<PAGE>
<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 29, 1997
REGISTRATION NOS. 333-00305
811-07497
________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM N-1A
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933 [x]
PRE-EFFECTIVE AMENDMENT NO. [ ]
POST-EFFECTIVE AMENDMENT NO. 2 [x]
AND/OR
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940 [x]
AMENDMENT NO. 3 [x]
------------------------
SALOMON BROTHERS
INSTITUTIONAL SERIES FUNDS INC
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
------------------------
7 WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(800) 725-6666
------------------------
LAWRENCE H. KAPLAN, ESQ.
SALOMON BROTHERS ASSET MANAGEMENT INC
7 WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
(NAME AND ADDRESS OF AGENT FOR SERVICE)
------------------------
COPY TO:
GARY S. SCHPERO, ESQ.
SIMPSON THACHER & BARTLETT
425 LEXINGTON AVENUE
NEW YORK, NY 10017
------------------------
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after
this Registration Statement becomes effective.
It is proposed that this filing will become effective (check appropriate
box):
[x] immediately upon filing pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
<TABLE>
<S> <C>
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
</TABLE>
------------------------
THE REGISTRANT HAS PREVIOUSLY REGISTERED AN INDEFINITE NUMBER OF ITS SHARES
PURSUANT TO RULE 24F-2 UNDER THE INVESTMENT COMPANY ACT OF 1940, AS AMENDED. THE
REGISTRANT FILED ITS RULE 24F-2 NOTICE FOR THE FISCAL YEAR ENDED FEBRUARY 28,
1997 ON APRIL 25, 1997.
________________________________________________________________________________
<PAGE>
<PAGE>
SALOMON BROTHERS INSTITUTIONAL SERIES FUNDS INC
REGISTRATION STATEMENT ON FORM N-1A
CROSS REFERENCE SHEET
PURSUANT TO RULE 495(A) UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
N-1A
ITEM NO. LOCATION INFORMATION 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... Summary; Investment Objective and Policies; Additional Investment
Activities and Risk Factors; Investment Limitations
Item 5. Management of the Fund.............. Summary; Fee Table; Management; Purchase and Redemption of Shares
Item 5A. Management's Discussion of
Performance....................... Not Applicable
Item 6. Capital Stock and Other
Securities........................ Financial Highlights; Dividends, Distributions and Taxes; Capital
Stock; Account Services
Item 7. Purchase of Securities Being
Offered........................... Summary; Purchase and Redemption of Shares; Management;
Dividends, Distributions and Taxes
Item 8. Redemption or Repurchase............ Summary; Dividends, Distributions and Taxes; Purchase and
Redemption of Shares; Management
Item 9. Pending Legal Proceedings........... Not Applicable
PART B
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 Registrant........ 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>
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>
<PAGE>
Salomon Brothers
Institution
Investment Series
Prospectus
April 29, 1997
Money Market Fund
High Yield Bond Fund
Emerging Markets Debt Fund
Asia Growth Fund
- ---------------------------------
Salomon Brothers Asset Management
- ---------------------------------
<PAGE>
<PAGE>
Salomon Brothers
Institutional Investment Series
-------------------------------------
7 WORLD TRADE CENTER NEW YORK, NEW YORK 10048 (800) SALOMON OR (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'). INSTITUTIONAL SERIES FUNDS AND SERIES FUNDS ARE COLLECTIVELY,
THE 'COMPANIES.'
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 THE MONEY MARKET FUND WILL MAINTAIN A STABLE
NET ASSET VALUE OF $1.00 PER SHARE. SHARES OF THE MONEY MARKET FUND ARE NEITHER
GUARANTEED NOR 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. EACH OF THE FUNDS, EXCEPT THE MONEY MARKET FUND,
MAY INVEST IN CERTAIN SECURITIES, COMMONLY REFERRED TO AS JUNK BONDS, WHICH
PRESENT A HIGH DEGREE OF RISK. SUCH LOWER-QUALITY SECURITIES INVOLVE
COMPARATIVELY GREATER RISKS, INCLUDING PRICE VOLATILITY AND THE RISK OF DEFAULT
IN THE TIMELY PAYMENT OF INTEREST AND PRINCIPAL, THAN HIGHER-QUALITY SECURITIES.
THE HIGH YIELD BOND FUND AND THE EMERGING MARKETS DEBT FUND ARE NOT LIMITED IN
THE PERCENTAGE OF THEIR ASSETS WHICH MAY BE INVESTED IN SUCH SECURITIES. THE
ASIA GROWTH FUND MAY INVEST UP TO 10% OF ITS TOTAL ASSETS IN NON-CONVERTIBLE
SECURITIES OF THIS TYPE AND MAY INVEST WITHOUT LIMIT IN CONVERTIBLE SECURITIES
OF THIS TYPE. SEE 'ADDITIONAL INVESTMENT ACTIVITIES AND RISK FACTORS.'
This Prospectus sets forth concisely the information a prospective investor
should know before investing and should be read and retained for future
reference. A Statement of Additional Information dated April 29, 1997 has been
filed with the Securities and Exchange Commission (the 'SEC') and is
incorporated herein by reference. It is available without charge and can be
obtained by writing to the Funds at the address, or by calling the toll-free
telephone number, listed above.
------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
SALOMON BROTHERS ASSET MANAGEMENT INC -- INVESTMENT MANAGER
SALOMON BROTHERS INC -- DISTRIBUTOR
PROSPECTUS
APRIL 29, 1997
Page 1
<PAGE>
<PAGE>
Table of Contents
- ----------------------------------------------
<TABLE>
<S> <C>
Fee Table 3
Summary 4
Financial Highlights 5
Performance Information 7
Investment Objective and Policies 8
Additional Investment Activities and Risk Factors 20
Investment Limitations 29
Purchase and Redemption of Shares 31
Management 35
Dividends, Distributions and Taxes 39
Account Services 42
Capital Stock 42
Appendix A:
Description of Ratings A-1
Appendix B:
General Characteristics and Risks of Derivatives B-1
</TABLE>
Page 2
<PAGE>
<PAGE>
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 by the Fund of any
front-end sales charge, contingent deferred sales charge or any other
transaction fee. Under certain circumstances, certain broker/dealers may impose
transaction fees on the purchase and/or sale of Fund shares. See 'Purchase and
Redemption of Shares.'
<TABLE>
<CAPTION>
HIGH EMERGING
MONEY YIELD MARKETS ASIA
MARKET BOND DEBT GROWTH
ANNUAL FUND OPERATING EXPENSES FUND* FUND** FUND*** FUND****
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
(as a % of average net assets):
Management Fee .18% .50% .70% .75%
-- ---
Other Expenses (after reimbursement) .00% .05% .05% .25%
-- -- -- ---
Total Fund Operating Expenses (after reimbursement) .18% .55% .75% 1.00%
-- -- -- ---
-- -- -- ---
- ---------------------------------------------------------------------------------------------------------------------
EXAMPLE
You would pay the following expenses on a $1,000 investment, assuming (i) a 5% annual return; (ii) operating
expenses as shown in the fee table set out above`D' and (iii) redemption at the end of each time period:
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------
Money Market Fund $2 $6 $10 $23
High Yield Bond Fund $6 $18 $31 $69
Emerging Markets Debt Fund $8 $24 $42 $93
Asia Growth Fund $10 $32 $55 $122
</TABLE>
- --------------------------------------------------------------------------------
* Reflects the voluntary waiver of management fees and reimbursement of
certain expenses by Salomon Brothers Asset Management Inc ('SBAM'), the
Fund's investment manager, for the fiscal year ended December 31, 1996.
Absent such waiver and reimbursement, Management Fee, Other Expenses and
Total Fund Operating Expenses would have been .20%, .26% and .46%,
respectively. SBAM has voluntarily agreed to reduce or otherwise limit
Total Fund Operating Expenses of the Money Market Fund (exclusive of
taxes, interest and extraordinary expenses such as litigation and
indemnification expenses), on an annualized basis, to .18% of the Fund's
average daily net assets for a period of at least one year from the date
of this Prospectus, and no more than .25% thereafter.
** Reflects the voluntary waiver of management fees and reimbursement of
certain expenses by SBAM for the fiscal year ended February 28, 1997.
Absent such waiver and reimbursement, Management Fee, Other Expenses and
Total Fund Operating Expenses would have been .50%, 4.72% and 5.22%,
respectively. For the fiscal year ending February 28, 1998, SBAM has
voluntarily agreed to reduce or otherwise limit Total Fund Operating
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.
*** Reflects the voluntary waiver of management fees and reimbursement of
certain expenses by SBAM for the fiscal year ended February 28, 1997.
Absent such waiver and reimbursement, Management Fee, Other Expenses and
Total Fund Operating Expenses would have been .70%, 6.87% and 7.57%,
respectively. For the fiscal year ending February 28, 1998, SBAM has
voluntarily agreed to reduce or otherwise limit Total Fund Operating
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.
**** Reflects the voluntary waiver of management fees and reimbursement of
certain expenses by SBAM for the fiscal year ended February 28, 1997.
Absent such waiver and reimbursement, Management Fee, Other Expenses and
Total Fund Operating Expenses would have been .75%, 9.28% and 10.03%,
respectively. For the fiscal year ending February 28, 1998, SBAM has
voluntarily agreed to reduce or otherwise limit Total Fund Operating
Expenses of the Asia Growth Fund (exclusive of taxes, interest and
extraordinary expenses such as litigation and indemnification expenses),
on an annualized basis, to 1.00% of the Fund's average daily net assets.
`D' Assuming the expense caps of .18%, .55%, .75% and 1.00% discussed above
are in effect throughout the time period shown.
The purpose of the foregoing table is to assist an investor in understanding
the various costs and expenses that an investor in a Fund will incur either
directly or indirectly. 'Other Expenses' include administrative fees, custodial
fees, legal and accounting fees, printing costs and registration fees. THE
EXAMPLE ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES AND ACTUAL EXPENSES FOR ANY OF THE FUNDS MAY BE HIGHER OR LOWER THAN
THE AMOUNTS SHOWN. Moreover, while the example assumes a 5% annual return, each
Fund's performance will vary and may result in a return greater or less than
5%. For more complete descriptions of the various costs and expenses borne by
the Funds, see 'Management' in this Prospectus and the Statement of Additional
Information.
Page 3
<PAGE>
<PAGE>
Summary
- ----------------------------------------------
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 High Yield
Bond Fund is organized as a diversified series and the Emerging Markets Debt
Fund and the Asia Growth Fund are organized as non-diversified series of the
Institutional Series Funds. The Money Market Fund is organized as a no-load,
diversified investment series 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 THE FUND WILL MAINTAIN A STABLE NET
ASSET VALUE OF $1.00 PER SHARE. SHARES OF THE FUND ARE NEITHER GUARANTEED NOR
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 can be no assurance that any Fund will achieve its investment objective.
PURCHASE AND REDEMPTION OF SHARES
The minimum initial investment in the Money Market Fund is $250,000 and the
minimum initial investment in the other Funds is $1,000,000. Each Fund may
waive minimum investment requirements at its discretion. There is no subsequent
investment minimum in any Fund. Each Fund reserves the right to reject any
purchase order. See 'Purchase and Redemption of Shares.'
MANAGEMENT SERVICES
Salomon Brothers Asset Management Inc ('SBAM'), an indirect, wholly-owned
subsidiary of Salomon Inc, serves as each Fund's investment manager. SBAM has
retained an affiliate, Salomon Brothers Asset Management Asia Pacific Limited
('SBAM AP'), to serve as sub-adviser to the Asia Growth Fund, subject to the
supervision of SBAM. See 'Management.'
DISTRIBUTOR
Salomon Brothers Inc ('Salomon Brothers'), also an indirect wholly-owned
subsidiary of Salomon Inc ('SI'), serves as each Fund's distributor.
RISK FACTORS
Prospective investors should consider certain risks associated with an
investment in each Fund.
The medium and low rated and comparable unrated securities in which the High
Yield Bond Fund and the Emerging Markets Debt Fund will invest (commonly
referred to as 'junk bonds') involve significantly greater risks than higher
rated securities, including price volatility and risk of default in
Page 4
<PAGE>
<PAGE>
payment of interest and principal. The Emerging Markets Debt Fund's investments
in securities of emerging market countries involves certain considerations not
typically associated with investing in securities of U.S. issuers, including
restrictions on foreign investment and on repatriation of capital, currency
fluctuations, price volatility and lesser liquidity or lack of a secondary
trading market, and political and economic risks, including the risk of
nationalization or expropriation of assets. The Asia Growth Fund is subject to
these same risks and concentration of the Fund's assets in one or a few of the
Asian countries and Asian currencies will subject the Fund, to a greater extent
than if the Fund's assets were less geographically concentrated, to the risks
of adverse changes in the securities and foreign exchange markets of such
countries and social, political or economic events which may occur in such
countries. Additionally, certain Funds may use various investment practices
that involve special considerations, including investing in illiquid
securities, zero coupon and deferred payment securities, loan participations
and assignments and warrants and engaging in repurchase and reverse repurchase
agreements and derivative transactions. See 'Investment Objective and Policies'
and 'Additional Investment Activities and Risk Factors.'
FINANCIAL HIGHLIGHTS
The following data per share of capital stock outstanding throughout each
period and ratios should be read in conjunction with the financial statements
included in the Statement of Additional Information. The financial statements
and financial highlights of the Money Market Fund for the period from December
7, 1990 (commencement of operations) through December 31, 1990 and for each of
the years in the period ended December 31, 1996, and the financial statements
and financial highlights of the High Yield Bond Fund for the period May 15,
1996 (commencement of operations) to February 28, 1997, for the Emerging
Markets Debt Fund for the period October 17, 1996 (commencement of operations)
to February 28, 1997 and for the Asia Growth Fund for the period May 6, 1996
(commencement of operations) to February 28, 1997, have been audited by Price
Waterhouse LLP, whose unqualified reports thereon are included in the Statement
of Additional Information.
<TABLE>
<CAPTION>
Money Market Fund
YEAR ENDED DECEMBER 31, PERIOD ENDED
--------------------------------------------------------------- DECEMBER 31,
1996(A) 1995 1994 1993 1992 1991 1990**
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
-------- ------- ------- ------- ------- ------- ------------
Net investment income 0.050* 0.049* 0.036 0.028 0.034 0.054* 0.005*
Dividends from net investment income (0.050) (0.049) (0.036) (0.028) (0.034) (0.054) (0.005)
-------- ------- ------- ------- ------- ------- ------------
Net asset value, end of year $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
-------- ------- ------- ------- ------- ------- ------------
-------- ------- ------- ------- ------- ------- ------------
Net assets end of year (thousands) $159,651 $11,425 $27,667 $34,120 $50,554 $35,414 $ 4,596
Total investment return +5.1% +5.0% +3.6% +2.9% +3.4% +5.5% +0.5%
Ratios to average net assets:
Expenses 0.20%* 0.65%* 0.45% 0.35% 0.44% 0.54%* 0.74%*`D'
Net investment income 5.29% 4.89% 3.53% 2.83% 3.42% 5.23% 6.45%`D'
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The Fund changed its investment objective on April 29, 1996. Prior to
April 29, 1996, the Fund was called the Salomon Brothers U.S. Treasury
Securities Money Market Fund and invested principally in United States
Treasury bonds, notes and bills.
* Net investment income per share would have been $.048, $.049, $.052 and
$.004 and the expense ratios to average net assets would have been .46%,
.70%, .64% and 1.72%, respectively, for the periods ended December 31,
1996, 1995, 1991 and 1990 before applicable waiver of management fee,
expenses absorbed by SBAM and credits earned on custodian cash balances.
** December 7, 1990, commencement of operations, through December 31, 1990.
`D' Annualized.
Page 5
<PAGE>
<PAGE>
FOR THE PERIOD ENDED FEBRUARY 28, 1997(A)(B)(C)
SELECTED DATA PER SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT THE PERIOD:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
HIGH EMERGING
YIELD MARKET ASIA GROWTH
BOND FUND DEBT FUND FUND
--------- --------- -----------
<S> <C> <C> <C>
Net asset value, beginning of period....................................... $ 10.00 $ 10.00 $ 10.00
--------- --------- -----------
Net investment income.................................................. 0.57 0.35 0.04
Net gain on investments (both realized and unrealized)................. 0.93 0.78 0.91
--------- --------- -----------
Total from investment operations.................................. 1.50 1.13 0.95
--------- --------- -----------
Dividends from net investment income................................... (0.36) (0.20) (0.04)
Distributions from net realized gain on investments.................... (0.01) (0.02) (0.04)
--------- --------- -----------
Total dividends and distributions................................. (0.37) (0.22) (0.08)
--------- --------- -----------
Net asset value, end of period............................................. $ 11.13 $ 10.91 $ 10.87
--------- --------- -----------
--------- --------- -----------
Net assets, end of period (thousands)...................................... $ 6,575 $ 6,211 $ 4,942
Total return*.............................................................. +15.1% +11.4% +9.6%
Ratios to average net assets:
Expenses............................................................... 0.55%** 0.75%** 1.00%**
Net investment income.................................................. 9.36%** 8.94%** 0.58%**
Portfolio turnover rate.................................................... 151% 136% 133%
Average Broker Commission Rate............................................. N/A N/A $0.0052
Before waiver of management fee, expenses absorbed by SBAM and credits
earned from and fees waived by the custodian, net investment income
(loss) per share and expense ratios would have been:
Net investment income (loss) per share................................. $0.29 $0.08 ($0.59)
Expense ratio.......................................................... 5.22%** 7.57%** 10.03%**
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The High Yield Bond Fund's commencement of investment operations was May
15, 1996.
(b) The Emerging Markets Debt Fund's commencement of investment operations was
October 17, 1996.
(c) The Asia Growth Fund's commencement of investment operations was May 6,
1996.
* Total return is calculated assuming a $1,000 investment on the first day of
each period reported, reinvestment of all dividends at the net asset value
on the ex-dividend date, and a sale at net asset value on the last day of
each period reported. Total return calculated for a period of less than one
year is not annualized.
** Annualized.
Page 6
<PAGE>
<PAGE>
Performance Information
-------------------------------------
From time to time, a Fund may advertise its 'yield,' 'effective yield,'
'distribution rate' and / or standardized and nonstandardized 'average annual
total return' over various periods of time. Total return figures show the
average annual percentage change in value of an investment in a Fund from the
beginning date of the measuring period to the end of the measuring period.
These figures reflect changes in the price of the shares and assume that any
income dividends and / or capital gains distributions made by a Fund during the
period were reinvested in the Fund.
Standardized total return is calculated in accordance with the SEC's formula.
Nonstandardized total return differs from the standardized total return only in
that it may relate to a nonstandard period or is presented in the aggregate
rather than as an annual average.
Total return figures will be given for the most current one-, five- and
ten-year periods, or the life of a Fund to the extent it has not been in
existence for any such periods, and may be given for other periods as well,
such as on a year-by-year basis. When considering average total return figures
for periods longer than one year, it is important to note that the total return
for any one year in the period might have been greater or less than the average
for the entire period. 'Aggregate total return' figures may be used for various
periods, representing the cumulative change in value of an investment in Fund
shares for the specific period (again reflecting changes in share prices and
assuming reinvestment of dividends and distributions). Aggregate total return
may be shown by means of schedules, charts or graphs and may indicate subtotals
of the various components of total return (i.e., change in the value of initial
investment, income dividends and capital gains distributions).
Yield is calculated in accordance with the SEC's formula. Yield differs from
total return in that it does not consider changes in net asset value.
From time to time, the Money Market Fund may make available information as to
its 'yield' and 'effective yield.' Both yield figures are based on historical
earnings and are not intended to indicate future performance. The 'yield' of
the Money Market Fund refers to income generated by an investment in the Fund
over a seven-day period, which period will be stated in the advertisement. This
income is then 'annualized.' That is, the amount of income generated by the
investment during that week is assumed to be generated each week over a 52-week
period and is shown as a percentage of the investment. The 'effective yield' is
calculated similarly but, when annualized, the income earned by an investment
in the Fund is assumed to be reinvested. The effective yield will be slightly
higher than the yield because of the compounding effect of this assumed
reinvestment.
Distribution rate differs from yield in that it is calculated by dividing the
annualization of the most recent month's distribution by the maximum offering
price at the end of the month.
Furthermore, in reports or other communications to shareholders or in
advertising materials, performance of Fund shares may be compared with that of
other mutual funds or classes of shares of other mutual funds, as listed in the
rankings prepared by Lipper Analytical Services, Inc. or similar independent
services that monitor the performance of mutual funds, financial indices such
as the S&P 500 Index or other industry or financial publications including, but
not limited to, Bank Rate Monitor, Barron's, Business Week, CDA Investment
Technologies, Inc., Changing Times, Forbes, Fortune, ICB / Donoghue's Money
Fund Report, Institutional Investor, Investors Daily, Money, Morningstar Mutual
Fund Values, The New York Times, USA Today and The Wall Street Journal. The
yield of the Money Market Fund may also be compared to yields set forth in the
weekly statistical release H.15(519) or the monthly statistical release
designated G.13(415) published by the Board of Governors of the Federal Reserve
System. The annual report to shareholders of the Money Market Fund for the
fiscal year ended December 31, 1996 and the annual report to shareholders of
the High Yield Bond Fund, Emerging Markets Debt Fund and Asia Growth Fund for
the fiscal period ended February 28, 1997, containing additional performance
information is available without charge and can be obtained
Page 7
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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
- ----------------------------------------------
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 can be no assurance
that any Fund will achieve its investment objective.
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 mature in thirteen months or less, with an average
portfolio maturity of all portfolio instruments (on a dollar-weighted basis) of
not more than 90 days. The Fund is classified as 'diversified' under the
Investment Company Act of 1940, as amended (the '1940 Act'), and seeks 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: (i) securities rated in one of the two highest short-term
rating categories by: (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
(together, 'Requisite NRSROs'), (ii) securities of issuers that have received
such ratings with respect to other short-term debt securities and (iii)
comparable unrated securities. The Fund may not invest more than 5% of its
total assets in Eligible Securities that have not received the highest rating
from the Requisite NRSROs and comparable unrated securities ('Second Tier
Securities') and may not invest more than the greater of 1% of its total assets
or $1 million in the Second Tier Securities of any one issuer.
The Money Market Fund may also enter into repurchase agreements with respect to
the obligations identified above. While the maturity of the underlying
securities in a repurchase agreement transaction may be more than thirteen
months, the term of the repurchase agreement will always be less than thirteen
months. For a description of repurchase agreements and their associated risks,
see 'Additional Investment Activities and Risk Factors -- Repurchase
Agreements.'
Securities issued or guaranteed by the U.S. government or by its agencies or
instrumentalities include obligations of several kinds. Such securities in
general include a wide variety of U.S. Treasury obligations consisting of bills,
notes and bonds, which principally differ only in their interest rates,
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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 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.
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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
credit quality requirements and be deemed to have a maturity of thirteen months
or less in accordance with applicable regulations. See 'Additional Information
on Portfolio Instruments and Investment Policies' in the Statement of
Additional Information.
The Money Market Fund may also invest in high-quality, short-term municipal
obligations that carry yields that are competitive with those of other types of
money market instruments in which the Fund may invest. Dividends paid by the
Fund derived from interest on municipal obligations that may be purchased by it
will be taxable to shareholders for federal income tax purposes because the
Fund will not qualify as an entity that can pass through the tax-exempt
character of such interest.
The Money Market Fund may purchase securities on a firm commitment basis,
including when-issued securities and the Fund may invest in other investment
funds. See 'Additional Investment Activities and Risk Factors' for a
description of such securities and their associated risks. The Fund is not
currently authorized to use any of the various investment strategies referred
to under 'Additional Investment Activities and Risk Factors -- Derivatives.'
The foregoing investment policies, other than the Money Market Fund's
investment objective, are not fundamental policies and may be changed by vote
of the Board of Directors without the approval of shareholders.
Prior to April 29, 1996, the Fund was known as Salomon Brothers U.S. Treasury
Money Market Fund and invested primarily in United States Treasury bonds, bills
and notes.
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 rated investment grade and which generally entail
increased credit and market risks. To mitigate these risks, the Fund will
diversify its holdings by issuer, industry and credit quality. The Fund is
diversified within the meaning of the 1940 Act.
The High Yield Bond Fund intends to invest, under normal market conditions, at
least 80% of its total assets in non-investment grade fixed-income securities,
(e.g., bonds, debentures, notes, equipment lease certificates, equipment trust
certificates, conditional sales contracts, commercial paper and other
obligations and preferred stock). The lower-rated bonds in which the Fund will
invest are commonly referred to as 'junk bonds.'
The debt obligations in which the Fund will invest generally will be rated, at
the time of investment, 'Ba' or 'B' or lower by Moody's Investors Service
('Moody's') or 'BB' or 'B' or lower by Standard & Poor's Rating Services Group
('S&P'), or determined by SBAM to be of comparable quality. Debt securities
rated by both Moody's and S&P need only satisfy the foregoing ratings standards
with respect to either the Moody's or the S&P rating. The Fund is not required
to dispose of a debt security if its credit rating or credit quality declines.
Medium and low-rated and comparable unrated
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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 further discussion of high
yield securities and the special risks associated therewith, see 'Additional
Investment Activities and Risk Factors -- High Yield Securities.'
The High Yield Bond Fund may invest up to 10% of its total assets in securities
of foreign issuers and up to 5% of its total assets in foreign governmental
issuers in any one country. The foreign securities in which the High Yield Bond
Fund may invest, all or a portion of which may be non-U.S. dollar denominated,
include: (a) debt obligations issued or guaranteed by foreign national,
provincial, state, municipal or other governments with taxing authority or by
their agencies or instrumentalities, including Brady Bonds; (b) debt
obligations of supranational entities; (c) debt obligations of the U.S.
government issued in non-dollar securities; (d) debt obligations and other
fixed-income securities of foreign corporate issuers; and (e) U.S. corporate
issuers. There is no minimum rating criteria for the Fund's investments in such
securities. A description of Brady Bonds is set forth in the discussion of the
investment objective and policies of the Emerging Markets Debt Fund. The risks
associated with these investments are described under the captions 'Additional
Investment Activities and Risk Factors -- Foreign Securities' and ' -- High
Yield Securities.' Moreover, investments in foreign securities may have adverse
tax implications as described under 'Dividends, Distributions and Taxes.'
In light of the risks associated with high yield corporate and sovereign 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, each which involve special risk
considerations. See 'Additional Investment Activities and Risk Factors -- Zero
Coupon Securities, Pay-in-Kind Bonds and Deferred Payment Securities.'
The High Yield Fund may also invest in fixed and floating rate loans ('Loans')
arranged through private negotiations between a corporate borrower or a foreign
sovereign entity and one or more financial institutions ('Lenders'). The Fund
may invest in such Loans in the form of participations in Loans ('Loan
Participations') and assignments of all or a portion of Loans from third parties
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('Assignments'). See 'Additional Investment Activities and Risk Factors -- Loan
Participations and Assignments.'
The High Yield Fund may invest up to 10% of its total assets in either: (1)
equipment lease certificates, equipment trust certificates and conditional
sales contracts; or (2) limited partnership interests. The Fund may invest up
to 10% of its total assets in common stock, convertible securities, warrants or
other equity securities (other than preferred stock for which there is no
limit) when consistent with its investment objective. The Fund will generally
hold such equity investments as a result of purchases of unit offerings of
fixed-income securities which include such securities or in connection with an
actual or proposed conversion or exchange of fixed-income securities, but may
also purchase equity securities not associated with fixed-income securities
when, in the opinion of SBAM, such purchase is appropriate.
In order to maintain liquidity, the Fund may hold and/or invest up to 20% of
its total assets in cash and/or U.S. dollar denominated debt securities
including: (1) short-term (less than 12 months to maturity) and medium-term
(not greater than five years to maturity) obligations issued or guaranteed by
(a) the U.S. government or the government of a developed country, their
agencies or instrumentalities or (b) international organizations designated or
supported by multiple foreign governmental entities to promote economic
reconstruction or development ('supranational entities'); (2) finance company
obligations, corporate commercial paper and other short-term commercial
obligations, in each case rated or issued by companies with similar securities
outstanding that are rated 'Prime-1' or 'A' or better by Moody's or 'A-1' or
'A' or better by S&P or, if unrated, of comparable quality as determined by
SBAM; (3) obligations (including certificates of deposit, time deposits, demand
deposits and bankers' acceptances) of banks; and (4) repurchase agreements (as
discussed below under 'Additional Investment Activities and Risk
Factors -- Repurchase Agreements') with respect to securities in which the Fund
may invest. The Fund may invest its assets without limit in such instruments
for temporary defensive purposes in the event of adverse market conditions. To
the extent the Fund adopts such a temporary defensive position, it will not be
invested so as to directly achieve its investment objective.
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
determined by SBAM to be liquid 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
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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 policies and may be
changed by vote of the Board of Directors without the approval of shareholders.
EMERGING MARKETS DEBT FUND
The investment objective of the Emerging Markets Debt Fund is to maximize total
return. The Fund seeks to achieve its objective by investing at least 80% of
its total assets in debt securities of government, government-related and
corporate issuers in emerging market countries and of entities organized to
restructure outstanding debt of such issuers. As used in this Prospectus, an
'emerging market country' is any country considered to be an emerging market
country by the World Bank at the time of investment. These countries generally
include every nation in the world except the United States, Canada, Japan,
Australia, New Zealand and most countries located in Western Europe. The Fund
is non-diversified within the meaning of the 1940 Act. See 'Additional
Investment Activities and Risk Factors -- Non-Diversification.'
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
Argentina
Brazil
Bulgaria
Chile
China
Colombia
Costa Rica
Czech Republic
Dominican Republic
Ecuador
Egypt
Greece
Hungary
India
Indonesia
Ivory Coast
Jamaica
Jordan
Lebanon
Malaysia
Mexico
Morocco
Nicaragua
Nigeria
Pakistan
Panama
Paraguay
Peru
Philippines
Poland
Portugal
Russia
Slovakia
Slovenia
South Africa
Thailand
Trinidad & Tobago
Tunisia
Turkey
Uruguay
Venezuela
Vietnam
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 risks. As opportunities to invest in debt securities in other
countries develop, the Fund expects to expand and further diversify the
emerging market countries in which it invests. While the Fund generally is not
restricted in the portion of its assets which may be invested in a single
country or region, it is anticipated that, under normal conditions, the Fund's
assets will be invested in issuers in at least three countries.
Emerging market country debt securities in which the Emerging Markets Debt Fund
may invest are U.S. dollar-denominated and non-U.S. dollar-denominated debt
securities, including bonds, notes, bills, debentures, convertible securities,
warrants, bank debt obligations, short-term paper, mortgage and other
asset-backed securities, preferred stock, Loan Participations and Assignments
and interests issued by entities organized and operated for the purpose of
restructuring the investment characteristics of instruments issued by emerging
market country issuers. The Fund is subject to no restrictions on the
maturities of the emerging market country debt securities in which it will
invest
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and such maturities may range from overnight to thirty years. There is no limit
on the percentage of the Fund's assets that may be invested in non-U.S. dollar
denominated securities and a substantial portion of the Fund's assets may be
invested in non-U.S. dollar denominated securities. The amount of assets
invested in non-U.S. dollar denominated securities will vary depending upon
market conditions. The Fund may invest in Brady Bonds, which are debt
securities issued under the framework of the Brady Plan, an initiative
announced by former U.S. Treasury Secretary Nicholas F. Brady in 1989 as a
mechanism for debtor nations to restructure their outstanding external
indebtedness. For a description of Brady Bonds, see 'Additional Investment
Activities and Risk Factors -- High Yield Securities' herein and 'Additional
Information on Portfolio Instruments and Investment Policies -- Brady Bonds' in
the Statement of Additional Information. For a description of Loan
Participations and Assignments, see 'Additional Investment Activities and Risk
Factors -- Loan Participations and Assignments.'
Investments in securities of foreign issuers may involve risks arising from
differences between U.S. and foreign securities markets, including less volume,
much greater price volatility in and relative illiquidity of foreign securities
markets, different trading and settlement practices and less governmental
supervision and regulation, changes in currency exchange rates, high and
volatile rates of inflation, economic, social and political conditions and, as
with domestic multinational corporations, fluctuating interest rates. See
'Additional Investment Activities and Risk Factors -- Foreign Securities.'
The Fund's investments in government, government-related and restructured debt
securities will consist of: (i) debt securities or obligations issued or
guaranteed by governments, governmental agencies or instrumentalities and
political subdivisions located in emerging market countries (including
participations in loans between governments and financial institutions); (ii)
debt securities or obligations issued by government-owned, controlled or
sponsored entities located in emerging market countries (including
participations in loans between governments and financial institutions); and
(iii) interests in issuers organized and operated for the purpose of
restructuring the investment characteristics of instruments issued by any of
the entities described above. Such type of restructuring involves the deposit
with or purchase by an entity of specific instruments and the issuance by that
entity of one or more classes of securities backed by, or representing
interests in, the underlying instruments. Certain issuers of such structured
securities may be deemed to be 'investment companies' as defined in the 1940
Act. As a result, the Fund's investment in such securities may be limited by
certain investment restrictions contained in the 1940 Act. See 'Additional
Information on Portfolio Instruments and Investment Policies -- Structured
Investments' in the Statement of Additional Information. In addition to the
risks of investing in emerging market country debt securities, the Fund's
investment in government, government-related and restructured debt instruments
are subject to special risks, including the inability or unwillingness to repay
principal and interest, requests to reschedule or restructure outstanding debt,
and requests to extend additional loan amounts. The Fund may have limited
recourse in the event of default on such debt instruments. See 'Additional
Investments Activities and Risk Factors -- Foreign Securities' and ' -- High
Yield Securities.'
The Emerging Market Debt Fund's investments in debt securities of corporate
issuers in emerging market countries may include debt securities or obligations
issued by: (i) banks located in emerging market countries or by branches of
emerging market country banks located outside such 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 and generally the Fund's
investments are expected to be in the lower and lowest rating categories of
internationally recognized credit rating organizations or of comparable
quality. Such securities, commonly referred to as 'junk bonds,' 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
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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, such factors
typically include the issuer's financial resources, its sensitivity to economic
conditions and trends, the operating history of the issuer, and the experience
and track record of the issuer's management. For sovereign debt instruments,
these will typically include the economic and political conditions within the
issuer's country, the issuer's overall and external debt levels and debt
service ratios, the issuer's access to capital markets and other sources of
funding, and the issuer's debt service payment history. SBAM will also review
the ratings, if any, assigned to the security by any recognized rating
organizations, although SBAM's judgment as to the quality of a debt security
may differ from that suggested by the rating published by a rating service. In
addition to the foregoing credit analysis, SBAM will evaluate the relative
value of an investment compared with its perceived credit risk. In selecting
securities for the Emerging Markets Debt Fund, SBAM intends to consider the
correlation among securities represented in the Fund's portfolio in an attempt
to reduce the risk of exposure to market, industry and issuer volatility. The
Fund's ability to achieve its investment objective may be more dependent on
SBAM's credit analysis than would be the case if it invested in higher quality
debt securities. A description of the ratings used by Moody's and S&P is set
forth in Appendix A to this Prospectus.
The Emerging Markets Debt Fund may invest in zero coupon securities,
pay-in-kind bonds and deferred payment securities. The characteristics and
risks of these investments are described under 'Additional Investment
Activities and Risk Factors -- Zero Coupon Securities, Pay-in-Kind Bonds and
Deferred Payment Securities.'
The Emerging Markets Debt Fund may invest up to 10% of its total assets in
common stock, convertible securities, warrants or other equity securities when
consistent with the Fund's objective. The Fund will generally hold such equity
investments as a result of purchases of unit offerings of fixed-income
securities which include such securities or in connection with an actual or
proposed conversion or exchange of fixed-income securities, but may also
purchase equity securities not associated with fixed-income securities when, in
the opinion of SBAM, such purchase is appropriate.
In order to maintain liquidity, the Emerging Markets Debt Fund may hold and/or
invest up to 20% of its total assets in cash and/or U.S. dollar denominated
debt securities including: (1) short-term (less than 12 months to maturity) and
medium-term (not greater than five years to maturity) obligations issued or
guaranteed by (a) the U.S. government or the government of a developed country,
their agencies or instrumentalities or (b) international organizations
designated or supported by multiple foreign governmental entities to promote
economic reconstruction or development ('supranational entities'); (2) finance
company obligations, corporate commercial paper and other short-term commercial
obligations, in each case rated or issued by companies with similar securities
outstanding that are rated 'Prime-1' or 'A' or better by Moody's or 'A-1' or
'A' or better by S&P or, if unrated, of comparable quality as determined by
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. The Fund may invest its assets without limit in such instruments
for temporary defensive purposes in the event of adverse market conditions. To
the extent the Fund adopts such a temporary defensive position, it will not be
invested so as to directly achieve its investment objective.
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
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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
determined by SBAM to be liquid 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, other than the Emerging Markets Debt Fund's
investment objective, are not fundamental policies and may be changed by vote
of the Board of Directors without the approval of shareholders.
ASIA GROWTH FUND
The Asia Growth Fund's objective is to achieve long-term capital appreciation.
The Fund seeks to achieve its objective by investing at least 65% of its total
assets in equity and equity-related securities of Asian Companies. Asian
Companies include companies that: (i) are organized under the laws of
Bangladesh, China, Hong Kong, India, Indonesia, Korea, Malaysia, Pakistan, the
Philippines, Singapore, Sri Lanka, Taiwan, Thailand or any other country in the
Asian region (other than Japan, Australia and New Zealand) that currently or in
the future permits foreign investment (collectively, 'Asian Countries'); or (ii)
regardless of where organized and as determined by SBAM AP; (a) derive at least
50% of their revenues from goods produced or sold, investments made, or
services performed in or with one or more of the Asian Countries; (b) maintain
at least 50% of their assets in one or more of the Asian Countries; or (c) have
securities which are traded principally on a stock exchange in an Asian
Country. The Fund is non-diversified within the meaning of the 1940 Act. See
'Additional Investment Activities and Risk Factors -- Non-Diversification.'
Equity securities in which the Asia Growth Fund may invest include common and
preferred stocks (including convertible preferred stock), bonds, notes and
debentures convertible into common and preferred stock, stock purchase warrants
and rights, equity-linked debt securities, equity interests in trusts,
partnerships, joint ventures or similar enterprises, and American, Global or
other types of Depositary Receipts. Equity-linked debt securities are debt
instruments whose prices are indexed to the prices of equity securities or
securities indices. In other words, the value at maturity or coupon rate of
these equity-linked debt instruments is determined by reference to a specific
instrument or statistic. The performance of equity-linked debt instruments
depends to a great extent on the performance of the security or index to which
they are indexed, and may also be influenced by interest rate changes in the
United States and abroad. At the same time, these instruments are subject to
the credit risks associated with the issuer of the security, and their values
may decline substantially if the issuer's creditworthiness deteriorates.
Indexed instruments may be more volatile than the underlying instruments.
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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 anticipates that up to 40% of the
Fund's total assets may be invested in Hong Kong. Under an agreement signed in
1984, Britain will pass Hong Kong's sovereignty to China effective July 1,
1997. At times, relations between Britain and China have been strained over
differences in political and legal issues related to Hong Kong's sovereignty.
The political, social and financial ramifications of China's assumption of
sovereignty over Hong Kong, and the impact on the financial markets in Hong
Kong, Asia or elsewhere, are uncertain. Although SBAM AP expects that most of
the equity securities purchased by the Fund will be traded on a stock exchange
or in an over-the-counter market, most of the Asian securities markets have
substantially less volume than U.S. or other established markets and some of
the stock exchanges in the Asian Countries are in the early stages of their
development. Concentration of the Fund's assets in one or a few of the Asian
countries and Asian currencies will subject the Fund, to a greater extent than
if the Fund's assets were less geographically concentrated, to the risks of
adverse changes in the securities and foreign exchange markets of such
countries and social, political or economic events which may occur in those
countries. For a more detailed discussion of the special risks which the Fund
is subject to by virtue of its investment in foreign securities, see
'Additional Investment Activities and Risk Factors -- Foreign Securities.' An
investment in the Asia Growth Fund should not be considered as a complete
investment program.
In pursuing the Asia Growth Fund's investment objective, SBAM AP will combine a
traditional fundamental approach towards evaluating industry sectors and
individual securities of Asian Companies with a risk management driven approach
seeking to keep the Fund's volatility of return in line with or lower than that
currently experienced in the Asian markets.
SBAM AP expects to focus on certain industry groups across Asian Countries in
an attempt to identify and capture the relative value of such groups on a
pan-regional basis. SBAM AP will research individual companies in an effort to
identify the investment opportunities within these industry groups which will
provide long-term capital appreciation. In addition, SBAM AP intends to meet the
management of individual companies on a periodic basis. As part of the Asia
Growth Fund's risk management objective, SBAM AP will also concentrate on
macroeconomic issues and other variables influencing the direction of monetary
policies followed by Asian Central Banks.
The investment process to be implemented by SBAM AP will consist of the three
following principal (and potentially overlapping) types of approaches.
PAN-REGIONAL INDUSTRY GROUP DECISIONS. SBAM AP will seek to identify the
pan-regional industrial sectors which are likely to exhibit attractive returns
over the long-term. In selecting such industrial sectors, SBAM AP will focus on
industry cycles and competitiveness as well as the industrial characteristics
of the Asian economies. In addition, SBAM AP will review government regulations,
industrial policies, access to technology and industrial research reports
provided by industrial companies or associations and securities dealers in
Asian Countries. SBAM AP will focus on those industries which represent
meaningful weightings in the total market capitalization of the Asian Countries
including, but not limited to, telecommunications, consumer durables and
nondurables, food and beverage, electronics, hotels, power engineering and
generation, basic industries, public utilities, property and financial sectors.
SBAM AP believes that an investment process that places emphasis on industry
groups is appropriate given the current state of economic and financial
integration being achieved by the Asian Countries and the relatively
significant concentration of market capitalization in Asian Countries toward
certain industrial sectors.
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FUNDAMENTAL ANALYSIS: INDIVIDUAL SECURITY DECISIONS. In order to identify the
most attractive investment opportunities within industry groups, SBAM AP will
employ extensive research to select investments in Asian Countries that offer
long-term growth potential for investors. While the Asia Growth Fund generally
seeks to invest in securities of larger companies within the particular Asian
market, it may also invest in the securities of medium and smaller companies
that, in the opinion of SBAM AP, have potential for growth. In particular, SBAM
AP will employ the following three-step process to evaluate particular
investment opportunities for the Fund.
Screening Process. SBAM AP will implement a systematic screening process in an
effort to identify individual securities it believes likely to exhibit
attractive returns over the long term. SBAM AP will screen companies according
to factors such as the perceived quality of their management and business,
overall sustainable competitiveness, historical earnings, dividend records over
at least a full business cycle, liquidity, trading volumes and historical and
expected volatility.
Financial Analysis Process. The financial analysis of selected companies will
focus on evaluating the fundamental value of the enterprise. SBAM AP will use a
value-driven process which will emphasize quantitative analysis based on return
on equity ('ROE') and its components, such as operating margins, financial
leverage, asset turnover and interest and tax burdens. In addition, the
company's cash flow generating capabilities and return on assets will be
considered. SBAM AP believes that ROE and cash flow dynamics are appropriate
variables when analyzing companies which operate in high growth markets, such
as Asia, as the ability of such companies to capture this growth by using the
right allocation of resources and asset financing is of utmost importance.
Valuation Process and Volatility Analysis. The valuation process will focus on
Price Earnings Ratio ('PER') calculations and comparisons with historical
relative PER bands and local market conditions. SBAM AP will use measures such
as PER/growth, and will evaluate whether the security enjoys accelerating
earnings growth momentum due to management changes or the introduction of new
products and/or services. In addition, where appropriate, SBAM AP will conduct
specific dividend discount model and discount cash flow analyses for specific
securities with predictable cash flows or dividend streams. Through the use of
this analysis, SBAM AP will attempt to identify companies with strong potential
for appreciation relative to their downside exposure. Lastly, SBAM AP will
conduct a volatility analysis on selected securities in an effort to forecast
the expected risk of such securities and compare the results of such risk
analysis with these securities' expected returns. Investments may be made in
companies that do not have extensive operating experience provided that SBAM AP
believes such companies nevertheless have significant growth potential.
RISK MANAGEMENT AND MACROECONOMIC/TOP-DOWN ANALYSIS. SBAM AP will also consider
macroeconomic variables, such as liquidity and capital flows, foreign equity
and industrial investments and the direction of monetary policies in the Asian
Countries in an effort to capture individual market movements as well as attain
an optimal asset allocation mix and to identify the appropriate risk management
parameters for the Asia Growth Fund. The macroeconomic data SBAM AP will
monitor and analyze includes, but is not limited to, gross domestic product
growth, balance of payments and current account balances, budget deficits or
surpluses, inflation and interest rates. SBAM AP intends to meet with central
bankers, regional economists and strategists on a regular basis to assess the
present and future direction of monetary policies and their likely impact on
the markets of the Asian Countries.
As part of the Fund's risk management approach and in an attempt to better
assess and control the Fund's overall risk level on an ongoing basis, SBAM AP
will employ a quantitative analysis at each stage of the investment process
which will consist of analyzing and forecasting volatilities of the Asian
markets and securities. SBAM AP will use a number of volatility-control
strategies, including derivative instruments (as discussed below), in an effort
to attain an optimal asset allocation mix, for hedging purposes in an attempt
to control the Fund's overall risk level and to obtain exposure to markets in
the Asian Countries which have restrictions on foreign investment.
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The Asia Growth Fund from time to time may invest up to 10% of its total assets
in non-convertible debt securities, which may include securities rated below
investment grade by S&P and Moody's with no minimum rating required or
comparable unrated securities (commonly referred to as 'junk bonds'). There is
no limit on the amount of the Fund's assets that can be invested in convertible
securities rated below investment grade. For additional information on these
high yield debt securities, which may involve a high degree of risk, see
'Additional Investment Activities and Risk Factors -- High Yield Securities.'
In order to maintain liquidity, the Asia Growth Fund may hold and/or invest up
to 35% of its total assets in debt securities denominated in U.S. dollars or in
another freely convertible currency including: (1) short-term (less than 12
months to maturity) and medium-term (not greater than five years to maturity)
obligations issued or guaranteed by (a) the U.S. government or the government of
an Asian Country, their agencies or instrumentalities or (b) international
organizations designated or supported by multiple foreign governmental entities
to promote economic reconstruction or development ('supranational entities');
(2) finance company obligations, corporate commercial paper and other
short-term commercial obligations, in each case rated, or issued by companies
with similar securities outstanding that are rated, 'Prime-1' or 'A' or better
by Moody's or 'A-1' or 'A' or better by S&P or, if unrated, of comparable
quality as determined by SBAM AP; (3) obligations (including certificates of
deposit, time deposits, demand deposits and bankers' acceptances) of banks; and
(4) repurchase agreements (as described below under 'Additional Investment
Activities and Risk Factors -- Repurchase Agreements') with respect to
securities in which the Fund may invest. The Fund may invest its assets without
limit in such instruments for temporary defensive purposes in the event of
adverse market conditions. To the extent the Fund adopts such a temporary
defensive position, it will not be invested so as to directly achieve its
investment objective.
The Asia Growth Fund may enter into repurchase agreements and reverse
repurchase agreements, may purchase securities on a firm commitment basis,
including when-issued securities and may lend portfolio securities. The Fund
may also invest in investment funds. For a description of these investment
practices and the risks associated therewith, see 'Additional Investment
Activities and Risk Factors.'
The Asia Growth Fund may purchase securities for which there is a limited
trading market or which are subject to restrictions on resale to the public.
The Fund will not invest more than 15% of the value of its total assets in
illiquid securities, such as 'restricted securities' which are illiquid, and
securities that are not readily marketable. For further discussion of illiquid
securities and their associated risks, see 'Additional Investment Activities
and Risk Factors -- Restricted Securities and Securities With Limited Trading
Markets.' As more fully described in the Statement of Additional Information,
the Fund may purchase Rule 144A securities. The Fund's holdings of Rule 144A
securities determined by SBAM AP to be liquid 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 other than the Asia Growth Fund's investment
objective, are not fundamental policies and may be changed by vote of the Board
of Directors without the approval of shareholders.
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Additional
Investment Activities
and Risk Factors
-------------------------------------
REPURCHASE AGREEMENTS. Each Fund may enter into repurchase agreements for cash
management purposes. A repurchase agreement is a transaction in which the
seller of a security commits itself at the time of sale to repurchase that
security from the buyer at a mutually agreed upon time and price. Each Fund
will enter into repurchase agreements only with dealers, banks or recognized
financial institutions which, in the investment manager's determination based
on guidelines established by each Company's Board of Directors, are deemed
creditworthy. The investment manager monitors 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.
REVERSE REPURCHASE AGREEMENTS. Certain of the Funds may enter into 'reverse'
repurchase agreements to avoid selling securities during unfavorable market
conditions to meet redemptions. Pursuant to a reverse repurchase agreement, a
Fund will sell portfolio securities and agree to repurchase them from the buyer
at a particular date and price. Whenever a Fund enters into a reverse
repurchase agreement, it will establish a segregated account in which it will
maintain liquid assets in an amount at least equal to the repurchase price
marked to market daily (including accrued interest), and will subsequently
monitor the account to ensure that such equivalent value is maintained. A Fund
pays interest on amounts obtained pursuant to reverse repurchase agreements.
Reverse repurchase agreements are considered to be borrowings by a Fund.
LOANS OF PORTFOLIO SECURITIES. Certain of the Funds may lend portfolio
securities to generate income. In the event of the bankruptcy of the other
party to a securities loan, a Fund could experience delays in recovering the
securities it lent. To the extent that, in the meantime, the value of the
securities a Fund lent has increased, the Fund could experience a loss. The
value of securities loaned will be marked to market daily. Any securities that
a Fund may receive as collateral will not become a part of its portfolio at the
time of the loan and, in the event of a default by the borrower, the Fund will,
if permitted by law, dispose of such collateral except that the Fund may retain
any such part thereof that is a security in which the Fund is permitted to
invest. The Fund may invest the cash collateral and earn additional income or
receive an agreed-upon fee from a borrower that has delivered cash equivalent
collateral. Cash collateral received by a Fund may be invested in securities in
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
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price at the time of delivery may be lower than the agreed upon purchase price,
in which case there could be an unrealized loss at the time of delivery. A Fund
will only make commitments to purchase securities on a firm commitment basis
with the intention of actually acquiring the securities, but may sell them
before the settlement date if it is deemed advisable. A Fund will establish a
segregated account in which it will maintain liquid assets in an amount at
least equal in value to the Fund's commitments to purchase securities on a firm
commitment basis. If the value of these assets declines, the Fund will place
additional liquid assets in the account on a daily basis so that the value of
the assets in the account is equal to the amount of such commitments.
ZERO COUPON SECURITIES, PAY-IN-KIND BONDS AND DEFERRED PAYMENT SECURITIES. The
High Yield Bond Fund and the Emerging Markets Debt Fund may invest in zero
coupon securities, pay-in-kind bonds and deferred payment securities.
Zero coupon securities are debt securities that pay no cash income but are sold
at substantial discounts from their value at maturity. When a zero coupon
security is held to maturity, its entire return, which consists of the
amortization of discount, comes from the difference between its purchase price
and its maturity value. This difference is known at the time of purchase, so
that investors holding zero coupon securities until maturity know at the time
of their investment what the expected return on their investment will be.
Certain zero coupon securities also are sold at substantial discounts from
their maturity value and provide for the commencement of regular interest
payments at a deferred date. Zero coupon securities may have conversion
features. A Fund also may purchase pay-in-kind bonds. Pay-in-kind bonds pay all
or a portion of their interest in the form of debt or equity securities.
Deferred payment securities are securities that remain zero coupon securities
until a predetermined date, at which time the stated coupon rate becomes
effective and interest becomes payable at regular intervals.
Zero coupon securities, pay-in-kind bonds and deferred payment securities tend
to be subject to greater price fluctuations in response to changes in interest
rates than are ordinary interest-paying debt securities with similar
maturities. The value of zero coupon securities appreciates more during periods
of declining interest rates and depreciates more during 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
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assume the credit risk of both the borrower and the Lender that is selling the
Participation. In the event of the insolvency of the Lender selling a
Participation, a Fund may be treated as a general creditor of the Lender and
may not benefit from any set-off between the Lender and the borrower. A Fund
will acquire Loan Participations only if the Lender interpositioned between the
Fund and the borrower is determined by SBAM to be creditworthy. When a Fund
purchases Assignments from Lenders, the Fund will acquire direct rights against
the borrower on the Loan, except that under certain circumstances such rights
may be more limited than those held by the assigning Lender.
A Fund may have difficulty disposing of Assignments and Loan Participations.
Because the market for such instruments is not highly liquid, the Funds
anticipate that such instruments could be sold only to a limited number of
institutional investors. The lack of a highly liquid secondary market may have
an adverse impact on the value of such instruments and will have an adverse
impact on a Fund's ability to dispose of particular Assignments or Loan
Participations in response to a specific economic event, such as deterioration
in the creditworthiness of the borrower.
The Board of Directors of Institutional Series Funds has adopted policies and
procedures for the High Yield Bond Fund and the Emerging Markets Debt Fund to
determine whether Assignments and Loan Participations purchased by such Funds
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 Loan Participation or Assignment is liquid or illiquid,
requiring that consideration be given to, among other things, the frequency of
quotes, the number of dealers willing to sell and the number of potential
purchasers, the nature of the Loan Participation or Assignment and the time
needed to dispose of it, and the contractual provisions of the relevant
documentation. The Board of Directors periodically reviews purchases and sales
of Assignments and Loan Participations. In valuing a Loan Participation or
Assignment held by a Fund for which a secondary trading market exists, the Fund
will rely upon prices or quotations provided by banks, dealers or pricing
services. To the extent a secondary trading market does not exist, a Fund's
Loan Participations and Assignments will be valued in accordance with
procedures adopted by the Board of Directors, taking into consideration, among
other factors: (i) the creditworthiness of the borrower under the Loan and the
Lender; (ii) the current interest rate, period until next rate reset and
maturity of the Loan; (iii) recent prices in the market for similar Loans; and
(iv) recent prices in the market for instruments of similar quality, rate,
period until next interest rate reset and maturity. See 'Net Asset Value.'
To the extent that liquid Assignments and Loan Participations that a Fund holds
become illiquid, due to the lack of sufficient buyers or market or other
conditions, the percentage of a Fund's assets invested in illiquid assets would
increase. SBAM, under the supervision of the Board of Directors, monitors Fund
investments in Assignments and Loan Participations and will, in such a case,
consider appropriate measures to enable a Fund to maintain sufficient liquidity
for operating purposes and to meet redemption requests.
RESTRICTED SECURITIES AND SECURITIES WITH LIMITED TRADING MARKETS. Each Fund may
purchase securities for which there is a limited trading market or which are
subject to restrictions on resale to the public. Investments in securities
which are 'restricted' may involve added expenses to a Fund should the Fund be
required to bear registration costs with respect to such securities and could
involve delays in disposing of such securities which might have an adverse
effect upon the price and timing of sales of such securities and the liquidity
of the Fund with respect to redemptions. Restricted securities and securities
for which there is a limited trading market may be significantly more difficult
to value due to the unavailability of reliable market quotations for such
securities, and investment in such securities may have an adverse impact on net
asset value. Rule 144A is a recent development and there is no assurance that a
liquid market in Rule 144A securities will develop or be maintained. To the
extent that the number of qualified institutional buyers is reduced, a
previously liquid Rule 144A security may be determined to be illiquid, thus
increasing the percentage of illiquid assets in a
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Fund's portfolio. SBAM, under the supervision of the Board of Directors, is
responsible for monitoring the liquidity of Rule 144A securities. The Board of
Directors periodically reviews the Funds' purchases and sales of such Rule 144A
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 by a foreign subcustodian in the event of the
subcustodian's bankruptcy. Moreover, brokerage commissions and other
transactions costs on foreign securities exchanges are generally higher than in
the United States.
In addition, there may be less publicly-available information about a foreign
issuer than about a U.S. issuer, and foreign issuers may not be subject to the
same accounting, auditing and financial record-keeping standards and
requirements as U.S. issuers. In particular, the assets and profits appearing on
the financial statements of an emerging market country issuer may not reflect
its financial position or results of operations in the way they would be
reflected had the financial statements been prepared in accordance with U.S.
generally accepted accounting principles. In addition, for an issuer that keeps
accounting records in local currency, inflation accounting rules may require,
for both tax and accounting purposes, that certain assets and liabilities be
restated on the issuer's balance sheet in
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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 of any such foreign obligations, it
may be more difficult for a Fund to obtain or enforce a judgment against the
issuers of such obligations. See ' -- High Yield Securities.'
For a further discussion of certain risks involved in investing foreign
securities, particularly of emerging market issuers, see 'Additional
Information on Portfolio Instruments and Investment Policies -- Foreign
Securities' in the Statement of Additional Information.
FIXED-INCOME SECURITIES. Except to the extent that values are affected
independently by other factors such as developments relating to a specific
issuer, when interest rates decline, the value of a fixed-income portfolio can
generally be expected to rise. Conversely, when interest rates rise, the value
of a fixed-income portfolio can generally be expected to decline. Prices of
longer term securities generally increase or decrease more sharply than those
of shorter term securities in response to interest rate changes, particularly
if such securities were purchased at a discount. Because the High Yield Bond
Fund and the Emerging Markets Debt Fund will invest primarily in fixed-income
securities, the net asset value of these Funds' shares can be expected to
change as general levels of interest rates fluctuate. It should be noted that
the market values of securities rated below investment grade and comparable
unrated securities tend to react less to fluctuations in interest rate levels
than do those of higher-rated securities.
In addition, many fixed-income securities contain call or buy-back features
that permit their issuers to call or repurchase the securities from their
holders. Such securities may present risks based on payment expectations.
Although a Fund would typically receive a premium if an issuer were to redeem a
security, if an issuer exercises such a 'call option' and redeems the security
during a time of declining interest rates, a Fund may realize a capital loss on
its investment if the security was purchased at a premium and a Fund may have
to replace the called security with a lower yielding security, resulting in a
decreased rate of return to the Fund.
HIGH YIELD SECURITIES. The High Yield Bond Fund and the Emerging Markets Debt
Fund may invest without limitation in high yield securities. The Asia Growth
Fund may invest without limitation in convertible non-U.S. high yield
securities and up to 10% of its total assets in non-convertible non-U.S. high
yield securities. Under rating agency guidelines, medium- and lower-rated
securities and comparable unrated securities will likely have some quality and
protective characteristics that are outweighed by large uncertainties or major
risk exposures to adverse conditions. Medium and lower rated securities are
considered to have extremely poor prospects of ever attaining any real
investment standing, to have a current identifiable vulnerability to default or
are in default, to be unlikely to have the capacity to pay interest and repay
principal when due in the event of adverse business, financial or economic
conditions, and/or to be in default or not current in the payment of interest
or principal. Such securities are considered speculative with respect to the
issuer's capacity to pay interest and repay principal in accordance with the
terms of the obligations. Accordingly, it is possible that these types of
factors could, in certain instances, reduce the value of securities held by a
Fund with a commensurate effect on the value of the Fund's shares.
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
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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 to value such Fund's portfolio securities, and a greater degree
of judgment may be necessary in making such valuations. The secondary markets
for high yield securities may contract due to adverse economic conditions or
for other reasons relating to or independent of any specific adverse changes in
the condition of a particular issuer and, as a result, certain liquid
securities in a Fund's portfolio may become illiquid and the proportion of the
Fund's assets invested in illiquid securities may significantly increase.
Prices for high yield securities may be affected by legislative and regulatory
developments. These laws could adversely affect a Fund's net asset value and
investment practices, the secondary market for high yield securities, the
financial condition of issuers of these securities and the value of outstanding
high yield securities. For example, federal legislation requiring the
divestiture by federally insured savings and loan associations of their
investments in high yield bonds and limiting the deductibility of interest by
certain corporate issuers of high yield bonds adversely affected the market in
recent years.
High Yield Corporate Securities. While the market values of securities rated
below investment grade and comparable unrated securities tend to react less to
fluctuations in interest rate levels than do those of higher-rated securities,
the market values of certain of 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).
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High Yield Foreign Sovereign Debt Securities. Investing in fixed and floating
rate high yield foreign sovereign debt securities will expose a Fund to the
direct or indirect consequences of political, social or economic changes in the
countries that issue the securities. See ' -- Foreign Securities' above. The
ability and willingness of sovereign obligors in developing and emerging market
countries or the governmental authorities that control repayment of their
external debt to pay principal and interest on such debt when due may depend on
general economic and political conditions within the relevant country.
Countries such as those in which a Fund may invest have historically
experienced, and may continue to experience, high rates of inflation, high
interest rates, exchange rate trade difficulties and extreme poverty and
unemployment. Many of these countries are also characterized by political
uncertainty or instability. Additional factors which may influence the ability
or willingness to service debt include, but are not limited to, a country's
cash flow situation, the availability of sufficient foreign exchange on the
date a payment is due, the relative size of its debt service burden to the
economy as a whole, and the issuing 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 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
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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 market countries are among the
world's largest debtors to commercial banks, other governments, international
financial organizations and other financial institutions. These obligors have
in the past experienced substantial difficulties in servicing their external
debt obligations, which led to defaults on certain obligations and the
restructuring of certain indebtedness. Restructuring arrangements have
included, among other things, reducing and rescheduling interest and principal
payments by negotiating new or amended credit agreements or converting
outstanding principal and unpaid interest to Brady Bonds, and obtaining new
credit to finance interest payments. Holders of certain foreign sovereign debt
securities may be requested to participate in the restructuring of such
obligations and to extend further loans to their issuers. There can be no
assurance that the Brady Bonds and other foreign sovereign debt securities in
which the Funds may invest will not be subject to similar restructuring
arrangements or to requests for new credit which may adversely affect a Fund's
holdings. Furthermore, certain participants in the secondary market for such
debt may be directly involved in negotiating the terms of these arrangements
and may therefore have access to information not available to other market
participants.
For a further discussion of certain risks involved in investing in foreign
securities, particularly of emerging market issuers, see 'Additional
Information on Portfolio Instruments and Investment Policies -- Foreign
Securities' in the Statement of Additional Information.
INVESTMENT FUNDS. Certain of the Funds may invest in unaffiliated investment
funds which invest principally in securities in which that Fund is authorized
to invest. Under the 1940 Act, the Fund may invest a maximum of 10% of its
total assets in the securities of other investment companies. In addition,
under the 1940 Act, not more than 5% of the Fund's total assets may be invested
in the securities of any one investment company and a Fund may not purchase
more than 3% of the outstanding voting stock of such investment company. The
Money Market Fund will only invest in other money market funds which are
subject to the requirements of Rule 2a-7 under the 1940 Act and which are
considered to present minimal credit risks. To the extent a Fund invests in
other investment funds, the Fund's shareholders will incur certain duplicative
fees and expenses, including investment advisory fees. A Fund's investment in
certain investment funds will result in special U.S. Federal income tax
consequences described below under 'Dividends, Distributions and Taxes.'
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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' Funds under the 1940 Act, which means that
each Fund is not limited by the 1940 Act in the proportion of its assets that
may be invested in the obligations of a single issuer. Each Fund, however,
intends to comply with the diversification requirements imposed by the Code for
qualification as a regulated investment company. To the extent a Fund invests a
greater proportion of its assets in the securities of a smaller number of
issuers, the Fund may be more susceptible to any single economic, political or
regulatory occurrence than a more diversified fund and may be subject to
greater risk of loss with respect to its portfolio securities. See 'Dividends,
Distributions and Taxes' and 'Investment Limitations.'
DERIVATIVES. Certain of the Funds may be authorized to use various investment
strategies described below to hedge market risks (such as broad or specific
market movements, interest rates and currency exchange rates), to manage the
effective maturity or duration of debt instruments held by a Fund, or to seek
to increase a Fund's income or gain. These instruments are often referred to as
'Derivatives,' which may be defined as financial instruments whose performance
is derived, at least in part, upon the performance of another asset (such as a
security, currency or index securities). The description in this Prospectus of
each Fund indicates which, if any, of these types of transactions may be used by
that Fund. Although these strategies are regularly used by some investment
companies and other institutional investors, it is not presently anticipated
that any of these strategies will be used to a significant degree by any Fund
unless otherwise specifically indicated in the description of the particular
Fund contained in this Prospectus. Over time, however, techniques and
instruments may change as new instruments and strategies are developed or
regulatory changes occur.
Subject to the constraints described above, a Fund may (if and to the extent so
authorized) purchase and sell interest rate, currency or stock or bond index
futures contracts and enter into currency forward contracts and currency swaps;
purchase and sell (or write) exchange listed and over-the-counter put and call
options on securities, Loan Participations and Assignments, currencies, futures
contracts, indices and other financial instruments, and a Fund may enter into
interest rate transactions, equity swaps and related transactions and other
similar transactions which may be developed to the extent SBAM or SBAM AP
determines that they are consistent with the applicable Fund's investment
objective and policies and applicable regulatory requirements. 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.
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A Fund may use any or all types of Derivatives which it is authorized to use at
any time; no particular strategy will dictate the use of one type of
transaction rather than another, as use of any authorized Derivative will be a
function of numerous variables, including market conditions. The ability of a
Fund to utilize Derivatives successfully will depend on, in addition to the
factors described above, the investment manager's ability to predict pertinent
market movements, which cannot be assured. These skills are different from
those needed to select a Fund's portfolio securities. None of the Funds is a
'commodity pool' (i.e., a pooled investment vehicle which trades in commodity
futures contracts and options thereon and the operator of which is registered
with the CFTC), and Derivatives involving futures contracts and options on
futures contracts will be purchased, sold or entered into only for bona fide
hedging purposes, provided that a Fund may enter into such transactions for
purposes other than bona fide hedging if, immediately thereafter, the sum of
the amount of its initial margin and premiums on open contracts and options
would not exceed 5% of the liquidation value of the Fund's portfolio, after
taking into account unrealized profits and losses on existing contracts
provided, further, that, in the case of an option that is in-the-money, the
in-the-money amount may be excluded in calculating the 5% limitation. The use
of certain Derivatives in certain circumstances will require that a Fund
segregate cash, liquid high grade debt obligations or other assets to the
extent a Fund's obligations are not otherwise 'covered' through ownership of
the underlying security, financial instrument or currency. Derivatives involve
special risks, including possible default by the other party to the
transaction, illiquidity and, to the extent the investment manager's view as to
certain market movements is incorrect, the risk that the use of Derivatives
could result in significantly greater losses than if it had not been used. Use
of put and call options could result in losses to a Fund, force the purchase or
sale of portfolio securities at inopportune times or for prices higher or lower
than current market values, or cause a Fund to hold a security it might
otherwise sell. The use of currency transactions could result in a Fund
incurring losses as a result of the imposition of exchange controls, suspension
of settlements, or the inability to deliver or receive a specified currency in
addition to exchange rate fluctuations. The use of options and futures
transactions entails certain special risks. In particular, the variable degree
of correlation between price movements of futures contracts and price movements
in the related portfolio position of a Fund could create the possibility that
losses on the Derivative will be greater than gains in the value of the Fund's
position. In addition, futures and options markets could be illiquid in some
circumstances and certain over-the-counter options could have no markets. A
Fund might not be able to close out certain positions without incurring
substantial losses. To the extent a Fund utilizes futures and options
transactions for hedging, such transactions should tend to minimize the risk of
loss due to a decline in the value of the hedged position and, at the same
time, limit any potential 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.'
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
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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 vote of the applicable Fund's Board of
Directors without shareholder approval.
If a percentage restriction on investment or utilization of assets is adhered
to at the time an investment is made, a later change in percentage ownership
resulting from changing market values or similar type of event will not be
considered a violation of such restriction.
MONEY MARKET FUND
The Money Market Fund may not:
(1) invest more than 5% of the current value of its total assets in the
securities of any one issuer, other than obligations issued or guaranteed
by the U.S. government, its agencies or instrumentalities; however, up to
25% of the value of the total assets of the Fund may be invested without
regard to this limitation;
(2) purchase any securities which would cause more than 25% of the value
of its total assets at the time of such purchase to be invested in
securities of one or more issuers conducting their principal business
activities in the same industry, provided that there is no limitation with
respect to investment in obligations issued or guaranteed by the U.S.
government, its agencies or instrumentalities, with respect to bank
obligations or with respect to repurchase agreements collateralized by any
of such obligations;
(3) borrow money except as a temporary measure from banks for
extraordinary or emergency purposes, and in no event in excess of 15% of
the value of its total assets, except that for the purpose of this
restriction, short-term credits necessary for settlement of securities
transactions are not considered borrowings (the Fund will not purchase any
securities at any time while such borrowings exceed 5% of the value of its
total assets); or
(4) pledge, hypothecate, mortgage or otherwise encumber its assets in
excess of 20% of the value of its total assets, and then only to secure
borrowings permitted by (3) above.
With respect to investment limitation (1), the Fund intends (as a matter of
non-fundamental policy) to limit investments in the securities of any single
issuer (other than securities issued or guaranteed by the U.S. government, its
agencies or instrumentalities) to not more than 5% of the Fund's total assets
at the time of purchase, provided that the Fund may invest up to 25% of its
total assets in the securities of a single issuer for a period of up to three
Business Days.
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
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(3) invest more than 25% of the total assets of each Fund in the
securities of issuers having their principal activities in any particular
industry, except for obligations issued or guaranteed by the U.S.
government, its agencies or instrumentalities or by any state, territory
or any possession of the United States or any of their authorities,
agencies, instrumentalities or political subdivisions, or with respect to
repurchase agreements collateralized by any of such obligations (for
purposes of this restriction, supranational issuers will be considered to
comprise an industry as will each foreign government that issues
securities purchased by a Fund).
For purposes of investment limitations (1) and (3) above, both the borrower
under a Loan and the Lender selling a Participation will be considered an
'issuer.' See 'Additional Investment Activities and Risk Factors -- Loan
Participations and Assignments.'
Purchase and
Redemption of Shares
-------------------------------------
NET ASSET VALUE
For the purpose of pricing purchase and redemption orders, the net asset value
per share of each Fund is calculated separately and is determined once daily
for each Fund (other than the Money Market Fund) as of the close of regularly
scheduled trading on the New York Stock Exchange ('NYSE') (4:00 p.m., New York
time) and twice daily for the Money Market Fund, once at 12:00 noon (New York
time) and again at 4:00 p.m. (New York time). With respect to each Fund, such
calculation is determined on each day that the NYSE is open for trading, i.e.,
Monday through Friday, except for New Year's Day, President's Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day,
and the preceding Friday or subsequent Monday when one of those holidays falls
on a Saturday or Sunday, respectively. Net asset value per share of each Fund
is calculated by dividing the value of the Fund's securities and other assets,
less liabilities, by the number of shares outstanding. In calculating net asset
value, all portfolio securities will be valued at market value when there is a
reliable market quotation available for the securities and otherwise pursuant
to procedures adopted by the applicable Fund's Board of Directors. Securities
that are primarily traded on foreign exchanges generally are valued at the
preceding closing values of such securities on their respective exchanges,
except that when an occurrence subsequent to the time a value was so
established is likely to have changed such value, then the fair value of those
securities will be determined by consideration of other factors by or under the
direction of the applicable Fund's Board of Directors. Securities may be valued
by independent pricing services which use prices provided by market-makers or
estimates of market values obtained from yield data relating to instruments or
securities with similar characteristics. In valuing a Fund's assets, any assets
or liabilities initially expressed in terms of a foreign currency are converted
to U.S. dollar equivalents at the then current exchange rate. Corporate actions
by issuers of foreign securities held by the Fund, such as payment of dividends
or distributions, are reflected in the net asset value on the ex-dividend date
therefor, except that such actions will be so reflected on the date the Fund is
actually advised of the corporate action if subsequent to the ex-dividend date.
Further information regarding the Funds' valuation policies is contained in the
Statement of Additional Information.
The Money Market Fund uses the amortized cost method to value its portfolio
securities and seeks to maintain a stable net asset value of $1.00 per share.
Each of the other Funds values short-term investments that mature in 60 days or
less at amortized cost. If a Fund acquires securities with more than sixty days
remaining to maturity, they will be valued at current market value until the
60th day prior to maturity, and will then be valued on an amortized cost basis
based upon the value on such date unless the Board determines during such
60-day period that this amortized cost basis does not represent fair value. The
amortized cost method involves valuing a security at its cost and amortizing
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any discount or premium over the period until maturity, regardless of the
impact of fluctuating interest rates on the market value of the security. See
the Statement of Additional Information for a more complete description of the
amortized cost method.
PURCHASE PROCEDURES
There is no front-end sales charge or contingent-deferred sales charge imposed
on purchases of Fund shares. Under certain circumstances, certain
broker/dealers may impose transaction fees on the purchase and/or sale of
shares. 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 made in any amount.
Shares may be purchased by completing a Purchase Application and mailing it,
together with your check payable to Salomon Brothers Funds, to:
Investors Bank & Trust Company
P.O. Box 1537
Boston, Massachusetts 02205-1537
Attention: Transfer Agent
Subsequent investments may be made at any time by mailing a check to Investors
Bank and Trust Company, the Funds' transfer agent and dividend disbursing agent
(the 'Transfer Agent') at the address set forth above, along with a detachable
stub from the Statement of Account (or a letter providing the account number).
Shareholders should be sure to write the Fund's account number on the check.
Initial purchases of Fund shares may not be made by third party check.
Shares of each Fund may be purchased 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.
Initial and subsequent investments may also be made by wire transfer. The
investor should instruct the wiring bank to transmit the specified amount in
federal funds to:
Investors Bank & Trust Company
ABA #011-001-438
Account Name: Salomon Brothers Institutional Series Funds
Attn: (Name of Fund)
Salomon DDA#: 456789123
Name of Account:
Account #:
Amount of Wire:
Shareholders should note that their bank may charge a fee in connection with
transferring money by bank wire.
For a share purchase order for any Fund other than the Money Market Fund to
become effective on a particular business day, prior to 4:00 p.m. (New York
time): (i) in the case of a wire transfer payment, a purchaser must call (800)
347-6028 to inform the Transfer Agent 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 the Transfer Agent, and, in either case, federal
funds must be received by the Transfer Agent, on behalf of the 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 the
Transfer Agent, such purchase order shall be executed as of the date that
federal funds are actually received. Purchase
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<PAGE>
<PAGE>
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
on any business day at the applicable net asset value determined after the
receipt of proper redemption instructions. 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 Funds do not charge a redemption fee. The value of
shares at the time of redemption may be more or less than the shareholder's
cost.
For the convenience of shareholders, each Fund has established different
redemption procedures. No redemption requests will be processed until the Fund
has received a completed Purchase Application, and no redemption of shares
purchased by check will be made until all checks received for such shares have
been collected, which may take up to 15 days or more.
REDEMPTION BY MAIL
Shares may be redeemed by mail by submitting a written request from the
registered owner(s) signed exactly as shares are registered with the signature
guaranteed by an acceptable guarantor. The Transfer Agent has adopted standards
and procedures pursuant to which signature-guarantees in proper form generally
will be accepted from domestic banks, brokers, dealers, credit unions, national
securities exchanges, registered securities associations, clearing agencies and
savings associations, as well as from participants in the New York Stock
Exchange Medallion Signature Program, the Securities Transfer Agents Medallion
Program ('STAMP') and the Stock Exchanges Medallion Program. Shareholders with
any questions regarding signature-guarantees should contact the transfer agent.
In certain instances, the Transfer Agent may require additional documents such
as, but not limited to, trust instruments, death certificates, appointments as
executor or administrator or certificates of corporate authority.
Checks for redemption proceeds will be mailed to the address of record within
seven days of redemption. Each Fund reserves the right to reject any order for
redemption.
REDEMPTION BY WIRE
If redemption by wire has been elected in the Purchase Application, shares may
be redeemed on any business day upon request made by telephone or letter. A
shareholder or any authorized agent (so designated on the Account Application
Form) must provide Investors Bank with the dollar or share amount to be
redeemed, the account to which the redemption proceeds should be wired, the
name of the shareholder and the shareholder's account number. Shareholders
should note that their bank may charge a fee in connection with transferring
money by wire.
A shareholder may change its authorized agent, the address of record or the
account designated to receive redemption proceeds at any time by providing the
Transfer Agent with written instructions signature guaranteed as described
above.
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<PAGE>
<PAGE>
TELEPHONE REDEMPTION
A shareholder may request redemption by calling the Transfer Agent at (800)
347-6028. Proceeds from telephone redemptions will be forwarded to the
shareholder by check unless the shareholder has requested redemption by wire in
the manner described above under 'Redemption by Wire.' The check will be made
only payable to the registered shareholder and sent to the address of record on
file with the Transfer Agent. Each Fund reserves the right to refuse a
telephone request for redemption if it is believed advisable to do so.
Procedures for redeeming shares by telephone may be modified or terminated at
any time by the Funds. Neither the Funds nor the Transfer Agent 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 and/or the Transfer Agent may
be liable for any losses due to unauthorized or fraudulent instructions if they
do not follow such procedures. Each Fund may require personal identification
codes.
SMALL ACCOUNTS
Each Fund reserves the right, upon not less than 30 days' written notice, to
redeem shares in an account which has a value of $10,000 or less, if the
reduction in value is the result of shareholder redemptions or transfers and
not as a result of a decline in the net asset value. However, any shareholder
affected by the exercise of this right will be allowed to make additional
investments prior to the date fixed for redemption to avoid liquidation of the
account.
EXCHANGE PRIVILEGE
Shareholders of any Fund may exchange all or part of their shares for shares of
any other Fund at the applicable relative net asset value per share. The value
of the shares exchanged must meet the investment minimum of the Fund into which
the investor is exchanging. Shares of a Fund are eligible for exchange 30 days
after purchase.
Each Fund reserves the right to refuse a telephone request for exchange if it
is believed advisable to do so. Procedures for exchanging shares by telephone
may be modified or terminated at any time by a Fund. None of the Funds, the
Transfer Agent nor Salomon Brothers will be liable for following exchange
instructions received by telephone, which are reasonably believed to be
genuine, and the shareholder will bear the risk of loss in the event of
unauthorized or fraudulent telephone instructions. The Funds, the Transfer
Agent and Salomon Brothers may employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. The Funds, the Transfer
Agent and Salomon Brothers may be liable for any losses due to unauthorized or
fraudulent instructions if they do not follow such procedures. When requesting
an exchange by telephone, shareholders should have available the correct
account registration and account numbers or tax identification number.
The exchange of shares of one Fund for shares of another Fund is treated for
federal income tax purposes as a sale of the shares given in exchange by the
shareholder, and an exchanging shareholder may, therefore, realize a taxable
gain or loss. 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. Each Fund
reserves the right to reject any exchange request in whole or in part. The
exchange privilege may be modified or terminated at any time upon written
notice to shareholders.
Page 34
<PAGE>
<PAGE>
Management
-------------------------------------
DIRECTORS AND OFFICERS
The business and affairs of each Fund are managed under the direction of its
Board of Directors. The Board of Directors approves all significant agreements
between a Fund and the persons or companies that furnish services to the Fund,
including agreements with its distributor, investment manager, administrator,
custodian and transfer agent. The day-to-day operations of the Fund are
delegated to the Fund's investment manager and administrator. The Statement of
Additional Information contains general background information regarding the
Directors and officers of each Fund.
INVESTMENT MANAGER
Each Fund retains SBAM as its investment manager under an investment management
contract. SBAM is a wholly-owned subsidiary of Salomon Brothers Holding Company
Inc, which is in turn wholly-owned by Salomon Inc ('SI'). 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. In providing
such services, SBAM has access to SI's more than 400 economists, mortgage,
bond, sovereign and equity analysts. As of February 28, 1997, SBAM and its
worldwide asset management affiliates managed approximately $20.7 billion, of
which approximately $1.3 billion is invested in high yield securities and
approximately $2.3 billion of which is invested in emerging market country debt
securities. SBAM's offices are located at 7 World Trade Center, New York, New
York 10048.
Pursuant to a Subadvisory Agreement, SBAM has retained Salomon Brothers Asset
Management Asia Pacific Limited to act as sub-adviser to the Asia Growth Fund,
subject to the supervision of SBAM. Like SBAM, SBAM AP is an indirect,
wholly-owned subsidiary of SI. 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 of Salomon Brothers and SBAM and a Senior
Portfolio Manager of SBAM, responsible for SBAM's investment company and
institutional portfolios which invest in high yield non-U.S. and U.S. corporate
debt securities, high yield foreign sovereign debt securities and emerging
market debt securities. From 1984 to 1989, Mr. Wilby was employed by Prudential
Capital Management Group ('Prudential'), where he served as Director of
Prudential's credit research unit as a corporate and sovereign credit analyst.
Mr. Wilby also managed high yield bonds and leveraged securities for Prudential
mutual funds and institutional portfolios. Mr. Wilby is the portfolio manager
for Salomon Brothers High Yield Bond Fund, a portfolio of Series Funds, Global
Partners Income Fund Inc., The Emerging Markets Income Fund Inc, The Emerging
Markets Income Fund II Inc, The Emerging Markets Floating Rate Fund Inc,
Salomon Brothers Worldwide Income Fund Inc, Salomon Brothers High Income Fund
Inc, the high yield and sovereign bond portions of the Salomon Brothers
Strategic Bond Fund, a portfolio of Series Funds and the foreign sovereign debt
component of Salomon Brothers 2008 Worldwide Dollar Government Term Trust Inc.
Giampaolo G. Guarnieri is primarily responsible for the day-to-day management
of the Asia Growth Fund. Mr. Guarnieri has served as a Director of SBAM AP
since July 1996 and has been employed as a Senior Portfolio Manager since
joining SBAM AP in April 1995. Prior to joining SBAM AP, Mr. Guarnieri spent
five years 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
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<PAGE>
<PAGE>
1992 and as head of direct investment activities prior to that. Mr. Guarnieri
is also portfolio manager of Salomon Brothers Asia Growth Fund, a portfolio of
Series Funds.
Subject to policy established by the Board of Directors, which has overall
responsibility for the business and affairs of each Fund, SBAM manages the
investment and reinvestment of each Fund's assets pursuant to the applicable
management contract. SBAM also furnishes office space, personnel and certain
facilities required for the performance by SBAM of certain additional services
provided by it to each Fund under the applicable management contract, including
SEC compliance, supervision of Fund operations and certain administrative and
clerical services, and pays the compensation of the Funds' officers, employees
and directors affiliated with SBAM. Except for the expenses paid by SBAM that
are described herein, each Fund bears all costs of its operations. See
'Expenses' below.
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 and March 26, 1996, the Fund's Board of Directors and stockholders,
respectively, approved an increase in the management fee payable by the Fund
from .10% to .20% of the Fund's average daily net assets. SBAM has voluntarily
agreed to reduce or otherwise limit expenses of the Money Market Fund
(exclusive of taxes, interest and extraordinary expenses such as litigation and
indemnification expenses), on an annualized basis, to .18% of the Fund's
average daily net assets.
As compensation for its services, the High Yield Bond Fund pays SBAM a monthly
fee at an annual rate of .50% of the Fund's average daily net assets; the
Emerging Markets Debt Fund pays SBAM a monthly fee at an annual rate of .70% of
the Fund's average daily net assets; and the Asia Growth Fund pays SBAM a
monthly fee at an annual rate of .75% of the Fund's average daily net assets.
SBAM will pay SBAM AP, as full compensation for its services under the
Subadvisory Agreement, a portion of its investment management fee. SBAM has
voluntarily agreed to reduce or otherwise limit expenses of the High Yield Bond
Fund, the Emerging Markets Debt Fund and the Asia Growth Fund (exclusive of
taxes, interest and extraordinary expenses such as litigation and
indemnification expenses), on an annualized basis to .55%, .75% and 1.00%,
respectively, of the applicable Fund's average daily net assets.
The services of SBAM and SBAM AP are not deemed to be exclusive, and nothing in
the relevant agreements will prevent either of them or their affiliates from
providing similar services to other investment companies and other clients
(whether or not their investment objectives and policies are similar to those
of any of the Funds) or from engaging in other activities.
Consistent with the Rules of Fair Practice of the National Association of
Securities Dealers Regulation 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 broker/dealers 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 usual and customary levels. See 'Portfolio
Transactions' in the Statement of Additional Information.
PERFORMANCE OF ASIA GROWTH FUND AND RELATED ACCOUNTS
Set forth in the chart below is performance data provided by SBAM AP relating:
(i) for the period from January 1, 1992 to February 28, 1995, to a non-U.S.
collective investment vehicle (the 'Offshore Fund I') managed by the portfolio
manager of the Asia Growth Fund while he was employed by a different investment
adviser unaffiliated with SBAM; (ii) for the month ending September 30, 1995
and the quarter ending December 31, 1995, to a non-U.S. collective investment
vehicle managed by the portfolio manager after commencement of employment with
an affiliate of SBAM (the 'Offshore Fund II') and (iii) for the year ending
December 31, 1996 and the two months ending February 28, 1997, to a composite
('Composite') consisting of Offshore Fund II and Salomon Brothers Asia Growth
Fund ('Retail Asia
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<PAGE>
<PAGE>
Growth Fund'), a portfolio of Salomon Brothers Series Funds Inc, a U.S.
registered investment company. The Retail Asia Growth Fund and Asia
Growth Fund have the same portfolio manager and have identical investment
objectives, policies and strategies. Both Offshore Fund I and Offshore Fund II
have substantially similar, though not identical, investment objectives,
policies and strategies as those of the Fund. With respect to Offshore Fund I,
the period shown reflects the period for which the portfolio manager was
primarily responsible for the day-to-day management of the portfolio of
Offshore Fund I. During the period shown for Offshore Fund I, the size of the
fund ranged from approximately $45 million to $95 million and during the period
shown solely for Offshore Fund II, the size of the fund was approximately $8.5
million. During the period shown for the Composite, the size of the Composite
ranged from approximately $8.9 million to $20.7 million.
The Morgan Stanley Capital International All Country Asia Free Ex-Japan Index
is a widely recognized market index of Asian country equity issues. The index
is composed of a sample of companies from the following ten countries: Hong
Kong, India, Indonesia, Korea, Malaysia, Pakistan, Philippines, Singapore, Sri
Lanka and Thailand. Constituent stocks are selected for the index on the basis
of industry representation, liquidity and sufficient float. The index is
unmanaged and accordingly, does not reflect the effect of operating expenses,
including advisory fees, transaction costs and other expenses but does reflect
reinvestment of dividends.
The aggregate total return for the Asia Growth Fund (after management fee
waiver and reimbursement of certain expenses) for certain periods of time
ending February 28, 1997 is set forth below. See 'Performance Data' in the
Statement of Additional Information.
<TABLE>
<CAPTION>
AGGREGATE
TOTAL
PERIOD RETURN
- --------------------------------------------------------------------------------------------------------------------
<S> <C>
May 6, 1996 (commencement of investment operations) through December 31, 1996 3.61%
January 1, 1997 through February 28, 1997 5.64%
May 6, 1996 through February 28, 1997 9.60%
</TABLE>
The performance data shown below should be read in conjunction with the
information in 'General' that follows:
<TABLE>
<CAPTION>
AVERAGE
ANNUAL
TOTAL TOTAL
1/1/95- RETURN RETURN
1/1/92- 1/1/93- 1/1/94- 2/28/95 1/1/92- 1/1/92-
12/31/92 12/31/93 12/31/94 (ANNUALIZED) 2/28/95 2/28/95
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Offshore Fund I 29.50% 95.05% (13.55)% (5.47)% 106.42% 25.72%
Morgan Stanley Capital International
All Country Asia Free Ex-Japan Index 21.80 103.39 (16.94) (15.55) 100.05 24.48
</TABLE>
<TABLE>
<CAPTION>
FOR THE FOR THE
MONTH ENDED: QUARTER ENDED:
9/30/95 12/31/96
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Offshore Fund II 2.12% 3.23%
Morgan Stanley Capital
International All Country Asia Free Ex-Japan Index 1.19 0.80
</TABLE>
<TABLE>
<CAPTION>
CUMULATIVE
FOR THE FOR THE TWO RETURN
YEAR ENDED: MONTHS ENDED: SINCE
12/31/96 2/28/97 9/1/95*
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Composite 13.09% 5.56% 25.84%
Morgan Stanley Capital
International All Country Asia Free Ex-Japan Index 10.03 2.95 15.55
</TABLE>
- --------------
* These return figures are asset-weighted, is a weighted-average figure,
representing, for the period from September 1, 1995 to May 30, 1996,
cumulative return of Offshore Fund II, and for the period June 1, 1996 to
February 28, 1996, for the Composite.
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<PAGE>
<PAGE>
GENERAL
The performance results shown above are based on total returns reflecting
realized and unrealized gains and losses and income, including that derived
from cash positions. Returns are calculated monthly for Offshore Fund I,
Offshore Fund II and the Retail Asia Growth Fund and are compounded monthly.
The investment results are time-weighted on a daily basis and market-weighted
based on market values determined as of the first business day of each month.
The performance results are net of transaction costs and advisory and other
fees incurred and reflect reinvestment of dividends and capital gains
distributions, if any.
The performance results shown in the table are not performance results for the
Asia Growth Fund and should not be deemed to be indicative of future results
for the Asia Growth Fund owing to differences in brokerage commissions and
dealer spreads, expenses, including investment advisory fees, the size of
positions taken in relation to fund size, timing of purchases and sales and
market conditions at the time of a transaction, timing of cash flows and
availability of cash for new investments.
Although substantially similar, the investment objectives, policies and
strategies for Offshore Fund I and Offshore Fund II differ in certain respects
from those of the Asia Growth Fund. In addition, such accounts were and are
managed without regard to certain tax requirements applicable to U.S.
registered investment companies that limit the proportions of short-term gains
that such companies may realize to maintain their tax status. See 'Dividends,
Distributions and Taxes.' Accordingly, the performance results shown above and
that of the Asia Growth Fund are expected to differ.
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. INVESTORS SHOULD ALSO BE
AWARE THAT THE USE OF METHODS OF DETERMINING PERFORMANCE DIFFERENT THAN THAT
USED BY SBAM AP WOULD RESULT IN DIFFERENT PERFORMANCE DATA. NO ADJUSTMENT HAS
BEEN MADE FOR ANY INCOME TAXES WHICH ARE PAYABLE ON INCOME DIVIDENDS OR CAPITAL
GAINS DISTRIBUTIONS. THE EFFECT OF TAXES ON ANY INVESTOR WILL DEPEND ON SUCH
INVESTOR'S TAX STATUS. SEE 'DIVIDENDS, DISTRIBUTIONS AND TAXES.'
DISTRIBUTOR
Salomon Brothers is the Funds' distributor. Salomon Brothers, located at 7
World Trade Center, New York, New York 10048, is a wholly-owned subsidiary of
Salomon Brothers Holding Company Inc, which is in turn wholly-owned by SI. It
is also one of the largest securities dealers in the world and a registered
broker/dealer. Salomon Brothers makes markets in securities and provides a
broad range of underwriting, research, and financial advisory services to
governments, international corporations, and institutional investors. Salomon
Brothers from time to time may receive fees from SBAM in connection with
processing and other services that it provides for certain shareholder accounts.
ADMINISTRATOR
Each Fund employs Investors Bank & Trust Company ('IBT'), 89 South Street,
Boston, Massachusetts 02111, under an administration agreement to provide
certain administrative services to each Fund. IBT is not involved in the
investment decisions made with respect to the Funds. The services provided by
IBT under the administration agreements include certain accounting, clerical
and bookkeeping services, Blue Sky reports, corporate secretarial services and
assistance in the preparation and filing of tax returns and reports to
shareholders and the SEC. For its services as administrator, transfer agent and
custodian to the Funds, each Fund pays IBT a fee at an annual rate of .10% of
each Fund's average daily net assets up to $500 million in net assets and .05%
of each Fund's average daily net assets in excess of $500 million.
Page 38
<PAGE>
<PAGE>
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 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.
Net realized short-term capital gains of each Fund, if any, will be distributed
whenever the Board of Directors determines 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
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<PAGE>
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. If such
distributions are to be sent to an address other than the address on record or
the account designated to receive redemption proceeds a signature guarantee is
required. See 'Redemptions Procedures' above for instructions concerning
signature guarantees. Such signature must be signed exactly as registered with
the Transfer Agent. Shareholders may change the distribution option at any time
by notification to the Transfer Agent 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 Code. If it
so qualifies, a Fund will not be subject to U.S. federal income taxes on its
net investment income (i.e., its investment company taxable income, as that
term is defined in the Code, determined without regard to the deduction for
dividends paid) and net capital gain (i.e., the excess of a Fund's net realized
long-term capital gain over its net realized short-term capital loss), if any,
that it distributes to its shareholders in each taxable year, provided that it
distributes to its shareholders 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 and to alternative minimum tax
(currently at a maximum rate of 28%) on alternative minimum taxable income.
Each Fund is subject to a nondeductible 4% excise tax calculated as a
percentage of certain undistributed amounts of ordinary income and net realized
capital gains. To the extent possible, each Fund intends to make sufficient
distributions to avoid the application of both the corporate income and excise
taxes.
All dividends and distributions to shareholders of a Fund of net investment
income will be taxable to shareholders whether paid in cash or reinvested in
additional shares. For federal income tax purposes, distributions of net
investment income, which includes the excess of the Fund's net realized
short-term capital gains realized over net realized long-term capital losses,
are taxable to shareholders as ordinary income.
Distributions of 'net capital gains' designated by a Fund as 'capital gain
dividends' will be taxable as long-term capital gains, whether paid in cash or
additional shares, regardless of how long the shares have been held by such
shareholders, and such distributions will not be eligible for the dividends
received deduction. A portion of a Fund's dividends may qualify for the
dividends received deduction available to corporations. In general, the maximum
federal income tax rate imposed on individuals with respect to long-term
capital gain will be limited to 28%, whereas the maximum federal income tax rate
imposed on individuals with respect to ordinary income (and short-term capital
gains, which currently are taxed at the same rates as ordinary income) will be
39.6%. With respect to corporate taxpayers, long-term capital gains currently
are taxed at the same federal income tax rates as ordinary income
Page 40
<PAGE>
<PAGE>
and short-term capital gains. Investors should consider the tax implications of
buying shares shortly before the record date of a distribution because
distributions will be taxable even though the net asset value of shares of a
Fund is reduced by the distribution.
Funds investing in foreign securities or currencies may be required to pay
withholding or other taxes to foreign governments on dividends and interest.
The investment yield of a Fund investing in foreign securities or currencies
will be reduced by these foreign taxes. Shareholders will bear the cost of any
foreign taxes but may not be able to claim a foreign tax credit or deduction
for these foreign taxes. In addition, a Fund investing in securities of passive
foreign investment companies may be subject to U.S. federal income taxes (and
interest on such taxes) as a result of such investments. The investment yield
of a Fund making such investments will be reduced by these taxes and interest.
Shareholders will bear the cost of these taxes and interest, but will not be
able to claim a deduction for these amounts.
The redemption, sale or exchange of shares of one Fund for shares of another is
a taxable event and may result in a gain or loss. Gain or loss, if any,
recognized on the sale or other disposition of shares of a Fund will be taxed
as capital gain or loss if the shares are capital assets in the shareholder's
hands. Generally, a shareholder's gain or loss will be a long-term gain or loss
if the shares have been held for more than one year. If a shareholder sells or
otherwise disposes of shares of a Fund before holding them for more than six
months, any loss on the sale or other disposition of such shares shall be
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 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 of.
Each Fund may be required to withhold federal income tax at a rate of 31%
('backup withholding') from 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
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fails to certify that he or she is not subject to backup withholding.
Redemption proceeds may be subject to withholding under the circumstances
described in (i) above. Backup withholding is not an additional tax and any
amounts withheld may be credited against the shareholder's federal income tax
liability.
HONG KONG TAX MATTERS. The Asia Growth Fund would be subject to Hong Kong
profits tax, which is currently charged at the rate of 16.5% for corporations
and 15% for individuals, if, by virtue of the fact that SBAM AP is located in
Hong Kong, (a) the Fund or its agents were deemed to carry on a trade,
profession or business in Hong Kong and (b) profits from that trade, profession
or business were to arise in or be derived from Hong Kong. Hong Kong profits
tax will not be payable in respect of profits from the sale of shares and other
securities transacted outside Hong Kong, interest arising or derived from
outside Hong Kong and profits in the nature of capital gains. The sale of
securities will not be treated as the sale of capital assets if the profit or
loss from such sale is regarded as attributable to a trade or business carried
on in Hong Kong. The Asia Growth Fund does not currently believe that it will
be subject to Hong Kong profits tax.
Dividends which the Fund pays to its shareholders are not taxable in Hong Kong
(whether through withholding or otherwise) under current legislation and
practice. No Hong Kong stamp duty will be payable in respect of transactions in
shares of the Asia Growth Fund provided that the register of shareholders is
maintained outside of Hong Kong.
------------------------
Depending on the residence of the shareholder for tax purposes, distributions
may also be subject to state and local taxes or withholding taxes. Statements
detailing the tax status of each shareholders' dividends and distributions will
be mailed annually.
The foregoing is intended to be general information to shareholders and
potential investors in a Fund and does not constitute tax advice. Shareholders
and potential investors should consult their own tax advisers regarding
federal, state, local and foreign tax consequences of ownership of shares in a
Fund.
Account Services
- ----------------------------------------------
Shareholders of each Fund will be kept informed through semi-annual reports
showing diversification of investments and other financial data for such Fund.
Annual reports for all Funds will include audited financial statements.
Shareholders of each Fund will receive a Statement of Account following each
share transaction, except for shareholders of the Money Market Fund, who will
receive a Statement of Account at least monthly showing transactions in the
account, the total number of shares owned, and any dividends or distributions
paid. Shareholders can write or call a Fund at the address and telephone number
on the front cover of this Prospectus with any questions relating to their
investment in shares of such Fund.
Capital Stock
- ----------------------------------------------
The Institutional Series Funds was incorporated in Maryland on January 19,
1996. The authorized capital stock of the Institutional Series Funds consists
of 10,000,000,000 shares of common stock having a par value of $.001 per share.
Pursuant to the Institutional Series Funds' Articles of Incorporation, the
Board of Directors has authorized the issuance of three series of shares, each
representing shares in one of three separate funds. The High Yield Bond Fund,
the Emerging Markets Debt Fund and the Asia Growth Fund are the currently
existing portfolios of the Institutional Series Funds. The assets of each Fund
are segregated and separately managed. The Institutional Series Funds' Board of
Directors may, in the future, authorize the issuance of additional classes of
capital stock representing shares of additional investment portfolios.
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The Money Market Fund, a portfolio of the Series Funds, changed its name from
Salomon Brothers U.S. Treasury Securities Money Market Fund to its current name
on March 26, 1996. The Series Funds was incorporated in Maryland on April 17,
1990. On March 26, 1996, shareholders of the Money Market Fund approved a
change in the Fund's investment objective and policies and certain investment
restrictions to those described herein. The authorized capital stock of the
Series Funds consists of 10,000,000,000 shares of common stock having a par
value of $.001 per share. Pursuant to the Series Funds' Articles of
Incorporation and Articles Supplementary, the Board of Directors has authorized
the issuance of ten series of shares, each representing shares in one of ten
separate funds. In addition to the Money Market Fund, the portfolios of the
Series Funds include Salomon Brothers National Intermediate Municipal Fund,
Salomon Brothers U.S. Government Income Fund, Salomon Brothers High Yield Bond
Fund, Salomon Brothers Strategic Bond Fund, Salomon Brothers Total Return Fund,
Salomon Brothers Asia Growth Fund, Salomon Brothers Cash Management Fund 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, SBAM and Salomon Brothers Holding Company
Inc, the parent company of SBAM, own a significant percentage of the
outstanding shares of the High Yield Bond Fund, Emerging Markets Debt Fund and
Asia Growth Fund, and consequently are deemed to be 'control persons,' as
defined in the 1940 Act, of the Funds. In addition, Prouco Leasing Corporation
and MAC & Co. own a significant percentage of the outstanding shares of the
Salomon Brothers Institutional High Yield Bond Fund and the Salomon Brothers
Institutional Emerging Markets Debt Fund, respectively.
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.
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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 to
a high degree. Such issues are often in default or have other marked
shortcomings.
C -- Bonds which are rated 'C' are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Moody's applies numerical modifiers '1' '2' and '3' 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.
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STANDARD & POOR'S RATINGS GROUP CORPORATE BOND RATINGS
AAA -- This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to repay principal and
pay interest.
AA -- Bonds rated 'AA' also qualify as high-quality debt obligations. Capacity
to repay principal and interest is very strong, and differs from 'AAA' issues
only in small degree.
A -- Bonds rated 'A' have a strong capacity to repay principal and pay
interest, although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB -- Bonds rated 'BBB' are regarded as having an adequate capacity to repay
principal and pay interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to repay principal and pay interest for
bonds in this category than for higher rated categories.
BB-B-CCC-CC-C -- Bonds rated 'BB', 'B', 'CCC' and 'C' are regarded, on balance,
as predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the obligations.
BB indicates the lowest degree of speculation and C the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
CI -- BONDS RATED 'CI' ARE INCOME BONDS ON WHICH NO INTEREST IS BEING PAID.
D -- Bonds rated 'D' are in default. The 'D' category is used when interest
payments or principal payments are not made on the date due even if the
applicable grace period has not expired unless S&P believes that such payments
will be made during such grace period. The 'D' rating is also used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
The ratings set both above may be modified by the addition of a plus or minus
to show relative standing within the major rating categories.
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.
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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.
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.
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STANDARD & POOR'S RATINGS GROUP MUNICIPAL BOND RATINGS
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.
A -- Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions.
BBB -- Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds
in this category than for bonds in the A category.
The ratings set forth above may be modified by the addition of a plus or minus
to show relative standing within the major rating categories.
MOODY'S INVESTORS SERVICE'S RATINGS OF STATE AND MUNICIPAL NOTES
MIG-1/VMIG-1 -- Notes rated MIG-1/VMIG-1 are of the best quality. There is
present strong protection by established cash flows, superior liquidity support
or broad-based access to the market for refinancing.
MIG-2/VMIG-2 -- Notes which are rated MIG-2/VMIG-2 are of high-quality. Margins
of protection are ample though not so large as in the preceding group.
STANDARD & POOR'S RATINGS OF STATE AND MUNICIPAL NOTES
SP-1 -- Notes which are rated SP-1 have a very strong or strong capacity to pay
principal and interest. Those issues determined to possess overwhelming safety
characteristics will be given a plus (+) designation.
SP-2 -- Notes which are rated SP-2 have a satisfactory capacity to pay
principal and interest.
FITCH INVESTORS SERVICE, INC. MUNICIPAL BOND RATINGS
AAA -- Bonds rated AAA by Fitch are considered to be investment grade and of
the highest credit quality. The obligor has an exceptionally strong ability to
pay interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA -- Bonds rated AA by Fitch are considered to be investment grade and of very
high credit quality. The obligor's ability to pay interest and repay principal
is very strong, although not quite as strong as bonds rated AAA. Because bonds
rated in the AAA and AA categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issues is generally
rated F-1+ by Fitch.
A -- Bonds rated A by Fitch are considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
BBB -- Bonds rated BBB by Fitch are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have adverse consequences on
these bonds, and therefore impair timely payment. The likelihood that the
ratings of these bonds will fall below investment grade is higher than for
bonds with higher ratings.
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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.
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.
Page A-5
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Appendix B:
General Characteristics and
Risks of Derivatives
-------------------------------------
A detailed discussion of Derivatives (as defined above and below) that may be
used by the investment manager on behalf of certain Funds follows below. The
description in this Prospectus of each Fund indicates which, if any, of these
types of transactions may be used by that Fund. A Fund will not be obligated,
however, to use any Derivatives and makes no representation as to the
availability of these techniques at this time or at any time in the future.
'Derivatives,' as used in this Appendix B, refers to interest rate, currency or
stock or bond index futures contracts, currency forward contracts and currency
swaps, the purchase and sale (or writing) of exchange listed and
over-the-counter ('OTC') put and call options on debt and equity securities,
currencies, interest rate, currency or stock index futures and fixed-income and
stock indices and other financial instruments, entering into various interest
rate transactions such as swaps, caps, floors, collars, entering into equity
swaps, caps, floors or trading in other similar types of instruments.
A Fund's ability to pursue certain of these strategies may be limited by the
Commodity Exchange Act, as amended, applicable regulations of the Commodity
Futures Trading Commission ('CFTC') thereunder and the federal income tax
requirements applicable to regulated investment companies which are not
operated as commodity pools.
GENERAL CHARACTERISTICS OF OPTIONS
Put options and call options typically have structural characteristics and
operational mechanics regardless of the underlying instrument on which they are
purchased or sold. Thus, the following general discussion relates to each of
the particular types of options discussed in greater detail below. In addition,
many Derivatives involving options require segregation of Fund assets in
special accounts, as described below under 'Use of Segregated and Other Special
Accounts.'
A put option gives the purchaser of the option, upon payment of a premium, the
right to sell, and the writer of the obligation to buy, the underlying
security, index, currency or other instrument at the exercise price. A Fund's
purchase of a put option on a security, for example, might be designed to
protect its holdings in the underlying instrument (or, in some cases, a similar
instrument) against a substantial decline in the market value of such
instrument by giving the Fund the right to sell the instrument at the option
exercised price. A call option, upon payment of a premium, gives the purchaser
of the option the right to buy, and the seller the obligation to sell, the
underlying instrument at the exercise price. A Fund's purchase of a call option
on a security, financial futures contract, index, currency or other instrument
might be intended to protect the Fund against an increase in the price of the
underlying instrument that it intends to purchase in the future by fixing the
price at which it may purchase the instrument. An 'American' style put or call
option may be exercised at any time during the option period, whereas a
'European' style put or call option may be exercised only upon expiration or
during a fixed period prior to expiration. Exchange listed options are 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
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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, 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
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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 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.'
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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 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.
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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.
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.
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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
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
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the perceived linkage between various currencies may not be present or may not
be present during the particular time that the Fund is engaging in proxy
hedging. Currency transactions are also subject to risks different from those
of other portfolio transactions. Because currency control is of great
importance to the issuing governments and influences economic planning and
policy, purchases and sales of currency and related instruments can be
adversely affected by government exchange controls, limitations or restrictions
on repatriation of currency, and manipulations or exchange restrictions imposed
by governments. These forms of governmental actions can result in losses to a
Fund if it is unable to deliver or receive currency or monies in settlement of
obligations and could also cause hedges it has entered into to be rendered
useless, resulting in full currency exposure as well as incurring transaction
costs. Buyers and sellers of currency futures contracts are subject to the same
risks that apply to the use of futures contracts generally. Further, settlement
of a currency futures contract for the purchase of most currencies must occur
at a bank based in the issuing nation. Trading options on currency futures
contracts is relatively new, and the ability to establish and close out
positions on these options is subject to the maintenance of a liquid market
that may not always be available. Currency exchange rates may fluctuate based
on factors extrinsic to that country's economy.
Losses resulting from the use of Derivatives will reduce a Fund's net asset
value, and possibly income, and the losses can be greater than if Derivatives
had not been used.
RISK OF DERIVATIVES OUTSIDE THE UNITED STATES
When conducted outside the United States, Derivatives may not be regulated as
rigorously as in the United States, may not involve a clearing mechanism and
related guarantees, and will be subject to the risk of governmental actions
affecting trading in, or the prices of, foreign securities, currencies and
other instruments. In addition, the price of any foreign futures or foreign
options contract and, therefore, the potential profit and loss thereon, may be
affected by any variance in the foreign exchange rate between the time an order
is placed and the time it is liquidated, offset or exercised. The value of
positions taken as part of non-U.S. Derivatives also could be adversely
affected by: (1) other complex foreign political, legal and economic factors,
(2) lesser availability of dates on which to make trading decisions than in the
United States, (3) delays in the Fund's ability to act upon economic events
occurring in foreign markets during nonbusiness hours in the United States, (4)
the imposition of different exercise and settlement terms and procedures and
margin requirements than in the United States and (5) lower trading volume and
liquidity.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS
Use of many Derivatives by a Fund will require, among other things, that the
Fund segregate cash, liquid high grade debt obligations or other assets with
its custodian, or a designated sub-custodian, to the extent the Fund's
obligations are not otherwise 'covered' through ownership of the underlying
security, financial instrument or currency. In general, either the full amount
of any obligation by a Fund to pay or deliver securities or assets must be
covered at all times by the securities, instruments or currency required to be
delivered, or, subject to any regulatory restrictions, an amount of cash or
liquid high grade debt obligations at least equal to the current amount of the
obligation must be segregated with the custodian or sub-custodian. The
segregated assets cannot be sold or transferred unless equivalent assets are
substituted in their place or it is no longer necessary to segregate them. A
call option on securities written by a Fund, for example, will require the Fund
to hold the securities subject to the call (or securities convertible into the
needed securities without additional consideration) or to segregate liquid high
grade debt obligations sufficient to purchase and deliver the securities if the
call is exercised. A call option sold by a Fund on an index will require the
Fund to own portfolio securities that correlate with the index or to segregate
liquid high grade debt obligations equal to the excess of the index value over
the exercise price on a current basis. A put option on securities written by a
Fund will require the Fund to segregate liquid high grade debt obligations
equal to the exercise price. Except when a Fund enters into a forward contract
in connection with the purchase or sale of a
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security denominated in a foreign currency or for other non-speculative
purposes, which requires no segregation, a currency contract that obligates the
fund to buy or sell a foreign currency will generally require the Fund to hold
an amount of that currency or liquid securities denominated in that currency
equal to the Fund's obligations or to segregate liquid high grade debt
obligations equal to the amount of the Fund's obligations.
OTC options entered into by a Fund, including those on securities, currency,
financial instruments or indices, and OCC-issued and exchange-listed index
options will generally provide for cash settlement, although the Fund will not
be required to do so. As a result, when a Fund sells these instruments it will
segregate an amount of assets equal to its obligations under the Options.
OCC-issued and exchange-listed options sold by a Fund other than those
described above generally settle with physical delivery, and the Fund will
segregate an amount of assets equal to the full value of the option. OTC
options settling with physical delivery or with an election of either physical
delivery or cash settlement will be treated the same as other options settling
with physical delivery.
In the case of a futures contract or an option on a futures contract, a Fund
must deposit initial margin and, in some instances, daily variation margin in
addition to segregating assets sufficient to meet its obligations to purchase
or provide securities or currencies, or to pay the amount owed at the
expiration of an index-based futures contract. These assets may consist of
cash, cash equivalents, liquid debt or equity securities or other acceptable
assets. A Fund will accrue the net amount of the excess, if any, of its
obligations relating to swaps over its entitlements with respect to each swap
on a daily basis and will segregate with its custodian, or designated
sub-custodian, an amount of cash or liquid high grade debt obligations having
an aggregate value equal to at least the accrued excess. Caps, floors and
collars require segregation of assets with a value equal to the Fund's net
obligation, if any.
Derivatives may be covered by means other than those described above when
consistent with applicable regulatory policies. A Fund may also enter into
offsetting transactions so that its combined position, coupled with any
segregated assets, equals its net outstanding obligation in related
Derivatives. A Fund could purchase a put option, for example, if the strike
price of that option is the same or higher than the strike price of a put
option sold by the Fund. Moreover, instead of segregating assets if it holds a
futures contract or forward contract, a Fund could purchase a put option on the
same futures contract or forward contract with a strike price as high or higher
than the price of the contract held. Other Derivatives may also be offset in
combinations. If the offsetting transaction terminates at the time of or after
the primary transaction, no segregation is required, but if it terminates prior
to that time, assets equal to any remaining obligation would need to be
segregated.
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TELEPHONES
(800) SALOMON
(800) 725-6666
DISTRIBUTOR
Salomon Brothers Inc
Seven World Trade Center
New York, New York 10048
INVESTMENT MANAGER
Salomon Brothers Asset
Management Inc
Seven World Trade Center
New York, New York 10048
CUSTODIAN, TRANSFER AGENT AND
DIVIDEND DISBURSING AGENT
Investors Bank & Trust Company
89 South Street
Boston, Massachusetts 02111
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
LEGAL COUNSEL
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION
OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS
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.
------------------------------------------------
Salomon Brothers Institutional Investment Series
------------------------------------------------
SBII-5/96
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<PAGE>
SALOMON BROTHERS INSTITUTIONAL INVESTMENT SERIES
7 WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
(800) SALOMON
(800) 725-6666
STATEMENT OF ADDITIONAL INFORMATION
Salomon Brothers Institutional Investment Series consists of Salomon
Brothers Institutional Money Market Fund (the 'Money Market Fund'), Salomon
Brothers Institutional High Yield Bond Fund (the 'High Yield Bond Fund'),
Salomon Brothers Institutional Emerging Markets Debt Fund (the 'Emerging Markets
Debt Fund') and Salomon Brothers Institutional Asia Growth Fund (the 'Asia
Growth Fund') (each, a 'Fund' and collectively, the 'Funds'). Each of the Funds,
except the Money Market Fund, is a no-load investment portfolio of Salomon
Brothers Institutional Series Funds Inc, an open-end investment company
incorporated in Maryland on January 19, 1996 ('Institutional Series Funds'). The
Money Market Fund is a no-load investment portfolio of Salomon Brothers Series
Funds Inc, an open-end investment company incorporated in Maryland on April 17,
1990 ('Series Funds'). Institutional Series Funds and Series Funds are,
collectively, the 'Companies.'
This Statement of Additional Information ('SAI') is not a prospectus and is
only authorized for distribution when preceded or accompanied by the Funds'
current Prospectus dated April 29, 1997 (the 'Prospectus'). This SAI supplements
and should be read in conjunction with the Prospectus, a copy of which may be
obtained without charge by writing the Funds at the address, or by calling the
toll-free telephone number, listed above.
April 29, 1997
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<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Additional Information on Portfolio Instruments and Investment Policies......................... 3
Investment Limitations.......................................................................... 15
Additional Purchase and Redemption Information.................................................. 17
Portfolio Transactions.......................................................................... 18
Management...................................................................................... 19
Net Asset Value................................................................................. 26
Additional Information Concerning Taxes......................................................... 28
Performance Data................................................................................ 31
Capital Stock................................................................................... 33
Custodian and Transfer Agent.................................................................... 33
Independent Accountants......................................................................... 33
Counsel......................................................................................... 33
Financial Statements............................................................................ 34
</TABLE>
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ADDITIONAL INFORMATION ON PORTFOLIO INSTRUMENTS
AND INVESTMENT POLICIES
The discussion below supplements the information set forth in the
Prospectus under 'Investment Objective and Policies' and 'Additional Investment
Activities and Risk Factors.' References herein to the investment manager means,
with respect to the Money Market Fund, the High Yield Bond Fund and the Emerging
Markets Debt Fund, Salomon Brothers Asset Management Inc ('SBAM') and with
respect to the Asia Growth Fund, Salomon Brothers Asset Management Asia Pacific
Limited ('SBAM AP').
FOREIGN SECURITIES
As discussed in the Prospectus, investing in the securities of foreign
issuers generally, and particularly in emerging market issuers, involves special
considerations which are not typically associated with investing in securities
of U.S. issuers. The following discussion supplements the discussion contained
in the Prospectus under 'Additional Investment Activities and Risk
Factors -- Foreign Securities' and ' -- High Yield Securities -- High Yield
Foreign Sovereign Debt Securities.' See also ' -- Brady Bonds' below.
Certain of the risks associated with international investments and
investing in smaller capital markets are heightened for investments in emerging
market countries. For example, some of the currencies of emerging market
countries have experienced devaluations relative to the U.S. dollar, and major
adjustments have been made periodically in certain of such currencies. Certain
of such countries face serious exchange constraints. In addition, governments of
many emerging market countries have exercised and continue to exercise
substantial influence over many aspects of the private sector. In certain cases,
the government owns or controls many companies, including the largest in the
country. Accordingly, government actions in the future could have a significant
effect on economic conditions in developing countries which could affect private
sector companies and a Fund, as well as the value of securities in the Fund.
Certain markets are in only the earliest stages of development. There is
also a high concentration of market capitalization and trading volume in a small
number of issuers representing a limited number of industries, as well as a high
concentration of investors and financial intermediaries. Many of such markets
also may be affected by developments with respect to more established markets in
the region. Brokers in emerging market countries typically are fewer in number
and less capitalized than brokers in the United States. These factors, combined
with the U.S. regulatory requirements for open-end investment companies and the
restrictions on foreign investment, result in potentially fewer investment
opportunities for a Fund and may have an adverse impact on the investment
performance of a Fund.
There generally is less governmental supervision and regulation of
exchanges, brokers and issuers in foreign countries than there is in the United
States. For example, there may be no comparable provisions under certain foreign
laws to insider trading and similar investor protection securities laws that
apply with respect to securities transactions consummated in the United States.
Further, brokerage commissions and other transaction costs on foreign securities
exchanges generally are higher than in the United States.
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, as amended (the '1940
Act') limits a Fund's ability to invest in any equity security of an issuer
which, in its most recent fiscal year, derived more than 15% of its revenues
from 'securities related activities,' as defined by the rules thereunder. These
provisions may also restrict a Fund's investments in certain foreign banks and
other financial institutions.
3
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The manner in which foreign investors may invest in companies in certain
emerging market countries, as well as limitations on such investments, also may
have an adverse impact on the operations of a Fund. For example, the Fund may be
required in certain of such countries to invest initially through a local broker
or other entity and then have the shares purchased re-registered in the name of
the Fund. Re-registration may in some instances not be able to occur on a timely
basis, resulting in a delay during which the Fund may be denied certain of its
rights as an investor.
Foreign markets have different clearance and settlement procedures, and in
certain markets there have been times when settlements have failed to keep pace
with the volume of securities transactions, making it difficult to conduct such
transactions. Further, satisfactory custodial services for investment securities
may not be available in some countries having smaller, emerging capital markets,
which may result in a Fund incurring additional costs and delays in transporting
and custodying such securities outside such countries. Delays in settlement or
other problems could result in periods when assets of a Fund are uninvested and
no return is earned thereon. The inability of a Fund to make intended security
purchases due to settlement problems or the risk of intermediary counterparty
failures could cause a Fund to miss attractive investment opportunities. The
inability to dispose of a portfolio security due to settlement problems could
result either in losses to a Fund due to subsequent declines in the value of
such portfolio security or, if the Fund has entered into a contract to sell the
security, could result in possible liability to the purchaser.
Rules adopted under the 1940 Act permit a Fund to maintain its foreign
securities and cash in the custody of certain eligible non-U.S. banks and
securities depositories. Certain banks in foreign countries may not be eligible
sub-custodians for a Fund, in which event the Fund may be precluded from
purchasing securities in certain foreign countries in which it otherwise would
invest or which may result in the Fund's incurring additional costs and delays
in providing transportation and custody services for such securities outside of
such countries. A Fund may encounter difficulties in effecting on a timely basis
portfolio transactions with respect to any securities of issuers held outside
their countries. Other banks that are eligible foreign sub-custodians may be
recently organized or otherwise lack extensive operating experience. In
addition, in certain countries there may be legal restrictions or limitations on
the ability of a Fund to recover assets held in custody by foreign
sub-custodians in the event of the bankruptcy of the sub-custodian.
BANK OBLIGATIONS
Banks are subject to extensive governmental regulations which may limit
both the amounts and types of loans and other financial commitments which may be
made and interest rates and fees which may be charged. The profitability of this
industry is largely dependent upon the availability and cost of capital funds
for the purpose of financing lending operations under prevailing money market
conditions. Also, general economic conditions play an important part in the
operations of this industry and exposure to credit losses arising from possible
financial difficulties of borrowers might affect a bank's ability to meet its
obligations.
Investors should also be aware that securities issued or guaranteed by
foreign banks, foreign branches of U.S. banks, and foreign government and
private issuers may involve investment risks in addition to those relating to
domestic obligations. See 'Additional Investment Activities and Risk
Factors -- Foreign Securities' in the Prospectus and
' -- Foreign Securities' above.
As stated in the Prospectus, bank obligations that may be purchased by a
Fund include certificates of deposit, banker's acceptances and fixed time
deposits. A certificate of deposit is a short-term negotiable certificate issued
by a commercial bank against funds deposited in the bank and is either
interest-bearing or purchased on a discount basis. A bankers' acceptance is a
short-term draft drawn on a commercial bank by a borrower, usually in connection
with an international commercial transaction. The borrower is liable for payment
as is the bank, which unconditionally guarantees to pay the draft at its face
amount on the maturity date. Fixed time deposits are obligations of branches of
U.S. banks or foreign banks which are payable at a stated maturity date and bear
a fixed rate of interest. Although fixed
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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, such a
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.
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
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not realized. Because asset-backed securities are relatively new, the market
experience in these securities is limited and the market's ability to sustain
liquidity through all phases of the market cycle has not been tested.
LOANS OF PORTFOLIO SECURITIES
Certain Funds may lend portfolio securities to brokers or dealers or other
financial institutions. The procedure for the lending of securities will include
the following features and conditions. The borrower of the securities will
deposit cash, securities or other permissible forms of collateral (e.g., letters
of credit) with the Fund in an amount equal to a minimum of 100% of the market
value of the securities lent. The Fund will invest any cash 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 value of the collateral drops below the required minimum at any
time, the borrower may be called upon to post additional collateral. If the
additional collateral is not posted, 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
Institutional Series Funds and Series Funds have adopted policies and procedures
for the purpose of determining whether securities that are eligible for resale
under Rule 144A are liquid or illiquid for purposes of a Fund's limitation on
investment in illiquid securities. Pursuant to those policies and procedures,
each Company's Board of Directors has delegated to the investment manager the
determination as to whether a particular security is liquid or illiquid,
requiring that consideration be given to, among other things, the frequency of
trades and quotes for the security, the number of dealers willing to sell the
security and the number of potential purchasers, dealer undertakings to make a
market in the security, the nature of the security and the time needed to
dispose of the security. Each Company's 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 monitors Fund investments in Rule
144A securities under the supervision of each Company's Board of Directors, and
will consider appropriate measures to enable a Fund to maintain sufficient
liquidity for operating purposes and to meet redemption requests.
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BRADY BONDS
Brady Bonds are debt securities, generally denominated in U.S. dollars,
issued under the framework of the Brady Plan. The Brady Plan is an initiative
announced by former U.S. Treasury Secretary Nicholas F. Brady in 1989 as a
mechanism for debtor nations to restructure their outstanding external
commercial bank indebtedness. In restructuring its external debt under the Brady
Plan framework, a debtor nation negotiates with its existing bank lenders as
well as multilateral institutions such as the International Bank for
Reconstruction and Development (the 'World Bank') and the International Monetary
Fund (the 'IMF'). The Brady Plan framework, as it has developed, contemplates
the exchange of external commercial bank debt for newly issued bonds, known as
Brady Bonds. Brady Bonds may also be issued in respect of new money being
advanced by existing lenders in connection with the debt restructuring. The
World Bank and/or the IMF support the restructuring by providing funds pursuant
to loan agreements or other arrangements which enable the debtor nation to
collateralize the new Brady Bonds or to repurchase outstanding bank debt at a
discount. Under these arrangements with the World Bank and/or the IMF, debtor
nations have been required to agree to the implementation of certain domestic
monetary and fiscal reforms. Such reforms have included the liberalization of
trade and foreign investment, the privatization of state-owned enterprises and
the setting of targets for public spending and borrowing. These policies and
programs seek to promote the debtor country's economic growth and development.
Investors should also recognize that the Brady Plan only sets forth general
guiding principles for economic reform and debt reduction, emphasizing that
solutions must be negotiated on a case-by-case basis between debtor nations and
their creditors. SBAM believes that economic reforms undertaken by countries in
connection with the issuance of Brady Bonds make the debt of countries which
have issued or have announced plans to issue Brady Bonds an attractive
opportunity for investment. However, there can be no assurance that SBAM's
expectations with respect to Brady Bonds will be realized.
Investors should recognize that Brady Bonds have been issued only recently,
and accordingly do not have a long payment history. Brady Bonds which have been
issued to date are rated in the categories 'BB' or 'B' by Standard & Poor's
Rating Services Group ('S&P') or 'Ba' or 'B' by Moody's or, in cases in which a
rating by S&P or Moody's Investors Services ('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
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accruals being uncollateralized. The applicable Funds may purchase Brady Bonds
with no or limited collateralization, and will be relying for payment of
interest and (except in the case of principal collateralized Brady Bonds)
principal primarily on the willingness and ability of the foreign government to
make payment in accordance with the terms of the Brady Bonds. Brady Bonds issued
to date are purchased and sold in secondary markets through U.S. securities
dealers and other financial institutions and are generally maintained through
European transnational securities depositories. A substantial portion of the
Brady Bonds and other sovereign debt securities in which the Fund invests are
likely to be acquired at a discount, which involves certain considerations
discussed below under 'Additional Information Concerning Taxes.'
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
Forward Currency Exchange Contracts. As indicated in the Prospectus, in
order to hedge against currency exchange rate risks or to increase income or
gain, certain Funds may enter into forward currency exchange contracts with
securities dealers, financial institutions or other parties, through direct
bilateral agreements with such counterparties. A Fund will enter into forward
currency exchange contracts only with counterparties which the investment
manager deems creditworthy. In connection with a Fund's forward currency
transactions, the Fund will set aside in a segregated account with its
custodian, cash, cash equivalents or high quality debt securities in an amount
equal to the amount of the contract, to be used to pay for the commitment. The
segregated account will be marked-to-market on a daily basis. In addition to the
circumstances set forth in the Prospectus, a Fund may enter into forward
currency exchange contracts when the investment manager believes that the
currency of a particular country may suffer a substantial decline against the
U.S. dollar. In those
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circumstances, a Fund may enter into a forward contract to sell, for a fixed
amount of U.S. dollars, the amount of that currency approximating the value of
some or all of the Fund's portfolio securities denominated in such currency.
Forward contracts may limit potential gain from a positive change in the
relationship between the U.S. dollar and foreign currencies.
Futures Contracts. As indicated in the Prospectus, certain Funds may trade
futures contracts (1) on domestic and foreign exchanges on currencies, interest
rates and bond indices and (2) on domestic and, to the extent permitted by the
Commodity Futures Trading Commission ('CFTC'), foreign exchanges on stock
indices. None of the Funds is a commodity pool, and a Fund will use futures
contracts and options thereon solely: (i) for bona fide hedging purposes; and
(ii) for other purposes in amounts permitted by the rules and regulations
promulgated by the CFTC. A Fund may not enter into any futures contract or
related option other than for bona fide hedging purposes if, immediately
thereafter, the sum of the amount of aggregate initial margin deposits on the
Fund's existing futures contracts and premiums paid for options on futures
contracts would exceed 5% of the liquidation value of the Fund's portfolio,
after taking into account unrealized profits and losses on existing contracts.
In addition, the value of a Fund's long futures and options positions (futures
contracts on stock or bond indices, interest rates or foreign currencies and
call options on such futures contracts) will not exceed the sum of (a) cash,
cash equivalents or high quality debt securities segregated for this purpose,
(b) cash proceeds on existing investments due within thirty days and (c) accrued
profits on the particular futures or options positions. Furthermore, with
respect to the sale of futures contracts by a Fund, the value of such contracts
may not exceed the total market value of such Fund's portfolio securities.
Interest Rate Futures Contracts. A Fund may enter into interest rate
futures contracts in order to protect it from fluctuations in interest rates
without necessarily buying or selling fixed income securities. An interest rate
futures contract is an agreement to take or make delivery of either: (i) an
amount of cash equal to the difference between the value of a particular index
of debt securities at the beginning and at the end of the contract period; or
(ii) a specified amount of a particular debt security at a future date at a
price set at time of the contract. For example, if a Fund owns bonds, and
interest rates are expected to increase, the Fund might sell futures contracts
on debt securities having characteristics similar to those held in the
portfolio. Such a sale would have much the same effect as selling an equivalent
value of the bonds owned by the Fund. If interest rates did increase, the value
of the debt securities in the portfolio would decline, but the value of the
futures contracts to the Fund would increase at approximately the same rate,
thereby keeping the net asset value of the Fund from declining as much as it
otherwise would have. A Fund could accomplish similar results by selling bonds
with longer maturities and investing in bonds with shorter maturities when
interest rates are expected to increase. However, since the futures market may
be more liquid than the cash market, the use of futures contracts as a risk
management technique allows a Fund to maintain a defensive position without
having to sell its portfolio securities.
Similarly, when the investment manager expects that interest rates may
decline, a Fund may purchase interest rate futures contracts in an attempt to
hedge against having to make subsequently anticipated purchases of bonds at the
higher prices subsequently expected to prevail. Since the fluctuations in the
value of appropriately selected futures contracts should be similar to that of
the bonds that will be purchased, a Fund could take advantage of the anticipated
rise in the cost of the bonds without actually buying them until the market had
stabilized. At that time, a Fund could make the intended purchase of the bonds
in the cash market and the futures contracts could be liquidated.
At the time of delivery of securities pursuant to an interest rate futures
contract, adjustments are made to recognize differences in value arising from
the delivery of securities with a different interest rate from that specified in
the contract. In some (but not many) cases, securities called for by a futures
contract may have a shorter term than the term of the futures contract and,
consequently, may not in fact have been issued when the futures contract was
entered.
Options. As indicated in the Prospectus, in order to hedge against adverse
market shifts or to increase income or gain, certain Funds may purchase put and
call options or write 'covered' put and call options on futures contracts on
stock indices, interest rates and
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currencies. In addition, in order to hedge against adverse market shifts or to
increase its income, a Fund may purchase put and call options and write
'covered' put and call options on stocks, Loan Participations and Assignments
(as defined in the Prospectus), stock indices and currencies. A Fund may utilize
options on currencies in order to hedge against currency exchange rate risks. A
call option is 'covered' if, so long as the Fund is obligated as the writer of
the option, it will own: (i) the underlying investment subject to the option;
(ii) securities convertible or exchangeable without the payment of any
consideration into the securities subject to the option; or (iii) a call option
on the relevant security or currency with an exercise price no higher than the
exercise price on the call option written. A put option is 'covered' if, to
support its obligation to purchase the underlying investment if a put option
that a Fund writes is exercised, the Fund will either: (a) deposit with its
custodian in a segregated account cash, U.S. government securities or other high
grade liquid debt obligations having a value at least equal to the exercise
price of the underlying investment; or (b) continue to own an equivalent number
of puts of the same 'series' (that is, puts on the same underlying investment
having the same exercise prices and expiration dates as those written by the
Fund), or an equivalent number of puts of the same 'class' (that is, puts on the
same underlying investment) with exercise prices greater than those that it has
written (or, if the exercise prices of the puts it holds are less than the
exercise prices of those it has written, it will deposit the difference with its
custodian in a segregated account). Parties to options transactions must make
certain payments and/or set aside certain amounts of assets in connection with
each transaction, as described in the Prospectus.
In all cases except for certain options on interest rate futures contracts,
by writing a call, a Fund will limit its opportunity to profit from an increase
in the market value of the underlying investment above the exercise price of the
option for as long as the Fund's obligation as writer of the option continues.
By writing a put, a Fund will limit its opportunity to profit from a decrease in
the market value of the underlying investment below the exercise price of the
option for as long as the Fund's obligation as writer of the option continues.
Upon the exercise of a put option written by a Fund, the Fund may suffer an
economic loss equal to the difference between the price at which the Fund is
required to purchase the underlying investment and its market value at the time
of the option exercise, less the premium received for writing the option. Upon
the exercise of a call option written by a Fund, the Fund may suffer an economic
loss equal to an amount not less than the excess of the investment's market
value at the time of the option exercise over the Fund's acquisition cost of the
investment, less the sum of the premium received for writing the option and the
positive difference, if any, between the call price paid to the Fund and the
Fund's acquisition cost of the investment.
In all cases except for certain options on interest rate futures contracts,
in purchasing a put option, a Fund will seek to benefit from a decline in the
market price of the underlying investment, while in purchasing a call option, a
Fund will seek to benefit from an increase in the market price of the underlying
investment. If an option purchased is not sold or exercised when it has
remaining value, or if the market price of the underlying investment remains
equal to or greater than the exercise price, in the case of a put, or remains
equal to or below the exercise price, in the case of a call, during the life of
the option, the Fund will lose its investment in the option. For the purchase of
an option to be profitable, the market price of the underlying investment must
decline sufficiently below the exercise 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
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the option it had written or a closing sale transaction in which the Fund sells
an option having the same terms as the option it had purchased. A covered option
writer unable to effect a closing purchase transaction will not be able to sell
the underlying security until the option expires or the underlying security is
delivered upon exercise, with the result that the writer will be subject to the
risk of market decline in the underlying security during such period. Should a
Fund choose to exercise an option, the Fund will purchase in the open market the
securities, commodities or commodity futures contracts underlying the exercised
option.
Exchange-listed options on securities and currencies, with certain
exceptions, generally settle by physical delivery of the underlying security or
currency, although in the future, cash settlement may become available.
Frequently, rather than taking or making delivery of the underlying instrument
through the process of exercising the option, listed options are closed by
entering into offsetting purchase or sale transactions that do not result in
ownership of the new option. Index options are cash settled for the net amount,
if any, by which the option is 'in-the-money' (that is, the amount by which the
value of the underlying instrument exceeds, in the case of a call option, or is
less than, in the case of a put option, the exercise price of the option) at the
time the option is exercised.
A Fund's ability to close out its position as a purchaser or seller of an
exchange-listed put or call option is dependent upon the existence of a liquid
secondary market on option exchanges. Among the possible reasons for the absence
of a liquid secondary market on an exchange are: (i) insufficient trading
interest in certain options; (ii) restrictions on transactions imposed by an
exchange; (iii) trading halts, suspensions or other restrictions imposed with
respect to particular classes or series of options or underlying securities;
(iv) interruption of the normal operations on an exchange; (v) inadequacy of the
facilities of an exchange or the Options Clearing Corporation ('OCC') to handle
current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the secondary market on that exchange (or in that class or series
of options) would cease to exist, although outstanding options on that exchange
that had been listed by the OCC as a result of trades on that exchange would
generally continue to be exercisable in accordance with their terms.
Over-the-counter options ('OTC 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. OTC options are considered by the staff of the
SEC to be illiquid securities.
The hours of trading for options on securities may not conform to the hours
during which the underlying securities are traded. To the extent that the option
markets close before the markets for the underlying securities, significant
price and rate movements can take place in the underlying markets that cannot be
reflected in the options markets.
(a) Options on Stocks and Stock Indices. A Fund may purchase put and call
options and write covered put and call options on stocks and stock indices
listed on domestic and foreign securities exchanges in order to hedge against
movements in the equity markets or to increase income or gain to the Fund. In
addition, the Fund may purchase options on stocks that are traded
over-the-counter. Options on stock indices are similar to options on specific
securities. However, because options on stock indices do not involve the
delivery of an underlying security, the option represents the holder's right to
obtain from the writer cash in an amount equal to a fixed multiple of the amount
by which the exercise price exceeds (in the case of a put) or is less than (in
the case of a call) the closing value of the underlying stock index on the
exercise date. Currently, options traded include the Standard & Poor's 100 Index
of Composite Stocks, Standard & Poor's 500 Index of Composite Stocks (the 'S&P
500 Index'), the New York Stock Exchange ('NYSE') Composite Index, the American
Stock Exchange ('AMEX') Market Value Index, the National Over-the-Counter Index
and other standard broadly based stock market indices. Options are also traded
in certain industry or market segment indices such as the Oil Index, the
Computer Technology Index and the Transportation Index. Stock index options are
subject to position and exercise limits and other regulations imposed by the
exchange on which they are traded.
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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 or gain, as described above
in 'Forward Currency Exchange Contracts.'
(c) Options on Futures Contracts. A Fund may purchase put and call options
and write covered put and call options on futures contracts on stock indices,
interest rates and currencies traded on domestic and, to the extent permitted by
the CFTC, foreign exchanges, in order to hedge all or a portion of its
investments or to increase income or gain and may enter into closing
transactions in order to terminate existing positions. There is no guarantee
that such closing transactions can be effected. An option on a stock index
futures contract, interest rate futures contract or currency futures contract,
as contrasted with the direct investment in such a contract, gives the purchaser
the right, in return for the premium paid, to assume a position in the
underlying contract at a specified exercise price at any time on or before the
expiration date of the option. Upon exercise of an option, the delivery of the
futures position by the writer of the option to the holder of the option will be
accompanied by delivery of the accumulated balance in the writer's futures
margin account. The potential loss related to the purchase of an option on a
futures contract is limited to the premium paid for the option (plus transaction
costs). While the price of the option is fixed at the point of sale, the value
of the option does change daily and the change would be reflected in the net
asset value of the Fund.
Interest Rate and Equity Swaps and Related Transactions. Certain Funds may
enter into interest rate and equity swaps and may purchase or sell (i.e., write)
interest rate and equity caps, floors and collars. A Fund expects to enter into
these transactions in order to hedge against either a decline in the value of
the securities included in the Fund's portfolio, or against an increase in the
price of the securities which it plans to purchase, or in order to preserve or
maintain a return or spread on a particular investment or portion of its
portfolio or to achieve a particular return on cash balances, or in order to
increase income or gain. Interest rate and equity swaps involve the exchange by
a Fund with another party of their respective commitments to make or receive
payments based on a notional principal amount. The purchase of an interest rate
or equity cap entitles the purchaser, to the extent that a specified index
exceeds a predetermined level, to receive payments on a contractually-based
principal amount from the party selling the interest rate or equity cap. The
purchase of an interest rate or equity floor entitles the purchaser, to the
extent that a specified index falls below a predetermined rate, to receive
payments on a contractually-based principal amount from the party selling the
interest rate or equity floor. A collar is a combination of a cap and a floor
which preserve a certain return within a predetermined range of values.
A Fund may enter into interest rate and equity swaps, caps, floors and
collars on either an asset-based or liability-based basis, depending on whether
it is hedging its assets or its liabilities, and will usually enter into
interest rate and equity swaps on a net basis (i.e., the two payment streams are
netted out), with the Fund receiving or paying, as the case may be, only the net
amount of the two payments. The net amount of the excess, if any, of a Fund's
obligations over its entitlements with respect to each interest rate or equity
swap will be accrued on a daily basis, and an amount of cash and/or liquid high
grade debt securities having an aggregate net asset value at least equal to the
accrued excess will be maintained in a segregated account by the Fund's
custodian. If a Fund enters into an interest rate or equity
12
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<PAGE>
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 monitors the creditworthiness of
counterparties to its interest rate and equity swap, cap, floor and collar
transactions on an ongoing basis. If there is a default by the other party to
such a transaction, a Fund will have contractual remedies pursuant to the
agreements related to the transaction. The swap market has grown substantially
in recent years with a large number of banks and investment banking firms acting
both as principals and agents utilizing standardized swap documentation. The
investment manager has determined that, as a result, the swap market has become
relatively liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been developed and, accordingly,
they are less liquid than swaps. To the extent a Fund sells caps, floors, and
collars it will maintain in a segregated account cash and/or liquid high grade
debt securities having an aggregate net asset value at least equal to the full
amount, accrued on a daily basis, of the Fund's obligations with respect to the
caps, floors or collars. The use of interest rate and equity swaps is a highly
specialized activity which involves investment techniques and risks different
from those associated with ordinary portfolio securities transactions. If the
investment manager is incorrect in its forecasts of market values, interest
rates and other applicable factors, the investment performance of a Fund would
diminish compared with what it would have been if these investment techniques
were not utilized. Moreover, even if the investment manager is correct in its
forecasts, there is a risk that the swap position may correlate imperfectly with
the price of the asset or liability being hedged.
There is no limit on the amount of interest rate and equity swap
transactions that may be entered into by a Fund. These transactions do not
involve the delivery of securities or other underlying assets or principal.
Accordingly, the risk of loss with respect to interest rate and equity swaps is
limited to the net amount of payments that a Fund is contractually obligated to
make, if any. The effective use of 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, subject to the limits
of the 1940 Act. The return on such investments will be reduced by the operating
expenses, including investment advisory and administration fees, of such
investment funds, and will be further reduced by Fund expenses, including
management fees; that is, there will be a layering of certain fees and expenses.
Investment in investment companies also may involve the payment of substantial
premiums above the value of such companies' portfolio securities. The Funds do
not intend to invest in such vehicles or funds unless the Investment Manager
determines that the potential benefits of such investment justify the payment of
any applicable premiums.
PORTFOLIO TURNOVER
Purchases and sales of portfolio securities may be made as considered
advisable by the investment manager in the best interests of the shareholders.
Each Fund intends to limit portfolio trading to the extent practicable and
consistent with its investment objectives. Each Fund's portfolio turnover rate
may vary from year to year, as well as within a year. Short-
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term gains realized from portfolio transactions are taxable to shareholders as
ordinary income. In addition, higher portfolio turnover rates can result in
corresponding increases in portfolio transaction costs for a Fund.
With respect to the Money Market Fund, SBAM seeks to enhance the Fund's
yield by taking advantage of yield disparities or other factors that occur in
the money market. For example, market conditions frequently result in similar
securities trading at different prices. The Money Market Fund may dispose of any
portfolio security prior to its maturity if such disposition and reinvestment of
the proceeds are expected to enhance yield consistent with SBAM's judgment as to
a desirable portfolio maturity structure or if such disposition is believed to
be advisable due to other circumstances or considerations. Subsequent to its
purchase, a portfolio security may be assigned a lower rating or cease to be
rated. Such an event would not require the disposition of the instrument, but
SBAM will consider such an event in determining whether the Fund should continue
to hold the security. The policy of the Money Market Fund regarding dispositions
of portfolio securities and its policy of investing in securities deemed to have
maturities of thirteen months or less will result in high portfolio turnover. A
higher rate of portfolio turnover results in increased transaction costs to the
Fund in the form of dealer spreads. See 'Portfolio Transactions.'
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INVESTMENT LIMITATIONS
Except for: (i) the investment limitations set forth below which are
indicated as fundamental policies; (ii) the investment restrictions set forth in
the Prospectus; and (iii) each Fund's investment objective as described in the
Prospectus, the other policies and percentage limitations referred to in this
Statement of Additional Information and the Prospectus are not fundamental
policies of the Funds and may be changed by vote of each Company's Board of
Directors without shareholder approval. The investment restrictions which are
fundamental policies may be changed only when permitted by law, if applicable,
and approved by the holders of a majority of a Fund's outstanding voting
securities, which, as defined by the 1940 Act, means the lesser of: (i) 67% of
the shares represented at a meeting at which more than 50% of the outstanding
shares are represented; or (ii) more than 50% of the outstanding shares.
If a percentage restriction on investment or utilization of assets in a
fundamental policy or restriction set forth below is adhered to at the time a
transaction is effected, a later change in percentage ownership of a security or
kind of security resulting from changing market values or a similar type of
event will not be considered a violation of such policy or restriction.
Money Market Fund. The Money Market Fund may not:
(1) invest more than 10% of the value of its net assets in securities
which are illiquid;
(2) purchase shares of other investment companies (except as part of a
merger, consolidation or reorganization or purchase of assets approved by
the Fund's shareholders), provided that the Fund may purchase shares of any
registered open-end investment company that determines its net asset value
per share based on the amortized cost or penny-rounding method, if
immediately after any such purchase the Fund does not: (a) own more than 3%
of the outstanding voting stock of any one investment company, (b) invest
more than 5% of the value of its total assets in any one investment
company, or (c) invest more than 10% of the value of its total assets in
the aggregate in securities of investment companies;
(3) purchase securities on margin (except for delayed delivery or
when-issued transactions or such short-term credits as are necessary for
the clearance of transactions);
(4) sell securities short;
(5) purchase or sell commodities or commodity contracts, including
futures contracts;
(6) invest for the purpose of exercising control over management of
any company;
(7) make loans, except that the Fund may (a) purchase and hold debt
instruments in accordance with its investment objective and policies and
(b) enter into repurchase agreements with respect to portfolio securities;
(8) underwrite the securities of other issuers, except to the extent
that the purchase of investments directly from the issuer thereof and later
disposition of such securities in accordance with the Fund's investment
program may be deemed to be an underwriting;
(9) purchase real estate or real estate limited partnership interests
(other than securities issued by companies that invest in real estate or
interests therein);
(10) invest directly in interests in oil, gas or other mineral
exploration development programs or mineral leases; or
(11) purchase warrants.
Each of the above restrictions are fundamental policies of the Money Market
Fund. For the purpose of applying the above percentage restrictions and the
percentage investment limitations set forth in the Prospectus to
receivables-backed obligations, the special purpose entity issuing the
receivables-backed obligations and/or one or more of the issuers of the
underlying receivables will be considered an issuer in accordance with
applicable regulations.
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<PAGE>
High Yield Bond Fund, Emerging Markets Fund and Asia Growth Fund. Each of the
High Yield Bond Fund, Emerging Markets Fund and Asia Growth Fund may not:
(1) underwrite securities of other issuers, except to the extent that
the purchase of investments directly from the issuer thereof or from an
underwriter for an issuer and the later disposition of such securities in
accordance with a Fund's investment program may be deemed to be an
underwriting;
(2) purchase or sell real estate, although a Fund may purchase and
sell securities of companies which deal in real estate, may purchase and
sell marketable securities which are secured by interests in real estate
and may invest in mortgages and mortgage-backed securities;
(3) purchase or sell commodities or commodity contracts except that a
Fund may engage in derivative transactions to the extent permitted by its
investment policies as such policies are set forth from time to time in the
Prospectus and this Statement of Additional Information;
(4) make loans, except that: (a) a Fund may purchase and hold debt
securities in accordance with its investment objective and policies; (b) a
Fund may enter into repurchase agreements with respect to portfolio
securities, subject to applicable limitations of its investment policies;
(c) a Fund may lend portfolio securities with a value not in excess of
one-third of the value of its total assets, provided that collateral
arrangements with respect to options, forward currency and futures
transactions will not be deemed to involve loans of securities; and (d)
delays in the settlement of securities transactions will not be considered
loans;
(5) purchase the securities of other investment companies except as
permitted under the 1940 Act or in connection with a merger, consolidation,
acquisition or reorganization;
(6) purchase securities on margin (except for delayed delivery or
when-issued transactions or such short-term credits as are necessary for
the clearance of transactions, and except for initial and variation margin
payments in connection with purchases or sales of futures contracts);
(7) sell securities short; provided that short positions in a futures
contract or forward contract are permitted;
(8) purchase or retain any securities of an issuer if one or more
persons affiliated with a Fund owns beneficially more than 1/2 of 1% of the
outstanding securities of such issuer and such affiliated persons so owning
1/2 of 1% together own beneficially more than 5% of such securities;
(9) invest in oil, gas and other mineral leases, provided, however,
that this shall not prohibit a Fund from purchasing publicly traded
securities of companies engaging in whole or in part in such activities;
(10) with respect to the High Yield Bond Fund only, purchase the
securities of any issuer if by reason thereof the value of its investment
in all securities of that issuer will exceed 5% of the value of its total
assets;
(11) 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;
(12) 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
(13) 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 and restrictions (6) through (13) are non-fundamental policies of each
of the High Yield Bond Fund, Emerging Markets Fund and Asia Growth Fund.
16
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ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Certificates representing shares of the Funds will not be issued to
shareholders. Investors Bank and Trust Company ('Investors Bank'), the Fund's
transfer agent, will maintain an account for each shareholder upon which the
registration and transfer of shares are recorded, and any transfers shall be
reflected by bookkeeping entry, without physical delivery. Detailed
confirmations of each purchase or redemption are sent to each shareholder.
Monthly statements of account are sent which include shares purchased as a
result of a reinvestment of Fund distributions.
Investors Bank will require that a shareholder provide requests in writing,
accompanied by a valid signature guarantee form, when changing certain
information in an account (i.e., wiring instructions, telephone privileges,
etc.).
If the Board of Directors of each of Institutional Series Funds and Series
Funds shall determine that it is in the best interests of the remaining
shareholders of a Fund, the Fund may pay the redemption price in whole, or in
part, by a distribution in kind from the portfolio of the Fund, in lieu of cash,
taking such securities at their value employed for determining such redemption
price, and selecting the securities in such manner as such Board of Directors
may deem fair and equitable. However, each Fund has made an election pursuant to
Rule 18f-1 under the 1940 Act requiring that all redemptions be effected in cash
to each redeeming shareholder, during periods of 90 days, up to the lesser of
$250,000 or 1% of the net assets of such Fund. A shareholder who receives a
distribution in kind may incur a brokerage commission upon a later disposition
of such securities and may receive less than the redemption value of such
securities or property upon sale, particularly where such securities are sold
prior to maturity. Redemption in kind is not as liquid as a cash redemption.
Under the 1940 Act, a Fund may suspend the right of redemption or postpone
the date of payment upon redemption for any period: (i) during which the NYSE is
closed, other than customary weekend and holiday closings; (ii) during which
trading on the NYSE is restricted; or (iii) during which (as determined by the
SEC by rule or regulation) an emergency exists as a result of which disposal or
valuation of portfolio securities is not reasonably practicable, or for such
other periods as the SEC may permit. A Fund may also suspend or postpone the
recordation of the transfer of its shares upon the occurrence of any of the
foregoing conditions.
Exchange Privilege. Shareholders may exchange all or part of their shares
for shares of other Funds in the Salomon Brothers Institutional Investment
Series, as indicated in the Prospectus. The value of the shares exchanged must
meet the investment minimum of the Fund into which the investor is exchanging.
The exchange privilege enables shareholders of a Fund to acquire shares in
a Fund with a different investment objective when they believe that a shift
between Funds is an appropriate investment decision. This privilege is available
to shareholders residing in any state in which the Fund shares being acquired
may legally be sold.
Exercise of the exchange privilege is treated as a sale and purchase for
federal income tax purposes and, depending on the circumstances, a short-or
long-term capital gain or loss may be realized. The price of the shares of the
Fund into which shares are exchanged will be the new cost basis for tax
purposes.
Upon receipt of proper instructions and all necessary supporting documents,
shares submitted for exchange are redeemed at the then-current net asset value
and the proceeds immediately invested in shares of the Fund being acquired at a
price equal to the then current net asset value of such shares.
All accounts involved in a telephone or telegram exchange must have the
same registration. If a new account is to be established, the dollar amount to
be exchanged must be at least as much as the minimum initial investment of the
Fund whose shares are being purchased. Any new account established by exchange
will automatically be registered in the same way as the account from which
shares are exchanged and will carry the same dividend option.
The exchange privilege is not designed for investors trying to catch
short-term savings in market prices by making frequent exchanges. A Fund
reserves the right to impose a limit on
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<PAGE>
the number of exchanges a shareholder may make. Call or write the applicable
Fund for further details.
PORTFOLIO TRANSACTIONS
Subject to policy established by each Company's Board of Directors, the
investment manager is primarily responsible for each Fund's portfolio decisions
and the placing of the Fund's portfolio transactions.
Fixed-income, certain short-term securities and certain equities normally
will be purchased or sold from or to issuers directly or to dealers serving as
market makers for the securities at a net price, which may include dealer
spreads and underwriting commissions. Equity securities may also be purchased or
sold through brokers who will be paid a commission.
The general policy of each Fund in selecting brokers and dealers is to
obtain the best results taking into account factors such as the general
execution and operational facilities of the broker or dealer, the type and size
of the transaction involved, the creditworthiness of the broker or dealer, the
stability of the broker or dealer, execution and settlement capabilities, time
required to negotiate and execute the trade, research services and the
investment manager's arrangements related thereto (as described below), overall
performance, the dealer's risk in positioning the securities involved, and the
broker's commissions and dealer's spread or mark-up. While the investment
manager generally seeks the best price in placing its orders, a Fund may not
necessarily be paying the lowest price available.
Notwithstanding the above, in compliance with Section 28(e) of the
Securities Exchange Act of 1934, the investment manager may select brokers who
charge a commission in excess of that charged by other brokers, if the
investment manager determines in good faith that the commission to be charged is
reasonable in relation to the brokerage and research services provided to the
investment manager by such brokers. Research services generally consist of
research or statistical reports or oral advice from brokers and dealers
regarding particular companies, industries or general economic conditions. The
investment manager may also have arrangements with brokers pursuant to which
such brokers provide research services to the investment manager in exchange for
a certain volume of brokerage transactions to be executed by such broker. While
the payment of higher commissions increases a Fund's costs, the investment
manager does not believe that the receipt of such brokerage and research
services significantly reduces its expenses as a Fund's investment manager.
Arrangements for the receipt of research services from brokers may create
conflicts of interest.
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 each Company's Board of Directors, in order for such an affiliated
person to be permitted to effect any portfolio transactions for a Fund, the
commissions, fees or other remuneration received by such affiliated person must
be reasonable and fair compared to the commissions, fees or other remuneration
received by other brokers in connection with comparable transactions. This
standard would allow such an affiliated person to receive no more than the
remuneration which would be expected to be received by an unaffiliated broker in
a commensurate arm's-length transaction.
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 its affiliates (including Salomon Brothers Inc) is
a member under certain conditions, in accordance with the provisions of Rule
10f-3 promulgated under the 1940 Act.
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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. 'Interested directors' of the Funds (as defined in the 1940
Act) are indicated by an asterisk.
Except as indicated below, the address of each executive officer is 7 World
Trade Center, New York, New York 10048.
INSTITUTIONAL SERIES FUNDS AND SERIES FUNDS
<TABLE>
<CAPTION>
POSITION(S) PRINCIPAL OCCUPATION(S)
NAME, ADDRESS AND AGE HELD PAST 5 YEARS
- ------------------------------------ -------------------------- ---------------------------------------
<S> <C> <C>
Charles F. Barber .................. Director and Chairman, Consultant; formerly, Chairman of the
66 Glenwood Drive Audit Committee Board, ASARCO Incorporated.
Greenwich, CT 06830
Age: 80
Carol L. Colman .................... Director and President, Colman Consulting Co., Inc.
Colman Consulting Audit Committee
Co., Inc. Member
278 Hawley Road
North Salem, NY 10560
Age: 51
Daniel P. Cronin ................... Director and Vice President and General Counsel,
Pfizer, Inc Audit Committee Pfizer International Inc., Senior
253 East 42nd Street Member Assistant General Counsel, Pfizer
New York, NY 10017 Inc.
Age: 51
Michael S. Hyland* ................. Director and President and Managing Director of SBAM
Age: 51 President and Managing Director and Member of
the Management Board of Salomon
Brothers Inc ('SBI').
Giampaolo G. Guarnieri ............. Executive Vice President Member of Board of Directors and Head
Salomon Brothers Asset of SBAM AP from January 1997 to
Management Asia present. Director of SBAM AP since
Pacific Limited July 1996. Vice President and Senior
Three Exchange Square, Portfolio Manager of SBAM AP from
Hong Kong April 1995 to June 1996. From April
Age: 33 1995 to January 1996, Vice President
and Senior Vice President of Salomon
Brothers Hong Kong Limited. From
January 1992 to March 1995, Senior
Portfolio Investment Manager of
Credit Agricole Asset Management
(South East Asia) Limited.
Steven Guterman .................... Executive Vice Managing Director of SBAM and SBI since
Age: 43 President January 1996. Prior to January 1996,
(Series Fund only) Director of SBAM and SBI.
Peter J. Wilby ..................... Executive Vice Managing Director of SBAM and SBI since
Age: 38 President January 1996. Prior to January 1996,
Director of SBAM and SBI.
Richard E. Dahlberg ................ Executive Vice Managing Director of SBAM and SBI since
Age: 57 President January 1996. From July 1995 to
(Series Funds only) January 1996, Director of SBAM and
SBI. Prior to July 1995, Senior Vice
President and Senior Portfolio
Manager with Massachusetts Financial
Services.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
POSITION(S) PRINCIPAL OCCUPATION(S)
NAME, ADDRESS AND AGE HELD PAST 5 YEARS
- ------------------------------------ -------------------------- ---------------------------------------
<S> <C> <C>
Marybeth Whyte ..................... Executive Vice President Director of SBAM and SBI since January
Age: 41 1995. From July 1994 to December
1994, Vice President of SBAM and SBI.
Prior to July 1994, Senior Vice
President and head of the Municipal
Bond area at Fiduciary Trust Company
International.
Beth A. Semmel ..................... Executive Vice President Director of SBAM and SBI since January
Age: 36 1996. From May 1993 to December 1995,
Vice President of SBAM and SBI. From
January 1989 to May 1993, Vice
President of Morgan Stanley Asset
Management.
Maureen O'Callaghen ................ Executive Vice President Vice President of SBAM and SBI since
Age: 33 October 1988.
James E. Craige .................... Executive Vice President Vice President, SBAM and Salomon
Age: 29 Brothers Inc since 1992.
Thomas K. Flanagan ................. Executive Vice President Director, SBAM and Salomon Brothers Inc
Age: 44 since 1991.
Lawrence H. Kaplan ................. Executive Vice Vice President and Chief Counsel of
Age: 40 President and SBAM and Vice President of SBI since
General Counsel May 1995. Prior to May 1995, Senior
Vice President, Director, Assistant
Secretary and General Counsel, Kidder
Peabody Asset Management, Inc. and
Senior Vice President of Kidder,
Peabody & Co. Incorporated.
Eliza Lau .......................... Vice President Vice President and Portfolio Manager of
Salomon Brothers Asset SBAM AP since March 1996. From July
Management Asia 1994 to March 1996, Vice President
Pacific Limited and Portfolio Manager of Salomon
Three Exchange Square Brothers Hong Kong Limited; from
Hong Kong October 1991 to July 1994, research
Age: 34 analyst with SBI.
Nancy Noyes ........................ Vice President Director, SBAM and SBI since January
(Series Funds only) 1996. From August 1992 to January
Age: 38 1996, Vice President, SBAM and SBI.
Prior to August 1992, Vice President
of Swiss Bank Corp.
Jennifer G. Muzzey ................. Secretary Employee of SBAM since June 1994. Prior
Age: 37 to June 1994, Vice President of
SunAmerica Asset Management
Corporation.
Noel B. Daugherty .................. Assistant Secretary Employee of SBAM since November 1996.
Age: 31 From August 1993 to October 1996, an
employee of Chancellor LGT Asset
Management. From October 1989 to
August 1993, an employee of The
Dreyfus Corporation.
Alan M. Mandel ..................... Treasurer Vice President of SBAM and SBI since
Age: 39 January 1995. Prior to January 1995,
Chief Financial Officer and Vice
President of Hyperion Capital
Management Inc.
Reji Paul .......................... Assistant Treasurer Investment Accounting Manager of SBAM
Age: 34 since February 1995. Prior to
February 1995, Assistant Vice
President of Mitchell Hutchins Asset
Management Inc.
</TABLE>
20
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<TABLE>
<CAPTION>
POSITION(S) PRINCIPAL OCCUPATION(S)
NAME, ADDRESS AND AGE HELD PAST 5 YEARS
- ------------------------------------ -------------------------- ---------------------------------------
<S> <C> <C>
Janet Tolchin ...................... Assistant Treasurer Investment Accounting Manager of SBAM.
Age: 37 (Series Fund only)
Amy Yeung .......................... Assistant Treasurer Investment Accounting Manager of SBAM
Age: 31 (Institutional Series since April 1995; formerly Manager of
Funds only) McGladrey & Pullen, LLP (accounting
firm).
</TABLE>
Directors of the Series Funds and Institutional Series Funds not affiliated
with SBAM receive from their respective Funds an annual fee and a fee for each
Board of Directors and Board committee meeting attended and are reimbursed for
all out-of-pocket expenses relating to attendance at meetings. Directors who are
affiliated with SBAM do not receive compensation but are reimbursed for all
out-of-pocket expenses relating to attendance at such meetings.
The following lists shareholders of record who held 5% or more of the
outstanding shares of the Funds as of April 1, 1997. The shareholders of 25% or
more of the outstanding shares of a Fund are deemed to be 'control persons,' as
defined in the 1940 Act, of the Funds. As of April 1, 1997, Salomon Brothers
Asset Management Inc and its affiliates, 7 World Trade Center, New York, NY
10048, own 55.96%, 65.71%, 49.74% and 77.84% of the outstanding shares of the
Money Market Fund, High Yield Bond Fund, the Emerging Markets Debt Fund and the
Asia Growth Fund, respectively.
<TABLE>
<CAPTION>
PERCENTAGE
FUND SHAREHOLDER HELD
- --------------------------------------------- ------------------------------------------ ----------
<S> <C> <C>
Money Market Fund............................ Citibank NA TR 52.09%
u/a DTD 9/1/90
Salomon Brothers Inc Retirement Plan
111 Wall Street
20th Fl Zone 1
New York, NY 10043
Money Market Fund............................ Saturn & Co. 26.18%
c/o Investors Bank & Trust Co.
P.O. Box 1537
Top 57
Boston, MA 02205-1537
Money Market Fund............................ Viatel Inc. 9.48%
800 Third Avenue 18th Floor
New York, NY 10022
Money Market Fund............................ Barr Laboratories Inc. 5.65%
2 Quaker Road P.O. Box 2900
Pomona, NY 10970-0519
High Yield Bond Fund......................... Prouco Leasing Corporation 34.29%
c/o Richard B. Caruso
Suite 314 Two Radnor Station
290 King of Prussia Rd.
Radnor, PA 19087
High Yield Bond Fund......................... Salomon Brothers A/C PWM1389 29.58%
Attn: Jim Hamerschlag
7 World Trade Center
New York, NY 10048
High Yield Bond Fund......................... Salomon Brothers A/C PWM1207 16.45%
Attn: Jim Hamerschlag
7 World Trade Center
New York, NY 10048
High Yield Bond Fund......................... Salomon Brothers A/C PWM1249 15.81%
Attn: Jim Hamerschlag
7 World Trade Center
New York, NY 10048
Emerging Markets Debt Fund................... Mac & Co. A/C CRNF5025022 50.26%
Mutual Funds Operations
P.O. Box 3198
Pittsburgh, PA 15230-3198
</TABLE>
(table continued on next page)
21
<PAGE>
<PAGE>
(table continued from previous page)
<TABLE>
<CAPTION>
PERCENTAGE
FUND SHAREHOLDER HELD
- --------------------------------------------- ------------------------------------------ ----------
<S> <C> <C>
Emerging Markets Debt Fund................... Salomon Brothers Holding Co. Inc 19.68%
Attn: Marc Peckman
7 World Trade Center
New York, NY 10048
Emerging Markets Debt Fund................... Salomon Brothers A/C PWM1207 9.11%
Attn: Jim Hamerschlag
7 World Trade Center
New York, NY 10048
Emerging Markets Debt Fund................... Salomon Brothers A/C PWM1249 8.50%
Attn: Jim Hamerschlag
7 World Trade Center
New York, NY 10048
Emerging Markets Debt Fund................... Salomon Brothers A/C PWM1389 8.03%
Attn: Jim Hamerschlag
7 World Trade Center
New York, NY 10048
Asia Growth Fund............................. Salomon Brothers Holding Co. Inc 45.69%
Attn: Marc Peckman
7 World Trade Center
New York, NY 10048
Asia Growth Fund............................. Thomas W. Brock 22.16%
Cricklewood LN
Harrison, NY 10528
Asia Growth Fund............................. Salomon Brothers A/C PWM1389 20.74%
Attn: Jim Hamerschlag
7 World Trade Center
New York, NY 10048
Asia Growth Fund............................. Salomon Brothers Inc A/C V0410 8.37%
Attn: Peter Hegel
7 World Trade Center
New York, NY 10048
</TABLE>
As of April 1, 1997, 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 Funds. As of April 1, 1997, directors and officers of the Institutional
Series Funds beneficially owned less than 1% of the outstanding shares of any
series of the Institutional Series Funds.
COMPENSATION TABLE
The following table provides information concerning the compensation paid
to each director of the Series Funds during the fiscal year ended December 31,
1996 and the Institutional Series Funds for the fiscal year ended February 28,
1997. Neither the Institutional Series Funds nor the Series Funds provide any
pension or retirement benefits to directors. In addition, no remuneration was
paid by the Series Funds during the fiscal year ended December 31, 1996 or the
Institutional Series Funds for the fiscal year ended February 28, 1997 to
officers of the Series Funds or Institutional Series Funds or to Mr. Hyland, who
as employees of SBAM are 'interested persons,' as defined in the 1940 Act.
SERIES FUNDS
<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION TOTAL COMPENSATION
FROM THE FROM OTHER FUNDS
NAME OF PERSON, POSITION SERIES FUNDS ADVISED BY SBAM(A) TOTAL COMPENSATION
- ------------------------------------------ ------------ ------------------ ------------------
<S> <C> <C> <C>
Charles F. Barber, Director............... $6,083 $104,650(13) $110,733(14)
Daniel P. Cronin, Director................ $5,833 $ 22,650(4) $ 28,483(5)
Carol L. Colman, Director................. $6,083 $ 29,250(4) $ 35,333(5)
</TABLE>
- ------------
(A) The numbers in parenthesis indicate the applicable number of investment
company directorships held by that director.
22
<PAGE>
<PAGE>
INSTITUTIONAL SERIES FUNDS
<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION TOTAL COMPENSATION
FROM THE FROM OTHER FUNDS
NAME OF PERSON, POSITION SERIES FUNDS ADVISED BY SBAM(A) TOTAL COMPENSATION(A)
- --------------------------------------- ------------ ------------------ ---------------------
<S> <C> <C> <C>
Charles F. Barber, Director............ $4,250 $118,399(13) $ 122,649(14)
Daniel P. Cronin, Director............. $3,000 $ 28,150(4) $ 31,150(5)
Carol L. Colman, Director.............. $4,250 $ 30,999(4) $ 35,249(5)
</TABLE>
- ------------
(A) The numbers in parenthesis indicate the applicable number of investment
company directorships held by that director.
23
<PAGE>
<PAGE>
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
each Company's 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, account adjustments, development of new shareholder services and
maintenance of certain books and records; and certain services related 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 (the 'Subadvisory Agreement'), SBAM
has retained Salomon Brothers Asia Pacific Limited ('SBAM AP') as sub-adviser to
the Asia Growth Fund. Subject to the supervision of SBAM, SBAM AP will have
responsibility for the day-to-day management of the Fund's portfolio. Pursuant
to a sub-administration agreement (the 'Subadministration Agreement'), SBAM has
retained Salomon Brothers Asset Management Limited ('SBAM Limited') to provide
certain administrative services to SBAM relating to the Asia Growth Fund. Like
SBAM, SBAM AP and SBAM Limited are indirect, wholly-owned subsidiaries of
Salomon Inc. SBAM AP is a member of the Hong Kong Securities and Futures
Commission, SBAM Limited is a member of the Investment Management Regulatory
Organization in the United Kingdom and both SBAM AP and SBAM Limited are
registered as investment advisers in the United States pursuant to the
Investment Advisers Act of 1940, as amended.
As compensation for its services, the Money Market Fund pays SBAM a monthly
fee at an annual rate of .20% of the Fund's average daily net assets. On
November 16, 1995, the Board of Directors of the Series Funds approved an
amendment to the management contract of the Money Market Fund, subject to
shareholder approval, to increase the management fee from .10% of average daily
net assets to .20%. The shareholders approved the amendment on March 26, 1996.
SBAM has voluntarily agreed to reduce or otherwise limit the expenses of the
Fund (exclusive of taxes, interest and extraordinary expenses such as litigation
and indemnification expenses), on an annualized basis, to .25% of the Fund's
average daily net assets and for a period of at least one year from the date of
the Prospectus such expenses shall not exceed .18% of the Fund's average daily
net assets. See 'Fee Table' in the Prospectus. For the fiscal years ended
December 31, 1994, 1995 and 1996 the Money Market Fund paid SBAM $29,658, $8,121
(which reflects a waiver of $7,906) and $0 (which reflects a waiver of $126,986;
SBAM also absorbed an additional $23,847 of other expenses), respectively, for
its services.
As compensation for its services, the High Yield Bond Fund pays SBAM a
monthly fee at an annual rate of .50% of the Fund's average daily net assets;
the Emerging Markets Debt Fund pays SBAM a monthly fee at an annual rate of .70%
of the Fund's average daily net assets and the Asia Growth Fund pays SBAM a
monthly fee at an annual rate of .75% of the Fund's average daily net assets.
SBAM has voluntarily agreed to reduce or otherwise limit the expenses of the
High Yield Bond Fund, Emerging Markets Debt Fund and Asia Growth Fund (exclusive
of taxes, interest and extraordinary expenses such as litigation and
indemnification expenses) on an annualized basis, to .55%, .75% and 1.00%,
respectively, of the applicable Fund's average daily net assets. See 'Fee Table'
in the Prospectus.
For the fiscal period ended February 28, 1997, SBAM waived all investment
management fees from each of the High Yield Bond Fund, Emerging Markets Debt
Fund
24
<PAGE>
<PAGE>
and Asia Growth Fund, totalling $21,438, $15,317 and $21,437, respectively. SBAM
also absorbed an additional $147,817, $173,188 and $205,537 in expenses,
respectively.
The management contract for each Fund provides that it will continue
automatically for successive annual periods provided that such continuance is
approved at least annually: (a) by the vote of a majority of the directors not
parties to the management contract or interested persons of such parties, which
votes are cast in person at a meeting called for the purpose of voting on such
management contract; and (b) either by the Board 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 willful misfeasance, bad faith or gross negligence on
the part of either SBAM or its affiliates or from reckless disregard by it of
its obligations and duties under the Management Contract ('disabling conduct').
In addition, each of the High Yield Bond Fund, Emerging Markets Debt Fund and
Asia Growth Fund will indemnify SBAM and its affiliates and hold each of them
harmless against any losses or damages (including, with respect to the Asia
Growth Fund, the imposition of certain Hong Kong tax liabilities on the Fund),
not resulting from disabling conduct.
Investment decisions for a particular Fund are made independently from
those for other funds and accounts advised or managed by SBAM or SBAM AP. Such
other funds and accounts may also invest in the same securities as a Fund. If
those funds or accounts are prepared to invest in, or desire to dispose of, the
same security at the same time as a Fund, however, transactions in such
securities will be made, insofar as feasible, for the respective funds and
accounts in a manner deemed equitable to all. In some cases, this procedure may
adversely affect the size of the position obtained for or disposed of by a Fund
or the price paid or received by a Fund. In addition, because of different
investment objectives, a particular security may be purchased for one or more
funds or accounts when one or more funds or accounts are selling the same
security.
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. Each Company's Board of Directors has adopted a
code of ethics (the 'Fund Code') that incorporates personal trading policies and
procedures applicable to access persons of each Fund, which includes officers,
directors and other specified persons who may make, participate in or otherwise
obtain information concerning the purchase or sale of securities by the Fund. In
addition, the Fund Code attaches and incorporates personal trading policies and
procedures applicable to access persons of SBAM, as the investment adviser to
each Fund, and, in the case Asia Growth Fund, access persons of SBAM AP, as the
Fund's sub-adviser, which policies serve as SBAM's and SBAM AP's code of ethics,
respectively (the 'Adviser Code'). The Fund and Adviser Codes have been designed
to address potential conflicts of interest that can arise in connection with the
personal trading activities of investment company and investment advisory
personnel.
Pursuant to the Fund and Adviser Codes, access persons are generally
permitted to engage in personal securities transactions, provided that a
transaction does not involve securities that are being purchased or sold, are
being considered for purchase or sale, or are being recommended for purchase or
sale by or for a Fund. In 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.
25
<PAGE>
<PAGE>
ADMINISTRATOR
Institutional Series Funds and Series Funds employ IBT under their
applicable administration agreement to provide certain administrative services
to the respective Funds. For its services to the Money Market Fund, IBT receives
a fee from the Fund, at an annual rate of .08% of the Fund's average daily net
assets. For its services as administrator, custodian and transfer agent to the
High Yield Bond Fund, Emerging Markets Debt Fund and Asia Growth Fund, each Fund
pays IBT a fee of each Fund's average daily net assets at an annual rate of .10%
up to $500 million in net assets and .05% of each Funds average daily net assets
in excess of $500 million. The services provided by IBT under the applicable
administration agreement include, but are not limited to: 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. The Boston Company Advisors, Inc. ('Boston
Company') previously served as the administrator to the Money Market Fund. The
Money Market Fund paid the Boston Company a fee calculated daily and payable
monthly, at annual rate of .08% of that Fund's average daily net assets. For the
period January 1, 1994 to November 30, 1994, the Money Market Fund paid Boston
Company fees of $21,964. For the period December 1, 1994 to December 31, 1994,
and for the fiscal years ended December 31, 1995 and 1996, the Money Market Fund
paid fees of $1,762, $26,600 (which reflects a waiver of $31,000) and $69,483
(which reflects a waiver of $20,267) to IBT. Administration fees paid to IBT by
the High Yield Bond Fund, Emerging Markets Debt Fund and Asia Growth Fund for
the fiscal period ended February 28, 1997 were as follows:
<TABLE>
<CAPTION>
FUND FEE PAID*
- ------------------------------------------------------------------------------------------ ---------
<S> <C>
High Yield Bond Fund ..................................................................... $ 95,000
May 15, 1996 (commencement of operations)
through February 28, 1997
Emerging Markets Fund .................................................................... $ 98,700
October 17, 1996 (commencement of operations)
through February 28, 1997
Asia Growth Fund ......................................................................... $ 149,500
May 6, 1996 (commencement of operations)
through February 28, 1997
</TABLE>
- ------------
* The fees listed above reflect waivers of $30,875, $30,885 and $30,663,
respectively.
DISTRIBUTOR
Salomon Brothers, located at 7 World Trade Center, New York, New York
10048, serves as each Fund's distributor pursuant to a Distribution Contract
between Salomon Brothers and each Company. Salomon Brothers receives no
remuneration for its services as distributor.
EXPENSES
Each Fund's expenses include taxes, interest, fees and salaries of such
Fund directors and officers who are not directors, officers or employees of the
Fund's service contractors, SEC fees, state securities qualification fees, costs
of preparing and printing prospectuses for regulatory purposes and for
distribution to existing shareholders, advisory and administration fees, charges
of the custodian and of the transfer and dividend disbursing agent, certain
insurance premiums, outside auditing and legal expenses, costs of shareholder
reports and shareholder meetings and any extraordinary expenses. Each Fund also
pays for brokerage fees and commissions (if any) in connection with the purchase
and sale of portfolio securities.
NET ASSET VALUE
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.
26
<PAGE>
<PAGE>
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 each Company's Board of Directors or its delegates. In valuing
assets, prices denominated in foreign currencies are converted to U.S. dollar
equivalents at the current exchange rate. Securities may be valued by
independent pricing services which use prices provided by market-makers or
estimates of market values obtained from yield data relating to instruments or
securities with similar characteristics. Short-term obligations with maturities
of 60 days or less are valued at amortized cost, which constitutes fair value as
determined by the Board of Directors. Amortized cost involves valuing an
instrument at its original cost to a Fund and thereafter assuming a constant
amortization to maturity of any discount or premium, regardless of the impact of
fluctuating interest rates on the market value of the instrument. All other
securities and other assets of a Fund will be valued at fair value as determined
in good faith pursuant to procedures adopted by the Board of Directors of the
applicable Fund.
As stated in the Prospectus, the Money Market Fund seeks to maintain a net
asset value of $1.00 per share with respect to the Fund and, values the Fund's
instruments on the basis of amortized cost pursuant to Rule 2a-7 under the 1940
Act. While this method provides certainty in valuation, it may result in periods
during which value, as determined by amortized cost, is higher or lower than the
price the Fund would receive if it sold the instrument. During such periods the
yield to investors in the Fund may differ somewhat from that obtained in a
similar company which uses market values for all its portfolio securities. For
example, if the use of amortized cost resulted in a lower (higher) aggregate
portfolio value on a particular day, a prospective investor in the Fund would be
able to obtain a somewhat higher (lower) yield than would result from investment
in such a similar company, and existing investors would receive less (more)
investment income. The purpose of using the amortized cost method of calculation
is to attempt to maintain a stable net asset value per share of $1.00.
The Board of Directors of Series Funds has established procedures
applicable to the Money Market Fund, reasonably designed, taking into account
current market conditions and the Money Market Fund's investment objective, to
stabilize the net asset value per share as computed for the purposes of sales
and redemptions at $1.00. These procedures include periodic review, as the Board
of Directors deems appropriate and at such intervals as are reasonable in light
of current market conditions, of 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.
27
<PAGE>
<PAGE>
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.
The Money Market Fund has qualified for the fiscal year ended December 31,
1996 and High Yield Bond Fund, Emerging Markets Debt Fund and Asia Growth Fund
have qualified for the fiscal period ended February 28, 1997 and each Fund
intends to continue 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, options,
futures, certain forward contracts or foreign currencies (or any options,
futures or forward contracts on foreign currencies) but only if such currencies
are not directly related to a Fund's principal business of investing in stock or
securities (the '30% limitation'); and (c) diversify its holdings so that, at
the end of each quarter of each taxable year, (i) at least 50% of the market
value of a Fund's assets is represented by cash, cash items, United States
government securities, securities of other RICs and other securities with such
other securities limited, in respect of any one issuer, to an amount not greater
than 5% of the value of a Fund's assets and 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of its assets
is invested in the securities of any one issuer (other than United States
government securities or the securities of other RICs).
As a RIC, a Fund will not be subject to Federal income tax on its net
investment income (i.e., its investment company taxable income, as that term is
defined in the Code, determined without regard to the deduction for dividends
paid) and 'net capital gains' (the excess of the Fund's net long-term capital
gains over net short-term capital losses), if any, that it distributes in each
taxable year to its shareholders, provided that the Fund distributes at least
90% of its net investment income for such taxable year. However, a Fund would be
subject to corporate income tax (currently at a maximum rate of 35%) on any
undistributed net investment income and net capital gains. Each Fund expects to
designate amounts retained as undistributed net capital gains in a notice to its
shareholders who (i) will be required to include in income for United States
federal income tax purposes, as long-term capital gains, their proportionate
shares of the undistributed amount, (ii) will be entitled to credit their
proportionate shares of the 35% tax paid by a Fund on the undistributed amount,
against their federal income tax liabilities and to claim refunds to the extent
such credits exceed their liabilities and (iii) will be entitled to increase
their tax basis, for federal income tax purposes, in their shares by an amount
equal to 65% of the amount of undistributed net capital gains included in the
shareholder's income.
A Fund will be subject to a nondeductible 4% excise tax to the extent that
it does not distribute by the end of each calendar year: (a) at least 98% of its
ordinary income for such calendar year; (b) at least 98% of the excess of its
capital gains over its capital losses for the one year period ending, as a
general rule, on October 31 of each year; and (c) 100% of the undistributed
income and gains from the preceding calendar year (if any) pursuant to the
calculations in (a) and (b). For this purpose any income or gain retained by a
Fund that is subject to corporate tax will be considered to have been
distributed by year-end.
A Fund's investment in options, swaps and related transactions, futures
contracts and forward contracts, options on futures contracts and stock indices
and certain other securities, including transactions involving actual or deemed
short sales or foreign exchange gains or
28
<PAGE>
<PAGE>
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 purposes, resulting in possible deferral of losses, adjustments in the
holding periods of Fund securities and conversion of short-term capital losses
into long-term capital losses. Certain tax elections exist for mixed straddles
i.e., straddles comprised of at least one Section 1256 position and at least one
non-Section 1256 position which may reduce or eliminate the operation of these
straddle rules.
The 30% limitation (discussed above) 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.
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
29
<PAGE>
<PAGE>
discount with respect to a market discount bond, all or a portion of any
deduction for any interest expense incurred to purchase or hold such bond may be
deferred until such bond is sold or otherwise disposed.
If a Fund purchases shares in certain foreign investment entities, called
'passive foreign investment companies' ('PFICs'), the Fund may be subject to
U.S. federal income tax on a portion of any 'excess distribution' or gain from
the disposition of shares even if the income is distributed as a taxable
dividend by the Fund to its shareholders. Additional charges in the nature of
interest may be imposed on either a Fund or its shareholders with respect to
deferred taxes arising from the distributions or gains. If a Fund were to invest
in a PFIC and (if the Fund received the necessary information available from the
PFIC, which may be difficult to obtain) elected to treat the PFIC as a
'qualified electing fund' under the Code (a 'QEF'), in lieu of the foregoing
requirements, the Fund would be required to include in income each year a
portion of the ordinary earnings and net capital gains of the PFIC, even if not
distributed to the Fund, and the amounts would be subject to the 90% and excise
tax distribution requirements described above. Because of the expansive
definition of a PFIC, it is possible that a Fund may invest a portion of its
assets in PFICs.
On April 1, 1992 the Internal Revenue Service proposed regulations
providing a mark-to-market election for RICs that would avoid the need for a RIC
to make a QEF election. 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.
For any year that either Fund makes such an election, each shareholder in
such Fund will be required to include in its income an amount equal to his or
her allocable share of such income taxes paid by such Fund to a foreign
country's government and shareholders will be entitled, subject to certain
limitations, to credit their portions of these amounts against their United
States federal income tax due, if any, or to deduct their portions from their
United States taxable income, if any. No deductions for foreign taxes paid by
such Funds may be claimed, however, by non-corporate shareholders (including
certain foreign shareholders described below) who do not itemize deductions.
Shareholders that are exempt from tax under Section 501(a) of the Code, such as
pension plans, generally will derive no benefit from this election. However,
such shareholders should not be disadvantaged either because the amount of
additional income they are deemed to receive equal to their allocable share of
such foreign countries' income taxes paid by such Funds generally will not be
subject to United States federal income tax.
TAXATION OF UNITED STATES SHAREHOLDERS
The Prospectus describes each Fund's policy with respect to distribution of
net investment income and any net capital gains. Shareholders should consider
the tax implications of buying shares just prior to a distribution. Although the
price of shares purchased at that time may reflect the amount of the forthcoming
distribution, those purchasing just prior to a distribution will receive a
distribution which will nevertheless be taxable to them.
Shareholders receiving a distribution in the form of additional shares will
be treated for federal income tax purposes as receiving a distribution in an
amount equal to the fair market value, determined as of the distribution date,
of the shares received and will have a cost basis in each share received equal
to the fair market value of a share of a Fund on the distribution date.
Shareholders will be notified annually as to the federal tax status of
distributions, and shareholders receiving distributions in the form of shares
will receive a report as to the fair market value of the shares received.
30
<PAGE>
<PAGE>
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.
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)'pp'n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = Ending Redeemable Value of a hypothetical $1,000 payment made at the
beginning of a 1-, 5-, or 10-year period at the end of such period
(or fractional portion thereof), assuming reinvestment of all
dividends and distributions.
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.
The following table sets forth the aggregate total return for each of the
High Yield Bond Fund, Emerging Markets Debt Fund and Asia Growth Fund for
certain periods of time ending February 28, 1997 (in each case, after management
fee waiver and reimbursement of certain expenses).
31
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
MAY 15, 1996
(COMMENCEMENT OF
INVESTMENT OPERATIONS)
THROUGH
FUND FEBRUARY 28, 1997
- ---------------------------------------------------------------------------- --------------------
<S> <C>
High Yield Bond Fund........................................................ 15.1%
---
</TABLE>
<TABLE>
<CAPTION>
OCTOBER 17, 1996
(COMMENCEMENT OF
INVESTMENT OPERATIONS)
THROUGH
FUND FEBRUARY 28, 1997
- ------------------------------------------------------------------------------ ----------------------
<S> <C>
Emerging Markets Fund......................................................... 11.4%
---
</TABLE>
<TABLE>
<CAPTION>
MAY 6, 1996
(COMMENCEMENT OF
INVESTMENT OPERATIONS)
THROUGH
FUND FEBRUARY 28, 1997
- ----------------------------------------------------------------------------- ----------------------
<S> <C>
Asia Growth Fund............................................................. 9.6%
--
</TABLE>
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, 1996, the annualized yield and
effective yield of the Money Market Fund were 5.40% and 5.54%, respectively.
In periods of declining interest rates the Money Market Fund's yield will
tend to be somewhat higher than prevailing market rates on short-term
obligations, and in periods of rising interest rates the Fund's yield will tend
to be somewhat lower. Also, when interest rates are falling, the inflow of net
new money to the Money Market Fund from the continuous sale of shares will
likely be invested in portfolio instruments producing lower yields than the
balance of the Fund's portfolio, thereby reducing the Fund's current yield. In
periods of rising interest rates, the opposite can be expected to occur.
Any quotation of performance stated in terms of yield will be given no
greater prominence than the information prescribed under SEC rules. In addition,
all advertisements containing performance data of any kind will include a legend
disclosing that such performance data represents past performance and that the
investment return and principal value of an investment will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost.
Advertisements and communications may compare a Fund's performance with
that of other mutual funds, as reported by Lipper Analytical Services, Inc. or
similar independent services or financial publications. From time to time,
advertisements and other Fund materials and communications may cite statistics
to reflect a Fund's performance over time utilizing comparisons to indices.
A Fund's performance will vary from time to time depending upon market
conditions, the composition of its portfolio and operating expenses.
Consequently, any given performance quotation should not be considered
representative of the performance of Fund shares for any specified period in the
future. Because performance will vary, it may not provide a basis for comparing
an investment in Fund shares with certain bank deposits or other investments
that pay a fixed return for a stated period of time. Investors comparing a
Fund's performance with that of other mutual funds should give consideration to
the nature, quality and maturity of the respective investment companies'
portfolio securities and market conditions. An investor's principal is not
guaranteed by any Fund.
32
<PAGE>
<PAGE>
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 Fund share is entitled to such dividends and distributions out of the
income earned on the assets belonging to that Fund as are declared in the
discretion of the Fund's Board of Directors.
In the event of the liquidation or dissolution of the Institutional Series
Funds or Series Funds, as the case may be, shares of a Fund are entitled to
receive the assets attributable to it that are available for distribution, and a
proportionate distribution, based upon the relative net assets of a Fund, of any
general assets not attributable to a Fund that are available for distribution.
Shareholders are not entitled to any preemptive rights. All shares, when issued,
will be fully paid, non-assessable, fully transferable and redeemable at the
option of the holder.
CUSTODIAN AND TRANSFER AGENT
IBT serves as custodian for each Fund. As each Fund's custodian, IBT, 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
decide which securities a Fund will buy or sell. For its services as custodian,
IBT receives a monthly fee based upon the daily average market value of
securities held in custody and also receives securities transaction charges,
including out-of-pocket expenses. The assets of each Fund are held under bank
custodianship in compliance with the 1940 Act. A Fund may also periodically
enter into arrangements with other qualified custodians with respect to certain
types of securities or other transactions such as repurchase agreements or
derivatives transactions. IBT also serves as transfer agent for each Fund
registers and processes transfers of Fund stock, processes purchase and
redemption orders, acts as dividend disbursing agent for the Funds and maintains
records and handles correspondence with respect to shareholder accounts. For
these services, IBT receives a monthly fee. See 'Administrator.'
INDEPENDENT ACCOUNTANTS
Price Waterhouse ('Price Waterhouse') LLP serves as each Fund's independent
accountants. Price Waterhouse LLP 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.
Piper & Marbury LLP, of Baltimore, Maryland has issued an opinion regarding
the valid issuance of shares being offered for sale pursuant to the Funds'
Prospectus.
33
<PAGE>
<PAGE>
FINANCIAL STATEMENTS
The audited financial statements for the Institutional Money Market Fund
for the fiscal year ended December 31, 1996 as well as the audited financial
statements for the High Yield Bond Fund for the period May 15, 1996
(commencement of operations) to February 28, 1997, for the Emerging Markets Debt
Fund for the period October 17, 1996 (commencement of operations) to February
28, 1997 and for the Asia Growth Fund for the period May 6, 1996 (commencement
of operations) to February 28, 1997, are included on the following pages.
34
<PAGE>
<PAGE>
SALOMON BROTHERS INSTITUTIONAL MONEY MARKET FUND
- ------------------------------------------------
Portfolio of Investments
December 31, 1996
<TABLE>
<CAPTION>
YIELD TO
MATURITY
PRINCIPAL ON DATE OF MATURITY VALUE
AMOUNT DESCRIPTION PURCHASE* DATE (NOTE 1A)
- -----------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CERTIFICATES OF DEPOSIT -- 16.3%
BANKS -- 16.3%
$6,000,000 Bank Austria.............................................. 5.380% 01/21/97 $ 6,000,033
2,500,000 Barclay's Bank............................................ 5.550 01/06/97 2,500,000
5,000,000 Deutsche Bank............................................. 5.570 12/10/97 4,998,644
5,000,000 Mellon Bank N.A........................................... 5.750 02/18/97 5,000,630
2,500,000 Rabobank.................................................. 5.530 02/10/97 2,500,000
5,000,000 Societe Generale.......................................... 5.450 02/10/97 5,000,138
------------
TOTAL CERTIFICATES OF DEPOSIT (COST $25,999,445).......... 25,999,445
------------
COMMERCIAL PAPER -- 68.2%
AEROSPACE & DEFENSE -- 4.5%
6,000,000 AlliedSignal.............................................. 5.600 01/27/97 5,975,733
1,200,000 Lockheed Martin........................................... 5.720 01/30/97 1,194,471
------------
7,170,204
------------
BANKS -- 6.8%
6,000,000 ANZ Delaware.............................................. 5.280 05/12/97 5,884,720
5,000,000 BBL North America......................................... 5.340 01/07/97 4,995,550
------------
10,880,270
------------
BEVERAGES -- 5.3%
8,500,000 Seagram (Joseph E.) & Sons................................ 5.700 01/08/97 8,490,579
------------
CHEMICALS -- 3.8%
5,000,000 Air Products & Chemicals.................................. 5.320 01/17/97 4,988,178
1,000,000 Praxair................................................... 5.510 02/28/97 991,123
------------
5,979,301
------------
EDUCATION -- 3.8%
6,000,000 Regents of the University of California................... 5.330 01/17/97 5,985,787
------------
FINANCIAL SERVICES -- 11.1%
4,000,000 BIL North America......................................... 5.320 01/31/97 3,982,266
7,500,000 General Electric Capital.................................. 5.340 06/23/97 7,307,538
6,500,000 UBS Finance............................................... 5.550 01/21/97 6,479,958
------------
17,769,762
------------
</TABLE>
See accompanying notes to financial statements.
35
<PAGE>
<PAGE>
SALOMON BROTHERS INSTITUTIONAL MONEY MARKET FUND
- ------------------------------------------------
Portfolio of Investments
December 31, 1996
<TABLE>
<CAPTION>
YIELD TO
MATURITY ON
PRINCIPAL DATE OF MATURITY VALUE
AMOUNT DESCRIPTION PURCHASE* DATE (NOTE 1A)
- -----------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
COMMERCIAL PAPER -- 68.2% (CONTINUED)
HEAVY MACHINERY -- 1.5%
$2,400,000 Cooperative Association of Tractor Dealers................ 5.400% 02/04/97 $ 2,387,760
------------
INSURANCE -- 5.3%
2,000,000 Great West Life & Annuity................................. 5.530 01/06/97 1,998,464
2,500,000 Safeco Credit............................................. 5.320 01/06/97 2,498,153
2,000,000 Transamerica Finance...................................... 5.420 03/03/97 1,981,632
2,000,000 Transamerica Finance...................................... 5.430 03/31/97 1,973,152
------------
8,451,401
------------
LODGING -- 0.6%
1,000,000 Hilton Hotels............................................. 5.700 01/31/97 995,250
------------
MEDICAL SUPPLIES -- 1.9%
3,000,000 Abbott Laboratories....................................... 5.250 01/16/97 2,993,437
------------
MUNICIPAL -- 0.9%
1,500,000 Methodist Hospital (Houston, Texas)....................... 5.450 04/01/97 1,500,000
------------
OIL COMPANIES -- 1.3%
1,000,000 Occidental Petroleum...................................... 5.700 02/14/97 993,033
1,031,000 Vastar Resources.......................................... 5.800 01/17/97 1,028,343
------------
2,021,376
------------
RETAILERS -- 3.1%
5,000,000 Southland................................................. 5.340 01/27/97 4,980,717
------------
SECURITIES BROKERS -- 9.3%
3,500,000 BT Securities............................................. 5.570 01/10/97 3,495,127
3,500,000 Goldman Sachs Group....................................... 5.650 01/06/97 3,497,255
3,000,000 Goldman Sachs Group....................................... 5.350 05/21/97 2,937,583
5,000,000 Morgan Stanley Group...................................... 5.320 01/23/97 4,983,745
------------
14,913,710
------------
TECHNOLOGY -- 1.2%
1,900,000 Hitachi Credit America.................................... 5.400 01/15/97 1,896,010
------------
TRANSPORTATION -- 2.5%
4,000,000 Daimler-Benz NA........................................... 5.320 01/13/97 3,992,907
------------
</TABLE>
See accompanying notes to financial statements.
36
<PAGE>
<PAGE>
SALOMON BROTHERS INSTITUTIONAL MONEY MARKET FUND
<TABLE>
<CAPTION>
YIELD TO
MATURITY ON
PRINCIPAL DATE OF MATURITY VALUE
AMOUNT DESCRIPTION PURCHASE* DATE (NOTE 1A)
- -----------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
COMMERCIAL PAPER -- 68.2% (CONTINUED)
UTILITIES-TELEPHONE -- 5.3%
$2,500,000 BellSouth Capital......................................... 5.420% 01/21/97 $ 2,492,468
6,000,000 US West Communications.................................... 5.320 01/17/97 5,985,814
------------
8,478,282
------------
TOTAL COMMERCIAL PAPER (COST $108,886,753)................ 108,886,753
ASSET-BACKED SECURITIES -- 5.1% ------------
FINANCIAL SERVICES -- 5.1%
3,089,226 Capita Equipment Receivables Trust........................ 5.600 10/15/97 3,089,226
5,000,000 Olympic Auto Receivables Trust............................ 5.430 12/15/97 5,000,000
------------
TOTAL ASSET-BACKED SECURITIES (COST $8,089,226)........... 8,089,226
FLOATING RATE NOTES -- 8.3% ------------
CALIFORNIA -- 1.6%
2,600,000 Pasadena, California Certificates of Participation VR..... 5.800 01/07/97 2,600,000
------------
ILLINOIS -- 1.1%
1,800,000 Illinois Student Assistance Commission VR................. 5.850 01/01/97 1,800,000
------------
NEW YORK -- 0.6%
400,000 New York City, New York
Industrial Development Agency VR........................ 6.000 01/01/97 400,000
600,000 New York City, New York
Industrial Development Agency VR........................ 6.000 01/01/97 600,000
------------
1,000,000
------------
NORTH CAROLINA -- 3.7%
2,900,000 Community Health Systems VR............................... 5.900 01/01/97 2,900,000
3,015,000 Greensboro, North Carolina GO VR.......................... 5.950 01/01/97 3,015,000
------------
5,915,000
------------
TEXAS -- 1.3%
1,970,000 Texas State GO VR......................................... 5.880 01/01/97 1,970,000
------------
TOTAL FLOATING RATE NOTES (COST $13,285,000).............. 13,285,000
------------
TOTAL INVESTMENTS -- 97.9% (COST $156,260,424)............ 156,260,424
</TABLE>
See accompanying notes to financial statements.
37
<PAGE>
<PAGE>
SALOMON BROTHERS INSTITUTIONAL MONEY MARKET FUND
- ------------------------------------------------
Portfolio of Investments
December 31, 1996
<TABLE>
<CAPTION>
YIELD TO
MATURITY ON
PRINCIPAL DATE OF MATURITY VALUE
AMOUNT DESCRIPTION PURCHASE* DATE (NOTE 1A)
- -----------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
REPURCHASE AGREEMENT -- 2.0%
$3,162,000 Repurchase Agreement dated 12/31/96, with UBS Securities,
collateralized by $2,523,000 U.S. Treasury Bonds,
8.875%, due 02/15/19, valued at $3,226,286; proceeds:
$3,163,142 (cost $3,162,000)............................ 6.500% 01/02/97 $ 3,162,000
Other assets in excess of liabilities -- 0.1%............. 228,354
------------
NET ASSETS -- 100.0%...................................... $159,650,778
------------
------------
</TABLE>
* Yield to maturity on date of purchase, except in the case of Variable Rate
Demand Notes (VR), whose yields are determined on date of last interest rate
change. For Variable Rate Demand Notes, maturity date shown is the date of
next interest rate change.
Abbreviation used in this statement:
GO -- General Obligation
See accompanying notes to financial statements.
38
<PAGE>
<PAGE>
SALOMON BROTHERS INSTITUTIONAL MONEY MARKET FUND
- ---------------------------------------------------------------
Statement of Assets and Liabilities
December 31, 1996
<TABLE>
<S> <C>
ASSETS
Investment, at value (cost $156,260,424)...................................................... $156,260,424
Repurchase Agreement, at value (cost $3,162,000).............................................. 3,162,000
Cash.......................................................................................... 348
Receivable from investment manager............................................................ 23,847
Interest receivable........................................................................... 418,133
Other assets.................................................................................. 643
------------
Total assets.......................................................................... 159,865,395
------------
LIABILITIES
Dividend payable.............................................................................. 85,811
Payable for Fund shares repurchased........................................................... 50,649
Accrued expenses.............................................................................. 78,157
------------
Total liabilities..................................................................... 214,617
------------
NET ASSETS (equivalent to $1.00 per share on 159,650,135 shares of $.001 par value capital
stock outstanding).......................................................................... $159,650,778
------------
------------
</TABLE>
- ------------------------------------------------
Statement of Operations
For the Year Ended December 31, 1996
<TABLE>
<S> <C> <C>
INCOME
Interest..................................................................................... $3,571,519
EXPENSES
Management fee.................................................................. $ 126,986
Custody, shareholder services and administration fees........................... 89,750
Legal........................................................................... 20,001
Audit and tax return preparation fees........................................... 20,000
Registration and filing fees.................................................... 20,000
Printing........................................................................ 15,001
Directors' fees and expenses.................................................... 2,767
Other........................................................................... 6,941
----------
301,446
Management fee waived and expenses absorbed by investment manager............... (150,833)
Credits earned on cash balances and fees waived by custodian.................... (20,267) 130,346
---------- ----------
Net investment income........................................................................ 3,441,173
NET REALIZED GAIN ON SECURITIES SOLD............................................................. 554
----------
NET INCREASE IN NET ASSETS FROM OPERATIONS....................................................... $3,441,727
----------
----------
</TABLE>
See accompanying notes to financial statements.
39
<PAGE>
<PAGE>
SALOMON BROTHERS INSTITUTIONAL MONEY MARKET FUND
- ------------------------------------------------------------------
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996(a) 1995
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
OPERATIONS
Net investment income....................................................... $ 3,441,173 $ 744,110
Net realized gain on securities sold........................................ 554 6,443
------------ -----------
Net increase in net assets from operations.................................. 3,441,727 750,553
------------ -----------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income........................................ (3,441,173) (744,110)
Distributions from net realized gains....................................... -- (959)
------------ -----------
(3,441,173) (745,069)
CAPITAL SHARE TRANSACTIONS
Proceeds from sales of shares............................................... 267,128,203 79,773,668
Net asset value of shares issued in reinvestment of dividends............... 2,994,052 555,617
Payment for redemption of shares............................................ (121,897,499) (96,624,438)
------------ -----------
Net increase (decrease) in net assets derived from share transactions....... 148,224,756 (16,295,153)
------------ -----------
Contribution from investment manager........................................ -- 48,447
------------ -----------
Net increase (decrease) in net assets....................................... 148,225,310 (16,241,222)
NET ASSETS
Beginning of year........................................................... 11,425,468 27,666,690
------------ -----------
End of year................................................................. $159,650,778 $11,425,468
------------ -----------
------------ -----------
</TABLE>
- -------------------------------------------
Financial Highlights
SELECTED DATA PER SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1996(A) 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year.......................... $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
-------- ------- ------- ------- -------
Net investment income....................................... 0.050* 0.049* 0.036 0.028 0.034
Dividends from net investment income........................ (0.050) (0.049) (0.036) (0.028) (0.034)
-------- ------- ------- ------- -------
Net asset value, end of year................................ $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
-------- ------- ------- ------- -------
-------- ------- ------- ------- -------
Net assets, end of year (thousands)......................... $159,651 $11,425 $27,667 $34,120 $50,554
Total investment return..................................... +5.1% +5.0% +3.6% +2.9% +3.4%
Ratios to average net assets:
Expenses................................................ 0.20%* 0.65%* 0.45% 0.35% 0.44%
Net investment income................................... 5.29% 4.89% 3.53% 2.83% 3.42%
</TABLE>
* Net investment income per share would have been $.048 and $.049 and the
expense ratios to average net assets would have been .46% and .70%,
respectively, for the years ended December 31, 1996 and 1995, before
applicable waiver of management fee, expenses absorbed by the investment
manager and credits earned from and fees waived by the custodian.
(a) The Fund changed its name and objective on April 29, 1996. See Note 1.
See accompanying notes to financial statements.
40
<PAGE>
<PAGE>
SALOMON BROTHERS INSTITUTIONAL MONEY MARKET FUND
- ---------------------------------------------------------
Notes to Financial Statements
1. Organization and Significant Accounting Policies
Salomon Brothers Series Funds Inc (the 'Company') was incorporated in Maryland
on April 17, 1990 as an open-end management investment company, and currently
operates as a series company comprised of ten portfolios. Only information with
respect to Salomon Brothers Institutional Money Market Fund (the 'Fund') is
included in this report. The other portfolios of the Company are reported in a
separate report and are not included herein. The Fund changed its name from
Salomon Brothers U.S. Treasury Securities Money Market Fund to its current name
on April 29, 1996. Prior to April 29, 1996, the Fund's objective was to seek a
high level of current income by investing only in short-term United States
government and government agency securities. The Fund's current objective is to
seek as high a level of current income as is consistent with liquidity and the
stability of principal.
Following is a summary of significant accounting policies followed by the Fund
in the preparation of its financial statements. The policies are in conformity
with generally accepted accounting principles ('GAAP'). The preparation of
financial statements in accordance with GAAP requires management to make
estimates of certain reported amounts in the financial statements. Actual
amounts could differ from those estimates.
(a) SECURITIES VALUATION. Portfolio securities are valued using the
amortized cost method, which involves initially valuing an investment at
its cost and thereafter assuming a constant amortization to maturity of any
premium or discount. This method results in a value approximating market
value and does not include unrealized gains or losses.
(b) FEDERAL INCOME TAXES. The 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.
(c) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends on the
shares of the Fund are declared each business day to shareholders of record
at twelve noon (New York time) on that day, and paid on the last business
day of the month. Distributions of net realized gains to shareholders, if
any, are declared annually and recorded on the ex-dividend date. Dividends
and distributions are determined in accordance with income tax regulations,
which may differ from GAAP.
41
<PAGE>
<PAGE>
SALOMON BROTHERS INSTITUTIONAL MONEY MARKET FUND
- ---------------------------------------------------------
Notes to Financial Statements
(d) EXPENSES. Direct expenses are charged to the Fund, and general
expenses of the Company are allocated to the Fund based on relative average
net assets for the period the expense was incurred.
(e) OTHER. Investment transactions are recorded as of the trade date.
Interest income, including the accretion of discounts or the amortization
of premiums, is recognized when earned. Gains or losses on sales of
securities are calculated on the identified cost basis.
2. Management Fee and Other Agreements
The Company retains Salomon Brothers Asset Management Inc ('SBAM'), an indirect
wholly owned subsidiary of Salomon Inc, to act as investment manager of the
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 an annual rate of .20% of the Fund's average daily net assets. Prior to
April 29, 1996, the management fee was based on an annual rate of .10% of the
Fund's average daily net assets.
Under a voluntary agreement between SBAM and the Fund, 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 .18% of the Fund's average daily net assets for a period
from April 29, 1996 through April 29, 1997, and to no more than .25% thereafter.
For the year ended December 31, 1996, SBAM voluntarily waived management fees of
$126,986 and voluntarily absorbed $23,847 of expenses.
Investors Bank & Trust Company ('IBT') serves as custodian, administrator and
shareholder servicing agent for the Fund, which includes performing custodial
and certain administrative services in connection with the operation of the
Fund. IBT agreed to waive a portion of its custody fees through October 31,
1996. In addition, a credit is earned on outstanding cash balances held by the
custodian during each billing period. During the year ended December 31, 1996,
fees of $20,000 were waived by IBT and credits of $267 were earned on
outstanding cash balances of the Fund.
The Fund has an agreement with Salomon Brothers Inc, an affiliate of SBAM, to
distribute its shares.
42
<PAGE>
<PAGE>
SALOMON BROTHERS INSTITUTIONAL MONEY MARKET FUND
3. Capital Stock
At December 31, 1996, the Company had 10,000,000,000 shares of authorized
capital stock, par value $.001 per share, of which the Fund had 1,000,000,000
shares authorized.
Because the Fund has maintained a $1.00 net asset value per share from
inception, the number of shares sold, shares issued to shareholders in
reinvestment of dividends declared, and shares repurchased, are equal to the
dollar amount shown in the Statement of Changes in Net Assets for the
corresponding capital share transactions.
Net assets consist of:
<TABLE>
<S> <C>
Par value..................................................................................... $ 159,650
Paid-in capital in excess of par.............................................................. 159,490,485
Undistributed net investment income........................................................... 265
Accumulated net realized gain on investments.................................................. 378
------------
Net assets.................................................................................... $159,650,778
------------
------------
</TABLE>
4. Portfolio Activity
The Fund invests in money market instruments maturing in thirteen months or less
whose credit ratings are within the two highest ratings category of two
nationally recognized statistical rating organizations ('NRSROs') or if rated by
only one NRSRO, that NRSRO, or, if not rated, are believed by the investment
manager to be of comparable quality.
During the year ended December 31, 1996, the Fund utilized $176 of capital loss
carry-forwards to offset net realized capital gains.
43
<PAGE>
<PAGE>
SALOMON BROTHERS INSTITUTIONAL MONEY MARKET FUND
- ----------------------------------------------------------------
Report of Independent Accountants
To the Board of Directors and Shareholders of
Salomon Brothers Institutional Money Market Fund
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio 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 Institutional
Money Market Fund (one of the portfolios constituting Salomon Brothers Series
Funds Inc, hereafter referred to as the 'Fund') at December 31, 1996, the
results of its operations for the year then ended, the changes in its net assets
for each of the two years in the period then ended and the financial highlights
for each of the five years in the period then ended, 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, 1996 by
correspondence with the custodian, provide a reasonable basis for the opinion
expressed above.
PRICE WATERHOUSE LLP
New York, New York
February 18, 1997
PAGE 44
<PAGE>
<PAGE>
SALOMON BROTHERS INSTITUTIONAL SERIES FUNDS INC
PORTFOLIO OF INVESTMENTS
FEBRUARY 28, 1997
SALOMON BROTHERS INSTITUTIONAL HIGH YIELD BOND FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL INTEREST MATURITY VALUE
AMOUNT DESCRIPTION RATE DATE (NOTE 1a)
- -------- --------------------------------------------------------------------- -------- -------- ----------
<C> <S> <C> <C> <C>
CORPORATE BONDS -- 95.1%
BASIC INDUSTRIES -- 17.1%
$100,000 Algoma Steel......................................................... 12.375% 07/15/05 $ 112,000
100,000 Alvey Systems........................................................ 11.375 01/31/03 105,500
100,000 Envirosource......................................................... 9.750 06/15/03 98,000
100,000 Fonda Group.......................................................... 9.500 03/01/07 100,750
240,000 NL Industries
(Zero Coupon until 10/15/98, 13.00% thereafter)(a)................. 11.765 10/15/05 219,600
100,000 Norcal Waste Systems*................................................ 13.000 11/15/05 112,750
100,000 Renco Metals......................................................... 11.500 07/01/03 105,250
100,000 Shop Vac............................................................. 10.625 09/01/03 106,250
150,000 Specialty Equipment.................................................. 11.375 12/01/03 163,500
----------
1,123,600
----------
CONSUMER CYCLICALS -- 7.0%
100,000 CSK Auto............................................................. 11.000 11/01/06 104,000
150,000 Revlon Worldwide(a).................................................. 10.750 03/15/01 98,438
25,000 Revlon Worldwide(a).................................................. 12.556 03/15/98 23,438
150,000 Waxman Industries
(Zero Coupon until 06/01/99, 12.75% thereafter)(a)................. 12.663 06/01/04 124,500
100,000 Wyndham Hotel........................................................ 10.500 05/15/06 107,000
----------
457,376
----------
CONSUMER NON-CYCLICALS -- 24.5%
100,000 Berry Plastics....................................................... 12.250 04/15/04 111,750
100,000 Doane Products....................................................... 10.625 03/01/06 107,000
150,000 Eyecare Centers of America........................................... 12.000 10/01/03 163,125
100,000 Hills Stores......................................................... 12.500 07/01/03 80,000
100,000 Iron Mountain........................................................ 10.125 10/01/06 108,000
100,000 Loomis Fargo......................................................... 10.000 01/15/04 102,375
100,000 Majestic Star Casino................................................. 12.750 05/15/03 108,500
100,000 Pen-Tab Industries................................................... 10.875 02/01/07 104,500
200,000 Rayovac.............................................................. 10.250 11/01/06 208,500
100,000 Remington Product.................................................... 11.000 05/15/06 93,750
100,000 Smiths Food & Drug................................................... 11.250 05/15/07 113,500
200,000 Stroh Brewery........................................................ 11.100 07/01/06 210,500
100,000 Trump Atlantic City.................................................. 11.250 05/01/06 96,500
----------
1,608,000
----------
ENERGY -- 11.3%
100,000 Benton Oil & Gas..................................................... 11.625 05/01/03 112,000
200,000 Costilla Energy...................................................... 10.250 10/01/06 212,000
100,000 Dawson Product Services.............................................. 9.375 02/01/07 102,250
100,000 National Energy Group................................................ 10.750 11/01/06 104,500
200,000 Parker Drilling...................................................... 9.750 11/15/06 213,000
----------
743,750
----------
</TABLE>
See accompanying notes to financial statements.
45
<PAGE>
<PAGE>
SALOMON BROTHERS INSTITUTIONAL SERIES FUNDS INC
PORTFOLIO OF INVESTMENTS
FEBRUARY 28, 1997
SALOMON BROTHERS INSTITUTIONAL HIGH YIELD BOND FUND (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL INTEREST MATURITY VALUE
AMOUNT DESCRIPTION RATE DATE (NOTE 1a)
- -------- --------------------------------------------------------------------- ------ -------- ----------
<C> <S> <C> <C> <C>
FINANCIAL SERVICES -- 4.8%
$100,000 Dollar Financial..................................................... 10.875% 11/15/06 $ 105,500
200,000 Intertek Finance..................................................... 10.250 11/01/06 210,000
----------
315,500
----------
HEALTH CARE -- 1.6%
100,000 Maxxim Medical....................................................... 10.500 08/01/06 105,250
----------
MEDIA -- 12.8%
200,000 Adelphia Communications.............................................. 12.500 05/15/02 212,500
100,000 Cablevision Systems.................................................. 10.500 05/15/16 105,000
300,000 Diamond Cable
(Zero Coupon until 12/15/00, 11.75% thereafter)(a)................. 11.392 12/15/05 207,000
100,000 Hollinger International Publishing................................... 9.250 02/01/06 101,500
150,000 Marcus Cable
(Zero Coupon until 06/15/00, 14.125% thereafter)(a)................ 13.316 12/15/05 110,250
100,000 SFX Broadcasting..................................................... 10.750 05/15/06 108,000
----------
844,250
----------
TECHNOLOGY -- 8.8%
100,000 Packard Bioscience................................................... 9.375 03/01/07 101,750
200,000 Quest Diagnostic..................................................... 10.750 12/15/06 209,500
100,000 Talley Manufacturing & Technology.................................... 10.750 10/15/03 104,500
150,000 UNC.................................................................. 11.000 06/01/06 165,562
----------
581,312
----------
TELECOMMUNICATIONS & UTILITIES -- 4.3%
250,000 ICG Holdings
(Zero Coupon until 09/15/00, 13.50% thereafter)(a)................. 11.459 09/15/05 185,625
150,000 International CableTel
(Zero Coupon until 02/01/01, 11.500% thereafter)(a)................ 11.804 02/01/06 100,500
----------
286,125
----------
TRANSPORTATION -- 2.9%
200,000 Central Transport Rental Group....................................... 9.500 04/30/03 189,000
----------
TOTAL INVESTMENTS -- 95.1%
(cost $6,020,829)....................................................................... 6,254,163
Other assets in excess of liabilities -- 4.9%............................................... 320,622
----------
NET ASSETS -- 100.0%........................................................................ $6,574,785
----------
----------
</TABLE>
* Interest rate shown reflects current rate on instrument with variable rate
or step coupon rate.
(a) Zero or step coupon bond. Interest rate shown reflects yield to maturity on
date of purchase.
See accompanying notes to financial statements.
46
<PAGE>
<PAGE>
SALOMON BROTHERS INSTITUTIONAL SERIES FUNDS INC
PORTFOLIO OF INVESTMENTS
FEBRUARY 28, 1997
SALOMON BROTHERS INSTITUTIONAL EMERGING MARKETS DEBT FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL INTEREST MATURITY VALUE
AMOUNT(a) DESCRIPTION RATE DATE (NOTE 1a)
- ---------- ------------------------------------------------------------------- -------- -------- ----------
<C> <S> <C> <C> <C>
SOVEREIGN BONDS -- 79.9%
ARGENTINA -- 15.9%
250,000 Republic of Argentina, Global Bond(f).............................. 11.750% 02/12/07 $ 263,688
245,000 Republic of Argentina, FRN*........................................ 6.625 03/31/05 222,031
750,000 Republic of Argentina, Par Bond, Series L*......................... 5.250 03/31/23 499,688
----------
985,407
----------
BRAZIL -- 15.4%
1,211,507 Federal Republic of Brazil, Capitalization Bond(b)(f).............. 8.000 04/15/14 959,362
----------
BULGARIA -- 2.4%
250,000 Republic of Bulgaria, IAB*......................................... 6.563 07/28/11 150,781
----------
CROATIA -- 3.9%
250,000 Republic of Croatia, FRN Series A*(f).............................. 6.500 07/30/10 245,156
----------
ECUADOR -- 6.5%
591,968 Republic of Ecuador, PDI Bond*(b).................................. 6.438 02/27/15 367,390
53,815 Republic of Ecuador, Registered PDI Bond*(b)....................... 6.438 02/27/15 33,399
----------
400,789
----------
MEXICO -- 5.6%
200,000 United Mexico States, Par Bonds, Series A,
including 200,000 attached rights, expiring 06/30/03............. 6.250 12/31/19 153,250
250,000 United Mexico States, Par Bonds, Series B,
including 250,000 attached rights, expiring 06/30/03............. 6.250 12/31/19 191,563
----------
344,813
----------
PANAMA -- 4.7%
100,000 Republic of Panama, IRB*........................................... 3.500 07/17/14 74,250
253,515 Republic of Panama, PDI Bond*(b)................................... 6.563 07/17/16 215,488
----------
289,738
----------
PERU -- 4.0%
400,000 Government of Peru, PDI Bond(c)(e)................................. -- 12/29/49 251,250
----------
PHILIPPINES -- 2.0%
125,000 Republic of the Philippines........................................ 8.750 10/07/16 127,031
----------
POLAND -- 4.2%
1,000,000 Republic of Poland................................................. 12.000 06/12/02 260,433
----------
PLZ
RUSSIA -- 11.6%
1,000,000 Russian Government, IAN(c)(e)...................................... -- 12/29/49 718,750
----------
VENEZUELA -- 3.7%
300,000 Republic of Venezuela, Par Bond,
including 1,500 attached warrants, expiring 03/31/20............. 6.750 03/31/20 228,750
----------
TOTAL SOVEREIGN BONDS
(cost $4,734,888)....................................................................... 4,962,260
----------
</TABLE>
See accompanying notes to financial statements.
47
<PAGE>
<PAGE>
SALOMON BROTHERS INSTITUTIONAL SERIES FUNDS INC
PORTFOLIO OF INVESTMENTS
FEBRUARY 28, 1997
SALOMON BROTHERS INSTITUTIONAL EMERGING MARKETS DEBT FUND (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL INTEREST MATURITY VALUE
AMOUNT(a) DESCRIPTION RATE DATE (NOTE 1a)
- ---------- ------------------------------------------------------------------- ------ -------- ----------
<C> <S> <C> <C> <C>
LOAN PARTICIPATIONS(D) -- 8.3%
ALGERIA -- 3.0%
225,000 The Peoples Democratic Republic of Algeria, Tranche A*
(Chase Manhattan Bank)........................................... 6.910% 09/04/06 $ 183,094
MOROCCO -- 5.3%
375,000 Kingdom of Morocco, Tranche A*
(Morgan Guaranty Trust Company).................................. 6.375 01/01/09 330,703
----------
TOTAL LOAN PARTICIPATIONS
(cost $486,021)......................................................................... 513,797
----------
TOTAL INVESTMENTS -- 88.2%
(cost $5,220,909)....................................................................... 5,476,057
Other assets in excess of liabilities -- 11.8%............................................ 734,566
----------
NET ASSETS -- 100.0%...................................................................... $6,210,623
----------
----------
</TABLE>
FORWARD FOREIGN CURRENCY CONTRACT
<TABLE>
<CAPTION>
MATURITY CONTRACT TO IN EXCHANGE CONTRACT AT UNREALIZED
DATE DELIVER FOR VALUE DEPRECIATION
-------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Sales 03/21/97 DEM 162,500 $96,070 $96,425 $ (355)
</TABLE>
* Interest rate shown reflects current rate on instrument with variable rate
or step coupon rate.
(a) Principal denominated in U.S. dollars unless otherwise indicated.
(b) Payment-in-kind security for which all or part of the interest earned is
paid by the issuance of additional bonds.
(c) When and if issued. Security issued pursuant to the corresponding
government's Brady Plan debt restructuring. The investment advisor believes
that the Brady Plan will be finalized and the related bonds issued.
Accordingly, the Fund has marked-to-market its investment in this security
at year end.
(d) Participation interests were acquired through the financial institutions
indicated parenthetically.
(e) Non-income producing security.
(f) Held in segregated account for when and if issued securities.
Abbreviations used in this statement:
<TABLE>
<S> <C> <C>
DEM -- German Deutschemark
FRN -- Floating Rate Notes
IAB -- Interest Arrears Bonds
IAN -- Interest Arrears Notes
IRB -- Interest Reduction Bonds
PDI -- Past Due Interest
PLZ -- Polish Zloty
</TABLE>
See accompanying notes to financial statements.
48
<PAGE>
<PAGE>
SALOMON BROTHERS INSTITUTIONAL SERIES FUNDS INC
PORTFOLIO OF INVESTMENTS
FEBRUARY 28, 1997
SALOMON BROTHERS INSTITUTIONAL ASIA GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES DESCRIPTION (NOTE 1a)
- --------- ----------------------------------------------------------------------------------------- ----------
<C> <S> <C>
COMMON STOCKS -- 94.8%
HONG KONG -- 33.8%
30,000 Asia Satellite Telecommunications Holdings*.............................................. $ 79,032
72,000 ASM Pacific Technology................................................................... 59,971
9,360 Bank of East Asia Hong Kong.............................................................. 34,146
12,000 Cheung Kong.............................................................................. 114,674
33,000 Cheung Kong Infrastructure*.............................................................. 93,327
85,000 China Resources Beijing Land*............................................................ 48,297
59,000 China Resources Enterprises.............................................................. 132,572
42,000 Cosco Pacific............................................................................ 58,577
11,000 Dickson Concepts International........................................................... 40,200
68,000 First Pacific............................................................................ 95,277
38,000 Giordano Holdings........................................................................ 26,990
86,000 Guang Nan Holdings....................................................................... 121,053
4,400 HSBC Holdings............................................................................ 107,391
18,000 Hutchison Whampoa........................................................................ 137,144
11,000 Hysan Development........................................................................ 37,928
44,000 Kerry Properties*........................................................................ 113,641
52,000 Lai Sun Development...................................................................... 77,896
11,000 New World Development.................................................................... 68,184
100,000 Qingling Motors.......................................................................... 60,695
22,000 Shanghai Industrial Holdings*............................................................ 94,322
106,000 Shanghai Petrochemical................................................................... 30,115
104,000 USI Holdings............................................................................. 40,291
----------
1,671,723
----------
INDIA -- 12.0%
6,500 Arvind Mills -- GDR...................................................................... 32,500
9,700 Gujarat Ambuja Cements -- GDR............................................................ 85,118
3,000 Hindalco Industries -- GDR............................................................... 79,950
7,200 Industrial Credit & Investment -- GDR.................................................... 71,100
8,400 Mahindra & Mahindra -- GDR............................................................... 103,740
3,000 Reliance Industries -- GDR............................................................... 51,150
5,150 State Bank of India -- GDR............................................................... 103,000
5,500 Tata Engineering & Locomotive -- GDR..................................................... 68,750
----------
595,308
----------
INDONESIA -- 4.0%
20,000 Lippo Karawachi*(a)...................................................................... 29,614
24,500 PT Indostat(a)........................................................................... 69,234
14,500 PT Inti Indorayon Utama(a)............................................................... 10,130
68,000 PT Lippo Life Insurance(a)............................................................... 86,507
----------
195,485
----------
</TABLE>
See accompanying notes to financial statements.
49
<PAGE>
<PAGE>
SALOMON BROTHERS INSTITUTIONAL SERIES FUNDS INC
PORTFOLIO OF INVESTMENTS
FEBRUARY 28, 1997
SALOMON BROTHERS INSTITUTIONAL ASIA GROWTH FUND (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES DESCRIPTION (NOTE 1a)
- --------- ----------------------------------------------------------------------------------------- ----------
<C> <S> <C>
KOREA -- 6.1%
9,000 Commercial Bank of Korea................................................................. $ 47,708
1,007 Deasung Industrial....................................................................... 53,380
2,450 Dong Ah Construction..................................................................... 53,027
2,266 Korea Mobile Telecommunications -- ADR................................................... 28,325
2,400 LG Electronics........................................................................... 30,833
1,020 LG Information & Communication........................................................... 85,590
----------
298,863
----------
MALAYSIA -- 12.8%
6,000 Ekran.................................................................................... 21,506
18,000 IJM, Class A............................................................................. 48,208
41,000 IOI...................................................................................... 73,975
12,000 Kian Joo Can Factory..................................................................... 56,545
20,000 Leader Universal Holdings................................................................ 42,690
9,000 Malakoff................................................................................. 41,683
26,000 MBM Resources............................................................................ 80,105
44,000 Pernas International Holdings............................................................ 54,225
10,000 Rashid Hussein........................................................................... 80,950
42,000 Renong................................................................................... 76,456
6,000 United Engineers......................................................................... 55,336
----------
631,679
----------
PAKISTAN -- 1.0%
2,860 Pakistan State Oil....................................................................... 22,228
400 Pakistan Telecommunications -- GDR....................................................... 29,000
----------
51,228
----------
PHILIPPINES -- 3.4%
88,000 Ayala Land, Series B..................................................................... 105,274
110,000 Belle*................................................................................... 35,091
45,000 Pilipino Telephone....................................................................... 29,053
----------
169,418
----------
SINGAPORE -- 10.5%
4,000 Cycle & Carriage......................................................................... 42,090
10,000 Elec & Eltek International............................................................... 49,400
6,500 Hong Leong Finance(a).................................................................... 25,079
60,000 Noble Group(b)........................................................................... 52,800
13,000 Sembawang................................................................................ 71,133
1,500 Singapore Press Holdings(a).............................................................. 29,253
11,500 United Overseas Bank(a).................................................................. 130,691
36,000 Wing Tai Holdings........................................................................ 118,190
----------
518,636
----------
</TABLE>
See accompanying notes to financial statements.
50
<PAGE>
<PAGE>
SALOMON BROTHERS INSTITUTIONAL SERIES FUNDS INC
PORTFOLIO OF INVESTMENTS
FEBRUARY 28, 1997
SALOMON BROTHERS INSTITUTIONAL ASIA GROWTH FUND (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES DESCRIPTION (NOTE 1a)
- --------- ----------------------------------------------------------------------------------------- ----------
<C> <S> <C>
SRI LANKA -- 0.4%
99,000 Asia Capital*............................................................................ $ 13,343
15,500 United Motors Lanka...................................................................... 7,817
----------
21,160
----------
TAIWAN -- 7.1%
18,000 Accton Technology*....................................................................... 77,834
7,000 Cathay Life Insurance.................................................................... 45,531
19,000 Formosa Plastics......................................................................... 51,090
74,000 Pacific Construction*.................................................................... 72,602
10,000 Umax Data Systems........................................................................ 59,593
32,800 Yang Ming Marine Transport............................................................... 44,695
----------
351,345
----------
THAILAND -- 3.8%
8,750 Bangkok Bank............................................................................. 59,471
7,400 Dhana Siam Finance(a).................................................................... 13,503
9,000 Property Perfect(a)...................................................................... 9,558
7,000 Singer Thailand.......................................................................... 27,573
11,000 Thai Farmers Bank........................................................................ 47,152
24,300 Thai Telephone & Telecommunications*(a).................................................. 23,929
----------
181,186
----------
TOTAL COMMON STOCKS
(cost $4,441,776)...................................................................... 4,686,031
----------
WARRANTS AND RIGHTS -- 2.2%*
100,000 China Resources Enterprises Warrants (expiring 08/28/97)................................. 14,722
1,030,000 China H Shares, Call Warrants (expiring 04/02/98)........................................ 11,971
600,000 Guangdong Investment Warrants (expiring 11/27/97)........................................ 17,743
11,142 Guangnan Warrants (expiring 08/31/98).................................................... 7,266
900,000 Hong Kong Telecom Warrants (expiring 01/09/98)........................................... 13,366
210,000 Hutchison Call Warrants (expiring 12/30/97).............................................. 16,271
270,000 Lai Sun Development Call Warrants (expiring 11/13/97).................................... 7,357
4,995 PT Indah Kiat Pulp & Paper Warrants (expiring 04/13/01).................................. 1,833
70,000 Shanghai & Shenzen Warrants (expiring 11/20/97).......................................... 13,650
12,150 Thai Telephone & Telecommunications Rights (expiring 12/31/99)(b)........................ 7,273
----------
TOTAL WARRANTS AND RIGHTS
(cost $77,623)......................................................................... 111,452
----------
</TABLE>
See accompanying notes to financial statements.
51
<PAGE>
<PAGE>
SALOMON BROTHERS INSTITUTIONAL SERIES FUNDS INC
PORTFOLIO OF INVESTMENTS
FEBRUARY 28, 1997
SALOMON BROTHERS INSTITUTIONAL ASIA GROWTH FUND (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
CONTRACTS DESCRIPTION (NOTE 1a)
- --------- ----------------------------------------------------------------------------------------- ----------
<C> <S> <C>
PURCHASED OPTION -- 0.3%*
HONG KONG -- 0.3%
237 Hang Seng Index OTC Put (expiring 4/2/97, exercise price 13,500 HKD) (cost $16,552)...... $ 13,313
----------
TOTAL INVESTMENTS -- 97.3%
(cost $4,535,951)...................................................................... 4,810,796
Other assets in excess of liabilities -- 2.7%............................................ 131,298
----------
NET ASSETS -- 100.0%..................................................................... $4,942,094
----------
----------
</TABLE>
* Non-income producing security.
(a) Foreign Shares
(b) Securities fair valued under procedures adopted by the Board of Directors.
At February 28, 1997, total securities fair valued in this manner amounted
to $60,073 (1.2% of Net Assets).
Abbreviations used in this statement:
ADR -- American Depository Receipt
GDR -- Global Depository Receipt
HKD -- Hong Kong Dollar
OTC -- Over The Counter
THB -- Thai Baht
See accompanying notes to financial statements.
52
<PAGE>
<PAGE>
SALOMON BROTHERS INSTITUTIONAL SERIES FUNDS INC
STATEMENTS OF ASSETS AND LIABILITIES
FEBRUARY 28, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EMERGING
HIGH YIELD MARKETS ASIA GROWTH
BOND FUND DEBT FUND FUND
---------- ---------- -----------
<S> <C> <C> <C>
ASSETS:
Investments, at value (Note A)....................................... $6,254,163 $5,476,057 $ 4,810,796
Cash and foreign currency............................................ 220,017 1,646,457 14,421
Receivable for securities sold....................................... 110,600 272,500 --
Interest and dividends receivable.................................... 143,021 92,699 3,724
Receivable from investment advisor................................... 147,817 133,188 205,537
Deferred organization expense........................................ 53,648 59,062 65,950
---------- ---------- -----------
Total assets.................................................... 6,929,266 7,679,963 5,100,428
---------- ---------- -----------
LIABILITIES:
Payable for:
Securities purchased................................................. 299,350 1,410,938 82,528
Unrealized depreciation of forward foreign currency contracts........ -- 355 33
Accrued expenses..................................................... 55,131 58,047 75,773
---------- ---------- -----------
Total liabilities............................................... 354,481 1,469,340 158,334
---------- ---------- -----------
NET ASSETS............................................................... $6,574,785 $6,210,623 $ 4,942,094
---------- ---------- -----------
---------- ---------- -----------
NET ASSETS CONSIST OF:
Paid-in capital...................................................... $6,044,848 $5,662,826 $ 4,511,315
Undistributed net investment income.................................. 126,298 85,215 15,493
Accumulated net realized gain on investments, options and foreign
currency transactions.............................................. 170,305 210,879 140,381
Net unrealized appreciation on investments, foreign currency
transactions and other assets...................................... 233,334 251,703 274,905
---------- ---------- -----------
NET ASSETS............................................................... $6,574,785 $6,210,623 $ 4,942,094
---------- ---------- -----------
---------- ---------- -----------
SHARES OUTSTANDING....................................................... 590,907 569,293 454,720
---------- ---------- -----------
---------- ---------- -----------
NET ASSET VALUE PER SHARE................................................ $ 11.13 $ 10.91 $ 10.87
---------- ---------- -----------
---------- ---------- -----------
Note A: Cost of investments.............................................. $6,020,829 $5,220,909 $ 4,535,951
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
See accompanying notes to financial statements.
53
<PAGE>
<PAGE>
SALOMON BROTHERS INSTITUTIONAL SERIES FUNDS INC
STATEMENTS OF OPERATIONS
FOR THE PERIOD ENDED FEBRUARY 28, 1997(A)(B)(C)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
HIGH EMERGING
YIELD MARKETS ASIA GROWTH
BOND FUND DEBT FUND FUND
--------- --------- -----------
<S> <C> <C> <C>
INCOME:
Interest.............................................................. $425,126 $212,032 $ 6,311
Dividends (Note A).................................................... -- -- 38,940
--------- --------- ---------
425,126 212,032 45,251
EXPENSES:
Management fee........................................................ 21,438 15,317 21,437
Custody, administration and shareholder servicing fees................ 125,875 99,585 180,163
Audit and tax return preparation fees................................. 20,001 15,000 19,999
Printing.............................................................. 18,000 1,000 25,000
Amortization of organization expenses................................. 10,130 4,716 12,914
Legal................................................................. 9,999 13,001 10,000
Registration and filing fees.......................................... 9,559 10,300 9,500
Directors' fees and expenses.......................................... 5,209 3,332 5,209
Other................................................................. 3,501 3,500 1,998
--------- --------- ---------
223,712 165,751 286,220
Management fee waived and expenses absorbed by investment advisor..... (169,255) (148,505) (226,974)
Credits earned on cash balances and fees waived by custodian.......... (30,875) (885) (30,663)
--------- --------- ---------
Net expenses.......................................................... 23,582 16,361 28,583
--------- --------- ---------
NET INVESTMENT INCOME..................................................... 401,544 195,671 16,668
--------- --------- ---------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments (Note B).................................................. 179,876 221,919 177,989
Options written....................................................... -- -- 172
Foreign currency transactions......................................... -- -- (5,809)
--------- --------- ---------
179,876 221,919 172,352
--------- --------- ---------
Net change in unrealized appreciation (depreciation) on:
Investments........................................................... 233,334 255,148 274,845
Foreign currency transactions and other assets........................ -- (3,445) 60
--------- --------- ---------
233,334 251,703 274,905
--------- --------- ---------
NET REALIZED AND UNREALIZED GAIN.......................................... 413,210 473,622 447,257
--------- --------- ---------
NET INCREASE IN NET ASSETS FROM OPERATIONS................................ $814,754 $669,293 $ 463,925
--------- --------- ---------
--------- --------- ---------
Note A: Net of foreign withholding tax of................................. $ -- $ -- $ 3,902
--------- --------- ---------
--------- --------- ---------
Note B: Net of tax on capital gains of.................................... $ -- $ -- $ 1,492
--------- --------- ---------
--------- --------- ---------
</TABLE>
- ------------
(a) The High Yield Bond Fund's commencement of investment operations was May 15,
1996.
(b) The Emerging Markets Debt Fund's commencement of investment operations was
October 17, 1996.
(c) The Asia Growth Fund's commencement of investment operations was May 6,
1996.
See accompanying notes to financial statements.
54
<PAGE>
<PAGE>
SALOMON BROTHERS INSTITUTIONAL SERIES FUNDS INC
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE PERIOD ENDED FEBRUARY 28, 1997(A)(B)(C)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EMERGING
HIGH YIELD MARKETS ASIA GROWTH
BOND FUND DEBT FUND FUND
----------- ----------- -----------
<S> <C> <C> <C>
OPERATIONS:
Net investment income............................................... $ 401,544 $ 195,671 $ 16,668
Net realized gain on investments, options, and foreign currency
transactions...................................................... 179,876 221,919 172,352
Net change in unrealized appreciation on investments, foreign
currency transactions and other assets............................ 233,334 251,703 274,905
----------- ----------- -----------
Net increase in net assets from operations.......................... 814,754 669,293 463,925
----------- ----------- -----------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from net investment income................................ (275,246) (110,456) (16,532)
Distributions from net realized gains............................... (9,571) (11,040) (16,614)
----------- ----------- -----------
(284,817) (121,496) (33,146)
----------- ----------- -----------
CAPITAL SHARE TRANSACTIONS:
Proceeds from sales of shares....................................... 10,905,307 8,800,000 6,600,000
Net asset value of shares issued in reinvestment of dividends....... 284,817 121,496 33,146
Payment for redemption of shares.................................... (5,178,606) (3,292,000) (2,155,171)
----------- ----------- -----------
Change in net assets resulting from capital share transactions...... 6,011,518 5,629,496 4,477,975
----------- ----------- -----------
NET INCREASE IN NET ASSETS.............................................. 6,541,455 6,177,293 4,908,754
----------- ----------- -----------
NET ASSETS:
Beginning of period................................................. 33,330 33,330 33,340
----------- ----------- -----------
End of period*...................................................... $ 6,574,785 $ 6,210,623 $ 4,942,094
----------- ----------- -----------
----------- ----------- -----------
* Including undistributed net investment income of.................. $ 126,298 $ 85,215 $ 15,493
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
- ------------
(a) The High Yield Bond Fund's commencement of investment operations was May 15,
1996.
(b) The Emerging Markets Debt Fund's commencement of investment operations was
October 17, 1996.
(c) The Asia Growth Fund's commencement of investment operations was May 6,
1996.
See accompanying notes to financial statements.
55
<PAGE>
<PAGE>
SALOMON BROTHERS INSTITUTIONAL SERIES FUNDS INC
FINANCIAL HIGHLIGHTS
FOR THE PERIOD ENDED FEBRUARY 28, 1997(A)(B)(C)
SELECTED DATA PER SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT THE PERIOD:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
HIGH EMERGING
YIELD MARKET ASIA GROWTH
BOND FUND DEBT FUND FUND
--------- --------- -----------
<S> <C> <C> <C>
Net asset value, beginning of period............................ $ 10.00 $ 10.00 $ 10.00
------- ------- -------
Net investment income....................................... 0.57 0.35 0.04
Net gain on investments (both realized and unrealized)...... 0.93 0.78 0.91
------- ------- -------
Total from investment operations....................... 1.50 1.13 0.95
------- ------- -------
Dividends from net investment income........................ (0.36) (0.20) (0.04)
Distributions from net realized gain on investments......... (0.01) (0.02) (0.04)
------- ------- -------
Total dividends and distributions...................... (0.37) (0.22) (0.08)
------- ------- -------
Net asset value, end of period.................................. $ 11.13 $ 10.91 $ 10.87
------- ------- -------
------- ------- -------
Net assets, end of period (thousands)........................... $ 6,575 $ 6,211 $ 4,942
Total return*................................................... +15.1% +11.4% +9.6%
Ratios to average net assets:
Expenses.................................................... 0.55%** 0.75%** 1.00%**
Net investment income....................................... 9.36%** 8.94%** 0.58%**
Portfolio turnover rate......................................... 151% 136% 133%
Average Broker Commission Rate.................................. N/A N/A $0.0052
Before waiver of management fee, expenses absorbed by SBAM and
credits earned from and fees waived by the custodian, net
investment income (loss) per share and expense ratios would
have been:
Net investment income (loss) per share...................... $0.29 $0.08 ($0.59)
Expense ratio............................................... 5.22%** 7.57%** 10.03%**
</TABLE>
- ------------
(a) The High Yield Bond Fund's commencement of investment operations was May
15, 1996.
(b) The Emerging Markets Debt Fund's commencement of investment operations was
October 17, 1996.
(c) The Asia Growth Fund's commencement of investment operations was May 6,
1996.
* Total return is calculated assuming a $1,000 investment on the first day of
each period reported, reinvestment of all dividends at the net asset value
on the ex-dividend date, and a sale at net asset value on the last day of
each period reported. Total return calculated for a period of less than one
year is not annualized.
** Annualized.
56
<PAGE>
<PAGE>
SALOMON BROTHERS INSTITUTIONAL SERIES FUNDS INC
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
The Salomon Brothers Institutional High Yield Bond Fund (the 'High Yield Bond
Fund'), Salomon Brothers Institutional Asia Growth Fund (the 'Asia Growth Fund')
and Salomon Brothers Institutional Emerging Markets Debt Fund (the 'Emerging
Markets Debt Fund') are portfolios of the Salomon Brothers Institutional Series
Funds Inc (the 'Institutional Series'). The Institutional Series is an open-end
investment company incorporated in Maryland on January 19, 1996. Each Fund has a
specific investment objective: the High Yield Bond Fund's objective is to
maximize total return 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's objective is to maximize total return
by investing primarily in debt securities of government, government related and
corporate issuers located in emerging market countries; the Asia Growth Fund's
objective is to seek long-term capital appreciation.
Salomon Brothers Asset Management Inc ('SBAM'), the Fund's investment manager,
purchased 3,333 shares of the High Yield Bond Fund and Emerging Markets Debt
Fund and 3,334 shares of the Asia Growth Fund on March 21, 1996. The Asia Growth
Fund and High Yield Bond Fund began offering shares to investors on May 6, 1996
and May 15, 1996, respectively, and the Emerging Markets Debt Fund began
accepting shareholder subscriptions on October 17, 1996.
The following is a summary of significant accounting policies followed by the
Institutional Series in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles
('GAAP'). The preparation of financial statements in accordance with GAAP
requires management to make estimates of certain reported amounts in the
financial statements. Actual amounts could differ from those estimates.
(a) INVESTMENT VALUATION. Portfolio securities listed or traded on national
securities exchanges, or reported on the NASDAQ national market system, are
valued at the last sale price, or if there have been no sales on that day,
at the mean of the current bid and asked price which represents the current
value of the security. Over-the-counter securities are valued at the mean
of the current bid and asked price. Debt securities are valued by using
either market quotations or independent pricing services which use prices
provided by market-makers or estimates of market values obtained from yield
data relating to instruments or securities with similar characteristics.
Publicly traded sovereign bonds are typically traded internationally on the
over-the-counter market and are valued at the mean of the last current bid
and asked price as of the close of business of that market. Short-term
securities with less than 60 days remaining to maturity when acquired by a
Fund are valued at amortized cost which approximates market value. If a
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.
Prior governmental approval for foreign investments may be required under
certain circumstances in some emerging market countries, and the extent of
foreign investment in domestic companies may be subject to limitation in
other emerging market countries. Foreign ownership limitations also may be
imposed by the charters of individual companies in emerging market
countries to prevent, among other concerns, violation of foreign investment
limitations. As a result, an additional class of shares (identified as
'Foreign Shares' in the Portfolio of Investments) may be created and
offered for investment. The 'local' and 'foreign' shares' market values may
differ.
Foreign securities quoted in a foreign currency are translated into U.S.
dollars using exchange rates at 2:30 p.m. Eastern time (12:30 p.m. for the
Asia Growth Fund), or at such other rates as SBAM may determine to be
appropriate in computing net asset value.
57
<PAGE>
<PAGE>
SALOMON BROTHERS INSTITUTIONAL SERIES FUNDS INC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
Securities for which reliable quotations or prices from pricing services
are not readily available (as may be the case for securities of limited
marketability) and all other assets are valued at their respective fair
value as determined in good faith by, or under procedures established by,
the Board of Directors.
(b) OPTION CONTRACTS. When a Fund writes or purchases a call or a put
option, an amount equal to the premium received or paid by the Fund is
recorded as a liability or asset, the value of which is marked-to-market
daily to reflect the current market value of the option. When the option
expires, the Fund realizes a gain or loss equal to the amount of the
premium received or paid. When the Fund exercises an option or enters into
a closing transaction by purchasing or selling an offsetting option, it
realizes a gain or loss without regard to any unrealized gain or loss on
the underlying security. When a written call option is exercised, the Fund
realizes a gain or loss from the sale of the underlying security and the
proceeds from such sale are increased by the premium originally received.
When a written put option is exercised, the amount of the premium received
reduces the cost of the security that the Fund purchased upon exercise of
the option.
(c) REPURCHASE AGREEMENTS. When entering into repurchase agreements, it is
each Fund's policy that the Fund take possession, through its custodian, of
the underlying collateral and monitor the collateral's value at the time
the agreement is entered into and on a daily basis during the term of the
repurchase agreement to ensure that it equals or exceeds the repurchase
price. In the event of default or bankruptcy by the other party to the
agreement, realization and/or retention of the collateral may be subject to
legal proceedings.
(d) FOREIGN CURRENCY TRANSLATION. The accounting records of each Fund are
maintained in U.S. dollars. Investment securities and other assets and
liabilities of the Funds denominated in a foreign currency are translated
into U.S. dollars at the prevailing rates of exchange each day. Purchases
and sales of securities, income receipts and expense payments are
translated into U.S. dollars at the prevailing exchange rate on the
respective dates of the transactions. Net realized gains and losses on
foreign currency transactions represent net gains and losses from sales and
maturities of forward currency contracts, disposition of foreign
currencies, currency gains and losses realized between the trade and
settlement dates on securities transactions and the difference between the
amount of net investment income accrued and the U.S. dollar amount actually
received. The effect of changes in foreign currency exchange rates on
investments in securities are not segregated in the Statements of
Operations from the effects of changes in market prices of those
securities, but are included with the net realized and unrealized gain or
loss on investments.
(e) FORWARD FOREIGN CURRENCY CONTRACTS. Each Fund may enter into forward
foreign currency contracts in connection with planned purchases or sales of
securities or to hedge the value of portfolio securities. A forward foreign
currency contract is an agreement between two parties to buy and sell a
currency at a set price on a future date. The contract is marked-to-market
daily and the change in value is recorded by the Fund as an unrealized gain
or loss. When a forward foreign currency contract is extinguished, through
either delivery or offset by entering into another forward foreign currency
contract, the Fund records a realized gain or loss equal to the difference
between the value of the contract at the time it was opened and the value
of the contract at the time it was extinguished or offset.
(f) FEDERAL INCOME TAXES. Each Fund intends to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies
by distributing all of its income, including any net realized gains, to
shareholders. Therefore, no Federal income tax or excise tax provision is
required.
The Asia Growth Fund may be subject to taxes imposed by countries in which
it invests. Such taxes are generally based on income and/or capital gains
earned or repatriated. Taxes are
58
<PAGE>
<PAGE>
SALOMON BROTHERS INSTITUTIONAL SERIES FUNDS INC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
accrued and applied to net investment income, net realized gains and net
unrealized appreciation as such income and/or gains are earned.
(g) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Each Fund declares
dividends from net investment income annually. Distributions of net
realized gains to shareholders of each Fund, if any, are declared at least
annually. Dividends and distributions to shareholders of each Fund are
recorded on the ex-dividend date and are determined in accordance with
income tax regulations which may differ from GAAP primarily due to
differences in the treatment of foreign currency gains/losses, treatment of
gain from passive foreign investment companies ('PFICs'), deferral of wash
sales, and post-October losses incurred by each Fund. Permanent book/tax
differences are reclassified within the capital accounts based on their
federal income tax basis treatment; temporary differences do not require
reclassifications. Dividends and distributions which exceed net investment
income and net realized gains for financial reporting purposes but not for
tax purposes are reported as dividends in excess of net investment income
and distributions in excess of net realized capital gains.
(h) EXPENSES. Direct expenses are charged to the Fund that incurred them,
and general expenses of the Institutional Series are allocated to the Funds
based on each Fund's relative net assets.
(i) ORGANIZATIONAL COSTS. Certain costs incurred in connection with each
Fund's organization have been deferred and are being amortized by the Funds
over a 60 month period from the date each Fund commenced investment
operations. In the event that any of the initial shares purchased by SBAM
are redeemed, proceeds of such redemption will be reduced by the
proportionate amount of the unamortized deferred organization costs which
the number of shares redeemed bears to the total number of initial shares
purchased.
(j) OTHER. Investment transactions are recorded as of the trade date.
Dividend income is recorded on the ex-dividend date or on a when-known
basis for the Asia Growth Fund. Interest income, including the accretion of
discounts or amortization of premiums, is recognized when earned. Gains or
losses on sales of securities are calculated for financial accounting and
Federal income tax purposes on the identified cost basis.
2. MANAGEMENT FEE AND OTHER AGREEMENTS
Each Fund retains SBAM, an indirect wholly owned subsidiary of Salomon Inc, to
act as investment manager of each Fund, subject to the supervision by the Board
of Directors of the Institutional Series. Among other things, SBAM furnishes the
Funds with office space and certain services and facilities required for
conducting the business of the Funds, and pays the compensation of its officers.
The management fee for these services for each Fund is payable monthly and is
based on the following annual percentages of each Funds' average daily net
assets: .50% for the High Yield Bond Fund, .70% for the Emerging Markets Debt
Fund and .75% for the Asia Growth Fund. SBAM has retained Salomon Brothers Asset
Management Asia Pacific Limited ('SBAM AP'), an affiliate of SBAM, to act as
sub-advisor to the Asia Growth Fund. SBAM AP is compensated by SBAM at no
additional expense to the Asia Growth Fund. Salomon Brothers Asset Management
Limited ('SBAM Limited'), an affiliate of SBAM, provides certain administrative
services to the Asia Growth Fund. For such administrative services, SBAM Limited
is compensated by SBAM at no additional expense to the Asia Growth Fund.
For the period ended February 28, 1997, SBAM waived management fees of $21,438,
$15,317 and $21,437 for the High Yield Bond Fund, Emerging Markets Debt Fund and
Asia Growth Fund, respectively, and voluntarily absorbed expenses of $147,817,
$133,188 and $205,537 for the High Yield Bond Fund, Emerging Markets Debt Fund
and Asia Growth Fund, respectively.
59
<PAGE>
<PAGE>
SALOMON BROTHERS INSTITUTIONAL SERIES FUNDS INC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
Investors Bank & Trust Company ('IBT') serves as custodian, administrator and
shareholder servicing agent for each Fund, which includes performing custodial
and certain administrative services in connection with the operation of each
Fund. IBT agreed to waive a portion of its custody fees through October 31,
1996. In addition, a credit is earned on outstanding cash balances held by the
custodian during each billing period. During the period ended February 28, 1997,
fees of $30,000 were waived by IBT for the High Yield Bond Fund and Asia Growth
Fund and credits of $875, $885 and $663 were earned on outstanding cash balances
of the High Yield Bond Fund, Emerging Markets Debt Fund and Asia Growth Fund,
respectively.
3. CAPITAL STOCK
At February 28, 1997, the Institutional Series had 10,000,000,000 shares of
authorized capital stock, par value $.001 per share. Transactions in Fund shares
for the period ended February 28, 1997 were as follows:
<TABLE>
<CAPTION>
HIGH EMERGING
YIELD MARKETS ASIA
BOND FUND DEBT FUND GROWTH FUND
--------- --------- -----------
<S> <C> <C> <C>
Shares sold..................................................... 1,041,101 868,547 651,672
Shares issued as reinvestment................................... 26,445 11,716 3,224
Shares redeemed................................................. 479,972 314,303 203,510
--------- ------- -------
Net increase.................................................... 587,574 565,960 451,386
--------- ------- -------
--------- ------- -------
</TABLE>
At February 28, 1997, SBAM owned approximately 40% and 46% of total shares
outstanding of the Emerging Markets Debt Fund and Asia Growth Fund,
respectively.
4. PORTFOLIO ACTIVITY
Cost of purchases and proceeds from sales of securities, excluding short-term
obligations, for the period ended February 28, 1997, were as follows:
<TABLE>
<CAPTION>
PURCHASES SALES
----------- ----------
<S> <C> <C>
High Yield Bond Fund................................................. $13,197,162 $7,403,049
----------- ----------
----------- ----------
Emerging Markets Debt Fund........................................... $12,554,713 $7,578,906
----------- ----------
----------- ----------
Asia Growth Fund..................................................... $ 8,953,035 $4,590,308
----------- ----------
----------- ----------
</TABLE>
At February 28, 1997, undistributed net investment income and accumulated net
realized gain on investments have been adjusted for current period permanent
book/tax differences which arose principally from differing book/tax treatments
of foreign currency transactions and gains of securities of certain corporations
designated as PFICs. The Asia Growth Fund reclassified $15,357 from accumulated
net realized gain on investments to undistributed net investment income. Net
investment income, net realized gain (loss) on investments and net assets were
not affected by this reclassification.
During the year ended February 28, 1997, the Asia Growth Fund and Emerging
Markets Debt Fund have elected to defer to March 1, 1997, Post-October net
foreign currency losses of $1,115
60
<PAGE>
<PAGE>
SALOMON BROTHERS INSTITUTIONAL SERIES FUNDS INC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
and $355, respectively. Cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in value of investments held in each
Fund were as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AGGREGATE UNREALIZED UNREALIZED NET UNREALIZED
COST APPRECIATION DEPRECIATION APPRECIATION
---------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
High Yield Bond Fund........................... $6,020,829 $252,688 $ 19,354 $233,334
Emerging Markets Debt Fund..................... $5,228,956 $294,010 $ 46,909 $247,101
Asia Growth Fund............................... $4,556,627 $536,558 $282,389 $254,169
</TABLE>
Transactions in options written for the Asia Growth Fund during the period ended
February 28, 1997 were as follows:
<TABLE>
<CAPTION>
NUMBER OF PREMIUMS
CONTRACTS RECEIVED
--------- --------
<S> <C> <C>
Options written......................................................... 14,000 $ 2,344
Options terminated in closing purchase transactions..................... (14,000) (2,344)
------- --------
Options outstanding at February 28, 1997................................ -- --
------- --------
------- --------
</TABLE>
5. PORTFOLIO INVESTMENT RISKS
CREDIT AND MARKET RISK. Funds that invest in emerging markets and high yield
debt instruments are subject to certain credit and market risks. The yields of
debt obligations reflect, among other things, perceived credit risk. Securities
rated below investment grade typically involve risks not associated with higher
rated securities including, among others, greater risk of timely and ultimate
payment of interest and principal, greater market price volatility and less
liquid secondary market trading. The consequences of political, social, economic
or diplomatic changes in emerging markets countries may have disruptive effects
on the market prices of investments held by the Funds.
The Funds' investment in non-dollar denominated securities may also result in
foreign currency losses caused by devaluations and exchange rate fluctuations.
Foreign securities and currency transactions involve certain considerations and
risks not typically associated with those of U.S. dollar denominated
transactions as a result of, among other factors, the possibility of lower
levels of governmental supervision and regulation of foreign securities markets
and the possibility of political or economic instability.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK. Each Fund may enter into
forward foreign currency contracts ('forward contracts') to facilitate
settlement of foreign currency denominated portfolio transactions or to manage
foreign currency exposure associated with foreign currency denominated
securities. Forward contracts involve elements of market risk in excess of the
amounts reflected in the Statements of Assets and Liabilities. The Funds bear
the risk of an unfavorable change in the foreign exchange rate underlying the
forward contract. Risks may also arise upon entering into these contracts from
the potential inability of the counterparties to meet the terms of their
contracts.
The High Yield Bond Fund and Emerging Markets Debt Fund may invest in
instruments whose values and interest rates may be linked to foreign currencies,
interest rates, indices or some other financial indicator. The value at maturity
or interest rates for these instruments will increase or decrease according to
the change in the indicator to which it is indexed. These securities are
generally more volatile in nature and the risk of loss of principal is greater.
A risk in writing a covered call option is that the Fund may forego the
opportunity of profit if the market price of the underlying security increases
and the option is exercised. A risk in writing a put option is that the Fund may
incur a loss if the market price of the underlying security decreases and the
option is exercised. In addition, there is the risk that the Fund may not be
able to enter into a closing transaction because of an illiquid secondary
market.
61
<PAGE>
<PAGE>
SALOMON BROTHERS INSTITUTIONAL SERIES FUNDS INC
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Board of Directors and Shareholders of
SALOMON BROTHERS INSTITUTIONAL 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 the Salomon Brothers Institutional
High Yield Bond Fund, Salomon Brothers Institutional Emerging Markets Debt Fund
and Salomon Brothers Institutional Asia Growth Fund (constituting Salomon
Brothers Institutional Series Funds Inc, hereafter referred to as the 'Fund') at
February 28, 1997, and the results of each of their operations, the changes in
each of their net assets, 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 audit. We conducted our audit of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit, which included confirmation of securities at February
28, 1997 by correspondence with the custodian and brokers and the application of
alternative auditing procedures where confirmations from brokers were not
received, provides a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
April 11, 1997
62
<PAGE>
<PAGE>
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 ('Money
Market Fund') (formerly known as 'U.S. Treasury Securities Money Market
Fund'), Salomon Brothers Institutional High Yield Bond Fund ('High Yield
Bond Fund'), Salomon Brothers Institutional Asia Growth Fund ('Asia Growth
Fund') and Salomon Brothers Institutional Emerging Markets Debt Fund
('Emerging Markets 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:
1. For Salomon Brothers Institutional Money Market Fund
(i) Portfolio of Investments at December 31, 1996
(ii) Statement of Assets and Liabilities at December 31, 1996
(iii) Statement of Operations for the fiscal year ended December
31, 1996
(iv) Statement of Changes in Net Assets for the fiscal years
ended December 31, 1996 and 1995
(v) Financial Highlights for the years ended December 31, 1996,
1995, 1994, 1993 and 1992
(vi) Notes to Financial Statements
(vii) Report of Independent Accountants
2. For High Yield Bond Fund, Asia Growth Fund and Emerging Markets
Fund:
(i) Portfolio of Investments at February 28, 1997
(ii) Statement of Assets and Liabilities at February 28, 1997
(iii) Statement of Operations for the fiscal period ended
February 28, 1997
(iv) Statement of Changes in Net Assets for the fiscal period
ended February 28, 1997
(v) Financial Highlights for the fiscal period ended February
28, 1997
(vi) Notes to Financial Statements
(vii) Report of Independent Accountants
(b) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ----------------------------------------------------------------------------------------------------------
<C> <S>
1(a) -- Articles of Incorporation of Registrant (filed as Exhibit 1(a) to the Registration Statement on Form
N-1A and incorporated herein by reference).
2(a) -- Registrant's By-Laws (filed as Exhibit 2(a) to the Registration Statement on Form N-1A and incorporated
herein by reference).
3 -- None.
4(a) -- None.
5(a) -- Form of Management Contract between Registrant and Salomon Brothers Asset Management Inc ('SBAM')
relating to the Salomon Brothers Institutional High Yield Bond Fund (filed as Exhibit 5(a) to
Pre-Effective Amendment No. 1 to the Registration Statement on Form N-1A and incorporated herein by
reference).
5(b) -- Form of Management Contract between Registrant and SBAM relating to the Salomon Brothers Institutional
Emerging Markets Debt Fund (filed as Exhibit 5(b) to Pre-Effective Amendment No. 1 to the Registration
Statement on Form N-1A and incorporated herein by reference).
</TABLE>
C-1
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ----------------------------------------------------------------------------------------------------------
<C> <S>
5(c) -- Form of Management Contract between Registrant and SBAM relating to the Salomon Brothers Institutional
Asia Growth Fund (filed as Exhibit 5(c) to Pre-Effective Amendment No. 1 to the Registration Statement
on Form N-1A and incorporated herein by reference).
5(d) -- Form of Subadvisory Agreement between SBAM and Salomon Brothers Asset Management Asia Pacific Limited
('SBAM AP') relating to the Salomon Brothers Institutional Asia Growth Fund (filed as Exhibit 5(d) to
Pre-Effective Amendment No. 1 to the Registration Statement on Form N-1A and incorporated herein by
reference).
6 -- Form of Distribution Agreement between Registrant and Salomon Brothers Inc (filed as Exhibit 6 to
Pre-Effective Amendment No. 1 to the Registration Statement on Form N-1A and incorporated herein by
reference).
7 -- None.
8 -- Form of Custodian Agreement between Registrant and Investors Bank & Trust Company ('Investors Bank')
(filed as Exhibit 8 to Pre-Effective Amendment No. 1 to the Registration Statement on Form N-1A and
incorporated herein by reference).
9(a) -- Form of Transfer Agency Agreement between Registrant and Investors Bank (filed as Exhibit 9(a) to
Pre-Effective Amendment No. 1 to the Registration Statement on Form N-1A and incorporated herein by
reference).
9(b) -- Form of Administration Agreement between Registrant and Investors Bank (filed as Exhibit 9(b) to
Pre-Effective Amendment No. 1 to the Registration Statement on Form N-1A and incorporated herein by
reference).
9(c) -- Form of Subadministration Agreement between SBAM and Salomon Brothers Asset Management Limited (filed
as Exhibit 9(c) to Pre-Effective Amendment No. 1 to the Registration Statement on Form N-1A and
incorporated herein by reference).
0 -- Opinion and Consent of Counsel of Piper & Marbury, LLP as to the Legality of Securities Being
Registered (filed as Exhibit 10 to Pre-Effective Amendment No. 1 to the Registration Statement on Form
N-1A and incorporated herein by reference).
11 -- Consents of Independent Accountants are filed herewith.
12 -- None.
13 -- Share Purchase Agreement relating to Salomon Brothers Institutional High Yield Bond Fund, Salomon
Brothers Institutional Emerging Markets Debt Fund and Salomon Brothers Institutional Asia Growth Fund
(filed as Exhibit 13 to Pre-Effective Amendment No. 1 to the Registration Statement on Form N-1A and
incorporated herein by reference).
14 -- None.
15 -- None.
16 -- None.
17 -- Financial Data Schedules for Salomon Brothers Institutional High Yield Bond Fund, Salomon Brothers
Institutional Asia Growth Fund and Salomon Brothers Institutional Emerging Markets Debt Fund are filed
herewith.
18 -- None.
19 -- Power of Attorney (filed as Exhibit 19 to Pre-Effective Amendment No. 1 to the Registration Statement
on Form N-1A and incorporated herein by reference).
</TABLE>
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Entities within the Salomon Brothers Group own greater than 25% of the
outstanding shares of (i) the Asia Growth Fund, (ii) Class O shares of Salomon
Brothers Capital Fund and (iii) the classes of Salomon Brothers Series Fund Inc
set forth below, and therefore may be deemed to be control persons of such funds
and classes. As a result, such funds and classes may be deemed to be under
common control.
New York Municipal Money Market Fund -- Class B and C
National Intermediate Municipal Fund -- Class O, A, B and C
U.S. Government Income Fund -- Class O and C
Strategic Bond Fund -- Class O
Asia Growth Fund -- Class O, A and B
C-2
<PAGE>
<PAGE>
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
<TABLE>
<CAPTION>
NUMBER OF
RECORD HOLDERS
TITLE OF CLASS AT APRIL 1, 1997
- ------------------------------------------------------------------------------------------------- ----------------
<S> <C>
Shares of Salomon Brothers Institutional Asia Growth Fund, par value $.001 per share............. 6
Shares of Salomon Brothers Institutional High Yield Bond Fund, par value $.001 per share......... 6
Shares of Salomon Brothers Institutional Emerging Markets Debt Fund, par value $.001 per share... 8
</TABLE>
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
801-51393, respectively).
ITEM 29. PRINCIPAL UNDERWRITER
(a) Salomon Brothers Inc ('Salomon Brothers') currently acts as distributor
for, in addition to the Registrant, Salomon Brothers Capital Fund Inc, Salomon
Brothers Investors Fund Inc, Salomon Brothers Opportunity Fund Inc and Salomon
Brothers Series Funds Inc.
(b) The information required by this Item 29 with respect to each director,
officer or partner of Salomon Brothers is incorporated by reference to Schedule
A of Form BD filed by Salomon Brothers pursuant to the Securities Exchange Act
of 1934 (SEC File No. 8-26920).
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
(1) Salomon Brothers Asset Management Inc, 7 World Trade Center, New York,
New York 10048
(2) Investor Bank & Trust Company, 89 South Street, Boston, Massachusetts
02111
ITEM 31. MANAGEMENT SERVICES
Not applicable.
ITEM 32. UNDERTAKINGS
(a) Not applicable.
(b) Not applicable.
(c) Registrant undertakes to furnish to each person to whom a prospectus is
delivered a copy of Registrant's latest annual report to shareholders, upon
request and without charge.
C-3
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, and
the Investment Company Act of 1940, as amended, the Registrant hereby certifies
that it meets all of the requirements for effectiveness of this Post-Effective
Amendment to the Registration Statement pursuant to Rule 485(b) under the
Securities Act of 1933, as amended, and has duly caused this Post-Effective
Amendment to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, and State of
New York, on the 29th day of April, 1997.
SALOMON BROTHERS 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
- ----------------------------------------- ---------------------------------------------------- ---------------
<C> <S> <C>
/S/ MICHAEL S. HYLAND Director and President (Principal Executive Officer) April 29, 1997
.........................................
(MICHAEL S. HYLAND)
* Director April 29, 1997
.........................................
(CHARLES F. BARBER)
* Director April 29, 1997
.........................................
(CAROL L. COLMAN)
* Director April 29, 1997
.........................................
(DANIEL P. CRONIN)
/S/ ALAN M. MANDEL Treasurer (Principal Financial and Accounting April 29, 1997
......................................... Officer)
(ALAN M. MANDEL)
*By
/s/ ALAN M. MANDEL
.........................................
ALAN M. MANDEL
ATTORNEY-IN-FACT
</TABLE>
C-4
<PAGE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ --------------------------------------------------------------------------------------------------------------
<C> <S>
11 -- Consents of Independent Accountants.
17 -- Financial Data Schedule for the Salomon Brothers Institutional High Yield Bond Fund, Salomon Brothers
Institutional Asia Growth Fund and Salomon Brothers Institutional Emerging Markets Debt Fund.
</TABLE>
STATEMENT OF DIFFERENCES
------------------------
The dagger symbol shall be expressed as `D'
Characters normally expressed as superscript shall be preceded by ......'pp'
<PAGE>
<PAGE>
EXHIBIT 11
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 2 to the Registration
Statement of Form N-1A (the 'Registration Statement') of our report dated April
11, 1997, relating to the financial statements and financial highlights of
Salomon Brothers Institutional High Yield Bond Fund, Salomon Brothers
Institutional Emerging Markets Debt Fund and Salomon Brothers Institutional Asia
Growth Fund (constituting Salomon Brothers Institutional Series Funds Inc),
which appears in such Statement of Additional Information, and to the
incorporation by reference of our report into the Prospectus which constitutes
part of this Registration Statement. We also consent to the reference to us
under the heading 'Independent Accountants' in such Statement of Additional
Information and to the reference to us under the heading 'Financial Highlights'
in such Prospectus.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
April 28, 1997
<PAGE>
<PAGE>
EXHIBIT 11
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 2 to the Registration
Statement of Form N-1A (the 'Registration Statement') of our report dated
February 18, 1997, relating to the financial statements and financial highlights
of Salomon Brothers Institutional Institutional Money Market Fund (one of the
portfolios constituting Salomon Brothers Series Funds Inc), which appears in
such Statement of Additional Information, and to the incorporation by reference
of our report into the Prospectus which constitutes part of this Registration
Statement.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
April 28, 1997
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information
extracted from The Salomon Brothers Institutional Series Funds
Inc form N-SAR for the period ended February 28, 1997 and
is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<SERIES>
<NUMBER> 01
<NAME> Institutional High Yield Bond Fund
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-END> FEB-28-1997
<INVESTMENTS-AT-COST> 6,020,829
<INVESTMENTS-AT-VALUE> 6,254,163
<RECEIVABLES> 401,438
<ASSETS-OTHER> 273,665
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 6,929,266
<PAYABLE-FOR-SECURITIES> 299,350
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 55,131
<TOTAL-LIABILITIES> 354,481
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 6,044,848
<SHARES-COMMON-STOCK> 590,907
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 126,298
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 170,305
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 233,334
<NET-ASSETS> 6,574,785
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 425,126
<OTHER-INCOME> 0
<EXPENSES-NET> 23,582
<NET-INVESTMENT-INCOME> 401,544
<REALIZED-GAINS-CURRENT> 179,876
<APPREC-INCREASE-CURRENT> 233,334
<NET-CHANGE-FROM-OPS> 814,754
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 275,246
<DISTRIBUTIONS-OF-GAINS> 9,571
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,041,101
<NUMBER-OF-SHARES-REDEEMED> 479,972
<SHARES-REINVESTED> 26,445
<NET-CHANGE-IN-ASSETS> 6,541,455
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 21,438
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 223,712
<AVERAGE-NET-ASSETS> 5,398,725
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.57
<PER-SHARE-GAIN-APPREC> 0.93
<PER-SHARE-DIVIDEND> (0.36)
<PER-SHARE-DISTRIBUTIONS> (0.01)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 11.13
<EXPENSE-RATIO> 0.55
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information
extracted from The Salomon Brothers Institutional Series Funds
Inc form N-SAR for the period ended February 28, 1997 and is
qualified in its entirety by reference to such financial
statements.
</LEGEND>
<SERIES>
<NUMBER> 02
<NAME> Institutional Asia Growth Fund
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-END> FEB-28-1997
<INVESTMENTS-AT-COST> 4,535,951
<INVESTMENTS-AT-VALUE> 4,810,796
<RECEIVABLES> 209,261
<ASSETS-OTHER> 80,371
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 5,100,428
<PAYABLE-FOR-SECURITIES> 82,528
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 75,806
<TOTAL-LIABILITIES> 158,334
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 4,511,315
<SHARES-COMMON-STOCK> 454,720
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 15,493
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 140,381
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 274,905
<NET-ASSETS> 4,942,094
<DIVIDEND-INCOME> 38,940
<INTEREST-INCOME> 6,311
<OTHER-INCOME> 0
<EXPENSES-NET> 28,583
<NET-INVESTMENT-INCOME> 16,668
<REALIZED-GAINS-CURRENT> 172,352
<APPREC-INCREASE-CURRENT> 274,905
<NET-CHANGE-FROM-OPS> 463,925
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 16,532
<DISTRIBUTIONS-OF-GAINS> 16,614
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 651,672
<NUMBER-OF-SHARES-REDEEMED> 203,510
<SHARES-REINVESTED> 3,224
<NET-CHANGE-IN-ASSETS> 4,908,754
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 21,437
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 286,220
<AVERAGE-NET-ASSETS> 3,491,600
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.04
<PER-SHARE-GAIN-APPREC> 0.91
<PER-SHARE-DIVIDEND> (0.04)
<PER-SHARE-DISTRIBUTIONS> (0.04)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.87
<EXPENSE-RATIO> 1.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information
extracted from The Salomon Brothers Institutional Series
Funds Inc form N-SAR for the period ended February 28,
1997 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<SERIES>
<NUMBER> 03
<NAME> Institutional Emerging Markets Debt Fund
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-END> FEB-28-1997
<INVESTMENTS-AT-COST> 5,220,909
<INVESTMENTS-AT-VALUE> 5,476,057
<RECEIVABLES> 498,387
<ASSETS-OTHER> 1,705,519
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 7,679,963
<PAYABLE-FOR-SECURITIES> 1,410,938
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 58,402
<TOTAL-LIABILITIES> 1,469,340
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 5,662,826
<SHARES-COMMON-STOCK> 569,293
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 85,215
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 210,879
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 251,703
<NET-ASSETS> 6,210,623
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 212,032
<OTHER-INCOME> 0
<EXPENSES-NET> 16,361
<NET-INVESTMENT-INCOME> 195,671
<REALIZED-GAINS-CURRENT> 221,919
<APPREC-INCREASE-CURRENT> 251,703
<NET-CHANGE-FROM-OPS> 669,293
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 110,456
<DISTRIBUTIONS-OF-GAINS> 11,040
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 868,547
<NUMBER-OF-SHARES-REDEEMED> 314,303
<SHARES-REINVESTED> 11,716
<NET-CHANGE-IN-ASSETS> 6,177,293
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 15,317
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 165,751
<AVERAGE-NET-ASSETS> 5,916,174
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.35
<PER-SHARE-GAIN-APPREC> 0.78
<PER-SHARE-DIVIDEND> (0.20)
<PER-SHARE-DISTRIBUTIONS> (0.02)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.91
<EXPENSE-RATIO> 0.75
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
<PAGE>
