liability to the Company or its stockholders to which the
Investment Manager would otherwise be subject by reason of willful misfeasance,
bad faith or gross negligence in the performance of its duties under this
agreement or by reason of its reckless disregard of its obligations and duties
hereunder ("disabling conduct"). The Fund will indemnify the Investment
Manager against, and hold it harmless from, any and all losses, claims,
damages, liabilities or expenses, including reasonable counsel fees and
expenses and any amounts paid in satisfaction of judgments, in compromise or as
fines or penalties, not resulting from disabling conduct by the Investment
Manager. Indemnification shall be made only following: (i) a final decision
on the merits by a court or other body before whom the proceeding was brought
that the Investment Manager was not liable by reason of disabling conduct, or
(ii) in the absence of such a decision, a reasonable determination, based upon
a review of the facts, that the Investment Manager was not liable by reason of
disabling conduct by (a) the vote of a majority of a quorum of directors of the
Company who are neither "interested persons" of the Company nor parties to the
proceeding ("disinterested non-party directors"), or (b) an independent legal
counsel in a written opinion. The Investment Manager shall be entitled to
advances from the Fund for payment of the reasonable expenses incurred by it in
connection with the matter as to which it is seeking indemnification in the
manner and to the fullest extent permissible under law. The Investment Manager
shall provide to the Fund a written affirmation of its good faith belief that
the standard of conduct necessary for indemnification by the Fund has been met
and a written undertaking to repay any such advance if it should ultimately be
determined that the standard of conduct has not been met. In addition, at
least one of the following additional conditions shall be met: (a) the
Investment Manager shall provide security in form and amount acceptable to the
Fund for its undertaking; (b) the Fund is insured against losses arising by
reason of the advance; or (c) a majority of a quorum of disinterested non-party
directors, or independent legal counsel, in a written opinion, shall have
<PAGE> 4
4
determined, based on a review of facts readily available to the Fund at the
time the advance is proposed to be made, that there is reason to believe that
the Investment Manager will ultimately be found to be entitled to
indemnification. For purposes of this paragraph 6 only, the term "Investment
Manager" shall be deemed to include affiliates of the Investment Manager to
whom the Investment Manager has delegated the exercise of all or any of its
powers, discretion and duties under this agreement.
7. In consideration of the services to be
rendered by the Investment Manager under this agreement, the Company shall pay
the Investment Manager a monthly fee on the first business day of each month at
an annual rate of 0.70% of the average daily value (as determined on the days
and at the time set forth in the Prospectus for determining net asset value per
share) of the Fund's net assets during the preceding month. If the fee payable
to the Investment Manager pursuant to this paragraph 7 begins to accrue before
the end of any month or if this agreement terminates before the end of any
month, the fee for the period from such date to the end of such month or from
the beginning of such month to the date of termination, as the case may be,
shall be prorated according to the proportion which such period bears to the
full month in which such effectiveness or termination occurs. For purposes of
calculating each such monthly fee, the value of the Fund's net assets shall be
computed in the manner specified in the Prospectus and the Articles for the
computation of the value of the Fund's net assets in connection with the
determination of the net asset value of shares of the Fund's capital stock.
8. If the aggregate expenses incurred by, or
allocated to, the Fund in any fiscal year shall exceed the expense limitations
applicable to the Fund imposed by state securities laws or regulations
thereunder, as such limitations may be raised or lowered from time to time, the
Investment Manager shall reimburse the Fund for such excess. The Investment
Manager's reimbursement obligation will be limited to the amount of fees it
received under this agreement during the period in which such expense
limitations were exceeded, unless otherwise required by applicable laws or
regulations. With respect to portions of a fiscal year in which this contract
shall be in effect, the foregoing limitations shall be prorated according to
the proportion which that portion of the fiscal year bears to the full fiscal
year. Any payments required to be made by this paragraph 8 shall be made once
a year promptly after the end of the Company's fiscal year.
9. This agreement shall continue in effect until
two years from the date hereof and thereafter for successive annual periods,
provided that such continuance is specifically approved at least annually (a)
by the vote of a majority of the Fund's outstanding voting securities (as
defined in the 1940 Act) or by the Company's Board of Directors and (b) by the
vote, cast in person at a meeting called for the purpose, of a majority of the
<PAGE> 5
5
Company's directors who are not parties to this agreement or "interested
persons" (as defined in the 1940 Act) of any such party. This agreement may be
terminated at any time, without the payment of any penalty, by a vote of a
majority of the Fund's outstanding voting securities (as defined in the 1940
Act) or by a vote of a majority of the Company's entire Board of Directors on
60 days' written notice to the Investment Manager or by the Investment Manager
on 60 days' written notice to the Company. This agreement shall terminate
automatically in the event of its assignment (as defined in the 1940 Act). The
respective agreements, covenants, indemnities and other statements set forth in
Section 6 hereof shall remain in full force and effect regardless of any
termination or cancellation of this agreement. All property of the Fund shall
be returned to the Fund as soon as reasonably practicable after the termination
of this agreement.
10. Upon expiration or earlier termination of
this agreement, the Company shall, if reference to "Salomon Brothers" is made
in the corporate name of the Company or in the name of the Fund and if the
Investment Manager requests in writing, as promptly as practicable change its
corporate name and the name of the Fund so as to eliminate all reference to
"Salomon Brothers", and thereafter the Company and the Fund shall cease
transacting business in any corporate name using the words "Salomon Brothers"
or any other reference to the Investment Manager or "Salomon Brothers". The
foregoing rights of the Investment Manager and obligations of the Company shall
not deprive the Investment Manager, or any affiliate thereof which has "Salomon
Brothers" in its name, of, but shall be in addition to, any other rights or
remedies to which the Investment Manager and any such affiliate may be entitled
in law or equity by reason of any breach of this agreement by the Company, and
the failure or omission of the Investment Manager to request a change of the
Company's or the Fund's name or a cessation of the use of the name of "Salomon
Brothers" as described in this paragraph 10 shall not under any circumstances
be deemed a waiver of the right to require such change or cessation at any time
thereafter for the same or any subsequent breach.
11. Except to the extent necessary to perform the
Investment Manager's obligations under this agreement, nothing herein shall be
deemed to limit or restrict the right of the Investment Manager, or any
affiliate of the Investment Manager, or any employee of the Investment Manager,
to engage in any other business or to devote time and attention to the
management or other aspects of any other business, whether of a similar or
dissimilar nature, or to render services of any kind to any other corporation,
firm, individual or association.
12. This agreement shall be governed by the laws
of the State of New York.
<PAGE> 6
6
If the foregoing correctly sets forth the agreement
between the Company and the Investment Manager, please so indicate by signing
and returning to the Company the enclosed copy hereof.
Very truly yours,
SALOMON BROTHERS INSTITUTIONAL
SERIES FUNDS INC
By:
----------------------------
Name: Michael S. Hyland
Title: President
ACCEPTED:
SALOMON BROTHERS ASSET
MANAGEMENT INC
By:
------------------------
Name: Michael S. Hyland
Title: President
<PAGE> 1
Exhibit 5(c)
MANAGEMENT CONTRACT
SALOMON BROTHERS INSTITUTIONAL SERIES FUNDS INC
7 World Trade Center
New York, New York 10048
April 1996
Salomon Brothers Asset Management Inc
7 World Trade Center
New York, New York 10048
Dear Sirs:
This will confirm the agreement between the
undersigned (the "Company") and you (the "Investment Manager") as follows:
1. The Company is an open-end investment company
which currently has three investment portfolios -- Salomon Brothers
Institutional High Yield Bond Fund, Salomon Brothers Institutional Emerging
Markets Debt Fund and Salomon Brothers Institutional Asia Growth Fund. The
Company proposes to engage in the business of investing and reinvesting the
assets of Salomon Brothers Asia Growth Fund (the "Asia Growth Fund" or the
"Fund") in the manner and in accordance with the investment objective and
limitations specified in the Company's Articles of Incorporation, as amended
(the "Articles") and the currently effective prospectus, including the
documents incorporated by reference therein (the "Prospectus"), relating to the
Company and the Fund, included in the Company's Registration Statement, as
amended from time to time (the "Registration Statement"), filed by the Company
under the Investment Company Act of 1940, as amended (the "1940 Act"), and the
Securities Act of 1933, as amended. Copies of the documents referred to in the
preceding sentence have been furnished to the Investment Manager. Any
amendments to these documents shall be furnished to the Investment Manager.
2. The Company employs the Investment Manager to
(a) make investment strategy decisions for the Fund, (b) manage the investing
and reinvesting of the Fund's assets as specified in paragraph 1, (c) place
purchase and sale orders on behalf of the Fund and (d) provide continuous
supervision of the Fund's investment portfolio. At the Investment Manager's
own expense and subject to its supervision, the Investment Manager may delegate
the performance of all or a part of its services under this agreement to
others.
3. (a) The Investment Manager shall, at its
expense, (i) provide the Fund with office space, office facilities and
personnel reasonably necessary for performance of the services to be provided
by the Investment Manager pursuant to this Agreement,
<PAGE> 2
2
(ii) provide the Fund with persons satisfactory to the Company's Board of
Directors to serve as officers and employees of the Fund and (iii) provide the
office space, facilities, equipment and personnel necessary to perform the
following services for the Fund: (A) review purchases and sales of portfolio
instruments and review the Fund's portfolio to assess compliance with the
Fund's stated investment objective and limitations and compliance with the 1940
Act and other applicable laws and regulations, (B) record keeping and reporting
to the extent such records and reports are not maintained or furnished by the
Fund's transfer agent, custodian, administrative and accounting services agent,
or other agents employed by the Fund, (C) supervision of Fund operations,
including coordination of functions of administrator, transfer agent,
custodian, administrative and accounting services agent, accountants, counsel
and other parties performing services or operational functions for the Fund;
and (D) certain administrative and clerical services not otherwise provided by
the Fund's transfer agent, custodian, administrative and accounting services
agent, or other agents employed by the Fund.
(b) Except as provided in subparagraph (a), the
Company shall be responsible for all of the Fund's expenses and liabilities,
including organizational expenses; taxes; interest; fees (including fees paid
to its directors who are not affiliated with the Investment Manager or any of
its affiliates); fees payable to the Securities and Exchange Commission; state
securities qualification fees; costs of preparing and printing prospectuses for
regulatory purposes and for distribution to existing shareholders; advisory and
administration fees; charges of the custodian, transfer agent; administrative
and accounting services agent and any other agent employed by the Fund;
insurance premiums; auditing and legal expenses; costs of shareholders' reports
and shareholders' meetings; charges and expenses of any entity used for pricing
the Fund's portfolio securities and calculating the net asset value of the
Fund's shares; any extraordinary expenses; and brokerage fees and commissions,
if any, in connection with the purchase or sale of portfolio securities; and
payments to the Fund's distributor for activities intended to result in the
sale of Fund shares.
4. As manager of the Fund's assets, the
Investment Manager shall make investments for the Fund's account in accordance
with the investment objective and limitations set forth in the Articles, the
Prospectus, the 1940 Act, the provisions of the Internal Revenue Code of 1986,
as amended, relating to regulated investment companies, applicable banking laws
and regulations, and policy decisions adopted by the Company's Board of
Directors from time to time. The Investment Manager shall advise the Company's
officers and Board of Directors, at such times as the Company's Board of
Directors may specify, of investments made for the Fund's account and shall,
when requested by the Company's officers or Board of Directors, supply the
reasons for making such investments.
<PAGE> 3
3
5. The Investment Manager is authorized on
behalf of the Company, from time to time when deemed to be in the best
interests of the Company and to the extent permitted by applicable law, to
purchase and/or sell securities in which the Investment Manager or any of its
affiliates underwrites, deals in and/or makes a market and/or may perform or
seek to perform investment banking services for issuers of such securities.
The Investment Manager is further authorized, to the extent permitted by
applicable law, to select brokers for the execution of trades for the Company,
which broker may be an affiliate of the Investment Manager, provided that the
best competitive execution price is obtained at the time of the trade
execution.
6. In consideration of the Investment Manager's
undertaking to render the services described in this agreement, the Company
agrees that the Investment Manager shall not be liable under this agreement for
any error of judgment or mistake of law or for any loss suffered by the Company
(including any Hong Kong taxes or related expenses imposed on the Asia Growth
Fund in relation to matters contemplated by this agreement) in connection with
the performance of this agreement, provided that nothing in this agreement
shall be deemed to protect or purport to protect the Investment Manager against
any liability to the Company or its stockholders to which the Investment
Manager would otherwise be subject by reason of willful misfeasance, bad faith
or gross negligence in the performance of its duties under this agreement or by
reason of its reckless disregard of its obligations and duties hereunder
("disabling conduct"). The Fund will indemnify the Investment Manager against,
and hold it harmless from, any and all losses, claims, damages, liabilities or
expenses, (including any Hong Kong taxes or related expenses imposed on the
Asia Growth Fund in relation to matters contemplated by this agreement)
including reasonable counsel fees and expenses and any amounts paid in
satisfaction of judgments, in compromise or as fines or penalties, not
resulting from disabling conduct by the Investment Manager. Indemnification
shall be made only following: (i) a final decision on the merits by a court or
other body before whom the proceeding was brought that the Investment Manager
was not liable by reason of disabling conduct, or (ii) in the absence of such a
decision, a reasonable determination, based upon a review of the facts, that
the Investment Manager was not liable by reason of disabling conduct by (a) the
vote of a majority of a quorum of directors of the Company who are neither
"interested persons" of the Company nor parties to the proceeding
("disinterested non- party directors"), or (b) an independent legal counsel in
a written opinion. The Investment Manager shall be entitled to advances from
the Fund for payment of the reasonable expenses incurred by it in connection
with the matter as to which it is seeking indemnification in the manner and to
the fullest extent permissible under law. The Investment Manager shall provide
to the Fund a written affirmation of its good faith belief that the standard of
conduct necessary for indemnification by the Fund has been met and a written
undertaking to repay any such advance if
<PAGE> 4
4
it should ultimately be determined that the standard of conduct has not been
met. In addition, at least one of the following additional conditions shall be
met: (a) the Investment Manager shall provide security in form and amount
acceptable to the Fund for its undertaking; (b) the Fund is insured against
losses arising by reason of the advance; or (c) a majority of a quorum of
disinterested non-party directors, or independent legal counsel, in a written
opinion, shall have determined, based on a review of facts readily available to
the Fund at the time the advance is proposed to be made, that there is reason
to believe that the Investment Manager will ultimately be found to be entitled
to indemnification. For purposes of this paragraph 6 only, the term
"Investment Manager" shall be deemed to include affiliates of the Investment
Manager to whom the Investment Manager has delegated the exercise of all or any
of its powers, discretion and duties under this agreement.
7. In consideration of the services to be
rendered by the Investment Manager under this agreement, the Company shall pay
the Investment Manager a monthly fee on the first business day of each month at
an annual rate of [0.__%] of the average daily value (as determined on the days
and at the time set forth in the Prospectus for determining net asset value per
share) of the Fund's net assets during the preceding month. If the fee payable
to the Investment Manager pursuant to this paragraph 7 begins to accrue before
the end of any month or if this agreement terminates before the end of any
month, the fee for the period from such date to the end of such month or from
the beginning of such month to the date of termination, as the case may be,
shall be prorated according to the proportion which such period bears to the
full month in which such effectiveness or termination occurs. For purposes of
calculating each such monthly fee, the value of the Fund's net assets shall be
computed in the manner specified in the Prospectus and the Articles for the
computation of the value of the Fund's net assets in connection with the
determination of the net asset value of shares of the Fund's capital stock.
8. If the aggregate expenses incurred by, or
allocated to, the Fund in any fiscal year shall exceed the expense limitations
applicable to the Fund imposed by state securities laws or regulations
thereunder, as such limitations may be raised or lowered from time to time, the
Investment Manager shall reimburse the Fund for such excess. The Investment
Manager's reimbursement obligation will be limited to the amount of fees it
received under this agreement during the period in which such expense
limitations were exceeded, unless otherwise required by applicable laws or
regulations. With respect to portions of a fiscal year in which this contract
shall be in effect, the foregoing limitations shall be prorated according to
the proportion which that portion of the fiscal year bears to the full fiscal
year. Any payments required to be made by this paragraph 8 shall be made once
a year promptly after the end of the Company's fiscal year.
<PAGE> 5
5
9. This agreement shall continue in effect until
two years from the date hereof and thereafter for successive annual periods,
provided that such continuance is specifically approved at least annually (a)
by the vote of a majority of the Fund's outstanding voting securities (as
defined in the 1940 Act) or by the Company's Board of Directors and (b) by the
vote, cast in person at a meeting called for the purpose, of a majority of the
Company's directors who are not parties to this agreement or "interested
persons" (as defined in the 1940 Act) of any such party. This agreement may be
terminated at any time, without the payment of any penalty, by a vote of a
majority of the Fund's outstanding voting securities (as defined in the 1940
Act) or by a vote of a majority of the Company's entire Board of Directors on
60 days' written notice to the Investment Manager or by the Investment Manager
on 60 days' written notice to the Company. This agreement shall terminate
automatically in the event of its assignment (as defined in the 1940 Act). The
respective agreements, covenants, indemnities and other statements set forth in
Section 6 hereof shall remain in full force and effect regardless of any
termination or cancellation of this agreement. All property of the Fund shall
be returned to the Fund as soon as reasonably practicable after the termination
of this agreement.
10. Upon expiration or earlier termination of
this agreement, the Company shall, if reference to "Salomon Brothers" is made
in the corporate name of the Company or in the name of the Fund and if the
Investment Manager requests in writing, as promptly as practicable change its
corporate name and the name of the Fund so as to eliminate all reference to
"Salomon Brothers", and thereafter the Company and the Fund shall cease
transacting business in any corporate name using the words "Salomon Brothers"
or any other reference to the Investment Manager or "Salomon Brothers". The
foregoing rights of the Investment Manager and obligations of the Company shall
not deprive the Investment Manager, or any affiliate thereof which has "Salomon
Brothers" in its name, of, but shall be in addition to, any other rights or
remedies to which the Investment Manager and any such affiliate may be entitled
in law or equity by reason of any breach of this agreement by the Company, and
the failure or omission of the Investment Manager to request a change of the
Company's or the Fund's name or a cessation of the use of the name of "Salomon
Brothers" as described in this paragraph 10 shall not under any circumstances
be deemed a waiver of the right to require such change or cessation at any time
thereafter for the same or any subsequent breach.
11. Except to the extent necessary to perform the
Investment Manager's obligations under this agreement, nothing herein shall be
deemed to limit or restrict the right of the Investment Manager, or any
affiliate of the Investment Manager, or any employee of the Investment Manager,
to engage in any other business or to devote time and attention to the
management or other aspects of any other business, whether of a similar or
<PAGE> 6
6
dissimilar nature, or to render services of any kind to any other corporation,
firm, individual or association.
12. This agreement shall be governed by the laws
of the State of New York.
If the foregoing correctly sets forth the agreement
between the Company and the Investment Manager, please so indicate by signing
and returning to the Company the enclosed copy hereof.
Very truly yours,
SALOMON BROTHERS INSTITUTIONAL
SERIES FUNDS INC
By:
----------------------------
Name: Michael S. Hyland
Title: President
ACCEPTED:
SALOMON BROTHERS ASSET
MANAGEMENT INC
By:
-----------------------
Name: Michael S. Hyland
Title: President
<PAGE> 1
Exhibit 5(d)
SUBADVISORY AGREEMENT
Agreement, dated as of April , 1996 between Salomon
Brothers Asset Management Inc, a Delaware Corporation (the "Investment
Manager") and Salomon Brothers Asset Management Asia Pacific Limited (the
"Subadviser"), a company incorporated in Hong Kong and registered with the Hong
Kong Securities and Futures Commission as a investment adviser (registration
number _________), relating to the Salomon Brothers Asia Growth Fund (the
"Fund"), an investment portfolio of Salomon Brothers Series Funds Inc, an
open-end investment company (the "Company").
1. The Company proposes to engage in the
business of investing and reinvesting the assets of the Fund in the manner and
in accordance with the investment objective and limitations specified in the
Company's Articles of Incorporation, as amended (the "Articles") and the
currently effective prospectus, including the documents incorporated by
reference therein (the "Prospectus"), relating to the Company and the Fund,
included in the Company's Registration Statement, as amended from time to time
(the "Registration Statement"), filed by the Company under the Investment
Company Act of 1940, as amended (the "1940 Act"), and the Securities Act of
1933, as amended. Copies of the documents referred to in the preceding
sentence have been furnished by the Investment Manager to the Subadviser. Any
amendments to these documents shall be furnished by the Investment Manager to
the Subadviser.
2. Pursuant to Section 2 of the Investment
Management Agreement dated the date hereof between the Company and the
Investment Manager relating to the Fund (the "Investment Management
Agreement"), the Investment Manager hereby delegates the performance of certain
of its services to the Subadviser to the extent and on the terms set forth in
this agreement. The Subadviser accepts such delegation and agrees to render
the services herein set forth for the compensation herein provided.
3. The Subadviser shall (a) make investment strategy
decisions for the Fund, (b) manage the investing and reinvesting of the Fund's
assets as specified in paragraph 1, (c) place purchase and sale orders on
behalf of the Fund and (d) provide continuous supervision of the Fund's
investment portfolio. The Subadviser shall, at its expense, (i) provide office
space, office facilities and personnel reasonably necessary for performance of
the services to be provided by the Subadviser pursuant to this agreement, and
(ii) provide persons satisfactory to the Company's Board of Directors to serve
as officers and employees of the Fund.
4. As manager of the Fund's assets, the
Subadviser shall make investments for the Fund's account in accordance with the
investment objective and limitations set forth in the Articles, the Prospectus,
the 1940 Act, the provisions of the
<PAGE> 2
2
Internal Revenue Code of 1986, as amended, relating to regulated investment
companies, applicable banking laws and regulations, and policy decisions
adopted by the Company's Board of Directors from time to time. The Subadviser
shall advise the Investment Manager, the Company's officers and Board of
Directors, at such times as the Company's Board of Directors may specify, of
investments made for the Fund's account and shall, when requested by the
Subadviser and/or the Company's officers or Board of Directors, supply the
reasons for making such investments.
5. The Subadviser is authorized on behalf of the
Company, from time to time when deemed to be in the best interests of the
Company and to the extent permitted by applicable law, to purchase and/or sell
securities in which the Subadviser, Investment Manager or any of their
affiliates underwrites, deals in and/or makes a market and/or may perform or
seek to perform investment banking services for issuers of such securities.
The Subadviser is further authorized, to the extent permitted by applicable
law, to select brokers for the execution of trades for the Company, which
broker may be an affiliate of the Subadviser and the Investment Manager,
provided that the best competitive execution price is obtained at the time of
the trade execution.
6. In consideration of the Subadviser's
undertaking to render the services described in this agreement, the Investment
Manager agrees that the Subadviser shall not be liable under this agreement for
any error of judgment or mistake of law or for any loss suffered by the Company
(including any Hong Kong taxes or related expenses imposed on the Fund in
relation to matters contemplated by this agreement) in connection with the
performance of this agreement, provided that nothing in this agreement shall be
deemed to protect or purport to protect the Subadviser against any liability to
the Company or its stockholders to which the Subadviser would otherwise be
subject by reason of willful misfeasance, bad faith or gross negligence in the
performance of its duties under this agreement or by reason of its reckless
disregard of its obligations and duties hereunder ("disabling conduct"). To
the extent the Investment Manager obtains indemnification from the Fund, the
Investment Manager will indemnify the Subadviser against, and hold it harmless
from, any and all losses, claims, damages, liabilities or expenses (including
any Hong Kong taxes or related expenses imposed on the Fund in relation to the
matters contemplated by this agreement), including reasonable counsel fees and
expenses and any amounts paid in satisfaction of judgments, in compromise or as
fines or penalties, not resulting from disabling conduct by the Subadviser.
Indemnification shall be made only following: (i) a final decision on the
merits by a court or other body before whom the proceeding was brought that the
Subadviser was not liable by reason of disabling conduct, or (ii) in the
absence of such a decision, a reasonable determination, based upon a review of
the facts, that the Subadviser was not liable by reason of disabling conduct by
(a) the vote of a majority of a quorum of
<PAGE> 3
3
directors of the Company who are neither "interested persons" of the Company
nor parties to the proceeding ("disinterested non-party directors"), or (b) an
independent legal counsel in a written opinion. To the extent the Investment
Manager receives the same from the Fund, the Subadviser shall be entitled to
advances from the Investment Manager for payment of the reasonable expenses
incurred by it in connection with the matter as to which it is seeking
indemnification in the manner and to the fullest extent permissible under law.
The Subadviser shall provide to the Investment Manager, who in turn will
provide to the Fund, a written affirmation of the Subadviser's good faith
belief that the standard of conduct necessary for indemnification has been met
and a written undertaking to repay any such advance if it should ultimately be
determined that the standard of conduct has not been met. In addition, at
least one of the following additional conditions shall be met: (a) the
Subadviser shall provide security in form and amount acceptable to the
Investment Manager for its undertaking; (b) the Fund is insured against losses
arising by reason of the advance; or (c) a majority of a quorum of
disinterested non-party directors, or independent legal counsel, in a written
opinion, shall have determined, based on a review of facts readily available to
the Fund at the time the advance is proposed to be made, that there is reason
to believe that the Subadviser will ultimately be found to be entitled to
indemnification.
7. In consideration of the services to be
rendered by the Subadviser under this agreement, the Investment Manager shall
pay the Investment Adviser, in respect of each quarter of its service, a lump
sum fee in such amount as shall be agreed between the parties hereto from time
to time. Such agreement may be recorded in an agreement substantially in the
form of Attachment A hereto. The quarterly fee referred to in the preceding
sentence shall be paid by the Investment Manager to the Subadviser in arrears.
Any amount payable to the Subadviser under this agreement shall be computed in
U.S. dollars. The fee due for any quarter during which this agreement remains
in effect for less than a full quarter will be determined on a pro rata basis.
8. This agreement shall continue in effect until
two years from the date hereof and thereafter for successive annual periods,
provided that such continuance is specifically approved at least annually (a)
by the vote of a majority of the Fund's outstanding voting securities (as
defined in the 1940 Act) or by the Company's Board of Directors and (b) by the
vote, cast in person at a meeting called for the purpose, of a majority of the
Company's directors who are not parties to this agreement or "interested
persons" (as defined in the 1940 Act) of any such party. This agreement may be
terminated at any time, without the payment of any penalty, (i) by a vote of a
majority of the Fund's outstanding voting securities (as defined in the 1940
Act), (ii) by a vote of a majority of the Company's entire Board of Directors
on 60 days' written notice to the Investment Manager
<PAGE> 4
4
and the Subadviser or (iii) by either the Subadviser or the Investment Manager
on 60 days' written notice to the other party and the Company. This agreement
shall terminate automatically in the event of its assignment (as defined in the
1940 Act). Termination of this agreement shall not relieve either the
Investment Manager nor the Subadviser from any liability or obligation in
respect of any matters, undertakings or conditions which shall not have been
done, observed or performed prior to such termination. The respective
agreements, covenants, indemnities and other statements set forth in Section 6
hereof shall remain in full force and effect regardless of any termination or
cancellation of this agreement. All property of the Fund shall be returned to
the Fund as soon as reasonably practicable after the termination of this
agreement.
10. Upon expiration or earlier termination of
this agreement, the Company shall, if reference to "Salomon Brothers" is made
in the corporate name of the Company or in the name of the Fund and if the
Investment Manager requests in writing, as promptly as practicable change its
corporate name and the name of the Fund so as to eliminate all reference to
"Salomon Brothers", and thereafter the Company and the Fund shall cease
transacting business in any corporate name using the words "Salomon Brothers"
or any other reference to the Investment Manager or "Salomon Brothers". The
foregoing rights of the Investment Manager and obligations of the Company shall
not deprive the Investment Manager, or any affiliate thereof which has "Salomon
Brothers" in its name, of, but shall be in addition to, any other rights or
remedies to which the Investment Manager and any such affiliate may be entitled
in law or equity by reason of any breach of this agreement by the Company, and
the failure or omission of the Investment Manager to request a change of the
Company's or the Fund's name or a cessation of the use of the name of "Salomon
Brothers" as described in this paragraph 10 shall not under any circumstances
be deemed a waiver of the right to require such change or cessation at any time
thereafter for the same or any subsequent breach.
11. Except to the extent necessary to perform the
Investment Manager's obligations under this agreement, nothing herein shall be
deemed to limit or restrict the right of the Investment Manager, or any
affiliate of the Investment Manager, or any employee of the Investment Manager,
to engage in any other business or to devote time and attention to the
management or other aspects of any other business, whether of a similar or
dissimilar nature, or to render services of any kind to any other corporation,
firm, individual or association.
12. Each of the parties hereto undertakes to notify
the other of any material change in any information supplied in, or pursuant
to, this agreement within a reasonable time after such change. The Subadviser
undertakes (i) to notify the Investment Manager of any change in its directors
within a reasonable time after such change and (ii) to provide, on demand,
<PAGE> 5
5
such financial and other information relating to itself or its business as the
Investment Manager may from time to time reasonably require. The Investment
Manager acknowledges that the Subadviser may be required by law or the rules of
any governmental or other regulatory authority to disclose information relating
to the Fund.
13. This agreement shall be governed by the laws
of the State of New York.
<PAGE> 6
6
IN WITNESS WHEREOF, the parties hereto have caused
this agreement to be executed by their officers designated below as of the date
hereinabove written.
SALOMON BROTHERS ASSET MANAGEMENT
ASIA PACIFIC LIMITED
By:
----------------------------
Name:
Title:
SALOMON BROTHERS ASSET
MANAGEMENT INC
By:
-----------------------
Name: Michael S. Hyland
Title: President
<PAGE> 7
7
Attachment A
From: Salomon Brothers Asset Management Asia Pacific Limited
To: Salomon Brothers Asset Management Inc
Date:
-------------------------
This confirms that the amount of the quarterly fee under paragraph 7 of our
agreement effective March , 1996 for the period set forth below shall be as
follows:
Period: from to
----------- ------------
Amount of Quarterly Fee:
-------------------
Please initial next to your name above and return to indicate your confirmation.
<PAGE> 1
Exhibit 6
DISTRIBUTION AGREEMENT
April 1996
Salomon Brothers Asset Management Inc
7 World Trade Center
New York, New York 10048
Dear Sirs:
This is to confirm that, in consideration of the agreements
hereinafter contained, Salomon Brothers Institutional High Yield Bond Fund,
Salomon Brothers Institutional Emerging Markets Debt Fund and Salomon Brothers
Institutional Asia Growth Fund (together, the "Funds") each an investment
portfolio of Salomon Brothers Institutional Series Funds Inc (the "Company"),
an open-end, professionally managed investment company organized as a
corporation under the laws of the State of Maryland, has agreed that Salomon
Brothers Inc ("Salomon Brothers") shall be, for the period of this Agreement,
the distributor of shares of the Company (the "Shares").
1. Services as Distributor
1.1 Salomon Brothers will act as agent for the
distribution of the Shares covered by 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").
1.2 Salomon Brothers agrees to use its best efforts to
solicit orders for the sale of the Shares at the public offering price, as
determined in accordance with the registration statement, and will undertake
such advertising and promotion as it believes is reasonable in connection with
such solicitation.
1.3 All activities by Salomon Brothers as distributor of
the Shares shall comply with all applicable laws, rules and regulations,
including, without limitation, all rules and regulations made or adopted by the
Securities and Exchange Commission (the "SEC") or by any securities association
registered under the Securities Exchange Act of 1934, as amended.
1.4 Salomon Brothers will transmit any orders received
by it for purchase or redemption of shares of each Fund to First Data
Investment Services, Inc. ("First Data") (formerly, The Shareholder Services
Group, Inc.), the Funds' transfer agent and dividend disbursing agent, or any
successor to First Data of which the Funds have notified Salomon Brothers in
writing.
1.5 Salomon Brothers acknowledges that, whenever in the
judgment of the Funds' officers such action is warranted for
<PAGE> 2
2
any reason, including, without limitation, market, economic or political
conditions, those officers may decline to accept any orders for, or make any
sales of, the Shares until such time as those officers deem it advisable to
accept such orders and to make such sales.
1.6 As compensation for its services hereunder, Salomon
Brothers shall be entitled to such compensation as is described in the Funds'
current registration statement.
2. Duties of the Funds
2.1 Each Fund agrees at its own expense to execute any
and all documents, to furnish any and all information and to take any other
actions that may be reasonably necessary in connection with the qualification
of the Shares for sale in those states that Salomon Brothers may designate.
2.2 Each Fund shall furnish from time to time, for use
in connection with the sale of the Shares, such information reports with
respect to such Fund and its Shares as Salomon Brothers may reasonably request,
all of which shall be signed by one or more of such Fund's duly authorized
officers; and each Fund warrants that the statements contained in any such
reports, when so signed by one or more of such Fund's officers, shall be true
and correct. Each Fund shall also furnish Salomon Brothers upon request with:
(a) annual audits of such Fund's books and accounts made by independent public
accountants regularly retained by such Fund, (b) semiannual unaudited financial
statements pertaining to such Fund, (c) quarterly earnings statements prepared
by such Fund, (d) a monthly itemized list of the securities in the portfolio of
such Fund, (e) monthly balance sheets as soon as practicable after the end of
each month and (f) from time to time such additional information regarding such
Fund's financial condition as Salomon Brothers may reasonably request.
3. Representations and Warranties
Each Fund represents to Salomon Brothers that all registration
statements, prospectuses and statements of additional information filed by such
Fund with the SEC under the 1933 Act and the 1940 Act with respect to the
shares of such Fund have been carefully prepared in conformity with the
requirements of the 1933 Act, the 1940 Act 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 Funds with the SEC and any amendments and supplements thereto
which at any time shall have been filed with the SEC. Each Fund represents and
warrants to Salomon Brothers that any registration
<PAGE> 3
3
statement, prospectus and statement of additional information, when such
registration statement becomes effective, will include all statements required
to be contained therein in conformity with the 1933 Act, the 1940 Act and the
rules and regulations of the SEC; that all statements of 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 such Fund's shares. Salomon Brothers 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 Salomon Brothers' counsel, be
necessary or advisable. If a Fund shall not propose such amendment or
amendments and/or supplement or supplements within fifteen days after receipt
by such Fund of a written request from Salomon Brothers to do so, Salomon
Brothers may, at its option, terminate this Agreement. Each Fund shall not file
any amendment to any registration statement or supplement to any prospectus or
statement of additional information without giving Salomon Brothers reasonable
notice thereof in advance; provided, however, that nothing contained in this
Agreement shall in any way limit each 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 such Fund may
deem advisable, such right being in all respects absolute and unconditional.
4. Indemnification
4.1 Each Fund authorizes Salomon Brothers and any dealers
with whom Salomon Brothers has entered into dealer agreements to use any
prospectus or statement of additional information furnished by such Fund from
time to time, in connection with the sale of such Fund's shares. Each Fund
agrees to indemnify, defend and hold Salomon Brothers, its several officers and
directors, and any person who controls Salomon Brothers 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 counsel fees incurred
in connection therewith) which Salomon Brothers, its officers and directors, or
any such controlling person, may incur under the 1933 Act, the 1940 Act or
common law or otherwise, arising out of or based upon any untrue statement or
alleged untrue statement of a material fact contained in any
<PAGE> 4
4
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 each
Fund's agreement to indemnify Salomon Brothers, its officers or directors, and
any such controlling person shall not be deemed to cover any claims, demands,
liabilities or expenses arising out of or based upon any statements or
representations made by Salomon Brothers or its representatives or agents other
than such statements and representations as are contained in any registration
statement, prospectus or statement of additional information and in such
financial and other statements as are furnished to Salomon Brothers pursuant to
paragraph 2.2 hereof; and further provided that each Fund's agreement to
indemnify Salomon Brothers and each Fund's representations and warranties
hereinbefore set forth in paragraph 3 shall not be deemed to cover any
liability to such Fund or its shareholders to which Salomon Brothers would
otherwise be subject by reason of willful misfeasance, bad faith or gross
negligence in the performance of its duties, or by reason of Salomon Brothers'
reckless disregard of its obligations and duties under this Agreement. Each
Fund's agreement to indemnify Salomon Brothers, its officers and directors, and
any such controlling person, as aforesaid, is expressly conditioned upon such
Fund's being notified of any action brought against Salomon Brothers, its
officers or directors, or any such controlling person, such notification to be
given by letter or by telegram addressed to such Fund at its principal office
in New York, New York and sent to such 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 such 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 such Fund's indemnity agreement contained in this paragraph 4.1.
Each Fund's indemnification agreement contained in this paragraph 4.1 and each
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 Salomon Brothers, its officers and directors, or any controlling
person, and shall survive the delivery of any of such Fund's shares. This
agreement of indemnity will inure exclusively to Salomon Brothers' benefit, to
the benefit of its several officers and directors, and their respective
estates, and to the benefit of the controlling persons and their successors.
Each Fund agrees to notify Salomon Brothers promptly of the commencement of any
litigation or proceedings against such Fund or any of its officers or directors
in connection with the issuance and sale of any of such Fund's shares.
<PAGE> 5
5
4.2 Salomon Brothers agrees to indemnify, defend and hold
each Fund, its several officers and directors, and any person who controls such
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 such Fund, its officers
or directors or any such controlling person may incur under the 1933 Act, the
1940 Act or common law or otherwise, but only to the extent that such liability
or expense incurred by such Fund, its officers or directors or such controlling
person resulting from such claims or demands shall arise out of or be based
upon (a) any unauthorized sales literature, advertisements, information,
statements or representations or (b) any untrue or alleged untrue statement of
a material fact contained in information, furnished in writing by Salomon
Brothers to such Fund and used in the answers to any of these 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 Salomon Brothers to
such Fund and required to be stated in such answers or necessary to make such
information not misleading. Salomon Brothers' agreement to indemnify each
Fund, its officers and directors, and any such controlling person, as
aforesaid, is expressly conditioned upon Salomon Brothers' being notified of
any action brought against such Fund, its officers or directors, or any such
controlling person, such notification to be given by letter or telegram
addressed to Salomon Brothers at its principal office in New York, New York and
sent to Salomon Brothers 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 Salomon Brothers of any such action shall not
relieve Salomon Brothers from any liability that Salomon Brothers may have to
such Fund, its officers or directors, 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 Salomon Brothers' indemnity agreement contained in
this paragraph 4.2. Salomon Brothers agrees to notify each Fund promptly of
the commencement of any litigation or proceedings against Salomon Brothers or
any of its officers or directors in connection with the issuance and sale of
any of such Fund's shares.
4.3 In case any action shall be brought against any
indemnified party under paragraph 4.1 or 4.2, and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party shall be
entitled to participate in, and, to the extent that it shall wish to do so, to
assume the defense thereof with counsel satisfactory to such indemnified party.
If the indemnifying party opts to assume the defense of such action,
<PAGE> 6
6
the indemnifying party will not be liable to the indemnified party for any
legal or other expenses subsequently incurred by the indemnified party in
connection with the defense thereof other than (a) reasonable costs of
investigation or the furnishing of documents or witnesses and (b) all
reasonable fees and expenses of separate counsel to such indemnified party if
(i) the indemnifying party and the indemnified party shall have agreed to the
retention of such counsel or (ii) the indemnified party shall have concluded
reasonably that representation of the indemnifying party and the indemnified
party by the same counsel would be inappropriate due to actual or potential
differing interests between them in the conduct of the defense of such action.
5. Effectiveness of Registration
None of the Shares shall be offered by either Salomon
Brothers or the Funds under any of the provisions of this Agreement and no
orders for the purchase or sale of the Shares hereunder shall be accepted by
the Funds 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 an application to or bearing upon each Fund's obligation to
repurchase its Shares from any shareholder in accordance with the provisions of
such Fund's prospectus, statement of additional information or articles of
incorporation.
6. Notice to Salomon Brothers
Each Fund agrees to advise Salomon Brothers immediately in
writing:
(a) of any request by the SEC for amendments to the
registration statement, prospectuses or statements of additional information
then in effect or for additional information;
(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
<PAGE> 7
7
(d) of all actions of the SEC with respect to any
amendment to any registration statement, prospectus or statement of additional
information which may from time to time be filed with the SEC.
7. Term of Agreement
This Agreement shall continue for one year from the date
hereof and thereafter shall continue automatically for successive annual
periods, provided such continuance is specifically approved at least annually
by (i) the Company's Board of Directors with respect to each Fund, or (ii) by a
vote of a majority (as defined in the 1940 Act) of such Fund's outstanding
voting securities, provided that in either event the continuance is also
approved by the majority of the Directors of the Company 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, without penalty, on 60 days' notice by the
Company's Board of Directors, by vote of the holders of a majority of each
Fund's shares, or on 90 days' notice by Salomon Brothers. This Agreement will
also terminate automatically in the event of its assignment (as defined in the
1940 Act).
8. Miscellaneous
Each Fund recognizes that directors, officers and employees
of Salomon Brothers may from time to time serve as directors, trustees,
officers and employees of corporations and business trusts (including other
investment companies) and that such other corporations and trusts may include
the name "Salomon" or "Salomon Brothers" as part of their names, and that
Salomon Brothers or its affiliates may enter into distribution or other
agreements with such other corporations and trusts. If Salomon Brothers, or an
affiliate, ceases to act as the distributor of a Fund's shares, such Fund
agrees that, at Salomon Brothers' request, such Fund's license to use the words
"Salomon Brothers" will terminate and that such Fund will take all necessary
action to change the name of such Fund to a name not including the words
"Salomon" or "Salomon Brothers."
<PAGE> 8
8
Please confirm that the foregoing is in accordance with your
understanding by indicating your acceptance thereof at the place below
indicated, whereupon it shall become a binding agreement between us.
Very truly yours,
SALOMON BROTHERS INSTITUTIONAL
SERIES FUNDS INC
By:
-------------------------------
Michael S. Hyland
President
Accepted:
SALOMON BROTHERS INC
By:
---------------------------
Michael S. Hyland
Managing Director
<PAGE> 9
EXHIBIT A
DEALER CONTRACT
SALOMON BROTHERS INC
7 World Trade Center
New York, New York 10048
[Name of Broker-Dealer]
- -----------------------
- -----------------------
- -----------------------
Ladies and Gentlemen:
We, Salomon Brothers Inc ("Salomon"), have agreements
with certain investment companies for which Salomon Brothers Asset Management
Inc serves as investment adviser (each a "Company") pursuant to which we act as
the distributor for the sale of shares of each Company's capital stock, par
value $.001 per share ("shares"), and as such have the right to distribute
shares for resale. Each Company is an open-end investment company registered
under the Investment Company Act of 1940, as amended (the "1940 Act") and the
shares being offered to the public are registered under the Securities Act of
1933, as amended (the "1933 Act"). You have received copies of the
Distribution Contract (the "Distribution Contract") between ourselves and each
Company and reference is made herein to certain provisions of the Distribution
Contract. Each Company or, in the case of a series investment company, each
investment portfolio of such Company, together with any other investment
company or investment portfolio thereof which may in the future be included in
the Salomon Brothers Institutional Investment Series is referred to in this
agreement as a "Fund" and collectively as the "Funds." The term "Prospectus",
as used herein, refers to the prospectus and related statement of additional
information (the "Statement of Additional Information") incorporated therein by
reference (as amended or supplemented) on file with the Securities and Exchange
Commission which is part of the most recent effective Registration Statement of
the Fund under the 1933 Act. As principal, we offer to sell to you, as a
dealer, shares of each Fund upon the following terms and conditions:
1. In all sales to the public you shall act as
dealer for your own account, and in no transaction shall you have any authority
to act as agent for the Funds, for us or for any other dealer.
2. Orders received from you will be accepted through
us only at the public offering price per share (i.e. the net asset value per
share applicable to each order), and all orders for redemption of any Fund
shares shall be executed at the net asset value per share, as set forth in the
Prospectus. The procedure relating to the handling of orders shall be subject
to paragraph 4 hereof and instructions which we or the Funds shall
<PAGE> 10
2
forward from time to time to you. All orders are subject to acceptance
or rejection by Salomon or each Fund in the sole discretion of either. The
minimum initial purchase and the minimum subsequent purchase shall be as set
forth in the Prospectus of each Fund.
3. You shall not place orders for any shares unless
you have already received purchase orders for those shares at the applicable
public offering price and subject to the terms hereof and of the Distribution
Contracts. You agree that you will not offer or sell any shares except under
circumstances that will result in compliance with the applicable Federal and
state securities laws, the applicable rules and regulations thereunder and the
rules and regulations of applicable regulatory agencies or authorities and that
in connection with sales and offers to sell shares you will furnish to each
person to whom any such sale or offer is made, at or prior to the time of such
sale or offer, a copy of the Prospectus and, upon request, the Statement of
Additional Information, and will not furnish to any person any information
relating to shares which is inconsistent in any respect with the information
contained in the Prospectus or Statement of Additional Information (as then
amended or supplemented). You shall not furnish or cause to be furnished to
any person or display or publish any information or materials relating to the
shares (including, without limitation, promotional materials and sales
literature, advertisements, press releases, announcements, statements, posters,
signs or other similar material), except such information and materials as may
be furnished to you by us or by the Funds, and such other information and
materials as may be approved in writing by us.
4. As a dealer, you are hereby authorized (i) to
place orders directly with the Funds for shares to be resold by us to you
subject to the applicable terms and conditions governing the placement of
orders by us set forth in the Prospectus and the Distribution Contract and (ii)
to tender shares directly to each Fund or its agent for redemption subject to
the applicable terms and conditions governing the redemption of shares
applicable to us set forth in the Prospectus and the Distribution Contract.
5. You shall not withhold placing orders received
from your customers so as to profit yourself as a result of such withholding,
e.g., by a change in the "net asset value" from that used in determining the
offering price to your customers.
6. In determining the amount of any sales concession
payable to you hereunder, we reserve the right to exclude any sales which we
reasonably determine are not made in accordance with the terms of the
Prospectus and the provisions of this Agreement. Unless at the time of
transmitting an order we advise you or the transfer agent to the contrary, the
shares ordered will be deemed to be the total holdings of the specified
investor.
<PAGE> 11
3
7. (a) You agree that payment for orders
from you for the purchase of shares will be made in accordance with the terms
of the Prospectus. On or before the business day following the settlement date
of each purchase order for shares, you shall transfer same day funds to an
account designated by us with the transfer agent an amount equal to the public
offering price on the date of purchase of the shares being purchased less your
sales concession, if any, with respect to such purchase order determined in
accordance with the Prospectus. If payment for any purchase order is not
received in accordance with the terms of the Prospectus, we reserve the right,
without notice, to cancel the sale and to hold you responsible for any loss
sustained as a result thereof.
(b) Upon payment for shares in accordance with
paragraph 7(a) above, the transfer agent will issue and transmit to you a
confirmation statement evidencing the purchase of such shares. Any transaction
in uncertificated shares, including purchases, transfers, redemptions and
repurchases, shall be effected and evidenced by book-entry on the records of
the transfer agent.
8. No person is authorized to make any
representations concerning shares except those contained in the current
Prospectus and Statement of Additional Information and in printed information
subsequently issued by us or the Funds as information supplemental to the
Prospectus and the Statement of Additional Information. In purchasing shares
through us you shall rely solely on the representations contained in the
Prospectus, the Statement of Additional Information and the supplemental
information above mentioned.
9. You agree to deliver to each purchaser making a
purchase of shares from you a copy of the Prospectus at or prior to the time of
offering or sale, and, upon request, the Statement of Additional Information.
You may instruct the transfer agent to register shares purchased in your name
and account as nominee for your customers. You agree thereafter to deliver to
any purchaser whose shares you are holding as record holder copies of the
annual and interim reports and proxy solicitation materials and any other
information and materials relating to the Funds and prepared by or on behalf of
us, the Funds or the investment adviser, custodian, transfer agent or dividend
disbursing agent for distribution to such customer. The Funds shall be
responsible for the costs associated with forwarding such reports, materials
and other information and shall reimburse you in full for such costs. You
further agree to make reasonable efforts to endeavor to obtain proxies from
such purchasers whose shares you are holding as record holder. You further
agree to obtain from each customer to whom you sell shares any taxpayer
identification number certification required under Section 3406 of the Internal
Revenue Code of 1986, as amended (the "Code"), and the regulations promulgated
thereunder, and to provide us or our designee with timely written notice of any
failure to obtain
<PAGE> 12
4
such taxpayer identification number certification in order to enable the
implementation of any required backup withholding in accordance with Section
3406 of the Code and the regulations thereunder. Additional copies of the
Prospectus, Statement of Additional Information, annual or interim reports,
proxy solicitation materials and any such other information and materials
relating to the Funds will be supplied to you in reasonable quantities upon
request.
10. Exchanges (i.e., the investment of the proceeds
from the liquidation of shares of one fund in the shares of another fund, each
of which is managed by the Funds' investment adviser) shall, where available,
be made in accordance with the terms of each Prospectus.
11. We reserve the right in our discretion, without
notice, to suspend sales or withdraw the offering of shares entirely. Each
party hereto has the right to cancel this agreement upon notice to the other
party.
12. We shall have full authority to take such action
as we may deem advisable in respect of all matters pertaining to the continuous
offering of shares. We shall be under no liability to you except for lack of
good faith and for obligations expressly assumed by us herein. Nothing
contained in this paragraph 12 is intended to operate as, and the provisions of
this paragraph 12 shall not in any way whatsoever constitute a waiver by you of
compliance with, any provisions of the 1933 Act or of the rules and regulations
of the Securities and Exchange Commission issued thereunder.
13. You agree that: (a) you shall not effect any
transactions (including, without limitation, any purchases and redemptions) in
any shares registered in the name of, or beneficially owned by, any customer
unless such customer has granted you full right, power and authority to effect
such transactions on his behalf, (b) we shall have full authority to act upon
your express instructions to sell, repurchase or exchange shares through us on
behalf of your customers under the terms and conditions provided in the
Prospectus and (c) we, the Funds, the transfer agent and our and their
respective officers, directors or trustees, agents, employees and affiliates
shall not be liable for, and shall be fully indemnified and held harmless by
you from and against, any and all claims, demands, liabilities and expenses
(including, without limitation, reasonable attorneys' fees) which may be
incurred by us or any of the foregoing persons entitled to indemnification from
you hereunder arising out of or in connection with (i) the execution of any
transactions in shares registered in the name of, or beneficially owned by, any
customer in reliance upon any oral or written instructions believed to be
genuine and to have been given by or on behalf of you, (ii) any statements or
representations that you or your employees make concerning the Funds that are
inconsistent with the applicable Fund's Prospectus and (iii) any sale of
<PAGE> 13
5
shares of a Fund where the Fund or its shares were not properly registered or
qualified for sale in any state, any U.S. territory or the District of
Columbia, when we have indicated to you that the Fund or its shares were not
properly registered or qualified. The indemnification agreement contained in
this Paragraph 13 shall survive the termination of this Agreement.
14. You represent that: (a) you are a member in good
standing of the National Association of Securities Dealers, Inc. (the "NASD"),
or, if a foreign dealer who is not eligible for membership in the NASD, that
(i) you will not make any sales of shares in, or to nationals of, the United
States of America, its territories or its possessions, and (ii) in making any
sales of shares you will comply with the NASD's Rules of Fair Practice and (b)
you are a member in good standing of the Securities Investor Protection
Corporation ("SIPC"). You agree that you will provide us with timely written
notice of any change in your NASD or SIPC status.
15. We shall inform you as to the states or other
jurisdictions in which each Fund has advised us that shares have been qualified
for sale under, or are exempt from the requirements of, the respective
securities laws of such states, but we assume no responsibility or obligation
as to your qualification to sell shares in any jurisdiction.
16. All communications to us should be sent, postage
prepaid, to 7 World Trade Center, New York, New York 10048. Attention:
___________. Any notice to you shall be duly given if mailed, telegraphed or
telecopied to you at the address specified by you below. Communications
regarding placement of orders for shares should be sent, postage prepaid, to
First Data Invsetor Services Group, Inc., P.O. Box 9109, Boston, Massachusetts
02205-9109.
<PAGE> 14
6
17. This Agreement shall be binding upon both
parties hereto when signed by us and accepted by you in the space provided
below.
18. This Agreement and the terms and conditions
set forth herein shall be governed by, and construed in accordance with, the
laws of the State of New York.
SALOMON BROTHERS INC
By:
-------------------------
(Authorized Signature)
Please return one signed copy of this Contract to:
Salomon Brothers Inc
7 World Trade Center
New York, New York 10048
Attention:
Accepted:
Firm Name:
-------------------------------------------------
By:
--------------------------------------------------------
Address:
---------------------------------------------------
-------------------------------------------------------------
Accepted By (signature):
-----------------------------------
Name (print): Title:
------------------ -------------------
Date:
------------------------------------------------------
<PAGE> 1
Exhibit 8
CUSTODIAN AGREEMENT
between
SALOMON BROTHERS INSTITUTIONAL SERIES FUNDS INC
and
INVESTORS BANK & TRUST COMPANY
<PAGE> 2
TABLE OF CONTENTS
Page
----
1. Bank Appointed Custodian . . . . . . . . . . . . . . . . . . . . . . 1
2. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.1 Authorized Person. . . . . . . . . . . . . . . . . . . . . . 1
2.2 Security . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.3 Portfolio Security . . . . . . . . . . . . . . . . . . . . 1
2.4 Officers' Certificate . . . . . . . . . . . . . . . . . . . 2
2.5 Book-Entry System . . . . . . . . . . . . . . . . . . . . . 2
2.6 Depository . . . . . . . . . . . . . . . . . . . . . . . . 2
2.7 Proper Instructions . . . . . . . . . . . . . . . . . . . . 2
3. Separate Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . 2
4. Certification as to Authorized Persons . . . . . . . . . . . . . . . 3
5. Custody of Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
5.1 Purchase of Securities . . . . . . . . . . . . . . . . . . 3
5.2 Redemptions . . . . . . . . . . . . . . . . . . . . . . . . 3
5.3 Distributions and Expenses of Fund . . . . . . . . . . . . 3
5.4 Payment in Respect of Securities . . . . . . . . . . . . . 4
5.5 Repayment of Loans . . . . . . . . . . . . . . . . . . . . 4
5.6 Repayment of Cash . . . . . . . . . . . . . . . . . . . . . 4
5.7 Foreign Exchange Transactions . . . . . . . . . . . . . . . 4
5.8 Other Authorized Payments . . . . . . . . . . . . . . . . . 4
5.9 Termination . . . . . . . . . . . . . . . . . . . . . . . . 4
6. Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
6.1 Segregation and Registration . . . . . . . . . . . . . . . 4
6.2 Voting and Proxies . . . . . . . . . . . . . . . . . . . . 5
6.3 Book-Entry System . . . . . . . . . . . . . . . . . . . . . 5
6.4 Use of a Depository . . . . . . . . . . . . . . . . . . . . 6
6.5 Use of Book-Entry System for Commercial Paper . . . . . . . 7
6.6 Use of Immobilization Programs . . . . . . . . . . . . . . 8
6.7 Eurodollar CDs . . . . . . . . . . . . . . . . . . . . . . 8
6.8 Options and Futures Transactions . . . . . . . . . . . . . 9
(a) Puts and Calls Traded on Securities Exchanges,
NASDAQ or Over-the-Counter . . . . . . . . . . . . . 9
<PAGE> 3
Page
----
(b) Puts, Calls, and Futures Traded
on Commodities Exchanges . . . . . . . . . . . . . 9
6.9 Segregated Account . . . . . . . . . . . . . . . . . . . . 9
6.10 Interest Bearing Call or Time Deposits . . . . . . . . . . 11
6.11 Transfer of Securities . . . . . . . . . . . . . . . . . . 11
7. Redemptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
8. Merger, Dissolution, etc. of Fund . . . . . . . . . . . . . . . . . . 13
9. Actions of Bank Without Prior Authorization . . . . . . . . . . . . . 13
10. Collections and Defaults . . . . . . . . . . . . . . . . . . . . . . 14
11. Maintenance of Records and Accounting Services . . . . . . . . . . . 15
12. Concerning the Bank . . . . . . . . . . . . . . . . . . . . . . . . . 15
12.1 Performance of Duties and Standard of Care . . . . . . . . 15
12.2 Agents and sub-custodians with Respect to Property
of the Fund Held in the United States . . . . . . . . . . . 16
12.3 Duties of the Bank with Respect to Property
Held Outside of the United States . . . . . . . . . . . . . 17
12.4 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . 21
12.5 Fees and Expenses of Bank . . . . . . . . . . . . . . . . . 21
12.6 Advances by Bank . . . . . . . . . . . . . . . . . . . . . 21
13. Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
14. Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
15. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
16. Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
17. Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
18. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
19. Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
<PAGE> 4
CUSTODIAN AGREEMENT
AGREEMENT made as of this [ ] day of [ ] 1996, between
SALOMON BROTHERS INSTITUTIONAL SERIES FUNDS INC, a Maryland corporation
(the "Fund") and INVESTORS BANK & TRUST COMPANY (the "Bank").
The Fund, an open-end management investment company consisting of four
separate portfolios, as listed on Appendix A hereto, desires to place and
maintain all of its portfolio securities and cash in the custody of the Bank.
The Bank has at least the minimum qualifications required by Section 17(f)(1)
of the Investment Company Act of 1940, as amended, (the "1940 Act") to act as
custodian of the portfolio securities and cash of the Fund, and has indicated
its willingness to so act, subject to the terms and conditions of this
Agreement
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements contained herein, the parties hereto agree as follows:
1. Bank Appointed Custodian. The Fund hereby appoints the Bank
as custodian of its portfolio securities and cash delivered to the Bank as
hereinafter described and the Bank agrees to act as such upon the terms and
conditions hereinafter set forth.
2. Definitions. Whenever used herein, the terms listed below
will have the following meaning:
2.1 Authorized Person. Authorized Person will mean any
of the persons duly authorized to give Proper Instructions or otherwise act on
behalf of the Fund by appropriate resolution of its Board of Directors (the
"Board"), and set forth in a certificate as required by Section 4 hereof.
2.2 Security. The term security as used herein will have
the same meaning as when such term is used in the Securities Act of 1933, as
amended, including, without limitation, any note, stock, treasury stock, bond,
debenture, evidence of indebtedness, certificate of interest or participation
in any profit sharing agreement, collateral-trust certificate, preorganization
certificate or subscription, transferable share, investment contract,
voting-trust certificate, certificate of deposit for a security, fractional
undivided interest in oil, gas, or other mineral rights, any put, call.
straddle, option, or privilege on any security, certificate of deposit, or
group or index of securities (including any interest therein or based on the
value thereof), or any put, call, straddle, option, or privilege entered into
on a national securities exchange relating to a foreign currency, or, in
general, any interest or instrument commonly known as a "security", or any
certificate of interest of participation in, temporary or interim certificate
for, receipt for, guarantee of, or warrant or right to subscribe to, or option
contract to purchase or sell any of the foregoing, and futures, forward
contracts and options thereon.
2.3 Portfolio Security. Portfolio Security will mean any
security owned by the Fund.
<PAGE> 5
2.4 Officers Certificate. Officers' Certificate will
mean, unless otherwise indicated, any request, direction, instruction, or
certification in writing signed by any two Authorized Persons of the Fund.
2.5 Book-Entry System. Book-Entry System shall mean the
Federal Reserve-Treasury Department Book Entry System for United States
government, instrumentality and agency securities operated by the Federal
Reserve Bank, its successor or successors and its nominee or nominees.
2.6 Depository. Depository shall mean The Depository
Trust Company ("DTC"), a clearing agency registered with the Securities and
Exchange Commission ("SEC") under Section 17A of the Securities Exchange Act of
1934 ("Exchange Act"), its successor or successors and its nominee or nominees.
The term "Depository" shall further mean and include any other person
authorized to act as a depository under the 1940 Act, its successor or
successors and its nominee or nominees, specifically identified in a certified
copy of a resolution of the Board.
2.7 Proper Instructions. Proper Instructions shall mean
(i) instructions regarding the purchase or sale of Portfolio Securities, and
payments and deliveries in connection therewith, given by an Authorized Person
as shall have been designated in an Officers' Certificate, such instructions to
be given in such form and manner as the Bank and the Fund shall agree upon from
time to time, and (ii) instructions (which may be continuing instructions)
regarding other matters signed or initialed by such one or more persons from
time to time designated in an Officers' Certificate as having been authorized
by the Board. Oral instructions will be considered Proper Instructions if the
Bank reasonably believes them to have been given by a person authorized to give
such instructions with respect to the transaction involved. The Fund shall
cause all oral instructions to be promptly confirmed in writing. The Bank
shall act upon and comply with any subsequent Proper Instruction which modifies
a prior instruction and the sole obligation of the Bank with respect to any
follow-up or confirmatory instruction shall be to make reasonable efforts to
detect any discrepancy between the original instruction and such confirmation
and to report such discrepancy to the Fund. The Fund shall be responsible, at
the Fund's expense, for taking any action, including any reprocessing,
necessary to correct any such discrepancy or error, and to the extent such
action requires the Bank to act the Fund shall give the Bank specific Proper
Instructions as to the action required. Upon receipt of an Officers'
Certificate as to the authorization by the Board accompanied by a detailed
description of procedures approved by the Fund, Proper Instructions may include
communication effected directly between electromechanical or electronic devices
provided that the Board and the Bank are satisfied that such procedures afford
adequate safeguards for the Fund's assets.
3. Separate Accounts. If the Fund has more than one series or
portfolio, the Bank will segregate the assets of each series or portfolio to
which this Agreement relates into a separate account for each such series or
portfolio containing the assets of such series or portfolio (and all investment
earnings thereon).
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<PAGE> 6
4. Certification as to Authorized Persons. The Secretary or
Assistant Secretary of the Fund will at all times maintain on file with the
Bank his or her certification to the Bank, in such form as may be acceptable to
the Bank, of the names and signatures of the Authorized Persons, it being
understood that upon the occurrence of any change in the information set forth
in the most recent certification on file (including without limitation any
person named in the most recent certification who is no longer an Authorized
Person as designated therein), the Secretary or Assistant Secretary of the
Fund, will sign a new or amended certification setting forth the change and the
new, additional or omitted names or signatures. The Bank will be entitled to
rely and act upon any Officers' Certificate given to it by the Fund which has
been signed by Authorized Persons named in the most recent certification.
5. Custody of Cash. As custodian for the Fund, the Bank will
open and maintain a separate account or accounts in the name of each portfolio
or in the name of the Bank, as Custodian of each portfolio, and will deposit to
the account of the Fund all of the cash of the Fund, except for cash held by a
sub-custodian appointed pursuant to Section 12.2 hereof, including borrowed
funds, delivered to the Bank, subject only to draft or order by the Bank acting
pursuant to the terms of this Agreement. Upon receipt by the Bank of Proper
Instructions (which may be continuing instructions) or in the case of payments
for redemptions and repurchases of outstanding shares of common stock of the
Fund, notification from the Fund's transfer agent as provided in Section 7,
requesting such payment, designating the payee or the account or accounts to
which the Bank will release funds for deposit, and stating that it is for a
purpose permitted under the terms of this Section 5, specifying the applicable
subsection, the Bank will make payments of cash held for the accounts of the
Fund, insofar as funds are available for that purpose, only as permitted in
subsections 5.1-5.9 below.
5.1 Purchase of Securities. Upon the purchase of
securities for the Fund, against contemporaneous receipt of such securities by
the Bank or, against delivery of such securities to the Bank in accordance with
generally accepted settlement practices and customs in the jurisdiction or
market in which the transaction occurs, registered in the name of the Fund or
in the name of, or properly endorsed and in form for transfer to, the Bank, or
a nominee of the Bank, or receipt for the account of the Bank pursuant to the
provisions of Section 6 below, each such payment to be made at the purchase
price shown on a broker's confirmation (or transaction report in the case of
Book Entry Paper) of purchase of the securities received by the Bank before
such payment is made, as confirmed in the Proper Instructions received by the
Bank before such payment is made.
5.2 Redemptions. In such amount as may be necessary for
the repurchase or redemption of common shares of the Fund offered for
repurchase or redemption in accordance with Section 7 of this Agreement.
5.3 Distributions and Expenses of Fund. For the payment
on the account of the Fund of dividends or other distributions to shareholders
as may from time to time be declared by the Board, interest, taxes, management
or supervisory fees, distribution fees,
3
<PAGE> 7
fees of the Bank for its services hereunder and reimbursement of the expenses
and liabilities of the Bank as provided hereunder, fees of any transfer agent,
fees for legal, accounting, and auditing services, or other operating expenses
of the Fund.
5.4 Payment in Respect of Securities. For payments in
connection with the conversion, exchange or surrender of Portfolio Securities
or securities subscribed to by the Fund held by or to be delivered to the Bank.
5.5 Repayment of Loans. To repay loans of money made to
the Fund, but, in the case of final payment, only upon redelivery to the Bank
of any Portfolio Securities pledged or hypothecated therefor and upon surrender
of documents evidencing the loan.
5.6 Repayment of Cash. To repay the cash delivered to
the Fund for the purpose of collateralizing the obligation to return to the
Fund certificates borrowed from the Fund representing Portfolio Securities, but
only upon redelivery to the Bank of such borrowed certificates.
5.7 Foreign Exchange Transactions. For payments in
connection with foreign exchange contracts or options to purchase and sell
foreign currencies for spot and future delivery which may be entered into by
the Bank on behalf of the Fund upon the receipt of Proper Instructions, such
Proper Instructions to specify the currency broker or banking institution
(which may be the Bank, or any other sub-custodian or agent hereunder, acting
as principal) with which the contract or option is made, and the Bank shall
have no duty with respect to the selection of such currency brokers or banking
institutions with which the Fund deals or for their failure to comply with the
terms of any contract or option.
5.8 Other Authorized Payments. For other authorized
transactions of the Fund, or other obligations of the Fund incurred for proper
Fund purposes; provided that before making any such payment the Bank will also
receive a certified copy of a resolution of the Board signed by an Authorized
Person (other than the Person certifying such resolution) and certified by its
Secretary or Assistant Secretary, naming the person or persons to whom such
payment is to be made, and either describing the transaction for which payment
is to be made and declaring it to be an authorized transaction of the Fund, or
specifying the amount of the obligation for which payment is to be made,
setting forth the purpose for which such obligation was incurred and declaring
such purpose to be a proper corporate purpose.
5.9 Termination. Upon the termination of this Agreement
as hereinafter set forth pursuant to Section 8 and Section 13 of this
Agreement.
6. Securities.
6.1 Segregation and Registration. Except as otherwise
provided herein, and except for securities to be delivered to any sub-custodian
appointed pursuant to Section 12.2 hereof, the Bank as custodian, will receive
and hold pursuant to the provisions hereof, in a separate account or accounts
and physically segregated at all times from those
4
<PAGE> 8
of other persons, any and all Portfolio Securities which may now or hereafter
be delivered to it by or for the account of the Fund. All such Portfolio
Securities will be held or disposed of by the Bank for, and subject at all
times to, the instructions of the Fund pursuant to the terms of this Agreement.
Subject to the specific provisions herein relating to Portfolio Securities that
are not physically held by the Bank, the Bank will register all Portfolio
Securities (unless otherwise directed by Proper Instructions or an Officers'
Certificate), in the name of a registered nominee of the Bank as defined in the
Internal Revenue Code and any Regulations of the Treasury Department issued
thereunder, and will execute and deliver all such certificates in connection
therewith as may be required by such laws or regulations or under the laws of
any state.
The Fund will from time to time furnish to the Bank appropriate
instruments to enable it to hold or deliver in proper form for transfer, or to
register in the name of its registered nominee, any Portfolio Securities which
may from time to time be registered in the name of the Fund.
6.2 Voting and Proxies. Neither the Bank nor any nominee
of the Bank will vote any of the Portfolio Securities held hereunder, except in
accordance with Proper Instructions or an Officers' Certificate. The Bank will
execute and deliver, or cause to be executed and delivered, to the Fund all
notices, proxies and proxy soliciting materials with respect to such
Securities, such proxies to be executed by the registered holder of such
Securities (if registered otherwise than in the name of the Fund), but without
indicating the manner in which such proxies are to be voted.
6.3 Book-Entry System. Provided (i) the Bank has
received a certified copy of a resolution of the Board specifically approving
deposits of Fund assets in the Book-Entry System, and (ii) for any subsequent
changes to such arrangements following such approval, the Board has reviewed
and approved the arrangement and has not delivered an Officer's Certificate to
the Bank indicating that the Board has withdrawn its approval:
(a) The Bank may keep Portfolio Securities in the
Book-Entry System provided that such Portfolio Securities are represented in an
account ("Account") of the Bank (or its agent) in such System which shall not
include any assets of the Bank (or such agent) other than assets held as a
fiduciary, custodian, or otherwise for customers;
(b) The records of the Bank (and any such agent)
with respect to the Fund's participation in the Book-Entry System through the
Bank (or any such agent) will identify by book entry Portfolio Securities
belonging to the Fund which are included with other securities deposited in the
Account and shall at all times during the regular business hours of the Bank
(or such agent) be open for inspection by duly authorized officers, employees
or agents of the Fund. Where securities are transferred to the Fund's account,
the Bank shall also, by book entry or otherwise, identify as belonging to the
Fund a quantity of securities in fungible bulk of securities (i) registered in
the name of the Bank or its nominee, or (ii) shown on the Bank's account on the
books of the Federal Reserve Bank;
5
<PAGE> 9
(c) The Bank (or its agent) shall pay for
securities purchased for the account of the Fund or shall pay cash collateral
against the return of Portfolio Securities loaned by the Fund upon (i) receipt
of advice from the Book-Entry System that such Securities have been transferred
to the Account, and (ii) the making of an entry on the records of the Bank (or
its agent) to reflect such payment and transfer for the account of the Fund.
The Bank (or its agent) shall transfer securities sold or loaned for the
account of the Fund upon (i) receipt of advice from the Book-Entry System that
payment for securities sold or payment of the initial cash collateral against
the delivery of securities loaned by the Fund has been transferred to the
Account; and (ii) the making of an entry on the records of the Bank (or its
agent) to reflect such transfer and payment for the account of the Fund.
Copies of all advices from the Book-Entry System of transfers of securities for
the account of the Fund shall identify the Fund, be maintained for the Fund by
the Bank and shall be provided to the Fund at its request. The Bank shall send
the Fund a confirmation, as defined by Rule 17f-4 of the 1940 Act, of any
transfers to or from the account of the Fund;
(d) The Bank will promptly provide the Fund with
any report obtained by the Bank or its agent on the Book-Entry System's
accounting system, internal accounting control and procedures for safeguarding
securities deposited in the Book-Entry System;
(e) The Bank shall be liable to the Fund for any
loss or damage to the Fund resulting from use of the Book-Entry System by
reason of any negligence, willful misfeasance or bad faith of the Bank or any
of its agents or of any of its or their employees or from any negligence by the
Bank or any such agent of its duty to use its best efforts to enforce such
rights as it may have against the Book-Entry System; at the election of the
Fund, it shall be entitled to be subrogated for the Bank in any claim against
the Book-Entry System or any other person which the Bank or its agent may have
as a consequence of any such loss or damage if and to the extent that the Fund
has not been made whole for any loss or damage.
6.4 Use of a Depository. Provided (i) the Bank has
received a certified copy of a resolution of the Board specifically approving
deposits in DTC or other such Depository and (ii) for any subsequent changes to
such arrangements following such approval, the Board has reviewed and approved
the arrangement and has not delivered an Officer's Certificate to the Bank
indicating that the Board has withdrawn its approval:
(a) The Bank may use a Depository to hold,
receive, exchange, release, lend, deliver and otherwise deal with Portfolio
Securities including stock dividends, rights and other items of like nature,
and to receive and remit to the Bank on behalf of the Fund all income and other
payments thereon and to take all steps necessary and proper in connection with
the collection thereof;
(b) Registration of Portfolio Securities may be
made in the name of any nominee or nominees used by such Depository;
6
<PAGE> 10
(c) Payment for securities purchased and sold may
be made through the clearing medium employed by such Depository for
transactions of participants acting through it. Upon any purchase of Portfolio
Securities, payment will be made only upon delivery of the securities to or for
the account of the Fund and the Fund shall pay cash collateral against the
return of Portfolio Securities loaned by the Fund only upon delivery of the
Securities to or for the account of the Fund; and upon any sale of Portfolio
Securities, delivery of the Securities will be made only against payment
thereof or, in the event Portfolio Securities are loaned, delivery of
Securities will be made only against receipt of the initial cash collateral to
or for the account of the Fund; and
(d) The Bank shall be liable to the Fund for any
loss or damage to the Fund resulting from use of a Depository by reason of any
negligence, willful misfeasance or bad faith of the Bank or its employees or
from any negligence by the Bank of its duty to use its best efforts to enforce
such rights as it may have against a Depository; at the election of the Fund,
it shall be entitled to be subrogated for the Bank in any claim against such
depository or any other person which the Bank or its agent may have as a
consequence of any such loss or damage if and to the extent that the Fund has
not been made whole for any loss or damage. In this connection, the Bank shall
use its best efforts to ensure that:
(i) The Depository obtains replacement of any
certificated Portfolio Security deposited with it in the event such Security is
lost, destroyed, wrongfully taken or otherwise not available to be returned to
the Bank upon its request;
(ii) Any proxy materials received by a Depository
with respect to Portfolio Securities deposited with such Depository are
forwarded immediately to the Bank for prompt transmittal to the Fund;
(iii) Such Depository immediately forwards to the
Bank confirmation of any purchase or sale of Portfolio Securities and of the
appropriate book entry made by such Depository to the Fund's account;
(iv) Such Depository prepares and delivers to the
Bank such records with respect to the performance of the Bank's obligations and
duties hereunder as may be necessary for the Fund to comply with the
recordkeeping requirements of Section 31 (a) of the 1940 Act and Rule 31(a)
thereunder; and
(v) Such Depository delivers to the Bank and the
Fund all internal accounting control reports, whether or not audited by an
independent public accountant, as well as such other reports as the Fund may
reasonably request in order to verify the Portfolio Securities held by such
Depository.
6.5 Use of Book-Entry System for Commercial Paper.
Provided (i) the Bank has received a certified copy of a resolution of the
Board specifically approving participation in a system maintained by the Bank
for the holding of commercial paper in book-entry form ("Book-Entry Paper") and
(ii) for each year following such approval the Board has received and approved
the arrangements, upon receipt of Proper Instructions
7
<PAGE> 11
and upon receipt of confirmation from an Issuer (as defined below) that the
Fund has purchased such Issuer's Book-entry Paper, the Bank shall issue and
hold in book-entry form, on behalf of the Fund, commercial paper issued, by
issuers with whom the Bank has entered into a book-entry agreement (the
"Issuers"). In maintaining its Book-entry Paper System, the Bank agrees that:
(a) the Bank will maintain all Book-Entry Paper
held by the Fund in an account of the Bank that includes only assets held by it
for customers;
(b) the records of the Bank with respect to the
Fund's purchase of Book-entry Paper through the Bank will identify, by
book-entry, Commercial Paper belonging to the Fund which is included in the
Book-entry Paper System and shall at all times during the regular business
hours of the Bank be open for inspection by duly authorized officers, employees
or agents of the Fund;
(c) the Bank shall pay for Book-Entry Paper
purchased for the account of the Fund upon contemporaneous (i) receipt of
advice from the Issuer that such sale of Book-Entry Paper has been effected,
and (ii) the making of an entry on the records of the Bank to reflect such
payment and transfer for the account of the Fund;
(d) the Bank shall cancel such Book-Entry Paper
obligation upon the maturity thereof upon contemporaneous (i) receipt of advice
that payment for such Book-Entry Paper has been transferred to the Fund, and
(ii) the making of an entry on the records of the Bank to reflect such payment
for the account of the Fund;
(e) the Bank shall transmit to the Fund a
transaction journal confirming each transaction in Book-Entry Paper for the
account of the Fund on the next business day following the transaction; and
(f) the Bank will send to the Fund such reports
on its system of internal accounting control with respect to the Book-Entry
Paper System as the Fund may reasonably request from time to time.
6.6 Use of Immobilization Programs. Provided (i) the
Bank has received a certified copy of a resolution of the Board specifically
approving the maintenance of Portfolio Securities in an immobilization program
operated by a bank which meets the requirements of Section 26(a)(1) of the 1940
Act, and (ii) for each year following such approval the Board has reviewed and
approved the arrangement and has not delivered an Officer's Certificate to the
Bank indicating that the Board has withdrawn its approval, the Bank shall enter
into such immobilization program with such bank acting as a sub-custodian
hereunder.
6.7 Eurodollar CDs. Any Portfolio Securities which are
Eurodollar CDs may be physically held by the European branch of the U.S.
banking institution that is the issuer of such Eurodollar CD (a "European
Branch"), provided that such Securities are identified on the books of the Bank
as belonging to the Fund and that the books of the Bank identify
8
<PAGE> 12
the European Branch holding such Securities. Notwithstanding any other
provision of this Agreement to the contrary, except as stated in the first
sentence of this subsection 6.7, the Bank shall be under no other duty with
respect to such Eurodollar CDs belonging to the Fund, and shall have no
liability to the Fund or its shareholders with respect to the actions,
inactions, whether negligent or otherwise of such European Branch in connection
with such Eurodollar CDs, except for any loss or damage to the Fund resulting
from the Bank's own negligence, willful misfeasance or bad faith in the
performance of its duties hereunder.
6.8 Options and Futures Transactions.
(a) Puts and Calls Traded on Securities Exchanges,
NASDAQ or Over-the-Counter.
1. The Bank shall take action as to put options
("puts") and call options ("calls") purchased or sold (written) by the Fund
regarding escrow or other arrangements (i) in accordance with the provisions of
any agreement entered into upon receipt of Proper Instructions between the
Bank, any broker-dealer registered under the Exchange Act and a member of the
National Association of Securities Dealers, Inc. (the "NASD"), and, if
necessary, the Fund relating to the compliance with the rules of the Options
Clearing Corporation and of any registered national securities exchange, or of
any similar organization or organizations.
2. Unless another agreement requires it to do
so, the Bank shall be under no duty or obligation to see that the Fund has
deposited or is maintaining adequate margin, if required, with any broker in
connection with any option, nor shall the Bank be under duty or obligation to
present such option to the broker for exercise unless it receives Proper
Instructions from the Fund. The Bank shall have no responsibility for the
legality of any put or call purchased or sold on behalf of the Fund, the
propriety of any such purchase or sale, or the adequacy of any collateral
delivered to a broker in connection with an option or deposited to or withdrawn
from a Segregated Account (as defined in subsection 6.9 below). The Bank
specifically, but not by way of limitation, shall not be under any duty or
obligation to: (i) periodically check or notify the Fund that the amount of
such collateral held by a broker or held in a Segregated Account is sufficient
to protect such broker of the Fund against any loss; (ii) effect the return of
any collateral delivered to a broker; or (iii) advise the Fund that any option
it holds, has or is about to expire. Such duties or obligations shall be the
sole responsibility of the Fund.
(b) Puts, Calls and Futures Traded on Commodities
Exchanges
1. The Bank shall take action as to puts, calls
and futures contracts ("Futures") purchased or sold by the Fund in accordance
with the provisions of any agreement among the Fund, the Bank and a Futures
Commission Merchant registered under the Commodity Exchange Act, relating to
compliance with the rules of the
9
<PAGE> 13
Commodity Futures Trading Commission and/or any Contract Market, or any similar
organization of organizations, regarding account deposits in connection with
transactions by the Fund.
2. The responsibilities and liabilities of the
Bank as to futures, puts and calls traded on commodities exchanges, any Futures
Commission Merchant account and the Segregated Account shall be limited as set
forth in subparagraph (a)(2) of this Section 6.8 as if such subparagraph
referred to Futures Commission Merchants rather than brokers, and Futures and
puts and calls thereon instead of options.
6.9 Segregated Account. The Bank shall upon receipt of
Proper Instructions establish and maintain a Segregated Account or Accounts for
and on behalf of the Fund, into which Account or Accounts may be transferred
upon receipt of Proper Instructions cash and/or Portfolio Securities:
(a) in accordance with the provisions of any
agreement among the Fund, the Bank and a broker-dealer registered under the
Exchange Act and a member of the NASD of any Futures Commission Merchant
registered under the Commodity Exchange Act, relating to compliance with the
rules of the Options Clearing Corporation and of any registered national
securities exchange or the Commodity Futures Trading Commission or any
registered Contract Market, or of any similar organizations regarding escrow of
other arrangements in connection with transactions by the Fund;
(b) for the purpose of segregating cash or
securities in connection with options purchased or written by the Fund or
commodity futures purchased or written by the Fund;
(c) for the deposit of liquid assets, such as
cash, U.S. Government securities or other high grade debt obligations, having a
market value (marked to market on a daily basis) at all times equal to not less
than the aggregate purchase price due on the settlement dates of all the Fund's
then outstanding forward commitment or "when-issued" agreements relating to the
purchase of Portfolio Securities and all the Fund's then outstanding
commitments under reverse repurchase agreements entered into with broker-dealer
firms;
(d) for the deposit of any Portfolio Securities
which the Fund has agreed to sell on a forward commitment basis, all in
accordance with Investment Company Act Release No. 10666;
(e) for the purposes of compliance by the Fund
with the procedures required by Investment Company Act Release No. 10666, or
any subsequent release or releases of the Securities and Exchange Commission
relating to the maintenance of Segregated Accounts by registered investment
companies;
(f) for other proper corporate purposes, but
only, in the case of this clause (f), upon receipt of, in addition to Proper
Instructions, a certified copy of a resolution of
10
<PAGE> 14
the Board, or of the Executive Committee signed by an officer of the Fund and
certified by the Secretary or an Assistant Secretary, setting forth the purpose
or purposes of such Segregated Account and declaring such purposes to be proper
corporate purposes.
(g) Assets may be withdrawn from the Segregated
Account pursuant to Proper Instructions only
(i) in accordance with the provisions of any
agreements referenced in (a) above;
(ii) for sale or delivery to meet the Fund's
obligations under outstanding firm commitment or when-issued agreements for the
purchase of Portfolio Securities and under reverse repurchase agreements;
(iii) for exchange for other liquid assets of equal
or greater value deposited in the Segregated Account;
(iv) to the extent that the Fund's outstanding
forward commitment or when-issued agreements for the purchase of portfolio
securities or reverse repurchase agreements are sold to other parties or the
Fund's obligations thereunder are met from assets of the Fund other than those
in the Segregated Account; or
(v) for delivery upon settlement of a forward
commitment agreement for the sale of Portfolio Securities.
6.10 Interest Bearing Call or Time Deposits. The Bank
shall, upon receipt of Proper Instructions relating to the purchase by the Fund
of interest-bearing fixed-term and call deposits, transfer cash, by wire or
otherwise, in such amounts and to such bank of banks as shall be indicated in
such Proper Instructions. The Bank shall include in its records with respect
to the assets of the Fund appropriate notation as to the amount of each such
deposit, the banking institution with which such deposit is made (the "Deposit
Bank"), and shall retain such forms of advice or receipt evidencing the
deposit, if any, as may be forwarded to the Bank by the Deposit Bank. Such
deposits shall be deemed Portfolio Securities of the Fund and the
responsibility of the Bank therefore shall be the same as and no greater than
the Bank's responsibility in respect of other Portfolio Securities of the Fund.
6.11 Transfer of Securities. The Bank will transfer.
exchange, deliver or release Portfolio Securities held by it hereunder, insofar
as such Securities are available for such purpose, provided that before making
any transfer, exchange, delivery or release under this Section the Bank will
receive Proper Instructions requesting such transfer, exchange or delivery
stating that it is for a purpose permitted under the terms of this Section
6.11, specifying the applicable subsection, or describing the purpose of the
transaction with sufficient particularity to permit the Bank to ascertain the
applicable subsection, only
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(a) upon sales of Portfolio Securities for the
account of the Fund, against contemporaneous receipt by the Bank of payment
therefor in full, or, against payment to the Bank in accordance with generally
accepted settlement practices and customs in the jurisdiction or market in
which the transaction occurs, each such payment to be in the amount of the sale
price shown in a broker's confirmation of sale of the Portfolio Securities
received by the Bank before such payment is made, as confirmed in the Proper
Instructions received by the Bank before such payment is made;
(b) in exchange for or upon conversion into other
securities alone or other securities and cash pursuant to any plan of merger,
consolidation, reorganization, share split-up, change in par value,
recapitalization or readjustment or otherwise, upon exercise of subscription,
purchase or sale or other similar rights represented by such Portfolio
Securities, or for the purpose of tendering shares in the event of a tender
offer therefor, provided however that in the event of an offer of exchange,
tender offer, or other exercise of rights requiring the physical tender or
delivery of Portfolio Securities, the Bank shall have no liability for failure
to so tender in a timely manner unless such Proper Instructions are received by
the Bank at least two business days prior to the date required for tender, and
unless the Bank (or its agent or sub-custodian hereunder) has actual possession
of such Security at least two business days prior to the date of tender;
(c) upon conversion of Portfolio Securities
pursuant to their terms into other securities;
(d) for the purpose of redeeming in kind shares of
the Fund upon authorization from the Fund;
(e) in the case of option contracts owned by the
Fund, for presentation to the endorsing broker,
(f) when such Portfolio Securities are called,
redeemed or retired or otherwise become payable;
(g) for the purpose of effectuating the pledge of
Portfolio Securities held by the Bank in order to collateralize loans made to
the Fund by any bank, including the Bank; provided, however, that such
Portfolio Securities will be released only upon payment to the Bank for the
account of the Fund of the moneys borrowed, except that in cases where
additional collateral is required to secure a borrowing already made, and such
fact is made to appear in the Proper Instructions, further Portfolio Securities
may be released for that purpose without any such payment. In the event that
any such pledged Portfolio Securities are held by the Bank, they will be so
held for the account of the lender, and after notice to the Fund from the
lender in accordance with the normal procedures of the lender, that an event of
deficiency or default on the loan has occurred, the Bank may deliver such
pledged Portfolio Securities to or for the account of the lender;
(h) for the purpose of releasing certificates
representing Portfolio Securities, against contemporaneous receipt by the Bank
of the fair market value of such
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security, as set forth in the Proper Instructions received by the Bank before
such payment is made;
(i) for the purpose of delivering securities lent
by the Fund to a bank or broker dealer, but only against receipt in accordance
with street delivery custom except as otherwise provided herein, of adequate
collateral as agreed upon from time to time by the Fund and the Bank, and upon
receipt of payment in connection with any repurchase agreement relating to such
securities entered into by the Fund;
(j) for other authorized transactions of the Fund
or for other proper corporate purposes; provided that before making such
transfer, the Bank win also receive a certified copy of resolutions of the
Board, signed by an authorized officer of the Fund (other than the officer
certifying such resolution) and certified by its Secretary or Assistant
Secretary, specifying the Portfolio Securities to be delivered, setting forth
the transaction in or purpose for which such delivery is to be made, declaring
such transaction to be an authorized transaction of the Fund or such purpose to
be a proper corporate purpose, and naming the person or persons to whom
delivery of such securities shall be made; and
(k) upon termination of this Agreement as
hereinafter set forth pursuant to Section 8 and Section 14 of this Agreement.
As to any deliveries made by the Bank pursuant to subsections (a),
(b), (c), (e), (f), (g), (h) and (i) securities or cash receivable in exchange
therefor shall be delivered to the Bank.
7. Redemptions. In the case of payment of assets of the Fund
held by the Bank in connection with redemptions and repurchases by the Fund of
outstanding common shares, the Bank will rely on notification by the Fund's
transfer agent of receipt of a request for redemption and certificates, if
issued, in proper form for redemption before such payment is made. Payment
shall be made in accordance with the Articles and By-laws of the Fund, from
assets available for said purpose.
8. Merger, Dissolution, etc. of Fund. In the case of the
following transactions, not in the ordinary course of business, namely, the
merger of the Fund into or the consolidation of the Fund with another
investment company, the sale by the Fund of all, or substantially all, of its
assets to another investment company, or the liquidation or dissolution of the
Fund and distribution of its assets, the Bank will deliver the Portfolio
Securities held by it under this Agreement and disburse cash only upon the
order of the Fund set forth in an Officers' Certificate, accompanied by a
certified copy of a resolution of the Board authorizing any of the foregoing
transactions. Upon completion of such delivery and disbursement and the
payment of the fees, disbursements and expenses of the Bank, this Agreement
will terminate.
9. Actions of Bank Without Prior Authorization. Notwithstanding
anything herein to the contrary, unless and until the Bank receives an
Officers' Certificate to the contrary, it will without prior authorization or
instruction of the Fund or the transfer agent:
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(a) Endorse for collection and collect on behalf of and
in the name of the Fund all checks, drafts, or other negotiable or transferable
instruments or other orders for the payment of money received by it for the
account of the Fund and hold for the account of the Fund all income, dividends,
interest and other payments or distribution of cash with respect to the
Portfolio Securities held thereunder;
(b) Present for payment all coupons and other income
items held by it for the account of the Fund which call for payment upon
presentation and hold the cash received by it upon such payment for the account
of the Fund;
(c) Receive and hold for the account of the Fund all
securities received as a distribution on Portfolio Securities as a result of a
stock dividend, share split-up, reorganization, recapitalization, merger,
consolidation, readjustment, distribution of rights and similar securities
issued with respect to any Portfolio Securities held by it hereunder.
Execute as agent on behalf of the Fund all necessary ownership and
other certificates and affidavits required by the Internal Revenue Code or the
regulations of the Treasury Department issued thereunder, or by the laws of any
state, now or hereafter in effect, inserting the Fund's name on such
certificates as the owner of the securities covered thereby, to the extent it
may lawfully do so and as may be required to obtain payment in respect thereof.
The Bank will execute and deliver such certificates in connection with
Portfolio Securities delivered to it or by it under this Agreement as may be
required under the provisions of the Internal Revenue Code and any Regulations
of the Treasury Department issued thereunder, or under the laws of any State;
(d) Present for payment all Portfolio Securities which
are called, redeemed, retired or otherwise become payable, and hold cash
received by it upon payment for the account of the Fund; and
(e) Exchange interim receipts or temporary securities for
definitive securities.
10. Collections and Defaults. The Bank will use all reasonable
efforts to collect any funds which may to its knowledge become collectible
arising from Portfolio Securities, including dividends, interest and other
income, and to transmit to the Fund notice actually received by it of any call
for redemption, offer of exchange, right of subscription, reorganization or
other proceedings affecting such Securities. If Portfolio Securities upon
which such income is payable are in default or payment is refused after due
demand or presentation, the Bank will notify the Fund in writing of any
default or refusal to pay within two business days from the day on which it
receives knowledge of such default or refusal. In addition, the Bank will send
the Fund a written report once each month showing any income on any Portfolio
Security held by it which is more than ten days overdue on the date of such
report and which has not previously been reported.
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11. Maintenance of Records and Accounting Services. The Bank will
maintain records with respect to transactions for which the Bank is responsible
pursuant to the terms and conditions of this Agreement, and in compliance with
the applicable rules and regulations of the 1940 Act and will furnish the Fund
daily with a statement of condition of the Fund. The Bank will furnish to the
Fund at the end of every month, and at the close of each quarter of the Fund's
fiscal year, a list of the Portfolio Securities and the aggregate amount of
cash held by it for the Fund. The books and records of the Bank pertaining to
its actions under this Agreement and reports by the Bank or its independent
accountants concerning its accounting system, procedures for safeguarding
securities and internal accounting controls will be open to inspection and
audit at reasonable times by officers of or auditors employed by the Fund and
employees of the SEC and will be preserved by the Bank in the manner and in
accordance with the applicable rules and regulations under the 1940 Act. All
records maintained by the Bank in connection with the performance of its duties
under this Agreement will remain the property of the Fund, will be surrendered
promptly on request and in the event of termination of this agreement will be
delivered to the Fund or the successor custodian.
The Bank shall keep the books of account and reader statements or
copies from time to time as reasonably requested by the Treasurer or any
executive officer of the Fund.
The Bank shall assist generally in the preparation of reports to
shareholders and others, audits of accounts, and other ministerial matters of
like nature.
12. Concerning the Bank.
12.1 Performance of Duties and Standard of Care. In
performing its duties hereunder and any other duties listed on any Schedule
hereto, if any, the Bank will be entitled to receive and act upon the advice of
independent counsel of its own selection, which may be counsel for the Fund,
and will be without liability for any action taken or thing done or omitted to
be done in accordance with this Agreement in good faith in conformity with such
advice. In the performance of its duties hereunder, the Bank will be protected
and not be liable, and will be indemnified and held harmless for any action
taken or omitted to be taken by it in good faith reliance upon the terms of
this Agreement, any Officers' Certificate, Proper Instructions, resolution of
the Board, telegram, notice, request, certificate or other instrument
reasonably believed by the Bank to be genuine and for any other loss to the
Fund except in the case of its negligence, willful misfeasance or bad faith in
the performance of its duties. In order that the indemnification provision
contained in this Section 13.1 shall apply, it is understood that the Fund
shall be fully and promptly advised of all pertinent facts concerning the
situation and that the Fund shall have the option to defend the Bank against
any claim which may be the subject of this indemnification. The Bank shall in
no case confess any claim or make any compromise in any case in which the Fund
will be asked to indemnify the Bank except with the Fund's consent. It is
further understood that the indemnification provision contained in this Section
13.1 does not apply with respect to the acts and omissions of a Selected
Foreign Sub-Custodian constituting negligence or willful misconduct in the
conduct of its responsibilities under the terms of a Foreign Sub-Custodian
Agreement.
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The Bank will be under no duty or obligation to inquire into and will
not be liable for:
(a) the validity of the issue of any Portfolio Securities
purchased by or for the Fund, the legality of the purchases thereof or the
propriety of the price incurred therefor;
(b) the legality of any sale of any Portfolio Securities
by or for the Fund or the propriety of the amount for which the same are sold;
(c) the legality of an issue or sale of any common
shares of the Fund or the sufficiency of the amount to be received therefor;
(d) the legality of the repurchase of any common shares
of the Fund or the propriety of the amount to be paid therefor;
(e) the legality of the declaration of any dividend by the
Fund or the legality of the distribution of any Portfolio Securities as payment
in kind of such dividend; and
(f) any property or moneys of the Fund unless and until
received by it, and any such property or moneys delivered or paid by it
pursuant to the terms hereof.
Moreover, the Bank will not be under any duty or obligation to
ascertain whether any Portfolio Securities at any time delivered to or held by
it for the account of the Fund are such as may properly be held by the Fund
under the provisions of its Articles, By-laws, any federal or state statutes or
any rule or regulation of any governmental agency.
Notwithstanding anything in this Agreement to the contrary, in no
event shall the Bank be liable hereunder or to any third party for any losses
or damages of any kind resulting from acts of God, earthquakes, fires, floods,
storms or other disturbances of nature, epidemics, strikes, riots,
nationalization, expropriation, currency restrictions, acts of war, civil war
or terrorism, insurrection, nuclear fusion, fission or radiation, the
interruption, loss or malfunction of utilities, transportation, or computers
(hardware or software) and computer facilities, the unavailability of energy
sources and other similar happenings or events except as results from the
Bank's own negligence;
12.2 Agents and Subcustodians with Respect to Property of
the Fund Held in the United States. The Bank may employ agents in the
performance of its duties hereunder and shall be responsible for the acts and
omissions of such agents and sub-custodians as if performed by the Bank
hereunder.
Upon receipt of Proper Instructions, the Bank may employ
sub-custodians, provided that any such sub-custodian meets at least the minimum
qualifications required by Section 17(f)(1) of the 1940 Act to act as a
custodian of the Fund's assets with respect to property of the Fund held in the
United States. The Bank shall have no liability to the Fund or any other
person by reason of any act or omission of any such sub-custodian and the Fund
shall indemnify the Bank and hold it harmless from and against any and all
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<PAGE> 20
actions, suits and claims, arising directly or indirectly out of the
performance of any sub-custodian. Upon request of the Bank, the Fund shall
assume the entire defense of any action, suit, or claim subject to the
foregoing indemnity. The Fund shall pay all fees and expenses of any
sub-custodian.
12.3 Duties of the Bank with Respect to Property of the
Fund Held Outside of the United States.
(a) Appointment of Foreign Sub-Custodians. The
Fund hereby authorizes and instructs the Bank to employ as sub-custodians for
the Fund's Portfolio Securities and other assets maintained outside the United
States the foreign banking institutions and foreign securities depositories
designated on the Schedule attached hereto (each, a "Selected Foreign
Sub-Custodian"). Upon receipt of Proper Instructions, together with a
certified resolution of the Fund's Board of Directors, the Bank and the Fund
may agree to designate additional foreign banking institutions and foreign
securities depositories to act as Selected Foreign Sub-Custodians hereunder
provided that any such institution shall constitute an "eligible foreign
custodian" within the meaning of Rule l7f-5 under the 1940 Act. Upon receipt
of Proper Instructions, the Fund may instruct the Bank to cease the employment
of any one or more such Selected Foreign Sub-Custodians for maintaining custody
of the Fund's assets, and the Bank shall so cease to employ such sub-custodian
as soon as alternate custodial arrangements have been implemented.
(b) Foreign Securities Depositories. The Bank
may authorize one or more of the Selected Foreign Sub-Custodians to use the
facilities of one or more foreign central securities depositories or clearing
agencies provided that any such organization shall constitute an "eligible
foreign custodian". Where the Fund's securities are deposited in a securities
depository, the Selected Foreign Sub-Custodian shall identify as belonging to
such Selected Foreign Sub-Custodian as agent for the customer a quantity of
securities in a fungible bulk of securities shown in such sub-custodian's
account on the books of such securities depository. Notwithstanding the
foregoing, except as may otherwise be agreed upon in writing by the Bank and
the Fund, the Fund authorizes the deposit in Euro-clear, the securities
clearance and depository facilities operated by Morgan Guaranty Trust Company
of New York in Brussels, Belgium, of Foreign Portfolio Securities eligible for
deposit therein and to utilize such securities depository in connection with
settlements of purchases and sales of securities and deliveries and returns of
securities, until notified to the contrary pursuant to subparagraph (a)
hereunder.
(c) Segregation of Securities. The Bank shall
identify on its books as belonging to the Fund the Foreign Portfolio Securities
held by each Selected Foreign Sub-Custodian. Each agreement pursuant to which
the Bank employs a foreign banking institution shall require that such
institution establish a custody account for the Bank and hold in that account,
Foreign Portfolio Securities and other assets of the Fund, and, in the event
that such institution deposits Foreign Portfolio Securities in a foreign
securities depository, that it shall identify on its books as belonging to the
Bank the securities so deposited. Each Selected Foreign Sub-Custodian shall
hold securities of the Fund which
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<PAGE> 21
are not held in a securities depository physically segregated at all times from
those of such Selected Foreign Sub-Custodian and shall identify as belonging to
such Selected Foreign Sub-Custodian as agent for the customer.
(d) Agreements with Foreign Banking Institutions.
Each of the agreements pursuant to which a foreign banking institution holds
assets of the Fund (each, a "Foreign Sub-Custodian Agreement") shall be
substantially in the form previously made available to the Fund and shall
provide provisions conforming to paragraph (a)(i)(iii) of Rule 17f-5 under the
1940 Act (or any successor provision of like import) that: (a) the Fund's
assets will not be subject to any right, charge, security interest, lien or
claim of any kind in favor of the foreign banking institution or its creditors
or agent, except a claim of payment for their safe custody or administration
(including, without limitation, any fees or taxes payable upon transfers or
reregistration of securities); (b) beneficial ownership of the Fund's assets
will be freely transferable without the payment of money or value other than
for custody or administration (including, without limitation, any fees or taxes
payable upon transfers or reregistration of securities); (c) adequate records
will be maintained identifying the assets as belonging to Bank; (d) officers of
or auditors employed by, or other representatives of the Bank, including to the
extent permitted under applicable law, the independent public accountants for
the Fund, will be given access to the books and records of the foreign banking
institution relating to its actions under its agreement with the Bank; and (e)
assets of the Fund held by the Selected Foreign Sub-Custodian will be subject
only to the instructions of the Bank or its agents. The Bank represents that
as of the date of this Agreement to the best of its knowledge, after due
inquiry, each of the sub-custodians and securities depositories listed on the
Schedule attached hereto is an "eligible foreign custodian" or an overseas
branch of a "Qualified U.S. Bank", each as defined by Rule 17f-5 under the Act.
The Bank agrees that it shall not amend any sub-custodial agreement in a
manner which would cause the Fund to be in violation of Rule 17f-5 under the
Act and agrees to give the Fund 30 days prior written notice of any amendment
which materially affects the Fund's rights.
(e) Access of lndependent Accountants of the
Fund. Upon request of the Fund, the Bank will use its best efforts to arrange
for the independent accountants of the Fund to be afforded access to the books
and records of any foreign banking institution employed as a Selected Foreign
Sub-Custodian insofar as such books and records relate to the performance of
such foreign banking institution under its Foreign Sub-Custodian Agreement.
(f) Reports by Bank. The Bank will supply to the
Fund periodic statements as the Fund shall reasonably request in respect of the
securities and other assets of the Fund held by Selected Foreign
Sub-Custodians, including but not limited to an identification of entities
having possession of the Foreign Portfolio Securities and other assets of the
Fund and shall furnish to the Fund such notices of transfers of securities,
deposits or other assets to or from the Fund's account by any Selected Foreign
Sub-Custodian as the Fund shall request.
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<PAGE> 22
(g) Transactions in Foreign Custody Account.
Transactions with respect to the assets of the Fund held by a Selected Foreign
Sub-Custodian shall be effected pursuant to Proper Instructions from the Fund
to the Bank and shall be effected in accordance with the applicable Foreign
Sub-Custodian Agreement. If at any time any Foreign Portfolio Securities shall
be registered in the name of the nominee of the Selected Foreign Sub-Custodian,
the Fund agrees to hold any such nominee harmless from any liability by reason
of the registration of such securities in the name of such nominee.
Notwithstanding any provision of this Agreement to the contrary,
settlement and payment for Foreign Portfolio Securities received for the
account of the Fund and delivery of Foreign Portfolio Securities maintained for
the account of the Fund may be effected in accordance with the customary
established securities trading or securities processing practices and
procedures in the jurisdiction or market in which the transaction occurs,
including, without limitation, delivering securities to the purchaser thereof
or to a dealer therefor (or an agent for such purchaser or dealer) against a
receipt with the expectation of receiving later payment for such securities
from such purchaser or dealer.
In connection with any action to be taken with respect to the Foreign
Portfolio Securities held hereunder, including, without limitation, the
exercise of any voting rights, subscription rights, redemption rights, exchange
rights, conversion rights or tender rights, or any other action in connection
with any other right, interest or privilege with respect to such Securities
(collectively, the "Rights"), the Bank shall promptly transmit to the Fund such
information in connection therewith as is made available to the Bank by the
Foreign Sub-Custodian, and shall promptly forward to the applicable Foreign
Sub-Custodian any instructions, forms or certifications with respect to such
Rights, and any instructions relating to the actions to be taken in connection
therewith, as the Bank shall receive from the Fund pursuant to Proper
Instructions. Notwithstanding the foregoing, the Bank shall have no further
duty or obligation with respect to such Rights, including, without limitation,
the determination of whether the Fund is entitled to participate in such Rights
under applicable U.S. and foreign laws, or the determination of whether any
action proposed to be taken with respect to such Rights by the Fund or by the
applicable Foreign Sub-Custodian will comply with all applicable terms and
conditions of any such Rights or any applicable laws or regulations, or market
practices within the market in which such action is to be taken or omitted.
(h) Liability of Selected Foreign Sub-Custodians.
Each Foreign Sub-Custodian Agreement with a foreign banking institution shall
require the institution to exercise reasonable care in the performance of its
duties and to indemnify, and hold harmless, the Bank and each Fund from and
against certain losses, damages, costs, expenses, liabilities or claims arising
out of or in connection with the institution's performance of such obligations,
all as set forth in the applicable Foreign Sub-Custodian Agreement. The Fund
acknowledges that the Bank, as a participant in Euro-clear, is subject to the
Terms and Conditions Governing the Euro-Clear System, a copy of which has been
made available to the Fund. The Fund acknowledges that pursuant to such Terms
and Conditions, Morgan Guaranty Brussels shall have the sole right to exercise
or assert any and all rights or claims in respect of actions or omissions of,
or the bankruptcy
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or insolvency of, any other depository, clearance system or custodian utilized
by Euroclear in connection with the Fund's securities and other assets.
(i) Liability of Bank. It is understood by both
parties that the use of any such sub-custodian will not effect any of the
Bank's responsibilities to the Fund under this Agreement and that the Custodian
shall be liable for the acts and omissions of each sub-custodian constituting
negligence or willful misconduct in the conduct of its responsibilities under
the terms of the Sub-custodian agreement. The Bank shall not be liable for any
loss, damage, cost, expense, liability or claim resulting from nationalization,
expropriation, currency restrictions, or acts of war or terrorism, political
risk (including, but not limited to, exchange control restrictions,
confiscation, insurrection, civil strife or armed hostilities) other losses due
to Acts of God, nuclear incident or any loss where the Selected Foreign Sub-
Custodian has otherwise exercised reasonable care.
The Bank shall advise the Fund promptly if it learns that any foreign
agent or subcustodian no longer constitutes an "eligible foreign custodian" and
of any failure by any Selected Foreign Sub-Custodian to observe any "material
term" of its appointment within the meaning of Rule l7f-5 under the 1940 Act.
(j) Monitoring Responsibilities. The Bank shall
furnish annually to the Fund, information concerning the Selected Foreign
Sub-Custodians employed hereunder for use by the Fund in evaluating such
Selected Foreign Sub-Custodians to ensure compliance with the requirements of
Rule 17f-5 of the Act. In addition, the Bank will promptly inform the Fund in
the event that the Bank is notified by a Selected Foreign Sub-Custodian that
there appears to be a substantial likelihood that its shareholders' equity will
decline below $200 million (U.S. dollars or the equivalent thereof) or that its
shareholders' equity has declined below $200 million (in each case computed in
accordance with generally accepted U.S. accounting principles) or any other
capital adequacy test applicable to it by exemptive order, or if the Bank has
actual knowledge of any material loss of the assets of the Fund held by a
Foreign Sub-Custodian.
In the event that any Selected Foreign Sub-Custodian fails to perform
any of its obligations under the terms of its appointment, the Bank shall use
its best efforts to cause such foreign sub-custodian to perform such
obligations and shall notify the Fund as promptly as practicable of any failure
of a sub-custodian to perform its obligations in any material respect. At the
written request of the Fund, the Custodian shall use its best efforts to assert
and collect any claim for liability for any loss or damage incurred by the Fund
arising out of the failure of any such sub-custodian to perform such
obligations. At the election of the Fund, it shall have the right to enforce,
to the extent permitted by the sub-custodian agreement and applicable law, the
Custodian's rights against any such subcustodian for loss of damage caused by
the Fund by such sub-custodian. All the written request of the Fund, the
Custodian will terminate any sub-custodian in accordance with the termination
provisions under the applicable sub-custodian agreement. The Custodian will
not amend any sub-custodian agreement in any way which materially adversely
affects the custody of the Fund's assets, except upon the prior approval of the
Fund.
(k) Tax Law. The Bank shall have no
responsibility or liability for any obligations now or hereafter imposed on the
Fund or the Bank as custodian of the Fund by
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<PAGE> 24
the tax laws of any jurisdiction, and it shall be the responsibility of the
Fund to notify the Bank of the obligations imposed on the Fund or the Bank as
the custodian of the Fund by the tax law of any non-U.S. jurisdiction,
including responsibility for withholding and other taxes, assessments or other
governmental charges, certifications and governmental reporting. The sole
responsibility of the Bank with regard to such tax law shall be to use
reasonable efforts to assist the Fund with respect to any claim for exemption
or refund under the tax law of jurisdictions for which the Fund has provided
such information.
12.4 Insurance. The Bank shall use the same care with
respect to the safekeeping of Portfolio Securities and cash of the Fund held by
it as it uses in respect of its own similar property but it need not maintain
any special insurance for the benefit of the Fund.
12.5. Fees and Expenses of Bank. The Fund will pay or
reimburse the Bank from time to time for any transfer taxes payable upon
transfer of Portfolio Securities made hereunder, and for all necessary proper
disbursements, expenses and charges made or incurred by the Bank in the
performance of this Agreement (including any duties listed on any Schedule
hereto, if any) including any indemnities for any loss, liabilities or expense
to the Bank as provided above. For the services rendered by the Bank
hereunder, the Fund will pay to the Bank such compensation or fees at such rate
and at such times as shall be agreed upon in writing by the parties from time
to time. The Bank will also be entitled to reimbursement by the Fund for all
reasonable expenses incurred in conjunction with termination of this Agreement
by the Fund.
12.6 Advances by Bank. The Bank may, in its sole
discretion, advance funds on behalf of the Fund to make any payment permitted
by this Agreement upon receipt of any proper authorization required by this
Agreement for such payments by the Fund. Should such a payment or payments,
with advanced funds, result in an overdraft (due to insufficiencies of the
Fund's account with the Bank, or for any other reason) this Agreement deems any
such overdraft or related indebtedness, a loan made by the Bank to the Fund
payable on demand and bearing interest at the current rate charged by the Bank
for such loans unless the Fund shall provide the Bank with agreed upon
compensating balances. The Fund agrees that the Bank shall have a continuing
lien and security interest to the extent of any overdraft or indebtedness, in
and to any property at any time held by it for the Fund's benefit or in which
the Fund has an interest and which is then in the Banks possession or control
(or in the possession or control of any third party acting on the Bank's
behalf). The Fund authorizes the Bank, in its sole discretion, at any time to
charge any overdraft or indebtedness, together with interest due thereon
against any balance of account standing to the credit of the Fund on the Bank's
books.
13. Termination.
(a) This Agreement may be terminated at any time without
penalty upon sixty days written notice delivered by either party to the other
by means of registered mail, and upon the expiration of such sixty days this
Agreement will terminate; provided,
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<PAGE> 25
however, that the effective date of such termination may be postponed to a date
not more than ninety days from the date of delivery of such notice (i) by the
Bank in order to prepare for the transfer by the Bank of all of the assets of
the Fund held hereunder, and (ii) by the Fund in order to give the Fund an
opportunity to make suitable arrangements for a successor custodian. At any
time after the termination of this Agreement, the Fund will, at its request,
have access to the records of the Bank relating to the performance of its
duties as custodian.
(b) In the event of the termination of this Agreement,
the Bank will immediately upon receipt or transmittal, as the case may be, of
notice of termination, commence and prosecute diligently to completion the
transfer of all cash and the delivery of all Portfolio Securities duly endorsed
and all records maintained under Section 11 to the successor custodian when
appointed by the Fund. The obligation of the Bank to deliver and transfer over
the assets of the Fund held by it directly to such successor custodian will
commence as soon as such successor is appointed and win continue until
completed as aforesaid. If the Fund does not select a successor custodian
within ninety (90) days from the date of delivery of notice of termination the
Bank may, subject to the provisions of subsection 13(c), deliver the Portfolio
Securities and cash of the Fund held by the Bank to a bank or trust company of
its own selection which meets the requirements of Section 17(f)(1) of the 1940
Act and has a reported capital, surplus and undivided profits aggregating not
less than $2,000,000, to be held as the property of the Fund under terms
similar to those on which they were held by the Bank, whereupon such bank or
trust company so selected by the Bank will become the successor custodian of
such assets of the Fund with the same effect as though selected by the Board.
(c) Prior to the expiration of ninety (90) days after
notice of termination has been given, the Fund may furnish the Bank with an
order of the Fund advising that a successor custodian cannot be found willing
and able to act upon reasonable and customary terms and that there has been
submitted to the shareholders of the Fund the question of whether the Fund will
be liquidated or will function without a custodian for the assets of the Fund
held by the Bank. In that event the Bank will deliver the Portfolio Securities
and cash of the Fund hold by it, subject as aforesaid, in accordance with one
of such alternatives which may be approved by the requisite vote of
shareholders, upon receipt by the Bank of a copy of the minutes of the meeting
of shareholders at which action was taken, certified by the Fund's Secretary
and an opinion of counsel to the Fund in form and content satisfactory to the
Bank.
14. Confidentiality. Both parties hereto agree than any
non-public information obtained hereunder concerning the other party is
confidential and may not be disclosed to any other person without the consent
of the other party, except as may be required by applicable law or at the
request of a governmental agency. The parties further agree that a breach of
this provision would irreparably damage the other party and accordingly agree
that each of them is entitled, without bond or other security, to an injunction
or injunctions to prevent breaches of this provision.
22
<PAGE> 26
15. Notices. Any notice or other instrument in writing authorized
or required by this Agreement to be given to either party hereto will be
sufficiently given if addressed to such party and mailed or delivered to it at
its office at the address set forth below; namely:
(a) In the case of notices sent to the Fund to:
Salomon Brothers Institutional Series Funds Inc
c/o Salomon Brothers
7 World Trade Center
NY, NY 10048
Attention: Alan Mandel
(b) In the case of notices sent to the Bank to:
Investors Bank & Trust Company
89 South Street
Boston, Massachusetts 02111
Attention: Henry Joyce
or at such other place as such party may from time to time designate
in writing.
16. Amendments. This Agreement may not be altered or amended,
except by an instrument in writing, executed by both parties, and in the case
of the Fund, such alteration or amendment will be authorized and approved by
its Board.
17. Parties. This Agreement will be binding upon and shall inure
to the benefit of the parties hereto and their respective successors and
assigns; provided, however, that this Agreement will not be assignable by the
Fund without the written consent of the Bank or by the Bank without the written
consent of the Fund, authorized and approved by its Board; and provided further
that termination proceedings pursuant to Section 13 hereof will not be deemed
to be an assignment within the meaning of this provision.
18. Governing Law. This Agreement and all performance hereunder
will be governed by the laws of the Commonwealth of Massachusetts.
19. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but such
counterparts shall, together, constitute only one instrument.
23
<PAGE> 27
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their respective officers thereunto duly authorized as of the
day and year first written above.
SALOMON BROTHERS
INSTITUTIONAL SERIES FUNDS INC
By:
---------------------------------
Name:
Title:
ATTEST:
----------------------------
INVESTORS BANK & TRUST COMPANY
By:
---------------------------------
Name:
Title:
ATTEST:
----------------------------
DATE:
------------------------------
24
<PAGE> 28
APPENDIX A
DATED APRIL 1, 1996
to
CUSTODY AGREEMENT
between
SALOMON BROTHERS INSTITUTIONAL SERIES FUNDS INC
and
INVESTORS BANK & TRUST COMPANY
Salomon Brothers Institutional High Yield Bond Fund
Salomon Brothers Institutional Emerging Market Debt Fund
Salomon Brothers Institutional Asia Growth Fund
Salomon Brothers Institutional Money Market Fund
25
<PAGE> 1
Exhibit 9(a)
TRANSFER AGENCY AND SERVICE AGREEMENT
among
SALOMON BROTHERS INSTITUTIONAL SERIES FUNDS INC
SALOMON BROTHERS SERIES FUNDS INC
and
INVESTORS BANK & TRUST COMPANY
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
o ARTICLE 1. Terms of Appointment; Duties of the Bank . . . . . . . . . . . . . . . . 1
o ARTICLE 2. Sale of Company Shares . . . . . . . . . . . . . . . . . . . . . . . . . 4
o ARTICLE 3. Returned Checks . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
o ARTICLE 4. Redemptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
o ARTICLE 5. Transfers and Exchanges . . . . . . . . . . . . . . . . . . . . . . . . 5
o ARTICLE 6. Right to Seek Assurances . . . . . . . . . . . . . . . . . . . . . . . . 5
o ARTICLE 7. Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
o ARTICLE 8. Other Duties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
o ARTICLE 9. Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
o ARTICLE 10. Books and Records . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
o ARTICLE 11. Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
o ARTICLE 12. Representations and Warranties of the Bank . . . . . . . . . . . . . . . 8
o ARTICLE 13. Representations and Warranties of the Company . . . . . . . . . . . . . 8
o ARTICLE 14. Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
o ARTICLE 15. Covenants of the Company and the Bank . . . . . . . . . . . . . . . . . 10
o ARTICLE 16. Term of Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
o ARTICLE 17. Additional Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
o ARTICLE 18. Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
o ARTICLE 19. Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
o ARTICLE 20. Massachusetts Law to Apply . . . . . . . . . . . . . . . . . . . . . . . . 13
o ARTICLE 21. Merger of Agreement and Severability . . . . . . . . . . . . . . . . . . . 13
o ARTICLE 22. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
o ARTICLE 23. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
</TABLE>
<PAGE> 4
TRANSFER AGENCY AND SERVICE AGREEMENT
AGREEMENT effective as of the ____ day of ____, 1996 among
Salomon Brothers Institutional Series Funds, Inc., a corporation organized
under the laws of the State of Maryland ("Institutional Series Funds"),
Salomon Brothers Series Funds Inc, a corporation organized under the laws of
Maryland ("Series Funds") (each, a "Company") and INVESTORS BANK & TRUST
COMPANY, a Massachusetts trust company (the "Bank").
WITNESSETH:
WHEREAS, the Bank is duly registered as a transfer agent as provided
in Section 17A(c) of the Securities Exchange Act of 1934, as amended, (the
"1934 Act");
WHEREAS, each Company is authorized to issue shares in separate series,
with each such series representing interests in a separate portfolio of
securities and other assets;
WHEREAS, each Company desires to appoint the Bank as its transfer
agent, dividend disbursing agent and agent in connection with certain other
activities, and the Bank desires to accept such appointment; with respect to
the series listed on Appendix A corresponding to each Company (such series,
together with all other series subsequently established by either Company and
made subject to this Agreement in acccordance with Article 17, being herein
referred to as the "Fund(s)");
NOW, THEREFORE, in consideration of the mutual covenants herein set
forth, the Company and the Bank agree as follows:
ARTICLE 1. Terms of Appointment: Duties of the Bank
1.01 Subject to the terms and conditions set forth in this
Agreement, each Company on behalf of their respective Funds, hereby employs and
appoints the Bank to act as, and the Bank agrees to act as, transfer agent for
each of the Fund(s)' authorized and issued shares of beneficial interest
("Shares"), dividend disbursing agent and agent in connection with any
accumulation, open-account or similar plans provided to the shareholders of the
Company ("Shareholders") and set out in the currently effective prospectus and
statement of additional information, as each may be amended from time to time,
(the "Prospectus") of the Company, including without limitation any periodic
investment plan or periodic withdrawal program.
1.02 The Bank agrees that it will perform the following services:
<PAGE> 5
(a) In connection with procedures established from time to time by
agreement between the Company and the Bank, the Bank shall:(i) Receive for
acceptance, orders for the purchase of Shares, and promptly deliver payment and
appropriate documentation therefor to the custodian of the Company appointed by
the Board of Directors of the Company (the "Custodian");
(ii) Pursuant to purchase orders, issue the appropriate
number of Shares and hold such Shares in the appropriate Shareholder account;
(iii) Receive for acceptance, redemption requests and
redemption directions and deliver the appropriate documentation therefor to the
Custodian;
(iv) At the appropriate time as and when it receives
monies paid to it by the Custodian with respect to any redemption, pay over or
cause to be paid over in the appropriate manner such monies as instructed by
the redeeming Shareholders;
(v) Effect transfers of Shares by the registered owners
thereof upon receipt of appropriate instructions;
(vi) Prepare and transmit payments for dividends and
distributions declared by the Company on behalf of a Fund; and
(vii) Create and maintain all necessary records including
those specified in Article 10 hereof, in accordance with all applicable laws,
rules and regulations, including but not limited to records required by Section
31(a) of the Investment Company Act of 1940, as amended (the "1940 Act"), and
those records pertaining to the various functions performed by it hereunder.
All records shall be available for inspection and use by the Company. Where
applicable, such records shall be maintained by the Bank for the periods and in
the places required by Rule 3la-2 under the 1940 Act.
(viii) Make available during regular business hours all
records and other data created and maintained pursuant to this Agreement for
reasonable audit and inspection by the Company, or any person retained by the
Company. Upon reasonable notice by the Company, the Bank shall make available
during regular business hours its facilities and premises employed in
connection with its performance of this Agreement for reasonable visitation by
the Company, or any person retained by the Company.
(ix) At the expense of and at the request of the Company,
the Bank shall maintain an adequate supply of blank share certificates for each
Fund providing for the issuance of certificates to meet the Bank's requirements
therefor. Such share certificates shall be property signed by facsimile. The
Company agrees that, notwithstanding the death, resignation, or removal of any
officer of the Company whose signature appears on such certificates, the Bank
may continue to countersign certificates which bear such signatures until
otherwise directed by the Company. Share certificates may be issued and
accounted for entirely by the Bank and do not require any third party registrar
or other endorsing party.
2
<PAGE> 6
(x) Issue replacement share certificates in lieu of
certificates which have been lost, stolen, mutilated or destroyed, without any
further action by the Board of Directors or any officer of the Company, upon
receipt by the Bank of properly executed affidavits and lost certificate bonds,
in form satisfactory to the Bank with the Company and the Bank as obligees
under the bond. At the discretion of the Bank, and at its sole risk, the Bank
may issue replacement certificates without requiring the affidavits and lost
certificate bonds described above and the Bank agrees to indemnify the Company
against any and all losses or claims which may arise by reason of the issuance
of such new certificates in the place of the ones allegedly lost, stolen or
destroyed.
(xi) Record the issuance of Shares of the Company and
maintain, pursuant to Rule 17Ad-10(e) under the 1934 Act, a record of the total
number of Shares of the Company which are authorized, based upon data provided
to it by the Company, and issued and outstanding. The Bank shall also provide
the Company on a regular basis with the total number of Shares which are
authorized and issued and outstanding and shall have no obligation, when
recording the issuance of Shares, to monitor the issuance of such Shares or to
take cognizance of any laws relating to the issue or sale of such Shares, which
functions shall be the sole responsibility of the Company.
(b) In addition to and not in lieu of the services set forth in
the above paragraph (a) or in any Schedule hereto, the Bank shall: (i) perform
all of the customary services of a transfer agent, dividend disbursing agent
and, as relevant, agent in connection with accumulation, open-account or
similar plans (including without limitation any periodic investment plan or
periodic withdrawal program); including but not limited to maintaining all
Shareholder accounts, preparing Shareholder meeting lists, mailing proxies,
receiving and tabulating proxies, mailing Shareholder reports and prospectuses
to current Shareholders, withholding taxes on all accounts, including
nonresident alien accounts, preparing and filing U.S. Treasury Department Forms
1099 and other appropriate forms required with respect to dividends and
distributions by federal authorities for all, Shareholders, preparing and
mailing confirmation form and statements of account to Shareholders for all
purchases and redemptions of Shares and other confirmable transactions in
Shareholder accounts, responding to Shareholder telephone calls and Shareholder
correspondence, preparing and mailing activity statements for Shareholders, and
providing Shareholder account information; and (ii) provide a system which will
enable the Company to monitor the total number of shares sold in each State.
The Company shall (i) identify to the Bank in writing those transactions and
assets to be treated as exempt from blue sky reporting for each State and (ii)
verify the establishment of transactions for each State on the system prior to
activation and thereafter monitor the daily activity for each State. The
responsibility of the Bank for a Fund's blue sky state registration status is
solely limited to the initial establishment of transactions subject to blue sky
compliance by such Fund(s) and the reporting of such transactions to the
Fund(s) as provided above.
(c) Additionally, the Bank shall utilize a system to identify all
share transactions which involve purchase and redemption orders that are
processed at a time other than the time of
3
<PAGE> 7
the computation of net asset value per share next computed after receipt of
such orders, and shall compute the net effect upon the Fund(s) of such
transactions so identified on a daily and cumulative basis.
ARTICLE 2. Sale of Company Shares
2.01 Whenever the Company shall sell or cause to be sold any Shares
of a Fund, the Company shall deliver or cause to be delivered to the Bank a
document duly specifying: (i) the name of the Fund whose Shares were sold; (ii)
the number of Shares sold, trade date, and price; (iii) the amount of money to
be delivered to the Custodian for the sale of such Shares and specifically
allocated to such Fund; and (iv) in the case of a new account, a new account
application or sufficient information to establish an account.
2.02 The Bank will, upon receipt by it of a check or other payment
identified by it as an investment in Shares of one of the Funds and drawn or
endorsed to the Bank as agent for, or identified as being for the account of,
one of the Funds, promptly deposit such check or other payment to the
appropriate account postings necessary to reflect the investment. The Bank
will notify the Company, or its designee, and the Custodian of all purchases
and related account adjustments.
2.03 Under procedures as established by mutual agreement between
the Company and the Bank, the Bank shall issue to the purchaser or his
authorized agent such Shares, computed to the nearest three decimal points, as
he is entitled to receive, based on the appropriate net asset value of the
Funds' Shares, determined in accordance with the prospectus and applicable
Federal law or regulation. In issuing Shares to a purchaser or his authorized
agent, the Bank shall be entitled to rely upon the latest directions, if any,
previously received by the Bank from the purchaser or his authorized agent
concerning the delivery of such Shares,
2.04 The Bank shall not be required to issue any Shares of the
Company where it has received a written instruction from the Company or written
notification from any appropriate Federal or State authority that the sale of
the Shares of the Fund(s) in question has been suspended or discontinued, and
the Bank shall be entitled to rely upon such written instructions or written
notification.
2.05 Upon the issuance of any Shares of any Fund(s) in accordance
with foregoing provisions of this Section, the Bank shall not be responsible
for the payment of any original issue or other taxes, if any, required to be
paid by the Company in connection with such issuance.
2.06 The Bank may establish such additional rules and regulations
governing the transfer or registration of Shares as it may deem advisable and
consistent with such rules and regulations generally adopted by transfer
agents, or with the written consent of the Company, any other rules and
regulations.
4
<PAGE> 8
ARTICLE 3. Returned Checks
3.01 In the event that any check or other order for the transfer of
money is returned unpaid for any reason, the Bank will take such steps as the
Bank may, in its discretion, deem appropriate to protect the Company from
financial loss or as the Company or its designee may instruct. Provided that
the standard procedures, as agreed upon from time to time, between the Company
and the Bank, regarding purchases and redemptions of Shares, are adhered to by
the Bank, the Bank shall not be liable for any loss suffered by a Fund as a
result of returned or unpaid purchase or redemption transactions. Legal or
other expenses incurred to collect amounts owed to a Fund as a consequence of
returned or unpaid purchase or redemption transactions shall be an expense of
that Fund.
ARTICLE 4. Redemptions
4.01 Shares of any Fund may be redeemed in accordance with the
procedures set forth in the Prospectus of the Company and the Bank will duly
process all redemption requests.
ARTICLE 5. Transfers and Exchanges
5.01 The Bank is authorized to review and process transfers of
Shares of each Fund, exchanges between Funds on the records of the Funds
maintained by the Bank, and exchanges between the Company and any other entity
as may be permitted by the Prospectus of the Company. If Shares to be
transferred are represented by outstanding certificates, the Bank will, upon
surrender to it of the certificates in proper form for transfer, and upon
cancellation thereof, countersign and issue new certificates for a like number
of Shares and deliver the same. If the Shares to be transferred are not
represented by outstanding certificates, the Bank will, upon an order therefor
by or on behalf of the registered holder thereof in proper form, credit the
same to the transferee on its books. If Shares are to be exchanged for Shares
of another Fund, the Bank will process such exchange in the same manner as a
redemption and sale of Shares, except that it may in its discretion waive
requirements for information and documentation.
ARTICLE 6. Right to Seek Assurances
6.01 The Bank reserves the right to refuse to transfer or redeem
Shares until it is satisfied that the requested transfer or redemption is
legally authorized, and it shall incur no liability for the refusal, in good
faith, to make transfers or redemptions which the Bank, in its judgment, deems
improper or unauthorized, or until it is satisfied that there is no basis for
any claims adverse to such transfer or redemption. The Bank may, in effecting
transfers, rely upon the provisions of the Uniform Act for the Simplification
of Fiduciary Security Transfers or the Uniform Commercial Code, as the same may
be amended from time to time, which protect it in not requiring certain
documents in connection with the transfer or redemption of Shares of any
5
<PAGE> 9
Fund, and Institutional Series Funds, only with respect to a Fund listed on
Appendix A as a series of that Company, and Series Funds, only with respect to
a Fund listed on Appendix A as a series of that Company, shall indemnify the
Bank for any act done or omitted by it in good faith reliance upon such laws;
provided that such indemnification shall only be available to the extent of the
applicable Fund's assets and shall not be paid from the assets of any other
Fund.
ARTICLE 7. Distributions
7.01 The Company will promptly notify the Bank of the declaration
of any dividend or distribution. The Company shall furnish to the Bank a
resolution of the Board of Directors of the Company certified by the Secretary
(a "Certificate"): (i) authorizing the declaration of dividends on a specified
periodic basis and authorizing the Bank to rely on oral instructions or a
Certificate specifying the date of the declaration of such dividend or
distribution, the date of payment thereof, the record date as of which
Shareholders entitled to payment shall be determined and the amount payable per
share to Shareholders of record as of the date and the total amount payable to
the Bank on the payment date; or (ii) setting forth the date of the declaration
of any dividend or distribution by a Fund, the date of payment thereof, the
record date as of which Shareholders entitled to payment shall be determined,
and the amount payable per share to the Shareholders of record as of that date
and the total amount payable to the Bank on the payment date.
7.02 The Bank, on behalf of the Company, shall instruct the
Custodian to place in a dividend disbursing account funds equal to the cash
amount of any dividend or distribution to be paid out. The Bank will
calculate, prepare and mail checks to (at the address as it appears on the
records of the Bank), or (where appropriate) credit such dividend or
distribution to the account of, Fund Shareholders, and maintain and safeguard
all underlying records.
7.03 The Bank will replace lost checks at its discretion and in
conformity with regular business practices.
7.04 The Bank will maintain all records necessary to reflect the
crediting of dividends which am reinvested in Shares of the Company, including
without limitation daily dividends.
7.05 The Bank shall not be liable for any improper payments made in
accordance with a resolution of the Board of Directors of the Company.
7.06 If the Bank shall not receive from the Custodian sufficient
cash to make payment to all Shareholders of the Company as of the record date,
the Bank shall, upon notifying the Company, withhold payment to all
Shareholders of record as of the record date until such sufficient cash is
provided to the Bank.
ARTICLE 8. Other Duties
8.01 In addition to the duties expressly provided for herein, the
Bank shall perform such other duties and functions and shall be paid such
amounts therefor as may from time to time be agreed to in writing.
6
<PAGE> 10
ARTICLE 9. Taxes
9.01 It is understood that the Bank shall file such appropriate
information returns concerning the payment of dividends and capital gain
distributions and tax withholding with the proper Federal, State and local
authorities as are required by law to be filed by the Company and shall
withhold such sums as are required to be withheld by applicable law.
ARTICLE 10. Books and Records
10.01 The Bank shall maintain confidential records showing for each
Shareholder's account the following: (i) names, addresses and tax
identification numbers; (ii) numbers of Shares held; (iii) historical
information (as available from prior transfer agents) regarding the account of
each Shareholder, including dividends paid and date and price of all
transactions on a Shareholder's account; (iv) any stop or restraining order
placed against a Shareholder's account; (v) information with respect to
withholdings; (vi) any capital gain or dividend reinvestment order, plan
application, dividend address and correspondence relating to the current
maintenance of a Shareholder's account; (vii) certificate numbers and
denominations for any Shareholders holding certificates; (viii) any information
required in order for the Bank to perform the calculations contemplated or
required by this Agreement; and (ix) such other information and data as may be
required by applicable law.
10.02 Any records required to be maintained by Rule 31a-1 under the
1940 Act will be preserved for the periods prescribed in Rule 31a-2 under the
1940 Act. Such records my be inspected by the Company at reasonable times. The
Bank may, at its option at any time, and shall forthwith upon the Company's
demand, turn over to the Company and cease to retain in the Bank's files,
records and documents created and maintained by the Bank in performance of its
service or for its protection. At the end of the six-year retention period,
such periods and documents will either be turned over to the Company, or
destroyed in accordance with the Company's authorization.
10.03 Procedures applicable to the services to be performed
hereunder may be established from time to time by agreement between the Fund(s)
and the Bank. The Bank shall have the right to utilize any shareholder
accounting and recordkeeping systems which, in its opinion, qualifies to
perform any services to be performed hereunder. The Bank shall keep records
relating to the services performed hereunder, in the form and manner as it may
deem advisable.
ARTICLE 11. Fees and Expenses,
11.01 For performance by the Bank pursuant to this Agreement, the
Fund(s) agree to pay the Bank an annual maintenance fee for each Shareholder
account as set out in the initial fee schedule attached hereto. Such fees and
out-of-pocket expenses and advances identified under Section 11.02 below may be
changed from time to time subject to mutual written agreement between the
Fund(s) and the Bank.
7
<PAGE> 11
11.02 In addition to the fee paid under Section 11.01 above, the
Fund(s) agree to reimburse the Bank for out-of-pocket expenses or advances
incurred by the Bank for the items set out in the fee schedule attached hereto.
In addition, any other expenses incurred by the Bank at the request or with the
consent of the Fund(s) including, without limitation, any equipment or supplies
specifically ordered by the Company or required to be purchased by the Company,
will be reimbursed by the Fund(s).
11.03 The Fund(s) agree to pay all fees and reimbursable expenses
within thirty days following the mailing of the respective billing notice.
Postage for mailing of dividends, proxies, Fund reports and other mailings to
all shareholder accounts shall be advanced to the Bank by the Fund(s) at least
seven (7) days prior to the mailing date of such material.
ARTICLE 12. Representations and Warranties of the Bank
The Bank represents and warrants to the Company that:
12.01 It is a trust company duly organized and existing and in good
standing under the laws of the Commonwealth of Massachusetts.
12.02 It is empowered under applicable laws and by its charter and
by-laws to enter into and perform this Agreement.
12.03 All requisite corporate proceedings have been taken to
authorize it to enter into and perform this Agreement.
12.04 It has and will continue to have access to the necessary
facilities, equipment and personnel to perform its duties and obligations under
this Agreement.
12.05 The various procedures and systems which it has implemented
with regard to safeguarding from loss or damage attributable to fire, theft or
any other cause, each Company's blank checks, records and other data and the
Bank's records, data, equipment facilities and other property used in the
performance of its obligations hereunder are adequate and that it will make
such changes herein from time to time as are required for the secure
performance of its obligations hereunder.
ARTICLE 13. Representations and Warranties of the Company
The Company represents and warrants to the Bank that:
13.01 It is a corporation duly organized and existing and in good
standing under the laws of the State of its incorporation as set forth in the
preamble hereto.
13.02 It is empowered under applicable laws and by its charter
documents and by-laws to enter into and perform this Agreement.
13.03 All proceedings required by said charter documents and by-laws
have been taken to authorize it to enter into and perform this Agreement.
13.04 It is an open-end investment company registered under the 1940
Act.
13.05 A registration statement on Form N-lA (including a prospectus
and statement of additional information) under the Securities Act of 1933 and
the 1940 Act is currently
8
<PAGE> 12
effective and will remain effective, and appropriate state securities law
filings have been made and will continue to be made, with respect to all Shares
of the Company being offered for sale.
13.06 When Shares are hereafter issued in accordance with the terms
of the Prospectus, such Shares shall be validly issued, fully paid and
nonassessable by the Fund(s).
ARTICLE 14. Indemnification
14.01 Except as set forth in subparagraph (e) hereof, the Bank shall
not be responsible for, and Instituitional Series Funds, only with respect to a
Fund listed on Appendix A as a series of that Company and only from the assets
of the applicable Fund, and Series Funds, only with respect to a Fund listed on
Appendix A as a series of that Company and only from the assets of the
applicable Fund, shall indemnify and hold the Bank harmless from and against,
any and all losses, damages, costs, charges, counsel fees, payments, expenses
and liability arising out of or attributable to:
(a) All actions taken or omitted to be taken by the Bank or its
agent or subcontractors in good faith in reliance on or use by the Bank or its
agents or subcontractors of information, records and documents which (i) are
received by the Bank or its agents or subcontractors and furnished to it by or
on behalf of a Fund and (ii) have been prepared and/or maintained by the
Fund or any other person or firm on behalf of a Fund, and (iii) were
received by the Bank or its agents or subcontractors from a prior transfer
agent.
(b) Any action or failure or omission to act by a Fund as a
result of such Fund's lack of good faith, negligence or willful misconduct.
(d) The reliance on, or the carrying out by the Bank or its agents
or subcontractors of any instructions or requests, whether written or oral, of
a Fund.
(c) The offer or sale of Shares by a Fund in violation of any
requirement under the federal securities laws or regulations or the securities
laws or regulations of any State that such Shares be registered in such State
or in violation of any stop order or other determination or ruling by any
federal agency or any State with respect to the offer or sale of such Shares in
such state.
(e) In addition to any other limitation provided herein, or by
law, indemnification under this Agreement shall not apply to actions or
omissions of the Bank or its directors, officers, employees, agents or
subcontractors in cases of its or their own gross negligence, willful
misconduct bad faith, reckless disregard of its duties or their own duties
hereunder, knowing violation of law or fraud.
9
<PAGE> 13
14.02 The Bank shall indemnify and hold the Fund(s) harmless from
and against any and all losses, damages, costs, charges, counsel fees,
payments, expenses and liability arising out of or attributed to any action or
failure or omission to act by the Bank as a result of the Bank's lack of good
faith, negligence, willful misconduct, knowing violation of law or fraud.
14.03 At any time the Bank may apply to any officer of the
applicable Company for instructions with respect to any matter arising in
connection with the services to be performed by the Bank under this
Agreement for a Fund, and the Bank and its agents or subcontractors shall not
be liable and shall be indemnified by the applicable Company for any action
taken or omitted by it in good faith reliance upon such instructions except for
a knowing violation of law. The Bank, its agents and subcontractors shall be
protected and indemnified by Institutional Series Funds, only with respect to a
Fund listed on Appendix A as a series of that Company and only from the assets
of the applicable Fund, and Series Funds, only with respect to a Fund listed on
Appendix A as a series of that Company and only from the assets of the
applicable Fund, in acting upon any paper or document furnished on behalf of a
Fund, reasonably believed to be genuine and to have been signed by the proper
person or persons, or upon any instruction, information, data, records or
documents provided by a Fund, the Bank or its agents or subcontractors by
machine readable input, telex, CRT data entry or other similar means authorized
by the applicable Company, on behalf of that Fund, and shall not be held to
have notice of any change of authority of any person, until receipt of written
notice thereof from the applicable Company, on behalf of that Fund. The Bank,
its agents and subcontractors shall also be protected and indemnified by the
applicable Company only to the extent of the assets of the applicable Fund in
recognizing stock certificates of that Fund which are reasonably believed to
bear the proper manual or facsimile signatures of an officer of that Company,
and one proper countersignature of any former transfer agent or registrar, or
of a co-transfer agent or co-registrar.
14.04 In the event any party is unable to perform its obligations
under the terms of this Agreement because of acts of God, strikes, interruption
of electrical power or other utilities, equipment or transmission failure or
damage reasonably beyond its control, or other causes reasonably beyond its
control, such party shall not be liable to the others for any damages resulting
from such failure to perform or otherwise from such causes.
14.05 No party to any Agreement shall be liable to the other
parties for consequential damages under any provision of this Agreement or for
any act or failure to act hereunder as contemplated by this Agreement.
14.06 In order that the indemnification provisions contained in this
Article 14 shall apply, upon the assertion of a claim for which a party may be
required to indemnify an other, the party seeking the indemnification shall
promptly notify the indemnifying party of such assertion, and shall keep the
other party advised with respect to all developments concerning such claim. The
party who may be required to indemnify shall have the option to participate
with the party seeking indemnification in the defense of such claim. The party
seeking indemnification shall in no case confess any claim or make any
compromise in any case in which the other party may be required to indemnify it
except with the other party's prior written consent, which consent shall not be
unreasonably withheld.
ARTICLE 15. Covenants of the Company and the Bank
15.01 The Company shall promptly furnish to the Bank the following:
10
<PAGE> 14
(a) A certified copy of the resolution of the Directors of the
Company authorizing the appointment of the Bank and the execution and delivery
of this Agreement.
(b) A copy of the charter documents and by-laws of the Company and
all amendments thereto.
(c) Copies of each vote of the Directors designating authorized
persons to give instructions to the Bank, and a Certificate providing specimen
signatures for such authorized persons.
(d) Certificates as to any change in any officer or Director of
the Company.
(e) If applicable a specimen of the certificate of Shares in each
Fund of the Company in the form approved by the Directors, with a Certificate
as to such approval.
(f) Specimens of all new certificates for Shares, accompanied by
the Directors' resolutions approving such forms.
(g) All account application forms and other documents relating to
shareholder accounts or relating to any plan, program or service offered by the
Company.
(h) A list of all Shareholders of the Fund(s) with the name,
address and tax identification number of each Shareholder, and the number of
Shares of the Fund(s) held by each, certificate numbers and denominations (if
any certificates have been issued), lists of any account against which stops
have been placed, together with the reasons for said stops, and the number of
Shares redeemed by the Fund(s).
(i) An opinion of counsel for the Company with respect to the
validity of the Shares and the status of such Shares under the Securities Act
of 1933.
(j) Copies of the Fund(s) registration statement on Form N-1A as
amended and declared effective by the Securities and Exchange Commission and
all post-effective amendments thereto.
(k) Such other certificates, documents or opinions as may mutually
be deemed necessary or appropriate for the Bank in the proper performance of
its duties.
15.02 The Bank hereby agrees to establish and maintain facilities
and procedures reasonably acceptable to the Company for safekeeping of stock
certificates, check forms and facsimile signature imprinting devices, if any;
and for the preparation or use, and for keeping account of, such certificates,
forms and devices.
15.03 The Bank shall keep records relating to the services to be
performed under, in the form and manner as it may deem advisable. To the
extent required by Section 31 of the
11
<PAGE> 15
1940 Act and the Rules thereunder, the Bank agrees that all such records
prepared or maintained by the Bank relating to the services to be performed by
the Bank hereunder are the confidential property of the Company and will be
preserved, maintained and made available in accordance with such Section and
Rules, and will be surrendered to the Company on and in accordance with its
request.
15.04 The Bank and the Company agree that all books, records,
information and data pertaining to the business of the other party which are
exchanged or received pursuant to the negotiation or the carrying out of this
Agreement shall remain confidential, and shall not be voluntarily disclosed to
any other person, except as may be required by law.
15.05 In case of any requests or demands for the inspection of the
Shareholder records of the Company, the Bank will endeavor to notify the
Company and to secure instructions from an authorized officer of the Company as
to such instruction. The Bank reserves the right, however, to exhibit the
Shareholder records to any person whenever it is advised by its counsel that it
may be held liable for the failure to exhibit the Shareholder records to such
person.
ARTICLE 16. Term of Agreement
16.01 This Agreement shall become effective on the date hereof (the
"Effective Date") and shall continue in effect for twelve months from the
Effective Date ( the "Initial Term") and from year to year thereafter with
respect to each Fund, provided that subsequent to the Initial Term, this
Agreement may be terminated by Institutional Series Funds, on behalf of a Fund
listed on Appendix A as a series of that Company, Series Funds, on behalf of a
Fund listed on Appendix A as a series of that Company, or the Bank, with
respect to a Fund, at any time without payment of any penalty upon ninety (90)
days written notice to the other. In the event such notice is given by a
Company, it shall be accompanied by a resolution of the Board of Directors,
certified by the Secretary, electing to terminate this Agreement.
16.02 Should either Company exercise its right to terminate with
respect to a Fund, all out-of-pocket expenses associated with the movement of
records and material will be borne by the Company. Nevertheless, the Bank will
consult with the applicable Company regarding the movement of records and
materials. Additionally, the Bank reserves the right to charge the applicable
Fund for any other reasonable expenses associated with such termination.
ARTICLE 17. Additional Funds
17.01 In the event that the Company establishes one or more series
of Shares in addition to the initial series with respect to which it desires to
have the Bank render services as transfer agent under the term hereof, it shall
so notify the Bank in writing, and if the Bank agrees in writing to provide
such services, such series of Shares shall become a Fund hereunder.
ARTICLE 18. Assignment
12
<PAGE> 16
18.01 Except as provided in Section 18.03 below, neither this
Agreement nor any rights or obligations hereunder may be assigned by either
party without the written consent of the other party.
18.02 This Agreement shall inure to the benefit of and be binding
upon the parties and their respective permitted successors and assigns.
18.03 The Bank, may without further consent on the part of the
Company, subcontract for the performance of any of the services to be provided
hereunder to third parties, including any affiliate of the Bank, provided that
the Bank shall remain liable hereunder for any acts or omissions of any
subcontractor as if performed by the Bank.
ARTICLE 19. Amendment
19.01 This Agreement may be amended or modified by a written
agreement executed by both parties.
ARTICLE 20. Massachusetts Law to Apply
20.01 This Agreement shall be construed and the provisions thereof
interpreted under and in accordance with the laws of the Commonwealth of
Massachusetts.
ARTICLE 21. Merger of Agreement and Severability
21.01 This Agreement constitutes the entire agreement between the
parties hereto and supersedes any prior agreement with respect to the subject
hereof whether oral or written.
21.02 In the event any provision of this Agreement shall be held
unenforceable or invalid for any reason, the remainder of the Agreement shall
remain in full force and effect.
21.03 This Agreement may be executed in any number of counterparts,
each of which shall be deemed to be an original; but such counterparts shall
together, constitute only one instrument.
ARTICLE 22. Notices
22.01 Any notice or other instrument in writing authorized or
required by this Agreement to be given to either party hereto will be
sufficiently given if addressed to such party and mailed or delivered to it at
its office at the address set forth below:
For the Fund(s): Salomon Brothers Institutional Series Funds Inc
c/o Salomon Brothers
7 World Trade Center
New York, NY 10048
Attention: Alan Mandel
13
<PAGE> 17
For the Bank: Investors Bank & Trust Company
P.O. Box 1537
Boston, Massachusetts 02205-1537
Attention: Henry Joyce
ARTICLE 23. Miscellaneous
23.01 Notwithstanding anything in this Agreement to the contrary,
the respective responsibilities, obligations and duties of each Company relate
only to a Fund which is listed on Appendix A as a series of that Company and
not to any Fund which is a series of the other Company. Moreover, any amount
owing to the Bank under any provision of this Agreement with respect to a
particular Fund shall be paid by the Company only from the assets of that Fund
and not from the assets of any other Fund.
14
<PAGE> 18
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed in their names and on their behalf under their seals by and through
their duly authorized officers, as of the day and the year first above written.
Salomon Brothers
Institutional Series Funds Inc
By:
---------------------------------
Name:
Title:
ATTEST:
--------------------------
Investors Bank & Trust Company
By:
---------------------------------
Name:
Title:
ATTEST:
--------------------------
DATE:
----------------------------
<PAGE> 19
APPENDIX A
DATED APRIL 1, 1996
to
TRANSFER AGENCY AND SERVICE AGREEMENT
between
SALOMON BROTHERS INSTITUTIONAL SERIES FUNDS INC
and
INVESTORS BANK & TRUST COMPANY
Salomon Brothers Institutional High Yield Bond Fund
Salomon Brothers Institutional Emerging Market Debt Fund
Salomon Brothers Institutional Asia Growth Fund
Salomon Brothers Institutional Money Market Fund
<PAGE> 1
Exhibit 9(b)
ADMINISTRATION AND ACCOUNTING SERVICES AGREEMENT
between
SALOMON BROTHERS INSTITUTIONAL SERIES FUNDS INC
and
INVESTORS BANK & TRUST COMPANY
<PAGE> 2
ADMINISTRATION AND ACCOUNTING SERVICES AGREEMENT
THIS ADMINISTRATION AND ACCOUNTING SERVICES AGREEMENT is made as of
, 1996 by and between SALOMON BROTHERS INSTITUTIONAL SERIES
FUNDS INC, a corporation organized under the laws of the State of Maryland
(the "Fund"), and INVESTORS BANK & TRUST COMPANY, a Massachusetts trust company
("Investors Bank").
WHEREAS, the Fund is registered as an open-end management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act")
consisting of separate portfolios listed on Appendix A, attached hereto; and
WHEREAS, the Fund desires to retain Investors Bank to render certain
administrative services to the Fund and Investors Bank is willing to render such
services;
WITNESSETH:
NOW, THEREFORE, in consideration of the mutual covenants herein set
forth, it is agreed between the parties hereto as follows:
1. Definitions. Whenever used herein, the terms listed below will have
the following meaning:
(a) Authorized Person. Authorized Person will mean any of the
persons duly authorized to give Proper Instructions or otherwise act on behalf
of the Fund by appropriate resolution of the Board of Directors of the Fund.
(b) Proper Instructions. Proper Instructions shall mean
instructions (which may be continuing instructions) regarding Investors Bank's
duties hereunder signed or initialed by an Authorized Person. Oral
instructions will be considered Proper Instructions if Investors Bank
reasonably believes them to have been given by an Authorized Person. The Fund
shall cause all oral instructions to be promptly confirmed in writing.
Investors Bank shall act upon and comply with any subsequent Proper
Instructions which modifies a prior instruction and the sole obligation of
Investors bank with respect to any follow-up or confirmatory instruction, shall
be to make reasonable efforts to detect any discrepancy between the original
instruction and such confirmation and to report such discrepancy to the Fund.
Proper Instructions may include communication effected directly between
electromechanical or electronic devices as agreed upon by the parties hereto.
2. Delivery of Documents. The Fund has furnished or will furnish
Investors Bank with copies properly certified or authenticated of each of the
following:
<PAGE> 3
(a) Resolutions of the Fund's Board of Directors authorizing the
appointment of Investors Bank to provide certain administrative services to the
Fund and approving this Agreement;
(b) The Fund's incorporating documents filed with the state of
Maryland on and all amendments thereto (the "Articles");
(c) The Fund's by-laws and all amendments thereto (the "By-Laws");
(d) The Fund's agreements with all service providers which include
any investment advisory agreements, sub-investment advisory agreements, custody
agreements, distribution agreements and transfer agency agreements
(collectively, the "Agreements");
(e) The Fund's most recent Registration Statement on Form N-1A
(the "Registration Statement") under the Securities Act of 1933 and under the
1940 Act and all amendments thereto; and
(f) The Fund's most recent prospectus and statement of additional
information (the "Prospectus"); and
(g) Such other certificates, documents or opinions as may mutually
be deemed necessary or appropriate for Investors Bank in the proper performance
of its duties hereunder.
The Fund will immediately furnish Investors Bank with copies, properly
certified or authenticated, of all amendments of or supplements to the
foregoing. Furthermore, the Fund will notify Investors Bank as soon as
possible of any matter materially affecting the performance of Investors Bank
of its services under this Agreement.
3.(a) Duties of Administrator. Subject to the supervision and
direction of the Board of Directors of the Fund, Investors Bank, as
Administrator, will assist in supervising various aspects of the Fund's
administrative operations and undertakes to perform the following specific
services:
(i) Maintaining office facilities (which may be in the offices of
Investors Bank or a corporate affiliate);
(ii) Furnishing internal executive and administrative services and
clerical services;
(iii) Furnishing corporate secretarial services including
preparation and distribution of materials for Board of Directors meetings;
(iv) Accumulating information for and, subject to approval by the
Fund's treasurer and legal counsel, coordination of the preparation, filing,
printing and dissemination of reports to the Fund's shareholders of record and
the Securities and Exchange Commission ("SEC") including, but not necessarily
limited to, post-effective amendments to the Fund's registration statement,
annual reports, semiannual reports, Form N-SAR, 24f-2 notices and proxy
material;
2
<PAGE> 4
(v) Participating in the preparation and filing of various reports
or other documents required by federal, state and other applicable laws and
regulations, other than those filed or required to be filed by the Fund's
investment adviser or transfer agent:
(vi) Coordinating the preparation and filing of the Fund's tax
returns; and
(vii) Other services as may be detailed as an appendix to this
Agreement.
3.(b) Duties as Accounting Agent. Investors Bank as Accounting Agent
undertakes to perform the following specific services:
(i) Provide accounting and bookkeeping services, which includes
the maintenance of such accounts, books and records of the Fund as may be
required by Section 31(a) of the 1940 Act and the rules promulgated thereunder;
(ii) Computation and calculation of the net asset value of the
shares of the Fund as of the close of trading on the New York Stock Exchange on
each day on which said Exchange is open for unrestricted trading and as of such
other hours, if any, as may be authorized by the Fund. In computing the net
asset value hereunder, Investors Bank nay rely in good faith upon information
furnished to it by any Authorized Person in respect of (i) the manner of
accrual of the liabilities of the Fund and in respect of liabilities of the
Fund not appearing on its books of account kept by the Bank, (ii) reserves, if
any, authorized by the Fund or that no reserves have been authorized, (iii) the
source of the quotations to be used in computing the net asset value, (iv) the
value to be assigned to any security for which no price quotations are
available, and (v) the method of computation of the offering price on the basis
of the net asset value of the shares, and Investors Bank shall not be
responsible for any loss occasioned by such reliance or for any good faith
reliance on any quotations received from a source pursuant to (iii) above.
In performing all services under this Agreement, Investors Bank shall
act in conformity with the Fund's Articles and By-Laws and the 1940 Act, as the
same may be amended from time to time; and the investment objectives,
investment policies and other practices and policies set forth in the Fund's
Registration Statement, as the same may be amended from time to time.
Notwithstanding any item discussed herein, Investors Bank has no discretion
over the Fund's assets or choice of investments and cannot be held liable for
any problem relating to such investments.
4. Fees and Expenses.
(a) For the services to be rendered and the facilities to be
furnished by Investors Bank, as provided for in this Agreement, the Fund will
compensate Investors Bank in accordance with the fee schedule attached hereto.
Such fees do not include out-of-pocket disbursements (as delineated on the fee
schedule or other expenses with the prior approval of the Fund's management) of
the Administrator for which the Administrator shall be entitled to bill
separately.
(b) Investors Bank shall not be required to pay any expenses
incurred by the Fund.
3
<PAGE> 5
5. Limitation of Liability.
(a) Investors Bank, its directors, officers, employees and agents
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 performance of its obligations and
duties under this Agreement, except a loss resulting from willful misfeasance,
bad faith or gross negligence in the performance of such obligations and
duties, or by reason of its reckless disregard thereof.
(b) Investors Bank may apply to the Fund at any time for
instructions and may consult counsel for the Fund, or its own counsel, and with
accountants and other experts with respect to any matter arising in connection
with its duties hereunder, and Investors Bank shall not be liable or
accountable for any action taken or omitted by it in good faith in accordance
with such instruction, or with the opinion of such counsel, accountants, or
other experts. Investors Bank shall be protected in acting upon any document,
certificate or instrument which it reasonably believes to be genuine and to be
signed or presented by the proper person or persons. Investors Bank shall not
be held to have notice of any change of authority of any officers, employees,
or agents of the Fund until receipt of written notice thereof has been received
from the Fund.
(c) Notwithstanding anything in this Agreement to the contrary, in
no event shall Investors Bank be liable hereunder or to any third party for any
losses or damages of any kind resulting from acts of God, earthquakes, fires,
floods, storms or other disturbances of nature, epidemics, strikes, riots,
nationalization, expropriation, currency restrictions, acts of war, civil war
or terrorism, insurrection, nuclear fusion, fission or radiation, the
interruption, loss or malfunction of utilities, transportation, or computers
(hardware or software) and computer facilities, the unavailability of energy
sources and other similar happenings or events except as results from the
Bank's own gross negligence.
(d) Investors Bank shall not be liable for special, punitive or
consequential damages arising from the provisions of services hereunder, even
if Investors Bank has been advised of the possibility of such damages.
6. Termination of Agreement.
(a) This Agreement shall become effective on the date hereof and
shall remain in force unless terminated pursuant to the provisions of
subsection (b) of this Section 6.
(b) This Agreement may be terminated at any time after three years
from the date of this agreement, without payment of any penalty, upon 60 days
written notice, by vote of the holders of a majority of the outstanding voting
securities of the Fund, or by vote of a majority of the Board of Directors of
the Fund, or by Investors Bank.
7. Miscellaneous.
(a) Any notice or other instrument authorized or required by this
Agreement to be given in writing to the Fund or Investors Bank shall be
sufficiently given if addressed to that party and
4
<PAGE> 6
received by it at its office set forth below or at such other place as it may
from time to time designate in writing.
To the Fund: Salomon Brothers Institutional Series Funds Inc
c/o Salomon Brothers
World Trade Center
New York, NY 10048
Attention: Alan Mandel
To Investors Bank: Investors Bank & Trust Company
89 South Street
Boston, MA 02111
Attention: Henry Joyce
(b) This Agreement shall extend to and shall be binding upon the
parties hereto and their respective successors and assigns; provided, however,
that this Agreement shall not be assignable without the written consent of the
other party.
(c) This Agreement shall be construed in accordance with the laws
of the Commonwealth of Massachusetts.
(d) This Agreement may be executed in any number of counterparts
each of which shall be deemed to be an original and which collectively shall be
deemed to constitute only one instrument.
(e) The captions of this Agreement are included for convenience of
reference only and in no way define or delimit any of the provisions hereof or
otherwise affect their construction or effect.
8. Confidentiality. All books, records, information and data
pertaining to the business of the other party which are exchanged or received
pursuant to the negotiation or the carrying out of this Agreement shall remain
confidential, and shall not be voluntarily disclosed to any other person,
except as may be required in the performance of duties hereunder or as
otherwise required by law.
9. Use of Name. The Fund shall not use the name of Investors
Bank or any of its affiliates in any prospectus, sales literature or other
material relating to the Fund in a manner not approved by the Bank prior
thereto in writing; provided however, that the approval of the Bank shall not
be required for any use of its name which merely refers in accurate and factual
terms to its appointment hereunder or which is required by the Securities and
Exchange Commission or any state securities authority or any other appropriate
regulatory, governmental or judicial authority; provided further, that in no
event shall such approval be unreasonably withheld or delayed.
5
<PAGE> 7
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be duly executed and delivered by their duly authorized officers as of the date
fast written above.
Salomon Brothers Institutional Series Funds Inc
By:
--------------------------------------------
Name:
Title:
ATTEST:
-----------------------
Investors Bank & Trust Company
By:
--------------------------------------------
Name:
ATTEST:
-----------------------
Date:
-------------------------
6
<PAGE> 8
APPENDIX A
DATED APRIL 1, 1996
to
ADMINISTRATION AND ACCOUNTING SERVICES AGREEMENT
between
SALOMON BROTHERS INSTITUTIONAL SERIES FUNDS INC
and
INVESTORS BANK & TRUST COMPANY
Salomon Brothers Institutional High Yield Bond Fund
Salomon Brothers Institutional Emerging Market Debt Fund
Salomon Brothers Institutional Asia Growth Fund
Salomon Brothers Institutional Money Market Fund
7
<PAGE> 1
Exhibit 9(c)
SUBADMINISTRATION AGREEMENT
Agreement dated as of _____, 1996, by and between SALOMON
BROTHERS ASSET MANAGEMENT LIMITED, a company incorporated under the laws of
England ("SBAM Limited") and SALOMON BROTHERS ASSET MANAGEMENT INC, a Delaware
Corporation ("SBAM").
1. SBAM, pursuant to a Management Contract (the
"Management Contract") dated the date hereof between SBAM and Salomon Brothers
Institutional Series Funds Inc, an open-end investment company (the "Company"),
SBAM is the investment manager of the Salomon Brothers Asia Growth Fund (the
"Fund"), an investment portfolio of the Company;
2. Pursuant to Section 2 of the Management Contract,
SBAM shall delegate the performance of certain administrative services to SBAM
Limited as are agreed to by the parties from time to time.
3. In consideration of the services to be rendered by
SBAM Limited under this agreement, SBAM shall pay SBAM Limited [a monthly fee
on the first business day of each month] at an annual rate of [____] of the
average daily value (as determined on the days and at the time set forth in the
Fund's prospectus for determining net asset value per share) of the Fund's net
assets during the preceding month. If the fee payable to the Investment
Manager pursuant to this paragraph 3 begins to accrue before the end of any
month or if this agreement terminates before the end of any month, the fee for
the period from such date to the end of such month or from the beginning of
such month to the date of termination, as the case may be, shall be prorated
according to the proportion which such period bears to the full month in which
such effectiveness or termination occurs. For purposes of calculating each
such monthly fee, the value of the Fund's net assets shall be computed in the
manner specified in the Fund's prospectus and the Company's Articles of
Incorporation (as amended) for the computation of the value of the Fund's net
assets in connection with the determination of the net asset value of shares of
the Fund's capital stock.
4. This Agreement shall become effective as of the date
first above written and shall remain in force for two years from the date
hereof, and for such successive annual periods thereafter but only so long as
each such continuance is specifically approved at least annually by (1) a vote
of the holders of a majority of the outstanding voting securities of the Fund
(as defined in the Investment Company Act of 1940, as amended (the "1940 Act"))
or by the Company's Board of Directors and (2) a majority of the Directors of
the Company who are not parties to this Agreement or interested persons of any
such parties (other than as Directors of the Company), by vote cast in person
at a meeting duly called for the purpose of voting on such approval.
5. This Agreement may be terminated at any time without
the payment of any penalty: (1) by a vote of a majority of the entire
<PAGE> 2
2
Board of Directors of the Company on sixty (60) days' written notice to SBAM
Limited and SBAM; (2) by vote of the holders of a majority of the outstanding
voting securities of the Fund (as defined in the 1940 Act); or (3) by SBAM
Limited or SBAM on 60 days' written notice to the Company.
This Agreement shall automatically terminate in the event of
itsassignment, the term "assignment" for this purpose having the meaning
defined in Section 2(a)(4) of the 1940 Act and the rules thereunder.
6. Nothing contained herein shall limit the obligations
of SBAM under the Management Contract.
7. This Agreement shall be governed in accordance with
the laws of the State of New York.
<PAGE> 3
3
IN WITNESS WHEREOF, the parties hereto have caused this
Subadministration Agreement to be executed by their officers thereunto duly
authorized.
SALOMON BROTHERS ASSET MANAGEMENT INC
By:
--------------------------------
Name: Michael S. Hyland
Title: President
SALOMON BROTHERS ASSET MANAGEMENT
LIMITED
By:
--------------------------------
Name: Michael S. Hyland
Title: President
<PAGE> 1
EXHIBIT 10
[PIPER & MARBURY LETTERHEAD]
March 19, 1996
Salomon Brothers Institutional Series Funds Inc
7 World Trade Center
New York, New York 10048
Re: Salomon Brothers Institutional Series Funds Inc
Registration Statement on Form N-1A
Ladies and Gentlemen:
We have acted as Maryland counsel to Salomon Brothers Institutional
Series Funds Inc, a Maryland corporation (the "Company"), in connection with
the Company's Registration Statement on Form N-1A, (the "Registration
Statement") filed with the Securities and Exchange Commission under the
Securities Act of 1933, as amended, (the "Act") and the issuance of
10,000,000,000 shares of the Company's common stock, par value of $0.001 per
share, of which 3,333,333,333 shares are classified as the "High Yield Bond
Fund" Series, 3,333,333,333 shares are classified as the "Emerging Market Debt
Fund" Series and 3,333,333,334 shares are classified as the "Asia Growth Fund"
Series (collectively, the "Shares"), pursuant to the Registration Statement.
In this capacity, we have examined the Company's Aritcles of
Incorporation filed with the State Department of Assessments and Taxation of
Maryland (the "SDAT") on January 19, 1996; the Company's by-laws; the
prospectus included in the Registration Statement; the resolutions of the
Board of Directors of the Company relating to the issuance of the Shares; a
good-standing certificate recently issued by the SDAT; a Certificate of the
Secretary of the Company dated the date hereof, upon which we have relied
without independent verification; and such other statutes, certificates,
instruments and documents relating to the Company and matters of law as we
have deemed necessary to the issuance of this opinion. In such examination, we
have assumed the genuineness of all signatures, the comformity of final
documents in all material respects to the versions thereof submitted to us in
draft form, the authenticity of all documents submitted to us as originals, and
the conformity with originals of all documents submitted to us as copies.
<PAGE> 2
PIPER & MARBURY
L.L.P.
Salomon Brothers Institutional Series Funds Inc
March 19, 1996
Page 2
Based upon the foregoing, and limited in all respects to applicable
Maryland law, we are of the opinion and advise you that:
1. The Company has been duly incorporated and is validly existing as
a corporation under the laws of the State of Maryland.
2. The Shares to be issued by the Company pursuant to the
Registration Statement have been duly authorized and, when issued as
contemplated in the Registration Statement, will be validly issued, fully
paid and nonassessable.
Simpson Thacker & Bartlett is authorized to rely upon this opinion in
rendering any opinion to the Company which is to be filed as an Exhibit to the
Registration Statement. We hereby consent to the filing of this opinion as an
Exhibit to the Registration Statement and to the reference to our firm in the
Registration Statement and the related Prospectus.
Very truly yours,
/s/ Piper & Marbury L.L.P.
<PAGE> 1
Exhibit 11(a)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Pre-Effective Amendment No. 1 to the registration
statement on Form N-1A (the "Registration Statement") of our report dated March
21, 1996, relating to the financial statements and financial highlights of
Salomon Brothers Institutional High Yield Bond Fund, Salomon Brothers
Institutional Emerging Markets Debt Fund and Salomon Brothers Institutional
Asia Growth Fund (constituting Salomon Brothers Institutional Series Funds
Inc), which appears in such Statement of Additional Information, and to the
incorporation by reference of our report into the Prospectus which constitutes
part of this Registration Statement.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York, 10036
March 29, 1996
<PAGE> 1
Exhibit 11(b)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Pre-Effective Amendment No. 1 to the registration
statement on Form N-1A (the "Registration Statement") of our report dated
February 16, 1996, relating to the financial statements and financial
highlights of Salomon Brothers New York Municipal Money Market Fund and Salomon
Brothers U.S. Treasury Securities Money Market Fund (two of the portfolios
constituting Salomon Brothers Series Funds Inc), which appears in such
Statement of Additional Information, and to the incorporation by reference of
our report into the Prospectus which constitutes part of this Registration
Statement. We also consent to the reference to us under the heading
"Independent Accountants" in such Statement of Additional Information and to
the reference to us under the heading "Financial Hightlights" in such
Prospectus.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York, 10036
March 29, 1996
<PAGE> 1
Exhibit 13
PURCHASE AGREEMENT
Salomon Brothers Institutional Series Funds Inc (the
"Company"), a Maryland corporation, and Salomon Brothers Asset Management Inc
("SBAM"), a Delaware corporation, hereby agree as follows:
1. The Company hereby offers SBAM and SBAM hereby
purchases the following shares of capital stock of the Company (par value $.001
per share): 3,333 shares of each of "High Yield Bond Fund Series" and
"Emerging Market Debt Fund Series" and 3,334 shares of "Asia Growth Fund
Series" for consideration of $10.00 per share (collectively, the "Shares").
SBAM hereby acknowledges receipt of a purchase confirmation reflecting the
purchase of the Shares, and the Company hereby acknowledges receipt from SBAM
of funds in the amount of $100,000.00 in full payment for the Shares.
2. SBAM represents and warrants to the Company that
the Shares are being acquired for investment purposes and not with a view to
the distribution thereof.
3. SBAM agrees that if it or any direct or indirect
transferee of any of the Shares redeems any of the Shares prior to the fifth
anniversary of the date the Company begins its investment activities, SBAM will
pay to the Company an amount equal to the number resulting from multiplying the
Company's total unamortized organizational expenses by a fraction, the
numerator of which is equal to the number of Shares redeemed by SBAM or such
transferee and the denominator of which is equal to the number of Shares
outstanding as of the date of such redemption, as long as the administration
position of the staff of the Securities Exchange Commission requires such
reimbursement.
<PAGE> 2
IN WITNESS WHEREOF, the parties hereto have executed
this Agreement as of the 21st day of March, 1996.
SALOMON BROTHERS INSTITUTIONAL SERIES
FUNDS INC
Attest:
/s/ LAWRENCE H. KAPLAN By: /s/ MICHAEL S. HYLAND
- ----------------------- -------------------------
Lawrence H. Kaplan Michael S. Hyland
President
(SEAL)
SALOMON BROTHERS ASSET MANAGEMENT INC
Attest:
/s/ LAWRENCE H. KAPLAN By: /s/ MICHAEL S. HYLAND
- ----------------------- --------------------------
Lawrence H. Kaplan Michael S. Hyland
President
<PAGE> 1
EXHIBIT 19
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the undersigned director of the Salomon
Brothers Institutional Series Funds Inc, a Maryland corporation (hereinafter
called the "Company") does hereby constitute and appoint Michael S. Hyland,
Lawrence H. Kaplan, Alan M. Mandel and Tana E. Tselepsis, and each of them,
his or her true and lawful attorneys and agents, with full power to act without
the others, for him and in his name, place and stead, in any and all
capacities, to do any and all acts and things, and execute in his name any and
all instruments, which said attorneys and agents may deem necessary or
advisable in order to enable the Company to comply with the Investment Company
Act of 1940, the Securities Act of 1933, any requirements of the Securities and
Exchange Commission in respect thereof, and any state securities laws, in
connection with the registration under said Acts of the aforesaid Company and
the offerings of shares by such Company including specifically power and
authority to sign his or her name to any and all Notifications of Registration
and Registration Statements to be filed with the Securities and Exchange
Commission under either of said Acts in respect of such Company and shares, and
any amendments (including post-effective amendments) or applications for
amendment or supplements of or to such Notifications of Registration and
Registration Statements, and to file the same with the Securities and Exchange
Commission; and the undersigned does hereby ratify and confirm all that said
attorneys and agents, and each of them, shall do or cause to be done by virtue
hereof. Any one of said agents and attorneys shall have, and may exercise,
without the others, all the powers hereby conferred.
IN WITNESS WHEREOF, the undersigned has signed his name hereto as of
this 19th day of March, 1996.
/s/ Charles F. Barber /s/ Carol L. Colman
- --------------------------------- ------------------------------------
Charles F. Barber Carol L. Colman
/s/ Daniel P. Cronin /s/ Michael S. Hyland
- --------------------------------- ------------------------------------
Daniel P. Cronin Michael S. Hyland
