<PAGE>
<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 24, 1998
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. 4 [x]
AND/OR
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940 [x]
AMENDMENT NO. 5 [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
------------------------
ROBERT A. VEGLIANTE, 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):
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[x] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for
a previously filed post-effective amendment.
________________________________________________________________________________
<PAGE>
<PAGE>
SALOMON BROTHERS 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>
EXPLANATORY NOTE
The prospectus for Salomon Brothers Institutional Investment Series which
includes Salomon Brothers Institutional Money Market Fund, Salomon Brothers
Institutional Emerging Markets Debt Fund and the Class I shares of the Salomon
Brothers Institutional High Yield Bond Fund is incorporated herein by reference
to the Registrant's filing of Post-Effective Amendment No. 3 pursuant to Rule
485 under the Securities Act of 1933, as amended, on April 30, 1998.
<PAGE>
<PAGE>
SALOMON BROTHERS
INSTITUTIONAL HIGH
YIELD BOND FUND
PROSPECTUS
[ J A N U A R Y , 1 9 9 9 ]
CLASS T SHARES
-----------------------
SALOMON BROTHERS
------------------------
Asset Management
<PAGE>
<PAGE>
Salomon Brothers
Institutional High Yield Bond Fund
Class T Shares
-------------------------------------
7 WORLD TRADE CENTER NEW YORK, NEW YORK 10048 (800) 446-1013
SALOMON BROTHERS INSTITUTIONAL HIGH YIELD BOND FUND (THE 'FUND') IS A NO-LOAD
INVESTMENT PORTFOLIO OF SALOMON BROTHERS INSTITUTIONAL SERIES FUNDS INC (THE
'COMPANY').
The 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.
------------------------------------------------------------------
THERE CAN BE NO ASSURANCE THAT THE FUND WILL ACHIEVE ITS INVESTMENT OBJECTIVE
AND THE FUND MAY EMPLOY CERTAIN INVESTMENT PRACTICES WHICH INVOLVE SPECIAL RISK
CONSIDERATIONS. THE FUND MAY INVEST UP TO 100% OF ITS ASSETS 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. SEE 'INVESTMENT
OBJECTIVE AND POLICIES' AND '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 [January , 1999] 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 Company at the address, or by calling the toll-free
telephone number, listed above. THE SEC MAINTAINS A WEB SITE AT
HTTP://WWW.SEC.GOV THAT CONTAINS THE STATEMENT OF ADDITIONAL INFORMATION,
MATERIAL INCORPORATED BY REFERENCE AND OTHER INFORMATION REGARDING SALOMON
BROTHERS INSTITUTIONAL INVESTMENT SERIES.
------------------------------------------------------------------
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
CFBDS, INC. -- DISTRIBUTOR
PROSPECTUS
[JANUARY , 1999]
Page 1
<PAGE>
<PAGE>
Table of Contents
- ----------------------------------------------
<TABLE>
<S> <C>
Fee Table 3
Summary 3
Financial Highlights 4
Performance Information 5
Investment Objective and Policies 5
Additional Investment Activities and Risk Factors 9
Investment Limitations 18
Purchase and Redemption of Shares 18
Management 22
Dividends, Distributions and Taxes 24
Account Services 26
Capital Stock 27
Appendix A:
Description of Ratings A-1
</TABLE>
Page 2
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<PAGE>
Fee Table
-------------------------------------
Information in the table below for the Fund's Class T shares is given as a
percentage of average daily net assets and is estimated based on the annualized
operating expenses for the Fund's Class I shares for the six month period ended
August 31, 1998. Shares of the Fund are sold without imposition by the Fund of
any front-end sales charge or contingent deferred sales charge.
<TABLE>
<CAPTION>
CLASS T
ANNUAL FUND OPERATING EXPENSES* SHARES
- ---------------------------------------------------------------------------------------------------------------------
<S> <C>
(as a % of average net assets):
Management Fee (after waiver) 0
12b-1 Fee (Service Fee) .25%
Other Expenses (after reimbursement) 55%
--
Total Fund Operating Expenses (after waiver and reimbursement) .80%
--
--
- ---------------------------------------------------------------------------------------------------------------------
EXAMPLE
The following table demonstrates the projected dollar amount of total cumulative expenses that would be incurred over
various periods with respect to a hypothetical investment in the Fund. The example assumes payment by the Fund of
operating expenses at the levels set forth in the preceding table and also makes the following assumptions:
You would pay the following expenses on a $1,000 investment, assuming (i) a 5% annual return; and (ii) redemption at the
end of each time period:
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------------------------------------------
<S> <C> <C> <C> <C>
$8 $26 $44 $99
</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 six months ended August 31, 1998. Absent
such waiver and reimbursement, Management Fee, Other Expenses and Total
Fund Operating Expenses would have been 0.50%, 0.89% and 1.64%, for the
Class T shares.
The purpose of the foregoing table is to assist an investor in understanding
the various costs and expenses that an investor in the 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 THE FUND MAY BE HIGHER OR LOWER THAN THE
AMOUNTS SHOWN. Moreover, while the example assumes a 5% annual return, the
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 Fund, see 'Management' in this Prospectus and the Statement of Additional
Information.
Summary
-------------------------------------
THE FUND
The 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 Fund is organized as a diversified series of the
Institutional Series Funds. The Fund seeks 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. There can be no
assurance that the Fund will achieve its investment objective.
PURCHASE AND REDEMPTION OF SHARES
Class T shares may only be purchased by participants in certain 'wrap fee' or
asset allocation programs or other fee based arrangements sponsored by broker-
dealers or other financial institutions that have entered into arrangements with
the Fund's distributor, CFBDS Inc. ('CFBDS') and Salomon Smith Barney Inc
('Salomon Smith Barney'). The minimum initial investment in Class T Shares of
the Fund is $500 and the subsequent investment minimum is $50. The Fund may
waive minimum investment requirements at its discretion. The Fund reserves the
right to reject any purchase order. See 'Purchase and Redemption of Shares.'
MANAGEMENT SERVICES
Salomon Brothers Asset Management Inc ('SBAM') serves as the Fund's investment
manager. See 'Management.'
Page 3
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DISTRIBUTOR
CFBDS, a registered broker-dealer and an indirect wholly-owned subsidiary of
Signature Financial Group, Inc., serves as the Fund's distributor.
RISK FACTORS
Prospective investors should consider certain risks associated with an
investment in the Fund.
The medium and low rated and comparable unrated securities in which the Fund
will invest (commonly referred to as 'junk bonds') involve significantly
greater risks than higher rated securities, including price volatility and risk
of default in payment of interest and principal. Additionally, the Fund may use
various investment practices that involve special considerations, including
investing in illiquid securities, zero coupon and deferred payment securities,
loan participations and assignments and warrants and engaging in repurchase and
reverse repurchase agreements and derivative transactions. See 'Investment
Objective and Policies' and 'Additional Investment Activities and Risk Factors.'
Page 4
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<PAGE>
Performance Information
-------------------------------------
From time to time, the Fund may advertise its 'distribution rate' and / or
standardized and nonstandardized 'average annual total return' and/or
'aggregate total return' over various periods of time. Total return figures
show the average annual percentage change in value of an investment in shares
of the 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
the Fund during the period were reinvested proportionally in shares of 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 the 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 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.
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
semi-annual report to shareholders of the Fund for the six months ended August
31, 1998, and the annual report for the fiscal year ended February 28, 1998,
each containing additional performance information, are available without
charge and can be obtained by writing or calling the address or telephone number
printed on the front cover of this Prospectus. Performance figures are based on
historical earnings and are not intended to indicate future performance. See
'Performance Data' in the Statement of Additional Information.
Investment Objective and Policies
-------------------------------------
The investment objective of the 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 Investment Company Act of 1940, as
amended (the '1940 Act'). There can be no assurance that the Fund will achieve
its investment objective.
Page 5
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<PAGE>
The 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 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 Ratings Group ('S&P'),
or determined by SBAM to be of comparable quality. Debt securities rated by
both Moody's and S&P need only satisfy the foregoing ratings standards with
respect to either the Moody's or the S&P rating. The Fund is not required to
dispose of a debt security if its credit rating or credit quality declines.
Medium and low-rated and comparable unrated securities offer yields that
fluctuate over time, but generally are superior to the yields offered by higher
rated securities. However, such securities also involve significantly greater
risks, including price volatility and risk of default 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 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 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 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. Brady Bonds are debt
securities issued under the framework of the Brady Plan, an initiative
announced by former U.S. Treasury Secretary Nicholas F. Brady in 1989 as a
mechanism for debtor nations to restructure their outstanding external
indebtedness. For a description of Brady Bonds, see 'Additional Investment
Activities and Risk Factors -- High Yield Securities' herein and 'Additional
Information on Portfolio Instruments and Investment Policies -- Brady Bonds' in
the Statement of Additional Information. The risks associated with these
investments are described under the caption 'Additional Investment Activities
and Risk Factors -- 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
Page 6
<PAGE>
<PAGE>
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 Fund 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 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 Fund may also invest in fixed and floating rate loans ('Loans') arranged
through private negotiations between a corporate borrower or a foreign
sovereign entity and one or more financial institutions ('Lenders'). The Fund
may invest in such Loans in the form of participations in Loans ('Loan
Participations') and assignments of all or a portion of Loans from third
parties ('Assignments'). See 'Additional Investment Activities and Risk
Factors -- Loan Participations and Assignments.'
The Fund may invest up to 10% of its total assets in either: (1) equipment
lease certificates, equipment trust certificates and conditional sales
contracts; or (2) limited partnership interests. The Fund may invest up to 10%
of its total assets in common stock, convertible securities, warrants or other
equity securities (other than preferred stock for which there is no limit) when
consistent with its investment objective. The Fund will generally, but not
exclusively, 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 Fund may enter into repurchase agreements and reverse repurchase
agreements, may purchase securities on a firm commitment basis, including
when-issued securities and may lend portfolio securities. The Fund may also
invest in investment funds. For a description of these investment practices and
the risks associated therewith, see 'Additional Investment Activities and Risk
Factors.'
Page 7
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<PAGE>
The 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 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.
See 'Additional Investment Activities and Risk Factors -- Derivatives' and the
Statement of Additional Information for a description of these strategies and
of certain risks associated therewith.
The foregoing investment policies and activities, other than the Fund's
investment objective, are not fundamental policies and may be changed by vote
of the Board of Directors without the approval of shareholders.
Page 8
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<PAGE>
Additional
Investment Activities
and Risk Factors
-------------------------------------
REPURCHASE AGREEMENTS. The 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. The 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. The Fund
requires that additional securities be deposited if the value of the securities
purchased decreases below their resale price and does not bear the risk of a
decline in the value of the underlying security unless the seller defaults
under the repurchase obligation. In the event of default by the seller under
the repurchase agreement, the 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 the 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. The Fund may enter into 'reverse' repurchase
agreements to avoid selling securities during unfavorable market conditions to
meet redemptions. Pursuant to a reverse repurchase agreement, the Fund will
sell portfolio securities and agree to repurchase them from the buyer at a
particular date and price. Whenever the 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. The Fund pays
interest on amounts obtained pursuant to reverse repurchase agreements. Reverse
repurchase agreements are considered to be borrowings by the Fund.
LOANS OF PORTFOLIO SECURITIES. The Fund may lend portfolio securities to
generate income. In the event of the bankruptcy of the other party to a
securities loan, the Fund could experience delays in recovering the securities
it lent. To the extent that, in the meantime, the value of the securities the
Fund lent has increased, the Fund could experience a loss. The value of
securities loaned will be marked to market daily. Any securities that the 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 the 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 the Fund will
be subject to termination at the Fund's or the borrower's option. The 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. The 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
Page 9
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<PAGE>
are recorded as an asset and are subject to changes in value based upon changes
in the general level of interest rates. Purchasing a security on a firm
commitment basis can involve a risk that the market price at the time of
delivery may be lower than the agreed upon purchase price, in which case there
could be an unrealized loss at the time of delivery. The 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. The 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
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. The 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 generally be considered illiquid for the purposes of the
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, the 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 Fund may invest in Loan Participations
and Assignments. The Fund considers these investments to be investments in debt
securities for purposes of this Prospectus. Loan Participations typically will
result in the Fund having a contractual relationship only with the Lender, not
with the borrower. The 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, the 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
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in which it has purchased the Participation. As a result, the Fund will assume
the credit risk of both the borrower and the Lender that is selling the
Participation. In the event of the insolvency of the Lender selling a
Participation, the 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. The 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.
The Fund may have difficulty disposing of Assignments and Loan Participations.
In certain cases the market for such instruments is not highly liquid, and
therefore the Fund anticipates that in such cases such instruments could be
sold only to a limited number of institutional investors. The lack of a highly
liquid secondary market may have an adverse impact on the value of such
instruments and will have an adverse impact on the 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 the Company has adopted policies and procedures for
the Fund to determine whether Assignments and Loan Participations purchased by
the Fund are liquid or illiquid for purposes of the Fund's limitation on
investment in illiquid securities. Pursuant to those policies and procedures,
the Board of Directors has delegated to SBAM the determination as to whether a
particular Loan Participation or Assignment is liquid or illiquid, requiring
that consideration be given to, among other things, the frequency of quotes,
the number of dealers willing to sell and the number of potential purchasers,
the nature of the Loan Participation or Assignment and the time needed to
dispose of it, and the contractual provisions of the relevant documentation.
The Board of Directors periodically reviews purchases and sales of Assignments
and Loan Participations. In valuing a Loan Participation or Assignment held by
the 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, the 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 the Fund
holds become illiquid, due to the lack of sufficient buyers or market or other
conditions, the percentage of the 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 the Fund to maintain sufficient
liquidity for operating purposes and to meet redemption requests.
RESTRICTED SECURITIES AND SECURITIES WITH LIMITED TRADING MARKETS. The Fund may
purchase securities for which there is a limited trading market or which are
subject to restrictions on resale to the public. If the Fund were to acquire
substantial positions in securities with limited trading markets, the
activities of the Fund could have an adverse effect upon the liquidity and
marketability of such securities and the Fund might not be able to dispose of
its holdings in those securities at then current market prices. Circumstances
could also exist (to satisfy redemptions, for example) when portfolio
securities might have to be sold by the Fund at times which otherwise might be
considered to be disadvantageous so that the Fund might receive lower proceeds
from such sales than it had expected to realize. Investments in securities
which are 'restricted' may involve added expenses to the 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
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securities and securities for which there is a limited trading market may be
significantly more difficult to value due to the unavailability of reliable
market quotations for such securities, and investment in such securities may
have an adverse impact on net asset value. As more fully described in the
Statement of Additional Information, the Fund may purchase Rule 144A securities
for which there may be a secondary market of qualified institutional buyers as
contemplated by Rule 144A under the 1933 Act. The Fund's holdings of Rule 144A
securities which are liquid securities will not be subject to the Fund's
applicable limitation on investments in illiquid securities. Rule 144A is a
relatively recent development and there is no assurance that a liquid market in
Rule 144A securities will develop or be maintained. To the extent that the
number of qualified institutional buyers is reduced, a previously liquid Rule
144A security may be determined to be illiquid, thus increasing the percentage
of illiquid assets in a Fund's portfolio. SBAM, under the supervision of the
Board of Directors, is responsible for monitoring the liquidity of Rule 144A
securities. The Board of Directors periodically reviews the Fund's purchases
and sales of such Rule 144A securities.
WARRANTS. The Fund 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.
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 will invest primarily in fixed-income securities, the net asset value of
the Fund's shares can be expected to change as general levels of interest rates
fluctuate. It should be noted that the market values of securities rated below
investment grade and comparable unrated securities tend to react less to
fluctuations in interest rate levels than do those of higher-rated securities.
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 the 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, the Fund may realize a
capital loss on its investment if the security was purchased at a premium and
the 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 Fund may invest without limitation in high yield
securities. Under rating agency guidelines, medium- and lower-rated securities
and comparable unrated securities will likely have some quality and protective
characteristics that are outweighed by large uncertainties or major risk
exposures to adverse conditions. Medium and lower rated securities may have poor
prospects of ever attaining any real investment standing, may have a current
identifiable vulnerability to default or are in default, may be unlikely to
have the capacity to pay interest and repay principal when due in the event of
adverse business, financial or economic conditions, and/or to be in default or
not current in the payment of interest or principal. Such securities are
considered speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations.
Accordingly, it is possible that these types of factors could reduce the value
of securities held by the 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
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description of the ratings used by Moody's and S&P is set forth in Appendix A
to this Prospectus. The ratings of Moody's and S&P generally represent the
opinions of those organizations as to the quality of the securities that they
rate. Such ratings, however, are relative and subjective, are not absolute
standards of quality, are subject to change and do not evaluate the market risk
or liquidity of the securities. Ratings of a non-U.S. debt instrument, to the
extent that those ratings are undertaken, are related to evaluations of the
country in which the issuer of the instrument is located. Ratings generally
take into account the currency in which a non-U.S. debt instrument is
denominated. Instruments issued by a foreign government in other than the local
currency, for example, typically have a lower rating than local currency
instruments due to the existence of an additional risk that the government will
be unable to obtain the required foreign currency to service its foreign
currency-denominated debt. In general, the ratings of debt securities or
obligations issued by a non-U.S. public or private entity will not be higher
than the rating of the currency or the foreign currency debt of the central
government of the country in which the issuer is located, regardless of the
intrinsic creditworthiness of the issuer.
The secondary markets for high yield securities are not as liquid as the
secondary markets for higher rated securities. The secondary markets for high
yield securities are concentrated in relatively few market makers and
participants in the market are mostly institutional investors, including
insurance companies, banks, other financial institutions and mutual funds. In
addition, the trading volume for high yield securities is generally lower than
that for higher-rated securities and the secondary markets could contract under
adverse market or economic conditions independent of any specific adverse
changes in the condition of a particular issuer. These factors may have an
adverse effect on the ability of the 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 the Fund to obtain
accurate market quotations for purposes of valuing securities and calculating
net asset value. If the Fund is not able to obtain precise or accurate market
quotations for a particular security, it will become more difficult to value
the 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 the 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 the Fund's net asset value and
investment practices, the secondary market for high yield securities, the
financial condition of issuers of these securities and the value of outstanding
high yield securities. For example, federal legislation requiring the
divestiture by federally insured savings and loan associations of their
investments in high yield bonds and limiting the deductibility of interest by
certain corporate issuers of high yield bonds adversely affected the market in
recent years.
High Yield Corporate Securities. While the market values of securities rated
below investment grade and comparable unrated securities tend to react less to
fluctuations in interest rate levels than do those of higher-rated securities,
the values of certain of these securities also tend to be more sensitive to
individual corporate developments and changes in economic conditions than
higher-rated securities. In addition, such securities present a higher degree
of credit risk. Issuers of these securities are often highly leveraged and may
not have more traditional methods of financing available to them, so that their
ability to service their debt obligations during an economic downturn or during
sustained periods of rising interest rates may be impaired. The risk of loss
due to default by such issuers is significantly greater than with investment
grade securities because such securities generally are unsecured and
subordinated to the prior payment of senior indebtedness. The 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.
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The development of a market for high yield non-U.S. corporate securities has
been a relatively recent phenomenon. On the other hand, the market for high
yield U.S. corporate debt securities is more established than that for high
yield non-U.S. corporate debt securities, but has undergone significant changes
in the past and may undergo significant changes in the future.
High yield corporate securities in which the Fund may invest will generally be
unsecured. Most of the debt securities will bear interest at fixed rates but
the Fund may also invest in securities with variable rates of interest or which
involve equity features, such as contingent interest or participations based on
revenues, sales or profits (i.e., interest or other payments, often in addition
to a fixed rate of return, that are based on the borrower's attainment of
specified levels of revenues, sales or profits and thus enable the holder of
the security to share in the potential success of the venture).
High Yield Foreign Sovereign Debt Securities. Investing in fixed and floating
rate high yield foreign sovereign debt securities, especially in emerging
market countries, will expose the Fund to the direct or indirect consequences
of political, social or economic changes in the countries that issue the
securities or in which the issuers are located. 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. The ability and willingness of sovereign obligors
in developing and emerging market countries or the governmental authorities
that control repayment of their external debt to pay principal and interest on
such debt when due may depend on general economic and political conditions
within the relevant country. Certain countries in which a Fund may invest,
especially emerging market countries, have historically experienced, and may
continue to experience, high rates of inflation, high interest rates, exchange
rate trade difficulties and extreme poverty and unemployment. Many of these
countries are also characterized by political uncertainty or instability.
Additional factors which may influence the 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, especially an obligor in an
emerging market country, 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
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devaluations may affect the ability of a sovereign obligor to obtain sufficient
foreign exchange to service its external debt. The risks enumerated above are
particularly heightened with regard to issues in emerging market countries.
As a result of the foregoing or other factors, a governmental obligor,
especially in an emerging market country, may default on its obligations. If
such an event occurs, the Fund may have limited legal recourse against the
issuer and/or guarantor. Remedies must, in some cases, be pursued in the courts
of the defaulting party itself, and the ability of the holder of foreign
sovereign debt securities to obtain recourse may be subject to the political
climate in the relevant country. In addition, no assurance can be given that
the holders of commercial bank debt will not contest payments to the holders of
other foreign sovereign debt obligations in the event of default under their
commercial bank loan agreements.
Certain debt obligations, customarily referred to as 'Brady Bonds,' are created
through the exchange of existing commercial bank loans to foreign entities for
new obligations in connection with debt restructuring under a plan introduced
by former U.S. Secretary of the Treasury, Nicholas F. Brady (the 'Brady Plan').
Brady Bonds have been issued only recently, and, accordingly, do not have a long
payment history. They may be fully or partially collateralized or
uncollateralized and issued in various currencies (although most are U.S.
dollar denominated) and they are actively traded in the over-the-counter
secondary market. U.S. dollar denominated, collateralized Brady Bonds, which
may be fixed rate par bonds or floating rate discount bonds, are generally
collateralized in full as to principal due at maturity by U.S. Treasury zero
coupon obligations which have the same maturity as the Brady Bonds. Certain
interest payments on these Brady Bonds may be collateralized by cash or
securities in an amount that, in the case of fixed rate bonds, is typically
equal to between 12 and 18 months of rolling interest payments or, in the case
of floating rate bonds, initially is typically equal to between 12 and 18
months rolling interest payments based on the applicable interest rate at that
time and is adjusted at regular intervals thereafter with the balance of
interest accruals in each case being uncollateralized. A significant amount of
the Brady Bonds that the Fund may purchase have no or limited
collateralization, and the Fund will be relying for payment of interest and
(except in the case of principal collateralized Brady Bonds) principal
primarily on the willingness and ability of the foreign government to make
payment in accordance with the terms of the Brady Bonds. In the event of a
default 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, the 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 Fund invests 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
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can be no assurance that the Brady Bonds and other foreign sovereign debt
securities in which the Fund may invest will not be subject to similar
restructuring arrangements or to requests for new credit which may adversely
affect the 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. The Fund may invest in unaffiliated investment funds which
invest principally in securities in which that Fund is authorized to invest. In
general, under the 1940 Act, the Fund may invest a maximum of 10% of its total
assets in the securities of other investment companies, not more than 5% of the
Fund's total assets may be invested in the securities of any one investment
company and the Fund may not purchase more than 3% of the outstanding voting
stock of such investment company. To the extent the Fund invests in other
investment funds, the Fund's shareholders will incur certain duplicative fees
and expenses, including investment advisory fees.
BORROWING. The Fund 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 the 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. The 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 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 the 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.
DERIVATIVES. The Fund is 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 the Fund, or to seek to
increase the 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
the Fund indicates that 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 the Fund unless
otherwise specifically indicated in the description of the 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, the 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 the Fund may enter into
interest rate transactions, equity swaps and related transactions and other
similar transactions which may be developed to the extent SBAM determines that
they are consistent with the applicable Fund's investment objective and
policies and applicable regulatory requirements. The Fund's interest rate
transactions may take the form of swaps, caps, floors and collars, and the
Fund's currency transactions
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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 the Fund's portfolio
resulting from securities markets or currency exchange rate fluctuations, to
protect the 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 the 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 the Fund's income or gain.
The 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 the
Fund to utilize Derivatives successfully will depend on, in addition to the
factors described above, SBAM's ability to predict pertinent market movements,
which cannot be assured. These skills are different from those needed to select
the Fund's portfolio securities. The Fund is not 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 the 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 the Fund segregate cash or other liquid
assets to the extent the 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 the Fund,
force the purchase or sale of portfolio securities at inopportune times or for
prices higher or lower than current market values, or cause the Fund to hold a
security it might otherwise sell. The use of currency transactions could result
in the 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 the 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. The Fund might not be able to close out certain positions without
incurring substantial losses. To the extent the 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 the Fund's net asset value, and possibly
income, and the losses may be significantly greater than if Derivatives had not
been used. Additional information regarding the risks and special considerations
associated with Derivatives appears in the Statement of Additional Information.
The degree of the Fund's use of Derivatives may be limited by certain
provisions of the Code. See 'Dividends, Distributions and Taxes.'
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Investment Limitations
- ----------------------------------------------
The following investment restrictions and certain of those described in the
Statement of Additional Information are fundamental policies applicable to the
Fund which may be changed only when permitted by law and approved by the
holders of a majority of the Fund's outstanding voting securities, as defined
in the 1940 Act. Except for the investment restrictions set forth below and in
the Statement of Additional Information and the 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 Fund and may be changed by vote of the 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.
The Fund may not:
(1) invest more than 5% of the current value of its total assets in the
securities of any one issuer, other than obligations issued or guaranteed
by the U.S. government, its agencies or instrumentalities; however, up to
25% of the value of the total assets of the Fund may be invested without
regard to this limitation, so long as no more than 25% of its total assets
are invested in the securities of any one issuer;
(2) borrow money, except for temporary or emergency purposes and then not
in excess of 5% of the value of the total assets of the Fund at the time
the borrowing is made, except that for the purpose of this restriction,
short-term credits necessary for settlement of securities transactions are
not considered borrowings (the Fund will not purchase additional
securities at any time its borrowings exceed 5% of total assets); or
(3) invest more than 25% of the total assets 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 the 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 class of the Fund is calculated once daily as of the close of
regularly scheduled trading on the New York Stock Exchange ('NYSE') (typically
4:00 p.m., New York time). Such calculation is determined on each day that the
NYSE is open for trading, i.e., Monday through Friday, except for New Year's
Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day, and the
preceding Friday or subsequent Monday
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when one of those holidays falls on a Saturday or Sunday, respectively. Net
asset value per share of each class of the Fund is calculated by dividing the
value of the Fund's securities and other assets attributable to that class,
less liabilities attributable to that class, by the number of shares outstanding
of that class. 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 Board of Directors. Securities that are primarily traded on foreign
exchanges generally are valued at the preceding closing values of such
securities on their respective exchanges, except that when an occurrence
subsequent to the time a value was so established is likely to have changed
such value, then the fair value of those securities will be determined by
consideration of other factors by or under the direction of the Board of
Directors. Securities may be valued by independent pricing services which use
prices provided by market-makers or estimates of market values obtained from
yield data relating to instruments or securities with similar characteristics.
In valuing the 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 Fund values short-term investments that mature in 60 days or less at
amortized cost. If the 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.
PURCHASE PROCEDURES
There is no front-end sales charge or contingent-deferred sales charge imposed
on purchases of Class T shares of the Fund. Under certain circumstances,
certain broker/dealers may impose transaction fees on the purchase and/or sale
of Class T shares. The minimum investment in the Class T shares is $500 and
the subsequent investment minimum is $50. Subsequent purchases may be made in
any amount.
Class T shares may be purchased through First Data Investor Services Group,
Inc. (the 'Transfer Agent') or from selected dealers. Purchases of shares made
through a selected dealer should be made in accordance with the procedures
prescribed by such selected dealer. The Fund reserves the right to reject any
purchase order in whole or in part. Currently, Class T shares may only be
purchased by participants in certain 'wrap fee' or asset allocation programs or
other fee based arrangements sponsored by broker-dealers or other financial
institutions that have entered into arrangements with CFBDS and Salomon Smith
Barney.
Class T shares may be purchased by completing a Purchase Application and
mailing it, together with your check payable to Salomon Brothers Funds, to:
Salomon Brothers Institutional High Yield Bond Fund
c/o First Data Investor Services Group
P.O. Box 5127
Westborough, MA 01581-5127
Subsequent investments may be made at any time through a selected dealer or by
mailing a check to 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 Class T shares may not be made by third party
check.
Shares of the 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.
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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:
First Data Investor Services Group
ABA #011-001-234
Account Name: Salomon Brothers Institutional Series Funds
Attn: High Yield Bond Fund
Salomon DDA#: 142743
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.
Orders for the purchase of Class T shares received by selected dealers by the
close of regular trading on the NYSE (typically, 4:00 p.m., New York time) on
any day that the Fund calculates its net asset value and transmitted to the
Transfer Agent through the facilities of the National Securities Clearing
Corporation ('NSCC') by 7:00 p.m., New York time, on that day will be priced
according to the net asset value determined on that day. Otherwise, the orders
will be priced as of the time the net asset value is next determined. It is the
dealers' responsibility to ensure that orders are transmitted on a timely basis
to the Transfer Agnet through the facilities of NSCC. Any loss resulting from a
dealer's failure to submit an order within the prescribed time frame will be
borne by that dealer. See above for information on obtaining a reference number
for wire orders, which will facilitate the handling of such orders and ensure
prompt credit to the investor's account.
Funds transmitted by a wire system other than the Federal Reserve Wire System
generally take one business day to be converted into federal funds. In those
cases in which an investor pays for shares by a check drawn on a member bank of
the Federal Reserve System, federal funds generally will become available on
the business day after the check is deposited. Checks drawn on banks which are
not members of the Federal Reserve System or foreign banks may take
substantially longer to be converted into federal funds.
REDEMPTION PROCEDURES
The 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 Fund does 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, the 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.
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REDEMPTION THROUGH SELECTED DEALERS
Redemption orders received by a dealer prior to the close of trading on the NYSE
on any business day and transmitted to the Transfer Agent prior to the close of
its business day (normally 5:00 p.m., New York time) are effective that day.
Otherwise, the shares will be redeemed at the applicable net asset value next
determined. It is the responsibility of the dealer to transmit orders on a
timely basis. The dealer may charge the investor a fee for executing the order.
This redemption arrangement is discretionary and may be withdrawn or modified
at any time.
REDEMPTION BY MAIL
Shares may be redeemed by mail by submitting 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. The 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 the Transfer Agent 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.
TELEPHONE REDEMPTION
A shareholder may request redemption by calling the Transfer Agent at (800)
446-1013. 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. The 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
Fund. Neither the Fund 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. The Fund will employ
reasonable procedures to confirm that instructions communicated by telephone
are genuine. The 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. The Fund may require personal identification codes.
SMALL ACCOUNTS
The Fund reserves the right, upon not less than 30 days' written notice, to
redeem Class T shares in an account which has a value of $500 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.
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Management
- ----------------------------------------------
DIRECTORS AND OFFICERS
The business and affairs of the Fund are managed under the direction of its
Board of Directors. The Board of Directors approves all significant agreements
between the 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
The Fund retains SBAM as its investment manager under an investment management
contract. SBAM is an indirect wholly-owned subsidiary of Salomon Smith Barney
Holdings, Inc., which in turn is a wholly-owned subsidiary of Citigroup Inc.
SBAM was incorporated in 1987 and together with SBAM affiliates in London,
Frankfurt and Hong Kong, provides a broad range of fixed-income and equity
investment advisory services to various individuals and institutional clients
located throughout the world, and serves as investment adviser to various
investment companies. As of October 31, 1998, SBAM and such affiliates managed
approximately $29 billion of assets. SBAM's offices are located at 7 World
Trade Center, New York, New York 10048.
Peter J. Wilby is primarily responsible for the day-to-day management of the
Fund. Mr. Wilby, who joined SBAM in 1989, is a Managing Director of Salomon
Smith Barney 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.
As compensation for its services, the Fund pays SBAM a monthly fee at an annual
rate of .50% of the Fund's average daily net assets. Subject to policy
established by the Board of Directors, which has overall responsibility for the
business and affairs of the Fund, SBAM manages the investment and reinvestment
of the Fund's assets pursuant to the investment 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 the Fund
under the investment management contract, including SEC compliance, supervision
of Fund operations and certain administrative and clerical services, and pays
the compensation of the Fund's officers, employees and directors affiliated with
SBAM. Except for the expenses paid by SBAM that are described herein, the Fund
bears all costs of its operations. See 'Expenses' below.
The services of SBAM are not deemed to be exclusive, and nothing in the
investment management contract will prevent SBAM or its 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 the Fund) 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 may consider sales of shares of the Fund as
a factor in the selection of broker/dealers to execute portfolio transactions
for the Fund. The Fund may use affiliated broker-dealers to execute portfolio
transactions when SBAM believes that the broker's charge for the transaction
does not exceed usual and customary levels charged by other brokers in
connection with comparable transactions involving similar securities. See
'Portfolio Transactions' in the Statement of Additional Information.
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SBAM may from time to time, at its own expense, provide compensation to certain
selected dealers for performing administrative services for their customers.
These services include maintaining account records, processing orders to
purchase, redeem and exchange Class T shares and responding to certain customer
inquiries. The amount of such compensation may be up to .10% annually of the
average net assets of the Class T shares.
YEAR 2000. The investment management services provided to the Fund by SBAM
depend in large part on the smooth functioning of their computer systems. Many
computer software systems in use today cannot recognize the year 2000, but
revert to 1900 or some other date, due to the manner in which dates were
encoded or calculated. The capability of these systems to recognize the year
2000 could have a negative impact on SBAM's provision of investment advisory
services, including the handling of securities trades, pricing and account
services. SBAM has advised the Fund that it has been reviewing all of its
computer systems and actively working on necessary changes to its systems to
prepare for the year 2000 and expects that given the extensive testing which it
is undertaking its systems will be year 2000 compliant before such date. In
addition, SBAM has been advised by certain of the Fund's service providers that
they are also in the process of modifying their systems with the same goal.
There can, however, be no assurance that SBAM or any other service provider
will be successful in achieving year 2000 compliance, or that interaction with
other non-complying computer systems will not impair services to the Fund at
that time.
DISTRIBUTOR
CFBDS, Inc., located at 21 Milk Street, Boston, Massachusetts 02106, serves as
the Fund's distributor. CFBDS is a registered broker-dealer and an indirect
wholly-owned subsidiary of Signature Financial Group, Inc. CFBDS receives no
distribution fee with respect to sales of Class T shares of the Fund. CFBDS and
other affiliated broker/dealers from time to time may receive fees from SBAM in
connection with processing and other services that it provides for certain
shareholder accounts.
CFBDS may, from time to time assist dealers by, among other things, providing
sales literature to, and holding informational programs for the benefit of,
dealers' registered representatives which may include payment for travel
expenses, including lodging, incurred in connection with trips taken by
qualifying registered representatives and members of their families within or
outside the United States. Participation of registered representatives in such
informational programs may require the sale of minimum dollar amounts of shares
of the Fund.
SHAREHOLDER SERVICING
The Fund is authorized, pursuant to a Services Plan adopted pursuant to Rule
12b-1 promulgated under the 1940 Act (the 'Plan'), to pay Salomon Smith Barney
a service fee with respect to Class T shares of the Fund at the rate of 0.25%
of the value of the average daily net assets of the Class T shares (the
'Service Fee'). The Service Fee is used for servicing shareholder accounts,
including payments by Salomon Smith Barney to selected securities dealers. Under
the Plan, Salomon Smith Barney may retain all or a portion of the Service Fee.
From time to time, Salomon Smith Barney may waive receipt of fees under the
Plan while retaining the ability to be paid under the Plan thereafter. The fees
payable to Salomon Smith Barney under the Plan and payments by Salomon Smith
Barney to selected securities dealers are payable without regard to actual
expenses incurred. See 'Management -- Shareholder Servicing' in the Statement of
Additional Information for further information about the Plan.
ADMINISTRATOR
The Fund currently employs Investors Bank & Trust Company ('IBT') under an
administration agreement to provide certain administrative services to the
Fund. IBT is not involved in the investment decisions made with respect to the
Fund. The services currently provided by IBT under the administration agreement
include certain accounting, clerical and bookkeeping services, Blue Sky
reports, corporate secretarial services and assistance in the preparation and
filing of tax returns and
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reports to shareholders and the SEC. For its services as both the Fund's
administrator and custodian the Fund pays IBT a combined fee at an annual rate
of .10% of the Fund's average daily net assets up to $500 million in net assets
and .05% of the Fund's average daily net assets in excess of $500 million.
EXPENSES
The 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. The 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 Fund declares dividends from net investment income annually and pays 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, for purposes of the discussion under this sub-heading,
excludes any net realized capital gain. Class T shares of the Fund are entitled
to dividends declared beginning on the day after the purchase order is received
in good order. 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 gain of the 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. The
Fund distributes annually any net realized long-term capital gain from the sale
of securities (after deducting any net realized losses that may be carried
forward from prior years).
If, for any full fiscal year, the Fund's total distributions exceed net
investment income and net realized capital gain, 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 the Fund distributes amounts in excess of its
net investment income and net realized capital gain, 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 Class T shares of the 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
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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, the
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. The Fund qualified for the fiscal year ended
February 28, 1998, and intends to continue to qualify and elect to be treated,
as a regulated investment company under Subchapter M of the Code. If it so
qualifies, the 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 the 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 the 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.
The 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 20%) on alternative minimum taxable income.
The Fund is subject to a nondeductible 4% excise tax calculated as a percentage
of certain undistributed amounts of ordinary income and capital gain net income
on a calendar year basis. Under normal circumstances, the 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 the 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 gain realized over net realized long-term capital loss, are
taxable to shareholders as ordinary income. A portion of the Fund's dividends
may qualify for the dividends received deduction available to corporations.
Distributions of 'net capital gain' designated by the Fund as 'capital gain
dividends' will be taxable as long-term capital gain, whether paid in cash or
additional shares, regardless of how long the shares have been held by such
shareholders, and such distributions will not be eligible for the dividends
received deduction. In general, the maximum federal income tax rate imposed on
individuals with respect to capital assets held for more than twelve months is
20%. The maximum federal income tax rate imposed on individuals with respect to
ordinary income (and net short-term capital gain, which currently is taxed at
the same rates as ordinary income) will be 39.6%. With respect to corporate
taxpayers, long-term capital gain currently is taxed at the same federal income
tax rates as ordinary income and short-term capital gain. Investors should
consider the tax implications of buying shares shortly before the record date
of a distribution because distributions will be taxable even though the net
asset value of shares of the Fund is reduced by the distribution.
With respect to any investments in foreign securities or currencies the Fund
may be required to pay withholding or other taxes to foreign governments on
dividends and interest. The investment yield of the Fund 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,
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investing in securities of passive foreign investment companies may subject the
Fund to U.S. federal income taxes (and interest on such taxes) as a result of
such investments. The investment yield 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 or sale of shares 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 the 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 the
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 the 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.
The 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 the 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 the Fund, such Fund may be required to
borrow money or dispose of other securities to be able to make distributions to
its investors. In addition, if an election is not made to currently accrue
market discount with respect to a market discount bond, all or a portion of any
deduction or any interest expense incurred to purchase or hold such bond may be
deferred until such bond is sold or otherwise disposed of.
The 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 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.
------------------------
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 the Fund and does not constitute tax advice.
Shareholders and potential investors should consult their own
Page 26
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tax advisers regarding federal, state, local and foreign tax consequences of
ownership of shares in the Fund. For a further discussion of tax considerations
affecting the Fund and its shareholders, see 'Additional Information Concerning
Taxes' in the Statement of Additional Information.
Account Services
-------------------------------------
Shareholders of the Fund will be kept informed through semi-annual reports
showing diversification of investments and other financial data for the Fund.
Annual reports for the Fund will include audited financial statements.
Shareholders of the Fund will receive a Statement of Account following each
share transaction. Shareholders can write or call the Fund at the address and
telephone number on the first page of this Prospectus with any questions
relating to their investment in shares of the Fund.
Capital Stock
-------------------------------------
The Company was incorporated in Maryland on January 19, 1996. The authorized
capital stock of the Company consists of 10,000,000,000 shares of common stock
having a par value of $.001 per share. The Company's Board of Directors may, in
the future, authorize the issuance of additional classes of capital stock
representing shares of additional investment portfolios. Effective January ,
1999 the Fund offers two classes of shares: Class T and Class I Shares. Each
share of the Fund accrues income in the same manner, but expenses differ based
upon the class. Accordingly, performance may vary between the classes. This
Prospectus relates only to Class T shares of the Fund. Class T shares are
offered to the general public and are sold at net asset value without a front
end sales charge. Class T shares are subject to an ongoing Rule 12b-1 Service
Fee at an annual rate of .25% of its average daily net assets. See
'Management -- Shareholder Servicing.' Investors may call 1-800-446-1013 to
obtain information about investing in Class I shares of the Fund.
As of the date of this Prospectus, L-3 Communications Corp. owned more
than 25% of the outstanding shares of the Fund and consequently, is deemed to
be a 'control person,' as defined in the 1940 Act, of the Fund.
The Class T and Class I shares of the 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 the Fund will, when
issued, be fully paid and nonassessable. Under the corporate law of Maryland,
the state of incorporation of the Company, and the By-Laws of the Company the
Company is not required and does not currently intend to hold annual meetings of
shareholders for the election of directors except as required under the 1940
Act. A more complete statement of the voting rights of shareholders is
contained in the Statement of Additional Information.
Page 27
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Appendix A:
Description of Ratings
-------------------------------------
A DESCRIPTION OF THE RATING POLICIES OF MOODY'S, S&P AND FITCH WITH RESPECT TO
BONDS AND COMMERCIAL PAPER APPEARS BELOW.
MOODY'S CORPORATE BOND RATINGS
AAA -- Bonds which are rated 'Aaa' are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
'gilt edged.' Interest payments are protected by a large or by an exceptionally
stable margin, and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
AA -- Bonds which are rated 'Aa' are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long-term risk appear
somewhat larger than the Aaa securities.
A -- Bonds which are rated 'A' possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment some time in the future.
BAA -- Bonds which are rated 'Baa' are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BA -- Bonds which are rated 'Ba' are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position,
characterizes bonds in this class.
B -- Bonds which are rated 'B' generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA -- Bonds which are rated 'Caa' are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
CA -- Bonds which are rated 'Ca' represent obligations which are speculative to
a high degree. Such issues are often in default or have other marked
shortcomings.
C -- Bonds which are rated 'C' are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Moody's applies numerical modifiers '1' '2' and '3' in each generic rating
classification from Aa to Caa. The modifier '1' indicates that the security
ranks in the higher end of its generic rating category; the modifier '2'
indicates a mid-range ranking; and the modifier '3' indicates that the issue
ranks in the lower end of its generic rating category.
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S&P 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 COMMERCIAL PAPER RATINGS
PRIME-1 -- Issuers (or related supporting institutions) rated 'Prime-1' have a
superior ability for repayment of short-term debt obligations. 'Prime-1'
repayment ability will often be evidenced by leading market positions in
well-established industries, high rates of return on funds employed,
conservative capitalization structures with moderate reliance on debt and ample
asset protection, broad margins in earnings coverage of fixed financial charges
and high internal cash generation, and well-established access to a range of
financial markets and assured sources of alternate liquidity.
PRIME-2 -- Issuers (or related supporting institutions) rated 'Prime-2' have a
strong ability for repayment of short-term obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratio, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternative liquidity is maintained.
PRIME-3 -- Issuers (or related supporting institutions) rated 'Prime-3' have an
acceptable ability for repayment of senior short-term debt obligations. The
effect of industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and may require relatively high
financial leverage. Adequate alternate liquidity is maintained.
NOT PRIME -- Issuers rated 'Not Prime' do not fall within any of the Prime
rating categories.
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S&P COMMERCIAL PAPER RATINGS
An 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 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 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.
Page A-3
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S&P 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 RATINGS OF STATE AND MUNICIPAL NOTES
MIG-1/VMIG-1 -- Notes rated MIG-1/VMIG-1 are of the best quality. There is
present strong protection by established cash flows, superior liquidity support
or broad-based access to the market for refinancing.
MIG-2/VMIG-2 -- Notes which are rated MIG-2/VMIG-2 are of high-quality. Margins
of protection are ample though not so large as in the preceding group.
S&P RATINGS OF STATE AND MUNICIPAL NOTES
SP-1 -- Notes which are rated SP-1 have a very strong or strong capacity to pay
principal and interest. Those issues determined to possess overwhelming safety
characteristics will be given a plus (+) designation.
SP-2 -- Notes which are rated SP-2 have a satisfactory capacity to pay
principal and interest.
FITCH MUNICIPAL BOND RATINGS
AAA -- Bonds rated AAA by Fitch are considered to be investment grade and of
the highest credit quality. The obligor has an exceptionally strong ability to
pay interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA -- Bonds rated AA by Fitch are considered to be investment grade and of very
high credit quality. The obligor's ability to pay interest and repay principal
is very strong, although not quite as strong as bonds rated AAA. Because bonds
rated in the AAA and AA categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issues is generally
rated F-1+ by Fitch.
A -- Bonds rated A by Fitch are considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
BBB -- Bonds rated BBB by Fitch are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have adverse consequences on
these bonds, and therefore impair timely payment. The likelihood that the
ratings of these bonds will fall below investment grade is higher than for
bonds with higher ratings.
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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.
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FOR CUSTOMER SERVICE
(800) 446-1013
FOR BROKER/DEALER INQUIRIES
(800) SALOMON
(800) 725-6666
Dial 11 for a representative
DISTRIBUTOR
CFBDS, Inc.
21 Milk Street
Boston, Massachusetts 02106
INVESTMENT MANAGER
Salomon Brothers Asset
Management Inc
Seven World Trade Center
New York, New York 10048
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION
OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS,
IN CONNECTION WITH THE OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE 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 [Logo]
<PAGE>
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SALOMON BROTHERS INSTITUTIONAL INVESTMENT SERIES
7 WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
(800) 446-1013
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') and
Salomon Brothers Institutional Emerging Markets Debt Fund (the 'Emerging Markets
Debt 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'). The Emerging Markets Debt Fund is a non-diversified
portfolio and the other Funds are diversified portfolios. Institutional Series
Funds and Series Funds are, individually a 'Company,' and 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 May 1, 1998 (the 'Combined Prospectus') or the
Prospectus relating to the Class T Shares of the High Yield Bond Fund dated
[January , 1999] (each, a '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.
[January , 1999]
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TABLE OF CONTENTS
<TABLE>
<S> <C>
Additional Information on Portfolio Instruments and Investment Policies......................... 3
Investment Limitations.......................................................................... 21
Additional Purchase and Redemption Information.................................................. 23
Portfolio Transactions.......................................................................... 24
Management...................................................................................... 25
Net Asset Value................................................................................. 30
Additional Information Concerning Taxes......................................................... 32
Performance Data................................................................................ 34
Capital Stock................................................................................... 36
Custodian and Transfer Agent.................................................................... 37
Independent Accountants......................................................................... 37
Counsel......................................................................................... 37
Financial Statements............................................................................ 38
</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
Salomon Brothers Asset Management Inc ('SBAM').
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 Combined 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.
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
3
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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 Combined Prospectus and ' -- Foreign
Securities' above.
As stated in the Prospectus, bank obligations that may be purchased by a
Fund include certificates of deposit, banker's acceptances and fixed time
deposits. A certificate of deposit is a short-term negotiable certificate issued
by a commercial bank against funds deposited in the bank and is either
interest-bearing or purchased on a discount basis. A bankers' acceptance is a
short-term draft drawn on a commercial bank by a borrower, usually in connection
with an international commercial transaction. The borrower is liable for payment
as is the bank, which unconditionally guarantees to pay the draft at its face
amount on the maturity date. Fixed time deposits are obligations of branches of
U.S. banks or foreign banks which are payable at a stated maturity date and bear
a fixed rate of interest. Although fixed time deposits do not have a market,
there are no contractual restrictions on the right to transfer a beneficial
interest in the deposit to a third party.
4
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Bank obligations may be general obligations of the parent bank or may be
limited to the issuing branch by the terms of the specific obligations or by
government regulation.
FLOATING AND VARIABLE RATE INSTRUMENTS
Certain Funds may invest in floating and variable rate obligations.
Floating or variable rate obligations bear interest at rates that are not fixed,
but vary with changes in specified market rates or indices, such as the prime
rate, and at specified intervals. Certain of the floating or variable rate
obligations that may be purchased by a Fund may carry a demand feature that
would permit the holder to tender them back to the issuer at par value prior to
maturity. Such obligations include variable rate master demand notes, which are
unsecured instruments issued pursuant to an agreement between the issuer and the
holder that permit the indebtedness thereunder to vary and provide for periodic
adjustments in the interest rate. A Fund will limit its purchases of floating
and variable rate obligations to those of the same quality as it otherwise is
allowed to purchase. SBAM or the applicable sub-adviser will monitor on an
ongoing basis the ability of an issuer of a demand instrument to pay principal
and interest on demand.
Certain of the floating or variable rate obligations that may be purchased
by a Fund may carry a demand feature that would permit the holder to tender them
back to the issuer of the instrument or to a third party at par value prior to
maturity. Some of the demand instruments purchased by 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
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obligations to another party, there is a risk that the purchaser would acquire
an interest superior to that of the holders of the related automobile
receivables. In addition, because of the large number of vehicles involved in a
typical issuance and technical requirements under state laws, the trustee for
the holders of the automobile receivables may not have a proper security
interest in all of the obligations backing such receivables. Therefore, there is
the possibility that recoveries on repossessed collateral may not, in some
cases, be available to support payments on these securities. Other types of
asset-backed securities will be subject to the risks associated with the
underlying assets. If a letter of credit or other form of credit enhancement is
exhausted or otherwise unavailable, holders of asset-backed securities may also
experience delays in payments or losses if the full amounts due on underlying
assets are not realized. Because asset-backed securities are relatively new, the
market experience in these securities is limited and the market's ability to
sustain liquidity through all phases of the market cycle has not been tested.
LOANS OF PORTFOLIO SECURITIES
Certain Funds may lend portfolio securities to brokers or dealers or other
financial institutions. The procedure for the lending of securities will include
the following features and conditions. The borrower of the securities will
deposit cash, 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.
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.
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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.
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
Ratings 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
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as to principal due at maturity (typically 30 years from the date of issuance)
by U.S. Treasury zero coupon bonds with a maturity equal to the final maturity
of such Brady Bonds, although the collateral is not available to investors until
the final maturity of the Brady Bonds. Collateral purchases are financed by the
IMF, the World Bank and the debtor nations' reserves. In addition, interest
payments on certain types of Brady Bonds may be collateralized by cash or
high-grade securities in amounts that typically represent between 12 and 18
months of interest accruals on these instruments with the balance of the
interest accruals being uncollateralized. The applicable Funds may purchase
Brady Bonds with no or limited collateralization, and will be relying for
payment of interest and (except in the case of principal collateralized Brady
Bonds) principal primarily on the willingness and ability of the foreign
government to make payment in accordance with the terms of the Brady Bonds.
Brady Bonds issued to date are purchased and sold in secondary markets through
U.S. securities dealers and other financial institutions and are generally
maintained through European transnational securities depositories. A substantial
portion of the Brady Bonds and other sovereign debt securities in which the Fund
invests are likely to be acquired at a discount, which involves certain
considerations discussed below under 'Additional Information Concerning Taxes.'
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
A detailed discussion of Derivatives (as defined below) that may be used by
the investment manager on behalf of certain Funds follows below. The description
in the Prospectus indicates which, if any, of these types of transactions may be
used by that Fund. A Fund will not be obligated, however, to use any Derivatives
and makes no representation as
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to the availability of these techniques at this time or at any time in the
future. 'Derivatives,' as used in the Prospectus and this Statement of
Additional Information, refers to interest rate, currency or stock or bond index
futures contracts, currency forward contracts and currency swaps, the purchase
and sale (or writing) of exchange listed and over-the-counter ('OTC') put and
call options on debt and equity securities, currencies, interest rate, currency
or stock index futures and fixed-income and stock indices and other financial
instruments, entering into various interest rate transactions such as swaps,
caps, floors, collars, entering into equity swaps, caps, floors, the purchase
and sale of indexed debt securities or trading in other similar types of
instruments.
Derivatives may be used to attempt to protect against possible changes in
the market value of securities held or to be purchased for a Fund's portfolio
resulting from securities markets or currency exchange rate fluctuations, to
protect a Fund's unrealized gains in the value of its securities, to facilitate
the sale of those securities for investment purposes, to manage the effective
maturity or duration of a Fund's portfolio or to establish a position in the
derivatives markets as a temporary substitute for purchasing or selling
particular securities or to seek to enhance a Fund's income or gain. A Fund may
use any or all types of Derivatives which it is authorized to use at any time;
no particular strategy will dictate the use of one type of transaction rather
than another, as use of any authorized Derivative will be a function of numerous
variables, including market conditions. The ability of a Fund to utilize
Derivatives successfully will depend on numerous factors including the
investment manager's ability to predict pertinent market movements, which cannot
be assured. These skills are different from those needed to select a Fund's
portfolio securities.
A Fund's ability to pursue certain of these strategies may be limited by
the Commodity Exchange Act, as amended, applicable regulations of the Commodity
Futures Trading Commission ('CFTC') thereunder and the federal income tax
requirements applicable to regulated investment companies which are not operated
as commodity pools.
Currency Transactions. A Fund may engage in currency transactions with
Counterparties to hedge the value of portfolio securities denominated in
particular currencies against fluctuations in relative value or to generate
income or gain. Currency transactions include currency forward contracts,
exchange-listed currency futures contracts and options thereon, exchange-listed
and OTC options on currencies, and currency swaps. A forward currency contract
involves a privately negotiated obligation to purchase or sell (with delivery
generally required) a specific currency at a future date, which may be any fixed
number of days from the date of the contract agreed upon by the parties, at a
price set at the time of the contract. A currency swap is an agreement to
exchange cash flows based on the notional difference among two or more
currencies and operates similarly to an interest rate swap, which is described
below under 'Swaps, Caps, Floors and Collars.' A Fund may enter into currency
transactions only with Counterparties that the investment manager deems to be
creditworthy.
A Fund may enter into forward currency exchange contracts when the
investment manager believes that the currency of a particular country may suffer
a substantial decline against the U.S. dollar. In those circumstances, a Fund
may enter into a forward contract to sell, for a fixed amount of U.S. dollars,
the amount of that currency approximating the value of some or all of the Fund's
portfolio securities denominated in such currency. Forward contracts may limit
potential gain from a positive change in the relationship between the U.S.
dollar and foreign currencies.
Transaction hedging is entering into a currency transaction with respect to
specific assets or liabilities of the Fund, which will generally arise in
connection with the purchase or sale of 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.
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A Fund may cross-hedge currencies by entering into transactions to purchase
or sell one or more currencies that are expected to increase or decline in value
relative to other currencies to which the Fund has or in which the Fund expects
to have exposure. To reduce the effect of currency fluctuations on the value of
existing or anticipated holdings of its securities, a Fund may also engage in
proxy hedging. Proxy hedging is often used when the currency to which the Fund's
holdings is exposed is difficult to hedge generally or difficult to hedge
against the dollar. Proxy hedging entails entering into a forward contract to
sell a currency, the changes in the value of which are generally considered to
be linked to a currency or currencies in which some or all of the Fund's
securities are or are expected to be denominated, and to buy dollars. The amount
of the contract would not exceed the market value of the Fund's securities
denominated in linked currencies.
Currency transactions are subject to risks different from other portfolio
transactions, as discussed below under 'Risk Factors.' If a Fund enters into a
currency hedging transaction, the Fund will comply with the asset segregation
requirements described below under 'Use of Segregated and Other Special
Accounts.'
Futures Contracts. A Fund may trade futures contracts: (1) on domestic and
foreign exchanges on currencies, interest rates and bond indices; and (2) on
domestic and, to the extent permitted by the CFTC, foreign exchanges on stock
indices. Futures contracts are generally bought and sold on the commodities
exchanges on which they are listed with payment of initial and variation margin
as described below. The sale of a futures contract creates a firm obligation by
the Fund, as seller, to deliver to the buyer the specific type of financial
instrument called for in the contract at a specific future time for a specified
price (or, with respect to certain instruments, the net cash amount). None of
the Funds is a commodity pool, and each Fund, where permitted, will use futures
contracts and options thereon solely: (i) for bona fide hedging purposes; and
(ii) for other purposes in amounts permitted by the rules and regulations
promulgated by the CFTC. A Fund's use of financial futures contracts and options
thereon will in all cases be consistent with applicable regulatory requirements
and in particular the rules and regulations of the CFTC. Maintaining a futures
contract or selling an option on a futures contract will typically require the
Fund to deposit with a financial intermediary, as security for its obligations,
an amount of cash or other specified assets ('initial margin') that initially is
from 1% to 10% of the face amount of the contract (but may be higher in some
circumstances). Additional cash or assets ('variation margin') may be required
to be deposited thereafter daily as the mark-to-market value of the futures
contract fluctuates. A Fund will not enter into a futures contract or option
thereon other than for bona fide hedging purposes if, immediately thereafter,
the sum of the amount of its initial margin and premiums required to maintain
permissible non-bona fide hedging positions in futures contracts and options
thereon would exceed 5% of the liquidation value of the Fund's portfolio, after
taking into account unrealized profits and losses on existing contracts;
however, in the case of an option that is in-the-money at the time of the
purchase, the in-the-money amount may be excluded in calculating the 5%
limitation. The value of all futures contracts sold by the Fund (adjusted for
the historical volatility relationship between the Fund and the contracts) will
not exceed the total market value of the Fund's securities. In addition, the
value of a Fund's long futures and options positions (futures contracts on stock
or bond indices, interest rates or foreign currencies and call options on such
futures contracts) will not exceed the sum of: (a) liquid assets segregated for
this purpose; (b) cash proceeds on existing investments due within thirty days;
and (c) accrued profits on the particular futures or options positions. The
segregation requirements with respect to futures contracts and options thereon
are described below under 'Use of Segregated and Other Special Accounts.'
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
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held in the portfolio. Such a sale would have much the same effect as selling an
equivalent value of the bonds owned by the Fund. If interest rates did increase,
the value of the debt securities in the portfolio would decline, but the value
of the futures contracts to the Fund would increase at approximately the same
rate, thereby keeping the net asset value of each class of the Fund from
declining as much as it otherwise would have. A Fund could accomplish similar
results by selling bonds with longer maturities and investing in bonds with
shorter maturities when interest rates are expected to increase. However, since
the futures market may be more liquid than the cash market, the use of futures
contracts as a risk management technique allows a Fund to maintain a defensive
position without having to sell its portfolio securities.
Similarly, when the investment manager expects that interest rates may
decline, a Fund may purchase interest rate futures contracts in an attempt to
hedge against having to make subsequently anticipated purchases of bonds at the
higher prices subsequently expected to prevail. Since the fluctuations in the
value of appropriately selected futures contracts should be similar to that of
the bonds that will be purchased, a Fund could take advantage of the anticipated
rise in the cost of the bonds without actually buying them until the market had
stabilized. At that time, a Fund could make the intended purchase of the bonds
in the cash market and the futures contracts could be liquidated.
At the time of delivery of securities pursuant to an interest rate futures
contract, adjustments are made to recognize differences in value arising from
the delivery of securities with a different interest rate from that specified in
the contract. In some (but not many) cases, securities called for by a futures
contract may have a shorter term than the term of the futures contract and,
consequently, may not in fact have been issued when the futures contract was
entered.
Options. As indicated in the Prospectus, in order to hedge against adverse
market shifts or to increase income or gain, certain Funds may purchase put and
call options or write 'covered' put and call options on futures contracts on
stock indices, interest rates and currencies. In addition, in order to hedge
against adverse market shifts or to increase its income, a Fund may purchase put
and call options and write 'covered' put and call options on stocks, stock
indices and currencies. A Fund may utilize options on currencies in order to
hedge against currency exchange rate risks. A call option is 'covered' if, so
long as the Fund is obligated as the writer of the option, it will own: (i) the
underlying investment subject to the option; (ii) securities convertible or
exchangeable without the payment of any consideration into the securities
subject to the option; or (iii) a call option on the relevant security or
currency with an exercise price no higher than the exercise price on the call
option written. A put option is 'covered' if, to support its obligation to
purchase the underlying investment if a put option that a Fund writes is
exercised, the Fund will either (a) deposit with its custodian in a segregated
account cash, cash equivalents, U.S. government securities or other high grade
liquid debt obligations having a value at least equal to the exercise price of
the underlying investment or (b) continue to own an equivalent number of puts of
the same 'series' (that is, puts on the same underlying investment having the
same exercise prices and expiration dates as those written by the Fund), or an
equivalent number of puts of the same 'class' (that is, puts on the same
underlying investment) with exercise prices greater than those that it has
written (or, if the exercise prices of the puts it holds are less than the
exercise prices of those it has written, it will deposit the difference with its
custodian in a segregated account). Parties to options transactions must make
certain payments and/or set aside certain amounts of assets in connection with
each transaction, as described in the Prospectus.
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
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purchase the underlying investment and its market value at the time of the
option exercise, less the premium received for writing the option. Upon the
exercise of a call option written by a Fund, the Fund may suffer an economic
loss equal to an amount not less than the excess of the investment's market
value at the time of the option exercise over the Fund's acquisition cost of the
investment, less the sum of the premium received for writing the option and the
positive difference, if any, between the call price paid to the Fund and the
Fund's acquisition cost of the investment.
In all cases except for certain options on interest rate futures contracts,
in purchasing a put option, a Fund will seek to benefit from a decline in the
market price of the underlying investment, while in purchasing a call option, a
Fund will seek to benefit from an increase in the market price of the underlying
investment. If an option purchased is not sold or exercised when it has
remaining value, or if the market price of the underlying investment remains
equal to or greater than the exercise price, in the case of a put, or remains
equal to or below the exercise price, in the case of a call, during the life of
the option, the Fund will lose its investment in the option. For the purchase of
an option to be profitable, the market price of the underlying investment must
decline sufficiently below the exercise price, in the case of a put, and must
increase sufficiently above the exercise price, in the case of a call, to cover
the premium and transaction costs.
In the case of certain options on interest rate futures contracts, a Fund
may purchase a put option in anticipation of a rise in interest rates, and
purchase a call option in anticipation of a fall in interest rates. By writing a
covered call option on interest rate futures contracts, a Fund will limit its
opportunity to profit from a fall in interest rates. By writing a covered put
option on interest rate futures contracts, a Fund will limit its opportunity to
profit from a rise in interest rates.
A Fund may choose to exercise the options it holds, permit them to expire
or terminate them prior to their expiration by entering into closing
transactions. A Fund may enter into a closing purchase transaction in which the
Fund purchases an option having the same terms as the option it had written or a
closing sale transaction in which the Fund sells an option having the same terms
as the option it had purchased. A covered option writer unable to effect a
closing purchase transaction will not be able to sell the underlying security
until the option expires or the underlying security is delivered upon exercise,
with the result that the writer will be subject to the risk of market decline in
the underlying security during such period. Should a Fund choose to exercise an
option, the Fund will purchase in the open market the securities, commodities or
commodity futures contracts underlying the exercised option.
Exchange-listed options on securities and currencies, with certain
exceptions, generally settle by physical delivery of the underlying security or
currency, although in the future, cash settlement may become available.
Frequently, rather than taking or making delivery of the underlying instrument
through the process of exercising the option, listed options are closed by
entering into offsetting purchase or sale transactions that do not result in
ownership of the new option. Index options are cash settled for the net amount,
if any, by which the option is 'in-the-money' (that is, the amount by which the
value of the underlying instrument exceeds, in the case of a call option, or is
less than, in the case of a put option, the exercise price of the option) at the
time the option is exercised.
Put options and call options typically have similar structural
characteristics and operational mechanics regardless of the underlying
instrument on which they are purchased or sold. Thus, the following general
discussion relates to each of the particular types of options discussed in
greater detail below. In addition, many Derivatives involving options require
segregation of Fund assets in special accounts, as described below under 'Use of
Segregated and Other Special Accounts.'
A put option gives the purchaser of the option, upon payment of a premium,
the right to sell, and the writer of the obligation to buy, the underlying
security, index, currency or other instrument at the exercise price. A Fund's
purchase of a put option on a security, for example, might be designed to
protect its holdings in the underlying instrument (or, in some cases, a similar
instrument) against a substantial decline in the market value of such instrument
by giving the Fund the right to sell the instrument at the option exercise
price. A
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call option, upon payment of a premium, gives the purchaser of the option the
right to buy, and the seller the obligation to sell, the underlying instrument
at the exercise price. A Fund's purchase of a call option on a security,
financial futures contract, index, currency or other instrument might be
intended to protect the Fund against an increase in the price of the underlying
instrument that it intends to purchase in the future by fixing the price at
which it may purchase the instrument. An 'American' style put or call option may
be exercised at any time during the option period, whereas a 'European' style
put or call option may be exercised only upon expiration or during a fixed
period prior to expiration. Exchange-listed options are issued by a regulated
intermediary such as the Options Clearing Corporation ('OCC'), which guarantees
the performance of the obligations of the parties to the options. The discussion
below uses the OCC as an example, but is also applicable to other similar
financial intermediaries.
OCC-issued and exchange-listed options, with certain exceptions, generally
settle by physical delivery of the underlying security or currency, although in
the future, cash settlement may become available. Index options are cash settled
for the net amount, if any, by which the option is 'in-the-money' (that is, the
amount by which the value of the underlying instrument exceeds, in the case of a
call option, or is less than, in the case of a put option, the exercise price of
the option) at the time the option is exercised. Frequently, rather than taking
or making delivery of the underlying instrument through the process of
exercising the option, listed options are closed by entering into offsetting
purchase or sale transactions that do not result in ownership of the new option.
A Fund's ability to close out its position as a purchaser or seller of an
OCC-issued or exchange-listed put or call option is dependent, in part, upon the
liquidity of the particular option market. Among the possible reasons for the
absence of a liquid option market on an exchange are: (1) insufficient trading
interest in certain options, (2) restrictions on transactions imposed by an
exchange, (3) trading halts, suspensions or other restrictions imposed with
respect to particular classes or series of options or underlying securities,
including reaching daily price limits, (4) interruption of the normal operations
of the OCC or an exchange, (5) inadequacy of the facilities of an exchange or
the OCC to handle current trading volume or (6) a decision by one or more
exchanges to discontinue the trading of options (or a particular class or series
of options), in which event the relevant market for that option on that exchange
would cease to exist, although any such outstanding options on that exchange
would continue to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that would not be reflected in the corresponding option
markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties (collectively referred to as 'Counterparties' and
individually referred to as a 'Counterparty') through a direct bilateral
agreement with the Counterparty. In contrast to exchange-listed options, which
generally have standardized terms and performance mechanics, all of the terms of
an OTC option, including such terms as method of settlement, term, exercise
price, premium, guaranties and security, are determined by negotiation of the
parties. It is anticipated that any Portfolio authorized to use OTC options will
generally only enter into OTC options that have cash settlement provisions,
although it will not be required to do so.
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
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the Federal Reserve Bank of New York as 'primary dealers,' or broker-dealers,
domestic or foreign banks, or other financial institutions that the investment
manager deems to be creditworthy. In the absence of a change in the current
position of the staff of the SEC, OTC options purchased by a Fund and the amount
of a Fund's obligation pursuant to an OTC option sold by the Fund (the cost of
the sell-back plus the in-the-money amount, if any) or the value of the assets
held to cover such options will be deemed illiquid.
If a Fund sells a call option, the premium that it receives may serve as a
partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments held by the Fund or will
increase the Fund's income. Similarly, the sale of put options can also provide
gains for a Fund.
A Fund may purchase and sell call options on securities that are traded on
U.S. and foreign securities exchanges and in the OTC markets, and on securities
indices, currencies and futures contracts. All calls sold by a Fund must be
'covered' (that is, the Fund must own the securities or futures contract subject
to the call), or must otherwise meet the asset segregation requirements
described below for so long as the call is outstanding. Even though the Fund
will receive the option premium to help protect it against loss, a call sold by
a Fund will expose the Fund during the term of the option to possible loss of
opportunity to realize appreciation in the market price of the underlying
security or instrument and may require the Fund to hold a security or instrument
that it might otherwise have sold.
A Fund reserves the right to purchase or sell options on instruments and
indices which may be developed in the future to the extent consistent with
applicable law, the Fund's investment objective and the restrictions set forth
herein.
A Fund may purchase and sell put options on securities (whether or not it
holds the securities in its portfolio) and on securities indices, currencies and
futures contracts. In selling put options, a Fund faces the risk that it may be
required to buy the underlying security at a disadvantageous price above the
market price.
(a) Options on Stocks and Stock Indices. A Fund may purchase put and call
options and write covered put and call options on stocks and stock indices
listed on domestic and foreign securities exchanges in order to hedge against
movements in the equity markets or to increase income or gain to the Fund. In
addition, the Fund may purchase options on stocks that are traded
over-the-counter. Options on stock indices are similar to options on specific
securities. However, because options on stock indices do not involve the
delivery of an underlying security, the option represents the holder's right to
obtain from the writer cash in an amount equal to a fixed multiple of the amount
by which the exercise price exceeds (in the case of a put) or is less than (in
the case of a call) the closing value of the underlying stock index on the
exercise date. Currently, options traded include the Standard & Poor's 100 Index
of Composite Stocks, Standard & Poor's 500 Index of Composite Stocks (the 'S&P
500 Index'), the New York Stock Exchange ('NYSE') Composite Index, the American
Stock Exchange ('AMEX') Market Value Index, the National Over-the-Counter Index
and other standard broadly based stock market indices. Options are also traded
in certain industry or market segment indices such as the Oil Index, the
Computer Technology Index and the Transportation Index. Stock index options are
subject to position and exercise limits and other regulations imposed by the
exchange on which they are traded.
If the investment manager expects general stock market prices to rise, a
Fund might purchase a call option on a stock index or a futures contract on that
index as a hedge against an increase in prices of particular equity securities
it wants ultimately to buy. If the stock index does rise, the price of the
particular equity securities intended to be purchased may also increase, but
that increase would be offset in part by the increase in the value of the Fund's
index option or futures contract resulting from the increase in the index. If,
on the other hand, the investment manager expects general stock market prices to
decline, it might purchase a put option or sell a futures contract on the index.
If that index does decline, the value of some or all of the equity securities in
a Fund's portfolio may also be expected to decline, but that decrease would be
offset in part by the increase in the value of the Fund's position in such put
option or futures contract.
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(b) Options on Currencies. A Fund may invest in options on currencies
traded on domestic and foreign securities exchanges in order to hedge against
currency exchange rate risks or to increase income or gain, as described above
in 'Forward Currency Exchange Contracts.'
(c) Options on Futures Contracts. A Fund may purchase put and call options
and write covered put and call options on futures contracts on stock indices,
interest rates and currencies traded on domestic and, to the extent permitted by
the CFTC, foreign exchanges, in order to hedge all or a portion of its
investments or to increase income or gain and may enter into closing
transactions in order to terminate existing positions. There is no guarantee
that such closing transactions can be effected. An option on a stock index
futures contract, interest rate futures contract or currency futures contract,
as contrasted with the direct investment in such a contract, gives the purchaser
the right, in return for the premium paid, to assume a position in the
underlying contract at a specified exercise price at any time on or before the
expiration date of the option. Upon exercise of an option, the delivery of the
futures position by the writer of the option to the holder of the option will be
accompanied by delivery of the accumulated balance in the writer's futures
margin account. The potential loss related to the purchase of an option on a
futures contract is limited to the premium paid for the option (plus transaction
costs). While the price of the option is fixed at the point of sale, the value
of the option does change daily and the change would be reflected in the net
asset value of the Fund.
The purchase of an option on a financial futures contract involves payment
of a premium for the option without any further obligation on the part of the
Fund. If the Fund exercises an option on a futures contract it will be obligated
to post initial margin (and potentially variation margin) for the resulting
futures position just as it would for any futures position. Futures contracts
and options thereon are generally settled by entering into an offsetting
transaction, but no assurance can be given that a position can be offset prior
to settlement or that delivery will occur.
Interest Rate and Equity Swaps and Related Transactions. Certain Funds may
enter into interest rate and equity swaps and may purchase or sell (i.e., write)
interest rate and equity caps, floors and collars. A Fund expects to enter into
these transactions in order to hedge against either a decline in the value of
the securities included in the Fund's portfolio, or against an increase in the
price of the securities which it plans to purchase, or in order to preserve or
maintain a return or spread on a particular investment or portion of its
portfolio or to achieve a particular return on cash balances, or in order to
increase income or gain. Interest rate and equity swaps involve the exchange by
a Fund with another party of their respective commitments to make or receive
payments based on a notional principal amount. The purchase of an interest rate
or equity cap entitles the purchaser, to the extent that a specified index
exceeds a predetermined level, to receive payments on a contractually-based
principal amount from the party selling the interest rate or equity cap. The
purchase of an interest rate or equity floor entitles the purchaser, to the
extent that a specified index falls below a predetermined rate, to receive
payments on a contractually-based principal amount from the party selling the
interest rate or equity floor. A collar is a combination of a cap and a floor
which preserve a certain return within a predetermined range of values.
A Fund may enter into interest rate and equity swaps, caps, floors and
collars on either an asset-based or liability-based basis, depending on whether
it is hedging its assets or its liabilities, and will usually enter into
interest rate and equity swaps on a net basis (i.e., the two payment streams are
netted out), with the Fund receiving or paying, as the case may be, only the net
amount of the two payments. The net amount of the excess, if any, of a Fund's
obligations over its entitlements with respect to each interest rate or equity
swap will be accrued on a daily basis, and an amount of liquid assets having an
aggregate net asset value at least equal to the accrued excess will be
maintained in a segregated account by the Fund's custodian in accordance with
procedures established by the Board of Directors. If a Fund enters into an
interest rate or equity swap on other than a net basis, the Fund will maintain a
segregated account in the full amount accrued on a daily basis of the Fund's
obligations with respect to the swap. A Fund will only enter into interest rate
and equity swap, cap, floor or collar transactions with counterparties the
investment manager deems to be creditworthy.
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The investment manager will monitor the creditworthiness of counterparties to
its interest rate and equity swap, cap, floor and collar transactions on an
ongoing basis. If there is a default by the other party to such a transaction, a
Fund will have contractual remedies pursuant to the agreements related to the
transaction. The swap market has grown substantially in recent years with a
large number of banks and investment banking firms acting both as principals and
agents utilizing standardized swap documentation. The investment manager has
determined that, as a result, the swap market is liquid. Caps, floors and
collars are more recent innovations for which standardized documentation has not
yet been developed and, accordingly, they are less liquid than swaps. To the
extent a Fund sells caps, floors and collars it will maintain in a segregated
account cash and/or, cash equivalents or other liquid high grade debt securities
having an aggregate net asset value at least equal to the full amount, accrued
on a daily basis, of the Fund's obligations with respect to the caps, floors or
collars. The use of interest rate and equity swaps is a highly specialized
activity which involves investment techniques and risks different from those
associated with ordinary portfolio securities transactions. If the investment
manager is incorrect in its forecasts of market values, interest rates and other
applicable factors, the investment performance of a Fund would diminish compared
with what it would have been if these investment techniques were not utilized.
Moreover, even if the investment manager is correct in its forecasts, there is a
risk that the swap position may correlate imperfectly with the price of the
asset or liability being hedged.
The liquidity of swap agreements will be determined by the investment
manager based on various factors, including (1) the frequency of trades and
quotations, (2) the number of dealers and prospective purchasers in the
marketplace, (3) dealer undertakings to make a market, (4) the nature of the
security (including any demand or tender features), and (5) the nature of the
marketplace for trades (including the ability to assign or offset the Fund's
rights and obligations relating to the investment). Such determination will
govern whether a swap will be deemed within the percentage restriction on
investments in securities that are not readily marketable.
A Fund will maintain liquid assets in a segregated custodial account to
cover its current obligations under swap agreements. If a Fund enters into a
swap agreement on a net basis, it will segregate assets with a daily value at
least equal to the excess, if any, of the Fund's accrued obligations under the
swap agreement over the accrued amount the Fund is entitled to receive under the
agreement. If a Fund enters into a swap agreement on other than a net basis, it
will segregate assets with a value equal to the full amount of the Fund's
accrued obligations under the agreement. See 'Use of Segregated and Other
Special Accounts' below.
There is no limit on the amount of interest rate and equity swap
transactions that may be entered into by a Fund. These transactions do not
involve the delivery of securities or other underlying assets or principal.
Accordingly, the risk of loss with respect to interest rate and equity swaps is
limited to the net amount of payments that a Fund is contractually obligated to
make, if any. The effective use of swaps and related transactions by a Fund may
depend, among other things, on the Fund's ability to terminate the transactions
at times when the investment manager deems it desirable to do so. Because swaps
and related transactions are bilateral contractual arrangements between a Fund
and counterparties to the transactions, the Fund's ability to terminate such an
arrangement may be considerably more limited than in the case of an exchange
traded instrument. To the extent a Fund does not, or cannot, terminate such a
transaction in a timely manner, the Fund may suffer a loss in excess of any
amounts that it may have received, or expected to receive, as a result of
entering into the transaction. If the other party to a swap defaults, a Fund's
risk of loss is the net amount of payments that the Fund contractually is
entitled to receive, if any. A Fund may purchase and sell caps, floors and
collars without limitation, subject to the segregated account requirement
described above.
Indexed Securities. A Fund may purchase securities whose prices are indexed
to the prices of other securities, securities indices, currencies, or other
financial indicators. Indexed securities typically, but not always, are debt
securities or deposits whose value at maturity or coupon rate is determined by
reference to a specific instrument or statistic. Currency-indexed
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securities typically are short-term to intermediate-term debt securities whose
maturity values or interest rates are determined by reference to the values of
one or more specified foreign currencies, and may offer higher yields than U.S.
dollar-denominated securities of equivalent issuers. Currency-indexed securities
may be positively or negatively indexed; that is, their maturity value may
increase when the specified currency value increases, resulting in a security
that performs similarly to a foreign currency-denominated instrument, or their
maturity value may decline when foreign currencies increase, resulting in a
security whose price characteristics are similar to a put on the underlying
currency. Currency-indexed securities may also have prices that depend on the
values of a number of different foreign currencies relative to each other.
Combined Transactions. A Fund may enter into multiple transactions,
including multiple options transactions, multiple futures transactions, multiple
currency transactions (including forward currency contracts), multiple interest
rate transactions and any combination of futures, options, currency and interest
rate transactions, instead of a single Derivative, as part of a single or
combined strategy when, in the judgment of the investment manager, it is in the
best interests of the Fund to do so. A combined transaction will usually contain
elements of risk that are present in each of its component transactions.
Although combined transactions will normally be entered into by a Fund based on
the investment manager's judgment that the combined strategies will reduce risk
or otherwise more effectively achieve the desired portfolio management goal, it
is possible that the combination will instead increase the risks or hinder
achievement of the Fund management objective.
Risk Factors. Derivatives have special risks associated with them,
including possible default by the Counterparty to the transaction, illiquidity
and, to the extent the investment manager's view as to certain market movements
is incorrect, the risk that the use of the Derivatives could result in losses
greater than if they had not been used. Use of put and call options could result
in losses to a Fund, force the sale or purchase of portfolio securities at
inopportune times or for prices higher than (in the case of put options) or
lower than (in the case of call options) current market values, or cause a Fund
to hold a security it might otherwise sell.
The use of futures and options transactions entails certain special risks.
In particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related securities position of a
Fund could create the possibility that losses on the hedging instrument are
greater than gains in the value of the Fund's position. In addition, futures and
options markets could be illiquid in some circumstances and certain
over-the-counter options could have no markets. As a result, in certain markets,
a Fund might not be able to close out a transaction without incurring
substantial losses. Although a Fund's use of futures and options transactions
for hedging should tend to minimize the risk of loss due to a decline in the
value of the hedged position, at the same time it will tend to limit any
potential gain to the Fund that might result from an increase in value of the
position. There is also the risk of loss by a Fund of margin deposits in the
event of bankruptcy of a broker with whom the Fund has an open position in a
futures contract or option thereon. Finally, the daily variation margin
requirements for futures contracts create a greater ongoing potential financial
risk than would purchases of options, in which case the exposure is limited to
the cost of the initial premium. However, because option premiums paid by a Fund
are small in relation to the market value of the investments underlying the
options, buying options can result in large amounts of leverage. The leverage
offered by trading in options could cause a Fund's net asset value to be subject
to more frequent and wider fluctuation than would be the case if the Fund did
not invest in options.
As is the case with futures and options strategies, the effective use of
swaps and related transactions by a Fund may depend, among other things, on a
Fund's ability to terminate the transactions at times when SBAM deems it
desirable to do so. To the extent a Fund does not, or cannot, terminate such a
transaction in a timely manner, a Fund may suffer a loss in excess of any
amounts that it may have received, or expected to receive, as a result of
entering into the transaction.
Currency hedging involves some of the same risks and considerations as
other transactions with similar instruments. Currency transactions can result in
losses to a Fund if
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the currency being hedged fluctuates in value to a degree or in a direction that
is not anticipated. Further, the risk exists that the perceived linkage between
various currencies may not be present or may not be present during the
particular time that the Fund is engaging in proxy hedging. Currency
transactions are also subject to risks different from those of other portfolio
transactions. Because currency control is of great importance to the issuing
governments and influences economic planning and policy, purchases and sales of
currency and related instruments can be adversely affected by government
exchange controls, limitations or restrictions on repatriation of currency, and
manipulations or exchange restrictions imposed by governments. These forms of
governmental actions can result in losses to a Fund if it is unable to deliver
or receive currency or monies in settlement of obligations and could also cause
hedges it has entered into to be rendered useless, resulting in full currency
exposure as well as incurring transaction costs. Buyers and sellers of currency
futures contracts are subject to the same risks that apply to the use of futures
contracts generally. Further, settlement of a currency futures contract for the
purchase of most currencies must occur at a bank based in the issuing nation.
Trading options on currency futures contracts is relatively new, and the ability
to establish and close out positions on these options is subject to the
maintenance of a liquid market that may not always be available. Currency
exchange rates may fluctuate based on factors extrinsic to that country's
economy.
Because the amount of interest and/or principal payments which the issuer
of indexed debt securities is obligated to make is linked to the prices of other
securities, securities indices, currencies, or other financial indicators, such
payments may be significantly greater or less than payment obligations in
respect of other types of debt securities. As a result, an investment in indexed
debt securities may be considered speculative. Moreover, the performance of
indexed securities depends to a great extent on the performance of and may be
more volatile than the security, currency, or other instrument to which they are
indexed, and may also be influenced by interest rate changes in the United
States and abroad. At the same time, indexed securities are subject to the
credit risks associated with the issuer of the security, and their values may
decline substantially if the issuer's creditworthiness deteriorates.
Losses resulting from the use of Derivatives will reduce a Fund's net asset
value, and possibly income, and the losses can be greater than if Derivatives
had not been used.
Risks of Derivatives Outside the United States. When conducted outside the
United States, Derivatives may not be regulated as rigorously as in the United
States, may not involve a clearing mechanism and related guarantees, and will be
subject to the risk of governmental actions affecting trading in, or the prices
of, foreign securities, currencies and other instruments. In addition, the price
of any foreign futures or foreign options contract and, therefore, the potential
profit and loss thereon, may be affected by any variance in the foreign exchange
rate between the time an order is placed and the time it is liquidated, offset
or exercised. The value of positions taken as part of non-U.S. Derivatives also
could be adversely affected by: (1) other complex foreign political, legal and
economic factors, (2) lesser availability of data on which to make trading
decisions than in the United States, (3) delays in the Fund's ability to act
upon economic events occurring in foreign markets during nonbusiness hours in
the United States, (4) the imposition of different exercise and settlement terms
and procedures and margin requirements than in the United States and (5) lower
trading volume and liquidity.
Use of Segregated and Other Special Accounts. Use of many Derivatives by a
Fund will require, among other things, that the Fund segregate liquid assets
with its custodian, or a designated sub-custodian, to the extent the Fund's
obligations are not otherwise 'covered' through ownership of the underlying
security, financial instrument or currency. In general, either the full amount
of any obligation by a Fund to pay or deliver securities or assets must be
covered at all times by the securities, instruments or currency required to be
delivered, or, subject to any regulatory restrictions, an amount of liquid
assets at least equal to the current amount of the obligation must be segregated
with the custodian or sub-custodian in accordance with procedures established by
the Board of Directors. The segregated assets cannot be sold or transferred
unless equivalent assets are substituted in their place or it is no
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longer necessary to segregate them. A call option on securities written by a
Fund, for example, will require the Fund to hold the securities subject to the
call (or securities convertible into the needed securities without additional
consideration) or to segregate liquid high grade debt obligations sufficient to
purchase and deliver the securities if the call is exercised. A call option sold
by a Fund on an index will require the Fund to own portfolio securities that
correlate with the index or to segregate liquid high grade debt obligations
equal to the excess of the index value over the exercise price on a current
basis. A put option on securities written by a Fund will require the Fund to
segregate liquid high grade debt obligations equal to the exercise price. Except
when a Fund enters into a forward contract in connection with the purchase or
sale of a security denominated in a foreign currency or for other
non-speculative purposes, which requires no segregation, a currency contract
that obligates the Fund to buy or sell a foreign currency will generally require
the Fund to hold an amount of that currency or liquid securities denominated in
that currency equal to the Fund's obligations or to segregate liquid high grade
debt obligations equal to the amount of the Fund's obligations.
OTC options entered into by a Fund, including those on securities,
currency, financial instruments or indices, and OCC-issued and exchange-listed
index options will generally provide for cash settlement, although the Fund will
not be required to do so. As a result, when a Fund sells these instruments it
will segregate an amount of assets equal to its obligations under the options.
OCC-issued and exchange-listed options sold by a Fund other than those described
above generally settle with physical delivery, and the Fund will segregate an
amount of assets equal to the full value of the option. OTC options settling
with physical delivery or with an election of either physical delivery or cash
settlement will be treated the same as other options settling with physical
delivery.
In the case of a futures contract or an option on a futures contract, a
Fund must deposit initial margin and, in some instances, daily variation margin
in addition to segregating liquid assets sufficient to meet its obligations to
purchase or provide securities or currencies, or to pay the amount owed at the
expiration of an index-based futures contract. A Fund will accrue the net amount
of the excess, if any, of its obligations relating to swaps over its
entitlements with respect to each swap on a daily basis and will segregate with
its custodian, or designated sub-custodian, an amount of liquid assets having an
aggregate value equal to at least the accrued excess. Caps, floors and collars
require segregation of liquid assets with a value equal to the Fund's net
obligation, if any.
Derivatives may be covered by means other than those described above when
consistent with applicable regulatory policies. A Fund may also enter into
offsetting transactions so that its combined position, coupled with any
segregated assets, equals its net outstanding obligation in related Derivatives.
A Fund could purchase a put option, for example, if the strike price of that
option is the same or higher than the strike price of a put option sold by the
Fund. Moreover, instead of segregating assets if it holds a futures contract or
forward contract, a Fund could purchase a put option on the same futures
contract or forward contract with a strike price as high or higher than the
price of the contract held. Other Derivatives may also be offset in
combinations. If the offsetting transaction terminates at the time of or after
the primary transaction, no segregation is required, but if it terminates prior
to that time, assets equal to any remaining obligation would need to be
segregated.
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.
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PORTFOLIO TURNOVER
Purchases and sales of portfolio securities may be made as considered
advisable by the investment manager in the best interests of the shareholders.
Each Fund intends to limit portfolio trading to the extent practicable and
consistent with its investment objectives. Each Fund's portfolio turnover rate
may vary from year to year, as well as within a year. Short-term gains realized
from portfolio transactions are taxable to shareholders as ordinary income. In
addition, higher portfolio turnover rates can result in corresponding increases
in portfolio transaction costs for a Fund.
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 397 days 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.
21
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<PAGE>
High Yield Bond Fund and Emerging Markets Fund. The High Yield Bond Fund and
Emerging Markets 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 the
High Yield Bond Fund and Emerging Markets Fund.
22
<PAGE>
<PAGE>
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Certificates representing shares of the Funds will not be issued to
shareholders. First Data Investor Services Group, Inc. ('FDISG'), 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.
FDISG 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. With the exception of Class T shareholders of the High
Yield Bond Fund, 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 the number of exchanges a shareholder
may make. Call or write the applicable Fund for further details.
23
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<PAGE>
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. The purchase by a Fund of
Participations of Assignments may be pursuant to privately negotiated
transactions pursuant to which a Fund may be required to pay fees to the seller
or forego a portion of payments in respect of the Participation Agreement.
Notwithstanding the above, in compliance with Section 28(e) of the
Securities Exchange Act of 1934, the investment manager may select brokers who
charge a commission in excess of that charged by other brokers, if the
investment manager determines in good faith that the commission to be charged is
reasonable in relation to the brokerage and research services provided to the
investment manager by such brokers. Research services generally consist of
research or statistical reports or oral advice from brokers and dealers
regarding particular companies, industries or general economic conditions. The
investment manager may also have arrangements with brokers pursuant to which
such brokers provide research services to the investment manager in exchange for
a certain volume of brokerage transactions to be executed by such broker. While
the payment of higher commissions increases a Fund's costs, the investment
manager does not believe that the receipt of such brokerage and research
services significantly reduces its expenses as a Fund's investment manager.
Arrangements for the receipt of research services from brokers may create
conflicts of interest.
Research services furnished to the investment manager by brokers who effect
securities transactions for a Fund may be used by the investment manager in
servicing other investment companies and accounts which it manages. Similarly,
research services furnished to the investment manager by brokers who effect
securities transactions for other investment companies and accounts which the
investment manager manages may be used by the investment manager in servicing a
Fund. Not all of these research services are used by the investment manager in
managing any particular account, including the Funds.
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.
24
<PAGE>
<PAGE>
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: 81
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: 52
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: 52
Heath B. McLendon* ................. Director and Managing Director, Salomon Smith Barney
Age: 64 President Inc ('Salomon Smith Barney');
President and Director, Mutual
Management Corp. and Travelers
Investment Adviser, Inc.; Chairman of
Smith Barney Strategy Advisers Inc.
Peter J. Wilby ..................... Executive Vice Managing Director of SBAM and Salomon
Age: 39 President Smith Barney since January 1996.
Prior to January 1996, Director of
SBAM and Salomon Smith Barney.
Beth A. Semmel ..................... Executive Vice President Director of SBAM and Salomon Smith
Age: 37 Barney since January 1996. From May
1993 to December 1995, Vice President
of SBAM and Salomon Smith Barney.
From January 1989 to May 1993, Vice
President of Morgan Stanley Asset
Management.
Maureen O'Callaghan ................ Executive Vice President Director of SBAM and Salomon Smith
Age: 34 Barney since October 1988.
James E. Craige .................... Executive Vice President Director, SBAM and Salomon Smith Barney
Age: 30 since 1992.
Thomas K. Flanagan ................. Executive Vice President Director, SBAM and Salomon Smith Barney
Age: 45 since 1991.
Nancy Noyes ........................ Vice President Director, SBAM and Salomon Smith Barney
Age: 39 (Series Funds only) since January 1996. From August 1992
to January 1996, Vice President, SBAM
and Salomon Smith Barney.
</TABLE>
25
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
POSITION(S) PRINCIPAL OCCUPATION(S)
NAME, ADDRESS AND AGE HELD PAST 5 YEARS
- ------------------------------------ -------------------------- ---------------------------------------
<S> <C> <C>
Lewis E. Daidone ................... Executive Vice President Managing Director of Salomon Smith
388 Greenwich Street and Treasurer Barney; Director and Senior Vice
New York, NY 10013 President of Mutual Management Corp.
Age: 40 and Travelers Investment Adviser,
Inc.
Christina T. Sydor ................. Secretary Managing Director of Salomon Smith
388 Greenwich Street Barney; General Counsel of Mutual
New York, NY 10013 Management Corp.
Age: 46
</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 November 6, 1998. 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 November 6, 1998, Salomon
Brothers Asset Management Inc and its affiliates, 7 World Trade Center, New
York, NY 10048, own 5.12% and 5.95% of the outstanding Class I shares of the
High Yield Bond Fund and the Emerging Markets Debt Fund, respectively.
<TABLE>
<CAPTION>
PERCENTAGE
FUND SHAREHOLDER HELD
- --------------------------------------------- ------------------------------------------ ----------
<S> <C> <C>
Money Market Fund............................ Citibank NA TR 45.55%
u/a DTD 9/1/90
Salomon Brothers Inc Retirement Plan
111 Wall Street
14th Floor
New York, NY 10043
Money Market Fund............................ Saturn & Co. 25.17%
c/o Investors Bank & Trust Co.
P.O. Box 9130 FPG90
Boston, MA 02117-9130
Money Market Fund............................ Silicon Alley Management Inc. 7.48%
103 Faulk Rd. Ste. 260
Wilmington, DE 19803
High Yield Bond Fund Class I................. L-3 Communications Corp. 84.73%
Master Trust
600 Third Ave.
New York, NY 10016
High Yield Bond Fund Class I................. Town of Plymouth Contributory 8.10%
Retirement System
11 Lincoln Street
Plymouth, MA 02360
Emerging Markets Debt Fund................... American National Can Company 45.39%
Attn: Walt Malcher
8770 West Bryn Mawr Avenue
Chicago, IL 60631-3542
Emerging Markets Debt Fund................... L-3 Communications Corp. 38.97%
Master Trust
600 Third Avenue
New York, NY 10016
Emerging Markets Debt Fund................... Michael Alper & 7.18%
Pamela Alper JTWROS
7263 Fisher Island Drive
Fisher Island, FL 33109
</TABLE>
26
<PAGE>
<PAGE>
As of November 6, 1998, 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,
1998 and the Institutional Series Funds for the fiscal year ended February 28,
1998. Neither Company provides any pension or retirement benefits to directors.
In addition, no remuneration was paid by the Series Funds during the fiscal year
ended December 31, 1998 or the Institutional Series Funds for the fiscal year
ended February 28, 1998 to officers of either Company including to Mr.
McClendon, who is affiliated with SBAM, or to Michael S. Hyland. Mr. Hyland,
former President and Chairman of Series Funds and Institutional Series Funds, is
an employee of SBAM. Accordingly, Messrs. McClendon and Hyland are 'interested
persons,' as defined in the 1940 Act.
SERIES FUNDS
<TABLE>
<CAPTION>
TOTAL COMPENSATION
AGGREGATE FROM OTHER FUNDS
COMPENSATION ADVISED BY
FROM THE SBAM AND ITS
NAME OF PERSON, POSITION SERIES FUNDS AFFILIATES(A) TOTAL COMPENSATION
- --------------------------------------- ------------ ------------------ ---------------------
<S> <C> <C> <C>
Charles F. Barber, Director............ $ $ (21)* $ (22)*
Daniel P. Cronin, Director............. $ $ (6) $ (7)
Carol L. Colman, Director.............. $ $ (5) $ (6)
</TABLE>
- ------------
(A) The numbers in parenthesis indicate the applicable number of investment
company directorships held by that director.
* Includes compensation from investment companies advised by affiliates of
SBAM.
INSTITUTIONAL SERIES FUNDS
<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION TOTAL COMPENSATION
FROM THE FROM OTHER FUNDS
INSTITUTIONAL ADVISED BY
SERIES SBAM AND ITS
NAME OF PERSON, POSITION FUNDS* AFFILIATES(A) TOTAL COMPENSATION(A)
- --------------------------------------- ------------ ------------------ ---------------------
<S> <C> <C> <C>
Charles F. Barber, Director............ $5,500 $111,250(21)* $ 133,850(22)**
Daniel P. Cronin, Director............. $5,500 $ 33,700(6) $ 39,200(7)
Carol L. Colman, Director.............. $5,000 $ 31,250(5) $ 36,250(6)
</TABLE>
- ------------
(A) The numbers in parenthesis indicate the applicable number of investment
company directorships held by that director.
* Includes compensation paid from the Institutional Asia Growth Fund, which
ceased operations as of February 28, 1998.
** Includes compensation from investment companies advised by affiliates of
SBAM.
27
<PAGE>
<PAGE>
INVESTMENT MANAGER
Each Fund retains SBAM to act as its investment manager. SBAM serves as the
investment manager to numerous individuals and institutions and other investment
companies.
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.
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. 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, 1996, 1997 and 1998, the Money Market Fund paid SBAM, $0 (which reflects a
waiver of $126,986), $0 (which reflects a waiver of $350,642) [and ]
respectively, for its services. SBAM also absorbed an additional $23,847 and
$47,012 of other expenses for the fiscal years ended December 31, 1996 and 1997.
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 and
the Emerging Markets Debt Fund pays SBAM a monthly fee at an annual rate of .70%
of the Fund's average daily net assets.
For the fiscal years ended February 28, 1997 and 1998, SBAM waived all
investment management fees from each of the High Yield Bond Fund and Emerging
Markets Debt Fund, totalling $21,438 and $32,193 and $15,317 and $75,783,
respectively. SBAM also absorbed an additional $147,817 and $192,736 and
$173,188 and $205,872 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. The management contracts for the Money Market, the High
Yield Bond and Emerging Market Debt Funds were most recently approved by
shareholders of the respective Funds on January 14, 1998.
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, 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,
28
<PAGE>
<PAGE>
the High Yield Bond Fund and Emerging Markets Debt Fund will indemnify SBAM and
its affiliates and hold each of them harmless against any losses or damages 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. 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, which policies serve as SBAM's code of ethics (the 'Adviser Code').
The Fund and Adviser Codes have been designed to address potential conflicts of
interest that can arise in connection with the personal trading activities of
investment company and investment advisory personnel.
Pursuant to the Fund and Adviser Codes, access persons are generally
permitted to engage in personal securities transactions, provided that a
transaction does not involve securities that are being purchased or sold, are
being considered for purchase or sale, or are being recommended for purchase or
sale by or for a Fund. In addition, the Adviser Codes contains specified
prohibitions and blackout periods for certain categories of securities and
transactions, including a prohibition on short-term trading and purchasing
securities during an initial public offering. The Adviser Codes also require
that access persons obtain preclearance to engage in personal securities
transactions with certain exceptions. Finally, the Fund and Adviser Codes
require access persons to report all personal securities transactions
periodically. The restrictions contained in the Fund and Adviser Codes are
generally inapplicable to transactions in money market securities.
ADMINISTRATOR
Institutional Series Funds and Series Funds employs Investors Bank & Trust
Company ('IBT') under their applicable administration agreement to provide
certain administrative services to the respective Funds. For the fiscal years
ended December 31, 1996, 1997 and 1998, the Money Market Fund paid fees of
$69,483 (which reflects a waiver of $20,267), $189,460 and $ to IBT. Fees
paid to IBT by the High Yield Bond Fund for the period May 15, 1996 through
February 28, 1997 and for the year ended February 28, 1998 were $95,000 (which
reflects a waiver of $30,875) and $165,100, respectively. Fees paid to IBT by
the Emerging Markets Debt Fund for the period October 17, 1996 through February
28, 1997 and for the year ended February 28, 1998 were $98,700 (which reflects a
waiver of $885) and $177,600, respectively.
DISTRIBUTOR
Shares of the Fund are offered on a continuous basis and without a sales
charge through CFBDS, Inc. ('Distributor') as distributor pursuant to a
distribution agreement between the Distributor and the Funds.
29
<PAGE>
<PAGE>
SHAREHOLDER SERVICING
Rule 12b-1 promulgated under the 1940 Act (the 'Rule') provides, among
other things, that an investment company may bear expenses of distributing its
shares only pursuant to a plan adopted in accordance with the Rule. The Board of
Directors of the Institutional Series Funds has adopted a services plan with
respect to the Class T shares of the High Yield Bond Fund pursuant to the Rule
(the 'Plan'). The Board of Directors of the Institutional Series Funds has
determined that there is a reasonable likelihood that the Plan will benefit the
High Yield Bond Fund and its shareholders.
Under the Plan, the High Yield Bond Fund pays Salomon Smith Barney a
service fee, accrued daily and paid monthly, calculated at the annual rate of
..25% of the value of the average daily net assets of the Class T shares. The
service fee is used as described in the Prospectus relating to the Class T
shares of the High Yield Bond Fund ('Class T Prospectus'). Class I shares of the
High Yield Bond Fund pay no service fee. Salomon Smith Barney is authorized, to
the extent indicated in the Class T Prospectus, to retain all or a portion of
the payments made to it pursuant to the Plan and make payments to third parties
that provide certain shareholder support services to investors. The service fee
payable pursuant to the Plan is a fee payable for the administration and
servicing of shareholder accounts, as more fully described in the Class T
Prospectus, and not costs which are primarily intended to result in the sale of
the Class T shares and which would require approval pursuant to the Rule.
A quarterly report of the amounts expended under the Plan, and the purposes
for which such expenditures were incurred, will be presented to the Board of
Directors for its review. In addition, the Plan provides, that it may not be
amended to increase materially the costs which may be borne for services
pursuant to the Plan without the approval of the Board of Directors, and by the
Directors who are neither 'interested persons,' as defined in the 1940 Act, nor
have any direct or indirect financial interest in the operation of the Plan or
any related agreements, by vote cast in person at a meeting called for the
purpose of considering such amendments. The Plan, and any related agreements are
subject to annual approval by the Board by such vote cast in person at a meeting
called for the purpose of voting on the Plan. The Plan may be terminated at any
time by vote of a majority of the Directors who are not 'interested persons' and
have no direct or indirect financial interest in the operation of the Plan or in
any related agreement or by vote of a majority of the shares of the High Yield
Bond Fund's Class T shares, as the case may be.
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. Fund expenses are allocated to a particular
class of Fund shares based on either expenses identifiable to the class or the
relative net assets of the class and other classes of Fund shares.
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.
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
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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 Combined 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.
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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,
1997 and High Yield Bond Fund and Emerging Markets Debt Fund have qualified for
the fiscal period ended February 28, 1998 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; and (b) diversify its
holdings so that, at the end of each quarter of each taxable year, (i) at least
50% of the market value of a Fund's assets is represented by cash, cash items,
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 gain' (the excess of the Fund's net long-term capital
gain over net short-term capital loss), if any, that it distributes in each
taxable year to its shareholders, provided that 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 gain. 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 gain, their proportionate
shares of the undistributed amount, (ii) will be entitled to credit their
proportionate shares of the 35% tax paid by a Fund on the undistributed amount,
against their federal income tax liabilities and to claim refunds to the extent
such credits exceed their liabilities and (iii) will be entitled to increase
their tax basis, for federal income tax purposes, in their shares by an amount
equal to 65% of the amount of undistributed net capital 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 gain net income for the one year period ending, as a general rule, on
October 31 of each year; and (c) 100% of the undistributed income and gains from
the preceding calendar year (if any) pursuant to the calculations in (a) and
(b). For this purpose any income or gain retained by a Fund that is subject to
corporate tax will be considered to have been distributed by year-end.
Certain Funds may engage in hedging or derivatives transactions involving
foreign currencies, forward contracts, options and futures contracts (including
options, futures and forward contracts on foreign currencies) and short sales.
See 'Additional Information on Portfolio Instruments and Investment
Policies -- Derivatives.' Such transactions will be subject to special
provisions of the Code that, among other things, may affect the character of
gains and losses realized by a Fund (that is, may affect whether gains or losses
are ordinary or capital), accelerate recognition of income of a Fund and defer
recognition of certain of a Fund's losses. These rules could therefore affect
the character, amount and
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timing of distributions to shareholders. In addition, these provisions (1) will
require a Fund to 'mark-to-market' certain types of positions in its portfolio
(that is, treat them as if they were closed out) and (2) may cause a Fund to
recognize income or gain without receiving cash with which to pay dividends or
make distributions in amounts necessary to satisfy the distribution requirement
for RIC qualification and avoid both the corporate level tax and the 4% excise
tax. Each Fund intends to monitor its transactions, will make the appropriate
tax elections and will make the appropriate entries in its books and records
when it acquires any option, futures contract, forward contract or hedged
investment in order to mitigate the effect of these rules.
A Fund will monitor its transactions in such options and contracts and may
make certain other tax elections in order to mitigate the effect of the above
rules and to prevent disqualification of the Fund as a RIC under Subchapter M of
the Code.
A Fund may make investments that produce income that is not matched by a
corresponding cash distribution to the Fund, such as investments pay-in-kind
bonds or in obligations such as certain Brady Bonds or zero-coupon securities
having original issue discount (i.e., an amount equal to the excess of the
stated redemption price of the security at maturity over its issue price), or
market discount (i.e., an amount equal to the excess of the stated redemption
price of the security over the basis of such bond immediately after it was
acquired) if the Fund elects to accrue market discount on a current basis. In
addition, income may continue to accrue for federal income tax purposes with
respect to a non-performing investment. Any such income would be treated as
income earned by a Fund and therefore would be subject to the distribution
requirements of the Code. Because such income may not be matched by a
corresponding cash distribution to a Fund, the Fund may be required to borrow
money or dispose of other securities to be able to make distributions to its
investors. The extent to which a Fund may liquidate securities at a gain may be
limited by the short-short test discussed above. In addition, if an election is
not made to currently accrue market discount with respect to a market discount
bond, all or a portion of any deduction for any interest expense incurred to
purchase or hold such bond may be deferred until such bond is sold or otherwise
disposed.
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 a 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 Fund may be
claimed, however, by non-corporate shareholders (including certain foreign
shareholders described below) who do not itemize deductions. Shareholders that
are exempt from tax under Section 501(a) of the Code, such as pension plans,
generally will derive no benefit from this election. 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 Fund 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
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purchasing just prior to a distribution will receive a distribution which will
nevertheless be taxable to them.
Shareholders receiving a distribution in the form of additional shares will
be treated for federal income tax purposes as receiving a distribution in an
amount equal to the fair market value, determined as of the distribution date,
of the shares received and will have a cost basis in each share received equal
to the fair market value of a share of a Fund on the distribution date.
Shareholders will be notified annually as to the federal tax status of
distributions, and shareholders receiving distributions in the form of shares
will receive a report as to the fair market value of the shares received.
Gain or loss on the sale or other disposition of Fund shares will result in
capital gain or loss to shareholders. Generally, a shareholder's capital gain or
loss will be long-term gain or loss if the shares have been held for more than
one year. In general, the maximum federal income tax rate imposed on long-term
capital gain of individuals with respect to capital assets held for more than 12
months is 20%. Not later than 60 days after the close of its taxable year the
Fund will provide its shareholders with a written notice designating the amounts
of any ordinary income dividends of capital gain dividends. The maximum federal
income tax rate imposed on individuals with respect to net realized short-term
capital gain (which is taxed at ordinary income rates) will be 39.6%. With
respect to corporate taxpayers, long-term capital gain is taxed at the same
federal income tax rates as ordinary income short-term capital gain, 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. Class T Shares of the High
Yield Bond Fund were introduced on [January , 1999], and performance shown for
Class T shares for periods prior to the date of introduction reflects the
performance for the Class I shares. Accordingly, the performance information for
Class T for periods prior to the introduction of this class is based on the
historical expenses of the Class I shares and does not reflect the actual
expenses to be borne by Class T. The fees and expenses of Class T shares are
greater than those borne by Class I. In that connection, the performance
information for periods prior to the introduction of Class T shares may be used
in assessing the Fund's performance history but does not reflect how the Class T
shares would have performed prior to their introduction on a relative basis,
which would require an adjustment to the ongoing expenses.
AVERAGE ANNUAL TOTAL RETURN
A Fund's 'average annual total return' figures, as described and shown in
the Prospectus, are computed according to a formula prescribed by the SEC. The
formula can be expressed as follows:
P(1+T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = Ending Redeemable Value of a hypothetical $1,000 payment made at the
beginning of a 1-, 5-, or 10-year period at the end of such period
(or fractional portion thereof), assuming reinvestment of all dividends and
distributions.
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The performance data represents past performance; investment returns and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
The following table sets forth the average annual total return for the High
Yield Bond Fund and Emerging Markets Debt Fund for certain periods of time
ending February 28, 1998 (in each case, after management fee waiver and
reimbursement of certain expenses). Returns on these Funds would have been lower
if there were not such reimbursements and waivers.
<TABLE>
<CAPTION>
FROM MAY 15,
1996
(COMMENCEMENT OF
OPERATIONS)
THROUGH
YEAR ENDED FEBRUARY 28,
FUND FEBRUARY 28, 1998 1998
- -------------------------------------------------------------- ----------------- --------------
<S> <C> <C>
High Yield Bond Fund
(Class T Shares and Class I Shares)......................... 11.12% 14.72%
</TABLE>
<TABLE>
<CAPTION>
FROM OCTOBER
17, 1996
(COMMENCEMENT OF
OPERATIONS)
THROUGH
YEAR ENDED FEBRUARY 28,
FUND FEBRUARY 28, 1998 1998
- -------------------------------------------------------------- ----------------- ----------------
<S> <C> <C>
Emerging Markets Debt Fund.................................... 14.61% 19.50%
</TABLE>
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:
ERV-P
AGGREGATE TOTAL RETURN = --------
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 the High
Yield Bond Fund and Emerging Markets Debt Fund for certain periods of time
ending February 28, 1998 (in each case, after management fee waiver and
reimbursement of certain expenses). Returns on these Funds would have been lower
if there were not such reimbursements and waivers.
<TABLE>
<CAPTION>
MAY 15, 1996
(COMMENCEMENT OF
OPERATIONS)
THROUGH
FEBRUARY 28,
FUND 1998
- ---------------------------------------------------------------------------------- ----------------
<S> <C>
High Yield Bond Fund (Class T Shares and Class I Shares).......................... 27.91%
</TABLE>
<TABLE>
<CAPTION>
OCTOBER 17, 1996
(COMMENCEMENT OF
OPERATIONS)
THROUGH
FEBRUARY 28,
FUND 1998
- ---------------------------------------------------------------------------------- ----------------
<S> <C>
Emerging Markets Debt Fund........................................................ 27.66%
</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
35
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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, 1998, the annualized yield and
effective yield of the Money Market Fund were % and %, respectively.
In periods of declining interest rates the Money Market Fund's yield will
tend to be somewhat higher than prevailing market rates on short-term
obligations, and in periods of rising interest rates the Fund's yield will tend
to be somewhat lower. Also, when interest rates are falling, the inflow of net
new money to the Money Market Fund from the continuous sale of shares will
likely be invested in portfolio instruments producing lower yields than the
balance of the Fund's portfolio, thereby reducing the Fund's current yield. In
periods of rising interest rates, the opposite can be expected to occur.
Any quotation of performance stated in terms of yield will be given no
greater prominence than the information prescribed under SEC rules. In addition,
all advertisements containing performance data of any kind will include a legend
disclosing that such performance data represents past performance and that the
investment return and principal value of an investment will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost.
Advertisements and communications may compare a Fund's performance with
that of other mutual funds, as reported by Lipper Analytical Services, Inc. or
similar independent services or financial publications. From time to time,
advertisements and other Fund materials and communications may cite statistics
to reflect a Fund's performance over time utilizing comparisons to indices.
A Fund's performance will vary from time to time depending upon market
conditions, the composition of its portfolio and operating expenses.
Consequently, any given performance quotation should not be considered
representative of the performance of Fund shares for any specified period in the
future. Because performance will vary, it may not provide a basis for comparing
an investment in Fund shares with certain bank deposits or other investments
that pay a fixed return for a stated period of time. Investors comparing a
Fund's performance with that of other mutual funds should give consideration to
the nature, quality and maturity of the respective investment companies'
portfolio securities and market conditions. An investor's principal is not
guaranteed by any Fund.
CAPITAL STOCK
As used in the Prospectus and this Statement of Additional Information, the
term 'majority,' when referring to the approvals to be obtained from
shareholders in connection with matters affecting a particular Fund, any other
single portfolio or any particular class (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.
Shares of each Fund (and, with respect to the High Yield Bond Fund, each
class of the Fund) are entitled to such dividends and distributions out of the
assets belonging to that Fund (or class, as the case may be) as are declared in
the discretion of the applicable Board of Directors. In determining the net
asset value of each class of the High Yield Bond Fund, assets belonging to each
class are credited with a proportionate share of any general assets of the Fund
not belonging to a class and are charged with the direct liabilities in respect
of that class and with a share of the general liabilities of the Fund which are
normally allocated in proportion to the relative net asset value of each class
of the Fund at the time of allocation.
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 (or shares of each
class of a Fund, as the case
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<PAGE>
may be) 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 (or classes, as the case may be), 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 currently serves as custodian for each Fund, and commencing in June of
1998, it is expected that PNC Bank, N.A. will serve as each Fund's custodian
except for the Emerging Markets Debt Fund ('PNC' and together with IBT in such
capacity, the 'Custodian'). The Custodian, among other things: maintains a
custody account or accounts in the name each 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, the Custodian receives a
monthly fee based upon the daily average market value of securities held in
custody and also receives securities transaction charges, including
out-of-pocket expenses. 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. FDISG, a subsidiary of First Data Corporation, located
at P.O. Box 5127, Westborough, Massachusetts 01581-5127, serves as each Fund's
transfer agent. As a Fund's transfer agent, FDISG: registers and processes
transfers of the Fund's stock, processes purchase and redemption orders, acts as
dividend disbursing agent for the Fund and maintains records and handles
correspondence with respect to shareholder accounts, pursuant to a transfer
agency agreement. For these services, FDISG receives a monthly fee and is
reimbursed for out-of-pocket expenses, which with respect to the High Yield Bond
Fund, is computed and paid separately for each class.
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP ('PwC') serves as each Fund's independent
accountants. PwC 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
Prospectuses and incorporated by reference in this Statement of Additional
Information have been included or incorporated in reliance upon the report of
PwC, independent accountants, given on the authority of that firm as experts in
auditing and accounting. PwC's address is 1177 Avenue of the Americas, New York,
New York 10036.
COUNSEL
Simpson Thacher & Bartlett serves as counsel to each Fund, and is located
at 425 Lexington Avenue, New York, New York 10017-3954.
Piper & Marbury L.L.P. of Baltimore, Maryland has issued an opinion
regarding the valid issuance of shares being offered for sale pursuant to the
Funds' Prospectuses.
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<PAGE>
FINANCIAL STATEMENTS
The (i) audited financial statements for the Institutional Money Market
Fund for the fiscal year ended December 31, 1997, (ii) the audited financial
statements for the High Yield Bond Fund and the Emerging Markets Debt Fund for
the fiscal year ended February 28, 1998; (iii) the unaudited financial
statements for the Institutional Money Market Fund for the six months ended
June 30, 1998 and (iv) the unaudited financial statements for the High Yield
Bond Fund and the Emerging Markets Debt Fund for the six months ended August 31,
1998, are each incorporated by reference into this SAI. Copies of such reports
may be obtained by calling the telephone number on the first page of this SAI.
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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' Class I shares) 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 for the High Yield Bond Fund Class I shares.
Financial Statements incorporated by reference in Part B:
1. For Money Market Fund
(i) Portfolio of Investments at June 30, 1998
(ii) Statement of Assets and Liabilities at June 30, 1998
(iii) Statement of Operations for the period ended June 30, 1998
(iv) Statement of Changes in Net Assets for the period ended
June 30, 1998 and for the fiscal year ended December 31, 1997
(v) Financial Highlights for the periods ended June 30, 1998,
December 31, 1997 and December 31, 1996
(vi) Notes to Financial Statements
2. For Money Market Fund
(i) Portfolio of Investments at December 31, 1997
(ii) Statement of Assets and Liabilities at December 31, 1997
(iii) Statement of Operations for the fiscal year ended
December 31, 1997
(iv) Statement of Changes in Net Assets for the fiscal years
ended December 31, 1997 and 1996
(v) Financial Highlights
(vi) Notes to Financial Statements
(vii) Report of Independent Accountants
3. For High Yield Bond Fund and Emerging Markets Fund:
(i) Portfolio of Investments at August 31, 1998
(ii) Statement of Assets and Liabilities at August 31, 1998
(iii) Statement of Operations for the period ended August 31,
1998
(iv) Statement of Changes in Net Assets for the period ended
August 31, 1998 and for the fiscal year ended February 28, 1998
(v) Financial Highlights for the periods ended August 31, 1998,
February 28, 1998 and February 28, 1997
(vi) Notes to Financial Statements
C-1
<PAGE>
<PAGE>
4. For High Yield Bond Fund and Emerging Markets Fund:
(i) Portfolio of Investments at February 28, 1998
(ii) Statement of Assets and Liabilities at February 28, 1998
(iii) Statement of Operations for the fiscal year ended
February 28, 1998
(iv) Statement of Changes in Net Assets for the fiscal periods
ended February 28, 1998 and 1997
(v) Financial Highlights for the periods ended February 28, 1997
and 1998
(vi) Notes to Financial Statements
(vii) Report of Independent Accountants
C-2
<PAGE>
<PAGE>
(b) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ----------------------------------------------------------------------------------------------------------
<S> <C>
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).
1(b) -- Form of Articles of Amendment are filed herewith.
1(c) -- Form of Articles Supplementary are filed herewith.
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) -- Management Contract between Registrant and Salomon Brothers Asset Management Inc ('SBAM') dated
November 28, 1997 relating to the Salomon Brothers Institutional High Yield Bond Fund (filed as Exhibit
5(a) to Post-Effective Amendment No. 3 to the Registration Statement on Form N-1A and incorporated
herein by reference).
5(b) -- Management Contract between Registrant and SBAM dated November 28, 1997 relating to the Salomon
Brothers Institutional Emerging Markets Debt Fund (filed as Exhibit 5(b) to Post-Effective Amendment
No. 3 to the Registration Statement on Form N-1A and incorporated herein by reference).
6(a) -- Distribution Agreement between Registrant and CFBDS, Inc. dated September 1, 1998, is filed herewith.
6(b) -- Form of Dealer Agreement is filed herewith.
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).
9(d) -- Transfer Agency Agreement between Registrant and First Data Investor Services, Inc. is filed herewith.
10 -- 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).
10(a) -- Opinion and Consent of Counsel of Piper & Marbury L.L.P. as to the legality of the Class T shares is
filed herewith.
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 -- Form of Services Plan is filed herewith.
16 -- None.
17 -- Financial Data Schedules for Salomon Brothers Institutional High Yield Bond Fund and Salomon Brothers
Institutional Emerging Markets Debt Fund are filed herewith.
18 -- Rule 18f-3 Plan is filed herewith.
19 -- Power of Attorney is filed herewith.
</TABLE>
C-3
<PAGE>
<PAGE>
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Not Applicable.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
Not Applicable.
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 Agreement
between the Registrant and CFBDS, 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,
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, pursuant to the Investment Advisers Act of 1940, as
amended (SEC File No. 801-32046).
ITEM 29. PRINCIPAL UNDERWRITER
(a) CFBDS, Inc. acts as distributor for, in addition to the Registrant,
Salomon Brothers Capital Fund Inc, Salomon Brothers Investors Fund Inc, Salomon
Brothers Series Funds Inc, Salomon Brothers Opportunity Fund Inc and Salomon
Brothers Variable Series Funds Inc. CFBDS is also the distributor for the
following funds sponsored by Salomon Smith Barney Inc.: Concert Investment
Series, Consulting Group Capital Markets Funds, Global Horizons Investment
Series (Cayman Islands), Greenwich Street California Municipal Fund Inc.,
Greenwich Street Municipal Fund Inc., Greenwich Street Series Fund, High Income
Opportunity Fund Inc., The Italy Fund Inc., Managed High Income Portfolio Inc.,
Managed Municipals Portfolio II Inc., Managed Municipals Portfolio Inc.
Municipal High Income Fund Inc., Puerto Rico Daily Liquidity Fund Inc., Puerto
Rico Equity Index and Income Fund Inc., Smith Barney Adjustable Rate Government
Income Fund, Smith Barney Aggressive Growth Fund Inc., Smith Barney Appreciation
Fund Inc. Smith Barney Arizona Municipals Fund Inc., Smith Barney California
Municipals Fund Inc., Smith Barney Concert Allocation Series Inc., Smith Barney
Equity Funds, Smith Barney Fundamental Value Fund Inc., Smith Barney Funds Inc.,
Smith Barney Income Funds, Smith Barney Institutional Cash Management Fund,
Inc., Smith Barney Intermediate Municipal Fund, Inc., Smith Barney Investment
Funds Inc., Smith Barney Investment Trust, Smith Barney Managed Governments Fund
Inc., Smith Barney Managed Municipals Fund Inc., Smith Barney Massachusetts
Municipals Fund, Smith Barney Money Funds, Inc., Smith Barney Muni Funds, Smith
Barney Municipal Fund, Inc., Smith Barney Municipal Money Market Fund, Inc.,
Smith Barney Natural Resources Fund Inc., Smith Barney New Jersey Municipals
Fund Inc., Smith Barney Oregon Municipals Fund Inc., Smith Barney Principal
Return Fund, Smith Barney Small Cap Blend Fund, Inc., Smith Barney
Telecommunications Trust, Smith Barney Variable Account Funds, Smith Barney
World Funds, Inc., Smith Barney Worldwide Special Fund N.V. (Netherlands
Antilles), Travelers Series Fund Inc., The USA High Yield Fund N.V. (Netherlands
Antilles), Worldwide Securities Limited (Bermuda), Zenix Income Fund Inc. and
various series of unit investment trusts.
C-4
<PAGE>
<PAGE>
In addition, CFDBS is also the distributor for CitiFunds'sm' International
Growth & Income Portfolio, CitiFunds'sm' International Growth Portfolio,
CitiFunds'sm' Intermediate Income Portfolio, CitiFunds'sm' Short-Term U.S.
Government Income Portfolio, CitiFunds'sm' Large Cap Growth Portfolio,
CitiFunds'sm' Cash Reserves, CitiFunds'sm' U.S. Treasury Reserves, CitiFunds'sm'
Premium U.S. Treasury Reserves, CitiFunds'sm' Premium Liquid Reserves,
CitiFunds'sm' Tax Free Reserves, CitiFunds'sm' California Tax Free Reserves,
CitiFunds'sm' Connecticut Tax Free Reserves, CitiFunds'sm' New York Tax Free
Reserves, CitiFunds'sm' Balanced Portfolio, CitiFunds'sm' Small Cap Value
Portfolio, CitiFunds'sm' Growth & Income Portfolio, CitiFunds'sm' Small Cap
Growth Portfolio, CitiFunds'sm' National Tax Free Income Portfolio,
CitiFunds'sm' New York Tax Free Income Portfolio, CitiFunds'sm' California Tax
Free Income Portfolio, CitiSelect'r' VIP Folio 200, CitiSelect'r' VIP Folio 300,
CitiSelect'r' VIP Folio 400, CitiSelect'r' VIP Folio 500, CitiFunds'sm' Small
Cap Growth VIP Portfolio, CitiSelect'r' Folio 200, CitiSelect'r' Folio 300,
CitiSelect'r' Folio 400, and CitiSelect'r' Folio 500. CFBDS is also the
placement agent for Large Cap Value Portfolio, Small Cap Value Portfolio,
International Portfolio, Foreign Bond Portfolio, Intermediate Income Portfolio,
Short-Term Portfolio, Growth & Income Portfolio, Large Cap Growth Portfolio,
Small Cap Growth Portfolio, International Equity Portfolio, Balanced Portfolio,
Government Income Portfolio, Tax Free Reserves Portfolio, Cash Reserves
Portfolio and U.S. Treasury Reserves Portfolio.
(b) The information required by this Item 29 with respect to each director,
officer or partner of CFBDS is incorporated by reference to Schedule A of Form
BD filed by CFBDS pursuant to the Securities Exchange Act of 1934 (SEC File No.
8-32417).
(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) Investors Bank & Trust Company, 200 Clarendon Street, Boston,
Massachusetts 02116
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-5
<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 has duly caused
this Post-Effective Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York,
and State of New York, on the 24th day of November, 1998.
SALOMON BROTHERS INSTITUTIONAL SERIES
FUNDS INC (Registrant)
By /s/ HEATH B. MCLENDON
...................................
HEATH B. MCLENDON
PRESIDENT
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------------- ---------------------------------------------- ------------------
<S> <C> <C>
/s/ HEATH B. MCLENDON Director and President (Principal Executive November 24, 1998
......................................... Officer)
(HEATH B. MCLENDON)
* Director November 24, 1998
.........................................
(CHARLES F. BARBER)
* Director November 24, 1998
.........................................
(CAROL L. COLMAN)
* Director November 24, 1998
.........................................
(DANIEL P. CRONIN)
/s/ LEWIS E. DAIDONE Executive Vice President and Treasurer November 24, 1998
......................................... (Principal Financial and Accounting Officer)
(LEWIS E. DAIDONE)
*By /s/ ROBERT VEGLIANTE
.........................................
ROBERT VEGLIANTE AS
ATTORNEY-IN-FACT
NOVEMBER 24, 1998
</TABLE>
C-6
<PAGE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ------------------------------------------------------------------------------------------------------------
<S> <C>
1(b) -- Form of Articles of Amendment.
1(c) -- Form of Articles Supplementary.
6(a) -- Distribution Agreement.
6(b) -- Form of Dealer Agreement.
9(d) -- Transfer Agency Agreement between Registrant and First Data Investor Services, Inc.
10(a) -- Opinion and Consent of Counsel of Piper & Marbury L.L.P. as to the legality of the Class T shares.
11 -- Consents of Independent Accountants.
15 -- Form of Services Plan.
17 -- Financial Data Schedule for the Salomon Brothers Institutional High Yield Bond Fund and Salomon Brothers
Institutional Emerging Markets Debt Fund.
18 -- Rule 18f-3 Plan.
19 -- Power of Attorney.
</TABLE>
STATEMENT OF DIFFERENCES
The service mark symbol shall be expressed as ....................... 'sm'
The registered trademark symbol shall be expressed as................ 'r'
<PAGE>
<PAGE>
DRAFT
Exhibit 1B
SALOMON BROTHERS INSTITUTIONAL SERIES FUNDS INC
ARTICLES OF AMENDMENT
Salomon Brothers Institutional Series Funds Inc, a Maryland
corporation having its principal office in Baltimore city, Maryland (hereinafter
called "Corporation"), hereby certifies to the State Department of Assessments
and Taxation of Maryland that:
FIRST: The charter of the Corporation, as heretofore amended,
is further amended by redesignating all of the shares of the Corporation's stock
previously designated as High Yield Bond Fund shares, whether issued or
unissued, to be High Yield Bond Fund Class I shares.
SECOND: The foregoing amendments to the charter of the
Corporation were approved by a majority of the entire Board of Directors of the
Corporation; the charter amendments are limited to changes expressly permitted
by Section 2-605 of Title 2 of Subtitle 6 of the Maryland General Corporation
Law to be made without action by the stockholders, and the Corporation is
registered as an open-end company under the Investment Company Act of 1940, as
amended.
THIRD: The amendment does not change the outstanding capital
stock of the Corporation or the
aggregate par value thereof.
FOURTH: These Articles of Amendment shall become effective as
of ____ p.m. on _____________, 1998.
IN WITNESS WHEREOF, Salomon Brothers Institutional Series
Funds Inc has caused this instrument to be signed in its name and on its behalf
by its President, and attested by its Secretary, on the __ day of _____________,
1998.
<PAGE>
<PAGE>
The undersigned President acknowledges these Articles of
Amendment to be the corporate act of the Corporation and states that, to the
best of his or her knowledge, information and belief, the matters and facts set
forth therein with respect to the authorization and approval thereof are true in
all material respects and that this statement is made under the penalties of
perjury.
SALOMON BROTHERS INSTITUTIONAL SERIES FUNDS INC.
By:
---------------------------------------------
Heath B. McLendon
President
ATTEST:
- ------------------------------
Christina T. Sydor
Secretary
<PAGE>
<PAGE>
Exhibit 1C
SALOMON BROTHERS INSTITUTIONAL SERIES FUNDS INC
ARTICLES SUPPLEMENTARY
Salomon Brothers Institutional Series Funds Inc, a Maryland corporation
having its principal office in Baltimore, Maryland (hereinafter called the
"Corporation"), certifies to the State Department of Assessments and Taxation of
Maryland that:
FIRST: The Board of Directors pursuant to the authority expressly
granted by Article V of the Articles of Incorporation, as amended from time to
time (the "Charter") reclassifies a portion of the authorized but unissued High
Yield Bond Fund Class I shares of the High Yield Bond Fund so that the Fund has
two classes until further changed:
a. x shares will be High Yield Bond Fund Class T shares ("Class T
Shares") and the remaining x shares, including all shares of the High
Yield Bond Fund currently issued and outstanding shall continue to be
designated High Yield Bond Fund Class I shares ("Class I Shares").
b. All classes of capital stock of the Corporation shall represent the
same interest in the Corporation and have identical voting, dividend,
liquidation, and capital stock of that class; provided however, that
notwithstanding anything in the charter of the Corporation to the
contrary:
i. The Class T Shares shall be subject to such front-end sales
charges and/or contingent deferred sales charges as may be
established by the Board of Directors from time to time in
accordance with the Investment Company Act of 1940, as amended
(the "Investment Company Act") and applicable rules and
regulations of the National Association of Securities Dealers,
Inc. ("NASD").
ii. The High Yield Bond Fund Class I shares shall not be subject to
front-end sales charges or contingent deferred sales charges.
iii. Expenses related solely to a particular class of shares shall be
borne by that class and shall be appropriately reflected (in the
manner determined by the Board of Directors) in the net asset
value, dividends, distribution and liquidation rights of the
shares of that class.
iv. Except as may be otherwise required by law pursuant to any
applicable order, rule or regulation issued by the Securities and
Exchange Commission (the "SEC") or under Maryland law or
otherwise, the holders of stock of any class created by these
Articles Supplementary shall have respectively (i) exclusive
voting rights with respect to any matter submitted to a vote of
stockholders which affects such class (provided that
<PAGE>
<PAGE>
if it affects one or more of such classes, but less than all of
such classes, the affected classes shall together have the
exclusive vote), including without limitation, the provisions of
any distribution and/or services plan adopted by the Corporation
pursuant to Rule 12b-1 under the Investment Company Act
applicable to such class and (ii) no voting rights with respect
to the provisions of any Rule 12b-1 plan not applicable to such
class or with regard to any other matter submitted to a vote of
stockholders that does not affect the holders of such class.
v. The holders of each class of capital stock classified or
designated by these Articles Supplementary shall have such rights
to exchange their shares for stock of any other class of the
Company or class of another investment company upon such terms as
may be approved by the Board of Directors from time to time and
set forth in appropriate disclosure documents under the
applicable law, rules and regulations of the SEC and the rules of
the NASD, including but not limited to such rights to credit
holding periods of the stock exchanged with respect to the stock
received in the exchange.
SECOND: The shares aforesaid have been duly classified or reclassified
by the Corporation's Board of Directors pursuant to the authority and power
contained in the Corporation's Charter. These Articles Supplementary do not
increase the aggregate authorized capital stock of the Corporation.
THIRD: The amendment does not change the outstanding capital stock of
the Corporation or the aggregate par value thereof.
IN WITNESS WHEREOF, Salomon Brothers Institutional Series Funds Inc has
caused these Articles Supplementary to be executed by its President and
witnessed by its Secretary on this ____ day of November, 1998. The President of
the Corporation who executed these Articles Supplementary acknowledges them to
be the act of the Corporation and states under penalties of perjury that, to the
best of his knowledge, information and belief, the matters and facts set forth
herein relating to authorization and approval hereof are true in all material
respects.
SALOMON BROTHERS INSTITUTIONAL SERIES FUNDS INC
By:
--------------------------------------------
Heath B. McLendon
President
WITNESS:
- ------------------------------
Christina T. Sydor
Secretary
<PAGE>
<PAGE>
Exhibit 6(a)
SALOMON BROTHERS INSTITUTIONAL SERIES FUNDS INC
DISTRIBUTION AGREEMENT
September 1, 1998
CFBDS, Inc.
21 Milk Street
Boston, MA 02109
Dear Sirs:
This is to confirm that, in consideration of the agreements hereinafter
contained, the above-named investment company (the "Fund") has agreed that you
shall be, for the period of this Agreement, the non-exclusive principal
underwriter and distributor of shares of the Fund. For purposes of this
Agreement, the term "Shares" shall mean shares of the Fund.
1. Services as Principal Underwriter and Distributor
1.1 You will act as agent for the distribution of Shares covered
by, and in accordance with, the registration statement, prospectus and statement
of additional information then in effect under the Securities Act of 1933, as
amended (the "1933 Act"), and the Investment Company Act of 1940, as amended
(the "1940 Act"), and will transmit or cause to be transmitted promptly any
orders received by you or those with whom you have sales or servicing agreements
for purchase or redemption of Shares to the Transfer and Dividend Disbursing
Agent for the Fund of which the Fund has notified you in writing.
1.2 You agree to use your best efforts to solicit orders for the
sale of Shares. It is contemplated that you will enter into sales or servicing
agreements with registered securities brokers and banks and into servicing
agreements with financial institutions and other industry professionals, such as
investment advisers, accountants and estate planning firms. In entering into
such agreements, you will act only on your own behalf as principal underwriter
and distributor. You will not be responsible for making any distribution plan or
service fee payments pursuant to any plans the Fund may adopt or agreements it
may enter into.
1.3 You shall act as the non-exclusive principal underwriter and
distributor of Shares in compliance with all applicable laws, rules, and
regulations, including, without limitation, all rules and regulations made or
adopted from time to time by the Securities and Exchange Commission (the "SEC")
pursuant to the 1933 Act or the 1940 Act or by any securities association
registered under the Securities Exchange Act of 1934, as amended.
<PAGE>
<PAGE>
1.4 Whenever in their judgment such action is warranted for any
reason, including, without limitation, market, economic or political conditions,
the Fund's officers may decline to accept any orders for, or make any sales of,
any Shares until such time as those officers deem it advisable to accept such
orders and to make such sales and the Fund shall advise you promptly of such
determination.
2. Duties of the Fund
2.1 The Fund agrees to pay all costs and expenses in connection
with the registration of Shares under the 1933 Act, and all expenses in
connection with maintaining facilities for the issue and transfer of Shares and
for supplying information, prices and other data to be furnished by the Fund
hereunder, and all expenses in connection with the preparation and printing of
the Fund's prospectuses and statements of additional information for regulatory
purposes and for distribution to shareholders; provided however, that nothing
contained herein shall be deemed to require the Fund to pay any costs of
advertising or marketing the sale of Shares.
2.2 The Fund agrees to execute any and all documents and to
furnish any and all information and otherwise to take any other actions that may
be reasonably necessary in the discretion of the Fund's officers in connection
with the qualification of Shares for sale in such states and other U.S.
jurisdictions as the Fund may approve and designate to you from time to time,
and the Fund agrees to pay all expenses that may be incurred in connection with
such qualification. You shall pay all expenses connected with your own
qualification as a securities broker or dealer under state or Federal laws and,
except as otherwise specifically provided in this Agreement, all other expenses
incurred by you in connection with the sale of Shares as contemplated in this
Agreement.
2.3 The Fund shall furnish you from time to time, for use in
connection with the sale of Shares, such information reports with respect to the
Fund and the Shares as you may reasonably request, all of which shall be signed
by one or more of the Fund's duly authorized officers; and the Fund warrants
that the statements contained in any such reports, when so signed by the Fund's
officers, shall be true and correct. The Fund also shall furnish you upon
request with (a) the reports of the annual audits of the financial statements of
the Fund made by independent certified public accountants retained by the Fund
for such purpose; (b) semi-annual unaudited financial statements pertaining to
the Fund; (c) quarterly earnings statements prepared by the Fund; (d) a monthly
itemized list of the securities in the Fund's portfolio; (e) monthly balance
sheets as soon as practicable after the end of each month; (f) the current net
asset value and offering price per share for the Fund on each day such net asset
value is computed; and (g) from time to time such additional information
regarding the financial condition of the Fund as you may reasonably request.
3. Representations and Warranties
The Fund represents to you that all registration statements,
prospectuses and statements of additional information filed by the Fund with the
SEC under the 1933 Act and the 1940 Act with respect to the Shares have been
prepared in conformity with the requirements of said Acts and the rules and
regulations of the SEC thereunder. As used in this Agreement, the terms
"registration statement", "prospectus" and "statement of additional information"
shall mean any registration statement, prospectus and statement of additional
information filed by the Fund with
2
<PAGE>
<PAGE>
the SEC and any amendments and supplements thereto filed by the Fund with the
SEC. The Fund represents and warrants to you that any such registration
statement, prospectus and statement of additional information, when such
registration statement becomes effective and as such prospectus and statement of
additional information are amended and supplemented, includes at the time of
such effectiveness, amendment or supplement all statements required to be
contained therein in conformance with the 1933 Act, the 1940 Act and the rules
and regulations of the SEC; that all statements of material fact contained in
any registration statement, prospectus or statement of additional information
will be true and correct when such registration statement becomes effective; and
that neither any registration statement nor any prospectus or statement of
additional information when such registration statement becomes effective will
include an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading to a purchaser of the Fund's Shares. The Fund may, but shall not be
obligated to, propose from time to time such amendment or amendments to any
registration statement and such supplement or supplements to any prospectus or
statement of additional information as, in the light of future developments,
may, in the opinion of the Fund, be necessary or advisable. If the Fund shall
not propose such amendment or amendments and/or supplement or supplements within
fifteen days after receipt by the Fund of a written request from you to do so,
you may, at your option, terminate this Agreement or decline to make offers of
the Fund's Shares until such amendments are made. The Fund shall not file any
amendment to any registration statement or supplement to any prospectus or
statement of additional information without giving you reasonable notice thereof
in advance; provided, however, that nothing contained in this Agreement shall in
any way limit the Fund's right to file at any time such amendments to any
registration statement and/or supplements to any prospectus or statement of
additional information, of whatever character, as the Fund may deem advisable,
such right being in all respects absolute and unconditional.
4. Indemnification
4.1 The Fund authorizes you to use any prospectus or statement of
additional information furnished by the Fund from time to time, in connection
with the sale of Shares. The Fund agrees to indemnify, defend and hold you, your
several officers and directors, and any person who controls you within the
meaning of Section 15 of the 1933 Act, free and harmless from and against any
and all claims, demands, liabilities and expenses (including the cost of
investigating or defending such claims, demands or liabilities and any such
counsel fees incurred in connection therewith) which you, your officers and
directors, or any such controlling person, may incur under the 1933 Act or under
common law or otherwise, arising out of or based upon any untrue statement, or
alleged untrue statement, of a material fact contained in any registration
statement, any prospectus or any statement of additional information or arising
out of or based upon any omission, or alleged omission, to state a material fact
required to be stated in any registration statement, any prospectus or any
statement of additional information or necessary to make the statements in any
of them not misleading; provided, however, that the Fund's agreement to
indemnify you, your officers or directors, and any such controlling person shall
not be deemed to cover any claims, demands, liabilities or expenses arising out
of any statements or representations made by you or your representatives or
agents other than such statements and representations as are contained in any
prospectus or statement of additional information and in such financial and
other statements as are furnished to you pursuant to paragraph 2.3 of this
Agreement; and further provided that the Fund's agreement to indemnify you and
the Fund's representations and warranties herein before set forth in paragraph 3
of this Agreement shall not
3
<PAGE>
<PAGE>
be deemed to cover any liability to the Fund or its shareholders to which you
would otherwise be subject by reason of willful misfeasance, bad faith or gross
negligence in the performance of your duties, or by reason of your reckless
disregard of your obligations and duties under this Agreement. The Fund's
agreement to indemnify you, your officers and directors, and any such
controlling person, as aforesaid, is expressly conditioned upon the Fund's being
notified of any action brought against you, your officers or directors, or any
such controlling person, such notification to be given by letter or by telegram
addressed to the Fund at its principal office in New York, New York and sent to
the Fund by the person against whom such action is brought, within ten days
after the summons or other first legal process shall have been served. The
failure so to notify the Fund of any such action shall not relieve the Fund from
any liability that the Fund may have to the person against whom such action is
brought by reason of any such untrue, or alleged untrue, statement or omission,
or alleged omission, otherwise than on account of the Fund's indemnity agreement
contained in this paragraph 4.1. The Fund will be entitled to assume the defense
of any suit brought to enforce any such claim, demand or liability, but, in such
case, such defense shall be conducted by counsel of good standing chosen by the
Fund. In the event the Fund elects to assume the defense of any such suit and
retains counsel of good standing, the defendant or defendants in such suit shall
bear the fees and expenses of any additional counsel retained by any of them;
but if the Fund does not elect to assume the defense of any such suit, the Fund
will reimburse you, your officers and directors, or the controlling person or
persons named as defendant or defendants in such suit, for the reasonable fees
and expenses of any counsel retained by you or them. The Fund's indemnification
agreement contained in this paragraph 4.1 and the Fund's representations and
warranties in this Agreement shall remain operative and in full force and effect
regardless of any investigation made by or on behalf of you, your officers and
directors, or any controlling person, and shall survive the delivery of any of
the Fund's Shares. This agreement of indemnity will inure exclusively to your
benefit, to the benefit of your several officers and directors, and their
respective estates, and to the benefit of the controlling persons and their
successors. The Fund agrees to notify you promptly of the commencement of any
litigation or proceedings against the Fund or any of its officers or Board
members in connection with the issuance and sale of any of the Fund's Shares.
4.2 You agree to indemnify, defend and hold the Fund, its several
officers and Board members, and any person who controls the Fund within the
meaning of Section 15 of the 1933 Act, free and harmless from and against any
and all claims, demands, liabilities and expenses (including the costs of
investigating or defending such claims, demands or liabilities and any counsel
fees incurred in connection therewith) that the Fund, its officers or Board
members or any such controlling person may incur under the 1933 Act, or under
common law or otherwise, but only to the extent that such liability or expense
incurred by the Fund, its officers or Board members, or such controlling person
resulting from such claims or demands shall arise out of or be based upon any
untrue, or alleged untrue, statement of a material fact contained in information
furnished in writing by you to the Fund and used in the answers to any of the
items of the registration statement or in the corresponding statements made in
the prospectus or statement of additional information, or shall arise out of or
be based upon any omission, or alleged omission, to state a material fact in
connection with such information furnished in writing by you to the Fund and
required to be stated in such answers or necessary to make such information not
misleading. Your agreement to indemnify the Fund, its officers or Board members,
and any such controlling person, as aforesaid, is expressly conditioned upon
your being notified of any action brought against the Fund, its officers or
Board members, or any such controlling person, such notification to be given by
letter or telegram addressed to you at your principal office in Boston,
Massachusetts and sent to you by the person against whom such
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action is brought, within ten days after the summons or other first legal
process shall have been served. You shall have the right to control the defense
of such action, with counsel of your own choosing, satisfactory to the Fund, if
such action is based solely upon such alleged misstatement or omission on your
part or with the Fund's consent, and in any other event the Fund, its officers
or Board members or such controlling person shall each have the right to
participate in the defense or preparation of the defense of any such action with
counsel of its own choosing reasonably acceptable to you but shall not have the
right to settle any such action without your consent, which will not be
unreasonably withheld. The failure to so notify you of any such action shall not
relieve you from any liability that you may have to the Fund, its officers or
Board members, or to such controlling person by reason of any such untrue, or
alleged untrue, statement or omission, or alleged omission, otherwise than on
account of your indemnity agreement contained in this paragraph 4.2. You agree
to notify the Fund promptly of the commencement of any litigation or proceedings
against you or any of your officers or directors in connection with the issuance
and sale of any of the Fund's Shares.
5. Effectiveness of Registration
No Shares shall be offered by either you or the Fund under any of the
provisions of this Agreement and no orders for the purchase or sale of such
Shares under this Agreement shall be accepted by the Fund if and so long as the
effectiveness of the registration statement then in effect or any necessary
amendments thereto shall be suspended under any of the provisions of the 1933
Act, or if and so long as a current prospectus as required by Section 5(b) (2)
of the 1933 Act is not on file with the SEC; provided, however, that nothing
contained in this paragraph 5 shall in any way restrict or have any application
to or bearing upon the Fund's obligation to repurchase its Shares from any
shareholder in accordance with the provisions of the Fund's prospectus,
statement of additional information or charter documents, as amended from time
to time.
6. Offering Price
Shares of any class of the Fund offered for sale by you shall be offered
for sale at a price per share (the "offering price") equal to (a) their net
asset value (determined in the manner set forth in the Fund's charter documents
and the then-current prospectus and statement of additional information) plus
(b) a sales charge, if applicable, which shall be the percentage of the offering
price of such Shares as set forth in the Fund's then-current prospectus. In
addition to or in lieu of any sales charge applicable at the time of sale,
Shares of any class of the Fund offered for sale by you may be subject to a
contingent deferred sales charge as set forth in the Fund's then-current
prospectus and statement of additional information. You shall be entitled to
receive any sales charge levied at the time of sale in respect of the Shares
without remitting any portion to the Fund. Any payments to a broker or dealer
through whom you sell Shares shall be governed by a separate agreement between
you and such broker or dealer and the Fund's then-current prospectus and
statement of additional information. Any payments to any provider of services to
you shall be governed by a separate agreement between you and such service
provider.
7. Notice to You
The Fund agrees to advise you immediately in writing:
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(a) of any request by the SEC for amendments to the registration
statement, prospectus or statement of additional information then in
effect or for additional information;
(b) in the event of the issuance by the SEC of any stop order
suspending the effectiveness of the registration statement, prospectus
or statement of additional information then in effect or the initiation
of any proceeding for that purpose;
(c) of the happening of any event that makes untrue any statement
of a material fact made in the registration statement, prospectus or
statement of additional information then in effect or that requires the
making of a change in such registration statement, prospectus or
statement of additional information in order to make the statements
therein not misleading; and
(d) of all actions of the SEC with respect to any amendment to
the registration statement, or any supplement to the prospectus or
statement of additional information which may from time to time be filed
with the SEC.
8. Term of the Agreement
This Agreement shall become effective on the date hereof, shall have an
initial term of one year from the date hereof, and shall continue for successive
annual periods thereafter so long as such continuance is specifically approved
at least annually by (a) the Fund's Board or (b) by a vote of a majority (as
defined in the 1940 Act) of the Fund's outstanding voting securities, provided
that in either event the continuance is also approved by a majority of the Board
members of the Fund who are not interested persons (as defined in the 1940 Act)
of any party to this Agreement, by vote cast in person at a meeting called for
the purpose of voting on such approval. This Agreement is terminable with or
without cause, without penalty, on 60 days' notice by the Fund's Board or by
vote of holders of a majority of the Fund's outstanding voting securities, or on
90 days' notice by you. This Agreement will also terminate automatically in the
event of its assignment (as defined in the 1940 Act and the rules and
regulations thereunder).
9. Arbitration
Any claim, controversy, dispute or deadlock arising under this Agreement
(collectively, a "Dispute") shall be settled by arbitration administered under
the rules of the American Arbitration Association ("AAA") in New York, New York.
Any arbitration and award of the arbitrators, or a majority of them, shall be
final and the judgment upon the award rendered may be entered in any state or
federal court having jurisdiction. No punitive damages are to be awarded.
10. Miscellaneous
So long as you act as a principal underwriter and distributor of Shares,
you shall not perform any services for any entity other than investment
companies advised or administered by Citigroup Inc. or its subsidiaries. The
Fund recognizes that the persons employed by you to assist in the performance of
your duties under this Agreement may not devote their full time to such service
and nothing contained in this Agreement shall be deemed to limit or restrict the
persons employed by you or any of your affiliates right to engage in and devote
time and
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attention to other businesses or to render services of whatever kind or
nature, provided, however, that in conducting such business or rendering such
services your employees and affiliates would take reasonable steps to assure
that the other parties involved are put on notice as to the legal entity with
which they are dealing. This Agreement and the terms and conditions set forth
herein shall be governed by, and construed in accordance with, the laws of the
State of New York without giving effect to its conflict of interest principles.
If the foregoing is in accordance with your understanding, kindly
indicate your acceptance of this Agreement by signing and returning to us the
enclosed copy, whereupon this Agreement will become binding on you.
Very truly yours,
Salomon Brothers Institutional Series Funds Inc
By:
--------------------------------
Accepted:
CFBDS, INC.
By:
------------------------
Authorized Officer
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EXHIBIT A
Salomon Brothers Institutional High Yield Bond Fund
Salomon Brothers Institutional Emerging Markets Debt Fund
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Exhibit 6(b)
DEALER CONTRACT
CFBDS, Inc.
21 Milk Street
Boston, Massachusetts 02109
[Name of Broker-Dealer]
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Ladies and Gentlemen:
We, CFBDS, Inc. ("CFBDS"), have agreements with certain
investment companies for which Salomon Brothers Asset Management Inc serves as
investment adviser (each a "Fund") pursuant to which we act as the nonexclusive
principal underwriter and distributor for the sale of shares of capital stock
("shares") of the various series of such Funds, and as such have the right to
distribute shares for resale. Each Fund is an open-end investment company
registered under the Investment Company Act of 1940, as amended (the "1940 Act")
and the shares being offered to the public are registered under the Securities
Act of 1933, as amended (the "1933 Act"). Each series of each Fund covered by a
Distribution Agreement from time to time is referred to in this agreement as a
"Series" and collectively as the "Series." The term "Prospectus", as used
herein, refers to the prospectus and related statement of additional information
(the "Statement of Additional Information") incorporated therein by reference
(as amended or supplemented) on file with the Securities and Exchange Commission
at the time in question. As a broker in the capacity of principal underwriter
and distributor for the Series, we offer to sell to you, as a broker or dealer,
shares of each Fund upon the following terms and conditions:
1. In all sales to the public you shall act as broker dealer for your
customers or as dealer for your own account, and in no transaction shall you
have any authority to act as agent for the Funds, for us or for any other
dealer.
2. Orders received from you will be accepted through us only at the
public offering price per share (i.e. the net asset value per share plus the
applicable front-end sales charge, if any) applicable to each order, and all
orders for redemption of any shares shall be executed at the net asset value per
share less any contingent deferred sales charge, if any, in each case as set
forth in the Prospectus. Any contingent deferred sales charge amounts received
or retained by you shall be paid over by you directly to Tower Square Securities
Inc. or its designated affiliate ("TSS") in partial consideration of its payment
to you of commission amounts at the time of sale. The procedure relating to the
handling of orders shall be subject to paragraph 4 hereof and instructions which
we or the Fund shall forward from time to time to you. All orders are subject to
acceptance or rejection by the applicable Fund or us in the sole discretion of
either. The minimum initial purchase and the minimum subsequent purchase of any
shares shall be as set forth in the Prospectus pertaining to the relevant
Series.
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3. You shall not place orders for any shares unless you have already
received purchase orders for those shares at the applicable public offering
price and subject to the terms hereof. You agree that you will not offer or sell
any shares except under circumstances that will result in compliance with the
applicable Federal and state securities laws, the applicable rules and
regulations thereunder and the rules and regulations of applicable regulatory
agencies or authorities and that in connection with sales and offers to sell
shares you will furnish to each person to whom any such sale or offer is made, a
copy of the Prospectus and, upon request, the Statement of Additional
Information, and will not furnish to any person any information relating to
shares which is inconsistent in any respect with the information contained in
the Prospectus or Statement of Additional Information (as then amended or
supplemented). You shall not furnish or cause to be furnished to any person or
display or publish any information or materials relating to the shares
(including, without limitation, promotional materials and sales literature,
advertisements, press releases, announcements, statements, posters, signs or
other similar material), except such information and materials as may be
furnished to you by, or on behalf of, us or the Funds, and such other
information and materials as may be approved in writing by, or on behalf of, us
or the Funds.
4. As a broker dealer, you are hereby authorized (i) to place orders
directly with the applicable Fund or Series for shares subject to the applicable
terms and conditions governing the placement of orders by us set forth in the
Prospectus and (ii) to tender shares directly to each Fund or its agent for
redemption subject to the applicable terms and conditions governing the
redemption of shares applicable to us set forth in the Prospectus.
5. You shall not withhold placing orders received from your customers so
as to profit yourself as a result of such withholding, e.g., by a change in the
"net asset value" from that used in determining the offering price to your
customers.
6. In determining the amount of any sales concession payable to you
hereunder, we reserve the right to exclude any sales which we reasonably
determine are not made in accordance with the terms of the Prospectus and the
provisions of this Agreement. Unless at the time of transmitting an order we
advise you or the transfer agent to the contrary, the shares ordered will be
deemed to be the total holdings of the specified investor.
7. (a) You agree that payment for orders from you for the purchase of
shares will be made in accordance with the terms of the Prospectus. On or before
the business day following the settlement date of each purchase order for
shares, you shall transfer same day funds to an account designated by us with
the transfer agent in an amount equal to the public offering price on the date
of purchase of the shares being purchased less your sales concession, if any,
with respect to such purchase order determined in accordance with the
Prospectus. If payment for any purchase order is not received in accordance with
the terms of the Prospectus, we reserve the right, without notice, to cancel the
sale and to hold you responsible for any loss sustained as a result thereof.
(b) If any shares sold under the terms of this Agreement are sold
with a sales charge and are redeemed or are tendered for redemption within seven
(7) business days after confirmation of your purchase order for such shares: (i)
you shall forthwith refund to us the full sales concession received by you on
the sale; and (ii) we shall forthwith pay to the applicable Series our portion
of the sales charge on the sale which has been retained by us, if any, and shall
also pay to the applicable Series the amount refunded by you.
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(c) TSS will pay or cause to be paid to you any ongoing trail
commission and/or shareholder service fees with respect to shares of the Series
purchased through you and held by or for your customers at such rates and in
such manner as may be described in the Prospectus.
(d) Certificates evidencing shares shall be available only upon
request. Upon payment for shares in accordance with paragraph 7(a) above, the
transfer agent will issue and transmit to you or your customer a confirmation
statement evidencing the purchase of such shares. Any transaction in
uncertificated shares, including purchases, transfers, redemptions and
repurchases, shall be effected and evidenced by book-entry on the records of the
transfer agent.
8. No person is authorized to make any representations concerning shares
except those contained in the current Prospectus and Statement of Additional
Information and in printed information subsequently issued by us or the Funds as
information supplemental to the Prospectus and the Statement of Additional
Information. In purchasing or offering shares pursuant to this Agreement you
shall rely solely on the representations contained in the Prospectus, the
Statement of Additional Information and the supplemental information above
mentioned.
9. You agree to deliver to each purchaser making a purchase of shares
from or through you a copy of the Prospectus at or prior to the time of offering
or sale, and, upon request, the Statement of Additional Information. You may
instruct the transfer agent to register shares purchased in your name and
account as nominee for your customers. You agree thereafter to deliver to any
purchaser whose shares you or your nominee are holding as record holder copies
of the annual and interim reports and proxy solicitation materials and any other
information and materials relating to the Funds and prepared by or on behalf of
us, the Funds or the investment adviser, custodian, transfer agent or dividend
disbursing agent for distribution to beneficial holders of shares. The Funds
shall be responsible for the costs associated with forwarding such reports,
materials and other information and shall reimburse you in full for such costs.
You further agree to make reasonable efforts to endeavor to obtain proxies from
such purchasers whose shares you or your nominee are holding as record holder.
You further agree to obtain from each customer to whom you sell shares any
taxpayer identification number certification required under Section 3406 of the
Internal Revenue Code of 1986, as amended (the "Code"), and the regulations
promulgated thereunder, and to provide us or our designee with timely written
notice of any failure to obtain such taxpayer identification number
certification in order to enable the implementation of any required backup
withholding in accordance with Section 3406 of the Code and the regulations
thereunder. Additional copies of the Prospectus, Statement of Additional
Information, annual or interim reports, proxy solicitation materials and any
such other information and materials relating to the Funds will be supplied to
you in reasonable quantities upon request.
10. (a) In accordance with the terms of the Prospectus, a reduced sales
charge may be available to customers, depending on the amount of the investment
or proposed investment. In each case where a reduced sales charge is applicable,
you agree to furnish to the transfer agent sufficient information to permit
confirmation of qualification for a reduced sales charge, and acceptance of the
purchase order is subject to such confirmation. Reduced sales charges may be
modified or terminated at any time in the sole discretion of each Fund.
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(b) You acknowledge that certain classes of investors may be
entitled to purchase shares at net asset value without a sales charge as
provided in the Prospectus and Statement of Additional Information.
(c) You agree to advise us promptly as to the amount of any and
all sales by you qualifying for a reduced sales charge or no sales charge.
(d) Exchanges (i.e., the investment of the proceeds from the
liquidation of shares of one Series in the shares of another Series, each of
which is managed by the same or an affiliated investment adviser) shall, where
available, be made in accordance with the terms of each Prospectus.
11. We and each Fund reserve the right in our discretion, without
notice, to suspend sales or withdraw the offering of any shares entirely. Each
party hereto has the right to cancel the portions of this Agreement to which it
is party upon notice to the other parties; provided, however, that no
cancellation shall affect any party's obligations hereunder with respect to any
transactions or activities occurring prior to the effective time of
cancellation. We reserve the right to amend this Agreement in any respect
effective on notice to you.
12. We shall have full authority to take such action as we may deem
advisable in respect of all matters pertaining to the continuous offering of
shares. We shall be under no liability to you except for lack of good faith and
for obligations expressly assumed by us herein. Nothing contained in this
paragraph 12 is intended to operate as, and the provisions of this paragraph 12
shall not in any way whatsoever constitute a waiver by you of compliance with,
any provisions of the 1933 Act or of the rules and regulations of the Securities
and Exchange Commission issued thereunder.
13. You agree that: (a) you shall not effect any transactions
(including, without limitation, any purchases and redemptions) in any shares
registered in the name of, or beneficially owned by, any customer unless such
customer has granted you full right, power and authority to effect such
transactions on his behalf, (b) we shall have full authority to act upon your
express instructions to sell, repurchase or exchange shares through us on behalf
of your customers under the terms and conditions provided in the Prospectus and
(c) we, the Funds, the investment adviser, the administrator, the transfer agent
and our and their respective officers, directors or trustees, agents, employees
and affiliates shall not be liable for, and shall be fully indemnified and held
harmless by you from and against, any and all claims, demands, liabilities and
expenses (including, without limitation, reasonable attorneys' fees) which may
be incurred by us or any of the foregoing persons entitled to indemnification
from you hereunder arising out of or in connection with (i) the execution of any
transactions in shares registered in the name of, or beneficially owned by, any
customer in reliance upon any oral or written instructions believed to be
genuine and to have been given by or on behalf of you, (ii) any statements or
representations that you or your employees or representatives make concerning
the Funds that are inconsistent with the applicable Fund's Prospectus, (iii) any
written materials used by you or your employees or representatives in connection
with making offers or sales of shares that were not furnished by us, the Funds
or the investment adviser or an affiliate thereof and (iv) any sale of shares of
a Fund where the Fund or its shares were not properly registered or qualified
for sale in any state, any U.S. territory or the District of Columbia, when we
have indicated to you that the Fund or its shares were not properly registered
or qualified. The indemnification agreement contained in this Paragraph 13 shall
survive the termination of this Agreement.
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14. You represent that: (a) you are a member in good standing of the
National Association of Securities Dealers, Inc. (the "NASD"), or, if a foreign
dealer who is not eligible for membership in the NASD, that (i) you will not
make any sales of shares in, or to nationals of, the United States of America,
its territories or its possessions, and (ii) in making any sales of shares you
will comply with the NASD's Conduct Rules and (b) you are a member in good
standing of the Securities Investor Protection Corporation ("SIPC"). You agree
that you will provide us with timely written notice of any change in your NASD
or SIPC status.
15. We shall inform you as to the states or other jurisdictions in which
the Fund has advised us that shares have been qualified for sale under, or are
exempt from the requirements of, the respective securities laws of such states,
but we assume no responsibility or obligation as to your qualification to sell
shares in any jurisdiction.
16. Any claim, controversy, dispute or deadlock arising under this
agreement (collectively, a "Dispute") shall be settled by arbitration
administered under the rules of the American Arbitration Association ("AAA") in
New York, New York. Any arbitration and award of the arbitrators, or a majority
of them, shall be final and the judgment upon the award rendered may be entered
in any state or federal court having jurisdiction. No punitive damages are to be
awarded.
17. All communications to us should be sent, postage prepaid, to 21 Milk
Street, Boston, Massachusetts 02109 Attention: Philip Coolidge. Any notice to
you shall be duly given if mailed, telegraphed or telecopied to you at the
address specified by you below. Communications regarding placement of orders for
shares should be sent, postage prepaid, to First Data Investor Services Group,
Inc., P.O. Box 5128, Westborough, Massachusetts 01581-5128.
18. This Agreement shall be binding upon both parties hereto when signed
by us and accepted by you in the space provided below, and your obligations to
TSS under the second sentence of paragraph 2 hereof shall be binding on you
directly to TSS when such provisions are accepted by it in the space provided
below; provided, however, that you shall not have any obligations hereunder
other than in respect of the duties and agreements expressly undertaken and made
by you herein.
19. This Agreement and the terms and conditions set forth herein shall
be governed by, and construed in accordance with, the laws of the State of New
York.
CFBDS, INC.
By:
(Authorized Signature)
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Please return one signed copy of this Contract to:
CFBDS, Inc.
21 Milk Street
Boston, Massachusetts 02109
Attention: Philip Coolidge
Accepted:
Firm Name:
By:
Address:
Accepted By (signature):
Name (print): Title:
Date:
Accepted:
Tower Square Securities Inc.
New York, New York
By:_______________________
Title:
Date:_____________________
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TRANSFER AGENCY AND SERVICES AGREEMENT
THIS AGREEMENT, dated as of this 1st day of June, 1997 between SALOMON
BROTHERS INSTITUTIONAL SERIES FUNDS, INC. (the "Fund"), a Maryland corporation
having its principal place of business at 7 World Trade Center, 38th Floor, New
York, NY 10048 and FIRST DATA INVESTOR SERVICES GROUP, INC. ("FDISG"), a
Massachusetts corporation with principal offices at 4400 Computer Drive,
Westboro, Massachusetts 01581.
WITNESSETH
WHEREAS, the Fund is authorized to issue Shares in separate series, with
each such series representing interests in a separate portfolio of securities or
other assets.
WHEREAS, the Fund initially intends to offer Shares in those Portfolios
identified in the attached Exhibit 1, each such Portfolio, together with all
other Portfolios subsequently established by the Fund shall be subject to this
Agreement in accordance with Article 14;
WHEREAS, the Fund on behalf of the Portfolios, desires to appoint FDISG
as its transfer agent, dividend disbursing agent and agent in connection with
certain other activities and FDISG desires to accept such appointment;
NOW, THEREFORE, in consideration of the mutual covenants and promises
hereinafter set forth, the Fund and FDISG agree as follows:
Article 1 Definitions.
1.1 Whenever used in this Agreement, the following words and phrases,
unless the context otherwise requires, shall have the following meanings:
(a) "Articles of Incorporation" shall mean the Articles of
Incorporation, Declaration of Trust, or other similar organizational
document as the case may be, of the Fund as the same may be amended from
time to time.
(b) "Authorized Person" shall be deemed to include (i) any
authorized officer of the Fund; or (ii) any person, whether or not such
person is an officer or employee of the Fund, duly authorized to give
Oral Instructions or Written Instructions on behalf of the Fund as
indicated in writing to FDISG from time to time.
(c) "Board of Directors" shall mean the Board of Directors or
Board of Trustees of the Fund, as the case may be.
(d) "Commission" shall mean the Securities and Exchange
Commission.
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(e) "Custodian" refers to any custodian or subcustodian of
securities and other property which the Fund may from time to time
deposit, or cause to be deposited or held under the name or account of
such a custodian pursuant to a Custodian Agreement.
(f) "1934 Act" shall mean the Securities Exchange Act of 1934 and
the rules and regulations promulgated thereunder, all as amended from
time to time.
(g) "1940 Act" shall mean the Investment Company Act of 1940 and
the rules and regulations promulgated thereunder, all as amended from
time to time.
(h) "Oral Instructions" shall mean instructions, other than
Written Instructions, actually received by FDISG from a person
reasonably believed by FDISG to be an Authorized Person;
(i) "Portfolio" shall mean each separate series of shares offered
by the Fund representing interests in a separate portfolio of securities
and other assets;
(j) "Prospectus" shall mean the most recently dated Fund
Prospectus and Statement of Additional Information, including any
supplements thereto if any, which has become effective under the
Securities Act of 1933 and the 1940 Act.
(k) "Shares" refers collectively to such shares of capital stock
or beneficial interest, as the case may be, or class thereof, of each
respective Portfolio of the Fund as may be issued from time to time.
(l) "Shareholder" shall mean a record owner of Shares of each
respective Portfolio of the Fund.
(m) "Written Instructions" shall mean a written communication
signed by a person reasonably believed by FDISG to be an Authorized
Person and actually received by FDISG. Written Instructions shall
include manually executed originals and authorized electronic
transmissions, including telefacsimile of a manually executed original
or other process.
Article 2 Appointment of FDISG.
The Fund, on behalf of the Portfolios, hereby appoints and constitutes
FDISG as transfer agent and dividend disbursing agent for Shares of each
respective Portfolio of the Fund and as shareholder servicing agent for the Fund
and FDISG hereby accepts such appointments and agrees to perform the duties
hereinafter set forth.
Article 3 Duties of FDISG.
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3.1 FDISG shall be responsible for:
(a) Administering and/or performing the customary services of a
transfer agent; acting as service agent in connection with dividend and
distribution functions; and for performing shareholder account and
administrative agent functions in connection with the issuance, transfer
and redemption or repurchase (including coordination with the Custodian)
of Shares of each Portfolio, as more fully described in the written
schedule of Duties of FDISG annexed hereto as Schedule A and
incorporated herein, and in accordance with the terms of the Prospectus
of the Fund on behalf of the applicable Portfolio, applicable law and
the procedures established from time to time between FDISG and the Fund.
(b) Recording the issuance of Shares and maintaining pursuant to
Rule 17Ad-10(e) of the 1934 Act a record of the total number of Shares
of each Portfolio which are authorized, based upon data provided to it
by the Fund, and issued and outstanding. FDISG shall provide the Fund on
a regular basis with the total number of Shares of each Portfolio which
are authorized and issued and outstanding and shall have no obligation,
when recording the issuance of Shares, to monitor the issuance of such
Shares or to take cognizance of any laws relating to the issue or sale
of such Shares, which functions shall be the sole responsibility of the
Fund.
(c) Notwithstanding any of the foregoing provisions of this
Agreement, FDISG shall be under no duty or obligation to inquire into,
and shall not be liable for: (i) the legality of the issuance or sale of
any Shares or the sufficiency of the amount to be received therefor;
(ii) the legality of the redemption of any Shares, or the propriety of
the amount to be paid therefor; (iii) the legality of the declaration of
any dividend by the Board of Directors, or the legality of the issuance
of any Shares in payment of any dividend; or (iv) the legality of any
recapitalization or readjustment of the Shares.
3.2 In addition and to the extent required by law, the Fund shall (i)
identify to FDISG in writing those transactions and assets to be treated as
exempt from blue sky reporting for each State and (ii) verify the establishment
of transactions for each State on the system prior to activation and thereafter
monitor the daily activity for each State. The responsibility of FDISG for the
Fund's blue sky State registration status is solely limited to the initial
establishment of transactions subject to blue sky compliance by the Fund and the
reporting of such transactions to the Fund as provided above.
3.3 In addition to the duties set forth herein, FDISG shall perform such
other duties and functions, and shall be paid such amounts therefor, as may from
time to time be agreed upon in writing between the Fund and FDISG.
Article 4 Recordkeeping and Other Information.
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4.1 FDISG shall create and maintain all records required of it pursuant
to its duties hereunder and as set forth in Schedule A in accordance with all
applicable laws, rules and regulations, including records required by Section
31(a) of the 1940 Act. All records shall be available during regular business
hours for inspection and use by the Fund. Where applicable, such records shall
be maintained by FDISG for the periods and in the places required by Rule 31a-2
under the 1940 Act.
4.2 Upon reasonable notice by the Fund, FDISG shall make available
during regular business hours such of its facilities and premises employed in
connection with the performance of its duties under this Agreement for
reasonable visitation by the Fund, or any other person retained by the Fund as
may be necessary for the Fund to evaluate the quality of the services performed
by FDISG pursuant hereto.
4.3 To the extent required by Section 31 of the 1940 Act, FDISG agrees
that all such records prepared or maintained by FDISG relating to the services
to be performed by FDISG hereunder are the property of the Fund and will be
preserved, maintained and made available in accordance with such section, and
will be surrendered promptly to the Fund on and in accordance with the Fund's
request.
4.4 In case of any requests or demands for the inspection of Shareholder
records of the Fund, FDISG will notify the Fund of such request and secure
Written Instructions as to the handling of such request. FDISG reserves the
right, however, upon prior written notice to the Fund, to exhibit the
Shareholder records to any person whenever it is advised by its counsel that it
may be held liable for the failure to comply with such request.
Article 5 Fund Instructions.
5.1 FDISG will have no liability when acting upon Written or Oral
Instructions believed to have been executed or orally communicated by an
Authorized Person and will not be held to have any notice of any change of
authority of any person until receipt of a Written Instruction thereof from the
Fund. FDISG will also have no liability when processing Share certificates which
it reasonably believes to bear the proper manual or facsimile signatures of the
officers of the Fund and the proper countersignature of FDISG.
5.2 At any time, FDISG may request Written Instructions from the Fund
and may seek advice from legal counsel for the Fund, or its own legal counsel,
with respect to any matter arising in connection with this Agreement, and it
shall not be liable for any action taken or not taken or suffered by it in good
faith in accordance with such Written Instructions or in accordance with the
opinion of counsel for the Fund or for FDISG. Written Instructions requested by
FDISG will be provided by the Fund within a reasonable period of time.
5.3 FDISG, its officers, agents or employees, shall accept Oral
Instructions or Written Instructions given to them by any person representing or
acting on behalf of the Fund only if said representative is an Authorized
Person. The Fund agrees that all Oral Instructions shall be
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followed within one business day by confirming Written Instructions, and that
the Fund's failure to so confirm shall not impair in any respect FDISG's right
to rely on Oral Instructions.
Article 6 Compensation.
6.1 The Fund on behalf of each of the Portfolios will compensate FDISG
for the performance of its obligations hereunder in accordance with the fees set
forth in the written Fee Schedule annexed hereto as Schedule B and incorporated
herein.
6.2 In addition to those fees set forth in Section 6.1 above, the Fund
on behalf of each of the Portfolios (but only from the assets of the particular
Portfolio) agrees to pay, and will be billed separately for, out-of-pocket
expenses incurred by FDISG in the performance of its duties hereunder.
Out-of-pocket expenses shall include, but shall not be limited to, the items
specified in the written schedule of out-of-pocket charges annexed hereto as
Schedule C and incorporated herein. Schedule C may be modified by written
agreement between the parties. Unspecified out-of-pocket expenses shall be
limited to those out-of-pocket expenses reasonably incurred by FDISG in the
performance of its obligations hereunder.
6.3 FDISG will transmit an invoice to the Fund as soon as practicable
after the end of each calendar month which will be detailed in accordance with
Schedule A, and the Fund on behalf of each of the Portfolios agrees to pay all
fees and out-of-pocket expenses within thirty (30) days following the receipt of
the respective invoice.
6.4 Any compensation agreed to hereunder may be adjusted from time to
time by attaching to Schedule B, a revised Fee Schedule executed and dated by
the parties hereto.
Article 7 Documents.
In connection with the appointment of FDISG, the Fund shall, on or
before the date this Agreement goes into effect, but in any case within a
reasonable period of time for FDISG to prepare to perform its duties hereunder,
deliver or caused to be delivered to FDISG the documents set forth in the
written schedule of Fund Documents annexed hereto as Schedule D.
Article 8 Transfer Agent System.
8.1 FDISG shall retain title to and ownership of any and all data bases,
computer programs, screen formats, report formats, interactive design
techniques, derivative works, inventions, discoveries, patentable or
copyrightable matters, concepts, expertise, patents, copyrights, trade secrets,
and other related legal rights utilized by FDISG in connection with the services
provided by FDISG to the Fund herein (the "FDISG System").
8.2 FDISG hereby grants to the Fund a limited license to the FDISG
System for the sole and limited purpose of having FDISG provide the services
contemplated hereunder and
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nothing contained in this Agreement shall be construed or interpreted otherwise
and such license shall immediately terminate with the termination of this
Agreement.
8.3 In the event that the Fund, including any affiliate or agent of the
Fund or any third party acting on behalf of the Fund is provided with direct
access to the FDISG System for either account inquiry or to transmit transaction
information, including but not limited to maintenance, exchanges, purchases and
redemptions, such direct access capability shall be limited to direct entry to
the FDISG System by means of on-line mainframe terminal entry or PC emulation of
such mainframe terminal entry and any other non-conforming method of
transmission of information to the FDISG System is strictly prohibited without
the prior written consent of FDISG.
Article 9 Representations and Warranties.
9.1 FDISG represents and warrants to the Fund that:
(a) it is a corporation duly organized, existing and in good
standing under the laws of the Commonwealth of Massachusetts;
(b) it is empowered under applicable laws and by its Articles of
Incorporation and By-Laws to enter into and perform this Agreement;
(c) all requisite corporate proceedings have been taken to
authorize it to enter into this Agreement;
(d) it is duly registered with its appropriate regulatory agency
as a transfer agent and such registration will remain in effect for the
duration of this Agreement; and
(e) it has and will continue to have access to the necessary
facilities, equipment and personnel to perform its duties and
obligations under this Agreement.
(f) the various procedures and systems which it has implemented
with regard to safeguarding from loss or damage attributable to fire,
theft or any other cause, each Portfolio's blank checks, records and
other data and FDISG's records, data equipment facilities and other
property used in the performance of its obligations hereunder are
adequate and that it will make such changes therein from time to time as
may be reasonably necessary for the secure performance of its
obligations thereunder.
9.2 The Fund represents and warrants to FDISG that:
(a) it is duly organized, existing and in good standing under the
laws of the jurisdiction in which it is organized;
(b) it is empowered under applicable laws and by its Articles of
Incorporation and By-Laws to enter into this Agreement;
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(c) all corporate proceedings required by said Articles of
Incorporation, By-Laws and applicable laws have been taken to authorize
it to enter into this Agreement;
(d) a registration statement under the Securities Act of 1933, as
amended, and the 1940 Act on behalf of each of the Portfolios is
currently effective and will remain effective; and to the extent
required by applicable law, all appropriate state securities law filings
have been made and will continue to be made, with respect to all Shares
of the Fund being offered for sale; and
(e) all outstanding Shares are validly issued, fully paid and
non-assessable and when Shares are hereafter issued in accordance with
the terms of the Fund's Articles of Incorporation and its Prospectus
with respect to each Portfolio, such Shares shall be validly issued,
fully paid and non-assessable.
9.3 THIS IS A SERVICE AGREEMENT. EXCEPT AS EXPRESSLY PROVIDED IN THIS
AGREEMENT, FDISG DISCLAIMS ALL OTHER REPRESENTATIONS OR WARRANTIES, EXPRESS OR
IMPLIED, MADE TO THE FUND OR ANY OTHER PERSON, INCLUDING, WITHOUT LIMITATION,
ANY WARRANTIES REGARDING QUALITY, SUITABILITY, MERCHANTABILITY, FITNESS FOR A
PARTICULAR PURPOSE OR OTHERWISE (IRRESPECTIVE OF ANY COURSE OF DEALING, CUSTOM
OR USAGE OF TRADE) OF ANY SERVICES OR ANY GOODS PROVIDED INCIDENTAL TO SERVICES
PROVIDED UNDER THIS AGREEMENT. FDISG DISCLAIMS ANY WARRANTY OF TITLE OR
NON-INFRINGEMENT EXCEPT AS OTHERWISE SET FORTH IN THIS AGREEMENT.
Article 10 Indemnification.
10.1 Each party hereto (the "Indemnifying Party") will indemnify the
other party (the "Indemnified Party") against and hold it harmless from any and
all losses, claims, damages, liabilities or expenses of any sort or kind
(including reasonable counsel fees and expenses) resulting from any claim,
demand, action or suit or other proceeding (a "Claim") unless such Claim has
resulted from a negligent failure to act or omission to act or bad faith of the
Indemnified Party in the performance of its duties hereunder. In addition, FDISG
shall not be responsible for and the Fund shall indemnify and hold FDISG
harmless from and against, any Claim which may be asserted against FDISG or for
which FDISG may be held to be liable arising out of or attributable to any of
the following:
(a) any actions of FDISG required to be taken pursuant to this
Agreement unless such Claim resulted from a negligent act or omission to
act or bad faith by FDISG in the performance of its duties hereunder;
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(b) FDISG's reasonable reliance on, or reasonable use of
information, data, records and documents (including but not limited to
magnetic tapes, computer printouts, hard copies and microfilm copies)
received by FDISG from the Fund, or any authorized third party acting on
behalf of the Fund, including but not limited to the prior transfer
agent for the Fund, in the performance of FDISG's duties and obligations
hereunder;
(c) the reliance on, or the implementation of, any Written or
Oral Instructions or any other instructions or requests of the Fund on
behalf of the applicable Portfolio;
(d) the offer or sales of shares in violation of any requirement
under the securities laws or regulations of any state that such shares
be registered in such state or in violation of any stop order or other
determination or ruling by any state with respect to the offer or sale
of such shares in such state; and
(e) the Fund's refusal or failure to comply with the terms of
this Agreement, or any Claim which arises out of the Fund's negligence
or misconduct or the breach of any representation or warranty of the
Fund made herein.
10.2 In any case in which the Indemnifying Party may be asked to
indemnify or hold the Indemnified Party harmless, the Indemnified Party will
notify the Indemnifying Party promptly after identifying any situation which it
believes presents or appears likely to present a claim for indemnification
against the Indemnifying Party although the failure to do so shall not prevent
recovery by the Indemnified Party and shall keep the Indemnifying Party advised
with respect to all developments concerning such situation. The Indemnifying
Party shall have the option to defend the Indemnified Party against any Claim
which may be the subject of this indemnification, and, in the event that the
Indemnifying Party so elects, such defense shall be conducted by counsel chosen
by the Indemnifying Party and reasonably satisfactory to the Indemnified Party,
and thereupon the Indemnifying Party shall take over complete defense of the
Claim and the Indemnified Party shall sustain no further legal or other expenses
in respect of such Claim. The Indemnified Party will not confess any Claim or
make any compromise in any case in which the Indemnifying Party will be asked to
provide indemnification, except with the Indemnifying Party's prior written
consent. The obligations of the parties hereto under this Article 10 shall
survive the termination of this Agreement.
10.3 Any claim for indemnification under this Agreement must be made
prior to the earlier of:
(a) one year after the Indemnifying Party becomes aware of the
event for which indemnification is claimed; or
(b) one year after the earlier of the termination of this
Agreement or the expiration of the term of this Agreement.
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10.4 Except for remedies that cannot be waived as a matter of law (and
injunctive or provisional relief), the provisions of this Article 10 shall be
FDISG's sole and exclusive remedy for claims or other actions or proceedings to
which the Fund's indemnification obligations pursuant to this Article 10 may
apply.
10.5 Any obligation of the Fund under this Article 10 to indemnify or
reimburse FDISG in connection with any claim, cost, expense, loss, damage,
charge, payment or liability that is attributable to a particular Portfolio
shall be satisfied from the assets of the Portfolio in question and not from the
assets of any other Portfolio.
Article 11 Standard of Care.
11.1 FDISG shall at all times act in good faith and agrees to use its
best efforts within commercially reasonable limits to ensure the accuracy of all
services performed under this Agreement, but assumes no responsibility for loss
or damage to the Fund unless said errors are caused by FDISG's own negligence,
bad faith or willful misconduct or that of its employees.
11.2 Each party shall have the duty to mitigate damages for which the
other party may become responsible.
Article 12 Consequential Damages.
IN NO EVENT AND UNDER NO CIRCUMSTANCES SHALL EITHER PARTY UNDER THIS
AGREEMENT BE LIABLE TO THE OTHER PARTY FOR INDIRECT LOSS OF PROFITS, REPUTATION
OR BUSINESS OR ANY OTHER CONSEQUENTIAL OR SPECIAL DAMAGES UNDER ANY PROVISION OF
THIS AGREEMENT OR FOR ANY ACT OR FAILURE TO ACT THEREUNDER.
Article 13 Term and Termination.
13.1 This Agreement shall be effective on the date first written above
and shall continue for a period of three (3) years (the "Initial Term").
13.2 Upon the expiration of the Initial Term, this Agreement shall
automatically renew for successive terms of three (3) years ("Renewal Terms")
each, unless the Fund or FDISG provides written notice to the other of its
intent not to renew. Such notice must be received not less than ninety (90) days
prior to the expiration of the Initial Term or the then current Renewal Term.
13.3 In the event a termination notice is given by the Fund, all
expenses associated with movement of records and materials and conversion
thereof to a successor transfer agent will be borne by the Fund. FDISG will
reasonably cooperate with the Fund and any successor transfer agent or agents in
the substitution process.
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13.4 If a party hereto is guilty of a material failure to perform its
duties and obligations hereunder (a "Defaulting Party") the other party (the
"Non-Defaulting Party") may give written notice thereof to the Defaulting Party,
and if such material breach shall not have been remedied within thirty (30) days
after such written notice is given, then the Non-Defaulting Party may terminate
this Agreement by giving thirty (30) days written notice of such termination to
the Defaulting Party. In all cases, termination by the Non-Defaulting Party
shall not constitute a waiver by the Non-Defaulting Party of any rights it might
have under this Agreement or otherwise against the Defaulting Party.
Article 14 Additional Portfolios
14.1 In the event that the Fund establishes one or more Portfolios in
addition to those identified in Exhibit 1, with respect to which the Fund
desires to have FDISG render services as transfer agent under the terms hereof,
the Fund shall so notify FDISG in writing, and if FDISG agrees in writing to
provide such services, Exhibit 1 shall be amended to include such additional
Portfolios.
Article 15 Confidentiality.
15.1 The parties agree that the Proprietary Information (defined below)
and the contents of this Agreement (collectively "Confidential Information") are
confidential information of the parties and their respective licensors. The Fund
and FDISG shall exercise at least the same degree of care, but not less than
reasonable care, to safeguard the confidentiality of the Confidential
Information of the other as it would exercise to protect its own confidential
information of a similar nature. The Fund and FDISG shall not duplicate, sell or
disclose to others the Confidential Information of the other, in whole or in
part, without the prior written permission of the other party. The Fund and
FDISG may, however, disclose Confidential Information to their respective parent
corporation, their respective affiliates, their subsidiaries and affiliated
companies and employees, provided that each shall use reasonable efforts to
ensure that the Confidential Information is not duplicated or disclosed in
breach of this Agreement. The Fund and FDISG may also disclose the Confidential
Information to independent contractors, auditors, and professional advisors,
provided they first agree to be bound by the confidentiality obligations
substantially similar to this Section 15.1. Notwithstanding the previous
sentence, in no event shall either the Fund or FDISG disclose the Confidential
Information to any competitor of the other without specific, prior written
consent.
15.2 Proprietary Information means:
(a) any data or information that is competitively sensitive
material, and not generally known to the public, including, but not
limited to, information about product plans, marketing strategies,
finance, operations, customer relationships, customer profiles, sales
estimates, business plans, and internal performance results relating to
the past, present or future business activities of the Fund or FDISG,
their respective subsidiaries and affiliated companies and the
customers, clients and suppliers of any of them;
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(b) any scientific or technical information, design, process,
procedure, formula, or improvement that is commercially valuable and
secret in the sense that its confidentiality affords the Fund or FDISG a
competitive advantage over its competitors; and
(c) all confidential or proprietary concepts, documentation,
reports, data, specifications, computer software, source code, object
code, flow charts, databases, inventions, know-how, show-how and trade
secrets, whether or not patentable or copyrightable.
15.3 Confidential Information includes, without limitation, all
documents, inventions, substances, engineering and laboratory notebooks,
drawings, diagrams, specifications, bills of material, equipment, prototypes and
models, and any other tangible manifestation of the foregoing of either party
which now exist or come into the control or possession of the other. The term
"Confidential Information" does not include any information which (i) at the
time of disclosure or thereafter is generally available to the public (other
than as a result of disclosure directly or indirectly by either party in
violation hereof), (ii) is or becomes available to either party on a
nonconfidential basis from a source other than the Fund or FDISG, as the case
may be, provided that, after due inquiry, such source was not prohibited from
disclosing such information to such party by a legal, contractual or fiduciary
obligation owed to either party or (iii) either party can establish is already
in such party's possession (other than information furnished by or on behalf of
either party).
15.4 If either party becomes legally compelled (including by deposition,
interrogatory, request for documents, subpoena, civil investigative demand or
similar process) to disclose any Confidential Information, such party will
provide the other party with prompt prior written notice of such requirements so
that such other party may seek a protective order or other appropriate remedy.
If such protective order or other remedy is not obtained, each party agrees to
disclose only that portion of the Confidential Information which such party is
advised by written opinion of outside counsel is legally required to be
disclosed and to take all reasonable steps to preserve the confidentiality of
the Confidential Information (including by obtaining an appropriate protective
order or other reliable assurance that confidential treatment will be accorded
the Confidential Information). In addition, each party agrees to not oppose any
action (and will, if and to the extent requested by the other party, cooperate
with, assist and join with the other party at the other party's expense, in any
reasonable action) by the other party to obtain an appropriate protective order
or other reliable assurance that confidential treatment will be accorded the
Confidential Information.
Article 16 Force Majeure.
No party shall be liable for any default or delay in the performance of
its obligations under this Agreement if and to the extent such default or delay
is caused, directly or indirectly, by (i) fire, flood, elements of nature or
other acts of God; (ii) any outbreak or escalation of hostilities,
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war, riots or civil disorders in any country, (iii) any act or omission of any
governmental authority; (iv) any labor disputes (whether or not the employees'
demands are reasonable or within the party's power to satisfy); or (v)
nonperformance by a third party or any similar cause beyond the reasonable
control of such party, including without limitation, failures or fluctuations in
telecommunications or other equipment. In any such event, the non-performing
party shall be excused from any further performance and observance of the
obligations so affected only for as long as such circumstances prevail and such
party continues to use commercially reasonable efforts to recommence performance
or observance as soon as practicable.
Article 17 Assignment and Subcontracting.
This Agreement, its benefits and obligations shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
permitted assigns. This Agreement may not be assigned or otherwise transferred
by either party hereto, without the prior written consent of the other party,
which consent shall not be unreasonably withheld; provided, however, that FDISG
may, in its sole discretion, assign all its right, title and interest in this
Agreement to an affiliate, parent or subsidiary, or upon prior written consent
of the Fund to the purchaser of substantially all of its business. FDISG may, in
its sole discretion, engage subcontractors to perform any of the obligations
contained in this Agreement to be performed by FDISG provided that FDISG shall
remain liable hereunder for any acts or omissions of any subcontractor as if
performed by FDISG.
Article 18 Arbitration.
18.1 Any claim or controversy arising out of or relating to this
Agreement, or breach hereof, shall be settled by arbitration administered by the
American Arbitration Association in Boston, Massachusetts in accordance with its
applicable rules, except that the Federal Rules of Evidence and the Federal
Rules of Civil Procedure with respect to the discovery process shall apply.
18.2 The parties hereby agree that judgment upon the award rendered by
the arbitrator may be entered in any court having jurisdiction.
18.3 The parties acknowledge and agree that the performance of the
obligations under this Agreement necessitates the use of instrumentalities of
interstate commerce and, notwithstanding other general choice of law provisions
in this Agreement, the parties agree that the Federal Arbitration Act shall
govern and control with respect to the provisions of this Article 18.
Article 19 Notice.
Any notice or other instrument authorized or required by this Agreement
to be given in writing to the Fund or FDISG, shall be sufficiently given if
addressed to that party and received by
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it at its office set forth below or at such other place as it may from time to
time designate in writing.
To the Fund:
Salomon Brothers Institutional Series Funds
7 World Trade Center
38th Floor
New York, NY 10048
Attention:
To FDISG:
First Data Investor Services Group, Inc.
4400 Computer Drive
Westboro, Massachusetts 01581
Attention: President
with a copy to FDISG's General Counsel
Article 20 Governing Law/Venue.
The Agreement shall be governed exclusively by the laws of the State of
New York without reference to the choice of law provisions thereof. Each party
hereto hereby agrees that (i) the Supreme Court of New York sitting in New York
County shall have exclusive jurisdiction over any and all disputes arising
hereunder; (ii) hereby consents to the personal jurisdiction of such court over
the parties hereto, hereby waiving any defense of lack of personal jurisdiction;
and (iii) appoints the person to whom notices hereunder are to be sent as agent
for service of process.
Article 21 Counterparts.
This Agreement may be executed in any number of counterparts, each of
which shall be deemed to be an original; but such counterparts shall, together,
constitute only one instrument.
Article 22 Captions.
The captions of this Agreement are included for convenience of reference
only and in no way define or limit any of the provisions hereof or otherwise
affect their construction or effect.
Article 23 Publicity.
Neither FDISG nor the Fund shall release or publish news releases,
public announcements, advertising or other publicity relating to this Agreement
or to the transactions contemplated by it
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without the prior review and written approval of the other party; provided,
however, that either party may make such disclosures as are required by legal,
accounting or regulatory requirements after making reasonable efforts in the
circumstances to consult in advance with the other party.
Article 24 Relationship of Parties/Non-Solicitation.
24.1 The parties agree that they are independent contractors and not
partners or co-venturers and nothing contained herein shall be interpreted or
construed otherwise.
Article 25 Entire Agreement; Severability.
25.1 This Agreement, including Schedules, Addenda, and Exhibits hereto,
constitutes the entire Agreement between the parties with respect to the subject
matter hereof and supersedes all prior and contemporaneous proposals,
agreements, contracts, representations, and understandings, whether written or
oral, between the parties with respect to the subject matter hereof. No change,
termination, modification, or waiver of any term or condition of the Agreement
shall be valid unless in writing signed by each party. A party's waiver of a
breach of any term or condition in the Agreement shall not be deemed a waiver of
any subsequent breach of the same or another term or condition.
25.2 The parties intend every provision of this Agreement to be severable. If a
court of competent jurisdiction determines that any term or provision is illegal
or invalid for any reason, the illegality or invalidity shall not affect the
validity of the remainder of this Agreement. In such case, the parties shall in
good faith modify or substitute such provision consistent with the original
intent of the parties. Without limiting the generality of this paragraph, if a
court determines that any remedy stated in this Agreement has failed of its
essential purpose, then all other provisions of this Agreement, including the
limitations on liability and exclusion of damages, shall remain fully effective.
Article 26 Miscellaneous
Any amount owing to FDISG under Articles 6 or 10 that are attributable
to a particular Portfolio shall be paid by the Fund only from and to the extent
of the assets of that Portfolio and not from the assets of any other Portfolio.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized officers, as of the day and year first above
written.
SALOMON BROTHERS INSTITUTIONAL
SERIES FUND, INC.
By:_____________________________________
Title:__________________________________
FIRST DATA INVESTOR SERVICES GROUP, INC.
By:_____________________________________
Title:__________________________________
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Exhibit 1
LIST OF PORTFOLIOS
High Yield Bond Fund
Emerging Markets Debt Fund
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Schedule A
DUTIES OF FDISG
1. Shareholder Information. FDISG shall maintain a record of the number
of Shares held by each Shareholder of record which shall include name, address,
taxpayer identification and which shall indicate whether such Shares are held in
certificates or uncertificated form.
2. Shareholder Services. FDISG shall respond as appropriate to all
inquiries and communications from Shareholders relating to Shareholder accounts
with respect to its duties hereunder and as may be from time to time mutually
agreed upon between FDISG and the Fund. FDISG shall provide the Fund with
reports concerning shareholder inquiries and the responses therto by FDISG, in
such form and at such times as are agreed to by the Fund and FDISG.
3. Share Certificates.
(a) At the expense of the Fund, the Fund shall supply FDISG with
an adequate supply of blank share certificates to meet FDISG requirements
therefor. Such Share certificates shall be properly signed by facsimile. The
Fund agrees that, notwithstanding the death, resignation, or removal of any
officer of the Fund whose signature appears on such certificates, FDISG or its
agent may continue to countersign certificates which bear such signatures until
otherwise directed by Written Instructions.
(b) FDISG shall issue replacement Share certificates in lieu of
certificates which have been lost, stolen or destroyed, upon receipt by FDISG of
properly executed affidavits and lost certificate bonds, in form satisfactory to
FDISG, with the Fund and FDISG as obligees under the bond.
(c) FDISG shall also maintain a record of each certificate
issued, the number of Shares represented thereby and the Shareholder of record.
With respect to Shares held in open accounts or uncertificated form (i.e., no
certificate being issued with respect thereto) FDISG shall maintain comparable
records of the Shareholders thereof, including their names, addresses and
taxpayer identification. FDISG shall further maintain a stop transfer record on
lost and/or replaced certificates.
4. Mailing Communications to Shareholders; Proxy Materials. FDISG will
address and mail to Shareholders of the Fund, all reports to Shareholders,
dividend and distribution notices and proxy material for the Fund's meetings of
Shareholders. In connection with meetings of Shareholders, FDISG will prepare
Shareholder lists, mail and certify as to the mailing of proxy materials,
process and tabulate returned proxy cards, report on proxies voted prior to
meetings, act as inspector of election at meetings and certify Shares voted at
meetings.
5. Sales of Shares.
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(a) FDISG shall not be required to issue any Shares of the Fund
where it has received a Written Instruction from the Fund or official notice
from any appropriate authority that the sale of the Shares of the Fund has been
suspended or discontinued. The existence of such Written Instructions or such
official notice shall be conclusive evidence of the right of FDISG to rely on
such Written Instructions or official notice.
(b) In the event that any check or other order for the payment of
money is returned unpaid for any reason, FDISG will endeavor to: (i) give prompt
notice of such return to the Fund or its designee; (ii) place a stop transfer
order against all Shares issued as a result of such check or order; and (iii)
take such actions as FDISG may from time to time deem appropriate.
6. Transfer and Repurchase.
(a) FDISG shall process all requests to transfer or redeem Shares
in accordance with the transfer or repurchase procedures set forth in the Fund's
Prospectus.
(b) FDISG will transfer or repurchase Shares upon receipt of Oral
or Written Instructions or otherwise pursuant to the Prospectus and Share
certificates, if any, properly endorsed for transfer or redemption, accompanied
by such documents as FDISG reasonably may deem necessary.
(c) FDISG reserves the right to refuse to transfer or repurchase
Shares until it is satisfied that the endorsement on the instructions is valid
and genuine. FDISG also reserves the right to refuse to transfer or repurchase
Shares until it is satisfied that the requested transfer or repurchase is
legally authorized, and it shall incur no liability for the refusal, in good
faith, to make transfers or repurchases which FDISG, in its good judgment, deems
improper or unauthorized, or until it is reasonably satisfied that there is no
basis to any claims adverse to such transfer or repurchase.
(d) When Shares are redeemed, FDISG shall, upon receipt of the
instructions and documents in proper form, deliver to the Custodian and the Fund
or its designee a notification setting forth the number of Shares to be
repurchased. Such repurchased shares shall be reflected on appropriate accounts
maintained by FDISG reflecting outstanding Shares of the Fund and Shares
attributed to individual accounts.
(e) FDISG shall upon receipt of the monies provided to it by the
Custodian for the repurchase of Shares, pay such monies as are received from the
Custodian, all in accordance with the procedures described in the written
instruction received by FDISG from the Fund.
(f) FDISG shall not process or effect any repurchase with respect
to Shares of the Fund after receipt by FDISG or its agent of notification of the
suspension of the determination of the net asset value of the Fund.
18
<PAGE>
<PAGE>
7. Dividends.
(a) Upon the declaration of each dividend and each capital gains
distribution by the Board of Directors of the Fund with respect to Shares of the
Fund, the Fund shall furnish or cause to be furnished to FDISG Written
Instructions setting forth the date of the declaration of such dividend or
distribution, the ex-dividend date, the date of payment thereof, the record date
as of which Shareholders entitled to payment shall be determined, the amount
payable per Share to the Shareholders of record as of that date, the total
amount payable on the payment date and whether such dividend or distribution is
to be paid in Shares at net asset value.
(b) On or before the payment date specified in such resolution of
the Board of Directors, the Fund will provide FDISG with sufficient cash to make
payment to the Shareholders of record as of such payment date.
(c) If FDISG does not receive sufficient cash from the Fund to
make total dividend and/or distribution payments to all Shareholders of the Fund
as of the record date, FDISG will, upon notifying the Fund, withhold payment to
all Shareholders of record as of the record date until sufficient cash is
provided to FDISG.
8. In addition to and neither in lieu nor in contravention of the
services set forth above, FDISG shall: (i) perform all the customary services of
a transfer agent, registrar, dividend disbursing agent and agent of the dividend
reinvestment and cash purchase plan as described herein consistent with those
requirements in effect as at the date of this Agreement. The detailed
definition, frequency, limitations and associated costs (if any) set out in the
attached fee schedule, include but are not limited to: maintaining all
Shareholder accounts, preparing Shareholder meeting lists, mailing proxies,
tabulating proxies, mailing Shareholder reports to current Shareholders,
withholding taxes on U.S. resident and non-resident alien accounts where
applicable, preparing and filing U.S. Treasury Department Forms 1099 and other
appropriate forms required with respect to dividends and distributions by
federal authorities for all Shareholders.
19
<PAGE>
<PAGE>
Schedule B
FEE SCHEDULE
I. Fees:
Salomon Brothers Institutional Series Funds shall pay the Transfer Agent with
respect to each Portfolio an annualized fee of $20.93 per open account per year.
Such fees shall be billed by the transfer agent monthly in arrears on a
prorated basis of 1/12th of the annualized fee for all accounts that are
open during such month.
Closed Accounts $ 2.50 per account/year
IRA Accounts $10.00 per account/year
DCXchange'sm' Fee $15.00 per account/year
II. Annual Fee Adjustment:
The per account fees will be incrementally adjusted annually relative to
the Consumer Price Index (CPI) change plus 2 percent.
III. Programming Costs, with respect to the whole Fund if a Dedicated Team is
requested (Charges for Client Requested Enhancements)
(a) Dedicated Team:
Programmer $100,000 per annum
BSA $ 85,000 per annum
Tester $ 65,000 per annum
(b) System Enhancements (Non Dedicated Team):
Programmer $135.00 per hour
The above rates are subject to an annual 5% increase after the one year
anniversary of the effective date of this Agreement.
<PAGE>
<PAGE>
Schedule C
OUT-OF-POCKET EXPENSES
The Fund shall reimburse FDISG monthly for applicable out-of-pocket
expenses, including, but not limited to the following items:
Microfiche/microfilm production
Magnetic media tapes and freight
Printing costs, including certificates, envelopes, checks and stationery
Postage (bulk, pre-sort, ZIP+4, barcoding, first class) direct pass through
to the Fund
Due diligence mailings
Telephone and telecommunication costs, including all lease, maintenance and
line costs
Ad hoc reports
Proxy solicitations, mailings and tabulations
Daily & Distribution advice mailings
Shipping, Certified and Overnight mail and insurance
Year-end form production and mailings
Terminals, communication lines, printers and other equipment and any
expenses incurred in connection with such terminals and lines
Duplicating services
Courier services
Incoming and outgoing wire charges
Federal Reserve charges for check clearance
Overtime, as approved by the Fund
Temporary staff, as approved by the Fund
Travel and entertainment, as approved by the Fund
Record retention, retrieval and destruction costs, including, but not
limited to exit fees charged by third party record keeping vendors
Third party audit reviews
Ad hoc SQL time
Insurance
Such other miscellaneous expenses reasonably incurred by FDISG in
performing its duties and responsibilities under this Agreement.
The Fund agrees that postage and mailing expenses will be paid on the
day of or prior to mailing as agreed with FDISG. In addition, the Fund will
promptly reimburse FDISG for any other unscheduled expenses incurred by FDISG
whenever the Fund and FDISG mutually agree that such expenses are not otherwise
properly borne by FDISG as part of its duties and obligations under the
Agreement.
1
<PAGE>
<PAGE>
Schedule D
FUND DOCUMENTS
Certified copy of the Articles of Incorporation of the Fund, as amended
Certified copy of the By-laws of the Fund, as amended,
Copy of the resolution of the Board of Directors authorizing the execution
and delivery of this Agreement
Specimens of the certificates for Shares of the Fund, if applicable, in the
form approved by the Board of Directors of the Fund, with a certificate of
the Secretary of the Fund as to such approval
All account application forms and other documents relating to Shareholder
accounts or to any plan, program or service offered by the Fund
Certified list of Shareholders of the Fund with the name, address and
taxpayer identification number of each Shareholder, and the number of
Shares of the Fund held by each, certificate numbers and denominations (if
any certificates have been issued), lists of any accounts against which
stop transfer orders have been placed, together with the reasons therefore,
and the number of Shares redeemed by the Fund
All notices issued by the Fund with respect to the Shares in accordance
with and pursuant to the Articles of Incorporation or By-laws of the Fund
or as required by law.
<PAGE>
<PAGE>
PIPER & MARBURY
L.L.P.
CHARLES CENTER SOUTH WASHINGTON
36 SOUTH CHARLES STREET NEW YORK
BALTIMORE, MARYLAND 21201-3018 PHILADELPHIA
410-539-2530 EASTON
FAX: 410-539-0489
November 24, 1998
Salomon Brothers Institutional Series Funds Inc
7 World Trade Center
New York, New York 10048
Re: Registration Statement on Form N-1A
Ladies and Gentlemen:
We have acted as special Maryland counsel to Salomon Brothers Institutional
Series Funds Inc, a Maryland corporation (the "Company"), in connection with
the Company's Registration Statement on Form N-1A (the "Registration
Statement"), filed with the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended (the "Act"), and the
issuance of High Yield Bond Fund Class T shares of the Company's Common Stock,
par value of $0.001 per share (the "Shares"), pursuant to the Registration
Statement.
In this capacity, we have examined the Company's Charter, as certified by
the State Department of Assessments and Taxation of Maryland (the "SDAT"); the
Company's by-laws; the prospectus included in the Registration Statement; the
resolutions of the Board of Directors of the Company relating to the issuance of
the Shares and authorizing the filing of the Articles Supplementary creating the
Shares; the Articles Supplementary creating the Shares; a good-standing
certificate recently issued by the SDAT; a Certificate of the Secretary of the
Company dated the date hereof, upon which we have relied without independent
verification; and such other statutes, certificates, instruments and documents
relating to the Company and matters of law as we have deemed necessary to the
issuance of this opinion. In such examination, we have assumed the genuineness
of all signatures, the legal capacity of all individuals who have executed any
of the aforesaid documents, the conformity of final documents in all material
respects to the versions thereof submitted to us in draft form, the
authenticity of all documents submitted to us as originals, the conformity
with originals of all documents submitted to us as copies and
<PAGE>
<PAGE>
Piper & Marbury
L.L.P.
Salomon Brothers Institutional Series Funds Inc
November 24, 1998
Page 2
the due authorization, validity and binding effect of all such documents (other
than the authorization, execution and delivery of the documents by the Company).
Article V of the Charter of the Company permits the Board of Directors to
classify and reclassify the authorized but unissued shares of Common Stock of a
particular class or series in accordance with Maryland law. Such a charter
provision is specifically authorized by Section 2-105(a)(9) of the Corporations
and Associations Article of the Annotated Code of Maryland (the "Maryland
General Corporation Law"), which provides that a corporation may provide by its
charter "that the board of directors may classify and reclassify any unissued
stock from time to time by setting or changing the preferences, conversion or
other rights, voting powers, restrictions as to dividends, qualifications, or
terms and conditions of redemption of the stock."
The Board of Directors of the Company proposes to reclassify a portion of
the authorized but unissued High Yield Bond Fund shares of the High Yield Bond
Fund as High Yield Bond Fund Class T shares. This will be accomplished by the
Board of Directors adopting a resolution approving the reclassification and the
filing of Articles Supplementary reflecting such action, as required by
Section 2-208 of the Maryland General Corporation Law. The Articles
Supplementary will be in substantially the form set forth as Exhibit A hereto.
Based upon the foregoing, and limited in all respects to applicable
Maryland law, we are of the opinion and advise you that:
1. The Company has been duly incorporated and is validly existing as a
corporation under the laws of the State of Maryland.
2. Assuming the completion of the action of the Board of Directors
contemplated herein and the filing and acceptance for record of the Articles
Supplementary creating the Shares, the Shares to be issued by the Company have
been duly authorized and, when issued as contemplated in the Registration
Statement, will be validly issued, fully paid and nonassessable.
Simpson Thacher & Bartlett is authorized to rely upon this opinion in
rendering any opinion to the Company which is to be filed as an Exhibit to the
Registration Statement. We hereby consent to the filing of this opinion as an
Exhibit to the Registration Statement and to the reference to our firm in the
Registration Statement and the related Prospectus.
Very truly yours,
/s/ Piper & Marbury L.L.P.
<PAGE>
<PAGE>
EXHIBIT 11
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus and
Statement of Additional Information constituting parts of this Post-Effective
Amendment No. 4 to the registration statement on Form N-1A (the 'Registration
Statement') of our report dated April 20, 1998, relating to the financial
statements and financial highlights appearing in the February 28, 1998 Annual
Report of the Salomon Brothers Institutional High Yield Bond Fund and Salomon
Brothers Institutional Emerging Markets Debt Fund (constituting Salomon Brothers
Institutional Series Funds Inc), which are also incorporated by reference into
the Registration Statement. We also consent to the reference to us under the
heading 'Independent Accountants' in the Statement of Additional Information.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
November 24, 1998
<PAGE>
<PAGE>
EXHIBIT 11
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus and
Statement of Additional Information constituting parts of this Post-Effective
Amendment No. 4 to the registration statement on Form N-1A (the 'Registration
Statement') of our report dated February 23, 1998, relating to the financial
statements and financial highlights appearing in the December 31, 1997 Annual
Report of the Salomon Brothers Institutional Money Market Fund (one of the
portfolios constituting Salomon Brothers Series Funds Inc), which are also
incorporated by reference into the Registration Statement.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
November 24, 1998
<PAGE>
<PAGE>
EXHIBIT 15
SALOMON BROTHERS INSTITUTIONAL SERIES FUNDS INC
FORM OF SERVICES PLAN
This Services Plan (the "Plan") is adopted in accordance with
Rule 12b-1 (the "Rule") under the Investment Company Act of 1940, as amended
(the "1940 Act"), by Salomon Brothers High Yield Bond Fund (the "Fund"), an
investment portfolio of Salomon Brothers Institutional Series Funds Inc, a
corporation organized under the laws of the State of Maryland (the "Company"),
with respect to its Class T shares, subject to the terms and conditions set
forth herein. The Service Fee (as defined herein) payable pursuant to the Plan
is a fee payable for the administration and servicing of shareholder accounts,
as more fully described in Section 2 below, and not costs which are primarily
intended to result in the sale of the Fund's shares and which would require
approval pursuant to the Rule.
SECTION 1. PAYMENTS FOR SERVICES.
(a) Service Fee. The Fund will pay to Salomon Smith Barney
Inc, a corporation organized under the laws of the State of Delaware (the
"Administrative Broker") or the person whom it directs, on behalf of the Class T
shares of the Fund, a service fee under the Plan at the annual rate of 0.25% of
the average daily net assets of the Fund attributable to the Class T shares (the
"Service Fee"). The Service Fee shall be deemed a "service fee" as defined in
Section 26 of the Rules of Fair Practice of the National Association of
Securities Dealers, Inc.
(b) Payment of Fees. The Service Fee will be calculated daily
and paid monthly by the Fund with respect to the Class T shares at the annual
rates indicated above. The Administrative Broker may make payments to assist in
the distribution of the Class T shares of the Fund out of any portion of the
fees paid to the Administrative Broker or any of its affiliates by the Fund, its
past profits or any other sources available to it.
SECTION 2. EXPENSES COVERED BY THE PLAN.
(a) The Service Fee payable with respect to the Class T shares
of the Fund are used by the Administrative Broker for servicing shareholder
accounts, including payments to selected dealers. Such administrative and
shareholder services may include processing purchase, exchange and redemption
requests from customers and placing orders with the Fund's transfer agent;
processing dividend and distribution payments from the Fund on behalf of
customers; providing information periodically to customers showing their
positions in shares; responding to inquiries from customers concerning their
investment in shares; arranging for bank wires; and providing such other similar
services as may be reasonably requested. The Administrative Broker may retain
all or a portion of the Service Fee.
<PAGE>
<PAGE>
2
(b) The amount of the Service Fee payable by the Fund under
Section 1 hereof is not related directly to expenses incurred by the
Administrative Broker and this Section 2 does not obligate the Fund to reimburse
the Administrative Broker for such expenses. The Administrative Broker may
retain any excess of the fees it receives pursuant to this Plan over its
expenses incurred in connection with providing the services described in this
Section 2. The Service Fee set forth in Section 1 will be paid by the Fund to
the Administrative Broker unless and until the Plan is terminated or not renewed
with respect to the Fund or Class T shares thereof, and any service expenses
incurred by the Administrative Broker on behalf of the Fund in excess of
payments of the Service Fee specified in Section 1 hereof which the
Administrative Broker has accrued through the termination date are the sole
responsibility and liability of the Administrative Broker and not an obligation
of the Fund. The Administrative Broker may waive receipt of fees under the Plan
for a period of time while retaining the ability to be paid under the Plan
thereafter.
SECTION 3. INDIRECT DISTRIBUTION EXPENSE
To the extent that any payments made by the Fund to the
Administrative Broker or Salomon Brothers Asset Management Inc, in its capacity
as investment adviser to the Fund, including payment of any administrative and
other service fees or investment advisory fees, may be deemed to be indirect
payment of distribution expenses, those indirect payments shall be deemed to be
authorized by this Plan.
SECTION 4. APPROVAL BY DIRECTORS.
Neither the Plan nor any related agreements will take effect
until approved by a majority of both (a) the full Board of Directors of the
Company and (b) those Directors who are not interested persons of the Company
and who have no direct or indirect financial interest in the operation of the
Plan or in any agreements related to it (the "Independent Directors"), cast in
person at a meeting called for the purpose of voting on the Plan and the related
agreements.
SECTION 5. CONTINUANCE OF THE PLAN.
The Plan will continue in effect from year to year with
respect to the Class T shares of the Fund, so long as its continuance is
specifically approved at least annually by the vote of the Company's Board of
Directors in the manner described in Section 4 above.
SECTION 6. TERMINATION.
The Plan may be terminated with respect to the Class T shares
of the Fund at any time, without the payment of any penalty, by the vote of a
majority of the outstanding voting securities (as so defined) of the Class T
shares of the Fund or by a majority vote of the Independent Directors.
SECTION 7. AMENDMENTS.
<PAGE>
<PAGE>
3
No material amendment to the Plan may be made unless approved
by the Company's Board of Directors in the manner described in Section 4 above.
SECTION 8. SELECTION OF CERTAIN DIRECTORS.
While the Plan is in effect, the selection and nomination of
the Company's Directors who are not interested persons of the Company will be
committed to the discretion of the Directors then in office who are not
interested persons of the Company.
SECTION 9. WRITTEN REPORTS.
In each year during which the Plan remains in effect, any
person authorized to direct the disposition of monies paid or payable by the
Fund with respect to the Class T shares pursuant to the Plan or any related
agreement will prepare and furnish to the Company's Board of Directors, and the
Board will review, at least quarterly, written reports complying with the
requirements of the Rule which set out the amounts expended under the Plan and
the purposes for which those expenditures were made.
SECTION 10. PRESERVATION OF MATERIALS.
The Company will preserve copies of the Plan, any agreement
relating to the Plan and any report made pursuant to Section 9 above, for a
period of not less than six years (the first two years in an easily accessible
place) from the date of the Plan, agreement or report.
SECTION 11. MEANINGS OF CERTAIN TERMS.
As used in the Plan, the term "interested person" will be
deemed to have the same meaning that those terms have under the 1940 Act and the
rules and regulations under the 1940 Act, subject to any exemption that may be
granted to the Company under the 1940 Act by the Securities and Exchange
Commission.
SECTION 12. LIMITATION OF LIABILITY.
The Articles of Incorporation of the Company, as amended from
time to time, which is on file with the Secretary of State of Maryland, provides
that to the fullest extent permitted by Maryland law, no Director or officer of
the Fund shall be personally liable to the Fund or its stockholders for money
damages, except to the extent such exemption from liability or limitation
thereof is not permitted by the 1940 Act.
<PAGE>
<PAGE>
SECTION 13. GOVERNING LAW.
This Plan shall be governed by, and construed and interpreted
in accordance with, the law of the State of New York.
SALOMON BROTHERS INSTITUTIONAL SERIES FUNDS INC
By:
-----------------------------------
Heath B. McLendon
President
Dated: , 1998
------------------------
<PAGE>
<PAGE>
Exhibit 18
SALOMON BROTHERS INSTITUTIONAL SERIES FUNDS INC
FORM OF MULTICLASS PLAN PURSUANT TO RULE 18F-3
UNDER THE INVESTMENT COMPANY ACT OF 1940
1. Background
This plan (the "Plan") pertains to the issuance by Salomon Brothers High
Yield Bond Fund Inc (the "Fund"), an investment portfolio of Salomon Brothers
Institutional Series Funds Inc (the "Company"), of multiple classes of
capital stock and is being adopted by the Company pursuant to Rule 18f-3
under the Investment Company Act of 1940, as amended (the "1940 Act").
REFERENCE SHOULD BE MADE TO THE COMPANY'S PROSPECTUS FOR FURTHER INFORMATION
ABOUT THE COMPANY'S MULTIPLE CLASS STRUCTURE.
2. Creation of Classes.
The Company's Articles of Incorporation authorize the Fund to
issue multiple series of capital stock. Pursuant to action taken by the Board of
Directors of the Company at its November 18, 1998 meeting, the Company
authorized the establishment of an additional class of shares for the Fund,
Class T shares. On ____________________, 1999, the authorized shares of the
Fund, whether issued or unissued, were redesignated as Class I shares.
Immediately following this redesignation, _______________ shares were
reclassified as Class T shares.
3. Purchase Limits
Neither Class T shares nor Class I shares are subject to any purchase limits.
4. Sales Charges
Neither Class T shares nor Class I shares are subject to any sales charges.
5. Distribution and Service Fees
According to a plan adopted pursuant to Rule 12b-1 under the
1940 Act ("Rule 12b-1"), Class T shares are subject to a service fee. Class T
shares are not subject to a distribution fee.
Class I shares are not subject to distribution or service fees.
6. Exchange and Conversion Features
Shares of each class of the Fund are exchangeable for shares of investment
portfolios of the Company or other investment companies pursuant to terms
adopted from time to time by the Board of Directors and set forth in the
Company's registration statement.
<PAGE>
<PAGE>
2
7. Allocation of Expenses
Expenses of each class of the Fund are borne on the basis of
relative net assets. The fees identified as "class expenses" (see below) are to
be allocated to each class based on actual expenses incurred, to the extent that
such expenses can properly be so allocated. To the extent that such expenses
cannot be properly allocated, such expenses are to be borne by the classes on
the basis of relative net assets.
The following are "class expenses":
(i) transfer agent fees as identified by the transfer agent as being
attributable to a specific class;
(ii) printing and postage expenses related to preparing and
distributing to the shareholders of a specific class materials such as
shareholder reports, prospectuses and proxies;
(iii) Blue Sky registration fees incurred by a class;
(iv) SEC registration fees incurred by a class;
(v) litigation or other legal expenses relating solely to one class;
(vi) professional fees relating solely to such class;
(vii) directors' fees, including independent counsel fees, incurred as a
result of issues relating to one class; and
(viii) shareholder meeting expenses for meetings of a particular class.
8. Voting Rights
All shares of the Fund have equal voting rights and will be voted in the
aggregate, and not by class, except where voting by class is required
by law or where the matter involved affects only one class.
9. Amendments
No material amendment to this Plan may be made unless it is first approved by
a majority of both (a) the full Board of Directors of the Company and (b) those
Directors who are not interested persons of the Company, as that
term is defined in the 1940 Act.
<PAGE>
<PAGE>
EXHIBIT 19
POWER OF ATTORNEY
We, the undersigned, hereby severally constitute and appoint Heath B.
McLendon, Robert A. Vegliante and Anthony Pace, as true and lawful attorneys,
with full power to them, to sign for us, and in our hands and in the capacities
indicated below, any and all Registration Statements on Form N-1A of Salomon
Brothers Institutional Series Funds Inc and any and all amendments thereto, and
to file the same, with all exhibits thereto, with the Securities and Exchange
Commission, granting unto said attorneys, full authority and power to do and
perform each and every act and thing requisite or necessary to be done in the
premises, as fully to all intents and purposes as they might or could do in
person, hereby ratifying and confirming all that said attorneys may lawfully do
or cause to be done by virtue thereof.
WITNESS our hands as of the dates set forth below:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------------- ---------------------------------------------- ------------------
<S> <C> <C>
/s/ CHARLES F. BARBER Director November 20, 1998
.........................................
(CHARLES F. BARBER)
/s/ CAROL L. COLMAN Director November 20, 1998
.........................................
(CAROL L. COLMAN)
/s/ DANIEL P. CRONIN Director November 20, 1998
.........................................
(DANIEL P. CRONIN)
</TABLE>
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from The Salomon
Brothers Institutional Series Inc form N-SAR for the period ended August 31,
1998 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> 6-MOS
<FISCAL-YEAR-END> FEB-28-1999
<PERIOD-END> AUG-31-1998
<INVESTMENTS-AT-COST> 23,697,721
<INVESTMENTS-AT-VALUE> 21,941,125
<RECEIVABLES> 590,023
<ASSETS-OTHER> 919,374
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 23,450,522
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 34,759
<TOTAL-LIABILITIES> 34,759
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 23,852,534
<SHARES-COMMON-STOCK> 2,498,254
<SHARES-COMMON-PRIOR> 2,343,699
<ACCUMULATED-NII-CURRENT> 1,248,951
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 70,874
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (1,756,596)
<NET-ASSETS> 23,415,763
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,187,211
<OTHER-INCOME> 0
<EXPENSES-NET> 73,170
<NET-INVESTMENT-INCOME> 1,114,041
<REALIZED-GAINS-CURRENT> (40,282)
<APPREC-INCREASE-CURRENT> (1,864,698)
<NET-CHANGE-FROM-OPS> (790,939)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,382,746
<NUMBER-OF-SHARES-REDEEMED> 1,228,191
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 752,003
<ACCUMULATED-NII-PRIOR> 134,910
<ACCUMULATED-GAINS-PRIOR> 111,156
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 66,518
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 185,106
<AVERAGE-NET-ASSETS> 26,359,866
<PER-SHARE-NAV-BEGIN> 9.67
<PER-SHARE-NII> 0.44
<PER-SHARE-GAIN-APPREC> (0.74)
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 9.37
<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 August
31, 1998 qualified in its entirety by reference to such financial statements.
</LEGEND>
<SERIES>
<NUMBER> 03
<NAME> Institutional Emerging Markets Debt Fund
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> FEB-28-1999
<PERIOD-END> AUG-31-1998
<INVESTMENTS-AT-COST> 26,144,540
<INVESTMENTS-AT-VALUE> 15,223,733
<RECEIVABLES> 2,424,326
<ASSETS-OTHER> 545,754
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 18,193,813
<PAYABLE-FOR-SECURITIES> 471,344
<SENIOR-LONG-TERM-DEBT> 0
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<PAGE>
