<PAGE> 1
As filed with the Securities and Exchange Commission
on January 19, 1996
Registration Nos. 33-
811-
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /x/
Pre-Effective Amendment No. ___ / /
Post-Effective Amendment No. ___ / /
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /x/
Amendment No. ___ / /
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
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 hereby elects 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
is $500.
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
Performance Not Applicable
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
</TABLE>
<PAGE> 4
4
<TABLE>
<S> <C> <C>
Item 9. Pending Legal Proceedings Not Applicable
Statement of Additional
Part B Location Information Caption
- ------ -------- -----------------------
Item 10. Cover Page Cover Page
Item 11. Table of Contents Table of Contents
Item 12. General Information and
History Not applicable.
Item 13. Investment Objectives and
Policies Additional Information on Portfolio
Instruments and Investment Policies;
Investment Limitations
Item 14. Management of the Fund Management
Item 15. Control Persons and Principal
Holders of Securities Management
Item 16. Investment Advisory and
Other Services Management; Custodian and Transfer
Agent; Independent Accountants
Item 17. Brokerage Allocation and
Other Practices Portfolio Transactions
Item 18. Capital Stock and Other
Securities Capital Stock
Item 19. Purchase, Redemption and
Pricing of Securities
Being Offered Management; Net Asset Value; Additional
Purchase 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>
<PAGE> 5
5
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> 6
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 JANUARY 19, 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).
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
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
<PAGE> 7
2
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> 8
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
FEE TABLE................................................................. 4
HIGHLIGHTS................................................................ 6
FINANCIAL HIGHLIGHTS...................................................... 10
PERFORMANCE INFORMATION................................................... 10
INVESTMENT OBJECTIVE AND POLICIES......................................... 12
ADDITIONAL INVESTMENT ACTIVITIES AND RISK FACTORS......................... 26
INVESTMENT LIMITATIONS.................................................... 39
PURCHASE AND REDEMPTION OF SHARES......................................... 41
MANAGEMENT................................................................ 45
DIVIDENDS, DISTRIBUTIONS AND TAXES........................................ 48
ACCOUNT SERVICES.......................................................... 53
CAPITAL STOCK............................................................. 53
APPENDIX A: DESCRIPTION OF RATINGS....................................... A-1
APPENDIX B: GENERAL CHARACTERISTICS AND RISKS OF DERIVATIVES............. B-1
</TABLE>
<PAGE> 9
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>
ANNUAL FUND OPERATING MONEY MARKET HIGH YIELD EMERGING MARKETS ASIA GROWTH
EXPENSES FUND* BOND FUND** DEBT FUND *** FUND****
- ----------------------------------------- ------------ ----------- ---------------- -----------
<S> <C> <C> <C> <C>
Management Fee (after waiver)............ . % . % . % . %
Other Expenses (after reimbursement)..... . % + . % + . % + . % +
--- --- --- ---
Total Fund Operating Expenses (after
waiver and reimbursement)............... . % . % . % . %
=== === === ===
</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 $ $ $ $
High Yield Bond Fund $ $ N/A N/A
Emerging Markets Debt Fund $ $ N/A N/A
Asia Growth Fund $ $ N/A N/A
</TABLE>
- ---------------------
* The information in the fee table set forth above has been restated
because, as of the date of this Prospectus, Salomon Brothers Asset
Management Inc ("SBAM"), the Fund's investment manager, has agreed 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
.25% of the Fund's average daily net assets and for a period of at
least one year from the date of this Prospectus, such expenses shall
not exceed .18% of the Fund's average daily net assets. For the year
ended December 31, 1995, actual Management Fee, Other Expenses and
Total Fund Operating Expenses were .__%, .__% and .__%, respectively.
** As of the date of this Prospectus, SBAM has 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, Management
Fee, Other Expenses and Total Fund Operating Expenses are expected to
be .__%, .__%, and .__%, respectively.
*** As of the date of this Prospectus, SBAM has 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,
Management Fee, Other Expenses and Total Fund Operating Expenses are
expected to be .__%, .__%, and .__%, respectively.
**** As of the date of this Prospectus, SBAM has 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 .__% of the
<PAGE> 10
5
Fund's average daily net assets. Without this agreement, Management
Fee, Other Expenses and Total Fund Operating Expenses are expected be
.__%, .__%, and .__%, 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.
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.
<PAGE> 11
6
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.
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.
<PAGE> 12
7
- --------------------------------------------------------------------------------
Benefits of Investing Mutual funds, such as the Funds, are flexible
in the Funds 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
and a degree of diversification 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.
- 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.
<PAGE> 13
8
- 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. See "Purchase and Redemption of
Shares--Exchange Privilege."
- --------------------------------------------------------------------------------
Purchase and The minimum initial investment in the Money Market
Redemption of Shares 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 Each Fund retains Salomon Brothers Asset Management
Services 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 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. Certain
Funds may use various investment practices that
involve special considerations, including investing
in high yield securities, illiquid securities,
foreign securities (including emerging market
securities), zero
<PAGE> 14
9
coupon and deferred payment securities, loan
participations and assignments and warrants and
engaging in repurchase and reverse repurchase
agreements and hedging and derivative transactions.
See "Additional Investment Activities and Risk
Factors."
<PAGE> 15
10
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, 1994, 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 ______, 1996. On __________, 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. 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.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE YEAR ENDED DECEMBER 31, PERIOD ENDED
PER SHARE OPERATING 30, 1995 ------------------------------------------------ DECEMBER 31,
PERFORMANCE (UNAUDITED) 1994 1993 1992 1991 1990**
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . $ 1.000 $ 1.000 $ 1.000 $1.000 $ 1.000 $1.000
------- ------- ------- ------- ------- ------
Net investment income ................ 0.024 .036 .028 .034 .054+ .005+
Dividends from net investment
income .............................. (0.024) (.036) (.028) (.034) (.054) (.005)
------- ------- ------- ------- ------- ------
NET ASSET VALUE, END OF PERIOD ....... $ 1.000 $ 1.000 $ 1.000 $1.000 $ 1.000 $1.000
======= ======= ======= ======= ======= ======
Net assets end of period (thousands) . $13,954 $27,667 $34,120 $50,554 $35,414 $4,596
TOTAL INVESTMENT RETURN .............. +2.5% +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>
- ---------------------
* Annualized.
** December 7, 1990, commencement of operations, through December 31,
1990.
+ Net investment income would have been $.052 and $.004, and the expense
ratios would have been .64% and 1.72%, respectively, for the years
ended December 31, 1991 and December 31, 1990 before waiver of
management fee and expenses absorbed by SBAM.
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
<PAGE> 16
11
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 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
<PAGE> 17
12
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, 1994 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
- - 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."
<PAGE> 18
13
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.
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
<PAGE> 19
14
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 enhancements. Any asset-backed
securities held by the Fund must comply with its portfolio maturity and credit
quality requirements.
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 the Fund 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
<PAGE> 20
15
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 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 or "BB" or "B" or lower
by 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 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
<PAGE> 21
16
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.
The High Yield Bond Fund may invest in zero coupon securities, pay-in-kind bonds
and deferred payment securities, which involve special risk considerations. See
"Additional Investment Activities and Risk Factors--Zero Coupon Securities,
Pay-in-Kind Bonds and Deferred Payment Securities."
The 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 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
<PAGE> 22
17
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 Standard & Poor's Rating Services Group ("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, the Fund may 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."
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
Fund's Board of Directors without the approval of shareholders.
<PAGE> 23
18
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:
Algeria India Philippines
Argentina Indonesia Poland
Brazil Ivory Coast Portugal
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
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
<PAGE> 24
19
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."
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
<PAGE> 25
20
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."
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
<PAGE> 26
21
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, 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, the Fund may
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 Fund's Board of Directors without the approval of shareholders.
<PAGE> 27
22
ASIA GROWTH FUND
The Asia Growth Fund's objective is to achieve long-term capital appreciation.
The Fund seeks to achieve its objective by investing at least 65% of its total
assets in equity and equity- related securities of Asian Companies. Asian
Companies include companies that (i) are organized under the laws of Bangladesh,
China, Hong Kong, India, Indonesia, Korea, Malaysia, Pakistan, the Philippines,
Singapore, Sri Lanka, Taiwan, Thailand or any other country in the Asian region
(other than Japan, Australia and New Zealand) that currently or in the future
permits foreign investment (collectively, "Asian Countries") or (ii) regardless
of where organized and as determined by SBAM AP, (a) derive at least 50% of
their revenues from goods produced or sold, investments made, or services
performed in or with one or more of the Asian Countries, (b) maintain at least
50% of their assets in one or more of the Asian Countries, or (c) have
securities which are traded principally on a stock exchange in an Asian Country.
The Fund is non-diversified within the meaning of the 1940 Act. See "Additional
Investment Activities and Risk Factors--Non-Diversification."
Equity securities 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 40% 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,
<PAGE> 28
23
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 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 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.
<PAGE> 29
24
Screening Process. SBAM AP will implement a systematic screening process in an
effort to identify individual securities it believes likely to exhibit
attractive returns over the long term. SBAM AP will screen companies according
to factors such as the perceived quality of their management and business,
overall sustainable competitiveness, historical earnings, dividend records over
at least a full business cycle, liquidity, trading volumes and historical and
expected volatility.
Financial Analysis Process. The financial analysis of selected companies will
focus on evaluating the fundamental value of the enterprise. SBAM AP will use a
value-driven process which will emphasize quantitative analysis based on return
on equity ("ROE") and its components, such as operating margins, financial
leverage, asset turnover and interest and tax burdens. In addition, the
company's cash flow generating capabilities and return on assets will be
considered. SBAM AP believes that ROE and cash flow dynamics are appropriate
variables when analyzing companies which operate in high growth markets, such as
Asia, as the ability of such companies to capture this growth by using the right
allocation of resources and asset financing is of utmost importance.
Valuation Process and Volatility Analysis. The valuation process will focus on
Price Earnings Ratio ("PER") calculations and comparisons with historical
relative PER bands and local market conditions. SBAM AP will use measures such
as PER/growth, and will evaluate whether the security enjoys accelerating
earnings growth momentum due to management changes or the introduction of new
products and/or services. In addition, where appropriate, SBAM AP will conduct
specific dividend discount model and discount cash flow analyses for specific
securities with predictable cash flows or dividend streams. Through the use of
this analysis, SBAM AP will attempt to identify companies with strong potential
for appreciation relative to their downside exposure. Lastly, SBAM AP will
conduct a volatility analysis on selected securities in an effort to forecast
the expected risk of such securities and compare the results of such risk
analysis with these securities' expected returns. Investments may be made in
companies that do not have extensive operating experience provided that SBAM AP
believes such companies nevertheless have significant growth potential.
Risk Management and Macroeconomic/Top-Down Analysis. SBAM AP will also consider
macroeconomic variables, such as liquidity and capital flows, foreign equity and
industrial investments and the direction of monetary policies in the Asian
Countries in an effort to capture individual market movements as well as attain
an optimal asset allocation mix and to identify the appropriate risk management
parameters for the Asia Growth Fund. The macroeconomic data SBAM AP will monitor
and analyze includes, but is not limited to, gross domestic product growth,
balance of payments and current account balances, budget deficits or surpluses,
inflation and interest rates. SBAM AP intends to meet with central bankers,
regional economists and strategists on a regular basis to assess the present and
future direction of monetary policies and their likely impact on the markets of
the Asian Countries.
As part of the Fund's risk management approach and in an attempt to better
assess and control the Fund's overall risk level on an ongoing basis, SBAM AP
will employ a quantitative analysis at each stage of the investment process
which will consist of analyzing and forecasting volatilities of the Asian
markets and securities. SBAM AP will use a number
<PAGE> 30
25
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."
In order to maintain liquidity, the Asia Growth Fund may hold and/or invest up
to 35% of its total assets in debt securities denominated in U.S. dollars or
in another freely convertible currency including: (1) short-term (less than 12
months to maturity) and medium-term (not greater than five years to maturity)
obligations issued or guaranteed by (a) the U.S. government or the government of
an Asian Country, their agencies or instrumentalities or (b) international
organizations designated or supported by multiple foreign governmental entities
to promote economic reconstruction or development ("supranational entities");
(2) finance company obligations, corporate commercial paper and other short-term
commercial obligations, in each case rated, or issued by companies with similar
securities outstanding that are rated, "Prime-1" or "A" or better by Moody's or
"A-1" or "A" or better by S&P or, if unrated, of comparable quality as
determined by SBAM AP; (3) obligations (including certificates of deposit, time
deposits, demand deposits and bankers' acceptances) of banks; and (4) repurchase
agreements (as described below under "Additional Investment Activities and Risk
Factors--Repurchase Agreements") with respect to securities in which the Fund
may invest. If at some future date, in the opinion of SBAM AP, adverse
conditions prevail in the securities markets which makes the Asia Growth Fund's
investment strategy inconsistent with the best interests of the Fund's
shareholders, the Fund may invest its assets without limit in such instruments.
The Asia Growth Fund may enter into repurchase agreements and reverse repurchase
agreements, may purchase securities on a firm commitment basis, including
when-issued securities and may lend portfolio securities. The Fund may also
invest in investment funds. For a description of these investment practices and
the risks associated therewith, see "Additional Investment Activities and Risk
Factors."
The Asia Growth Fund may purchase securities for which there is a limited
trading market or which are subject to restrictions on resale to the public. The
Fund will not invest more than 15% of the value of its total assets in illiquid
securities, such as "restricted securities" which are illiquid, and securities
that are not readily marketable. For further discussion of illiquid securities
and their associated risks, see "Additional Investment Activities and Risk
Factors--Restricted Securities and Securities With Limited Trading Markets." As
more fully described in the Statement of Additional Information, the Fund may
purchase Rule 144A
<PAGE> 31
26
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
Fund's Board of Directors without the approval of shareholders.
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, domestic banks or
recognized financial institutions which, in the opinion of the investment
manager based on guidelines established by the 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
<PAGE> 32
27
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
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
<PAGE> 33
28
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 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
<PAGE> 34
29
between the Fund and the borrower is determined by SBAM to be creditworthy. When
a Fund purchases Assignments from Lenders, the Fund will acquire direct rights
against the borrower on the Loan, except that under certain circumstances such
rights may be more limited than those held by the assigning Lender.
A Fund may have difficulty disposing of Assignments and Loan Participations.
Because the market for such instruments is not highly liquid, the Funds
anticipate that such instruments could be sold only to a limited number of
institutional investors. The lack of a highly liquid secondary market may have
an adverse impact on the value of such instruments and will have an adverse
impact on a Fund's ability to dispose of particular Assignments or Loan
Participations in response to a specific economic event, such as deterioration
in the creditworthiness of the borrower.
The Board of Directors has adopted policies and procedures for the 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
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 security is liquid or
illiquid, requiring that consideration be given to, among other things, the
frequency of trades and quotes for the security, the number of dealers willing
to sell the security and the number of potential purchasers, dealer
undertakings to make a market in the security, the nature of the security and
the time needed to dispose of the security. The Board of Directors periodically
reviews Fund purchases and sales of Assignments and Loan Participations.
To the extent that liquid Assignments and Loan Participations 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 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
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30
percentage of illiquid assets in a Fund's portfolio. The Board of Directors will
be responsible for monitoring the liquidity of Rule 144A securities and the
selection by the investment manager of such securities.
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 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
<PAGE> 36
31
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 U.S.
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 and securities markets. Finally, in the event of a
default in any such foreign obligations, it may be more difficult for a Fund to
obtain or enforce a judgment against the issuers of such obligations. 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.
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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.
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
<PAGE> 38
33
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 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
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
<PAGE> 39
34
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 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
<PAGE> 40
35
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 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 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.
<PAGE> 41
36
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.
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 the 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 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 unduly 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 hedging and
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
<PAGE> 42
37
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, 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 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.
<PAGE> 43
38
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 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, 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 __%. 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
<PAGE> 44
39
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 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, so long as no more than 25%
of its total assets are invested in the securities of any one issuer;
(2) borrow money except as a temporary measure from banks for
extraordinary or emergency purposes, and in no event in excess of 15%
of the value of its total assets, except that for the purpose of this
restriction, short-term credits necessary for settlement of securities
transactions are not considered borrowings (the Fund will not purchase
any securities at any time while such borrowings exceed 5% of the value
of its total assets); or
<PAGE> 45
40
(3) pledge, hypothecate, mortgage or otherwise encumber its assets
in excess of 20% of the value of its total assets, and then only to
secure borrowings permitted by (2) above.
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.
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).
<PAGE> 46
41
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 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. 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 each Fund's Board of Directors. Securities that are primarily traded
on foreign exchanges generally are valued at the preceding closing values of
such securities on their respective exchanges, except that when an occurrence
subsequent to the time a value was so established is likely to have changed such
value, then the fair value of those securities will be determined by
consideration of other factors by or under the direction of the Board of
Directors. Securities may be valued by independent pricing services which use
prices provided by market-makers or estimates of market values obtained from
yield data relating to instruments or securities with similar characteristics.
In valuing a Fund's assets, any assets or liabilities initially expressed in
terms of a foreign currency are converted to U.S. dollar equivalents at the then
current exchange rate. Corporate actions by issuers of foreign securities held
by the Fund, such as payment of dividends or distributions, are reflected in the
net asset value on the ex-dividend date therefor, except that such actions will
be so reflected on the date the Fund is actually advised of the corporate action
if subsequent to the ex-dividend date. Further information regarding the Funds'
valuation policies is contained in the Statement of Additional Information.
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.
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42
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 Fund in such Fund's account with __________, 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 ______________. The shareholder's bank may impose a charge to execute a
wire transfer. The wiring instructions are:
________________________
ABA #___________
Account Name: ____________
Account #: _______________
Name of Account:
Reference: Name of Fund
Share purchase orders made with a check or money order should be mailed to the
following address:
______________________
______________________
______________________
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
(___)________ to inform _____________ 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 ___________, 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 ___________
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43
___, 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 _______________ 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 _______________. 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 their names appear on _______________ register. In certain instances,
____________ 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 _________________, payment will be mailed 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 ______________ with the dollar or
share amount to
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44
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
____________ 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
___________________.
TELEPHONE REDEMPTION
A shareholder may request redemption by calling ______________ at _____________.
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 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 _______________. 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 $___ 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.
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45
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, __________
and ___________ will be liable for following exchange instructions received by
telephone, which are reasonably believed to be genuine, and the shareholder will
bear the risk of loss in the event of unauthorized or fraudulent telephone
instructions. The Funds, _______ and ____________ may employ reasonable
procedures to confirm that instructions communicated by telephone are genuine.
The Funds, ______________ and ___________ 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. __________ and
____________ reserve the right to reject any exchange request. The exchange
privilege may be modified or terminated at any time after notice to
shareholders.
DISTRIBUTOR
Shares of each of the Funds may be purchased through Salomon Brothers, 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.
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46
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 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 December 31, 1995, SBAM had approximately $__
billion of assets under management of which approximately $______ million is
invested in high yield securities and approximately $____________ 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.
SBAM has retained Salomon Brothers 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, 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 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.
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
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47
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 _____________, 1996 and the
fee increase became effective shortly thereafter. SBAM has 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 .25% of the Fund's average daily net assets and for a
period of at least one year from the date of this Prospectus, such expenses
shall not exceed .18% of the Fund's average daily net assets.
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 .__% of the Fund's average daily net assets.
SBAM AP is compensated by SBAM at no additional expense to the Asia Growth Fund
at an annual rate of ___% of the Asia Growth Fund's daily assets. SBAM has
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 ___%, 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
High Yield Bond Fund. Set forth in the chart below is performance data
provided by SBAM relating to certain accounts managed by the portfolio manager
of the High Yield Bond Fund, each with substantially similar, though not
necessarily identical, investment objectives, policies and strategies as those
of the Fund. The composite shown is comprised of one discretionary
institutional account and the high-yield portion of two U.S. registered closed-
end investment companies. During the period shown, the accounts ranged in
size, individually, from $___ million to $___ million and, in the aggregate,
from $___ million to $___ million.
The performance results shown below are compared to the Salomon Brothers High
Yield Market Index, a widely recognized index of security issues of at least
$50 million in original issue size which are rated between BB+ and CCC by S&P
and traded or priced at least monthly. The index is unmanaged and accordingly,
does not reflect the effect of advisory fees and other expenses. The
performance results are also compared to Lipper's High Current Yield Universe,
prepared by Lipper Analytical Services, Inc. ("Lipper"), which reflects the
average total return performance, as calculated by Lipper, of ____ U.S.
registered open-end investment companies. The Lipper data assumes reinvestment
of dividends and other distributions on the ex-dividend date and reflects the
effect of operating expenses, including advisory fees and other expenses.
The performance data shown below should be read in conjunction with the notes
that follow.
[Performance results for the High Yield Composite to be inserted]
Emerging Markets Debt Fund. Set forth in the chart below is performance data
provided by SBAM relating to certain accounts managed by the portfolio manager
of the Emerging Markets Debt Fund, each with substantially similar, though not
necessarily identical, investment objectives, policies and strategies as those
of the Fund. The composite shown is comprised of up to three discretionary
institutional accounts and up to three U.S. registered closed-end investment
companies. During the period shown, the accounts ranged in size, individually,
from $___ million to $___ million and, in the aggregate, from $___ million to
$___ million.
The performance results shown below are compared to the Salomon Brothers Brady
Bond Index, a widely recognized index that measures the performance of emerging
market debt that has been restructured under the Brady Plan ("Brady Bonds").
See "Additional Investment Activities--High Yield Securities" for a discussion
of Brady Bonds. The index measures returns for all Brady Bonds beginning with
the first issue of Brady Bonds in March 1990 by Mexico and is comprised of Brady
Bonds issued by the following countries: Mexico, Costa Rica, Philippines,
Venezuela, Uruguay, Nigeria, Brazil, Argentina, Bulgaria and Poland. The index
is unmanaged and accordingly, does not reflect the effect of operating
expenses, including advisory fees and other expenses.
The performance data shown below should be read in conjunction with the notes
that follow.
[Performance results for the Emerging Markets Composite to be inserted]
Asia Growth Fund. 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 (the "Offshore
Fund I") managed by the portfolio manager of the Asia Growth Fund while he was
employed by a different investment adviser 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 and SBAM AP (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 $___ million to $___ million and
during the period shown for Offshore Fund II, the size of the fund ranged from
$___ millon to $___ 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.
[Performance results for Offshore Fund I and Offshore Fund II to be inserted]
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 each account
and fund for whom investment results are shown 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 Funds,
which have no history of operations. With respect to the composites shown
above, the results shown may not necessarily equate with the return experienced
by any one particular account or fund comprising that composite and should not
be deemed to be indicative of future results for the Funds owing to differences
in brokerage commissions and dealer spreads, account expenses, including
investment advisory fees, the size of positions taken in relation to account
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 the accounts and funds shown above differ in certain respects
from those of the respective Funds. In addition, the accounts and funds which
are not U.S. registered investment companies are managed without regard to
certain tax requirements applicable to U.S. registered investment companies
that limit the proportions of short-term gains that such companies may realize
to maintain their tax status. See "Dividends, Distributions and Taxes."
Accordingly, the performance of the accounts and the funds shown above and that
of the Funds 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 OR 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."
<PAGE> 53
48
ADMINISTRATOR
Each Fund employs _______________ under an administration agreement to provide
certain administrative services to each Fund. _______________ is not involved in
the investment decisions made with respect to the Funds. The services provided
by _______________ 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, each
Fund pays _______________ a fee, calculated daily and payable monthly, at an
annual rate of .__% of each Fund's average daily net assets.
TRANSFER AGENT
_______________ acts as each Fund's transfer agent pursuant to a transfer
agency, dividend disbursing agency and shareholder servicing agency agreement.
Pursuant to this Agreement, ______________ is 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.
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
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49
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. Net investment income for
a Saturday, Sunday or holiday will be declared as a dividend on the previous
business day. 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. With respect to the Money Market Fund, 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 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. A
shareholder who does not have a brokerage account may inform _______________, by
notice sent to _______________, that he or she wishes to receive such dividends
or distributions in cash directly from _______________. If such distribution is
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
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50
registered with __________. Shareholders may change the distribution option at
any time by notification to __________ or calling __________ 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.
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
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51
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 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
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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 the Investment Adviser
is located in Hong Kong, (a) the Fund or its agents were deemed to carry on a
trade, profession or business in Hong Kong and (b) profits from that trade,
profession or business were to arise in or be derived from Hong Kong. Hong Kong
profits tax will not be payable in respect of profits from the sale of shares
and other securities transacted outside Hong Kong, interest arising or derived
from outside Hong Kong and profits in the nature of capital gains. The sale of
securities will not be treated as the sale of capital assets if the profit or
loss from such sale is regarded as attributable to a trade or business carried
on in Hong Kong. The Asia Growth Fund does not currently believe that it will be
subject to Hong Kong profits tax.
Dividends which the Fund pays to its shareholders are not taxable in Hong Kong
(whether through withholding or otherwise) under current legislation and
practice. No Hong Kong stamp duty will be payable in respect of transactions in
shares of the Asia Growth Fund provided that the register of shareholders is
maintained outside of Hong Kong.
Depending on the residence of the shareholder for tax purposes, distributions
may also be subject to state and local taxes or withholding taxes.
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53
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 Salomon Brothers Series Funds Inc (the
"Series Funds"), changed its name from Salomon Brothers U.S. Treasury Securities
Money Market Fund to its current name on ______, 1996. The Series Funds was
incorporated in Maryland on April 17, 1990. On __________, 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 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
<PAGE> 59
54
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
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APPENDIX A:
DESCRIPTION OF RATINGS
A DESCRIPTION OF THE RATING POLICIES OF MOODY'S, S&P AND FITCH WITH RESPECT TO
BONDS AND COMMERCIAL PAPER APPEARS BELOW.
MOODY'S 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 in
high degree. Such issues are often in default or have other marked shortcomings.
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C-Bonds which are rated "C" are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Moody's applies numerical modifiers "1" "2" and "3" 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 regraded 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.
AAA-is the highest rating assigned by S&P to a debt obligation and indicates an
extremely strong capacity to pay principal and interest.
AA-Bonds rated AA also qualify as high quality debt obligations. Capacity to pay
principal and interest is very strong, and in the majority of instances they
differ from AAA issues only in small degrees.
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A-Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB-Bonds rated BBB are regarded as having an adequate capacity to pay principal
and interest. Whereas they normally exhibit adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this category
than for bonds in the A category.
The ratings set forth above may be modified by the addition of a plus or minus
to show relative standing within the major rating categories.
MOODY'S 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-1 have a satisfactory capacity to pay principal
and interest. Those issues determined to possess overwhelming safety
characteristics will be given a plus (+) designation.
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.
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
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A-6
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.
LOC-The symbol LOC indicates that the rating is based on a letter of credit
issued by a commercial bank.
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A-7
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.
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B-1
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 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
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B-2
options are issued by a regulated intermediary such as the Options Clearing
Corporation ("OCC"), which guarantees the performance of the obligations of the
parties to the options. The discussion below uses the OCC as an example, but is
also applicable to other similar financial intermediaries.
OCC-issued and exchange-listed options, with certain exceptions, generally
settle by physical delivery of the underlying security or (currency, although in
the future, cash settlement may become available. Index options are cash settled
for the net amount, if any, by which the option is "in-the-money" (that is, the
amount by which the value of the underlying instrument exceeds, in the case of a
call option, or is less than, in the case of a put option, the exercise price of
the option) at the time the option is exercised. Frequently, rather than taking
or making delivery of the underlying instrument through the process of
exercising the option, listed options are closed by entering into offsetting
purchase or sale transactions that do not result in ownership of the new option.
A Fund's ability to close out its position as a purchaser or seller of an
OCC-issued or exchange-listed put or call option is dependent, in part, upon the
liquidity of the particular option market. Among the possible reasons for the
absence of a liquid option market on an exchange are: (1) insufficient trading
interest in certain options, (2) restrictions on transactions imposed by an
exchange, (3) trading halts, suspensions or other restrictions imposed with
respect to particular classes or series of options or underlying securities,
including reaching daily price limits, (4) interruption of the normal operations
of the OCC or an exchange, (5) inadequacy of the facilities of an exchange or
the OCC to handle current trading volume or (6) a decision by one or more
exchanges to discontinue the trading of options (or a particular class or series
of options), in which event the relevant market for that option on that exchange
would cease to exist, although any such outstanding options on that exchange
would continue to be exercisable in accordance with their terms.
The hours of trading for listed options may 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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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 are generally bought and sold on
the commodities exchange on which they are listed with
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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 of a put, the
exercise price of the option (except if in the case of an OTC option, physical
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B-5
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 dollars. The amount
of the contract would not exceed the market value of the Fund's securities
denominated in linked currencies.
<PAGE> 72
B-6
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.
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.
<PAGE> 73
B-7
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.
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
<PAGE> 74
B-8
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 mantenance of a liquid market that may not always be
available. Currency exchange rates may fluctuate based on factors extrinsic to
that country's economy.
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.
<PAGE> 75
B-9
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 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,
<PAGE> 76
B-10
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.
<PAGE> 77
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 January 19, 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. 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.
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 .............................................. 20
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION ...................... 23
PORTFOLIO TRANSACTIONS .............................................. 25
MANAGEMENT .......................................................... 27
NET ASSET VALUE ..................................................... 36
ADDITIONAL INFORMATION CONCERNING TAXES ............................. 37
PERFORMANCE DATA .................................................... 43
CAPITAL STOCK ....................................................... 45
CUSTODIAN AND TRANSFER AGENT ........................................ 46
VALIDITY OF SHARES .................................................. 46
INDEPENDENT ACCOUNTANTS ............................................. 47
COUNSEL ............................................................. 47
OTHER INFORMATION ................................................... 47
</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
<PAGE> 81
4
investment companies and the restrictions on foreign investment, result in
potentially fewer investment opportunities for a Fund and may have an adverse
impact on the investment performance of a Fund.
There generally is less governmental supervision and regulation of
exchanges, brokers and issuers in foreign countries than there is in the United
States. For example, there may be no comparable provisions under certain foreign
laws to insider trading and similar investor protection securities laws that
apply with respect to securities transactions consummated in the United States.
Further, brokerage commissions and other transaction costs on foreign securities
exchanges generally are higher than in the United States.
With respect to investments in certain emerging market countries,
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
<PAGE> 82
5
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.
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.
<PAGE> 83
6
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.
<PAGE> 84
7
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
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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 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
each Fund has adopted policies and procedures for the purpose of determining
whether securities that are eligible for resale under Rule 144A are liquid or
illiquid 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
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potential purchasers, dealer undertakings to make a market in the security, the
nature of the security and the time needed to dispose of the security. The Board
of Directors periodically reviews Fund purchases and sales of Rule 144A
securities.
To the extent that liquid Rule 144A securities that a Fund holds become
illiquid, due to the lack of sufficient qualified institutional buyers or market
or other conditions, the percentage of a Fund's assets invested in illiquid
assets would increase. The investment manager under the supervision of the 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 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.
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Investors should recognize that Brady Bonds have been issued only
recently, and accordingly do not have a long payment history. Brady Bonds which
have been issued to date are rated in the categories "BB" or "B" by 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,
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which involves certain considerations discussed below under "Additional
Information Concerning Taxes."
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
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12
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
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.
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13
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 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
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Fund may purchase put and call options and write "covered" put and call options
on stocks, 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
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seek to benefit from a decline in the market price of the underlying investment,
while in purchasing a call option, a Fund will seek to benefit from an increase
in the market price of the underlying investment. If an option purchased is not
sold or exercised when it has remaining value, or if the market price of the
underlying investment remains equal to or greater than the exercise price, in
the case of a put, or remains equal to or below the exercise price, in the case
of a call, during the life of the option, the Fund will lose its investment in
the option. For the purchase of an option to be profitable, the market price of
the underlying investment must decline sufficiently below the exercise price, in
the case of a put, and must increase sufficiently above the exercise price, in
the case of a call, to cover the premium and transaction costs.
In the case of certain options on interest rate futures contracts, a
Fund may purchase a put option in anticipation of a rise in interest rates, and
purchase a call option in anticipation of a fall in interest rates. By writing a
covered call option on interest rate futures contracts, a Fund will limit its
opportunity to profit from a fall in interest rates. By writing a covered put
option on interest rate futures contracts, a Fund will limit its opportunity to
profit from a rise in interest rates.
A Fund may choose to exercise the options it holds, permit them to
expire or terminate them prior to their expiration by entering into closing
transactions. A Fund may enter into a closing purchase transaction in which the
Fund purchases an option having the same terms as the option it had written or a
closing sale transaction in which the Fund sells an option having the same terms
as the option it had purchased. A covered option writer unable to effect a
closing purchase transaction will not be able to sell the underlying security
until the option expires or the underlying security is delivered upon exercise,
with the result that the writer will be subject to the risk of market decline in
the underlying security during such period. Should a Fund choose to exercise an
option, the Fund will purchase in the open market the securities, commodities or
commodity futures contracts underlying the exercised option.
Exchange-listed options on securities and currencies, with certain
exceptions, generally settle by physical delivery of the underlying security or
currency, although in the future, cash settlement may become available.
Frequently, rather than taking or making delivery of the underlying instrument
through the process of exercising the option, listed options are closed by
entering into offsetting purchase or sale transactions that do not result in
ownership of the new option. Index options are cash settled for the net amount,
if any, by which the option is "in-the-money" (that is, the amount by which the
value of the underlying instrument exceeds, in the case of a call option, or is
less than, in the case of a put option, the exercise price of the option) at the
time the option is exercised.
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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 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
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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.
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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,
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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 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.
<PAGE> 97
20
INVESTMENT LIMITATIONS
Unless otherwise indicated, the investment restrictions described below
as well as those described under "Investment Restrictions" in the Prospectus are
fundamental policies which 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. 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 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) 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 or with respect to
repurchase agreements collateralized by any of such obligations;
(2) invest more than 10% of the value of its net assets in securities which
are illiquid;
(3) purchase shares of other investment companies (except as part of a
merger, consolidation or reorganization or purchase of assets approved
by the Fund's shareholders), provided that the Fund may purchase shares
of any registered open-end investment company that determines its net
asset value per share based on the amortized cost or penny-rounding
method, if immediately after any such purchase the Fund does not (a)
own more than 3% of the outstanding voting stock of any one investment
company, (b) invest more than 5% of the value of its total assets in
any one investment company, or (c) invest more than 10% of the value of
<PAGE> 98
21
its total assets in the aggregate in securities of investment
companies;
(4) purchase securities on margin (except for delayed delivery or
when-issued transactions or such short-term credits as are necessary
for the clearance of transactions);
(5) sell securities short;
(6) purchase or sell commodities or commodity contracts, including futures
contracts;
(7) invest for the purpose of exercising control over management of any
company;
(8) make loans, except that the Fund may (a) purchase and hold debt
instruments in accordance with its investment objective and policies
and (b) enter into repurchase agreements with respect to portfolio
securities;
(9) underwrite the securities of other issuers, except to the extent that
the purchase of investments directly from the issuer thereof and later
disposition of such securities in accordance with the Fund's investment
program may be deemed to be an underwriting;
(10) purchase real estate or real estate limited partnership interests
(other than securities issued by companies that invest in real estate
or interests therein);
(11) invest directly in interests in oil, gas or other mineral exploration
development programs or mineral leases; or
(12) purchase warrants.
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.
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;
<PAGE> 99
22
(2) purchase or sell real estate, although a Fund may purchase and sell
securities of companies which deal in real estate, may purchase and sell
marketable securities which are secured by interests in real estate and may
invest in mortgages and mortgage-backed securities;
(3) purchase or sell commodities or commodity contracts except that a
Fund may engage in hedging and derivative transactions to the extent permitted
by its investment policies as stated in the Prospectus and this Statement of
Additional Information;
(4) make loans, except that (a) a Fund may purchase and hold debt
securities in accordance with its investment objective 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;
(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;
<PAGE> 100
23
(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 normally be
issued to shareholders. ______________, 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.
______________ 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.).
If the Board of Directors 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
<PAGE> 101
24
cash, taking such securities at their value employed for determining such
redemption price, and selecting the securities in such manner as the Board of
Directors may deem fair and equitable. However, each Fund has made an election
pursuant to Rule 18f-1 under the 1940 Act requiring that all redemptions be
effected in cash to each redeeming shareholder, during periods of 90 days, up to
the lesser of $250,000 or 1% of the net assets of such Fund. A shareholder who
receives a distribution in kind may incur a brokerage commission upon a later
disposition of such securities and may receive less than the redemption value of
such securities or property upon sale, particularly where such securities are
sold prior to maturity. 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 New
York Stock Exchange, Inc. (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 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
<PAGE> 102
25
shares are being purchased. Any new account established by exchange will
automatically be registered in the same way as the account from which shares are
exchanged and will carry the same dividend option.
The exchange privilege is not designed for investors trying to catch
short-term savings in market prices by making frequent exchanges. A Fund
reserves the right to impose a limit on the number of exchanges a shareholder
may make. Call or write the applicable Fund for further details.
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
<PAGE> 103
26
transactions to be executed by such broker. While the payment of higher
commissions increases a Fund's costs, the investment manager does not believe
that the receipt of such brokerage and research services significantly reduces
its expenses as a Fund's investment manager. Arrangements for the receipt of
research services from brokers may create conflicts of interest.
Research services furnished to the investment manager by brokers who
effect securities transactions for a Fund may be used by the investment manager
in servicing other investment companies and accounts which it manages.
Similarly, research services furnished to the investment manager by brokers who
effect securities transactions for other investment companies and accounts which
the investment manager manages may be used by the investment manager in
servicing a Fund. Not all of these research services are used by the investment
manager in managing any particular account, including the Funds.
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 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.
<PAGE> 104
27
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. 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 with respect to non-interested directors and
Mr. Guarnieri, the address of each other director and executive officer is
Salomon Brothers Asset Management Inc, 7 World Trade Center, New York, New York
10048.
<PAGE> 105
28
DIRECTORS
<TABLE>
<CAPTION>
Position(s) Principal
Held With Occupation(s)
Name and Address The Company Past 5 Years
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Charles F. Barber Director Consultant; formerly Chairman of the
66 Glenwood Drive (Audit Committee Member) Board, ASARCO Incorporated
Greenwich, CT 06830
Age 77
Carol L. Colman Director President, Colman Consulting Co.,
Colman Consulting Co., Inc. (Audit Committee Member) Inc.; formerly Managing Partner of
P.O. Box 212 Inferential Focus
North Salem, NY 10560
Age 48
Daniel P. Cronin Director Vice President and General Counsel,
Pfizer, Inc (Audit Committee Member) Pfizer International Inc since 1987;
253 East 42nd Street Senior Assistant General Counsel,
New York, NY 10017 Pfizer, Inc since 1989
Age 48
Michael S. Hyland*/ Director and President President, SBAM and Managing
Age 50 Director, Salomon Brothers since
1989; formerly Managing Director,
First Boston Asset Management and
Managing Director, The First Boston
Corporation
</TABLE>
[Directors of Institutional Series Funds to be named]
- ----------------------
*/ Interested Person as defined in the 1940 Act.
<PAGE> 106
29
EXECUTIVE OFFICERS OF SERIES FUNDS
<TABLE>
<CAPTION>
Principal
Position(s) Occupation(s)
Name and Address Held Past 5 Years
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Giampaolo G. Guarnieri Executive Vice President Vice President and Portfolio Manager, SBAM
Salomon Brothers Asset AP since April 1995; formerly Senior
Management Asia Portfolio Investment Manager, Credit
Pacific Limited Agricole Asset Management (South East
Three Exchange Square, Asia) Limited since 1992 and head of
Hong Kong direct investment activities from 1990-
Age 32 1992
Steven Guterman Executive Vice President Managing Director, SBAM
Age 42
Nancy Noyes Executive Vice President Director, SBAM and Salomon Brothers Inc
Age 37
Peter J. Wilby Executive Vice President Managing Director, SBAM
Age 37
Richard E. Dahlberg Executive Vice President Managing Director, SBAM since January 1996;
Age 39 formerly Vice President SBAM since
June 1995; prior to that employed by
Massachusetts Financial Services Company
Lawrence H. Kaplan Executive Vice President and Vice President and Chief Counsel, SBAM and
Age 39 General Counsel Vice President, Salomon Brothers 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
</TABLE>
<PAGE> 107
30
<TABLE>
<CAPTION>
Principal
Position(s) Occupation(s)
Name and Address Held Past 5 Years
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Alan M. Mandel Treasurer Vice President, SBAM since January 1995;
Age 38 formerly Chief Financial Officer, Hyperion
Capital Management since 1991; prior to
which he was Vice President,
Mitchell Hutchins Asset Management
Tana E. Tselepis Secretary Compliance Officer, SBAM since 1993 and
Age 60 Senior Administrator since 1989; Vice
President, Salomon Brothers since 1991;
formerly Vice President and Senior
Administrator at First Boston Asset
Management Corporation, 1985-1989
Jennifer G. Muzzey Assistant Secretary Employee of SBAM since June 1994; formerly
Age 36 Vice President of SunAmerica Asset
Management Corporation
</TABLE>
[Executive Officers of Institutional Series Fund to be named]
COMPENSATION TABLE
The following tables provide information concerning the compensation
paid during the fiscal year ended December 31, 1995 to each director of the
Series Funds and the estimated compensation expected to be paid to each director
of the Institutional Series Funds for the 1996 fiscal year. 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
<PAGE> 108
31
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 from Total Compensation
Name of Person, the from Other Funds
Position Series Funds Advised by SBAM(A) Total Compensation
--------------- ----------------- ------------------ ------------------
<S> <C>
Charles F. Barber
Director (12)
Daniel P. Cronin
Director (3)
Carol L. Colman
Director (3)
</TABLE>
- -----------------
(A) The numbers in parenthesis indicate the applicable number of investment
company directorships held by that director.
Institutional Series Funds
<TABLE>
<CAPTION>
Estimated
Aggregate Total
Compensation Compensation
from the from Other Estimated
Name of Person, Institutional Funds Advised Total
Position Series Funds by SBAM(A) Compensation
--------------- ------------- ------------- ------------
<S> <C> <C> <C>
</TABLE>
- -----------------
(A) The numbers in parenthesis indicate the applicable number of investment
company directorships held by that director.
Principal Holders of Securities
Salomon Brothers Holding Company 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. As of _____________, held ___% of the
outstanding shares of the Money Market Fund.
<PAGE> 109
32
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.
For the year ended December 31, 1995, such fees and expenses borne by the Series
Funds Fund totaled $_______.
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. The Institutional Series Funds was incorporated on January
__, 1996 and therefore no shares were outstanding as of December 31, 1995.
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, 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, SBAM has retained Salomon
Brothers Asia Pacific Limited 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
<PAGE> 110
33
portfolio. Like SBAM, SBAM AP is an indirect, wholly-owned subsidiary of Salomon
Inc. SBAM AP is a member of the Hong Kong Securities and Futures Commission and
is registered as an investment adviser in the United States pursuant to the
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 ________, 1996
and the fee increase became effective shortly thereafter. As of the date of
this Statement of Additional Information, SBAM has agreed to reduce or otherwise
limit the expenses of the Fund (exclusive of taxes, interest and extraordinary
expenses such as litigation and indemnification expenses), on an annualized
basis, to .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 $_______
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 .__% of the Fund's average daily net assets.
Effective as of the date of the Prospectus, SBAM has agreed to reduce or
otherwise limit the expenses of the High Yield Bond Fund, 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 .__%, respectively, of the applicable Fund's average
daily net assets. See "Fee Table" in the Prospectus. SBAM AP is compensated by
SBAM at no additional expense to the Asia Growth Fund at an annual rate of ___%
of the Asia Growth Fund's daily 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 __________, 1996 and by the
sole shareholder of each Fund, SBAM, on __________, 1996. The management
contract for each Fund provides that it will continue automatically for
successive annual periods
<PAGE> 111
34
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 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 Fund wil 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
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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 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
Each Fund employs _______, under its applicable administration
agreement to provide certain administrative services to the respective Fund. The
services provided by ________ 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. ___________ is
located at ___________. For the fiscal year ended December 31, 1995, Investors
Bank and Trust Company received fees totaling $________ from the Money Market
Fund for services as administered to that 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
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36
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 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 Board of Directors or its delegates. In valuing assets, prices
denominated in foreign currencies are converted to U.S. dollar equivalents at
the current exchange rate. Securities may be valued by independent pricing
services which use prices provided by market-makers or estimates of market
values obtained from yield data relating to instruments or securities with
similar characteristics. Short-term obligations with maturities of 60 days or
less are valued at amortized cost, which constitutes fair value as determined by
the Board of Directors. Amortized cost involves valuing an instrument at its
original cost to a Fund and thereafter assuming a constant amortization to
maturity of any discount or premium, regardless of the impact of fluctuating
interest rates on the market value of the instrument. All other securities and
other assets of a Fund will be valued at fair value as determined in good faith
pursuant to procedures adopted by the Board of Directors of each Fund.
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
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37
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 the Money Market Fund has established
procedures 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.
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.
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38
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
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39
calendar year; (b) at least 98% of the excess of its capital gains over its
capital losses for the one year period ending, as a general rule, on October 31
of each year; and (c) 100% of the undistributed income and gains from the
preceding calendar year (if any) pursuant to the calculations in (a) and (b).
For this purpose any income or gain retained by a Fund that is subject to
corporate tax will be considered to have been distributed by year-end.
A Fund's investment in options, swaps and related transactions, futures
contracts and forward contracts, options on futures contracts and stock indices
and certain other securities, including transactions involving actual or deemed
short sales or foreign exchange gains or losses are subject to many complex and
special tax rules. For example, over-the-counter options on debt securities and
equity options, including options on stock and on narrow-based stock indexes,
will be subject to tax under Section 1234 of the Code, generally producing a
long-term or short-term capital gain or loss upon exercise, lapse or closing out
of the option or sale of the underlying stock or security. By contrast, a Fund's
treatment of certain other options, futures and forward contracts entered into
by a Fund is generally governed by Section 1256 of the Code. These "Section
1256" positions generally include listed options on debt securities, options on
broad-based stock indexes, options on securities indexes, options on futures
contracts, regulated futures contracts and certain foreign currency contracts
and options thereon.
Absent a tax election to the contrary, each such Section 1256 position
held by a Fund will be marked-to-market (i.e. treated as if it were sold for
fair market value) on the last business day of a Fund's fiscal year, and all
gain or loss associated with fiscal year transactions and mark-to-market
positions at fiscal year end (except certain currency gain or loss covered by
Section 988 of the Code) will generally be treated as 60% long-term capital gain
or loss and 40% short-term capital gain or loss. The effect of Section 1256
mark-to-market rules may be to accelerate income or to convert what otherwise
would have been long-term capital gains into short-term capital gains or
short-term capital losses into long-term capital losses within a Fund. The
acceleration of income on Section 1256 positions may 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
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40
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
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.
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41
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 potion 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
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42
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.
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
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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.
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.
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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.
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 __% and __%, 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
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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.
Each share of a Fund is entitled to such dividends and distributions
out of the income earned on the assets belonging to
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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
_________________, which is located at _______________________________,
serves as custodian and transfer agent for each Fund. As each Fund's custodian,
____________________ 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, _________________ 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 hedging transactions. As each
Fund's transfer agent, ___________ registers and processes transfer of the
Fund's stock, processes purchase and redemption orders, acts as dividend
disbursing agent for the Fund and maintains records and handles correspondence
with respect to shareholder accounts. For these services, _______________
receives a monthly fee.
VALIDITY OF SHARES
The validity of the shares will be passed upon for the Company by Piper
and Marbury L.L.P., Baltimore, Maryland.
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47
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.
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> 125
84
FINANCIAL STATEMENTS
<PAGE> 126
PORTFOLIO OF INVESTMENTS SALOMON BROTHERS CASH MANAGEMENT FUND
DECEMBER 31, 1994
<TABLE>
<CAPTION>
YIELD TO
MATURITY
PRINCIPAL ON DATE OF MATURITY VALUE
AMOUNT PURCHASE* DATE (NOTE 1a)
- --------- ---------- -------- ---------
<S> <C> <C> <C> <C>
COMMERCIAL PAPER-36.5%
$ 700,000 American Express Credit Corporation ....................... 5.80% 01/03/95 $ 699,774
595,000 Fairfax County, Virginia Economic
Development Agency ...................................... 6.25 01/12/95 595,000
800,000 General Mills ............................................. 5.97 01/03/95 799,735
500,000 Gillette Company .......................................... 5.70 01/03/95 499,842
700,000 Goldman Sachs Group ....................................... 5.95 01/09/95 699,074
500,000 Idaho Housing Agency ...................................... 5.60 01/05/95 499,689
500,000 Koch Industries ........................................... 5.90 01/03/95 499,836
500,000 Merrill Lynch ............................................. 5.80 01/03/95 499,839
600,000 Methodist Hospital ........................................ 5.75 01/06/95 600,000
500,000 Quaker Oats Company ....................................... 6.18 01/04/95 499,509
500,000 Smith Barney .............................................. 5.45 01/06/95 499,621
600,000 Sunshine State Governmental Financing
Commission, Florida ..................................... 6.33 01/17/95 598,313
-----------
TOTAL COMMERCIAL PAPER (cost $6,990,232) ......................................... 6,990,232
-----------
FLOATING RATE NOTES-32.5%
600,000 Community Health Systems, VR .............................. 6.40 01/04/95 600,000
500,000 Florida State Housing Finance Agency VR ................... 6.10 01/04/95 500,000
610,000 Fulton County, New York
Industrial Development Agency VR ........................ 6.35 01/05/95 610,000
500,000 Health Insurance Plan, Greater New York VR ................ 6.45 01/04/95 500,000
500,000 Illinois Student Assistance Commission VR ................. 6.17 01/04/95 500,000
315,000 New Jersey,
Economic Development Authority VR ....................... 6.41 01/03/95 315,000
285,000 New Jersey,
Economic Development Authority VR ....................... 6.29 01/03/95 285,000
400,000 New York, New York
Industrial Development Agency VR ........................ 6.30 01/04/95 400,000
200,000 New York, New York
Industrial Development Agency VR ........................ 6.30 01/04/95 200,000
500,000 Pasadena, California
Certificates of Participation VR ........................ 6.30 01/03/95 500,000
500,000 Selma, Alabama
Industrial Development Board VR ......................... 6.56 01/10/95 500,000
600,000 Tyler, Texas
Health Facilities Development VR ........................ 6.40 01/04/95 600,000
700,000 Virginia State,
Housing Development Authority VR ........................ 6.75 01/03/95 700,000
-----------
TOTAL FLOATING RATE NOTES (cost $6,210,000) ...................................... 6,210,000
-----------
</TABLE>
<PAGE> 127
PORTFOLIO OF INVESTMENTS SALOMON BROTHERS CASH MANAGEMENT FUND
DECEMBER 31, 1994
<TABLE>
<CAPTION>
YIELD TO
MATURITY
PRINCIPAL ON DATE OF MATURITY VALUE
AMOUNT PURCHASE* DATE (NOTE 1a)
- --------- ---------- -------- ---------
<S> <C> <C> <C> <C>
SHORT-TERM BONDS-7.6%
$ 700,000 Metro Pier & Export Authority, MBIA ....................... 5.50% 06/15/95 $ 700,000
750,000 Richmond County, Georgia
Development Authority PUT ............................... 5.71 06/01/95 750,000
-----------
TOTAL SHORT-TERM BONDS (cost $1,450,000) ......................................... 1,450,000
-----------
REPURCHASE AGREEMENT-18.5%
3,530,399 J.P. Morgan Securities, dated 12/30/94, with a
maturity value of $3,532,478, collateralized
by $3,727,000 U.S. Treasury Note, 5.625%,
due 8/31/97, valued at $3,671,095
(cost $3,530,399) ....................................... 5.30 01/03/95 3,530,399
-----------
TOTAL INVESTMENTS-95.1% OF NET ASSETS
(cost $18,180,631) ............................................................. $18,180,631
===========
</TABLE>
------------
*Yield to maturity on date of purchase, except in the case of
Variable Rate Demand Notes (VR), whose yields are determined on
date of the last interest rate change. For Variable Rate
Demand Notes, maturity date shown is the date of next interest
rate change.
Abbreviations used in this statement:
MBIA Insured as to principal and interest by the Municipal Bond
Investors Assurance Corporation.
PUT Optional or mandatory put. Maturity date shown is the put
date as well as the date of next interest rate change.
See accompanying notes to financial statements.
<PAGE> 128
STATEMENT OF ASSETS AND LIABILITIES SALOMON BROTHERS CASH MANAGEMENT FUND
DECEMBER 31, 1994
<TABLE>
<S> <C>
ASSETS
Investments at value (cost $14,650,232) ............................................... $14,650,232
Repurchase Agreement .................................................................. 3,530,399
Receivable for Fund shares sold ....................................................... 1,136,727
Interest receivable ................................................................... 46,104
Unamortized organization expenses ..................................................... 9,071
-----------
Total assets ...................................................................... 19,372,533
-----------
LIABILITIES
Payable for Fund shares redeemed ...................................................... 208,949
Dividend payable ...................................................................... 17,659
Accrued expenses ...................................................................... 19,109
-----------
Total liabilities ................................................................. 245,717
-----------
NET ASSETS (equivalent to $1.00 per share on 19,128,930 shares of $.001 par value
capital stock outstanding; 1,333,333,334 shares authorized) ....................... $19,126,816
===========
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1994
INCOME
Interest .............................................................................. $ 640,634
EXPENSES
Management fee .............................................................. $ 29,088
Registration and filing fees ................................................ 17,044
Amortization of organization expenses ....................................... 12,000
Administration fee .......................................................... 11,635
Custodian ................................................................... 9,800
Shareholder services ........................................................ 9,642
Legal ....................................................................... 8,961
Audit and tax return preparation fees ....................................... 8,007
Printing .................................................................... 7,249
Directors' fees ............................................................. 2,713
Other ....................................................................... 2,279
-------
118,418
Management fee waived ....................................................... (29,088) 89,330
------- -----------
Net investment income ................................................................. 551,304
Net realized loss on securities sold .................................................. (415)
-----------
Net increase in net assets resulting from operations .................................. $ 550,889
===========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 129
STATEMENT OF CHANGES IN NET ASSETS SALOMON BROTHERS CASH MANAGEMENT FUND
<TABLE>
YEAR ENDED DECEMBER 31,
-----------------------------
1994 1993
----------- -----------
<S> <C> <C>
OPERATIONS
Net investment income ...................................................... $ 551,304 $ 346,089
Net realized loss on securities sold ....................................... (415) (257)
----------- -----------
Net increase in net assets resulting from operations ....................... 550,889 345,832
----------- -----------
DIVIDENDS FROM NET INVESTMENT INCOME ....................................... (551,304) (346,089)
----------- -----------
CAPITAL SHARE TRANSACTIONS
Proceeds from sales of shares .............................................. 75,796,036 80,014,866
Net asset value of shares issued in reinvestment of dividends .............. 401,895 215,401
Payment for redemption of shares ........................................... (72,120,070) (76,793,905)
----------- -----------
Net increase in net assets resulting from capital share transactions ....... 4,077,861 3,436,362
----------- -----------
Total increase in net assets ............................................... 4,077,446 3,436,105
NET ASSETS
Beginning of year .......................................................... 15,049,370 11,613,265
----------- -----------
End of year ................................................................ $19,126,816 $15,049,370
=========== ===========
</TABLE>
FINANCIAL HIGHLIGHTS
SELECTED DATA PER SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PERIOD ENDED
---------------------------------------- DECEMBER 31,
1994 1993 1992 1991 1990*
------ ------ ------ ------ ------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
period ........................................ $1.000 $1.000 $1.000 $1.000 $1.000
------ ------ ------ ------ ------
Net investment income ............................ .038+ .027+ .033+ .055+ .019+
Dividends from net investment
income ......................................... (.038) (.027) (.033) (.055) (.019)
------ ------ ------ ------ ------
Net asset value, end of period ................... $1.000 $1.000 $1.000 $1.000 $1.000
====== ====== ====== ====== ======
Net assets end of period
(thousands) .................................... $19,127 $15,049 $11,613 $22,982 $10,293
Total investment return .......................... +3.9% +2.7% +3.4% +5.7% +1.9%
Ratios to average net assets:
Expenses ..................................... 0.61%+ 0.65%+ 0.65%+ 0.65%+ 0.65%**+
Net investment income ........................ 3.79% 2.68% 3.41% 5.43% 7.46%**
</TABLE>
- ------------
*October 2, 1990, commencement of operations, through December 31, 1990.
**Annualized.
+Net investment income would have been $.036, $.025, $.030, $.053 and $.018
and the expense ratios would have been .81%, .85%, .85%, .85% and .97%,
respectively, for the periods ended December 31, 1994, 1993, 1992, 1991 and
1990 before waiver of management fee and/or expenses absorbed by Salomon
Brothers Asset Management Inc ("SBAM").
See accompanying notes to financial statements.
<PAGE> 130
PORTFOLIO OF INVESTMENTS SALOMON BROTHERS NEW YORK MUNICIPAL
DECEMBER 31, 1994 MONEY MARKET FUND
<TABLE>
<CAPTION>
YIELD TO
MATURITY
PRINCIPAL ON DATE MATURITY VALUE
AMOUNT MUNICIPAL BONDS AND NOTES OF PURCHASE* DATE (NOTE 1a)
- --------- ------------ -------- ---------
<S> <C> <C> <C> <C>
NEW YORK-100.1%
$2,745,000 Albany County, New York
Industrial Development Agency PUT ....................... 4.65% 08/15/95 $ 2,745,000
3,300,000 Albany County, New York
Industrial Development Agency VR ........................ 5.75 01/05/95 3,300,000
1,210,000 Albany County, New York
Industrial Development Agency PUT ....................... 5.00 12/01/95 1,210,000
875,000 Albany County, New York
Industrial Development Agency VR ........................ 5.85 01/05/95 875,000
2,540,000 Albany, New York
Industrial Development Agency PUT ....................... 4.25 07/01/95 2,540,000
1,169,000 Albany, New York
Housing Authority VR .................................... 3.80 01/03/95 1,169,000
3,015,000 Amherst, New York
Industrial Development Agency VR ........................ 5.85 01/05/95 3,015,000
400,000 Amherst, New York
Industrial Development Agency VR ........................ 5.85 01/05/95 400,000
950,000 Auburn, New York
Industrial Development Agency VR ........................ 5.75 01/04/95 950,000
1,175,000 Babylon, New York
Industrial Development Agency VR ........................ 5.95 01/05/95 1,175,000
2,350,000 Broome County, New York
Industrial Development Agency VR ........................ 5.85 01/05/95 2,350,000
650,000 Broome County, New York
Industrial Development Agency VR ........................ 4.90 01/04/95 650,000
2,450,000 Chautaugua County, New York
Industrial Development Agency VR ........................ 5.75 01/04/95 2,450,000
3,760,000 Colonie, New York
Industrial Development Agency PUT ....................... 5.00 12/01/95 3,760,000
630,000 Colonie, New York
Industrial Development Agency VR ........................ 5.85 01/05/95 630,000
750,000 Colonie, New York
Housing Development Corporation VR ...................... 3.80 01/04/95 750,000
2,000,000 Dutchess County, New York
Industrial Development Agency VR ........................ 5.10 01/05/95 2,000,000
1,400,000 Dutchess County, New York
Industrial Development Agency VR ........................ 5.85 01/05/95 1,400,000
500,000 Erie County, New York
Industrial Development Agency VR ........................ 5.85 01/05/95 500,000
</TABLE>
<PAGE> 131
PORTFOLIO OF INVESTMENTS SALOMON BROTHERS NEW YORK MUNICIPAL
DECEMBER 31, 1994 MONEY MARKET FUND
<TABLE>
<CAPTION>
YIELD TO
MATURITY
PRINCIPAL ON DATE MATURITY VALUE
AMOUNT MUNICIPAL BONDS AND NOTES (CONTINUED) OF PURCHASE* DATE (NOTE 1a)
- --------- ------------ -------- ---------
<S> <C> <C> <C> <C>
NEW YORK (CONTINUED)
$ 450,800 Erie County, New York
Industrial Development Agency VR ........................ 5.85% 01/05/95 $ 450,800
590,000 Erie County, New York
Industrial Development Agency VR ........................ 5.85 01/05/95 590,000
1,240,000 Erie County, New York
Industrial Development Agency,
Series B VR ............................................. 5.85 01/05/95 1,240,000
1,330,000 Fulton County, New York
Industrial Development Agency PUT ....................... 5.00 12/01/95 1,330,000
1,910,000 Fulton County, New York
Industrial Development Agency VR ........................ 5.35 01/05/95 1,910,000
800,000 Lewis County, New York
Industrial Development Agency VR ........................ 5.40 01/04/95 800,000
6,500,000 Monroe County, New York
Industrial Development Agency VR ........................ 5.75 01/04/95 6,500,000
250,000 Monroe County, New York
Industrial Development Agency VR ........................ 5.85 01/05/95 250,000
3,325,000 Monroe County, New York
Industrial Development Agency VR ........................ 5.40 01/05/95 3,325,000
2,050,000 Monroe County, New York
Industrial Development Agency VR ........................ 5.85 01/05/95 2,050,000
4,825,000 Monroe County, New York
Industrial Development Agency VR ........................ 5.85 01/05/95 4,825,000
1,950,000 Monroe County, New York
Industrial Development Agency PUT ....................... 4.60 06/01/95 1,950,000
1,005,000 Monroe County, New York
Industrial Development Agency VR ........................ 5.95 01/05/95 1,005,000
1,620,000 Monroe County, New York
Industrial Development Agency VR ........................ 5.95 01/05/95 1,620,000
2,550,000 Monroe County, New York
Industrial Development Agency VR ........................ 5.95 01/05/95 2,550,000
700,000 Monroe County, New York
Industrial Development Agency PUT ....................... 4.40 06/15/95 700,000
1,700,000 Monroe County, New York
Industrial Development Agency VR ........................ 5.85 01/04/95 1,700,000
7,000,000 Nassau County, New York
Series B TAN ............................................ 4.50 03/15/95 7,003,445
</TABLE>
<PAGE> 132
PORTFOLIO OF INVESTMENTS SALOMON BROTHERS NEW YORK MUNICIPAL
DECEMBER 31, 1994 MONEY MARKET FUND
<TABLE>
<CAPTION>
YIELD TO
MATURITY
PRINCIPAL ON DATE MATURITY VALUE
AMOUNT MUNICIPAL BONDS AND NOTES (CONTINUED) OF PURCHASE* DATE (NOTE 1a)
- --------- ------------ -------- ---------
<S> <C> <C> <C> <C>
NEW YORK (CONTINUED)
$10,000,000 Nassau County, New York
Series A RAN ............................................ 4.00% 04/14/95 $ 10,010,978
7,685,000 Nassau County, New York
Series D BAN ............................................ 5.00 08/15/95 7,724,341
10,000,000 Nassau County, New York
Series C TAN ............................................ 5.40 09/28/95 10,021,311
1,230,000 Nassau County, New York
Industrial Development Agency VR ........................ 5.85 01/05/95 1,230,000
1,100,000 New York State, Environment
Facilities Corporation VR ............................... 6.10 01/03/95 1,100,000
4,400,000 New York State,
Energy Research & Development TECP ...................... 4.50 01/03/95 4,400,000
1,915,000 New York State,
Job Development Authority VR ............................ 3.75 01/03/95 1,915,000
110,000 New York State,
Job Development Authority VR ............................ 3.75 01/03/95 110,000
115,000 New York State,
Job Development Authority VR ............................ 3.75 01/03/95 115,000
1,035,000 New York State,
Job Development Authority VR ............................ 3.75 01/03/95 1,035,000
85,000 New York State,
Job Development Authority VR ............................ 3.85 01/03/95 85,000
535,000 New York State,
Job Development Authority VR ............................ 3.85 01/03/95 535,000
7,100,000 New York State,
Housing Finance Agency VR ............................... 5.50 01/04/95 7,100,000
500,000 New York State,
Energy Research & Development VR ........................ 3.55 01/03/95 500,000
3,400,000 New York State,
Energy Research & Development VR ........................ 5.00 01/03/95 3,400,000
2,600,000 New York State,
Local Government Assistance
Corporation VR .......................................... 5.10 01/04/95 2,600,000
7,600,000 New York State,
Energy Research & Development VR ........................ 5.00 01/03/95 7,600,000
300,000 New York State,
Energy Research & Development VR ........................ 5.00 01/03/95 300,000
1,200,000 New York State, Dormitory Authority VR .................... 4.80 01/04/95 1,200,000
16,235,000 New York State, Dormitory Authority
TECP .................................................... 4.25 01/09/95 16,235,000
</TABLE>
<PAGE> 133
PORTFOLIO OF INVESTMENTS SALOMON BROTHERS NEW YORK MUNICIPAL
DECEMBER 31, 1994 MONEY MARKET FUND
<TABLE>
<CAPTION>
YIELD TO
MATURITY
PRINCIPAL ON DATE MATURITY VALUE
AMOUNT MUNICIPAL BONDS AND NOTES (CONTINUED) OF PURCHASE* DATE (NOTE 1a)
- --------- ------------ ---- ---------
<S> <C> <C> <C> <C>
NEW YORK (CONTINUED)
$3,000,000 New York State,
Dormitory Authority TECP ............................. 4.00% 01/10/95 $ 3,000,000
1,500,000 New York State, Medical Care Facility
Finance Agency FHA P/R ............................... 2.65-2.70 01/15/95 1,533,960
3,675,000 New York, New York
Series A RAN ......................................... 4.50 04/12/95 3,681,833
4,000,000 New York, New York
Series B RAN ......................................... 4.75 06/30/95 4,013,121
860,000 New York, New York
Industrial Development Agency VR ..................... 5.95 01/05/95 860,000
1,600,000 New York, New York
Industrial Development Agency VR ..................... 5.85 01/05/95 1,600,000
230,000 New York, New York
Industrial Development Agency VR ..................... 5.85 01/05/95 230,000
1,255,000 New York, New York
Industrial Development Agency VR ..................... 5.85 01/05/95 1,255,000
475,000 New York, New York
Industrial Development Agency VR ..................... 5.80 01/05/95 475,000
700,000 New York, New York
Industrial Development Agency VR ..................... 5.95 01/05/95 700,000
2,400,000 New York, New York
Industrial Development Agency VR ..................... 5.40 01/04/95 2,400,000
3,000,000 New York, New York
Industrial Development Agency VR ..................... 5.25 01/05/95 3,000,000
1,765,000 New York, New York
Industrial Development Agency VR ..................... 5.95 01/05/95 1,765,000
300,000 New York, New York
Industrial Development Agency VR ..................... 5.35 01/04/95 300,000
4,500,000 New York, New York
Industrial Development Agency VR ..................... 5.15 01/03/95 4,500,000
2,000,000 New York, New York
Industrial Development Agency VR ..................... 4.80 01/04/95 2,000,000
16,000,000 New York, New York
Housing Development Corporation VR ................... 6.00 01/05/95 16,000,000
1,900,000 New York, New York
Housing Development Corporation VR ................... 6.00 01/05/95 1,900,000
2,000,000 New York, New York
Housing Development Corporation VR ................... 6.00 01/05/95 2,000,000
6,600,000 New York, New York
Housing Development Corporation VR ................... 5.40 01/04/95 6,600,000
</TABLE>
<PAGE> 134
PORTFOLIO OF INVESTMENTS SALOMON BROTHERS NEW YORK MUNICIPAL
DECEMBER 31, 1994 MONEY MARKET FUND
<TABLE>
<CAPTION>
YIELD TO
MATURITY
PRINCIPAL ON DATE MATURITY VALUE
AMOUNT MUNICIPAL BONDS AND NOTES (CONTINUED) OF PURCHASE* DATE (NOTE 1a)
- --------- ------------ ---- ---------
<S> <C> <C> <C> <C>
NEW YORK (CONTINUED)
$3,000,000 New York, New York
Housing Development Corporation VR ...................... 5.75% 01/04/95 $ 3,000,000
1,700,000 New York, New York Series A VR ............................ 6.00 01/03/95 1,700,000
2,000,000 New York, New York VR ..................................... 6.50 01/03/95 2,000,000
400,000 New York, New York VR ..................................... 6.00 01/03/95 400,000
600,000 New York, New York VR ..................................... 6.00 01/03/95 600,000
1,500,000 New York, New York VR ..................................... 6.00 01/03/95 1,500,000
3,350,000 New York, New York VR ..................................... 6.05 01/03/95 3,350,000
5,000,000 New York, New York
Municipal Water TECP .................................... 4.50 01/06/95 5,000,000
100,000 New York City
Trust for Cultural Resources VR ......................... 5.00 01/04/95 100,000
1,000,000 New York, New York Water Authority VR ..................... 6.00 01/03/95 1,000,000
3,600,000 Newburgh, New York
Industrial Development Agency VR ........................ 5.30 01/04/95 3,600,000
3,090,000 Niagara County, New York
Industrial Development Agency VR ........................ 5.65 01/04/95 3,090,000
1,250,000 Niagara County, New York
Industrial Development Agency VR ........................ 5.95 01/05/95 1,250,000
3,500,000 Onondaga County, New York
Industrial Development Agency,
Series B VR ............................................. 5.60 01/04/95 3,500,000
1,300,000 Onondaga County, New York
Industrial Development Agency,
Series 1989 VR .......................................... 5.60 01/04/95 1,300,000
3,100,000 Onondaga County, New York
Industrial Development Agency VR ........................ 5.50 01/05/95 3,100,000
379,000 Oneida County, New York
Industrial Development Agency VR ........................ 5.75 01/05/95 379,000
400,000 Port Authority,
New York & New Jersey VR ................................ 5.40 01/03/95 400,000
1,690,000 Rockland County, New York
Industrial Development Agency VR ........................ 5.85 01/05/95 1,690,000
1,800,000 Rockland County, New York
Industrial Development Agency VR ........................ 5.95 01/05/95 1,800,000
1,010,000 Saratoga County, New York
Industrial Development Agency VR ........................ 5.95 01/05/95 1,010,000
430,000 Schoharie County, New York
Industrial Development Agency VR ........................ 5.75 01/05/95 430,000
</TABLE>
<PAGE> 135
PORTFOLIO OF INVESTMENTS SALOMON BROTHERS NEW YORK MUNICIPAL
DECEMBER 31, 1994 MONEY MARKET FUND
<TABLE>
<CAPTION>
YIELD TO
MATURITY
PRINCIPAL ON DATE MATURITY VALUE
AMOUNT MUNICIPAL BONDS AND NOTES (CONTINUED) OF PURCHASE* DATE (NOTE 1a)
- --------- ------------ ---- ---------
<S> <C> <C> <C> <C>
NEW YORK (CONTINUED)
$ 80,000 St. Lawrence County, New York
Industrial Development Agency VR ........................ 5.75% 01/04/95 $ 80,000
8,000,000 Suffolk County, New York
Water Authority VR ...................................... 4.85 01/04/95 8,000,000
1,930,000 Suffolk County, New York
Industrial Development Agency VR ........................ 5.50 01/04/95 1,930,000
3,000,000 Suffolk County, New York
Industrial Development Agency VR ........................ 5.25 01/04/95 3,000,000
500,000 Suffolk County, New York
Industrial Development Agency VR ........................ 4.85 01/04/95 500,000
3,550,000 Syracuse, New York
Industrial Development Agency VR ........................ 5.85 01/04/95 3,550,000
1,550,000 Syracuse, New York
Industrial Development Agency PUT ....................... 4.40 06/15/95 1,550,000
725,000 Wyoming County, New York
Industrial Development Agency VR ........................ 5.85 01/05/95 725,000
1,580,000 Yates County, New York
Industrial Development Agency VR ........................ 5.35 01/05/95 1,580,000
1,000,000 Yonkers, New York
Industrial Development Agency VR ........................ 5.95 01/03/95 1,000,000
1,230,000 Yonkers, New York
Industrial Development Agency VR ........................ 5.85 01/05/95 1,230,000
------------
TOTAL INVESTMENTS-100.1% OF NET ASSETS
(cost $270,042,789) ............................................................ $270,042,789
============
</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.
Abbreviations used in this statement:
BAN Bond Anticipation Note
FHA Mortgage Insured by Federal Housing Administration
RAN Revenue Anticipation Note
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
VR Variable Rate Demand Note. Maturity date shown is the date
of next interest rate change
See accompanying notes to financial statements.
<PAGE> 136
STATEMENT OF ASSETS AND LIABILITIES SALOMON BROTHERS NEW YORK MUNICIPAL
DECEMBER 31, 1994 MONEY MARKET FUND
<TABLE>
<S> <C>
ASSETS
Investments at value (cost $270,042,789) .............................................. $270,042,789
Cash .................................................................................. 38,083
Receivable for securities sold ........................................................ 30,000
Receivable for Fund shares sold ....................................................... 1,749,838
Interest receivable ................................................................... 1,458,308
Unamortized organization expenses ..................................................... 9,071
------------
Total assets ...................................................................... 273,328,089
------------
LIABILITIES
Payable for Fund shares redeemed ...................................................... 3,408,802
Dividend payable ...................................................................... 16,954
Management fee payable ................................................................ 40,457
Accrued expenses ...................................................................... 73,881
------------
Total liabilities ................................................................. 3,540,094
------------
NET ASSETS equivalent to $1.00 per share on 270,044,096 shares of $.001 par
value capital stock outstanding; 3,333,333,333 shares authorized) ................... $269,787,995
============
</TABLE>
<TABLE>
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1994
<S> <C> <C>
INCOME
Interest ................................................................... $ 7,132,055
EXPENSES
Management fee ............................................................. $468,902
Administration fee ......................................................... 190,022
Shareholder services ....................................................... 114,737
Audit and tax return preparation fee ....................................... 49,325
Legal ...................................................................... 45,727
Custodian .................................................................. 36,572
Printing ................................................................... 29,876
Amortization of organization expenses ...................................... 11,968
Registration and filing fees ............................................... 7,330
Directors' fees ............................................................ 2,714
Other ...................................................................... 13,928 971,101
-------- ------------
Net investment income ................................................................. 6,160,954
Net realized loss on securities sold .................................................. (65,622)
------------
Net increase in net assets resulting from operations .................................. $ 6,095,332
============
</TABLE>
See accompanying notes to financial statements.
<PAGE> 137
STATEMENT OF CHANGES IN NET ASSETS SALOMON BROTHERS NEW YORK MUNICIPAL
MONEY MARKET FUND
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1994 1993
------------- ------------
<S> <C> <C>
OPERATIONS
Net investment income .................................................. $ 6,160,954 $ 5,102,444
Net realized gain (loss) on securities sold ............................ (65,622) 49,102
------------ ------------
Net increase in net assets resulting from operations ................... 6,095,332 5,151,546
------------ ------------
DIVIDENDS FROM NET INVESTMENT INCOME ................................... (6,160,954) (5,102,444)
------------ ------------
CAPITAL SHARE TRANSACTIONS
Proceeds from sales of shares .......................................... 424,692,601 516,356,557
Net asset value of shares issued in reinvestment of dividends .......... 5,955,238 4,803,596
Payment for redemption of shares ....................................... (423,206,832) (522,482,028)
------------ ------------
Net change in net assets resulting from capital share transactions ..... 7,441,007 (1,321,875)
------------ ------------
Total change in net assets ............................................. 7,375,385 (1,272,773)
NET ASSETS
Beginning of year ...................................................... 262,412,610 263,685,383
------------ ------------
End of year ............................................................ $269,787,995 $262,412,610
============ ============
</TABLE>
FINANCIAL HIGHLIGHTS
SELECTED DATA PER SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PERIOD ENDED
---------------------------------------------- DECEMBER 31,
1994 1993 1992 1991 1990*
-------- -------- -------- -------- ------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
period ................................ $1.000 $1.000 $1.000 $1.000 $1.000
------ ------ ------ ------ ------
Net investment income ................... .027 .023 .031 .047 .014(D)
Dividends from net investment
income ................................ (.027) (.023) (.031) (.047) (.014)
------ ------ ------ ------ ------
Net asset value, end of period .......... $1.000 $1.000 $1.000 $1.000 $1.000
====== ====== ====== ====== ======
Net assets end of period
(thousands) ........................... $269,788 $262,413 $263,685 $154,782 $34,529
Total investment return ................. +2.7% +2.3% +3.1% +4.8% +1.4%
Ratios to average net assets:
Expenses ............................ .41% .41% .42% .60% .64%**+
Net investment income ............... 2.63% 2.31% 3.07% 4.63% 5.79%**
</TABLE>
- ---------
*October 2, 1990, commencement of operations, through December 31, 1990.
**Annualized.
+Net investment income would have been $.012, and the expense ratio would
have been 1.23% for the period ended December 31, 1990 before waiver of
management fee and expenses absorbed by SBAM.
See accompanying notes to financial statements.
<PAGE> 138
PORTFOLIO OF INVESTMENTS SALOMON BROTHERS U.S. TREASURY SECURITIES
DECEMBER 31, 1994 MONEY MARKET FUND
<TABLE>
<CAPTION>
YIELD TO
MATURITY
PRINCIPAL ON DATE MATURITY VALUE
AMOUNT OF PURCHASE DATE (NOTE 1a)
- -------- ----------- ---- --------
<S> <C> <C> <C> <C>
U.S. TREASURY BILLS-103.8%
$8,049,000 U.S. Treasury Bill ....... 4.71% 02/02/95 $ 8,015,302
807,000 U.S. Treasury Bill ....... 4.65 02/09/95 802,935
3,260,000 U.S. Treasury Bill ....... 4.87 02/09/95 3,242,801
3,667,000 U.S. Treasury Bill ....... 5.20 02/09/95 3,646,342
2,200,000 U.S. Treasury Bill ....... 5.22 02/09/95 2,187,559
5,000,000 U.S. Treasury Bill ....... 5.33 03/09/95 4,950,401
6,000,000 U.S. Treasury Bill ....... 5.77 05/18/95 5,868,256
------------
28,713,596
------------
TOTAL U.S. TREASURY BILLS
(cost $28,713,596) ............................... 28,713,596
------------
TOTAL INVESTMENTS-103.8% OF NET ASSETS .............. $28,713,596
===========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 139
STATEMENT OF ASSETS AND LIABILITIES SALOMON BROTHERS U.S. TREASURY SECURITIES
DECEMBER 31, 1994 MONEY MARKET FUND
<TABLE>
<S> <C>
ASSETS
Investments, at value (cost $28,713,596) ........................ $28,713,596
Cash ............................................................ 8
Receivable for Fund shares sold ................................. 23,658
Unamortized organization expenses ............................... 11,241
-----------
Total assets ................................................ 28,748,503
-----------
LIABILITIES
Payable for Fund shares redeemed ................................ 1,052,863
Dividend payable ................................................ 14,563
Management fee payable .......................................... 2,203
Accrued expenses ................................................ 12,184
-----------
Total liabilities ........................................... 1,081,813
-----------
NET ASSETS (equivalent to $1.00 per share on 27,720,532
shares of $.001 par value capital stock outstanding;
2,000,000,000 shares authorized) .............................. $27,666,690
===========
</TABLE>
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1994
<TABLE>
<S> <C> <C>
INCOME
Interest ............................................... $1,177,203
EXPENSES
Management fee ......................................... $29,658
Administration fee ..................................... 23,727
Registration and filing fees ........................... 12,960
Shareholder services ................................... 12,852
Amortization of organization expenses .................. 12,000
Custodian .............................................. 10,997
Printing ............................................... 8,873
Audit and tax return preparation fees .................. 7,850
Legal .................................................. 5,309
Directors' fees ........................................ 2,713
Other .................................................. 5,015 131,954
------- ----------
Net investment income ........................................... 1,045,249
Net realized loss on securities sold ............................ (2,037)
----------
Net increase in net assets resulting from operations ............ $1,043,212
==========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 140
STATEMENT OF CHANGES IN NET ASSETS SALOMON BROTHERS U.S. TREASURY SECURITIES
MONEY MARKET FUND
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1994 1993
---------- -----------
<S> <C> <C>
OPERATIONS
Net investment income ................................................ $ 1,045,249 $ 1,135,069
Net realized loss on securities sold ................................. (2,037) (4,000)
----------- -----------
Net increase in net assets resulting from operations ................. 1,043,212 1,131,069
----------- -----------
DIVIDENDS FROM NET INVESTMENT INCOME ................................. (1,045,249) (1,135,069)
----------- -----------
CAPITAL SHARE TRANSACTIONS
Proceeds from sales of shares ........................................ 127,781,043 78,899,102
Net asset value of shares issued in reinvestment of dividends ........ 881,270 963,319
Payment for redemption of shares ..................................... (135,113,944) (96,292,490)
----------- -----------
Net decrease in net assets resulting from capital share transactions . (6,451,631) (16,430,069)
----------- -----------
Total decrease in net assets ......................................... (6,453,668) (16,434,069)
NET ASSETS
Beginning of year .................................................... 34,120,358 50,554,427
----------- -----------
End of year .......................................................... $27,666,690 $34,120,358
=========== ===========
</TABLE>
FINANCIAL HIGHLIGHTS
SELECTED DATA PER SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PERIOD ENDED
------------------------------------------------ DECEMBER 31,
1994 1993 1992 1991 1990*
-------- -------- -------- -------- ------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $1.000 $1.000 $1.000 $1.000 $1.000
------ ------ ------ ------ ------
Net investment income .............. .036 .028 .034 (.054)+ .005+
Dividends from net investment
income ............................ (.036) (.028) (.034) (.054) (.005)
------ ------ ------ ------ ------
Net asset value, end of period ..... $1.000 $1.000 $1.000 $1.000 $1.000
====== ====== ====== ====== ======
Net assets end of period (thousands) $27,667 $34,120 $50,554 $35,414 $4,596
Total investment return ............ +3.6% +2.9% +3.4% +5.5% +0.5%
Ratios to average net assets:
Expenses ....................... .45% .35% .44% .54%+ .74%**+
Net investment income .......... 3.53% 2.83% 3.42% 5.23% 6.45%**
</TABLE>
- ---------
*December 7, 1990, commencement of operations, through December 31, 1990.
**Annualized.
+Net investment income would have been $.052 and $.004, and the expense
ratios would have been .64% and 1.72%, respectively, for the years ended
December 31, 1991 and December 31, 1990 before waiver of management fee and
expenses absorbed by SBAM.
See accompanying notes to financial statements.
<PAGE> 141
PORTFOLIO OF INVESTMENTS SALOMON BROTHERS NEW YORK MUNICIPAL
DECEMBER 31, 1994 BOND FUND
<TABLE>
<CAPTION>
MOODY'S/S&P
PRINCIPAL CREDIT VALUE
AMOUNT MUNICIPAL SECURITIES RATING (NOTE 1a)
- --------- ---------- ---------
<S> <C> <C> <C>
NEW YORK-84.4%
$ 110,000 Metropolitan Transportation Authority New York
6.50%, 07/01/16 ............................... Baa1/BBB $ 102,320
120,000 Metropolitan Transportation Authority
5.75%, 07/01/15 ............................... Baa1/BBB 102,068
300,000 New York City Health & Hospital Corporation
6.30%, 02/15/20 ............................... Baa/BBB 267,855
300,000 New York Municipal Water Finance Authority
6.00%, 06/15/17 ............................... A/A- 270,648
100,000 New York State, Medical Care Finance Agency
6.00%, 02/15/11 ............................... Baa1/BBB+ 89,701
250,000 New York State, Local Government Assistance
6.00%, 04/01/18 ............................... A/A 226,500
100,000 New York State,
Dormitory Authority 5.75%, 07/01/18 ........... Baa1/BBB 84,873
315,000 New York State,
Dormitory Authority 6.00%, 05/15/17 ........... Baa1/BBB+ 276,088
55,000 New York State,
Dormitory Authority 6.00%, 07/01/16 ........... Baa1/BBB 48,379
250,000 New York State,
Thruway Authority Services 6.00%, 04/01/10 .... Baa1/BBB 231,608
100,000 New York State, Urban Development 5.50%, 01/01/18 Baa1/BBB 81,029
300,000 New York, New York 6.75%, 10/01/17 .............. Baa1/A- 284,952
300,000 New York, New York 7.375%, 08/15/13 ............. Baa1/A- 305,469
250,000 Onondaga County, New York Industrial Development
Agency 6.625%, 01/01/18 ....................... Baa/BBB 222,215
250,000 Port Authority of New York & New Jersey
6.00%, 01/15/28 ................................ A1/AA- 220,554
---------
TOTAL NEW YORK (COST $3,077,171) ................ 2,814,259
---------
PUERTO RICO-22.7%
250,000 Commonwealth of Puerto Rico 6.00%, 07/01/14 ..... Baa1/A 229,075
250,000 Puerto Rico, Commonwealth Highway Authority
6.00%, 07/01/20 ................................ Baa1/A 223,170
325,000 Puerto Rico,
Electric Power Authority 6.00%, 07/01/10 ....... Baa1/A- 302,972
---------
TOTAL PUERTO RICO (COST $823,516) .......................... 755,217
---------
TOTAL INVESTMENTS-107.1% OF NET ASSETS
(cost $3,900,687) ....................................... $3,569,476
==========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 142
STATEMENT OF ASSETS SALOMON BROTHERS NEW YORK MUNICIPAL
DECEMBER 31, 1994 BOND FUND
<TABLE>
<S> <C>
ASSETS
Investments, at value (cost $3,900,687) ........................ $3,569,476
Cash ........................................................... 18,145
Receivable from SBAM ........................................... 12,085
Interest receivable ............................................ 82,108
Unamortized organization expenses .............................. 41,896
----------
Total assets .............................................. 3,723,710
----------
LIABILITIES
Payable for Fund shares redeemed .............................. 359,878
Dividend payable................................................ 23,550
Accrued expenses ............................................... 6,852
----------
Total liabilities ......................................... 390,280
----------
NET ASSETS (equivalent to $8.98 per share on 371,007 shares
of $.001 par value capital stock outstanding;
3,333,333,333 shares authorized) .............................. $3,333,430
==========
</TABLE>
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1994
<TABLE>
<S> <C> <C>
INCOME
Interest ............................................. $ 453,076
EXPENSES
Management fee ....................................... $ 36,428
Amortization of organization expenses ................ 14,001
Printing ............................................. 7,817
Shareholder services ................................. 6,017
Administration fee ................................... 5,825
Audit and tax return preparation fees ................ 5,620
Directors' fees ...................................... 2,714
Registration and filing fees ......................... 1,208
Legal ................................................ 1,099
Custodian ............................................ 147
Other ................................................ 4,065
--------
84,941
Management fee waived and expenses absorbed by SBAM .. (48,513) 36,428
-------- ----------
Net investment income ................................ 416,648
----------
NET REALIZED LOSS ON SECURITIES SOLD ................. (552,459)
----------
NET UNREALIZED APPRECIATION (DEPRECIATION) OF
INVESTMENTS
Beginning of year .................................... 304,835
End of year .......................................... (331,211)
--------
Decrease in net unrealized appreciation ........................ (636,046)
----------
Net realized loss and decrease in net unrealized appreciation .. (1,188,505)
----------
Net decrease in net assets resulting from operations ........... $ (771,857)
==========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 143
STATEMENT OF CHANGES IN NET ASSETS SALOMON BROTHERS NEW YORK MUNICIPAL
DECEMBER 31, 1994 BOND FUND
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31,
1994 1993
----------- ------------
<S> <C> <C>
OPERATIONS
Net investment income $ 416,648 $ 327,999
Net realized gain (loss) on securities sold and futures transactions ............. (552,459) 9,043
Change in net unrealized appreciation ............................................ (636,046) 304,835
--------- ---------
Net change in net assets resulting from operations ............................... (771,857) 641,877
--------- ---------
DIVIDENDS TO SHAREHOLDERS FROM
Net investment income ............................................................ (416,648) (327,999)
Net realized gain on securities sold and futures ................................. - (15,783)
--------- ---------
(416,648) (343,782)
--------- ---------
CAPITAL SHARE TRANSACTIONS
Proceeds from sales of 194,976 and 985,472 shares, respectively .................. 1,960,677 9,956,475
Net asset value of 40,650 and 27,528 shares, respectively, issued in
reinvestment of dividends ...................................................... 390,961 283,762
Payment for redemption of 665,997 and 211,632 shares, respectively ............... (6,193,972) (2,174,163)
--------- ---------
Net change in net assets resulting from capital share transactions representing
a net decrease of 430,371 and a net increase of 801,368 shares,
respectively ................................................................... (3,842,334) 8,066,074
--------- ---------
Total change in net assets ....................................................... (5,030,839) 8,364,169
NET ASSETS
Beginning of year ................................................................ 8,364,269 100
--------- ---------
End of year ...................................................................... $3,333,430 $8,364,269
========== ==========
</TABLE>
FINANCIAL HIGHLIGHTS
SELECTED DATA PER SHARE OF CAPITAL STOCK OUTSTANDING
THROUGHOUT EACH PERIOD:
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31,
1994 1993*
----------- ------------
<S> <C> <C>
Net asset value, beginning of period ............................................. $10.44 $10.00
------ ------
Net investment income ............................................................ .55+ .46+
Net gains (losses) on securities and futures (both realized and unrealized) ...... (1.46) .46
------ ------
Total from investment operations ................................................. (.91) .92
------ ------
Dividends from net investment income ............................................. (.55) (.46)
Distibutions from net realized gain on securities and futures .................... - (.02)
------ ------
Total dividends and distributions ................................................ (.55) (.48)
------ ------
Net asset value, end of period ................................................... $ 8.98 $10.44
====== ======
Net assets end of period (thousands) ............................................. $3,333 $8,364
Total investment return .......................................................... -8.8%** +9.4%**
Ratios to average net assets:
Expenses ....................................................................... .50%+ .50%***+
Net investment income .......................................................... 5.72% 4.99%***
Portfolio turnover rate .......................................................... 63% 24%
</TABLE>
- ----------
*February 1, 1993, commencement of operations, through December 31, 1993.
**Dividends are declared daily and paid the first day of the following month in
which declared. For the purpose of the total return calculation, the
reinvestment is assumed using the end of month net asset value per share.
***Annualized.
+Net investment income would have been $.49 and $.40, and the expense ratios
would have been 1.17% and 1.24% for the year ended December 31, 1994 and the
period ended December 31, 1993, respectively, before waiver of management fee
and expenses absorbed by SBAM.
See accompanying notes to financial statements.
<PAGE> 144
NOTES TO FINANCIAL STATEMENTS SALOMON BROTHERS SERIES FUNDS INC
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 comprising three money market portfolios
(individually, the "Fund"): Salomon Brothers Cash Management Fund (the "Cash
Fund"), Salomon Brothers New York Municipal Money Market Fund (the "Municipal
Fund") and Salomon Brothers U.S. Treasury Securities Money Market Fund (the
"U.S. Treasury Fund"); and one long-term bond portfolio, Salomon Brothers New
York Municipal Bond Fund (the "Bond Fund").
Certain costs incurred in connection with the Company's organization, which
were payable to Salomon Brothers Asset Management Inc ("SBAM") have been
deferred and are being amortized by the Company over a 60 month period from the
date each Fund commenced operations. In the event that any of the 100,000 shares
purchased by SBAM on September 27, 1990 (the "Initial Shares") are redeemed
during the amortization period by any holder thereof, the Company will be
reimbursed by SBAM for any remaining unamortized costs in the same proportion as
the number of Initial Shares redeemed bears to the total number of Initial
Shares outstanding at the time of redemption.
Following is a summary of significant accounting policies followed by the
Company in the preparation of its financial statements. The policies are in
conformity with generally accepted accounting principles.
(a) Securities Valuation. Portfolio securities for the money market fund
portfolios 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.
For the Bond Fund, portfolio securities are valued by using either
market quotations or independent pricing services which use prices provided
by market-makers or estimates of market values obtained from yield data
relating to instruments or securities with similar characteristics.
Securities for which reliable quotations or prices from pricing services are
not readily available and all other assets will be valued at their
respective fair value as determined in good faith by, or under procedures
established by, the Board of Directors.
Short-term securities, held by the Bond Fund, with less than 60 days
remaining to maturity when acquired by the Fund will be valued at amortized
cost which approximates market value. If the Fund acquires such securities
with more than 60 days remaining to maturity, they will be valued at current
market value (using the bid price) until the 60th day prior to maturity, and
will then be valued on an amortized cost basis.
(b) Futures Contracts. The Bond Fund may use futures contracts, which
involves paying or receiving variation margin, which will be recorded as
unrealized gain or loss until the contract is closed, at such time, a
realized gain or loss will be recognized. Outstanding contracts involve
elements of market risk in excess of amounts reported in the financial
statements.
(c) 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> 145
NOTES TO FINANCIAL STATEMENTS (CONTINUED) SALOMON BROTHERS SERIES FUNDS INC
(d) Dividends. Dividends on the shares of each Fund are declared each
business day to shareholders of record that day, and for the Cash Fund,
Municipal Fund and U.S. Treasury Fund, paid on the last day of the month.
For the Bond Fund, dividends are paid the first day of the month following
that in which the dividends have been declared. Distributions of net
realized gains to shareholders, if any, are declared annually and recorded
on the ex-dividend date.
(e) Expenses. Direct expenses are charged to the Fund that incurred
them, and general expenses are allocated to the Funds based on each Fund's
relative average net assets for the period.
(f) Other. Investment transactions are recorded as of the trade date.
Interest income, including the amortization of discounts or 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 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 Cash Fund and
the Municipal Fund, .10% for the U.S. Treasury Fund and .50% for the Bond Fund.
For the year ended December 31, 1994, SBAM waived its management fees of $29,088
and $36,428 for the Cash Fund and Bond Fund, respectively, and voluntarily
absorbed $12,085 of expenses for the Bond Fund.
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, 1994.
At December 31, 1994, the Bond Fund has a receivable from SBAM of $12,085
relating to expenses voluntarily absorbed by SBAM.
As of December 1, 1994, Investors Bank and Trust Company ("IBT") serves as
the Company's custodian and administrator. IBT performs custodial and certain
administrative services in connection with the operation of the Company. Prior
to December 1, 1994, administrative services were provided by The Shareholder
Services Group, Inc. ("TSSG") and custodial services were provided by Boston
Safe Deposit and Trust Company. TSSG continues to serve as the Company's
transfer and shareholder services agent.
Each Fund has an agreement with Salomon Brothers Inc to distribute its
shares.
<PAGE> 146
NOTES TO FINANCIAL STATEMENTS (CONTINUED) SALOMON BROTHERS SERIES FUNDS INC
3. CAPITAL STOCK
At December 31, 1994, the Company had 10,000,000,000 shares of authorized
capital stock, par value $.001 per share.
The authorized shares are allocated as follows: Cash Fund-1,333,333,334
shares, Municipal Fund-3,333,333,333 shares, U.S. Treasury Fund-2,000,000,000
shares and Bond Fund-3,333,333,333 shares.
<TABLE>
<CAPTION>
Net assets consist of:
CASH FUND MUNICIPAL FUND U.S. TREASURY FUND BOND FUND
--------- -------------- ------------------ ---------
<S> <C> <C> <C> <C>
Par value .......................... $ 19,129 $ 270,044 $ 27,721 $ 371
Paid-in capital in excess of par ... 19,109,801 269,774,052 27,692,811 4,222,749
Accumulated net realized loss on
investments ....................... (2,114) (256,101) (53,842) (558,479)
Net unrealized depreciation ........ - - - (331,211)
----------- ------------ ------------ ----------
Net assets ......................... $19,126,816 $269,787,995 $27,666,690 $3,333,430
=========== ============ =========== ==========
</TABLE>
4. PORTFOLIO ACTIVITY
The Cash Fund and Municipal Fund invest 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 Municipal Fund and the Bond Fund each pursue their
investment objectives by investing at least 65% of their 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 Municipal Fund and
the Bond Fund invest primarily in obligations of the State and City of New York,
they are more susceptible to factors adversely affecting issuers of such
obligations than a fund that is more diversified.
When entering into repurchase agreements, it is the Company's policy to
take possession, through its custodian, of the underlying collateral and to
monitor the collateral value at the time the agreement is entered into and at
all times during the term of the repurchase agreement to ensure that such
collateral always equals or exceeds the repurchase price plus accrued interest.
In the event of default of the obligation to repurchase, the Company has the
right to liquidate the collateral and apply the proceeds in satisfaction of the
obligation. Under certain circumstances, in the event of default or bankruptcy
by the other party to the agreement, realization and/or retention of the
collateral may be subject to legal proceedings.
At December 31, 1994, the Cash Fund, Municipal Fund, U.S. Treasury Fund and
Bond Fund had net capital loss carryovers available to offset future capital
gains as follows:
<TABLE>
<CAPTION>
YEAR OF
EXPIRATION CASH FUND MUNICIPAL FUND U.S. TREASURY FUND BOND FUND
- ---------- --------- -------------- ------------------ ---------
<S> <C> <C> <C> <C>
1999 .......... $ 894 $ 94,844 - -
2000 .......... 396 94,778 $48,666 -
2001 .......... 409 - 4,363 -
2002 .......... 415 65,321 2,005 $305,822
------ -------- ------- --------
$2,114 $254,943 $55,034 $305,822
====== ======== ======= ========
</TABLE>
<PAGE> 147
NOTES TO FINANCIAL STATEMENTS (CONTINUED) SALOMON BROTHERS SERIES FUNDS INC
At December 31, 1994, as permitted under Federal income tax regulations,
the Municipal Fund, U.S. Treasury Fund and the Bond Fund have elected to defer
$301, $32 and $252,597, respectively, of Post-October losses to the next taxable
year.
The Bond Fund's cost of securities for Federal income tax purposes is the
same as for financial statement purposes, which amounted to $3,900,687. As of
December 31, 1994, total unrealized appreciation and depreciation, based on cost
for Federal income tax purposes, amounted to $12,169 and $343,380, respectively,
resulting in net unrealized depreciation of $331,211. Cost of securities
purchased and proceeds from securities sold (other than short-term investments)
during the year ended December 31, 1994 aggregated $4,451,411 and $8,247,502,
respectively.
5. SUBSEQUENT EVENT
Subsequent to December 31, 1994, the Company implemented a multiple class
pricing system with respect to the Cash Fund and the Bond Fund. In connection
with such implementation, the Fund designated all outstanding shares of the Cash
Fund and the Bond Fund as Class O shares, added four new portfolios, The
National Intermediate Municipal Fund, The U.S. Government Income Fund, The High
Yield Bond Fund and The Strategic Bond Fund and created three new classes of
shares designated Class A, Class B and Class C shares. Each of the new classes
of shares has its own distribution plan and sales charge structure.
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
SALOMON BROTHERS SERIES FUNDS INC
In our opinion, the accompanying statements of assets and liabilities,
including the portfolios of investments, and the related statements of
operations and of changes in net assets and the financial highlights present
fairly, in all material respects, the financial position of Salomon Brothers
Cash Management Fund, Salomon Brothers New York Municipal Money Market Fund,
Salomon Brothers U.S. Treasury Securities Money Market Fund and Salomon
Brothers New York Municipal Bond Fund (constituting Salomon Brothers Series
Funds Inc, hereafter referred to as the "Fund") at December 31, 1994, 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 (for
Salomon Brothers New York Municipal Bond Fund, for the year ended December 31,
1994 and the period from February 1, 1993 (commencement of operations) through
December 31, 1993) 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 Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with 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, 1994 by correspondence with the custodian, provide a reasonable
basis for the opinion expressed above.
PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
New York, New York
February 27, 1995
<PAGE> 148
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 Institutional Money Market Fund (formerly known as
Salomon Brothers U.S. Treasury Securities Money Market Fund), Selected Per Share
Data and Ratios for the specified periods are presented under the heading
"Financial Highlights" in the Prospectus
Financial Statements included in Part B:
Audited
For Salomon Brothers Cash Management Fund, Salomon Brothers U.S. Treasury
Securities Money Market Fund, Salomon Brothers New York Municipal Money Market
Fund and Salomon Brothers New York Municipal Bond Fund:
Portfolio of Investments at December 31, 1994
Statement of Assets and Liabilities at December 31, 1994
Statement of Operations for the year ended December 31, 1994
Statement of Changes in Net Assets for the years ended December 31, 1994 and
1993
Financial Highlights for the years ended December 31, 1994, 1993, 1992 and 1991
and the period from October 2, 1990 (commencement of operations) through
December 31, 1990 (for the Cash Management Fund and New York Municipal Money
Market Fund)
Financial Highlights for the years ended December 31, 1994, 1993, 1992 and 1991
and the period from December 7, 1990 (commencement of operations) through
December 31, 1990 (for the U.S. Treasury Securities Money Market Fund.)
For the Salomon Brothers New York Municipal Bond Fund, Financial Highlights for
the years ended December 31, 1994 and 1993:
Notes to Financial Statements for Salomon Brothers Series Funds Inc
Report of Independent Accountants
<PAGE> 149
2
For Salomon Brothers Institutional High Yield Bond Fund, Salomon Brothers
Institutional Emerging Markets Debt Fund and Salomon Brothers Institutional Asia
Growth Fund:
Statement of Assets and Liabilities at _______, 1996
Notes to Financial Statements
Report of Independent Accountants
<PAGE> 150
3
Notes to Financial Statements for Salomon Brothers Series Funds Inc
Report of Independent Accountants
(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) -- Forms of Specimen Stock Certificates for Salomon Brothers
Institutional High Yield Bond Fund, Salomon Brothers
Institutional Emerging Markets Debt Fund and Salomon Brothers
Institutional Asia Growth Fund.*
5(a) -- Form of Management Contract between Registrant and Salomon
Brothers Asset Management Inc relating to the Salomon Brothers
Institutional High Yield Bond Fund.*
5(b) -- Form of Management Contract between Registrant and Salomon
Brothers Asset Management Inc relating to the Salomon Brothers
Institutional Emerging Markets Debt Fund.*
5(c) -- Form of Management Contract between Registrant and Salomon
Brothers Asset Management Inc relating to the Salomon Brothers
Institutional Asia Growth Fund.*
5(d) -- Form of Subadvisory Agreement between Salomon Brothers Asset
Management Inc 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
____________.*
</TABLE>
- -----------------
*/ To be filed by amendment.
<PAGE> 151
4
<TABLE>
<S> <C>
9(a) -- Form of Transfer Agency Agreement between Registrant and
____________.*
9(b) -- Form of Administration Agreement between Registrant and
____________.*
10 -- Opinion and Consent of Counsel of Piper & Marbury, LLP as to
the Legality of Securities Being Registered.*
11 -- Consent of Independent Accountants.
12 -- None.
13 -- Form of 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 -- Performance Data for the Salomon Brothers U.S. Treasury
Securities Money Market Fund (filed as Exhibit 16 to
Post-Effective Amendment No. 4 to the Registration Statement
on Form N-1A of Salomon Brothers Series Funds Inc (File Nos.
33-34423 and 816-06087) and incorporated herein by reference).
17 -- None.
18 -- None.
19(a)-- Form of Application and Signature Card for Salomon Brothers
Institutional Investment Series.*
19(b)-- Powers of Attorney of ____________________.*
</TABLE>
Item 25. Persons Controlled by or under Common Control with Registrant.
None.
- -----------------
*/ To be filed by amendment.
<PAGE> 152
5
Item 26. Number of Holders of Securities
As of January 19, 1996, there are no holders of the shares of
common stock, par value $.001 per share, of each of Salomon Brothers
Institutional High Yield Bond Fund, Salomon Brothers Institutional Emerging
Markets Debt Fund and 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 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-_______, 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).
<PAGE> 153
6
(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) __________________________________
__________________________________
__________________________________
Item 31. Management Services.
Not applicable.
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.
<PAGE> 154
7
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this 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 18th day of
January, 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 1/18/96
- --------------------- (principal executive officer)
Michael S. Hyland
/s/ Alan Mandel Treasurer 1/18/96
- --------------------- (principal financial
Alan Mandel and accounting officer)
</TABLE>
<PAGE> 155
EXHIBIT INDEX
-------------
Exhibit
Number Description
------- -----------
99.1(a) Articles of Incorporation of Registrant.
99.2(a) Registrant's By-Laws.
99.11 Consent of Independent Accountants.
<PAGE> 1
ARTICLES OF INCORPORATION
of
SALOMON BROTHERS INSTITUTIONAL SERIES FUNDS INC
ARTICLE I
Incorporator
The undersigned Kimberly A. Williams, whose address is 36 South
Charles Street, Baltimore, Maryland 21201, being at least 18 years of age, as an
incorporator, hereby forms a corporation under and by virtue of the laws of the
State of Maryland.
ARTICLE II
Name
The name of the corporation is Salomon Brothers Institutional Series
Funds Inc (the "Corporation").
ARTICLE III
Corporate Purposes
The purposes for which the Corporation is formed and the business and
objects to be carried on and promoted by it are:
1. To engage generally in the business of investing, reinvesting,
owning, holding or trading in securities, as defined in the Investment
Company Act of 1940, as from time to time amended (hereinafter referred
to as the "Investment Company Act"), as an investment company
classified under the Investment Company Act as an open-end, management
company.
2. To engage in any one or more businesses or transactions, or to
acquire all or any portion of any entity engaged in any one or more
businesses or transactions, which the Board of Directors may from time
to time authorize or approve, whether or not related to the business
described elsewhere in this Article or to any other business at the
time or theretofore engaged in by the Corporation.
The foregoing enumerated purposes and objects shall be in no way
limited or restricted by reference to, or inference from, the terms of any other
clause of this or any other Article of the charter of the Corporation, and each
shall be regarded as independent; and they are intended to be and shall be
construed as powers as well as purposes and objects of the Corporation and
<PAGE> 2
2
shall be in addition to and not in limitation of the general powers of
corporations under the General Laws of the State of Maryland.
ARTICLE IV
Principal Office and Resident Agent
The address of the principal office of the Corporation in Maryland is
c/o The Corporation Trust Incorporated, 32 South Street, Baltimore, Maryland
21202. The name of the resident agent of the Corporation in Maryland is The
Corporation Trust Incorporated, a Maryland corporation, and the address of the
resident agent is 32 South Street, Baltimore, Maryland 21202.
ARTICLE V
Capital Stock
Section 1. Authorized Shares. (a) The total number of shares of stock
of all Classes and Series which the Corporation initially has authority to issue
is 10,000,000,000 shares of capital stock (par value $.001 per share), amounting
in aggregate par value to $10,000,000. All of such shares are initially
classified as "Common Stock". The Board of Directors may classify or reclassify
any unissued shares of capital stock (whether or not such shares have been
previously classified or reclassified) from time to time by setting or changing
in any one or more respects the preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends, qualifications, or terms or
conditions of redemption of such shares of stock.
(b) Unless otherwise prohibited by law, so long as the Corporation is
registered as an open-end company under the Investment Company Act, the Board of
Directors shall have the power and authority, without the approval of the
holders of any outstanding shares, to increase or decrease the number of shares
of capital stock or the number of shares of capital stock of any Class or Series
that the Corporation has authority to issue.
(c) Of the authorized shares of Common Stock, 3,333,333,333 shares are
initially classified as a Series of Common Stock designated as "High Yield Bond
Fund" Series, 3,333,333,333 shares are initially classified as a Series of
Common Stock designated as "Emerging Markets Debt Fund" Series and 3,333,333,334
shares are initially classified as a Series of Common Stock designated as "Asia
Growth Fund" Series. A Series of Common Stock shall be referred to individually
as a "Series" and collectively, together with any future Series from time to
time established, as the "Series".
<PAGE> 3
3
(d) The following is a description of the preferences, conversion and
other rights, voting powers, restrictions, limitations as to dividends,
qualifications, and terms and conditions of redemption of the shares of Common
Stock classified as the High Yield Bond Fund, Emerging Markets Debt Fund and the
Asia Growth Fund Series and any additional Series of Common Stock of the
Corporation (unless provided otherwise by the Board of Directors with respect to
any such additional Series at the time it is established and designated):
(1) Assets Belonging to Series. All consideration received by the
Corporation from the issue or sale of shares of a particular Series,
together with all assets in which such consideration is invested or
reinvested, all income, earnings, profits and proceeds thereof,
including any proceeds derived from the sale, exchange or liquidation
of such assets, and any funds or payments derived from any investment
or reinvestment of such proceeds in whatever form the same may be,
shall irrevocably belong to that Series for all purposes, subject only
to the rights of creditors, and shall be so recorded upon the books of
account of the Corporation. Such consideration, assets, income,
earnings, profits and proceeds, together with any General Items
allocated to that Series as provided in the following sentence, are
herein referred to collectively as "assets belonging to" that Series.
In the event that there are any assets, income, earnings, profits or
proceeds which are not readily identifiable as belonging to any
particular Series (collectively, "General Items"), such General Items
shall be allocated by or under the supervision of the Board of
Directors to and among any one or more of the Series established and
designated from time to time in such manner and on such basis as the
Board of Directors, in its sole discretion, deems fair and equitable;
and any General Items so allocated to a particular Series shall belong
to that Series. Each such allocation by the Board of Directors shall be
conclusive and binding for all purposes.
(2) Liabilities of Series. The assets belonging to each particular
Series shall be charged with the liabilities of the Corporation in
respect of that Series and all expenses, costs, charges and reserves
attributable to that Series, and any general liabilities, expenses,
costs, charges or reserves of the Corporation which are not readily
identifiable as pertaining to any particular Series, shall be allocated
and charged by or under the supervision of the Board of Directors to
and among any one or more of the Series established and designated from
time to time in such manner and on such basis as the Board of
Directors, in its sole discretion, deems fair and equitable. The
<PAGE> 4
4
liabilities, expenses, costs, charges and reserves allocated and so
charged to a Series are herein referred to collectively as "liabilities
of" that Series. Each allocation of liabilities, expenses, costs,
charges and reserves by or under the supervision of the Board of
Directors shall be conclusive and binding for all purposes.
(3) Dividends and Distributions. Dividends and capital
distributions on shares of a particular Series may be paid with such
frequency, in such form and in such amount as the Board of Directors
may determine by resolution adopted from time to time, or pursuant to a
standing resolution or resolutions adopted only once or with such
frequency as the Board of Directors may determine, after providing for
actual and accrued liabilities of that Series. All dividends on shares
of a particular Series shall be paid only out of the income belonging
to that Series and all capital gains distributions on shares of a
particular Series shall be paid only out of the capital gains belonging
to that Series. All dividends and distributions on shares of a
particular Series shall be distributed pro rata to the holders of that
Series in proportion to the number of shares of that Series held by
such holders at the date and time of record established for the payment
of such dividends or distributions, except that in connection with any
dividend or distribution program or procedure, the Board of Directors
may determine that no dividend or distribution shall be payable on
shares as to which the stockholder's purchase order and/or payment have
not been received by the time or times established by the Board of
Directors under such program or procedure.
Dividends and distributions may be paid in cash, property or
additional shares of the same or another Series, or a combination
thereof, as determined by the Board of Directors or pursuant to any
program that the Board of Directors may have in effect at the time for
the election by stockholders of the form in which dividends or
distributions are to be paid. Any such dividend or distribution paid in
shares shall be paid at the net asset value thereof.
(4) Voting. On each matter submitted to a vote of the
stockholders, each holder of shares shall be entitled to one vote for
each share standing in his name on the books of the Corporation,
irrespective of the Series thereof, and all shares of all Series shall
vote as a single Class ("Single Class Voting"); provided, however, that
(i) as to any matter with respect to which a separate vote of any
Series is required by the Investment Company Act or by the
<PAGE> 5
5
Maryland General Corporation Law, such requirement as to a separate
vote by that Series shall apply in lieu of Single Class Voting; (ii) in
the event that the separate vote requirement referred to in clause (i)
above applies with respect to one or more Series, then, subject to
clause (iii) below, the shares of all other Series shall vote as a
single Class; and (iii) as to any matter which does not affect the
interest of a particular Series, including liquidation of another
Series as described in subsection (7) below, only the holders of shares
of the one or more affected Series shall be entitled to vote.
(5) Redemption by Stockholders. Each holder of shares of a
particular Series shall have the right at such times as may be
permitted by the Corporation to require the Corporation to redeem all
or any part of his shares of that Series, at a redemption price per
share equal to the net asset value per share of that Series next
determined after the shares are properly tendered for redemption, less
such redemption fee or sales charge, if any, as may be established by
the Board of Directors in its sole discretion. Payment of the
redemption price shall be in cash; provided, however, that if the Board
of Directors determines, which determination shall be conclusive, that
conditions exist which make payment wholly in cash unwise or
undesirable, the Corporation may, to the extent and in the manner
permitted by the Investment Company Act, make payment wholly or partly
in securities or other assets belonging to the Series of which the
shares being redeemed are a part, at the value of such securities or
assets used in such determination of net asset value.
Notwithstanding the foregoing, the Corporation may postpone payment of
the redemption price and may suspend the right of the holders of shares
of any Series to require the Corporation to redeem shares of that
Series during any period or at any time when and to the extent
permissible under the Investment Company Act.
(6) Redemption by Corporation. The Board of Directors may cause
the Corporation to redeem at their net asset value the shares of any
Series held in an account having, because of redemptions or exchanges,
a net asset value on the date of the notice of redemption less than the
minimum initial investment in that Series specified by the Board of
Directors from time to time in its sole discretion, provided that at
least 60 days prior written notice of the proposed redemption has been
given to the holder of any such account by mail, postage prepaid, at
the address contained in the books
<PAGE> 6
6
and records of the Corporation and such holder has been given an
opportunity to purchase the required value of additional shares.
(7) Liquidation. In the event of the liquidation of a particular
Series, the stockholders of the Series that is being liquidated shall
be entitled to receive, as a Class, when and as declared by the Board
of Directors, the excess of the assets belonging to that Series over
the liabilities of that Series. The holders of shares of any particular
Series shall not be entitled thereby to any distribution upon
liquidation of any other Series. The assets so distributable to the
stockholders of any particular Series shall be distributed among such
stockholders in proportion to the number of shares of that Series held
by them and recorded on the books of the Corporation. The liquidation
of any particular Series in which there are shares then outstanding may
be authorized by vote of a majority of the Board of Directors then in
office, subject to the approval of a majority of the outstanding voting
securities of that Series, as defined in the Investment Company Act,
and without the vote of the holders of shares of any other Series. The
liquidation of a particular Series may be accomplished, in whole or in
part, by the transfer of assets of such Series to another Series or by
the exchange of shares of such Series for the shares of another Series.
(8) Net Asset Value Per Share. The net asset value per share of
any Series shall be the quotient obtained by dividing the value of the
net assets of that Series (being the value of the assets belonging to
that Series less the liabilities of that Series) by the total number of
shares of that Series outstanding, all as determined by or under the
direction of the Board of Directors in accordance with generally
accepted accounting principles and the Investment Company Act. Subject
to the applicable provisions of the investment Company Act, the Board
of Directors, in its sole discretion, may prescribe and shall set forth
in the By-Laws of the Corporation or in a duly adopted resolution of
the Board of Directors such bases and times for determining the value
of the assets belonging to, and the net asset value per share of
outstanding shares of, each Series, or the net income attributable to
such shares, as the Board of Directors deems necessary or desirable.
The Board of Directors shall have full discretion, to the extent not
inconsistent with the Maryland General Corporation Law and the
Investment Company Act, to determine which items shall be treated as
income and which items as capital, and whether any item of expense
shall be charged to income or capital. Each such determination
<PAGE> 7
7
and allocation shall be conclusive and binding for all purposes.
The Board of Directors may determine to maintain the net asset value
per share of any Series at a designated constant dollar amount and in
connection therewith may adopt procedures not inconsistent with the
Investment Company Act for the continuing declaration of income
attributable to that Series as dividends and for the handling of any
losses attributable to that Series. Such procedures may provide that in
the event of any loss, each stockholder shall be deemed to have
contributed to the capital of the Corporation attributable to that
Series his pro rata portion of the total number of shares required to
be canceled in order to permit the net asset value per share of that
Series to be maintained, after reflecting such loss, at the designated
constant dollar amount. Each stockholder of the Corporation shall be
deemed to have agreed, by his investment in any Series with respect to
which the Board of Directors shall have adopted any such procedure, to
make the, contribution referred to in the preceding sentence in the
event of any such loss.
(9) Equality. All shares of each particular Series shall represent
an equal proportionate interest in the assets belonging to that Series
(subject to the liabilities of that Series), and each share of any
particular Series shall be equal to each other share of that Series.
The Board of Directors may from time to time divide or combine the
shares of any particular Series into a greater or lesser number of
shares of that Series without thereby changing the proportionate
interest in the assets belonging to that Series or in any way affecting
the rights of holders of shares of any other Series.
(10) Conversion or Exchange Rights. Subject to compliance with the
requirements of the Investment Company Act, the Board of Directors
shall have the authority to provide that holders of shares of any
Series shall have the right to convert or exchange said shares into
shares of one or more other Series of shares in accordance with such
requirements and procedures as may be established by the Board of
Directors.
(e) The High Yield Bond Fund Series, the Emerging Markets Debt Fund
Series and the Asia Growth Fund Series and any additional Series of Common Stock
(unless otherwise specified in the articles supplementary designating such
Series) shall each initially have one Class of shares. Any Class of a Series of
Common Stock shall be referred to herein individually as a "Class" and
collectively together with any further class or classes of such Series from time
to time established as the "Classes."
<PAGE> 8
8
(f) All Classes of a particular Series of Common Stock of the
Corporation shall represent the same interest in the Corporation and have
identical voting, dividend, liquidation and other rights with any other shares
of Common Stock of that Series; provided, however, that notwithstanding anything
in the charter of the Corporation to the contrary:
(1) Expenses related solely to a particular Class of a Series
(including, without limitation, distribution expenses under a plan
adopted pursuant to Rule 12b-1 of the Investment Company Act and
administrative expenses under an administration or service agreement,
plan or other arrangement, however designated) shall be borne by that
Class and shall be appropriately reflected (in the manner determined by
the Board of Directors) in the net asset value, dividends, distribution
and liquidation rights of the shares of that Class.
(2) As to any matter with respect to which a separate vote of any
Class of a Series is required by the Investment Company Act or by the
Maryland General Corporation Law (including, without limitation,
approval of any plan, agreement or other arrangement referred to in
subsection (1) above), such requirement as to a separate vote by that
Class shall apply in lieu of Single Class Voting, and if permitted by
the Investment Company Act or the Maryland General Corporation Law, the
Classes of more than one Series shall vote together as a single Class
on any such matter which shall have the same effect on each such Class.
As to any matter which does not affect the interest of a particular
Class of a Series, only the holders of shares of the affected Classes
of that Series shall be entitled to vote.
(g) The Corporation shall not be obligated to issue certificates
representing shares of any Class or Series of capital stock. At the time of
issue or transfer of shares without certificates, the Corporation shall provide
the stockholder with such information as may be required under the Maryland
General Corporation Law.
Section 2. Fractional Shares. The Corporation may issue and sell
fractions of shares of capital stock having pro rata all the rights of full
shares, including, without limitation, the right to vote and the right to
receive dividends, and wherever the words "share" or "shares" are used in the
charter or By-laws of the Corporation, they shall be deemed to include fractions
of shares where the context does not clearly indicate that only full shares are
intended.
Section 3. Quorum Requirements and Voting Rights. Notwithstanding any
provision of law requiring the authorization of any action by a greater
proportion than a majority of the total
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number of shares of all Classes and Series of capital stock or of the total
number of shares of any Class or Series of capital stock entitled to vote as a
separate Class, such action shall be valid and effective if authorized by the
affirmative vote of the holders of a majority of the total number of shares of
all Classes and Series outstanding and entitled to vote thereon, or of the Class
or Series entitled to vote thereon as a separate Class, as the case may be,
except as otherwise provided herein. At a meeting of stockholders the presence
in person or by proxy of stockholders entitled to cast a majority of all the
votes entitled to be cast on any matter with respect to which one or more
Classes or Series of capital stock are entitled to vote as a separate Class
shall constitute a quorum of such separate Class for action on that matter.
Whether or not a quorum of such a separate Class for action on any such matter
is present, a meeting of stockholders convened on the date for which it was
called may be adjourned as to that matter from time to time without further
notice by a majority vote of the stockholders of the separate Class present in
person or by proxy to a date not more than 120 days after the original record
date.
Section 4. No Preemptive Rights. No holder of shares of capital stock
or other securities of the Corporation, whether now or hereafter authorized,
shall have any right to purchase or subscribe for any shares of any stock or
other securities of the Corporation other than such, if any, as the Board of
Directors, in its sole discretion, may determine and at such price or prices and
upon such other terms as the Board of Directors, in its sole discretion, may
fix; and any stock or other securities which the Board of Directors may
determine to offer for subscription may, as the Board of Directors in its sole
discretion shall determine, be offered to the holders of any Class, Series or
type of stock or other securities at the time outstanding to the exclusion of
the holders of any or all other Classes, Series or types of stock or other
securities at the time outstanding.
Section 5. Determination Made by the Board of Directors. Any
determination made in good faith by or pursuant to the direction of the Board of
Directors, as to the amount of assets, debts, obligations, or liabilities of the
Corporation, as to the amount of any reserves or charges set up and the
propriety thereof, as to the time of or purpose for creating such reserves or
charges, as to the use, alteration or cancellation of any reserves or charges
(whether or not any debt, obligation or liability for which such reserves or
charges shall have been created shall have been paid or discharged or shall be
then or thereafter required to be paid or discharged), as to the value of or the
method of valuing any investment or other asset owned or held by the
Corporation, as to the allocation of any asset or liability of the Corporation
to a particular Class or Classes of the Corporation's stock, as to the number of
shares of any Class of stock outstanding, as to the estimated expense to the
Corporation in connection with purchases of its shares, as to the ability to
liquidate investments in orderly fashion, or as to any
<PAGE> 10
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other matters relating to the issue, sale, purchase or other acquisition or
disposition of investments or shares of the Corporation, shall be final and
conclusive and shall be binding upon the Corporation and all holders of its
shares, past, present and future, and shares of the Corporation are issued and
sold on the condition and understanding that any and all such determinations
shall be binding as aforesaid.
Section 6. All Shares of Capital Stock Subject to Articles of
Incorporation. All persons who shall acquire shares of capital stock of the
Corporation shall acquire those shares subject to the provisions of these
Articles of Incorporation and the By-Laws of the Corporation.
ARTICLE VI
Directors
Section 1. Initial Board of Directors. The number of Directors of the
Corporation shall initially be one. The name of the Director who shall hold
office until the first annual meeting of stockholders or until his successor is
duly chosen and qualified is:
Michael S. Hyland
Section 2. Number of Directors. The number of Directors in office may
be changed from time to time in the manner specified in the By-Laws of the
Corporation, but this number shall never be less than the minimum number
required under the Maryland General Corporation Law.
Section 3. Certain Powers of Board of Directors. The Board of Directors
is hereby empowered to authorize the issuance from time to time of shares of its
stock of any Class or Series, whether now or hereafter authorized, or securities
convertible into shares of its stock of any Class or Series, whether now or
hereafter authorized, for such consideration as may be deemed advisable by the
Board of Directors and without any action by the stockholders. The Board of
Directors of the Corporation shall, consistent with applicable law, have power
in its sole discretion to determine from time to time in accordance with sound
accounting practice or other reasonable valuation methods what constitutes
annual or other net profits, earnings, surplus, or net assets in excess of
capital; to determine that retained earnings or surplus shall remain in the
hands of the Corporation; to set apart out of any funds of the Corporation such
reserve or reserves in such amount or amounts and for such proper purpose or
purposes as it shall determine and to abolish any such reserve or any part
thereof; to distribute and pay distributions or dividends in stock, cash or
other securities or property, out of surplus or any other funds or amounts
legally available therefor, at such times
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and to the stockholders of record on such dates as it may, from time to time,
determine; and to determine whether and to what extent and at what times and
places and under what conditions and regulations the books, accounts and
documents of the Corporation, or any of them, shall be open to the inspection of
stockholders, except as otherwise provided by statute or by the By-laws, and,
except as so provided, no stockholder shall have any right to inspect any book,
account or document of the Corporation unless authorized so to do by resolution
of the Board of Directors. The enumeration and definition of particular powers
of the Board of Directors included in the foregoing shall in no way be limited
or restricted by reference to or inference from the terms of any other clause of
this or any other Article of the charter of the Corporation, or construed as or
deemed by inference or otherwise in any manner to exclude or limit any powers
conferred upon the Board of Directors under the General Laws of the State of
Maryland now or hereafter in force.
ARTICLE VII
Liability and Indemnification
The Corporation shall indemnify (i) its directors and officers, whether
serving the Corporation or at its request any other entity, to the full extent
required or permitted by the General Laws of the State of Maryland now or
hereafter in force, including the advance of expenses under the procedures and
to the full extent permitted by law, and (ii) other employees and agents to such
extent as shall be authorized by the Board of Directors or the By-Laws and as
permitted by law. Nothing contained herein shall be construed to protect any
director or officer of the Corporation against any liability to the Corporation
or its security holders to which he would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence, or reckless disregard of the
duties involved in the conduct of his office. The foregoing rights of
indemnification shall not be exclusive of any other rights to which those
seeking indemnification may be entitled. The Board of Directors may take such
action as is necessary to carry out these indemnification provisions and is
expressly empowered to adopt, approve and amend from time to time such by-laws,
resolutions or contracts implementing such provisions or such further
indemnification on arrangements as may be permitted by law. No amendment of the
charter of the Corporation or repeal of any of its provisions shall limit or
eliminate the right of indemnification provided hereunder with respect to acts
or omissions occurring prior to such amendment or repeal.
To the fullest extent permitted by Maryland statutory or decisional
law, as amended or interpreted, and the Investment Company Act, no director or
officer of the Corporation shall be personally liable to the Corporation or its
stockholders for money damages; provided, however, that nothing herein shall be
construed
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to protect any director or officer of the Corporation against any liability to
the Corporation or its security holders to which he would otherwise be subject
by reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his office. No amendment of
the charter of the Corporation or repeal of any of its provisions shall limit or
eliminate the limitation of liability provided to directors and officers
hereunder with respect to any act or omission occurring prior to such amendment
or repeal.
ARTICLE VIII
Amendments
The Corporation reserves the right from time to time to make any
amendments of its charter which may be now or hereafter be authorized by law,
including any amendments changing the terms or contract rights, as expressly set
forth in its charter, of any of its outstanding capital stock by classification,
reclassification or otherwise.
ARTICLE IX
Perpetual Existence
The duration of the Corporation shall be perpetual.
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IN WITNESS WHEREOF, I have signed these ARTICLES OF INCORPORATION on
January 19, 1996 and acknowledge the same to be my act.
SALOMON BROTHERS INSTITUTIONAL SERIES
FUNDS INC
By:______________________
Kimberly A. Williams
WITNESS
_____________________________
<PAGE> 1
BY-LAWS
of
SALOMON BROTHERS INSTITUTIONAL SERIES FUNDS INC
ARTICLE I
Stockholders
SECTION 1. Place of Meeting. Meetings of stockholders shall be held at
such place in the United States as the Board of Directors may determine.
SECTION 2. Annual Meetings. The Corporation shall not be required to
hold an annual meeting of its stockholders in any year in which the election of
directors is not required to be acted upon under the Investment Company Act of
1940 ("the Investment Company Act"). In the event that the Corporation shall
hold an annual meeting of stockholders, such meeting shall be held at a date and
time set by the Board of Directors; provided, however, that if the purpose of
the meeting is to elect directors or to approve an investment advisory agreement
or distribution agreement, then the date and time of such meeting shall be set
in accordance with the Investment Company Act and no later than 120 days after
the occurrence of the event requiring the meeting. Any stockholders' meeting
held in accordance with the preceding sentence shall constitute the annual
meeting of stockholders for the fiscal year of the Corporation in which the
meeting is held. Except as the Charter or statute provides otherwise, any
business may be considered at an annual meeting without the purpose of the
meeting having been specified in the notice. Failure to hold an annual meeting
does not invalidate the Corporation's existence or affect any otherwise valid
corporate acts.
SECTION 3. Special Meetings. Special meetings of the stockholders for
any purpose or purposes, unless otherwise prescribed by statute or by the
Corporation's Charter, may be held at any place within the United States, and
may be called at any time by the Board of Directors or by the Chairman or the
President, and shall be called by the Secretary (or in his absence, an Assistant
Secretary) at the request in writing of a majority of the Board of Directors or
at the request in writing of stockholders entitled to cast at least twenty-five
percent (25%) of the votes entitled to be cast at the meeting upon payment by
such stockholders to the Corporation of the reasonably estimated cost of
preparing and mailing a notice of the meeting (which estimated cost shall be
provided to such stockholders by the Secretary of the Corporation).
Notwithstanding the foregoing, unless requested by stockholders entitled to cast
a majority of the votes entitled to be cast at the meeting, a special meeting of
the stockholders need not be called at the request of stockholders to consider
any matter that is substantially the same as a matter voted on at any special
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meeting of the stockholders held during the preceding twelve (12) months. A
written request shall state the purpose or purposes of the proposed meeting.
SECTION 4. Record Dates. The Board of Directors may fix, in advance, a
date as the record date for the purpose of determining stockholders entitled to
notice of, or to vote at, any meeting of stockholders, or stockholders entitled
to receive payment of any dividend or the allotment of any other rights, or in
order to make a determination of stockholders for any other proper purpose. Such
date in any case shall be not more than 90 days, and in case of a meeting of
stockholders, not less than 10 days, prior to the date on which the particular
action, requiring such determination of stockholders, is to be taken.
SECTION 5. Notice of Meeting; Waiver of Notice. Not less than 10 and
not more than 90 days before each meeting of stockholders, the Secretary shall
give to each stockholder entitled to vote at the meeting and to each other
stockholder entitled to notice of such meeting, written notice of the time,
date, place, and, in the case of a special meeting or when otherwise required by
the laws of the State of Maryland, the purpose or purposes of the meeting.
Notice is given to a stockholder when it is personally delivered to him, left at
his residence or usual place of business, or mailed to him at his address as it
appears on the records of the Corporation. Notice of any meeting of stockholders
shall be deemed waived by any stockholder who attends the meeting in person or
by proxy, or who before or after the meeting submits a signed waiver of notice
that is filed with the records of the meeting.
SECTION 6. Notice of Stockholder Business.
(a) At any annual or special meeting of the stockholders, only such
business shall be conducted as shall have been properly brought before the
meeting. To be properly brought before an annual or special meeting, the
business must be (i) (A) specified in the notice of meeting (or any supplement
thereto) given by or at the direction of the Board of Directors, (B) otherwise
properly brought before the meeting by or at the direction of the Board of
Directors, or (C) otherwise properly brought before the meeting by a stockholder
and (ii) a proper subject under applicable law for stockholder action.
(b) For business to be properly brought before an annual or special
meeting by a stockholder, the stockholder must have given timely notice thereof
in writing to the Secretary of the Corporation. To be timely, any such notice
must be delivered to or mailed and received at the principal executive offices
of the Corporation not later than 60 days prior to the date of the meeting;
provided, however, that if less than 70 days notice or prior public disclosure
of the date of the meeting is given or made to stockholders, any such notice by
a stockholder to be timely must be so received not later than the close of
business
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on the tenth day following the day on which notice of the date of the annual or
special meeting was given or such public disclosure was made.
(c) Any such notice by a stockholder shall set forth as to each matter
the stockholder proposes to bring before the annual or special meeting (i) a
brief description of the business desired to be brought before the annual or
special meeting and the reasons for conducting such business at the annual or
special meeting, (ii) the name and address, as they appear on the Corporation's
books, of the stockholder proposing such business, (iii) the class and number of
shares of the capital stock of the Corporation which are beneficially owned by
the stockholder, and (iv) any material interest of the stockholder in such
business.
(d) Notwithstanding anything in the By-Laws to the contrary, no
business shall be conducted at any annual or special meeting except in
accordance with the procedures set forth in this Section 6. The Chairman of the
annual or special meeting shall, if the facts warrant, determine and declare to
the meeting that business was not properly brought before the meeting and in
accordance with the provisions of this Section 6, and if he should so determine,
he shall so declare to the meeting that any such business not properly brought
before the meeting shall not be considered or transacted.
SECTION 7. Quorum; Voting. Unless statute or the Charter provides
otherwise, at a meeting of stockholders the presence in person or by proxy of
stockholders entitled to cast a majority of all the votes entitled to be cast at
the meeting constitutes a quorum, except that where the holders of shares of any
series or class thereof are entitled to a separate vote as a series or class
(such series or class being referred to as a "Separate Class") or where the
holders of shares of two or more (but not all) series or classes are required to
vote as a single series or class (such classes being referred to as a "Combined
Class"), the presence in person or by proxy of the holders of a majority of the
shares of that Separate Class or Combined Class, as the case may be, issued and
outstanding and entitled to vote thereat shall constitute a quorum for such
vote. A majority of all the votes cast at a meeting at which a quorum is present
is sufficient to approve any matter which properly comes before the meeting,
except that a plurality of all the votes cast at a meeting at which a quorum is
present is sufficient to elect a director.
SECTION 8. Adjournment. Whether or not a quorum is present, a meeting
of stockholders convened on the date for which it was called may be adjourned
from time to time without further notice by a majority vote of the stockholders
present in person or by proxy to a date not more than 120 days after the
original record date. If a quorum with respect to a Separate Class or a Combined
Class, as the case may be, shall not be present or represented at any meeting of
stockholders, the holders of a
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majority of the shares of such Separate Class or such Combined Class, as the
case may be, present in person or by proxy and entitled to vote shall have power
to adjourn the meeting from time to time as to such Separate Class or such
Combined Class, as the case may be, without notice other than announcement at
the meeting, until the requisite number of shares entitled to vote at such
meeting shall be present. Any business which might have been transacted at the
meeting as originally notified may be deferred and transacted at any such
adjourned meeting at which a quorum shall be present.
SECTION 9. Conduct of Meetings. Each meeting of stockholders shall be
presided over by the Chairman of the Board or, if he or she is not present, by
the Vice Chairman of the Board or, if neither of them are present, by a chairman
to be elected at the meeting. The Secretary shall act as secretary of the
meeting or, if he or she is not present, an Assistant Secretary shall so act. If
neither the Secretary nor an Assistant Secretary is present, the chairman of the
meeting shall appoint a Secretary.
SECTION 10. Order of Business. The order of business at all meetings of
the stockholders shall be as determined by the chairman of the meeting.
SECTION 11. General Right to Vote; Proxies. Unless the Charter provides
for a greater or lesser number of votes per share or limits or denies voting
rights, each outstanding share of stock, regardless of class or series, is
entitled to one vote on each matter submitted to a vote at a meeting of
stockholders. In all elections of directors, each share of stock may be voted
for as many individuals as there are directors to be elected and for whose
election the share is entitled to be voted. A stockholder may vote the stock he
owns of record either in person or by written proxy signed by the stockholder or
by his duly authorized attorney-in-fact. No proxy shall be valid after the
expiration of eleven (11) months from the date thereof, unless otherwise
provided in the proxy. Every proxy shall be revocable at the pleasure of the
stockholder executing it, except in those cases in which the proxy states that
it is irrevocable and in which an irrevocable proxy is permitted by law.
SECTION 12. List of Stockholders. At each meeting of stockholders, a
full, true and complete list of all stockholders entitled to vote as such
meeting, showing the number and classes or series of shares held by each and
certified by the transfer agent for such classes or series or by the Secretary,
shall be furnished by the Secretary.
SECTION 13. Inspectors. The Board of Directors may, in advance of any
meeting of stockholders, appoint one (1) or more inspectors to act at the
meeting or at any adjournment of the meeting. If the inspectors shall not be so
appointed or if any of them shall fail to appear or act, the chairman of the
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meeting may appoint inspectors. Each inspector, before entering upon the
discharge of his duties, shall, if required by the chairman of the meeting, take
and sign an oath to execute faithfully the duties of inspector at the meeting
with strict impartiality and according to the best of his ability. The
inspectors, if appointed, shall determine the number of shares outstanding and
the voting power of each share, the number of shares represented at the meeting,
the existence of a quorum and the validity and effect of proxies, and shall
receive votes, ballots or consents, hear and determine all challenges and
questions arising in connection with the right to vote, count and tabulate all
votes, ballots or consents, determine the result, and do those acts as are
proper to conduct the election or vote with fairness to all stockholders. On
request of the chairman of the meeting or any stockholder entitled to vote at
the meeting, the inspectors shall make a report in writing of any challenge,
request or matter determined by them and shall execute a certificate of any fact
found by them. No director or candidate for the office of director shall act as
inspector of an election of directors. Inspectors need not be stockholders of
the Corporation.
SECTION 14. Consent of Stockholders in Lieu of Meeting. Except as
otherwise provided by statute or the Corporation's Charter, any action required
or permitted to be taken at any annual or special meeting of stockholders may be
taken without a meeting, if the following are filed with the records of
stockholders' meetings: (a) a unanimous written consent that sets forth the
action and is signed by each stockholder entitled to vote on the matter and (b)
a written waiver of any right to dissent signed by each stockholder entitled to
notice of the meeting but not entitled to vote at the meeting.
ARTICLE II
Board of Directors
SECTION 1. Powers. The business and affairs of the Corporation shall be
managed by or under the direction of the Board of Directors, which may exercise
all powers of the corporation and do all lawful acts and things that are not by
law, the Charter of the Corporation or these By-Laws directed or required to be
done by the stockholders.
SECTION 2. Number and Tenure. The Corporation shall have at least three
directors; provided that, if there is no stock outstanding, the number of
directors may be less than three but not less than one, and, if there is stock
outstanding and so long as there are fewer than three stockholders, the number
of directors may be less than three but not less than the number of
stockholders. The Corporation shall have the number of directors as provided by
the Charter of the Corporation until changed by a
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vote of a majority of the entire Board of Directors from time to time, provided
that this number shall in no event be fewer than that required by law, nor more
than 21. Each director shall hold office until his successor is elected and
qualifies or until his earlier resignation or removal.
SECTION 3. Vacancies. The stockholders may elect a successor to fill a
vacancy on the Board of Directors which results from the removal of a director
by the stockholders. A director elected by the stockholders to fill a vacancy
which results from the removal of a director serves for the balance of the term
of the removed director. Vacancies in the Board of Directors for any cause,
except an increase in the authorized number of directors, may, subject to the
Investment Company Act, be filled by a majority of the directors then in office,
although less than a quorum, or by a sole remaining director. A vacancy
resulting from an increase in the authorized number of directors may, subject to
the Investment Company Act, be filled by a majority of the entire Board of
Directors. A director elected by the Board of Directors to fill a vacancy serves
until his successor is elected and qualifies or until his earlier resignation or
removal.
SECTION 4. Resignation. A director of the Corporation may resign at any
time by giving written notice of his resignation to the Board of Directors or
the Chairman of the Board or to the Vice-Chairman of the Board or the President
or the Secretary of the Corporation. Any resignation shall take effect at the
time specified in it or, should the time when it is to become effective not be
specified in it, immediately upon its receipt. Acceptance of a resignation shall
not be necessary to make it effective unless the resignation states otherwise.
SECTION 5. Removal of Directors. Unless statute or the Charter provides
otherwise, the stockholders may remove any director, with or without cause, by
the affirmative vote of a majority of all the votes entitled to be cast for the
election of directors. The Board of Directors shall promptly call a meeting of
stockholders for the purpose of voting upon the question of removal of any
director or directors when requested in writing to do so by the record holders
of not less than ten percent of the outstanding shares.
Whenever ten or more stockholders of record who have been such for at
least six months preceding the date of application, and who hold in the
aggregate either shares having a net asset value of at least $25,000 or at least
one percent of the outstanding shares, whichever is less, shall apply to the
Board of Directors in writing, stating that they wish to communicate with other
stockholders with a view to obtaining signatures to a request for a meeting to
vote on the removal of any director and accompanied by a form of communication
and request which they wish to transmit, the Board shall within five business
days after receipt of such application either (i) afford
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to such applicants access to a list of the names and addresses of all
stockholders as recorded on the books of the Corporation; or (ii) inform such
applicants as to the approximate number of stockholders of record, and the
approximate cost of mailing to them the proposed communication and form of
request. If the Board elects to follow the course specified in clause (ii)
above, the Board, upon the written request of such applicants accompanied by a
tender of the material to be mailed and of the reasonable expenses of mailing,
shall, with reasonable promptness, mail such material to all stockholders of
record at their addresses as recorded on the books, unless within five business
days after such tender the Board shall mail to such applicants and file with the
Securities and Exchange Commission (the "Commission"), together with a copy of
the material to be mailed, a written statement signed by at least a majority of
the directors to the effect that in their opinion either such material contains
untrue statements of fact or omits to state facts necessary to make the
statements contained therein not misleading, or would be in violation of
applicable law, and specifying the basis of such opinion. If the commission
shall enter an order refusing to sustain any of such objections, or if, after
the entry of an order sustaining one or more of such objections, the Commission
shall find, after notice and opportunity for hearing, that all objections so
sustained have been met and shall enter an order so declaring, the Board shall
mail copies of such material to all stockholders with reasonable promptness
after the entry of such order and the renewal of such tender.
SECTION 6. Notice of Meetings: Waiver of Notice. Except as provided in
Section 6, the Secretary shall give notice to each director of each regular and
special meeting of the Board of Directors. The notice shall state the time and
place of the meeting. Notice is given to a director when it is delivered
personally to him, left at his residence or usual place of business, or sent by
telegraph, facsimile transmission or telephone, at least 24 hours before the
time of the meeting or, in the alternative, by mail to his address as it shall
appear on the records of the Corporation at least 72 hours before the time of
the meeting. Unless statute, the By-Laws or a resolution of the Board of
Directors provides otherwise, the notice need not state the business to be
transacted at or the purposes of any regular or special meeting of the Board of
Directors. No notice of any meeting of the Board of Directors need be given to
any director who attends, or to any director who, in a writing executed and
filed with the records of the meeting either before or after the holding
thereof, waives such notice. Any meeting of the Board of Directors, regular or
special, may adjourn from time to time to reconvene at the same or some other
place, and no notice need be given of any such adjourned meeting other than by
announcement.
SECTION 7. Place of Meetings. Meetings of the Board of Directors,
regular or special, may be held at any place within
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or without the State of Maryland as the Board of Directors may determine.
SECTION 8. Regular Meetings. Regular Meetings of the Board of Directors
shall be held at the conclusion of each annual meeting of stockholders and at
any other time fixed by the Board of Directors. No notice of regular meetings
shall be required.
SECTION 9. Special Meetings. Special meetings of the Board of Directors
may be called at any time by the Chairman of the Board, the President or a
majority of the Directors. Written notice of the time and place of any special
meeting shall be delivered or telegraphed to each director not less than one day
before the meeting or mailed to each director not less than three days before
the meeting. Notice of any special meeting need not be given to any director who
shall, either before or after the meeting, sign a written waiver of notice that
is filed with the records of the meeting or who shall attend the meeting.
SECTION 10. Quorum. Unless statute or the Charter or these By-Laws
requires a greater proportion, a majority of the total number of directors shall
constitute a quorum for the transaction of business, provided that a quorum
shall be no less than two directors, except where the Board consists of only one
director, a quorum shall be one director. If at any meeting of the Board of
Directors there shall be less than a quorum present, a majority of those present
may adjourn the meeting until a quorum shall have been obtained. Except as
otherwise provided by law, the Charter of the Corporation, these By-Laws or any
contract or agreement to which the Corporation is a party, the act of a majority
of the directors present at any meeting at which there is a quorum shall be the
act of the Board of Directors.
SECTION 11. Committees. The Board of Directors may designate an
executive committee and other committees composed of two or more directors, and
the members thereof, and each committee shall have the powers, authority and
duties specified in the resolution creating the same and permitted by law. If a
member of a committee is absent or disqualified, the members present at a
meeting, whether or not constituting a quorum, may appoint another member of the
Board of Directors to act at the meeting in place of the absent or disqualified
member.
SECTION 12. Organization. The Chairman of the Board shall preside at
each meeting of the Board. In the absence or inability of the Chairman of the
Board to act, the President (if he is a director), or, in his absence or
inability to act, another director chosen by a majority of the directors
present, shall act as chairman of the meeting and preside at the meeting. The
Secretary (or, in his or her absence or inability to act, any person appointed
by the chairman) shall act as secretary of the meeting and keep the minutes of
the meeting.
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SECTION 13. Written Consent of Directors in Lieu of a Meeting. Subject
to the provisions of the Investment Company Act, any action required or
permitted to be taken at any meeting of the Board of Directors or of any
committee of the Board may be taken without a meeting if all members of the
Board or committee, as the case may be, consent thereto in writing, and the
writing or writings are filed with the minutes of the proceedings of the Board
or committee.
SECTION 14. Telephone Conference. Members of the Board of Directors or
any committee of the Board may participate in any Board or committee meeting by
means of a conference telephone or similar communications equipment by means of
which all persons participating in the meeting can hear each other at the same
time. Participation by such means shall constitute presence in person at the
meeting, provided, however, that such participation shall not constitute
presence in person with respect to matters which the Investment Company Act, and
the rules thereunder require the approval of directors by vote cast in person at
a meeting.
SECTION 15. Compensation of Directors. The Board of Directors may
authorize reasonable compensation to directors for their services as directors
and as members of committees of the Board of Directors and may authorize the
reimbursement of reasonable expenses incurred by directors in connection with
rendering those services.
ARTICLE III
COMMITTEES
SECTION 1. Committees. The Board of Directors may appoint from among
its members an Executive Committee and other committees composed of two or more
directors and delegate to these committees any of the powers of the Board of
Directors, except the power to declare dividends or other distributions on
stock, elect directors, issue stock other than as provided in the next sentence,
recommend to the stockholders any action which required stockholder approval,
amend the By-Laws, or approve any merger or share exchange which does not
require stockholder approval. If the Board of Directors has given general
authorization for the issuance of stock, a committee of the Board, in accordance
with a general formula or method specified by the Board by resolution or by
adoption of a stock option or other plan, may fix the terms of stock subject to
classification or reclassification and the terms on which any stock may be
issued, including all terms and conditions required or permitted to be
established or authorized by the Board of Directors.
SECTION 2. Committee Procedure. Each committee may fix rules of
procedure for its business. A majority of the members of a committee shall
constitute a quorum for the transaction of
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business and the action of a majority of those present at a meeting at which a
quorum is present shall be action of the committee. The members of a committee
present at any meeting, whether or not they constitute a quorum, may appoint a
director to act in the place of an absent member. Any action required or
permitted to be taken at a meeting of a committee may be taken without a
meeting, if a unanimous written consent which sets for the action is signed by
each member of the committee and filed with the minutes of the committee. The
members of a committee may conduct any meeting thereof by telephone in
accordance with the provisions of Article II Section 14.
SECTION 3. Emergency. In the event of a state of disaster of sufficient
severity to prevent the conduct and management of the affairs and business of
the Corporation by its directors and officers as contemplated by the Charter and
these By-Laws, any two or more available members of the then incumbent Executive
Committee shall constitute a quorum of that Committee for the full conduct and
management of the affairs and business of the Corporation in accordance with the
provisions of Section 1. In the event of the unavailability, at such time, of a
minimum of two members of the then incumbent Executive Committee, the available
directors shall elect an Executive Committee composed of any two members of the
Board of Directors, whether or not they be officers of the corporation, which
two members shall constitute the Executive Committee for the full conduct and
management of the affairs of the Corporation in accordance with the foregoing
provisions of this Section. This Section shall be subject to implementation by
resolution of the Board of Directors passed from time to time for that purpose,
and any provisions of these By-Laws (other than this Section) and any
resolutions which are contrary to the provisions of this Section or to the
provisions of any such implementing resolutions shall be suspended until it
shall be determined by any interim Executive Committee acting under this Section
that it shall be to the advantage of the Corporation to resume the conduct and
management of its affairs and business under all the other provisions of these
By-Laws.
ARTICLE IV
Officers
SECTION 1. Election and Removal. The Board of Directors shall elect a
President, a Secretary and a Treasurer. The Board of Directors may also in its
discretion elect a Chairman of the Board, a Vice Chairman of the Board, one or
more Executive Vice Presidents, Vice Presidents, Assistant Secretaries,
Assistant Treasurers and other officers, agents and employees. Any two or more
offices, except those of President and Vice President, may be held by the same
person. A person who holds more than one office may not act in more than one
capacity to execute, acknowledge, or verify an instrument required by law
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to be executed, acknowledged, or verified by more than one officer. The Board of
Directors may fill any vacancy which may occur in any office. All officers shall
hold office at the pleasure of the Board of Directors, and any officer may be
removed from office at any time with or without cause by the Board of Directors
whenever, in the judgment of the Board of Directors, the best interests of the
Corporation will be served thereby.
SECTION 2. Powers and Duties. The officers of the Corporation shall
have such powers and duties as generally pertain to their respective offices as
well as such powers and duties as may from time to time be conferred by
resolution of the Board of Directors.
ARTICLE V
INDEMNIFICATION AND INSURANCE
SECTION 1. Indemnification of Directors and Officers. The Corporation
shall indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than a
proceeding by or in the right of the Corporation in which such person shall have
been adjudged to be liable to the Corporation), by reason of being or having
been a director or officer of the Corporation, or serving or having served at
the request of the Corporation as a director, officer, partner, trustee,
employee or agent of another entity in which the Corporation has an interest as
a shareholder, creditor or otherwise (a "Covered Person"), against all
liabilities, including but not limited to amounts paid in satisfaction of
judgments, in compromise or as fines and penalties, and reasonable expenses
(including attorney's fees) actually incurred by the Covered Person in
connection with such action, suit or proceeding, except (i) liability in
connection with any proceeding in which it is determined by (A) the act or
omission of the Covered Person was material to the matter giving rise to the
proceeding, and was committed in bad faith or was the result of active and
deliberate dishonesty, or (B) the Covered Person actually received an improper
personal benefit in money, property or services, or (C) in the case of any
criminal proceeding, the Covered Person had reasonable cause to believe that the
act or omission was unlawful and (ii) liability to the Corporation or its
security holders to which the Covered Person would otherwise be subject by
reason of wilful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his office (any or all of the conduct
referred to in clauses (i) and (ii) being hereinafter referred to as "Disabling
Conduct").
SECTION 2. Procedure For Indemnification. Any indemnification under
Section 1 shall (unless ordered by a court)
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be made by the Corporation only as authorized for a specific proceeding by (i) a
final decision on the merits by a court or other body before whom the proceeding
was brought that the Covered Person to be indemnified was not liable by reason
of Disabling Conduct, (ii) dismissal of the proceeding against the Covered
Person for insufficiency of evidence of any Disabling Conduct, or (iii) a
reasonable determination, based upon a review of the facts, by a majority of a
quorum of the directors who are neither "interested persons" of the Corporation
as defined in the Investment Company Act nor parties to the proceeding
("disinterested, non-party directors"), or an independent legal counsel in a
written opinion, that the Covered Person was not liable by reason of Disabling
Conduct. The termination of any proceeding by judgment, order or settlement
shall not create a presumption that the Covered Person did not meet the required
standard of conduct; the termination of any proceeding by conviction, or a plea
of nolo contendere or its equivalent, or an entry of an order of probation prior
to judgment, shall create a rebuttable presumption that the Covered Person did
not meet the requirement standard of conduct. Any determination pursuant to this
Section 2 shall not prevent recovery from any Covered Person of any amount paid
to him in accordance with this By-Law as indemnification of such Covered Person
is subsequently adjudicated by a court of competent jurisdiction to be liable by
reason of Disabling Conduct.
SECTION 3. Advances. Any current or former director or officer of the
Corporation claiming indemnification within the scope of this Article V shall be
entitled to advances from the Corporation for payment of the reasonable expenses
incurred by him in connection with proceedings to which he is a party in the
manner and to the full extent permissible under the Maryland General Corporation
Law, the Securities Act of 1933, as amended (the "1933 Act"), and the Investment
Company Act, as those statutes are now or hereafter in force; provided, however,
that the person seeking indemnification shall provide to the Corporation a
written affirmation of his good faith belief that the standard of conduct
necessary for indemnification by the Corporation 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, and provided further that at
least one of the following additional conditions is met: (a) the person seeking
indemnification shall provide a security in form and amount acceptable to the
Corporation for his undertaking; (b) the Corporation is insured against losses
arising by reason of the advance; or (c) a majority of a quorum of directors of
the Corporation who are neither "interested persons" as defined in Section
2(a)(19) of the Investment Company Act, nor parties to the proceeding
("disinterested non-party directors"), or independent legal counsel, in a
written opinion, shall determine, based on a review of facts readily available
to the Corporation at the time the advance is proposed to be made, that there is
reason to believe that the person seeking
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indemnification will ultimately be found to be entitled to indemnification.
SECTION 4. Procedure. At the request of any current or former director
or officer, or any employee or agent whom the Corporation proposes to indemnify,
the Board of Directors shall determine, or cause to be determined, in a manner
consistent with the Maryland General Corporation Law, the 1933 Act, and the
Investment Company Act, as those statutes are now or hereafter in force, whether
the standards required by this Article V have been met; provided, however, that
indemnification shall be made only following: (a) a final decision on the merits
by a court or other body before whom the proceeding was brought, finding that
the person to be indemnified was not liable by reason of disabling conduct, (b)
dismissal of the proceeding against the person for insufficiency of evidence of
any disabling conduct, or (c) in the absence of such a decision, a reasonable
determination, based upon a review of the facts, that the person to be
indemnified was not liable by reason of disabling conduct, by (i) the vote of a
majority of a quorum of disinterested non-party directors or (ii) an independent
legal counsel in a written opinion. The termination of any proceeding by
judgment, order or settlement shall not create a presumption that the person
seeking indemnification did not meet the required standard of conduct; that a
termination of any proceeding by a conviction, or a plea of nolo contendere or,
its equivalent or an entry of an order of probation prior to judgment shall
create a rebuttable presumption that the person seeking indemnification did not
meet the required standard of care. Any determination pursuant to this Article
V, Section 3 shall not prevent recovery from any person of any amount paid to
him in accordance with this By-Law as indemnification if such person is
subsequently adjudicated by a court of competent jurisdiction to be liable by
reason of disabling conduct.
SECTION 5. Indemnification of Employees and Agents. Employees and
agents who are not officers or directors of the Corporation may be indemnified,
and reasonable expenses may be advanced to such employees or agents, in
accordance with the procedures set forth in this Article V to the extent
permissible under the Maryland General Corporation Law, the 1933 Act, and the
Investment Company Act, as those statutes are now or hereafter in force, and to
such further extent, consistent with the foregoing, as may be provided by action
of the Board of Directors or by contract.
SECTION 6. Other Rights. The indemnification and advances of expenses
provided by this Article V shall not be deemed exclusive of any other right,
with respect to indemnification or otherwise, to which those seeking such
indemnification may be entitled under any law (common or statutory) or any
agreement, vote of stockholders or disinterested directors or otherwise, both as
to action by a director or officer of the Corporation in his official capacity
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and as to action by such person in another capacity while holding such office or
position, and shall continue as to a person who has ceased to be a director or
officer and shall inure to the benefit of the heirs, executors and
administrators of such a person. All rights to indemnification and advance of
expenses under the Charter and hereunder shall be deemed to be a contract
between the Corporation and each director or officer of the corporation who
serves or served in such capacity at any time while this By-Law is in effect.
Nothing herein shall prevent the amendment of this By-Law, provided that no such
amendment shall diminish the rights of any Covered Person hereunder with respect
to events occurring or claims made before its adoption or as to claims made
after its adoption in respect of events occurring before its adoption. Any
repeal or modification of this By-Law shall not in any way diminish any rights
to indemnification or advance of expenses of a Covered Person or the obligations
of the Corporation arising hereunder with respect to events occurring, or claims
made, while this By-Law or any provision hereof is in force. The Corporation may
purchase and maintain insurance on behalf of any Covered Person against any
liability asserted against him and incurred by him in any such capacity, or
arising out of his status as such; provided, however, that the Corporation shall
not purchase insurance to indemnify any Covered Person against liability for
Disabling Conduct. The invalidity or unenforceability of any provision of this
Article V shall not affect the validity or enforceability of any other provision
hereof. The phrase "this By-Law" in this Article V means this Article V in its
entirety.
SECTION 7. Insurance. The Corporation shall have the power to purchase
and maintain insurance on behalf of any person who is or was a director,
officer, employee or agent of the Corporation, or who, while a director,
officer, employee or agent of the Corporation, is or was serving at the request
of the Corporation as a director, officer, partner, trustee, employee, agent or
fiduciary of another corporation, partnership, joint venture, trust, enterprise
or employee benefit plan, against any liability asserted against and incurred by
him in any such capacity, or arising out of his status as such, provided that no
insurance may be obtained by the Corporation for liabilities against which it
would not have the power to indemnify him under this Article V or applicable
law.
ARTICLE VI
Stock
SECTION 1. Certificates of Stock. If the Board of Directors authorizes
the issue of a series or class of stock with certificates, each holder of shares
of that series or class, upon written request therefor in accordance with such
procedures as may be established by the Board from time to time, is entitled to
certificates which represent and certify the shares of that
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series or class he holds in the Corporation. Each stock certificate shall
include on its face the name of the Corporation, the name of the stockholder or
other person to whom it is issued, and the series or class of stock and number
of shares it represents. It shall be in such form, not inconsistent with law or
with the Charter, as shall be approved by the Board of Directors or any officer
or officers designated for such purpose by resolution of the Board of Directors.
Each stock certificate shall be signed by the Chairman of the Board, the
President, an Executive Vice-President, or a Vice-President and countersigned by
the Secretary, an Assistant Secretary, the Treasurer, or an Assistant Treasurer.
Each certificate may be sealed with the actual corporate seal or a facsimile of
it or in any other form and the signatures may be either manual or facsimile
signatures. A certificate is valid and may be issued whether or not an officer
who signed it is still an officer when it is issued. The Board of Directors may
authorize the issue of some or all of the shares of any or all series or classes
without certificates. Such authorization shall not affect shares already
represented by certificates until they are surrendered to the Corporation. At
the time of issue or transfer of shares without certificates the Corporation
shall send each stockholder a written statement of the information required by
the Maryland General Corporation Law.
SECTION 2. Transfers. The Board of Directors shall have power and
authority to make such rules and regulations as it may deem expedient concerning
the issue, transfer and registration of shares of stock; and may appoint
transfer agents and registrars thereof. The duties of transfer agent and
registrar may be combined.
SECTION 3. Record Date and Closing of Transfer Books. The Board of
Directors may set a record date or direct that the stock transfer books be
closed for a stated period for the purpose of making any proper determination
with respect to stockholders, including which stockholders are entitled to
notice of a meeting, vote at a meeting, receive a dividend, or be allotted other
rights. The record date may not be prior to the close of business on the day the
record date is fixed nor, subject to Article I, Section 8, more than 90 days
before the date on which the action requiring the determination will be taken;
the transfer books may not be closed for a period longer than 20 days; and, in
the case of a meeting of stockholders, the record date of the closing of the
transfer books shall be at least ten days before the date of the meeting.
SECTION 4. Stock Ledger. The Corporation shall maintain a stock ledger
which contains the name and address of each stockholder and the number of shares
of stock of each series or class which the stockholder holds. The stock ledger
may be in written form or in any other form which can be converted within a
reasonable time into written form for visual inspection. The original or a
duplicate of the stock ledger shall be kept at the
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offices of a transfer agent for the particular series or class of stock, or, if
none, at the principal office in the State of Maryland or the principal
executive offices of the Corporation.
SECTION 5. Certification of Beneficial Owners. The Board of Directors
may adopt by resolution a procedure by which a stockholder of the Corporation
may certify in writing to the Corporation that any shares of stock registered in
the name of the stockholder are held for the account of a specified person other
than the stockholder. The resolution shall set forth the class of stockholders
who may certify, the purpose for which the certification may be made, the form
of certification and the information to be contained in it if the certification
is with respect to a record date or closing of the stock transfer books, the
time after the record date or closing of the stock transfer books within which
the certification may be received by the Corporation, and any other provisions
with respect to the procedure which the Board considers necessary or desirable.
On receipt of a certification which complies with the procedure adopted by the
Board in accordance with this Section, the person specified in the certification
is, for the purpose set forth in the certification, the holder of record of the
specified stock in place of the stockholder who makes the certification.
SECTION 6. Lost Stock Certificates. The Board of Directors of the
Corporation may determine the conditions for issuing a new stock certificate in
place of one which is alleged to have been lost, stolen or destroyed, including
the requirement that the owner furnish a bond as indemnity against any claim
that may be made against the Corporation in respect of the lost, stolen or
destroyed certificate, or the Board of Directors may delegate such power to any
officer or officers of the Corporation. In their discretion, the Board of
Directors or such officer or officers may refuse to issue such new certificate
save upon the order of some court having jurisdiction in the premises.
ARTICLE VII
Finance
SECTION 1. Check, Drafts, Etc. All checks, drafts and orders for the
payment of money, notes and other evidences of indebtedness, issued in the name
of the Corporation, shall, unless otherwise provided by resolution of the Board
of Directors, be signed by the President, an Executive Vice-President, a
Vice-President or an Assistant Vice-President and countersigned by the
Treasurer, an Assistant Treasurer, the Secretary or an Assistant Secretary.
SECTION 2. Annual Statement of Affairs. The President or Treasurer
shall prepare annually a full and correct statement of the affairs of the
Corporation, to include a statement of net assets and a financial statement of
operations for the preceding
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fiscal year. The statement of affairs shall be submitted at the annual meeting
of the stockholders, if any, within 20 days after the meeting (or, in the
absence of an annual meeting, within 120 days after the end of the fiscal year,
placed on file at the Corporation's principal office in the State of Maryland.
SECTION 3. Fiscal Year. The fiscal year of the Corporation shall be the
twelve-calendar-month period ending June 30 in each year, unless otherwise
provided by the Board of Directors.
SECTION 4. Dividends. If declared by the Board of Directors at any
meeting thereof, the Corporation may pay dividends on its shares in cash,
property, or in shares of the capital stock of the Corporation, unless such
dividend is contrary to law or to a restriction contained in the Charter of the
Corporation.
ARTICLE VIII
Sundry Provisions
SECTION 1. Books and Records. The Corporation shall keep correct and
complete books and records of its accounts and transactions and minutes of the
proceedings of its stockholders and Board of Directors and of any executive or
other committee when exercising any of the powers of the Board of Directors. The
books and records of the Corporation may be in written form or in any other form
which can be converted within a reasonable time into written form for visual
inspection. Minutes shall be recorded in written form but may be maintained in
the form of a reproduction. The original or a certified copy of these By-Laws
shall be kept at the principal office of the Corporation.
SECTION 2. Corporate Seal. The Board of Directors may provide a
suitable seal, bearing the name of the Corporation, which shall be in the charge
of the Secretary. The Board of Directors may authorize one or more duplicate
seals and provide for the custody thereof. If the Corporation is required to
place its corporate seal to a document, it is sufficient to meet the requirement
of any law, rule or regulation relating to a corporate seal to place the word
"Seal" adjacent to the signature of the person authorized to sign the document
on behalf of the Corporation.
SECTION 3. Bonds. The Board of Directors may require any officer, agent
or employee of the Corporation to give a bond to the Corporation, conditioned
upon the faithful discharge of his duties, with one or more sureties and in such
amount as may be satisfactory to the Board of Directors.
SECTION 4. Voting Shares in Other Corporations. Shares of other
corporations or associations, registered in the
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name of the Corporation, may be voted by the President, a Vice President, or a
proxy appointed by either of them. The Board of Directors, however, may by
resolution appoint some other person to vote such shares, in which case such
person shall be entitled to vote such shares upon the production of a certified
copy of such resolution.
SECTION 5. Mail. Any notice or other document which is required by
these By-Laws to be mailed shall be deposited in the United States mails,
postage prepaid.
SECTION 6. Execution of Documents. A person who holds more than one
office in the Corporation may not act in more than one capacity to execute,
acknowledge or verify an instrument required by law to be executed, acknowledged
or verified by more than one officer.
SECTION 7. Amendments. Subject to the special provisions of Article II,
Section 2, (i) any and all provisions of these By-Laws may be altered or
repealed and new by-laws may be adopted at any annual meeting of the
stockholders, or at any special meeting called for that purpose, and (ii) the
Board of Directors shall have the power, at any regular or special meeting of
the Board of Directors, to make and adopt new by-laws, or to amend, alter or
repeal any of the By-Laws of the Corporation.
ADOPTED: January 19, 1996
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EXHIBIT 11
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of the registration statement on Form N-1A (the "Registration
Statement") for Salomon Brothers Institutional Series Funds Inc of our report
dated February 27, 1995, relating to the financial statements and financial
highlights of Salomon Brothers Cash Management Fund, Salomon Brothers New York
Municipal Money Market Fund, Salomon Brothers U.S. Treasury Securities Money
Market Fund and Salomon Brothers New York Municipal Bond Fund (each a portfolio
of 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 Highlights" in such Prospectus.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
January 17, 1996
