<PAGE>
<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 30, 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. 3 [x]
AND/OR
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940 [x]
AMENDMENT NO. 4 [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)
[x] on May 1, 1998 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
[ ] 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>
Salomon Brothers
Institutional
Investment Series
Prospectus
MAY 1, 1998
Money Market Fund
High Yield Bond Fund
Emerging Markets Debt Fund
Salomon Brothers Asset Management
<PAGE>
<PAGE>
Salomon Brothers
Institutional Investment Series
-------------------------------------
7 WORLD TRADE CENTER NEW YORK, NEW YORK 10048 (800) 446-1013
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 HIGH YIELD
BOND FUND AND THE EMERGING MARKETS DEBT FUND IS A NO-LOAD INVESTMENT PORTFOLIO
OF SALOMON BROTHERS INSTITUTIONAL SERIES FUNDS INC ('INSTITUTIONAL SERIES
FUNDS'). THE MONEY MARKET FUND IS A NO-LOAD INVESTMENT PORTFOLIO OF SALOMON
BROTHERS SERIES FUNDS INC ('SERIES FUNDS'). INSTITUTIONAL SERIES FUNDS AND
SERIES FUNDS ARE INDIVIDUALLY, THE 'COMPANY,' AND COLLECTIVELY, THE 'COMPANIES.'
The MONEY MARKET FUND seeks as high a level of current income as is consistent
with liquidity and the stability of principal. The Fund seeks to achieve its
objective by investing in high-quality, short-term U.S. dollar denominated money
market instruments, and seeks to maintain a stable net asset value of $1.00 per
share. THERE IS NO ASSURANCE THAT THE MONEY MARKET FUND WILL MAINTAIN A STABLE
NET ASSET VALUE OF $1.00 PER SHARE. SHARES OF THE MONEY MARKET FUND ARE NEITHER
GUARANTEED NOR INSURED BY THE U.S. GOVERNMENT.
The HIGH YIELD BOND FUND seeks to maximize total return. The Fund seeks to
achieve its objective by investing primarily in a portfolio of high yield
fixed-income securities that offer a yield above that generally available on
debt securities in the four highest rating categories of the recognized rating
services.
The EMERGING MARKETS DEBT FUND seeks to maximize total return. The Fund seeks to
achieve its objective by investing at least 65% of its total assets in debt
securities of government, government related and corporate issuers located in
emerging market countries, and of entities organized to restructure outstanding
debt of such issuers.
------------------------------------------------------------------
THERE CAN BE NO ASSURANCE THAT ANY FUND WILL ACHIEVE ITS INVESTMENT OBJECTIVE
AND EACH OF THE FUNDS MAY EMPLOY CERTAIN INVESTMENT PRACTICES WHICH INVOLVE
SPECIAL RISK CONSIDERATIONS. THE HIGH YIELD BOND FUND AND THE EMERGING MARKETS
DEBT FUND MAY INVEST UP TO 100% OF THEIR 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 May 1, 1998 has been
filed with the Securities and Exchange Commission (the 'SEC') and is
incorporated herein by reference. It is available without charge and can be
obtained by writing to the Funds at the address, or by calling the toll-free
telephone number, listed above. 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
SALOMON BROTHERS INC -- DISTRIBUTOR
PROSPECTUS
MAY 1, 1998
Page 1
<PAGE>
<PAGE>
Table of Contents
- ----------------------------------------------
<TABLE>
<S> <C>
Fee Table 3
Summary 3
Financial Highlights 4
Performance Information 7
Investment Objective and Policies 8
Additional Investment Activities and Risk Factors 17
Investment Limitations 27
Purchase and Redemption of Shares 28
Management 32
Dividends, Distributions and Taxes 35
Account Services 38
Capital Stock 38
Appendix A:
Description of Ratings A-1
</TABLE>
Page 2
<PAGE>
<PAGE>
Fee Table
-------------------------------------
Information in the table below is given as a percentage of average daily net
assets and is based on each Fund's operating expenses for the most recent
fiscal year. Shares of each Fund are sold without imposition by the Fund of any
front-end sales charge, contingent deferred sales charge or any other
transaction fee. Under certain circumstances, certain broker/dealers may impose
transaction fees on the purchase and/or sale of Fund shares. See 'Purchase and
Redemption of Shares.'
<TABLE>
<CAPTION>
MONEY EMERGING
MARKET HIGH YIELD MARKETS
ANNUAL FUND OPERATING EXPENSES FUND* BOND FUND* DEBT FUND*
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
(as a % of average net assets):
Management Fee (after waiver) .18% -- --
Other Expenses (after reimbursement) .00% .55% .75%
-- -- --
Total Fund Operating Expenses (after waiver and reimbursement) .18% .55% .75%
-- -- --
-- -- --
- ---------------------------------------------------------------------------------------------------------------------
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 each Fund. The example assumes payment by each 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>
- -------------------------------------------------------------------------------------
Money Market Fund $2 $6 $10 $23
High Yield Bond Fund $6 $18 $31 $69
Emerging Markets Debt Fund $8 $24 $42 $93
</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 Money Market Fund's fiscal year ended
December 31, 1997 and the other Funds' fiscal year ended February 28, 1998.
Absent such waiver and reimbursement, Management Fee, Other Expenses and
Total Fund Operating Expenses would have been .20%, .21% and .41%,
respectively for the Money Market Fund; .50%, 3.53% and 4.03%, respectively
for the High Yield Bond Fund, and .70%, 2.64% and 3.34%, respectively for
the Emerging Markets Debt Fund. SBAM has voluntarily agreed to reduce or
otherwise limit Total Fund Operating Expenses of the Money Market Fund
(exclusive of taxes, interest and extraordinary expenses such as litigation
and indemnification expenses), on an annualized basis, to .18% of the
Fund's average daily net assets for a period of at least one year from
the date of this Prospectus, and no more than .25% thereafter.
The purpose of the foregoing table is to assist an investor in understanding
the various costs and expenses that an investor in a Fund will incur either
directly or indirectly. 'Other Expenses' include administrative fees, custodial
fees, legal and accounting fees, printing costs and registration fees. THE
EXAMPLE ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES AND ACTUAL EXPENSES FOR ANY OF THE FUNDS MAY BE HIGHER OR LOWER THAN
THE AMOUNTS SHOWN. Moreover, while the example assumes a 5% annual return, each
Fund's performance will vary and may result in a return greater or less than
5%. For more complete descriptions of the various costs and expenses borne by
the Funds, see 'Management' in this Prospectus and the Statement of Additional
Information.
Summary
-------------------------------------
THE FUNDS
Each of the Funds, except the Money Market Fund, is a no-load investment
portfolio of Salomon Brothers Institutional Series Funds Inc, an open-end
investment company incorporated in Maryland on January 19, 1996. The High Yield
Bond Fund is organized as a diversified series and the Emerging Markets Debt
Fund is organized as a non-diversified series of the Institutional Series
Funds. The
Page 3
<PAGE>
<PAGE>
Money Market Fund is organized as a no-load, diversified investment series of
Salomon Brothers Series Funds Inc, an open-end investment company incorporated
in Maryland on April 17, 1990.
The MONEY MARKET FUND seeks as high a level of current income as is consistent
with liquidity and the stability of principal. The Fund seeks to achieve its
objective by investing in high-quality, short-term U.S. dollar denominated
money market instruments, and seeks to maintain a stable net asset value of
$1.00 per share. THERE IS NO ASSURANCE THAT THE FUND WILL MAINTAIN A STABLE NET
ASSET VALUE OF $1.00 PER SHARE. SHARES OF THE FUND ARE NEITHER GUARANTEED NOR
INSURED BY THE U.S. GOVERNMENT.
The HIGH YIELD BOND FUND seeks to maximize total return. The Fund seeks to
achieve its objective by investing primarily in a portfolio of high yield
fixed-income securities that offer a yield above that generally available on
debt securities in the four highest rating categories of the recognized rating
services.
The EMERGING MARKETS DEBT FUND seeks to maximize total return. The Fund seeks
to achieve its objective by investing at least 65% of its total assets in debt
securities of government, government related and corporate issuers located in
emerging market countries, and of entities organized to restructure outstanding
debt of such issuers.
There can be no assurance that any Fund will achieve its investment objective.
PURCHASE AND REDEMPTION OF SHARES
The minimum initial investment in the Money Market Fund is $250,000 and the
minimum initial investment in the other Funds is $1,000,000. Each Fund may
waive minimum investment requirements at its discretion. There is no subsequent
investment minimum in any Fund. Each Fund reserves the right to reject any
purchase order. See 'Purchase and Redemption of Shares.'
MANAGEMENT SERVICES
Salomon Brothers Asset Management Inc ('SBAM') serves as each Fund's investment
manager. See 'Management.'
DISTRIBUTOR
Salomon Brothers Inc ('Salomon Brothers') serves as each Fund's distributor.
RISK FACTORS
Prospective investors should consider certain risks associated with an
investment in each Fund.
The medium and low rated and comparable unrated securities in which the High
Yield Bond Fund and the Emerging Markets Debt Fund will invest (commonly
referred to as 'junk bonds') involve significantly greater risks than higher
rated securities, including price volatility and risk of default in payment of
interest and principal. A Fund's investments in securities of emerging market
countries involves certain considerations not typically associated with
investing in securities of U.S. issuers, including restrictions on foreign
investment and on repatriation of capital, currency fluctuations, price
volatility and lesser liquidity or lack of a secondary trading market, and
political and economic risks, including the risk of nationalization or
expropriation of assets. Additionally, a 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.'
Financial Highlights
- ----------------------------------------------
The following data per share of capital stock outstanding throughout each
period and ratios should be read in conjunction with the financial statements
included in the Statement of Additional Information. The financial statements
and financial highlights of the Money Market Fund for the period from
Page 4
<PAGE>
<PAGE>
December 7, 1990 (commencement of operations) through December 31, 1990 and for
each of the years in the period ended December 31, 1997, and the financial
statements and financial highlights of the High Yield Bond Fund for the period
May 15, 1996 (commencement of operations) to February 28, 1997, and for the
fiscal year ended February 28, 1998, and for the Emerging Markets Debt Fund for
the period October 17, 1996 (commencement of operations) to February 28, 1997
and for the fiscal year ended February 28, 1998, have been audited by Price
Waterhouse LLP, whose unqualified reports thereon are included in the Statement
of Additional Information.
<TABLE>
<CAPTION>
MONEY MARKET FUND
YEAR ENDED DECEMBER 31, PERIOD ENDED
--------------------------------------------------------------------------- DECEMBER 31,
1997 1996(A) 1995 1994 1993 1992 1991 1990**
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
-------- -------- ------- ------- ------- ------- ------- ------------
Net investment income 0.055 0.050 0.049 0.036 0.028 0.034 0.054 0.005
Dividends from net investment income (0.055) (0.050) (0.049) (0.036) (0.028) (0.034) (0.054) (0.005)
-------- -------- ------- ------- ------- ------- ------- ------------
Net asset value, end of period $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
-------- -------- ------- ------- ------- ------- ------- ------------
-------- -------- ------- ------- ------- ------- ------- ------------
Net assets, end of period (thousands) $133,012 $159,651 $11,425 $27,667 $34,120 $50,554 $35,414 $ 4,596
Total investment return +5.6% +5.1% +5.0% +3.6% +2.9% +3.4% +5.5% +0.5%
Ratios to average net assets:
Expenses 0.18% 0.20% 0.65% 0.45% 0.35% 0.44% 0.54% 0.74%'D'
Net investment income 5.48% 5.29% 4.89% 3.53% 2.83% 3.42% 5.23% 6.45%'D'
Before waiver of managment fee;
expenses absorbed by SBAM and
credits earned on custodian cash
balances, net investment income per
share and expense ratios would have
been:
Net investment income per share $ 0.052 $ 0.048 $ 0.049 -- -- -- $ 0.052 $ 0.004
Expense ratios 0.41% 0.46% 0.70% -- -- -- 0.64% 1.72%
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The Fund changed its name and objective on April 29, 1996. Prior to April
29, 1996, the Fund was called the Salomon Brothers U.S. Treasury
Securities Money Market Fund and invested principally in United States
Treasury bonds, notes and bills.
** December 7, 1990, commencement of operations, through December 31, 1990.
'D' Annualized.
Page 5
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
HIGH YIELD BOND FUND EMERGING MARKETS DEBT FUND
------------------------------------------------ ------------------------------------------------
FOR THE FOR THE FOR THE
YEAR ENDED PERIOD ENDED YEAR ENDED FOR THE PERIOD ENDED
FEBRUARY 28, 1998 FEBRUARY 28, 1997(a) FEBRUARY 28, 1998 FEBRUARY 28, 1997(b)
--------------------- ------------------------- --------------------- -------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of
period...................... $ 11.13 $ 10.00 $ 10.91 $ 10.00
------ ------ ------ ------
Net investment income..... 1.51 0.57 1.69 0.35
Net gain on investments
(both realized and
unrealized)............. (0.34) 0.93 (0.27) 0.78
------ ------ ------ ------
Total from investment
operations.......... 1.17 1.50 1.42 1.13
------ ------ ------ ------
Dividends from net
investment income....... (1.66) (0.36) (1.77) (0.20)
Distributions from net
realized gain on
investments............. (0.97) (0.01) (3.35) (0.02)
------ ------ ------ ------
Total dividends and
distributions....... (2.63) (0.37) (5.12) (0.22)
------ ------ ------ ------
Net asset value, end of
period...................... $ 9.67 $ 11.13 $ 7.21 $ 10.91
------ ------ ------ ------
------ ------ ------ ------
Net assets, end of period
(thousands)................. $ 22,664 $ 6,575 $ 14,596 $ 6,211
Total return*................. +11.1% +15.1% +14.6% +11.4%
Ratios to average net assets:
Expenses.................. 0.55% 0.55%** 0.75% 0.75%**
Net investment income..... 9.10% 9.36%** 8.53% 8.94%**
Portfolio turnover rate....... 189% 151% 549% 136%
Before applicable waiver of
management fee, expenses
absorbed by SBAM and credits
earned from and fees waived
by the custodian, net
investment income per share
and expense ratios would
have been:
Net investment income per
share................... $0.93 $0.29 $1.18 $0.08
Expense ratio............. 4.03% 5.22%** 3.34% 7.57%**
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The High Yield Bond Fund's commencement of investment operations was May
15, 1996.
(b) The Emerging Markets Debt Fund's commencement of investment operations was
October 17, 1996.
* Total return is calculated assuming a $1,000 investment on the first day of
each period reported, reinvestment of all dividends at the net asset value
on the ex-dividend date, and a sale at net asset value on the last day of
each period reported. Total return calculated for a period of less than one
year is not annualized.
** Annualized.
Page 6
<PAGE>
<PAGE>
Performance Information
-------------------------------------
From time to time, a Fund may advertise its 'yield,' 'effective yield,'
'distribution rate' and / or standardized and nonstandardized 'average annual
total return' over various periods of time. Total return figures show the
average annual percentage change in value of an investment in a Fund from the
beginning date of the measuring period to the end of the measuring period.
These figures reflect changes in the price of the shares and assume that any
income dividends and / or capital gains distributions made by a Fund during the
period were reinvested in shares of the same Fund.
Standardized total return is calculated in accordance with the SEC's formula.
Nonstandardized total return differs from the standardized total return only in
that it may relate to a nonstandard period or is presented in the aggregate
rather than as an annual average.
Total return figures will be given for the most current one-, five- and
ten-year periods, or the life of a Fund to the extent it has not been in
existence for any such periods, and may be given for other periods as well,
such as on a year-by-year basis. When considering average total return figures
for periods longer than one year, it is important to note that the total return
for any one year in the period might have been greater or less than the average
for the entire period. 'Aggregate total return' figures may be used for various
periods, representing the cumulative change in value of an investment in Fund
shares for the specific period (again reflecting changes in share prices and
assuming reinvestment of dividends and distributions). Aggregate total return
may be shown by means of schedules, charts or graphs and may indicate subtotals
of the various components of total return (i.e., change in the value of initial
investment, income dividends and capital gains distributions).
Yield is calculated in accordance with the SEC's formula. Yield differs from
total return in that it does not consider changes in net asset value.
From time to time, the Money Market Fund may make available information as to
its 'yield' and 'effective yield.' Both yield figures are based on historical
earnings and are not intended to indicate future performance. The 'yield' of
the Money Market Fund refers to income generated by an investment in the Fund
over a seven-day period, which period will be stated in the advertisement. This
income is then 'annualized.' That is, the amount of income generated by the
investment during that week is assumed to be generated each week over a 52-week
period and is shown as a percentage of the investment. The 'effective yield' is
calculated similarly but, when annualized, the income earned by an investment
in the Fund is assumed to be reinvested. The effective yield will be slightly
higher than the yield because of the compounding effect of this assumed
reinvestment.
Distribution rate differs from yield in that it is calculated by dividing the
annualization of the most recent month's distribution by the maximum offering
price at the end of the month.
Furthermore, in reports or other communications to shareholders or in
advertising materials, performance of Fund shares may be compared with that of
other mutual funds or classes of shares of other mutual funds, as listed in the
rankings prepared by Lipper Analytical Services, Inc. or similar independent
services that monitor the performance of mutual funds, financial indices such
as the S&P 500 Index or other industry or financial publications including, but
not limited to, Bank Rate Monitor, Barron's, Business Week, CDA Investment
Technologies, Inc., Changing Times, Forbes, Fortune, ICB / Donoghue's Money
Fund Report, Institutional Investor, Investors Daily, Money, Morningstar Mutual
Fund Values, The New York Times, USA Today and The Wall Street Journal. The
yield of the Money Market Fund may also be compared to yields set forth in the
weekly statistical release H.15(519) or the monthly statistical release
designated G.13(415) published by the Board of Governors of the Federal Reserve
System. The annual report to shareholders of the Money Market Fund for the
fiscal year ended December 31, 1997 and the annual report to shareholders of
the High Yield Bond Fund and Emerging Markets Debt Fund for the fiscal year
ended February 28, 1998, containing additional performance information is
available without charge and can be obtained by writing or
Page 7
<PAGE>
<PAGE>
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 each Fund is deemed to be a fundamental policy and
may not be changed without the affirmative vote of the holders of a majority of
its outstanding shares, as defined in the Investment Company Act of 1940, as
amended (the '1940 Act'). There can be no assurance that any Fund will achieve
its investment objective.
MONEY MARKET FUND
The investment objective of the Money Market Fund is to seek as high a level of
current income as is consistent with liquidity and the stability of principal.
The Fund invests in high-quality, short-term U.S. dollar-denominated money
market instruments which mature in 397 days or less, with an average portfolio
maturity of all portfolio instruments (on a dollar-weighted basis) of not more
than 90 days. The Fund is classified as 'diversified' under the 1940 Act, and
seeks to maintain a stable net asset value of $1.00 per share.
The instruments in which the Money Market Fund may invest include, but are not
limited to:
-- Securities issued or guaranteed by the U.S. government or by agencies or
instrumentalities thereof;
-- Obligations issued or guaranteed by U.S. and foreign banks ('Bank
Obligations');
-- Commercial paper;
-- Corporate debt obligations, including variable rate obligations;
-- Short-term credit facilities;
-- Asset-backed securities; and
-- Other money market instruments.
The Money Market Fund will limit its portfolio investments to securities that
are determined by SBAM to present minimal credit risks pursuant to guidelines
established by the Fund's Board of Directors and which are 'Eligible
Securities' at the time of acquisition by the Fund. The term 'Eligible
Securities' includes: (i) securities rated in one of the two highest short-term
rating categories by: (a) any two nationally recognized statistical rating
organizations ('NRSROs') that have issued a rating with respect to a security
or class of debt obligations of an issuer; or (b) one NRSRO, if only one NRSRO
has issued such a rating at the time that the Fund acquires the security
(together, 'Requisite NRSROs'), (ii) securities of issuers that have received
such ratings with respect to other short-term debt securities comparable in
priority and security and (iii) comparable unrated securities. The Fund may not
invest more than 5% of its total assets in Eligible Securities that have not
received the highest rating from the Requisite NRSROs and comparable unrated
securities ('Second Tier Securities') and may not invest more than the greater
of 1% of its total assets or $1 million in the Second Tier Securities of any
one issuer.
The Money Market Fund may also enter into repurchase agreements with respect to
the obligations identified above. While the maturity of the underlying
securities in a repurchase agreement transaction may be more than 397 days, the
term of the repurchase agreement will always be less than 397 days. For a
description of repurchase agreements and their associated risks, see 'Additional
Investment Activities and Risk Factors -- Repurchase Agreements.'
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Securities issued or guaranteed by the U.S. government or by its agencies or
instrumentalities include obligations of several kinds. Such securities in
general include a wide variety of U.S. Treasury obligations consisting of
bills, notes and bonds, which principally differ only in their interest rates,
maturities and times of issuance. Securities issued or guaranteed by U.S.
government agencies and instrumentalities are debt securities issued by
agencies or instrumentalities established or sponsored by the U.S. government
and may be backed only by the credit of the issuing agency or instrumentality.
The Fund will invest in such obligations only where SBAM is satisfied that the
credit risk with respect to the issuer is minimal.
Bank Obligations that may be purchased by the Money Market Fund include
certificates of deposit, commercial paper, bankers' acceptances and fixed time
deposits. Fixed time deposits are obligations of branches of U.S. banks or
foreign banks which are payable at a stated maturity date and bear a fixed rate
of interest. Although fixed time deposits do not have a market, there are no
contractual restrictions on the right to transfer a beneficial interest in the
deposit to a third party. For a discussion of the risks associated with
investing in bank obligations, see 'Additional Information on Portfolio
Instruments and Investment Policies -- Bank Obligations' in the Statement of
Additional Information.
The Money Market Fund's investments in corporate debt securities consist of
non-convertible corporate debt securities such as bonds and debentures that
have 397 days or less remaining to maturity.
The Fund may invest in U.S. dollar-denominated securities of non-U.S. issuers,
including obligations of non-U.S. banks or non-U.S. branches of U.S. banks and
commercial paper and other corporate debt securities of non-U.S. issuers, where
SBAM deems the instrument to present minimal credit risks. Investments in
non-U.S. banks and non-U.S. issuers present certain risks. See 'Additional
Investment Activities -- Foreign Securities.'
The Money Market Fund may invest in floating and variable rate obligations with
stated maturities in excess of 397 days upon compliance with certain conditions
contained in Rule 2a-7 promulgated under the 1940 Act, in which case such
obligations will be treated, in accordance with Rule 2a-7, as having maturities
not exceeding 397 days. Floating or variable rate obligations bear interest at
rates that are not fixed, but vary with changes in specified market rates or
indices, such as the prime rate, and at specified intervals. Certain of the
floating or variable rate obligations that may be purchased by the Fund may
carry a demand feature that would permit the holder to tender them back to the
issuer at par value prior to maturity. Such obligations include variable rate
master demand notes, which are unsecured instruments issued pursuant to an
agreement between the issuer and the holder that permit the indebtedness
thereunder to vary and provide for periodic adjustments in the interest rate.
The Fund will limit its purchases of floating and variable rate obligations to
those of the same quality as it otherwise is allowed to purchase. SBAM will
monitor on an ongoing basis the ability of an issuer of a demand instrument to
pay principal and interest on demand.
The Money Market Fund may also invest in variable amount master demand notes. A
variable amount master demand note differs from ordinary commercial paper in
that it is issued pursuant to a written agreement between the issuer and the
holder, its amount may from time to time be increased by the holder (subject to
an agreed maximum) or decreased by the holder or the issuer, it is payable on
demand, the rate of interest payable on it varies with an agreed formula and it
is not typically rated by a rating agency.
The Money Market Fund may enter into, or acquire participations in, short-term
borrowing arrangements with corporations, consisting of either a short-term
revolving credit facility or a master note agreement payable upon demand. Under
these arrangements, the borrower may reborrow funds during the term of the
facility. The Fund treats any commitments to provide such advances as a standby
commitment to purchase the borrower's notes.
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The Money Market Fund may also purchase asset-backed securities. Asset-backed
securities represent defined interests in an underlying pool of assets. Such
securities may be issued as pass-through certificates, which represent
undivided fractional interests in the underlying pool of assets.
Alternatively, asset-backed securities may be issued as interests, generally in
the form of debt securities, in a special purpose entity organized solely for
the purpose of owning the underlying assets and issuing such securities. In the
latter case, such securities are secured by and payable from a stream of
payments generated by the underlying assets. The assets underlying asset-backed
securities are often a pool of assets similar to one another, such as motor
vehicle receivables or credit card receivables. Alternatively, the underlying
assets may be particular types of securities, various contractual rights to
receive payments and/or other types of assets. Asset-backed securities
frequently carry credit protection in the form of extra collateral,
subordinated certificates, cash reserve accounts, letters of credit or other
enhancements. Any asset-backed securities held by the Fund must comply with its
credit quality requirements and be deemed to have a maturity of 397 days
or less in accordance with applicable regulations. See 'Additional Information
on Portfolio Instruments and Investment Policies' in the Statement of
Additional Information.
The Money Market Fund may also invest in high-quality, short-term municipal
obligations that carry yields that are competitive with those of other types of
money market instruments in which the Fund may invest. Dividends paid by the
Fund derived from interest on municipal obligations that may be purchased by it
will be taxable to shareholders for federal income tax purposes because the
Fund will not qualify as an entity that can pass through the tax-exempt
character of such interest.
The Money Market Fund may purchase securities on a firm commitment basis,
including when-issued securities and the Fund may invest in other investment
funds. See 'Additional Investment Activities and Risk Factors' for a
description of such securities and their associated risks. The Fund is not
currently authorized to use any of the various investment strategies referred
to under 'Additional Investment Activities and Risk Factors -- Derivatives.'
The foregoing investment policies, other than the Money Market Fund's
investment objective, are not fundamental policies and may be changed by vote
of the Board of Directors without the approval of shareholders.
HIGH YIELD BOND FUND
The High Yield Bond Fund's investment objective is to maximize total return.
The Fund seeks to achieve its objective by investing primarily in a portfolio
of high yield fixed-income securities that offer a yield above that generally
available on debt securities rated investment grade and which generally entail
increased credit and market risks. To mitigate these risks, the Fund will
diversify its holdings by issuer, industry and credit quality. The Fund is
diversified within the meaning of the 1940 Act.
The High Yield Bond Fund intends to invest, under normal market conditions, at
least 80% of its total assets in non-investment grade fixed-income securities,
(e.g., bonds, debentures, notes, equipment lease certificates, equipment trust
certificates, conditional sales contracts, commercial paper and other
obligations and preferred stock). The lower-rated bonds in which the Fund will
invest are commonly referred to as 'junk bonds.'
The debt obligations in which the Fund will invest generally will be rated, at
the time of investment, 'Ba' or 'B' or lower by Moody's Investors Service
('Moody's') or 'BB' or 'B' or lower by Standard & Poor's 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
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volatility and risk of default in the payment of interest and principal, than
higher rated securities. Certain of the debt securities purchased by the Fund
may be rated as low as 'C' by Moody's or 'D' by S&P or may be considered
comparable to securities having such ratings. An investment in the High Yield
Bond Fund should not be considered as a complete investment program. For further
discussion of high yield securities and the special risks associated therewith,
see 'Additional Investment Activities and Risk Factors -- High Yield
Securities.'
The High Yield Bond Fund may invest up to 10% of its total assets in securities
of foreign issuers and up to 5% of its total assets in foreign governmental
issuers in any one country. The foreign securities in which the High Yield Bond
Fund may invest, all or a portion of which may be non-U.S. dollar denominated,
include: (a) debt obligations issued or guaranteed by foreign national,
provincial, state, municipal or other governments with taxing authority or by
their agencies or instrumentalities, including Brady Bonds; (b) debt
obligations of supranational entities; (c) debt obligations of the U.S.
government issued in non-dollar securities; (d) debt obligations and other
fixed-income securities of foreign corporate issuers; and (e) U.S. corporate
issuers. There is no minimum rating criteria for the Fund's investments in such
securities. A description of Brady Bonds is set forth in the discussion of the
investment objective and policies of the Emerging Markets Debt Fund. The risks
associated with these investments are described under the captions 'Additional
Investment Activities and Risk Factors -- Foreign Securities' and ' -- High
Yield Securities.' Moreover, investments in foreign securities may have adverse
tax implications as described under 'Dividends, Distributions and Taxes.'
In light of the risks associated with high yield corporate and sovereign debt
securities, SBAM will take various factors into consideration in evaluating the
creditworthiness of an issuer. These will typically include the issuer's
financial resources, its sensitivity to economic conditions and trends, the
operating history of the issuer, and the experience and track record of the
issuer's management. SBAM will also review the ratings, if any, assigned to the
security by any recognized rating agencies, although SBAM's judgment as to the
quality of a debt security may differ from that suggested by the rating
published by a rating service. In addition to the foregoing credit analysis,
SBAM will evaluate the relative value of an investment compared with its
perceived credit risk. In selecting securities for the Fund, SBAM intends to
consider the correlation among securities represented in the Fund's portfolio
in an attempt to reduce the risk of exposure to market, industry and issuer
volatility. The High Yield Bond Fund's ability to achieve its investment
objective may be more dependent on SBAM's credit analysis than would be the
case if it invested in higher quality debt securities. A description of the
ratings used by Moody's and S&P is set forth in Appendix A to this Prospectus.
The High Yield Bond 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 High Yield Bond Fund may invest in zero coupon securities, pay-in-kind
bonds and deferred payment securities, each which involve special risk
considerations. See 'Additional Investment Activities and Risk Factors -- Zero
Coupon Securities, Pay-in-Kind Bonds and Deferred Payment Securities.'
The High Yield Bond 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.'
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The High Yield Fund may invest up to 10% of its total assets in either: (1)
equipment lease certificates, equipment trust certificates and conditional
sales contracts; or (2) limited partnership interests. The Fund may invest up
to 10% of its total assets in common stock, convertible securities, warrants or
other equity securities (other than preferred stock for which there is no
limit) when consistent with its investment objective. The Fund will generally,
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 High Yield Bond Fund may enter into repurchase agreements and reverse
repurchase agreements, may purchase securities on a firm commitment basis,
including when-issued securities and may lend portfolio securities. The Fund
may also invest in investment funds. For a description of these investment
practices and the risks associated therewith, see 'Additional Investment
Activities and Risk Factors.'
The High Yield Bond Fund may purchase securities for which there is a limited
trading market or which are subject to restrictions on resale to the public.
The Fund will not invest more than 15% of the value of its total assets in
illiquid securities, such as 'restricted securities' which are illiquid, and
securities that are not readily marketable. See 'Additional Investment
Activities and Risk Factors -- Restricted Securities and Securities With
Limited Trading Markets.' As more fully described in the Statement of
Additional Information, the Fund may purchase certain restricted securities
('Rule 144A securities') for which there is a secondary market of qualified
institutional buyers as contemplated by Rule 144A under the Securities Act of
1933, as amended (the '1933 Act'). The Fund's holdings of Rule 144A securities
determined by SBAM to be liquid will not be subject to the 15% limitation on
investments in illiquid securities.
The High Yield Bond Fund is currently authorized to use all of the various
investment strategies referred to under 'Additional Investment Activities and
Risk Factors -- Derivatives.' It is not presently anticipated that any of these
strategies will be used to a significant degree by the Fund. The Fund's ability
to pursue certain of these strategies may be limited by applicable regulations
of the SEC, the Commodity Futures Trading Commission (the 'CFTC') and the
federal income tax requirements applicable to regulated investment companies.
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.
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The foregoing investment policies and activities, other than the High Yield
Bond Fund's investment objective, are not fundamental policies and may be
changed by vote of the Board of Directors without the approval of shareholders.
EMERGING MARKETS DEBT FUND
The investment objective of the Emerging Markets Debt Fund is to maximize total
return. The Fund seeks to achieve its objective by investing at least 65% of
its total assets in debt securities of government, government-related and
corporate issuers in emerging market countries and of entities organized to
restructure outstanding debt of such issuers. As used in this Prospectus, an
'emerging market country' is any country considered to be an emerging market
country by the World Bank at the time of investment. These countries generally
include every nation in the world except the United States, Canada, Japan,
Australia, New Zealand and most countries located in Western Europe. The Fund
is non-diversified within the meaning of the 1940 Act. See 'Additional
Investment Activities and Risk Factors -- Non-Diversification.'
The Emerging Markets Debt Fund expects that its investments in emerging market
country debt securities will be made primarily, but not exclusively, in some or
all of the following emerging market countries:
<TABLE>
<S> <C> <C>
Algeria Ivory Coast Romania
Argentina Jamaica Saudi Arabia
Azerbaijan Jordan Singapore
Brazil Kasakstan Slovakia
Bulgaria Kenya Slovenia
Chile Korea South Africa
China Latvia Taiwan
Colombia Lebanon Thailand
Costa Rica Lithuania Trinidad & Tobago
Croatia Malaysia Tunisia
Czech Republic Mexico Turkmenistan
Dominican Republic Moldova Ukraine
Ecuador Morocco Uruguay
Egypt Nicaragua Uzbekistan
Estonia Nigeria Venezuela
Ghana Pakistan Vietnam
Greece Panama Yugoslavia
Hong Kong Paraguay Zaire
Hungary Peru Zimbabwe
India Philippines
Indonesia Poland
Israel Portugal
</TABLE>
In selecting emerging market country debt securities for investment, SBAM will
apply a market risk analysis contemplating assessment of factors such as
liquidity, volatility, tax implications, interest rate sensitivity,
counterparty risks and technical market considerations. Currently, investing in
many emerging market country securities is not feasible or may involve
unacceptable risks. As opportunities to invest in debt securities in other
countries develop, the Fund expects to expand and further diversify the
emerging market countries in which it invests. While the Fund generally is not
restricted in the portion of its assets which may be invested in a single
country or region, it is anticipated that, under normal conditions, the Fund's
assets will be invested in issuers in at least three countries.
Emerging market country debt securities in which the Emerging Markets Debt Fund
may invest are U.S. dollar-denominated and non-U.S. dollar-denominated debt
securities, including bonds, notes, bills,
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debentures, convertible securities, warrants, bank debt obligations, short-term
paper, mortgage and other asset-backed securities, preferred stock, Loan
Participations and Assignments and interests issued by entities organized and
operated for the purpose of restructuring the investment characteristics of
instruments issued by emerging market country issuers. The Fund is subject to no
restrictions on the maturities of the emerging market country debt securities
in which it will invest and such maturities may range from overnight to thirty
years. There is no limit on the percentage of the Fund's assets that may be
invested in non-U.S. dollar denominated securities and a substantial portion of
the Fund's assets may be invested in non-U.S. dollar denominated securities.
The amount of assets invested in non-U.S. dollar denominated securities will
vary depending upon market conditions. The Fund may invest in Brady Bonds,
which are debt securities issued under the framework of the Brady Plan, an
initiative announced by former U.S. Treasury Secretary Nicholas F. Brady in
1989 as a mechanism for debtor nations to restructure their outstanding external
indebtedness. For a description of Brady Bonds, see 'Additional Investment
Activities and Risk Factors -- High Yield Securities' herein and 'Additional
Information on Portfolio Instruments and Investment Policies -- Brady Bonds' in
the Statement of Additional Information. For a description of Loan
Participations and Assignments, see 'Additional Investment Activities and Risk
Factors -- Loan Participations and Assignments.'
Investments in securities of foreign issuers may involve risks arising from
differences between U.S. and foreign securities markets, including less volume,
much greater price volatility in and relative illiquidity of foreign securities
markets, different trading and settlement practices and less governmental
supervision and regulation, changes in currency exchange rates, high and
volatile rates of inflation, economic, social and political conditions and, as
with domestic multinational corporations, fluctuating interest rates. See
'Additional Investment Activities and Risk Factors -- Foreign Securities.'
The Fund's investments in government, government-related and restructured debt
securities will consist of: (i) debt securities or obligations issued or
guaranteed by governments, governmental agencies or instrumentalities and
political subdivisions located in emerging market countries (including
participations in loans between governments and financial institutions); (ii)
debt securities or obligations issued by government-owned, controlled or
sponsored entities located in emerging market countries (including
participations in loans between governments and financial institutions); and
(iii) interests in issuers organized and operated for the purpose of
restructuring the investment characteristics of instruments issued by any of
the entities described above. Such type of restructuring involves the deposit
with or purchase by an entity of specific instruments and the issuance by that
entity of one or more classes of securities backed by, or representing
interests in, the underlying instruments. Certain issuers of such structured
securities may be deemed to be 'investment companies' as defined in the 1940
Act. As a result, the Fund's investment in such securities may be limited by
certain investment restrictions contained in the 1940 Act. See 'Additional
Information on Portfolio Instruments and Investment Policies -- Structured
Investments' in the Statement of Additional Information. In addition to the
risks of investing in emerging market country debt securities, the Fund's
investment in government, government-related and restructured debt instruments
are subject to special risks, including the inability or unwillingness to repay
principal and interest, requests to reschedule or restructure outstanding debt,
and requests to extend additional loan amounts. The Fund may have limited
recourse in the event of default on such debt instruments. See 'Additional
Investments Activities and Risk Factors -- Foreign Securities' and ' -- High
Yield Securities.'
The Emerging Market Debt Fund's investments in debt securities of corporate
issuers in emerging market countries may include debt securities or obligations
issued by: (i) banks located in emerging market countries or by branches of
emerging market country banks located outside such country; or (ii) companies
organized under the laws of an emerging market country.
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The securities in which the Fund will invest will not be required to meet a
minimum rating standard and may not be rated for creditworthiness by any
internationally recognized credit rating organization and generally the Fund's
investments are expected to be in the lower and lowest rating categories of
internationally recognized credit rating organizations or of comparable
quality. Such securities, commonly referred to as 'junk bonds,' involve
significantly greater risks, including price volatility and risk of default of
payment of interest and principal than higher rated securities. An investment
in the Emerging Markets Debt Fund should not be considered as a complete
investment program for all investors. See 'Additional Investment Activities and
Risk Factors -- Foreign Securities' and ' -- High Yield Securities.' Moreover,
substantial investments in foreign securities may have adverse tax implications
as described under 'Dividends, Distributions and Taxes.'
In light of the risks associated with high yield corporate and sovereign debt
securities, SBAM will take various factors into consideration in evaluating the
creditworthiness of an issuer. For corporate debt securities, such factors
typically include the issuer's financial resources, its sensitivity to economic
conditions and trends, the operating history of the issuer, and the experience
and track record of the issuer's management. For sovereign debt instruments,
these will typically include the economic and political conditions within the
issuer's country, the issuer's overall and external debt levels and debt
service ratios, the issuer's access to capital markets and other sources of
funding, and the issuer's debt service payment history. SBAM will also review
the ratings, if any, assigned to the security by any recognized rating
organizations, although SBAM's judgment as to the quality of a debt security
may differ from that suggested by the rating published by a rating service. In
addition to the foregoing credit analysis, SBAM will evaluate the relative
value of an investment compared with its perceived credit risk. In selecting
securities for the Emerging Markets Debt Fund, SBAM intends to consider the
correlation among securities represented in the Fund's portfolio in an attempt
to reduce the risk of exposure to market, industry and issuer volatility. The
Fund's ability to achieve its investment objective may be more dependent on
SBAM's credit analysis than would be the case if it invested in higher quality
debt securities. A description of the ratings used by Moody's and S&P is set
forth in Appendix A to this Prospectus.
The Emerging Markets Debt Fund may invest in zero coupon securities,
pay-in-kind bonds and deferred payment securities. The characteristics and
risks of these investments are described under 'Additional Investment
Activities and Risk Factors -- Zero Coupon Securities, Pay-in-Kind Bonds and
Deferred Payment Securities.'
The Emerging Markets Debt Fund may invest up to 10% of its total assets in
common stock, convertible securities, warrants or other equity securities when
consistent with the Fund's objective. The Fund will generally, 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 Emerging Markets Debt Fund may hold and/or
invest up to 35% 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
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agreements (as discussed below under 'Additional Investment Activities and Risk
Factors -- Repurchase Agreements') with respect to securities in which the Fund
may invest. The Fund may invest its assets without limit in such instruments
for temporary defensive purposes in the event of adverse market conditions. To
the extent the Fund adopts such a temporary defensive position, it will not be
invested so as to directly achieve its investment objective.
The Emerging Markets Debt Fund may enter into repurchase agreements and reverse
repurchase agreements, may purchase securities on a firm commitment basis,
including when-issued securities and may lend portfolio securities. The Fund
may also invest in investment funds. For a description of these investment
practices and the risks associated therewith, see 'Additional Investment
Activities and Risk Factors.'
The Emerging Markets Debt Fund may purchase securities for which there is a
limited trading market or which are subject to restrictions on resale to the
public. The Fund will not invest more than 15% of the value of its total assets
in illiquid securities, such as 'restricted securities' which are illiquid, and
securities that are not readily marketable. See 'Additional Investment
Activities and Risk Factors -- Restricted Securities and Securities with
Limited Trading Markets.' The Fund's holdings of Rule 144A securities
determined by SBAM to be liquid will not be subject to the 15% limitation on
investments in illiquid securities.
The Emerging Markets Debt Fund is currently authorized to use all of the
various investment strategies referred to under 'Additional Investment
Activities and Risk Factors -- Derivatives.' With the exception of currency
transactions, however, it is not presently anticipated that any of these
strategies will be used to a significant degree by the Fund. The Fund's ability
to pursue certain of these strategies, including the ability to hedge against
currency exchange rate risks with respect to its holdings of non-U.S. dollar
denominated securities, may be limited by applicable regulations of the SEC,
the CFTC and the federal income tax requirements applicable to regulated
investment companies. Appendix B to this Prospectus and the Statement of
Additional Information contain descriptions of these strategies and of certain
risks associated therewith.
The foregoing investment policies, other than the Emerging Markets Debt Fund's
investment objective, are not fundamental policies and may be changed by vote
of the Board of Directors without the approval of shareholders.
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Additional
Investment Activities
and Risk Factors
-------------------------------------
REPURCHASE AGREEMENTS. Each Fund may enter into repurchase agreements for cash
management purposes. A repurchase agreement is a transaction in which the
seller of a security commits itself at the time of sale to repurchase that
security from the buyer at a mutually agreed upon time and price. Each Fund
will enter into repurchase agreements only with dealers, banks or recognized
financial institutions which, in the investment manager's determination based
on guidelines established by each Company's Board of Directors, are deemed
creditworthy. The investment manager monitors the value of the securities
underlying the repurchase agreement at the time the transaction is entered into
and at all times during the term of the repurchase agreement to ensure that the
value of the securities always equals or exceeds the repurchase price. Each
Fund requires that additional securities be deposited if the value of the
securities purchased decreases below their resale price and does not bear the
risk of a decline in the value of the underlying security unless the seller
defaults under the repurchase obligation. In the event of default by the seller
under the repurchase agreement, a Fund could experience losses and experience
time delays in connection with the disposition of the underlying security. To
the extent that, in the meantime, the value of the securities that a Fund has
purchased has decreased, the Fund could experience a loss. Repurchase
agreements with maturities of more than seven days will be treated as illiquid
securities.
REVERSE REPURCHASE AGREEMENTS. The High Yield Bond Fund and the Emerging
Markets Debt Fund may enter into 'reverse' repurchase agreements to avoid
selling securities during unfavorable market conditions to meet redemptions.
Pursuant to a reverse repurchase agreement, a Fund will sell portfolio
securities and agree to repurchase them from the buyer at a particular date and
price. Whenever a Fund enters into a reverse repurchase agreement, it will
establish a segregated account in which it will maintain liquid assets in an
amount at least equal to the repurchase price marked to market daily (including
accrued interest), and will subsequently monitor the account to ensure that
such equivalent value is maintained. A Fund pays interest on amounts obtained
pursuant to reverse repurchase agreements. Reverse repurchase agreements are
considered to be borrowings by a Fund.
LOANS OF PORTFOLIO SECURITIES. The High Yield Bond Fund and the Emerging
Markets Debt Fund may lend portfolio securities to generate income. In the
event of the bankruptcy of the other party to a securities loan, a Fund could
experience delays in recovering the securities it lent. To the extent that, in
the meantime, the value of the securities a Fund lent has increased, the Fund
could experience a loss. The value of securities loaned will be marked to
market daily. Any securities that a Fund may receive as collateral will not
become a part of its portfolio at the time of the loan and, in the event of a
default by the borrower, the Fund will, if permitted by law, dispose of such
collateral except that the Fund may retain any such part thereof that is a
security in which the Fund is permitted to invest. The Fund may invest the cash
collateral and earn additional income or receive an agreed-upon fee from a
borrower that has delivered cash equivalent collateral. Cash collateral received
by a Fund may be invested in securities in which the Fund is permitted to
invest. Portfolio securities purchased with cash collateral are subject to
possible depreciation. Voting rights may pass with the lending of portfolio
securities. Loans of securities by a Fund will be subject to termination at the
Fund's or the borrower's option. A Fund may pay administrative and custodial
fees in connection with a securities loan and may pay a negotiated portion of
the interest or fee earned with respect to the collateral to the borrower or a
placing broker.
FIRM COMMITMENTS AND WHEN-ISSUED SECURITIES. A Fund may purchase securities on
a firm commitment basis, including when-issued securities. Securities purchased
on a firm commitment basis are purchased for delivery beyond the normal
settlement date at a stated price and yield. No income
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accrues to the purchaser of a security on a firm commitment basis prior to
delivery. Such securities are recorded as an asset and are subject to changes
in value based upon changes in the general level of interest rates. Purchasing
a security on a firm commitment basis can involve a risk that the market price
at the time of delivery may be lower than the agreed upon purchase price, in
which case there could be an unrealized loss at the time of delivery. A Fund
will only make commitments to purchase securities on a firm commitment basis
with the intention of actually acquiring the securities, but may sell them
before the settlement date if it is deemed advisable. A Fund will establish a
segregated account in which it will maintain liquid assets in an amount at
least equal in value to the Fund's commitments to purchase securities on a firm
commitment basis. If the value of these assets declines, the Fund will place
additional liquid assets in the account on a daily basis so that the value of
the assets in the account is equal to the amount of such commitments.
ZERO COUPON SECURITIES, PAY-IN-KIND BONDS AND DEFERRED PAYMENT SECURITIES. The
High Yield Bond Fund and the Emerging Markets Debt Fund may invest in zero
coupon securities, pay-in-kind bonds and deferred payment securities.
Zero coupon securities are debt securities that pay no cash income but are sold
at substantial discounts from their value at maturity. When a zero coupon
security is held to maturity, its entire return, which consists of the
amortization of discount, comes from the difference between its purchase price
and its maturity value. This difference is known at the time of purchase, so
that investors holding zero coupon securities until maturity know at the time
of their investment what the expected return on their investment will be.
Certain zero coupon securities also are sold at substantial discounts from
their maturity value and provide for the commencement of regular interest
payments at a deferred date. Zero coupon securities may have conversion
features. A Fund also may purchase pay-in-kind bonds. Pay-in-kind bonds pay all
or a portion of their interest in the form of debt or equity securities.
Deferred payment securities are securities that remain zero coupon securities
until a predetermined date, at which time the stated coupon rate becomes
effective and interest becomes payable at regular intervals.
Zero coupon securities, pay-in-kind bonds and deferred payment securities tend
to be subject to greater price fluctuations in response to changes in interest
rates than are ordinary interest-paying debt securities with similar
maturities. The value of zero coupon securities appreciates more during periods
of declining interest rates and depreciates more during 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 a Fund's
15% limitation on investments in illiquid securities discussed below.
Current federal income tax law requires the holder of a zero coupon security,
certain pay-in-kind bonds, deferred payment securities and certain other
securities acquired at a discount (such as Brady Bonds) to accrue income with
respect to these securities prior to the receipt of cash payments. Accordingly,
to avoid liability for federal income and excise taxes, a Fund may be required
to distribute income accrued with respect to these securities and may have to
dispose of portfolio securities under disadvantageous circumstances in order to
generate cash to satisfy these distribution requirements.
LOAN PARTICIPATIONS AND ASSIGNMENTS. The High Yield Bond Fund and the Emerging
Markets Debt Fund may invest in Loan Participations and Assignments. The Funds
consider these investments to be investments in debt securities for purposes of
this Prospectus. Loan Participations typically will result in a Fund having a
contractual relationship only with the Lender, not with the borrower. A Fund
will have the right to receive payments of principal, interest and any fees to
which it is entitled only from the Lender selling the Participation and only
upon receipt by the Lender of the payments from the borrower. In connection
with purchasing Loan Participations, a Fund generally will have no
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right to enforce compliance by the borrower with the terms of the loan
agreement relating to the Loan, nor any rights of set-off against the borrower,
and the Fund may not benefit directly from any collateral supporting the Loan
in which it has purchased the Participation. As a result, a Fund will assume
the credit risk of both the borrower and the Lender that is selling the
Participation. In the event of the insolvency of the Lender selling a
Participation, a Fund may be treated as a general creditor of the Lender and
may not benefit from any set-off between the Lender and the borrower. A Fund
will acquire Loan Participations only if the Lender interpositioned between the
Fund and the borrower is determined by SBAM to be creditworthy. When a Fund
purchases Assignments from Lenders, the Fund will acquire direct rights against
the borrower on the Loan, except that under certain circumstances such rights
may be more limited than those held by the assigning Lender.
A Fund may have difficulty disposing of Assignments and Loan Participations. In
certain cases the market for such instruments is not highly liquid, and
therefore the Funds anticipate that in such cases such instruments could be
sold only to a limited number of institutional investors. The lack of a highly
liquid secondary market may have an adverse impact on the value of such
instruments and will have an adverse impact on a Fund's ability to dispose of
particular Assignments or Loan Participations in response to a specific
economic event, such as deterioration in the creditworthiness of the borrower.
The Board of Directors of Institutional Series Funds has adopted policies and
procedures for the High Yield Bond Fund and the Emerging Markets Debt Fund to
determine whether Assignments and Loan Participations purchased by such Funds
are liquid or illiquid for purposes of a Fund's limitation on investment in
illiquid securities. Pursuant to those policies and procedures, the Board of
Directors has delegated to 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 a Fund
for which a secondary trading market exists, the Fund will rely upon prices or
quotations provided by banks, dealers or pricing services. To the extent a
secondary trading market does not exist, a Fund's Loan Participations and
Assignments will be valued in accordance with procedures adopted by the Board
of Directors, taking into consideration, among other factors: (i) the
creditworthiness of the borrower under the Loan and the Lender; (ii) the
current interest rate, period until next rate reset and maturity of the Loan;
(iii) recent prices in the market for similar Loans; and (iv) recent prices in
the market for instruments of similar quality, rate, period until next interest
rate reset and maturity. See 'Net Asset Value.'
To the extent that liquid Assignments and Loan Participations that a Fund holds
become illiquid, due to the lack of sufficient buyers or market or other
conditions, the percentage of a Fund's assets invested in illiquid assets would
increase. SBAM, under the supervision of the Board of Directors, monitors Fund
investments in Assignments and Loan Participations and will, in such a case,
consider appropriate measures to enable a Fund to maintain sufficient liquidity
for operating purposes and to meet redemption requests.
RESTRICTED SECURITIES AND SECURITIES WITH LIMITED TRADING MARKETS. Each Fund may
purchase securities for which there is a limited trading market or which are
subject to restrictions on resale to the public. If a Fund were to assume
substantial positions in securities with limited trading markets, the
activities of the Fund could have an adverse effect upon the liquidity and
marketability of such securities and the Fund might not be able to dispose of
its holdings in those securities at then current market prices. Circumstances
could also exist (to satisfy redemptions, for example) when portfolio
securities might have to be sold by a Fund at times which otherwise might be
considered to be disadvantageous so that the Fund might receive lower proceeds
from such sales than it had expected to realize. Investments in securities
which are 'restricted' may involve added expenses to a
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Fund should the Fund be required to bear registration costs with respect to
such securities and could involve delays in disposing of such securities which
might have an adverse effect upon the price and timing of sales of such
securities and the liquidity of the Fund with respect to redemptions. Restricted
securities and securities for which there is a limited trading market may be
significantly more difficult to value due to the unavailability of reliable
market quotations for such securities, and investment in such securities may
have an adverse impact on net asset value. As more fully described in the
Statement of Additional Information, certain Funds 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. A Fund's holdings of
Rule 144A securities which are liquid securities will not be subject to the
Fund's applicable limitation on investments in illiquid securities. Rule 144A
is a relatively recent development and there is no assurance that a liquid
market in Rule 144A securities will develop or be maintained. To the extent
that the number of qualified institutional buyers is reduced, a previously
liquid Rule 144A security may be determined to be illiquid, thus increasing the
percentage of illiquid assets in a Fund's portfolio. SBAM, under the
supervision of the Board of Directors, is responsible for monitoring the
liquidity of Rule 144A securities. The Board of Directors periodically reviews
the Funds' purchases and sales of such Rule 144A securities.
WARRANTS. Certain of the Funds may invest in warrants, which are securities
permitting, but not obligating, their holder to subscribe for other securities.
Warrants do not carry the right to dividends or voting rights with respect to
their underlying securities, and they do not represent any rights in assets of
the issuer. An investment in warrants may be considered speculative. In
addition, the value of a warrant does not necessarily change with the value of
the underlying securities and a warrant ceases to have value if it is not
exercised prior to its expiration date.
FOREIGN SECURITIES. Investors should recognize that investing in the securities
of foreign issuers generally, and particularly in emerging market issuers,
involves special considerations which are not typically associated with
investing in securities of U.S. issuers. Investments in securities of foreign
issuers may involve risks arising from differences between U.S. and foreign
securities markets, including less volume, much greater price volatility in and
relative illiquidity of foreign securities markets, different trading and
settlement practices and less governmental supervision and regulation, from
changes in currency exchange rates, from high and volatile rates of inflation,
from economic, social and political conditions and, as with domestic
multinational corporations, from fluctuating interest rates.
Investment in certain emerging market securities is restricted or controlled to
varying degrees which may at times limit or preclude investment in certain
emerging market securities and increase the costs and expenses of a Fund.
Certain emerging market countries require governmental approval prior to
investments by foreign persons, limit the amount of investment by foreign
persons in a particular issuer, limit the investment by foreign persons only to
a specific class of securities of an issuer that may have less advantageous
rights than other classes, restrict investment opportunities in issuers in
industries deemed important to national interests and/or impose additional
taxes on foreign investors.
Certain emerging market countries may require governmental approval for the
repatriation of investment income, capital or the proceeds of sales of
securities by foreign investors which could adversely affect a Fund. In
addition, if a deterioration occurs in an emerging market country's balance of
payments, it could impose temporary restrictions on foreign capital
remittances. Investing in local markets in emerging market countries may
require a Fund to adopt special procedures, seek local government approvals or
take other actions, each of which may involve additional costs to the Fund.
Other investment risks include the possible imposition of foreign taxes on
certain amounts of a Fund's income which may reduce the net return on foreign
investments as compared to income received from a U.S. issuer, the possible
seizure or nationalization of foreign assets and the possible establishment of
exchange controls, expropriation, confiscatory taxation, other foreign
governmental laws or restrictions which might affect adversely payments due on
securities held by a Fund, the lack of extensive
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operating experience of eligible foreign subcustodians and legal limitations on
the ability of a Fund to recover assets held in custody by a foreign
subcustodian in the event of the subcustodian's bankruptcy. Moreover, brokerage
commissions and other transactions costs on foreign securities exchanges are
generally higher than in the United States.
In addition, there may be less publicly-available information about a foreign
issuer than about a U.S. issuer, and foreign issuers may not be subject to the
same accounting, auditing and financial record-keeping standards and
requirements as U.S. issuers. In particular, the assets and profits appearing on
the financial statements of an emerging market country issuer may not reflect
its financial position or results of operations in the way they would be
reflected had the financial statements been prepared in accordance with U.S.
generally accepted accounting principles. In addition, for an issuer that keeps
accounting records in local currency, inflation accounting rules may require,
for both tax and accounting purposes, that certain assets and liabilities be
restated on the issuer's balance sheet in order to express items in terms of
currency of constant purchasing power. Inflation accounting may indirectly
generate losses or profits. Consequently, financial data may be materially
affected by restatements for inflation and may not accurately reflect the real
condition of those issuers and securities markets. Finally, in the event of a
default of any such foreign obligations, it may be more difficult for a Fund to
obtain or enforce a judgment against the issuers of such obligations. See
' -- High Yield Securities.'
For a further discussion of certain risks involved in investing foreign
securities, particularly of emerging market issuers, see 'Additional
Information on Portfolio Instruments and Investment Policies -- Foreign
Securities' in the Statement of Additional Information.
FIXED-INCOME SECURITIES. Except to the extent that values are affected
independently by other factors such as developments relating to a specific
issuer, when interest rates decline, the value of a fixed-income portfolio can
generally be expected to rise. Conversely, when interest rates rise, the value
of a fixed-income portfolio can generally be expected to decline. Prices of
longer term securities generally increase or decrease more sharply than those
of shorter term securities in response to interest rate changes, particularly
if such securities were purchased at a discount. Because the High Yield Bond
Fund and the Emerging Markets Debt Fund will invest primarily in fixed-income
securities, the net asset value of these Funds' shares can be expected to
change as general levels of interest rates fluctuate. It should be noted that
the market values of securities rated below investment grade and comparable
unrated securities tend to react less to fluctuations in interest rate levels
than do those of higher-rated securities.
In addition, many fixed-income securities contain call or buy-back features
that permit their issuers to call or repurchase the securities from their
holders. Such securities may present risks based on payment expectations.
Although a Fund would typically receive a premium if an issuer were to redeem a
security, if an issuer exercises such a 'call option' and redeems the security
during a time of declining interest rates, a Fund may realize a capital loss on
its investment if the security was purchased at a premium and a Fund may have
to replace the called security with a lower yielding security, resulting in a
decreased rate of return to the Fund.
HIGH YIELD SECURITIES. The High Yield Bond Fund and the Emerging Markets Debt
Fund may invest without limitation in high yield securities. 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
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these types of factors could reduce the value of securities held by a Fund with
a commensurate effect on the value of the Fund's shares.
Changes by recognized rating services in their ratings of any fixed-income
security and in the ability of an issuer to make payments of interest and
principal may also affect the value of these investments. A description of the
ratings used by Moody's and S&P is set forth in Appendix 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 a Fund holding such securities to dispose of
particular portfolio investments at fair value, may adversely affect the Fund's
net asset value per share and may limit the ability of such a Fund to obtain
accurate market quotations for purposes of valuing securities and calculating
net asset value. If a Fund is not able to obtain precise or accurate market
quotations for a particular security, it will become more difficult to value
such Fund's portfolio securities, and a greater degree of judgment may be
necessary in making such valuations. The secondary markets for high yield
securities may contract due to adverse economic conditions or for other reasons
relating to or independent of any specific adverse changes in the condition of
a particular issuer and, as a result, certain liquid securities in a Fund's
portfolio may become illiquid and the proportion of the Fund's assets invested
in illiquid securities may significantly increase.
Prices for high yield securities may be affected by legislative and regulatory
developments. These laws could adversely affect a Fund's net asset value and
investment practices, the secondary market for high yield securities, the
financial condition of issuers of these securities and the value of outstanding
high yield securities. For example, federal legislation requiring the
divestiture by federally insured savings and loan associations of their
investments in high yield bonds and limiting the deductibility of interest by
certain corporate issuers of high yield bonds adversely affected the market in
recent years.
High Yield Corporate Securities. While the market values of securities rated
below investment grade and comparable unrated securities tend to react less to
fluctuations in interest rate levels than do those of higher-rated securities,
the 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
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greater than with investment grade securities because such securities generally
are unsecured and subordinated to the prior payment of senior indebtedness. A
Fund also may incur additional expenses to the extent that it is required to
seek recovery upon a default in the payment of principal or interest on its
portfolio holdings.
The development of a market for high yield non-U.S. corporate securities has
been a relatively recent phenomenon. On the other hand, the market for high
yield U.S. corporate debt securities is more established than that for high
yield non-U.S. corporate debt securities, but has undergone significant changes
in the past and may undergo significant changes in the future.
High yield corporate securities in which a Fund may invest will generally be
unsecured. Most of the debt securities will bear interest at fixed rates but a
Fund may also invest in securities with variable rates of interest or which
involve equity features, such as contingent interest or participations based on
revenues, sales or profits (i.e., interest or other payments, often in addition
to a fixed rate of return, that are based on the borrower's attainment of
specified levels of revenues, sales or profits and thus enable the holder of
the security to share in the potential success of the venture).
High Yield Foreign Sovereign Debt Securities. Investing in fixed and floating
rate high yield foreign sovereign debt securities, especially in emerging
market countries, will expose a 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. See ' -- Foreign Securities' above. The
ability and willingness of sovereign obligors in developing and emerging market
countries or the governmental authorities that control repayment of their
external debt to pay principal and interest on such debt when due may depend on
general economic and political conditions within the relevant country. Certain
countries 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, a Fund may have limited legal recourse against the issuer
and/or guarantor. Remedies must, in some cases, be pursued in the courts of the
defaulting party itself, and the ability of the holder of foreign sovereign
debt securities to obtain recourse may be subject to the political climate in
the relevant country. In addition, no assurance can be given that the holders
of commercial bank debt will not contest payments to the holders of other
foreign sovereign debt obligations in the event of default under their
commercial bank loan agreements.
Certain debt obligations, customarily referred to as 'Brady Bonds,' are created
through the exchange of existing commercial bank loans to foreign entities for
new obligations in connection with debt restructuring under a plan introduced
by former U.S. Secretary of the Treasury, Nicholas F. Brady (the 'Brady Plan').
Brady Bonds have been issued only recently, and, accordingly, do not have a long
payment history. They may be fully or partially collateralized or
uncollateralized and issued in various currencies (although most are U.S.
dollar denominated) and they are actively traded in the over-the-counter
secondary market. U.S. dollar denominated, collateralized Brady Bonds, which
may be fixed rate par bonds or floating rate discount bonds, are generally
collateralized in full as to principal due at maturity by U.S. Treasury zero
coupon obligations which have the same maturity as the Brady Bonds. Certain
interest payments on these Brady Bonds may be collateralized by cash or
securities in an amount that, in the case of fixed rate bonds, is typically
equal to between 12 and 18 months of rolling interest payments or, in the case
of floating rate bonds, initially is typically equal to between 12 and 18
months rolling interest payments based on the applicable interest rate at that
time and is adjusted at regular intervals thereafter with the balance of
interest accruals in each case being uncollateralized. A significant amount of
the Brady Bonds that the Funds may purchase have no or limited
collateralization, and a 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, a Fund would not intend to purchase Brady Bonds which, at
the time of investment, are in default as to payments. However, in light of the
residual risk of the Brady Bonds and, among other factors, the history of
default with respect to commercial bank loans by public and private entities of
countries issuing Brady Bonds, investments in Brady Bonds are to be viewed as
speculative. A substantial portion of the Brady Bonds and other sovereign debt
securities in which the High Yield Bond Fund and Emerging Markets Debt Fund
invest are likely to be acquired at a discount, which involves certain
considerations discussed below under 'Dividends, Distributions and Taxes.'
Sovereign obligors in developing and emerging market countries are among the
world's largest debtors to commercial banks, other governments, international
financial organizations and other financial institutions. These obligors have
in the past experienced substantial difficulties in servicing their external
debt obligations, which led to defaults on certain obligations and the
restructuring of certain indebtedness. Restructuring arrangements have
included, among other things, reducing and rescheduling interest and principal
payments by negotiating new or amended credit agreements or converting
outstanding principal and unpaid interest to Brady Bonds, and obtaining new
credit to finance interest payments. Holders of certain foreign sovereign debt
securities may be requested to
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participate in the restructuring of such obligations and to extend further
loans to their issuers. There can be no assurance that the Brady Bonds and
other foreign sovereign debt securities in which the Funds may invest will not
be subject to similar restructuring arrangements or to requests for new credit
which may adversely affect a Fund's holdings. Furthermore, certain participants
in the secondary market for such debt may be directly involved in negotiating
the terms of these arrangements and may therefore have access to information
not available to other market participants.
For a further discussion of certain risks involved in investing in foreign
securities, particularly of emerging market issuers, see 'Additional
Information on Portfolio Instruments and Investment Policies -- Foreign
Securities' in the Statement of Additional Information.
INVESTMENT FUNDS. Each Fund may invest in unaffiliated investment funds which
invest principally in securities in which that Fund is authorized to invest.
Under the 1940 Act, a Fund may invest a maximum of 10% of its total assets in
the securities of other investment companies. In addition, under the 1940 Act,
not more than 5% of the Fund's total assets may be invested in the securities
of any one investment company and a Fund may not purchase more than 3% of the
outstanding voting stock of such investment company. The Money Market Fund will
only invest in other money market funds which are subject to the requirements
of Rule 2a-7 under the 1940 Act and which are considered to present minimal
credit risks. To the extent a Fund invests in other investment funds, the Fund's
shareholders will incur certain duplicative fees and expenses, including
investment advisory fees.
BORROWING. Each of the Funds may borrow in certain limited circumstances. See
'Investment Limitations.' Borrowing creates an opportunity for increased
return, but, at the same time, creates special risks. For example, borrowing
may exaggerate changes in the net asset value of a Fund's shares and in the
return on the Fund's portfolio. Although the principal of any borrowing will be
fixed, a Fund's assets may change in value during the time the borrowing is
outstanding. A Fund may be required to liquidate portfolio securities at a time
when it would be disadvantageous to do so in order to make payments with
respect to any borrowing, which could affect SBAM's strategy and the ability of
the Fund to comply with certain provisions of the Internal Revenue Code of
1986, as amended (the 'Code') in order to provide 'pass-through' tax treatment
to shareholders. Furthermore, if a Fund were to engage in borrowing, an
increase in interest rates could reduce the value of the Fund's shares by
increasing the Fund's interest expense.
NON-DIVERSIFICATION. The Emerging Markets Debt Fund is classified as a
'non-diversified' Fund under the 1940 Act, which means that the Fund is not
limited by the 1940 Act in the proportion of its assets that may be invested in
the obligations of a single issuer. The Fund, however, intends to comply with
the diversification requirements imposed by the Code for qualification as a
regulated investment company. To the extent the Fund invests a greater
proportion of its assets in the securities of a smaller number of issuers, the
Fund may be more susceptible to any single economic, political or regulatory
occurrence than a more diversified fund and may be subject to greater risk of
loss with respect to its portfolio securities. See 'Dividends, Distributions
and Taxes' and 'Investment Limitations.'
DERIVATIVES. Certain of the Funds may be authorized to use various investment
strategies described below to hedge market risks (such as broad or specific
market movements, interest rates and currency exchange rates), to manage the
effective maturity or duration of debt instruments held by a Fund, or to seek
to increase a Fund's income or gain. These instruments are often referred to as
'Derivatives,' which may be defined as financial instruments whose performance
is derived, at least in part, upon the performance of another asset (such as a
security, currency or index securities). The description in this Prospectus of
each Fund indicates which, if any, of these types of transactions may be used by
that Fund. Although these strategies are regularly used by some investment
companies and other institutional investors, it is not presently anticipated
that any of these strategies will be used to a significant degree by any Fund
unless otherwise specifically indicated in the description of the
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particular Fund contained in this Prospectus. Over time, however, techniques
and instruments may change as new instruments and strategies are developed or
regulatory changes occur.
Subject to the constraints described above, a Fund may (if and to the extent so
authorized) purchase and sell interest rate, currency or stock or bond index
futures contracts and enter into currency forward contracts and currency swaps;
purchase and sell (or write) exchange listed and over-the-counter put and call
options on securities, Loan Participations and Assignments, currencies, futures
contracts, indices and other financial instruments, and a Fund may enter into
interest rate transactions, equity swaps and related transactions and other
similar transactions which may be developed to the extent SBAM determines that
they are consistent with the applicable Fund's investment objective and
policies and applicable regulatory requirements. A Fund's interest rate
transactions may take the form of swaps, caps, floors and collars, and a Fund's
currency transactions may take the form of currency forward contracts, currency
futures contracts, currency swaps and options on currencies or currency futures
contracts.
Derivatives may be used to attempt to protect against possible changes in the
market value of securities held or to be purchased for a Fund's portfolio
resulting from securities markets or currency exchange rate fluctuations, to
protect a Fund's unrealized gains in the value of its securities, to facilitate
the sale of those securities for investment purposes, to manage the effective
maturity or duration of a Fund's portfolio or to establish a position in the
derivatives markets as a temporary substitute for purchasing or selling
particular securities or to seek to enhance a Fund's income or gain. A Fund may
use any or all types of Derivatives which it is authorized to use at any time;
no particular strategy will dictate the use of one type of transaction rather
than another, as use of any authorized Derivative will be a function of
numerous variables, including market conditions. The ability of a Fund to
utilize Derivatives successfully will depend on, in addition to the factors
described above, SBAM's ability to predict pertinent market movements, which
cannot be assured. These skills are different from those needed to select a
Fund's portfolio securities. None of the Funds is a 'commodity pool' (i.e., a
pooled investment vehicle which trades in commodity futures contracts and
options thereon and the operator of which is registered with the CFTC), and
Derivatives involving futures contracts and options on futures contracts will
be purchased, sold or entered into only for bona fide hedging purposes,
provided that a Fund may enter into such transactions for purposes other than
bona fide hedging if, immediately thereafter, the sum of the amount of its
initial margin and premiums on open contracts and options would not exceed 5%
of the liquidation value of the Fund's portfolio, after taking into account
unrealized profits and losses on existing contracts provided, further, that, in
the case of an option that is in-the-money, the in-the-money amount may be
excluded in calculating the 5% limitation. The use of certain Derivatives in
certain circumstances will require that a Fund segregate cash or other liquid
assets to the extent a Fund's obligations are not otherwise 'covered' through
ownership of the underlying security, financial instrument or currency.
Derivatives involve special risks, including possible default by the other
party to the transaction, illiquidity and, to the extent the investment
manager's view as to certain market movements is incorrect, the risk that the
use of Derivatives could result in significantly greater losses than if it had
not been used. Use of put and call options could result in losses to a Fund,
force the purchase or sale of portfolio securities at inopportune times or for
prices higher or lower than current market values, or cause a Fund to hold a
security it might otherwise sell. The use of currency transactions could result
in a Fund incurring losses as a result of the imposition of exchange controls,
suspension of settlements, or the inability to deliver or receive a specified
currency in addition to exchange rate fluctuations. The use of options and
futures transactions entails certain special risks. In particular, the variable
degree of correlation between price movements of futures contracts and price
movements in the related portfolio position of a Fund could create the
possibility that losses on the Derivative will be greater than gains in the
value of the Fund's position. In addition, futures and options markets could be
illiquid in some circumstances and certain over-the-counter options could have
no markets. A Fund might not be able to close out certain positions without
incurring substantial losses. To the
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extent a Fund utilizes futures and options transactions for hedging, such
transactions should tend to minimize the risk of loss due to a decline in the
value of the hedged position and, at the same time, limit any potential gain to
the Fund that might result from an increase in value of the position. Finally,
the daily variation margin requirements for futures contracts create a greater
ongoing potential financial risk than would purchases of options, in which case
the exposure is limited to the cost of the initial premium and transaction
costs. Losses resulting from the use of Derivatives will reduce a Fund's net
asset value, and possibly income, and the losses may be significantly greater
than if Derivatives had not been used. Additional information regarding the
risks and special considerations associated with Derivatives appears in the
Statement of Additional Information.
The degree of a Fund's use of Derivatives may be limited by certain provisions
of the Code. See 'Dividends, Distributions and Taxes.'
Investment Limitations
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The following investment restrictions and certain of those described in the
Statement of Additional Information are fundamental policies applicable to the
individual Funds which may be changed only when permitted by law and approved
by the holders of a majority of each Fund's outstanding voting securities, as
defined in the 1940 Act. Except for the investment restrictions set forth below
and in the Statement of Additional Information and each Fund's investment
objective, the other policies and percentage limitations referred to in this
Prospectus and in the Statement of Additional Information are not fundamental
policies of the Funds and may be changed by vote of the applicable Fund's Board
of Directors without shareholder approval.
If a percentage restriction on investment or utilization of assets is adhered
to at the time an investment is made, a later change in percentage ownership
resulting from changing market values or similar type of event will not be
considered a violation of such restriction.
MONEY MARKET FUND
The Money Market Fund may not:
(1) invest more than 5% of the current value of its total assets in the
securities of any one issuer, other than obligations issued or guaranteed
by the U.S. government, its agencies or instrumentalities; however, up to
25% of the value of the total assets of the Fund may be invested without
regard to this limitation;
(2) purchase any securities which would cause more than 25% of the value
of its total assets at the time of such purchase to be invested in
securities of one or more issuers conducting their principal business
activities in the same industry, provided that there is no limitation with
respect to investment in obligations issued or guaranteed by the U.S.
government, its agencies or instrumentalities, with respect to bank
obligations or with respect to repurchase agreements collateralized by any
of such obligations;
(3) borrow money except as a temporary measure from banks for
extraordinary or emergency purposes, and in no event in excess of 15% of
the value of its total assets, except that for the purpose of this
restriction, short-term credits necessary for settlement of securities
transactions are not considered borrowings (the Fund will not purchase any
securities at any time while such borrowings exceed 5% of the value of its
total assets); or
(4) pledge, hypothecate, mortgage or otherwise encumber its assets in
excess of 20% of the value of its total assets, and then only to secure
borrowings permitted by (3) above.
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With respect to investment limitation (1), the Fund intends (as a matter of
non-fundamental policy) to limit investments in the securities of any single
issuer (other than securities issued or guaranteed by the U.S. government, its
agencies or instrumentalities) to not more than 5% of the Fund's total assets
at the time of purchase, provided that the Fund may invest up to 25% of its
total assets in the securities of a single issuer for a period of up to three
Business Days provided such issuer meets certain credit quality requirements of
the 1940 Act.
HIGH YIELD BOND FUND AND EMERGING MARKETS DEBT FUND
The High Yield Bond Fund and Emerging Markets Debt Fund may not:
(1) With respect to the High Yield Bond Fund only, invest more than 5% of
the current value of its total assets in the securities of any one issuer,
other than obligations issued or guaranteed by the U.S. government, its
agencies or instrumentalities; however, up to 25% of the value of the
total assets of the Fund may be invested without regard to this
limitation, so long as no more than 25% of its total assets are invested
in the securities of any one issuer;
(2) borrow money, except for temporary or emergency purposes and then not
in excess of 5% of the value of the total assets of the applicable Fund at
the time the borrowing is made, except that for the purpose of this
restriction, short-term credits necessary for settlement of securities
transactions are not considered borrowings (neither Fund will purchase
additional securities at any time its borrowings exceed 5% of total
assets); or
(3) invest more than 25% of the total assets of each Fund in the
securities of issuers having their principal activities in any particular
industry, except for obligations issued or guaranteed by the U.S.
government, its agencies or instrumentalities or by any state, territory
or any possession of the United States or any of their authorities,
agencies, instrumentalities or political subdivisions, or with respect to
repurchase agreements collateralized by any of such obligations (for
purposes of this restriction, supranational issuers will be considered to
comprise an industry as will each foreign government that issues
securities purchased by a Fund).
For purposes of investment limitations (1) and (3) above, both the borrower
under a Loan and the Lender selling a Participation will be considered an
'issuer.' See 'Additional Investment Activities and Risk Factors -- Loan
Participations and Assignments.'
Purchase and
Redemption of Shares
- ----------------------------------------------
NET ASSET VALUE
For the purpose of pricing purchase and redemption orders, the net asset value
per share of each Fund is calculated separately and is determined once daily
for each Fund (other than the Money Market Fund) as of the close of regularly
scheduled trading on the New York Stock Exchange ('NYSE') (4:00 p.m., New York
time) and twice daily for the Money Market Fund, once at 12:00 noon (New York
time) and again at 4:00 p.m. (New York time). With respect to each Fund, such
calculation is determined on each day that the NYSE is open for trading, i.e.,
Monday through Friday, except for New Year's Day, 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 when one of those holidays falls on a Saturday or Sunday, respectively.
Net asset value per share of each Fund is calculated by dividing the value of
the Fund's securities and other assets, less liabilities, by the number of
shares outstanding. In calculating net asset value, all portfolio securities
will be valued at market value when there is a reliable market
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quotation available for the securities and otherwise pursuant to procedures
adopted by the applicable Fund's Board of Directors. Securities that are
primarily traded on foreign exchanges generally are valued at the preceding
closing values of such securities on their respective exchanges, except that
when an occurrence subsequent to the time a value was so established is likely
to have changed such value, then the fair value of those securities will be
determined by consideration of other factors by or under the direction of the
applicable Fund's Board of Directors. Securities may be valued by independent
pricing services which use prices provided by market-makers or estimates of
market values obtained from yield data relating to instruments or securities
with similar characteristics. In valuing a Fund's assets, any assets or
liabilities initially expressed in terms of a foreign currency are converted to
U.S. dollar equivalents at the then current exchange rate. Corporate actions by
issuers of foreign securities held by the Fund, such as payment of dividends or
distributions, are reflected in the net asset value on the ex-dividend date
therefor, except that such actions will be so reflected on the date the Fund is
actually advised of the corporate action if subsequent to the ex-dividend date.
Further information regarding the Funds' valuation policies is contained in the
Statement of Additional Information.
The Money Market Fund uses the amortized cost method to value its portfolio
securities and seeks to maintain a stable net asset value of $1.00 per share.
Each of the other Funds values short-term investments that mature in 60 days or
less at amortized cost. If a Fund acquires securities with more than sixty days
remaining to maturity, they will be valued at current market value until the
60th day prior to maturity, and will then be valued on an amortized cost basis
based upon the value on such date unless the Board determines during such
60-day period that this amortized cost basis does not represent fair value. The
amortized cost method involves valuing a security at its cost and amortizing
any discount or premium over the period until maturity, regardless of the
impact of fluctuating interest rates on the market value of the security. See
the Statement of Additional Information for a more complete description of the
amortized cost method.
PURCHASE PROCEDURES
There is no front-end sales charge or contingent-deferred sales charge imposed
on purchases of Fund shares. Under certain circumstances, certain
broker/dealers may impose transaction fees on the purchase and/or sale of
shares. The minimum initial investment in the Money Market Fund is $250,000 and
the minimum investment in the other Funds is $1,000,000. Subsequent purchases
may be made in any amount.
Shares may be purchased by completing a Purchase Application and mailing it,
together with your check payable to Salomon Brothers Funds, to:
(Name of Fund)
c/o First Data Investor Services Group
P.O. Box 5127
Westborough, MA 01581-5127
Subsequent investments may be made at any time by mailing a check to First Data
Investor Services Group, the Funds' transfer agent and dividend disbursing
agent (the 'Transfer Agent') at the address set forth above, along with a
detachable stub from the Statement of Account (or a letter providing the
account number). Shareholders should be sure to write the Fund's account number
on the check. Initial purchases of Fund shares may not be made by third party
check.
Shares of each Fund may be purchased on any business day at the net asset value
per share next determined after receipt of a purchase order. Shares
certificates will not be issued.
Share purchase orders are effective on the date the Fund receives a completed
Account Application Form (and other required documents) and federal funds
become available.
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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 #011-001-438
Account Name: Salomon Brothers Institutional Series Funds
Attn: (Name of Fund)
Salomon DDA#: 456789123
Name of Account:
Account #:
Amount of Wire:
Shareholders should note that their bank may charge a fee in connection with
transferring money by bank wire.
For a share purchase order for any Fund other than the Money Market Fund to
become effective on a particular business day, prior to 4:00 p.m. (New York
time): (i) in the case of a wire transfer payment, a purchaser must call (800)
446-1013 to inform the Transfer Agent of an incoming wire transfer; or (ii) in
the case of payment by check or money order, a complete share purchase order
must be actually received by the Transfer Agent, and, in either case, federal
funds must be received by the Transfer Agent, on behalf of the Fund. If federal
funds are received by a Fund that same day, the order will be effective on that
day. If a Fund receives notification of a wire transfer or a complete share
purchase order after 4:00 p.m., or if federal funds are not received by the
Transfer Agent, such purchase order shall be executed as of the date that
federal funds are actually received. Purchase orders for shares of the Money
Market Fund placed by 12:00 noon (New York time) on any business day will be
executed and begin to earn dividends that same day if payment is received in or
converted into federal funds by 12:00 noon (New York time) that day. Purchase
orders received after 12:00 noon (New York time) or for which payment is
received in or converted into federal funds after 12:00 noon (New York time)
will be executed and begin to earn dividends on the following business day.
REDEMPTION PROCEDURES
Each Fund will redeem all full and fractional shares of the Fund upon request
on any business day at the applicable net asset value determined after the
receipt of proper redemption instructions. Shareholders liquidating their
holdings will receive upon redemption all dividends reinvested through the date
of redemption. If notice of redemption is received on any business day, the
redemption will be effective on the date of receipt. Payment will ordinarily be
made by wire on the next business day, but, in any case, within no more than
seven business days from the date of receipt. If the notice is received on a
day that is not a business day or after the close of regularly scheduled
trading on the NYSE, the redemption notice will be deemed received as of the
next business day. The Funds do not charge a redemption fee. The value of
shares at the time of redemption may be more or less than the shareholder's
cost.
For the convenience of shareholders, each Fund has established different
redemption procedures. No redemption requests will be processed until the Fund
has received a completed Purchase Application, and no redemption of shares
purchased by check will be made until all checks received for such shares have
been collected, which may take up to 15 days or more.
REDEMPTION BY MAIL
Shares may be redeemed by mail by submitting a written request from the
registered owner(s) signed exactly as shares are registered with the signature
guaranteed by an acceptable guarantor. The Transfer Agent has adopted standards
and procedures pursuant to which signature-guarantees in proper form generally
will be accepted from domestic banks, brokers, dealers, credit unions, national
securities exchanges, registered securities associations, clearing agencies and
savings associations, as well as from
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participants in the New York Stock Exchange Medallion Signature Program, the
Securities Transfer Agents Medallion Program ('STAMP') and the Stock Exchanges
Medallion Program. Shareholders with any questions regarding
signature-guarantees should contact the transfer agent.
In certain instances, the Transfer Agent may require additional documents such
as, but not limited to, trust instruments, death certificates, appointments as
executor or administrator or certificates of corporate authority.
Checks for redemption proceeds will be mailed to the address of record within
seven days of redemption. Each Fund reserves the right to reject any order for
redemption.
REDEMPTION BY WIRE
If redemption by wire has been elected in the Purchase Application, shares may
be redeemed on any business day upon request made by telephone or letter. A
shareholder or any authorized agent (so designated on the Account Application
Form) must provide Investors Bank with the dollar or share amount to be
redeemed, the account to which the redemption proceeds should be wired, the
name of the shareholder and the shareholder's account number. Shareholders
should note that their bank may charge a fee in connection with transferring
money by wire.
A shareholder may change its authorized agent, the address of record or the
account designated to receive redemption proceeds at any time by providing the
Transfer Agent with written instructions signature guaranteed as described
above.
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. Each Fund reserves the right to refuse a
telephone request for redemption if it is believed advisable to do so.
Procedures for redeeming shares by telephone may be modified or terminated at
any time by the Funds. Neither the Funds nor the Transfer Agent will be liable
for following redemption instructions received by telephone which are
reasonably believed to be genuine, and the shareholder will bear the risk of
loss in the event of unauthorized or fraudulent telephone instructions. Each
Fund will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine. Each Fund and/or the Transfer Agent may
be liable for any losses due to unauthorized or fraudulent instructions if they
do not follow such procedures. Each Fund may require personal identification
codes.
SMALL ACCOUNTS
Each Fund reserves the right, upon not less than 30 days' written notice, to
redeem shares in an account which has a value of $10,000 or less, if the
reduction in value is the result of shareholder redemptions or transfers and
not as a result of a decline in the net asset value. However, any shareholder
affected by the exercise of this right will be allowed to make additional
investments prior to the date fixed for redemption to avoid liquidation of the
account.
EXCHANGE PRIVILEGE
Shareholders of any Fund may exchange all or part of their shares for shares of
any other Fund at the applicable relative net asset value per share. The value
of the shares exchanged must meet the investment minimum of the Fund into which
the investor is exchanging. Shares of a Fund are eligible for exchange 30 days
after purchase.
Each Fund reserves the right to refuse a telephone request for exchange if it
is believed advisable to do so. Procedures for exchanging shares by telephone
may be modified or terminated at any time by a
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Fund. None of the Funds, the Transfer Agent nor Salomon Brothers will be liable
for following exchange instructions received by telephone, which are reasonably
believed to be genuine, and the shareholder will bear the risk of loss in the
event of unauthorized or fraudulent telephone instructions. The Funds, the
Transfer Agent and Salomon Brothers may employ reasonable procedures to confirm
that instructions communicated by telephone are genuine. The Funds, the
Transfer Agent and Salomon Brothers may be liable for any losses due to
unauthorized or fraudulent instructions if they do not follow such procedures.
When requesting an exchange by telephone, shareholders should have available
the correct account registration and account numbers or tax identification
number.
The exchange of shares of one Fund for shares of another Fund is treated for
federal income tax purposes as a sale of the shares given in exchange by the
shareholder, and an exchanging shareholder may, therefore, realize a taxable
gain or loss. See 'Dividends, Distributions and Taxes.'
The exchange privilege is available to shareholders residing in any state in
which the shares of the Fund being acquired may be legally sold. Each Fund
reserves the right to reject any exchange request in whole or in part. The
exchange privilege may be modified or terminated at any time upon written
notice to shareholders.
Management
- ----------------------------------------------
DIRECTORS AND OFFICERS
The business and affairs of each Fund are managed under the direction of its
Board of Directors. The Board of Directors approves all significant agreements
between a Fund and the persons or companies that furnish services to the Fund,
including agreements with its distributor, investment manager, administrator,
custodian and transfer agent. The day-to-day operations of the Fund are
delegated to the Fund's investment manager and administrator. The Statement of
Additional Information contains general background information regarding the
Directors and officers of each Fund.
INVESTMENT MANAGER
Each Fund retains SBAM, a wholly-owned subsidiary of Salomon Brothers Holding
Company Inc, which is wholly-owned by Salomon Smith Barney Holdings, Inc.
('SSBHI') which is, in turn, wholly-owned by Travelers Group Inc.
('Travelers'), as its investment manager under an investment management
contract. 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 March 31, 1998, SBAM and such affiliates
managed approximately $27 billion of assets. SBAM's offices are located at 7
World Trade Center, New York, New York 10048.
On April 6, 1998, Travelers announced that it had entered into
a Merger Agreement with Citicorp. The transaction, which is
expected to be completed during the third quarter of 1998, is subject to
various regulatory approvals, including approval by the Federal Reserve Board.
The transaction is also subject to approval by the stockholders of each of the
Travelers Group and Citicorp. Upon consummation of the merger, it is
anticipated that SBAM and its SBAM affiliates, would be wholly-owned
subsidiaries of the merged corporation. The surviving corporation would be a
bank holding company subject to regulation under the Bank Holding Company Act
of 1956 ('BHCA'), the requirements of the Glass-Steagall Act and certain other
laws and regulations. Although the effects of the merger of Travelers and
Citicorp and compliance with the requirements of the BHCA and the
Glass-Steagall Act are still under review, SBAM has informed the Funds that it
does not believe that is compliance with applicable law following the merger of
Travelers and Citicorp will have a material
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adverse effect on its ability to continue to provide the Funds with the same
level of investment advisory services that it currently receives.
Peter J. Wilby is primarily responsible for the day-to-day management of the
High Yield Bond Fund and the Emerging Markets Debt Fund. Mr. Wilby, who joined
SBAM in 1989, is a Managing Director of Salomon Brothers Inc 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. Mr. Wilby is the portfolio manager for, among others,
Salomon Brothers High Yield Bond Fund, a portfolio of Series Funds, Salomon
Brothers Variable High Yield Bond Fund, Global Partners Income Fund Inc., The
Emerging Markets Income Fund Inc, The Emerging Markets Income Fund II Inc, The
Emerging Markets Floating Rate Fund Inc, Salomon Brothers Worldwide Income Fund
Inc, Salomon Brothers High Income Fund Inc, Salomon Brothers Variable High
Yield Bond Fund, a portfolio of Salomon Brothers Variable Series Funds Inc
('Variable Series'), the high yield and sovereign bond portions of both the
Salomon Brothers Strategic Bond Fund, a portfolio of Series Funds and the
Salomon Brothers Strategic Bond Fund, a portfolio of Variable Series and the
foreign sovereign debt component of Salomon Brothers 2008 Worldwide Dollar
Government Term Trust Inc.
Subject to policy established by the Board of Directors, which has overall
responsibility for the business and affairs of each Fund, SBAM manages the
investment and reinvestment of each Fund's assets pursuant to the applicable
management contract. SBAM also furnishes office space, personnel and certain
facilities required for the performance by SBAM of certain additional services
provided by it to each Fund under the applicable management contract, including
SEC compliance, supervision of Fund operations and certain administrative and
clerical services, and pays the compensation of the Funds' officers, employees
and directors affiliated with SBAM. Except for the expenses paid by SBAM that
are described herein, each Fund bears all costs of its operations. See
'Expenses' below.
As compensation for its services, the Money Market Fund pays SBAM a monthly fee
at an annual rate of .20% of the Fund's average daily net assets. On November
16, 1995 and March 26, 1996, the Fund's Board of Directors and stockholders,
respectively, approved an increase in the management fee payable by the Fund
from .10% to .20% of the Fund's average daily net assets. SBAM has voluntarily
agreed to reduce or otherwise limit expenses of the Money Market Fund
(exclusive of taxes, interest and extraordinary expenses such as litigation and
indemnification expenses), on an annualized basis, to .18% of the Fund's
average daily net assets for a period of at least one year from the date of this
Prospectus, and no more than .25% thereafter.
As compensation for its services, the High Yield Bond Fund pays SBAM a monthly
fee at an annual rate of .50% of the Fund's average daily net assets; 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.
The services of SBAM are not deemed to be exclusive, and nothing in the
relevant agreements will prevent either of them or their affiliates from
providing similar services to other investment companies and other clients
(whether or not their investment objectives and policies are similar to those
of any of the Funds) or from engaging in other activities.
Consistent with the Rules of Fair Practice of the National Association of
Securities Dealers Regulation Inc. and subject to seeking the most favorable
price and execution available, SBAM may consider sales of shares of the Funds
as a factor in the selection of broker/dealers to execute portfolio transactions
for the Funds. The Funds may use 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
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charged by other brokers in connection with comparable transactions involving
similar securities. See 'Portfolio Transactions' in the Statement of Additional
Information.
YEAR 2000. The investment management services provided to the Funds 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 Funds that it has been reviewing all of their
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 Funds' 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 Funds at
that time.
DISTRIBUTOR
Salomon Brothers Inc, located at 7 World Trade Center, New York, New York
10048, serves as each Fund's distributor. Salomon Brothers is a wholly-owned
subsidiary of Salomon Brothers Holding Company Inc. It is also one of the
largest securities dealers in the world and a registered broker/dealer. Salomon
Brothers, along with other broker/dealer subsidiaries of Travelers, makes
markets in securities and provides a broad range of underwriting, research, and
financial advisory services to governments, international corporations, and
institutional investors. Salomon Brothers 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.
ADMINISTRATOR
Each Fund currently employs Investors Bank & Trust Company ('IBT') under an
administration agreement to provide certain administrative services to each
Fund. Commencing in June of 1998 it is expected that each Fund will employ
Mutual Management Corp. ('MMC') as administrator. Neither IBT nor MMC is or
will be involved in the investment decisions made with respect to the Funds.
The services provided by IBT and to be provided by MMC under the administration
agreements include certain accounting, clerical and bookkeeping services, Blue
Sky reports, corporate secretarial services and assistance in the preparation
and filing of tax returns and reports to shareholders and the SEC. For its
services as administrator and custodian to the Money Market Fund, IBT receives
a fee from the Fund at an annual rate of .10% of the Fund's average daily net
assets. For its services as administrator and custodian to the High Yield Bond
Fund and Emerging Markets Debt Fund, each Fund pays IBT a fee at an annual
rate of .10% of each Fund's average daily net assets up to $500 million in net
assets and .05% of each Fund's average daily net assets in excess of $500
million. It is expected that each Fund will pay MMC and the Fund's custodian,
in the aggregate, the same fees for its services as are currently being paid
to IBT.
EXPENSES
Each Fund's expenses include taxes, interest, fees and salaries of the
directors and officers who are not directors, officers or employees of the
Fund's service contractors, SEC fees, state securities qualification fees,
costs of preparing and printing prospectuses for regulatory purposes and for
distribution to existing shareholders, advisory and administration fees,
charges of the custodian, transfer agent and dividend disbursing agent, certain
insurance premiums, outside auditing and legal expenses, costs of shareholder
reports and shareholder meetings and any extraordinary expenses. Each Fund also
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pays for brokerage fees and commissions (if any) in connection with the
purchase and sale of portfolio securities.
Dividends, Distributions
and Taxes
- ----------------------------------------------
DIVIDENDS AND DISTRIBUTIONS
The Money Market Fund intends to declare as a dividend substantially all of its
net investment income at the close of each Business Day to the Fund's
shareholders of record at 12:00 noon (New York time) on that day, and will pay
such dividends monthly. The High Yield Bond Fund and the Emerging Markets Debt
Fund will declare dividends from net investment income annually and pay them
annually.
Net investment income is a Fund's investment company taxable income, as that
term is defined in the Code, determined without regard to the deduction for
dividends paid and, for purposes of the discussion under this sub-heading,
excludes any net realized capital gain. Shares of a Fund (other than the Money
Market Fund, as described below) are entitled to dividends declared beginning
on the day after the purchase order is received in good order. Purchase orders
for shares of the Money Market Fund for which payment is received in or
converted into federal funds by 12:00 noon (New York time) on any Business Day
will become effective that day and begin to earn dividends on that day.
Purchase orders for shares of the Money Market Fund for which payment is
received in or converted into federal funds after 12:00 noon (New York time) on
any Business Day will become effective that day and begin to earn dividends on
the following Business Day. With respect to the Money Market Fund, shares
redeemed by 12:00 noon (New York time) will accrue dividends through the day
prior to redemption, shares redeemed after 12:00 noon (New York time) will
accrue dividends on the day of redemption. Net investment income for a
Saturday, Sunday or holiday will be declared as a dividend on the previous
Business Day.
Net realized short-term capital gain of each Fund, if any, will be distributed
whenever the Board of Directors determines that such distributions would be in
the best interest of shareholders, but in any event at least once a year. Each
Fund distributes annually any net realized long-term capital gain from the sale
of securities (after deducting any net realized losses that may be carried
forward from prior years). The Money Market Fund does not expect to realize any
long-term capital gain.
If, for any full fiscal year, a 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 a 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 shares of a Fund at net asset value and such shares will be
automatically credited to a shareholder's account, unless a shareholder elects
to receive either dividends or capital gains distributions in cash. If such
distributions are to be sent to an address other than the address on record or
the account designated to receive redemption proceeds a signature guarantee is
required. See 'Redemptions Procedures' above for instructions concerning
signature guarantees. Such signature must be signed exactly as registered with
the Transfer Agent. Shareholders may change the distribution option at any time
by notification to the Transfer Agent prior to the record date of any such
dividend or distribution.
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If a shareholder elects to receive dividends and/or distributions in cash and
the check cannot be delivered to a shareholder due to an invalid address or
otherwise remains uncashed by the shareholder for a period of six months, each
Fund reserves the right to reinvest the dividend and/or distribution in a
shareholder's account at the then-current net asset value and to convert the
shareholder's election to automatic reinvestment in shares of that Fund.
TAXES
FEDERAL INCOME TAX MATTERS. The Money Market Fund qualified for the fiscal year
ended December 31, 1997 and the High Yield Bond Fund and Emerging Markets Debt
Fund qualified for the fiscal year ended February 28, 1998, and each 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, a Fund will not be subject
to U.S. federal income taxes on its net investment income (i.e., its investment
company taxable income, as that term is defined in the Code, determined without
regard to the deduction for dividends paid) and net capital gain (i.e., the
excess of a Fund's net realized long-term capital gain over its net realized
short-term capital loss), if any, that it distributes to its shareholders in
each taxable year, provided that it distributes to its shareholders at least
90% of its net investment income for such taxable year. If in any year a Fund
fails to qualify as a regulated investment company, the Fund would incur
regular corporate federal income tax on its taxable income for that year and be
subject to certain additional distribution requirements upon requalification.
Each Fund will be subject to federal corporate income tax (currently at a
maximum rate of 35%) on any undistributed income and to alternative minimum tax
(currently at a maximum rate of 28%) on alternative minimum taxable income.
Each Fund is subject to a nondeductible 4% excise tax calculated as a
percentage of certain undistributed amounts of ordinary income and capital gain
net income. Under normal circumstances, each Fund intends to make sufficient
distributions to avoid the application of both the corporate income and excise
taxes.
All dividends and distributions to shareholders of a Fund of net investment
income will be taxable to shareholders whether paid in cash or reinvested in
additional shares. For federal income tax purposes, distributions of net
investment income, which includes the excess of the Fund's net realized
short-term capital gain realized over net realized long-term capital loss, are
taxable to shareholders as ordinary income. A portion of a Fund's dividends may
qualify for the dividends received deduction available to corporations.
Distributions of 'net capital gain' designated by a Fund as 'capital gain
dividends' will be taxable as long-term capital gain, whether paid in cash or
additional shares, regardless of how long the shares have been held by such
shareholders, and such distributions will not be eligible for the dividends
received deduction. In general, the maximum federal income tax rate imposed on
individuals with respect to capital assets held for more than one year but less
than eighteen months is 28% and with respect to capital assets held for more
than eighteen months is 20%. The maximum federal income tax rate imposed on
individuals with respect to ordinary income (and short-term capital gain, which
currently is taxed at the same rates as ordinary income) will be 39.6%. With
respect to corporate taxpayers, long-term capital gain currently is taxed at
the same federal income tax rates as ordinary income and short-term capital
gain. Investors should consider the tax implications of buying shares shortly
before the record date of a distribution because distributions will be taxable
even though the net asset value of shares of a Fund is reduced by the
distribution.
Funds investing in foreign securities or currencies may be required to pay
withholding or other taxes to foreign governments on dividends and interest.
The investment yield of a Fund investing in foreign securities or currencies
will be reduced by these foreign taxes. Shareholders will bear the cost of any
foreign taxes but may not be able to claim a foreign tax credit or deduction
for these foreign taxes. In addition, a Fund investing in securities of passive
foreign investment companies may be subject to
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U.S. federal income taxes (and interest on such taxes) as a result of such
investments. The investment yield of a Fund making such investments will be
reduced by these taxes and interest. Shareholders will bear the cost of these
taxes and interest, but will not be able to claim a deduction for these amounts.
The redemption, sale or exchange of shares of one Fund for shares of another is
a taxable event and may result in a gain or loss. Gain or loss, if any,
recognized on the sale or other disposition of shares of a Fund will be taxed
as capital gain or loss if the shares are capital assets in the shareholder's
hands. Generally, a shareholder's gain or loss will be a long-term gain or loss
if the shares have been held for more than one year. If a shareholder sells or
otherwise disposes of shares of a Fund before holding them for more than six
months, any loss on the sale or other disposition of such shares shall be
treated as a long-term capital loss to the extent of any capital gain dividends
received by the shareholder with respect to such shares. A loss realized on a
sale or exchange of shares may be disallowed if other shares are acquired
within a 61-day period beginning 30 days before and ending 30 days after the
date that the shares are disposed of.
Generally, shareholders will be taxable on dividends or distributions in the
year of receipt. However,
if a Fund declares a dividend or distribution in October, November or December
to shareholders
of record on a specified date in such a month which is actually paid during the
following January, it will be deemed to have been received by the shareholders
and paid by the Fund no later than December 31 of the year in which the
dividend or distribution is declared.
A Fund may make investments that produce income that is not matched by a
corresponding cash distribution to the Fund, such as investments in Pay-In-Kind
bonds or in obligations such as certain Brady Bonds or zero coupon securities
having original issue discount (i.e., an amount equal to the excess of the
stated redemption price of the security at maturity over its issue price), or
market discount (i.e., an amount equal to the excess of the stated redemption
price of the security over the basis of such bond immediately after it was
acquired) if the Fund elects to accrue market discount on a current basis. In
addition, income may continue to accrue for federal income tax purposes with
respect to a non-performing investment. Any such income would be treated as
income earned by a Fund and therefore would be subject to the distribution
requirements of the Code. Because such income may not be matched by a
corresponding cash distribution to a Fund, such Fund may be required to borrow
money or dispose of other securities to be able to make distributions to its
investors. In addition, if an election is not made to currently accrue market
discount with respect to a market discount bond, all or a portion of any
deduction or any interest expense incurred to purchase or hold such bond may be
deferred until such bond is sold or otherwise disposed of.
Each Fund may be required to withhold federal income tax at a rate of 31%
('backup withholding') from dividends and redemption proceeds paid to
noncorporate shareholders. This tax may be withheld from dividends if (i) the
payee fails to furnish the Fund with the payee's correct taxpayer
identification number (e.g., an individual's social security number), (ii) the
Internal Revenue Service ('IRS') notifies the Fund that the payee has failed to
report properly certain interest and dividend income to the IRS and to respond
to notices to that effect, or (iii) when required to do so, the payee 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 a Fund and does not constitute tax advice. Shareholders
and potential investors should consult their own tax
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advisers regarding federal, state, local and foreign tax consequences of
ownership of shares in a Fund. For a further discussion of tax considerations
affecting a Fund and its shareholders, see 'Additional Information Concerning
Taxes' in the Statement of Additional Information.
Account Services
-------------------------------------
Shareholders of each Fund will be kept informed through semi-annual reports
showing diversification of investments and other financial data for such Fund.
Annual reports for all Funds will include audited financial statements.
Shareholders of each Fund will receive a Statement of Account following each
share transaction, except for shareholders of the Money Market Fund, who will
receive a Statement of Account at least monthly showing transactions in the
account, the total number of shares owned, and any dividends or distributions
paid. Shareholders can write or call a Fund at the address and telephone number
on the front cover of this Prospectus with any questions relating to their
investment in shares of such Fund.
Capital Stock
-------------------------------------
The Institutional Series Funds was incorporated in Maryland on January 19,
1996. The authorized capital stock of the Institutional Series Funds consists
of 10,000,000,000 shares of common stock having a par value of $.001 per share.
Pursuant to the Institutional Series Funds' Articles of Incorporation, the
Board of Directors has authorized the issuance of two series of shares, each
representing shares in one of two separate funds. The High Yield Bond Fund and
the Emerging Markets Debt Fund are the currently existing portfolios of the
Institutional Series Funds. The assets of each Fund are segregated and
separately managed. The Institutional Series Funds' Board of Directors may, in
the future, authorize the issuance of additional classes of capital stock
representing shares of additional investment portfolios.
The Money Market Fund, a portfolio of the Series Funds, changed its name from
Salomon Brothers U.S. Treasury Securities Money Market Fund to its current name
on March 26, 1996. The Series Funds was incorporated in Maryland on April 17,
1990. On March 26, 1996, shareholders of the Money Market Fund approved a
change in the Fund's investment objective and policies and certain investment
restrictions to those described herein. The authorized capital stock of the
Series Funds consists of 10,000,000,000 shares of common stock having a par
value of $.001 per share. Pursuant to the Series Funds' Articles of
Incorporation and Articles Supplementary, the Board of Directors has authorized
the issuance of ten series of shares, each representing shares in one of ten
separate funds. In addition to the Money Market Fund, the portfolios of the
Series Funds include Salomon Brothers National Intermediate Municipal Fund,
Salomon Brothers U.S. Government Income Fund, Salomon Brothers High Yield Bond
Fund, Salomon Brothers Strategic Bond Fund, Salomon Brothers Total Return Fund,
Salomon Brothers Small Cap Growth Fund, Salomon Brothers Asia Growth Fund,
Salomon Brothers Cash Management Fund and Salomon Brothers New York Municipal
Money Market Fund. The assets of each fund are segregated and separately
managed. The Series Funds' Board of Directors may, in the future, authorize the
issuance of additional classes of capital stock representing shares of
additional investment portfolios.
As of the date of this Prospectus, SBAM and Salomon Brothers Holding Company
Inc, the parent company of SBAM, own a significant percentage of the
outstanding shares of the High Yield Bond Fund and Emerging Markets Debt Fund
and may therefore, be deemed to be 'control persons,' as defined in the 1940
Act, of the Funds.
Although each Fund is offering only its own shares, it is possible that a Fund
could become liable for a misstatement in this Prospectus about another Fund.
The Directors of the Institutional Series Funds and the Series Funds have
considered this factor in approving the use of a combined Prospectus.
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All shares of each Fund have equal voting rights and will be voted in the
aggregate, and not by series or class, except where voting by series or class
is required by law or where the matter involved affects only one series or
class. Each shareholder is entitled to cast, at all meetings of shareholders,
such number of votes as is equal to the number of full and fractional shares
held by such shareholder. All shares of each Fund will, when issued, be fully
paid and nonassessable. Under the corporate law of Maryland, the state of
incorporation of the Institutional Series Funds and the Series Funds, and the
By-Laws of both the Institutional Series Funds and the Series Funds, neither
the Institutional Series Funds nor the Series Funds is required and does not
currently intend to hold annual meetings of shareholders for the election of
directors except as required under the 1940 Act. A more complete statement of
the voting rights of shareholders is contained in the Statement of Additional
Information.
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Appendix A:
Description of Ratings
-------------------------------------
A DESCRIPTION OF THE RATING POLICIES OF MOODY'S, S&P AND FITCH WITH RESPECT TO
BONDS AND COMMERCIAL PAPER APPEARS BELOW.
MOODY'S 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.
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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
Salomon Brothers Inc
Seven World Trade Center
New York, New York 10048
INVESTMENT MANAGER
Salomon Brothers Asset
Management Inc
Seven World Trade Center
New York, New York 10048
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 A FUND, THE DISTRIBUTOR OR THE INVESTMENT MANAGER.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY STATE IN WHICH SUCH
OFFERING MAY NOT LAWFULLY BE MADE.
-----------------------------------------------
Salomon Brothers Asset Management
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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 '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.
May 1, 1998
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TABLE OF CONTENTS
<TABLE>
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Additional Information on Portfolio Instruments and Investment Policies......................... 3
Investment Limitations.......................................................................... 21
Additional Purchase and Redemption Information.................................................. 23
Portfolio Transactions.......................................................................... 24
Management...................................................................................... 25
Investment Manager.............................................................................. 29
Net Asset Value................................................................................. 31
Additional Information Concerning Taxes......................................................... 33
Performance Data................................................................................ 35
Capital Stock................................................................................... 37
Custodian and Transfer Agent.................................................................... 37
Independent Accountants......................................................................... 38
Counsel......................................................................................... 38
Financial Statements............................................................................ 39
</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 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
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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 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.
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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.
As stated in the Prospectus, certain of the floating or variable rate
obligations that may be purchased by a Fund may carry a demand feature that
would permit the holder to tender them back to the issuer of the instrument or
to a third party at par value prior to maturity. Some of the demand instruments
purchased by the Funds are not traded in a secondary market and derive their
liquidity solely from the ability of the holder to demand repayment from the
issuer or third party providing credit support. If a demand instrument is not
traded in a secondary market, each Fund will nonetheless treat the instrument as
'readily marketable' for the purposes of its investment restriction limiting
investments in illiquid securities unless the demand feature has a notice period
of more than seven days; if the notice period is greater than seven days, such a
demand instrument will be characterized as 'not readily marketable' for such
purpose.
A Fund's right to obtain payment at par on a demand instrument could be
affected by events occurring between the date such Fund elects to demand payment
and the date payment is due that may affect the ability of the issuer of the
instrument or a third party providing credit support to make payment when due,
except when such demand instruments permit same day settlement. To facilitate
settlement, these same day demand instruments may be held in book entry form at
a bank other than a Fund's custodian subject to a sub-custodian agreement
approved by the Fund between that bank and the Fund's custodian.
ASSET-BACKED SECURITIES
Asset-backed securities are generally issued as pass through certificates,
which represent undivided fractional ownership interests in the underlying pool
of assets, or as debt instruments, which are generally issued as the debt of a
special purpose entity organized solely for the purpose of owning such assets
and issuing such debt. Asset-backed securities are often backed by a pool of
assets representing the obligations of a number of different parties.
Asset-backed securities frequently carry credit protection in the form of extra
collateral, subordinated certificates, cash reserve accounts, letters of credit
or other enhancements. For example, payments of principal and interest may be
guaranteed up to certain amounts and for a certain time period by a letter of
credit or other enhancement issued by a financial institution unaffiliated with
the entities issuing the securities. Assets which, to date, have been used to
back asset-backed securities include motor vehicle installment sales contracts
or installment loans secured by motor vehicles, and receivables from revolving
credit (credit card) agreements.
Asset-backed securities present certain risks which are, generally, related
to limited interests, if any, in related collateral. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. Most issuers of automobile receivables permit the servicers to
retain possession of the underlying obligations. If the servicer were to sell
these
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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
17
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<PAGE>
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
18
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<PAGE>
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.
19
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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.
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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.
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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. 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.
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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.
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MANAGEMENT
DIRECTORS AND OFFICERS
The principal occupations of the directors and executive officers of the
Institutional Series Funds and the Series Funds for the past five years are
listed below. Certain of the directors and officers are also directors and
officers of one or more other investment companies for which SBAM acts as
investment manager. 'Interested directors' of the Funds (as defined in the 1940
Act) are indicated by an asterisk.
Except as indicated below, the address of each executive officer is 7 World
Trade Center, New York, New York 10048.
INSTITUTIONAL SERIES FUNDS AND SERIES FUNDS
<TABLE>
<CAPTION>
POSITION(S) PRINCIPAL OCCUPATION(S)
NAME, ADDRESS AND AGE HELD PAST 5 YEARS
- ------------------------------------ -------------------------- ---------------------------------------
<S> <C> <C>
Charles F. Barber .................. Director and Chairman, Consultant; formerly, Chairman of the
66 Glenwood Drive Audit Committee Board, ASARCO Incorporated.
Greenwich, CT 06830
Age: 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, Smith Barney, Inc.;
Age: 64 President President and Director, Mutual
Management Corp. and Travelers
Investment Adviser, Inc.; Chairman of
Smith Barney Strategy Advisers Inc.
Steven Guterman .................... Executive Vice Managing Director of SBAM and SBI since
Age: 44 President January 1996. Prior to January 1996,
(Series Fund only) Director of SBAM and SBI.
Peter J. Wilby ..................... Executive Vice Managing Director of SBAM and SBI since
Age: 39 President January 1996. Prior to January 1996,
Director of SBAM and SBI.
Richard E. Dahlberg ................ Executive Vice Managing Director of SBAM and SBI since
Age: 58 President January 1996. From July 1995 to
(Series Funds only) January 1996, Director of SBAM and
SBI. Prior to July 1995, Senior Vice
President and Senior Portfolio
Manager with Massachusetts Financial
Services.
Marybeth Whyte ..................... Executive Vice President Director of SBAM and SBI since January
Age: 42 1995. From July 1994 to December
1994, Vice President of SBAM and SBI.
Prior to July 1994, Senior Vice
President and head of the Municipal
Bond area at Fiduciary Trust Company
International.
Beth A. Semmel ..................... Executive Vice President Director of SBAM and SBI since January
Age: 37 1996. From May 1993 to December 1995,
Vice President of SBAM and SBI. From
January 1989 to May 1993, Vice
President of Morgan Stanley Asset
Management.
</TABLE>
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<TABLE>
<CAPTION>
POSITION(S) PRINCIPAL OCCUPATION(S)
NAME, ADDRESS AND AGE HELD PAST 5 YEARS
- ------------------------------------ -------------------------- ---------------------------------------
<S> <C> <C>
Maureen O'Callaghan ................ Executive Vice President Director of SBAM and SBI since October
Age: 34 1988.
James E. Craige .................... Executive Vice President Director, SBAM and Salomon Brothers Inc
Age: 30 since 1992.
Thomas K. Flanagan ................. Executive Vice President Director, SBAM and Salomon Brothers Inc
Age: 45 since 1991.
Nancy Noyes ........................ Vice President Director, SBAM and SBI since January
Age: 39 (Series Funds only) 1996. From August 1992 to January
1996, Vice President, SBAM and SBI.
Noel B. Daugherty .................. Secretary Employee of SBAM since November 1996.
Age: 32 From August 1993 to October 1996, an
employee of Chancellor LGT Asset
Management. From October 1989 to
August 1993, an employee of The
Dreyfus Corporation.
Alan M. Mandel ..................... Treasurer Vice President of SBAM and SBI since
Age: 40 January 1995. Prior to January 1995,
Chief Financial Officer and Vice
President of Hyperion Capital
Management Inc.
Janet Tolchin ...................... Assistant Treasurer Investment Accounting Manager of SBAM.
Age: 39
Amy Yeung .......................... Assistant Treasurer Investment Accounting Manager of SBAM
Age: 32 since April 1995; formerly Manager of
McGladrey & Pullen, LLP (accounting
firm).
</TABLE>
Directors of the Series Funds and Institutional Series Funds not affiliated
with SBAM receive from their respective Funds an annual fee and a fee for each
Board of Directors and Board committee meeting attended and are reimbursed for
all out-of-pocket expenses relating to attendance at meetings. Directors who are
affiliated with SBAM do not receive compensation but are reimbursed for all
out-of-pocket expenses relating to attendance at such meetings.
The following lists shareholders of record who held 5% or more of the
outstanding shares of the Funds as of April 1, 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 April 1, 1998, Salomon Brothers
Asset Management Inc and its affiliates, 7 World Trade Center, New York, NY
10048, own 5.30% and 8.10% of the outstanding 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 58.76%
u/a DTD 9/1/90
Salomon Brothers Inc Retirement Plan
388 Greenwich Street
7th Floor
New York, NY 10013
Money Market Fund............................ Saturn & Co. 24.79%
c/o Investors Bank & Trust Co.
P.O. Box 1537
Top 57
Boston, MA 02205-1537
Money Market Fund............................ Silicon Alley Management Inc. 9.64%
103 Faulk Rd. Ste. 260
Wilmington, DE 19803
</TABLE>
(table continued on next page)
26
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
(table continued from previous page)
PERCENTAGE
FUND SHAREHOLDER HELD
- --------------------------------------------- ------------------------------------------ ----------
<S> <C> <C>
High Yield Bond Fund......................... L-3 Communications Corp. 94.55%
Master Trust
600 Third Ave.
New York, NY 10016
High Yield Bond Fund......................... Salomon Brothers A/C PWM1207 5.30%
Attn: Jim Hamerschlag
7 World Trade Center
New York, NY 10048
Emerging Markets Debt Fund................... L-3 Communications Corp. 58.70%
Master Trust
600 Third Avenue
New York, NY 10016
Emerging Markets Debt Fund................... Michael Alper & 21.53%
Pamela Alper JTWROS
7263 Fisher Island Drive
Fisher Island, FL 33109
Emerging Markets Debt Fund................... Salomon Brothers A/C PWM1207 8.10%
Attn: Jim Hamerschlag
7 World Trade Center
New York, NY 10048
</TABLE>
As of April 1, 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,
1997 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, 1997 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>
AGGREGATE
COMPENSATION TOTAL COMPENSATION
FROM THE FROM OTHER FUNDS
NAME OF PERSON, POSITION SERIES FUNDS ADVISED BY SBAM(A) TOTAL COMPENSATION
- --------------------------------------- ------------ ------------------ ---------------------
<S> <C> <C> <C>
Charles F. Barber, Director............ $9,000 $107,750(14) $ 139,437(22)*
Daniel P. Cronin, Director............. $9,500 $ 29,700(5) $ 39,200(6)
Carol L. Colman, Director.............. $9,000 $ 27,250(5) $ 36,250(6)
</TABLE>
- ------------
(A) The numbers in parenthesis indicate the applicable number of investment
company directorships held by that director.
* Includes compensation from investment companies advised by affiliates of
SBAM.
27
<PAGE>
<PAGE>
INSTITUTIONAL SERIES FUNDS
<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION
FROM THE TOTAL COMPENSATION
INSTITUTIONAL FROM OTHER FUNDS
NAME OF PERSON, POSITION SERIES FUNDS* ADVISED BY SBAM(A) TOTAL COMPENSATION(A)
- ----------------------------------------- ------------- ------------------ ---------------------
<S> <C> <C> <C>
Charles F. Barber, Director.............. $5,500 $111,250(14) $133,850(22)**
Daniel P. Cronin, Director............... $5,500 $ 33,700(5) $ 39,200(6)
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.
28
<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. On November 28, 1997, Salomon Inc ('Salomon'), the ultimate parent
company of SBAM and Salomon Brothers Inc ('Salomon Brothers'), the Funds'
distributor, merged with and into Smith Barney Holdings Inc., a subsidiary of
Travelers Group Inc. ('Travelers'), to form a new company called Salomon Smith
Barney Holdings Inc. (the 'Transaction'). Upon consummation of the Transaction,
Travelers became the ultimate parent of SBAM and Salomon Brothers, which
continue to serve as the investment adviser and distributor, respectively, to
the Funds. Travelers is a diversified financial services company engaged in
investment services, asset management, consumer finance and life and property
casualty insurance services.
Under certain interpretations, the Transaction might be deemed to have
created an 'assignment' as defined in the 1940 Act, of (i) the Funds' management
contracts with SBAM; and (ii) the Funds' distribution agreements with SBI,
which, if so interpreted, would have resulted in the termination of such
contracts and agreements. Accordingly, the Funds' Boards approved new management
contracts and new distribution agreements for the Funds which are substantially
the same as existing contracts and agreements and which became effective on
November 28, 1997. The new management contracts were most recently approved by
shareholders at a special meeting held on January 14, 1998.
On April 6, 1998, Travelers announced that it had entered into a Merger
Agreement with Citicorp. The transaction, which is expected to be completed
during the third quarter of 1998, is subject to various regulatory approvals,
including approval by the Federal Reserve Board. The transaction is also subject
to approval by the stockholders of each of the Travelers Group and Citicorp.
Upon consummation of the merger, it is anticipated that SBAM and its SBAM
affiliates, would be wholly-owned subsidiaries of the merged corporation. The
surviving corporation would be a bank holding company subject to regulation
under the Bank Holding Company Act of 1956 ('BHCA'), the requirements of the
Glass-Steagall Act and certain other laws and regulations. Although the effects
of the merger of Travelers and Citicorp and compliance with the requirements
of the BHCA and the Glass-Steagall Act are still under review, SBAM has informed
the Funds that it does not believe that is compliance with applicable law
following the merger of Travelers and Citicorp will have a material adverse
effect on its ability to continue to provide the Funds with the same level of
investment advisory services that it currently receives.
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
29
<PAGE>
<PAGE>
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, 1995, 1996 and 1997, the Money Market Fund paid
SBAM $8,121 (which reflects a waiver of $7,096), $0 (which reflects a waiver of
$126,986, and $0 (which reflects a waiver of $350,642 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, 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
30
<PAGE>
<PAGE>
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 currently 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, 1995, 1996 and 1997, the Money Market Fund paid fees of
$26,600 (which reflects a waiver of $31), $69,483 (which reflects a waiver of
$20,267) and $189,460 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. In June of 1998, it is expected that each Fund will employ Mutual
Management Corp., an affiliate of SBAM, as administrator.
DISTRIBUTOR
Shares of the Fund are offered on a continuous basis and without a sales
charge through Salomon Brothers as distributor pursuant to a distribution
agreement between Salomon Brothers and the Funds. Salomon Brothers receives no
remuneration for its services as distributor and is not obligated to sell any
specific amount of Fund shares.
EXPENSES
Each Fund's expenses include taxes, interest, fees and salaries of such
Fund directors and officers who are not directors, officers or employees of the
Fund's service contractors, SEC fees, state securities qualification fees, costs
of preparing and printing prospectuses for regulatory purposes and for
distribution to existing shareholders, advisory and administration fees, charges
of the custodian and of the transfer and dividend disbursing agent, certain
insurance premiums, outside auditing and legal expenses, costs of shareholder
reports and shareholder meetings and any extraordinary expenses. Each Fund also
pays for brokerage fees and commissions (if any) in connection with the purchase
and sale of portfolio securities.
NET ASSET VALUE
In calculating net asset value, portfolio securities listed or traded on
national securities exchanges, or reported by the NASDAQ National Market
reporting system, are valued at the last sale price, or, if there have been no
sales on that day, at the mean of the current bid and ask price which represents
the current value of the security. Over-the-counter securities are valued at the
mean of the current bid and ask price.
Securities that are primarily traded on foreign exchanges generally are
valued at the preceding closing values of such securities on their respective
exchanges, except that when an occurrence subsequent to the time a value was so
established is likely to have changed such value, then the fair value of those
securities will be determined by consideration of other factors by or under the
direction of each Company's Board of Directors or its delegates. In valuing
assets, prices denominated in foreign currencies are converted to U.S. dollar
equivalents at the current exchange rate. Securities may be valued by
independent pricing
31
<PAGE>
<PAGE>
services which use prices provided by market-makers or estimates of market
values obtained from yield data relating to instruments or securities with
similar characteristics. Short-term obligations with maturities of 60 days
or less are valued at amortized cost, which constitutes fair value as
determined by the Board of Directors. Amortized cost involves valuing an
instrument at its original cost to a Fund and thereafter assuming a constant
amortization to maturity of any discount or premium, regardless of the impact of
fluctuating interest rates on the market value of the instrument. All other
securities and other assets of a Fund will be valued at fair value as determined
in good faith pursuant to procedures adopted by the Board of Directors of the
applicable Fund.
As stated in the Prospectus, the Money Market Fund seeks to maintain a net
asset value of $1.00 per share with respect to the Fund and, values the Fund's
instruments on the basis of amortized cost pursuant to Rule 2a-7 under the 1940
Act. While this method provides certainty in valuation, it may result in periods
during which value, as determined by amortized cost, is higher or lower than the
price the Fund would receive if it sold the instrument. During such periods the
yield to investors in the Fund may differ somewhat from that obtained in a
similar company which uses market values for all its portfolio securities. For
example, if the use of amortized cost resulted in a lower (higher) aggregate
portfolio value on a particular day, a prospective investor in the Fund would be
able to obtain a somewhat higher (lower) yield than would result from investment
in such a similar company, and existing investors would receive less (more)
investment income. The purpose of using the amortized cost method of calculation
is to attempt to maintain a stable net asset value per share of $1.00.
The Board of Directors of Series Funds has established procedures
applicable to the Money Market Fund, reasonably designed, taking into account
current market conditions and the Money Market Fund's investment objective, to
stabilize the net asset value per share as computed for the purposes of sales
and redemptions at $1.00. These procedures include periodic review, as the Board
of Directors deems appropriate and at such intervals as are reasonable in light
of current market conditions, of the amortized cost value per share and net
asset value per share based upon available indications of market value.
In the event of a deviation of 1/2 of 1% between the Money Market Fund's
net asset value based upon available market quotations or market equivalents and
$1.00 per share based on amortized cost, the Board of Directors will promptly
consider what action, if any, should be taken. The Board of Directors will also
take such action as they deem appropriate to eliminate or to reduce to the
extent reasonably practicable any material dilution or other unfair result which
might arise from differences between the two. Such action may include redemption
in kind, selling instruments prior to maturity to realize capital gains or
losses or to shorten the average maturity, withholding dividends, or utilizing a
net asset value per share as determined by using available market quotations.
32
<PAGE>
<PAGE>
ADDITIONAL INFORMATION CONCERNING TAXES
TAXATION OF A FUND
The following discussion is a brief summary of certain additional tax
considerations affecting a Fund and its shareholders. No attempt is made to
present a detailed explanation of all federal, state, local and foreign tax
concerns, and the discussions set forth here and in the Prospectus do not
constitute tax advice. Investors are urged to consult their own tax advisers
with specific questions relating to federal, state, local or foreign taxes.
The Money Market Fund has qualified for the fiscal year ended December 31,
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
33
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<PAGE>
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
34
<PAGE>
<PAGE>
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
one year but less than 18 months is 28%, and with respect to capital assets held
for more than 18 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 as well as the portions of its capital gain dividends that will be
eligible for the 28% and 20% rates. 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.
AVERAGE ANNUAL TOTAL RETURN
A Fund's 'average annual total return' figures, as described and shown in
the Prospectus, are computed according to a formula prescribed by the SEC. The
formula can be expressed as follows:
P(1+T)'pp'n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = Ending Redeemable Value of a hypothetical $1,000 payment made at the
beginning of a 1-, 5-, or 10-year period at the end of such period
(or fractional portion thereof), assuming reinvestment of all
dividends and distributions.
The performance data represents past performance; investment returns and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
35
<PAGE>
<PAGE>
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).
<TABLE>
<CAPTION>
FROM MAY 15,
1996
(COMMENCEMENT OF
OPERATIONS)
YEAR ENDED THROUGH FEBRUARY
FUND FEBRUARY 28, 1998 28, 1998
---- ----------------- ----------------
<S> <C> <C>
High Yield Bond Fund.......................................... 11.12% 14.74%
</TABLE>
<TABLE>
<CAPTION>
FROM OCTOBER 17,
1996
(COMMENCEMENT OF
OPERATIONS)
YEAR ENDED THROUGH FEBRUARY
FUND FEBRUARY 28, 1998 28, 1998
---- ----------------- ----------------
<S> <C> <C>
Emerging Markets Debt Fund.................................... 14.61% 19.36%
</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:
AGGREGATE TOTAL RETURN = ERV - P
-------
P
Where: P = a hypothetical initial payment of $10,000.
ERV = Ending Redeemable Value of a hypothetical $10,000 investment made
at the beginning of a 1-, 5-, or 10-year period at the end of such
period (or fractional portion thereof), assuming reinvestment of
all dividends and distributions.
The following table sets forth the aggregate total return for 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).
<TABLE>
<CAPTION>
MAY 15, 1996
(COMMENCEMENT OF
OPERATIONS)
THROUGH
FEBRUARY 28,
FUND 1998
---- ----------------
<S> <C>
High Yield Bond Fund.............................................................. 27.91%
</TABLE>
<TABLE>
<CAPTION>
OCTOBER 17, 1996
(COMMENCEMENT OF
OPERATIONS)
THROUGH
FEBRUARY 28,
FUND 1998
---- ----------------
<S> <C>
Emerging Markets 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 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.
36
<PAGE>
<PAGE>
For the seven-day period ended December 31, 1997, the annualized yield and
effective yield of the Money Market Fund were 5.78% and 5.95%, respectively.
In periods of declining interest rates the Money Market Fund's yield will
tend to be somewhat higher than prevailing market rates on short-term
obligations, and in periods of rising interest rates the Fund's yield will tend
to be somewhat lower. Also, when interest rates are falling, the inflow of net
new money to the Money Market Fund from the continuous sale of shares will
likely be invested in portfolio instruments producing lower yields than the
balance of the Fund's portfolio, thereby reducing the Fund's current yield. In
periods of rising interest rates, the opposite can be expected to occur.
Any quotation of performance stated in terms of yield will be given no
greater prominence than the information prescribed under SEC rules. In addition,
all advertisements containing performance data of any kind will include a legend
disclosing that such performance data represents past performance and that the
investment return and principal value of an investment will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost.
Advertisements and communications may compare a Fund's performance with
that of other mutual funds, as reported by Lipper Analytical Services, Inc. or
similar independent services or financial publications. From time to time,
advertisements and other Fund materials and communications may cite statistics
to reflect a Fund's performance over time utilizing comparisons to indices.
A Fund's performance will vary from time to time depending upon market
conditions, the composition of its portfolio and operating expenses.
Consequently, any given performance quotation should not be considered
representative of the performance of Fund shares for any specified period in the
future. Because performance will vary, it may not provide a basis for comparing
an investment in Fund shares with certain bank deposits or other investments
that pay a fixed return for a stated period of time. Investors comparing a
Fund's performance with that of other mutual funds should give consideration to
the nature, quality and maturity of the respective investment companies'
portfolio securities and market conditions. An investor's principal is not
guaranteed by any Fund.
CAPITAL STOCK
As used in the Prospectus and this Statement of Additional Information, the
term 'majority,' when referring to the approvals to be obtained from
shareholders in connection with matters affecting a particular Fund or any other
single portfolio (e.g., approval of investment management contracts), means the
vote of the lesser of: (i) 67% of the shares of the portfolio represented at a
meeting if the holders of more than 50% of the outstanding shares of the
portfolio are present in person or by proxy; or (ii) more than 50% of the
outstanding shares of the portfolio. Shareholders are entitled to one vote for
each full share held and fractional votes for fractional shares held.
Each Fund share is entitled to such dividends and distributions out of the
income earned on the assets belonging to that Fund as are declared in the
discretion of the Fund's Board of Directors.
In the event of the liquidation or dissolution of the Institutional Series
Funds or Series Funds, as the case may be, shares of a Fund are entitled to
receive the assets attributable to it that are available for distribution, and a
proportionate distribution, based upon the relative net assets of a Fund, of any
general assets not attributable to a Fund that are available for distribution.
Shareholders are not entitled to any preemptive rights. All shares, when issued,
will be fully paid, non-assessable, fully transferable and redeemable at the
option of the holder.
CUSTODIAN AND TRANSFER AGENT
IBT 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
37
<PAGE>
<PAGE>
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.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP ('Price Waterhouse') serves as each Fund's independent
accountants. Price Waterhouse provides audit services, tax return preparation
and assistance and consultation in connection with review of SEC filings. The
financial statements and financial highlights included or incorporated by
reference in the Prospectus and included in this Statement of Additional
Information have been included in reliance upon the report of Price Waterhouse,
independent accountants, given on the authority of that firm as experts in
auditing and accounting. Price Waterhouse's address is 1177 Avenue of the
Americas, New York, New York 10036.
COUNSEL
Simpson Thacher & Bartlett 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' Prospectus.
38
<PAGE>
<PAGE>
FINANCIAL STATEMENTS
The audited financial statements for the Institutional Money Market Fund
for the fiscal year ended December 31, 1997 as well as the audited financial
statements for the High Yield Bond Fund and the Emerging Markets Debt Fund for
the fiscal year ended February 28, 1998 are contained on the following pages.
39
<PAGE>
<PAGE>
SALOMON BROTHERS INSTITUTIONAL SERIES FUNDS INC
PORTFOLIO OF INVESTMENTS
FEBRUARY 28, 1998
SALOMON BROTHERS INSTITUTIONAL HIGH YIELD BOND FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL INTEREST MATURITY VALUE
AMOUNT DESCRIPTION RATE DATE (NOTE 1a)
- ---------- --------------------------------------------------------------- -------- -------- -----------
<C> <S> <C> <C> <C>
CORPORATE BONDS -- 74.7%
BASIC INDUSTRIES -- 8.3%
$ 100,000 Berry Plastics................................................. 12.250% 04/15/04 $ 110,500
250,000 Huntsman Packaging............................................. 9.125 10/01/07 257,500
500,000 Murrin Murrin Holdings......................................... 9.375 08/31/07 488,125
500,000 Stone Container................................................ 10.750 10/01/02 526,250
500,000 Tekni-Plex..................................................... 9.250 03/01/08 506,875
-----------
1,889,250
-----------
CONSUMER CYCLICALS -- 2.6%
100,000 Hills Stores................................................... 12.500 07/01/03 85,250
500,000 Maxim Group.................................................... 9.250 10/15/07 505,000
-----------
590,250
-----------
CONSUMER NON-CYCLICALS -- 17.0%
500,000 Ameriserv Food................................................. 8.875 10/15/06 517,500
350,000 Delta Beverage Group........................................... 9.750 12/15/03 366,625
250,000 French Fragrances.............................................. 10.375 05/15/07 267,500
100,000 Graham Field Health Products................................... 9.750 08/15/07 106,000
500,000 Grand Casinos.................................................. 9.000 10/15/04 517,500
250,000 Herff Jones.................................................... 11.000 08/15/05 276,250
100,000 Imperial Holly................................................. 9.750 12/15/07 103,000
100,000 Integrated Health Services..................................... 9.250 01/15/08 104,250
100,000 North Altlantic Trading........................................ 11.000 06/15/04 105,000
250,000 Packaged Ice................................................... 9.750 02/01/05 257,500
65,000 Rayovac........................................................ 10.250 11/01/06 71,825
400,000 Revlon Worldwide(a)............................................ 9.964 03/15/01 295,000
100,000 SC International Services...................................... 9.250 09/01/07 106,000
100,000 ShopVac........................................................ 10.625 09/01/03 109,500
200,000 Stroh Brewery.................................................. 11.100 07/01/06 151,000
500,000 Universal Hospital Services.................................... 10.250 03/01/08 505,000
-----------
3,859,450
-----------
DATA TECHNOLOGY/INFORMATION SERVICES -- 1.3%
100,000 DecisionOne Holdings
(Zero Coupon until 08/01/02, 11.50% thereafter)(a)........... 10.092 08/01/08 61,500
250,000 Unisys......................................................... 7.875 04/01/08 247,500
-----------
309,000
-----------
</TABLE>
See accompanying notes to financial statements.
PAGE 40
<PAGE>
<PAGE>
SALOMON BROTHERS INSTITUTIONAL SERIES FUNDS INC
PORTFOLIO OF INVESTMENTS
FEBRUARY 28, 1998
SALOMON BROTHERS INSTITUTIONAL HIGH YIELD BOND FUND (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL INTEREST MATURITY VALUE
AMOUNT DESCRIPTION RATE DATE (NOTE 1a)
- ---------- --------------------------------------------------------------- -------- -------- -----------
ENERGY -- 8.9%
<C> <S> <C> <C> <C>
$ 250,000 Costilla Energy................................................ 10.250% 10/01/06 $ 257,500
250,000 Dailey International........................................... 9.500 02/15/08 250,000
100,000 Dawson Product Services........................................ 9.375 02/01/07 104,500
500,000 Hvide Marine................................................... 8.375 02/15/08 492,500
100,000 National Energy Group.......................................... 10.750 11/01/06 102,500
200,000 Offshore Logistics............................................. 7.875 01/15/08 203,000
100,000 Parker Drilling................................................ 9.750 11/15/06 108,000
250,000 Transamerican Energy........................................... 11.500 06/15/02 253,437
250,000 Wainoco Oil.................................................... 9.125 02/15/06 248,750
-----------
2,020,187
-----------
FINANCIAL/LEASING -- 4.5%
250,000 ATC Group Services............................................. 12.000 01/15/08 251,250
500,000 MS Aircraft Finance............................................ 8.700 03/15/23 506,250
250,000 Nationwide Credit.............................................. 10.250 01/15/08 259,375
-----------
1,016,875
-----------
MANUFACTURING -- 11.7%
50,000 Alvey Systems.................................................. 11.375 01/31/03 53,625
100,000 Amphenol....................................................... 9.875 05/15/07 106,500
100,000 High Voltage Engineering....................................... 10.500 08/15/04 105,500
250,000 Insilco........................................................ 10.250 08/15/07 265,000
250,000 International Utility Structures............................... 10.750 02/01/08 259,375
500,000 Navistar International......................................... 8.000 02/01/08 505,000
500,000 Polymer Group.................................................. 8.750 03/01/08 501,900
500,000 Stellex Industries............................................. 9.500 11/01/07 510,000
250,000 Stena AB....................................................... 10.500 12/15/05 275,625
100,000 TFM
(Zero Coupon until 06/15/02, 11.75% thereafter)(a)........... 11.398 06/15/09 64,250
-----------
2,646,775
-----------
</TABLE>
See accompanying notes to financial statements.
PAGE 41
<PAGE>
<PAGE>
SALOMON BROTHERS INSTITUTIONAL SERIES FUNDS INC
PORTFOLIO OF INVESTMENTS
FEBRUARY 28, 1998
SALOMON BROTHERS INSTITUTIONAL HIGH YIELD BOND FUND (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL INTEREST MATURITY VALUE
AMOUNT DESCRIPTION RATE DATE (NOTE 1a)
- ---------- --------------------------------------------------------------- -------- -------- -----------
MEDIA -- 15.1%
<C> <S> <C> <C> <C>
$ 500,000 Century Communications(a)................................ 8.878% 01/15/08 $ 212,500
500,000 DTI Holdings
(Zero Coupon until 03/01/03, 12.50%
thereafter)(a)......................................... 12.500 03/01/08 271,250
250,000 Facilicom International.................................. 10.500 01/15/08 255,625
250,000 Global Telesystems Group................................. 9.875 02/15/05 257,500
100,000 Hollinger International Publishing....................... 9.250 02/01/06 106,250
250,000 ICG Holdings
(Zero Coupon until 9/15/00, 13.50%
thereafter)(a)......................................... 11.459 09/15/05 207,500
500,000 Intermedia Commission of Florida
(Zero Coupon until 05/15/01, 12.50%
thereafter)(a)......................................... 9.794 05/15/06 403,750
150,000 International CableTel
(Zero Coupon until 02/01/01, 11.50%
thereafter)(a)......................................... 11.804 02/01/06 120,000
250,000 KMC Telecom Holdings
(Zero Coupon until 02/15/03, 12.50%
thereafter)(a)......................................... 12.499 02/15/08 140,625
500,000 LIN Television........................................... 8.375 03/01/08 501,250
150,000 Marcus Cable
(Zero Coupon until 06/15/00, 14.25%
thereafter)(a)......................................... 13.316 12/15/05 133,875
250,000 Mastec................................................... 7.750 02/01/08 251,250
500,000 Nextel Communications
(Zero Coupon until 02/15/03, 9.95%
thereafter)(a)......................................... 9.950 02/15/08 305,000
250,000 Production Resource...................................... 11.500 01/15/08 251,250
-----------
3,417,625
-----------
SERVICES/OTHER -- 3.2%
400,000 Allied Waste
(Zero Coupon until 06/01/02, 11.30%
thereafter)(a)......................................... 9.400-11.300 06/01/07 292,000
250,000 Kindercare Learning Centers.............................. 9.500 02/15/09 256,875
50,000 Loomis Fargo............................................. 10.000 01/15/04 51,000
100,000 Norcal Waste Systems*.................................... 13.500 11/15/05 116,500
-----------
716,375
-----------
UTILITIES -- 2.1%
450,000 AES...................................................... 8.500 11/01/07 465,750
-----------
TOTAL INVESTMENTS -- 74.7%
(cost $16,823,435)..................................... 16,931,537
-----------
REPURCHASE AGREEMENT -- 11.8%
2,678,000 Repurchase Agreement dated 02/27/98, with
Merrill, Lynch, Pierce, Fenner & Smith,
collateralized by $2,545,000 U.S. Treasury Notes,
8.75%, due 05/15/00 valued at $2,732,694;
proceeds: $2,679,250 (cost $2,678,000)................. 5.600 03/02/98 2,678,000
-----------
Other assets in excess of liabilities -- 13.5%........... 3,054,223
-----------
NET ASSETS -- 100.0%..................................... $22,663,760
-----------
-----------
</TABLE>
* Interest rate shown reflects current rate on instrument with variable rates
or step coupon rates.
(a) Zero or step coupon bond. Interest rate shown reflects yield to maturity on
date of purchase.
See accompanying notes to financial statements.
PAGE 42
<PAGE>
<PAGE>
SALOMON BROTHERS INSTITUTIONAL SERIES FUNDS INC
PORTFOLIO OF INVESTMENTS
FEBRUARY 28, 1998
SALOMON BROTHERS INSTITUTIONAL EMERGING MARKETS DEBT FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL INTEREST MATURITY VALUE
AMOUNT DESCRIPTION RATE DATE (NOTE 1a)
- ---------- --------------------------------------------------------------- -------- -------- -----------
<C> <S> <C> <C> <C>
SOVEREIGN BONDS -- 78.5%
ARGENTINA -- 20.6%
$ 150,000 Republic of Argentina, Bonos Del Tesoro*....................... 8.750% 05/09/02 $ 146,550
1,395,465 Republic of Argentina, Bocon*.................................. 2.976 04/01/07 1,023,381
1,100,000 Republic of Argentina, Global Bond(d).......................... 11.000 10/09/06 1,237,225
250,000 Republic of Argentina, Global Bond............................. 11.750 02/12/07 265,000
250,000 Republic of Argentina, Global Bond............................. 8.750 07/10/02 230,000
100,000 Republic of Argentina, Global Bond............................. 9.750 09/19/27 99,700
-----------
3,001,856
-----------
BRAZIL -- 4.4%
798,182 Federal Republic of Brazil, Capitalization Bond(a)............. 8.000 04/15/14 647,525
-----------
BULGARIA -- 3.7%
250,000 Republic of Bulgaria, Discount Bond, Tranche A*................ 6.563 07/28/24 201,094
450,000 Republic of Bulgaria, IAB*..................................... 6.563 07/28/11 345,656
-----------
546,750
-----------
CROATIA -- 3.0%
500,000 Republic of Croatia, FRN Series A*............................. 6.500 07/31/10 443,125
-----------
ECUADOR -- 3.7%
250,000 Republic of Ecuador, Discount Bond*............................ 6.625 02/28/25 185,783
500,697 Republic of Ecuador, PDI Bond*(a).............................. 6.625 02/27/15 321,229
55,634 Republic of Ecuador, Registered PDI Bond*(a)................... 6.625 02/27/15 35,693
-----------
542,705
-----------
IVORY COAST -- 0.8%
325,000 Republic of Ivory Coast, FLIRB(b).............................. -- 03/29/18 112,227
-----------
MEXICO -- 4.2%
500,000 United Mexico States, Global Bond.............................. 11.500 05/15/26 612,750
-----------
PANAMA -- 4.4%
500,000 Republic of Panama, IRB*....................................... 3.750 07/17/14 391,250
312,440 Republic of Panama, PDI Bond*(a)............................... 6.563 07/17/16 258,153
-----------
649,403
-----------
PERU -- 4.7%
750,000 Republic of Peru, FLIRB*....................................... 3.250 03/07/17 456,563
300,000 Republic of Peru, Registered PDI Bond*......................... 4.000 03/07/17 199,875
50,000 Republic of Peru, PDI Bond*.................................... 4.000 03/07/17 33,313
-----------
689,751
-----------
PHILIPPINES -- 0.7%
100,000 Republic of the Philippines Treasury Bill(f)................... 5.750 08/14/98 101,000
-----------
RUSSIA -- 16.6%
2,600,000 Russian Government, Global Bond................................ 10.000 06/26/07 2,416,372
-----------
</TABLE>
See accompanying notes to financial statements.
PAGE 43
<PAGE>
<PAGE>
SALOMON BROTHERS INSTITUTIONAL SERIES FUNDS INC
PORTFOLIO OF INVESTMENTS
FEBRUARY 28, 1998
SALOMON BROTHERS INSTITUTIONAL EMERGING MARKETS DEBT FUND (CONCLUDED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL INTEREST MATURITY VALUE
AMOUNT DESCRIPTION RATE DATE (NOTE 1a)
- ---------- --------------------------------------------------------------- -------- -------- -----------
VENEZUELA -- 11.7%
<C> <S> <C> <C> <C>
$1,904,760 Republic of Venezuela, DCB, Series DL*......................... 6.813% 12/18/07 $ 1,703,570
-----------
TOTAL SOVEREIGN BONDS
(cost $11,039,565).................................................................. 11,467,034
-----------
LOAN PARTICIPATIONS -- 3.9%
ALGERIA -- 0.6%
100,000 The People's Democratic Republic of Algeria,
Tranche A*(c) (Chase Manhattan Bank)......................... 7.000 09/04/06 83,188
-----------
MOROCCO -- 3.3%
550,000 Kingdom of Morocco, Tranche A*(c) (Chase Manhattan Bank and
Morgan Guaranty Trust Company)............................... 6.656 01/01/09 483,313
-----------
TOTAL LOAN PARTICIPATIONS
(cost $534,298)................................................................... 566,501
-----------
PURCHASED OPTIONS(e) -- 0.4%
BRAZIL -- 0.4%
CONTRACTS
---------
20,000 Federal Republic of Brazil OTC Call
(expiring 05/12/98, exercise price $80.6875) (cost $64,612)......................... 58,626
-----------
TOTAL INVESTMENTS -- 82.8%
(cost $11,638,475)................................................................ 12,092,161
Other assets in excess of liabilities -- 17.2%........................................ 2,504,174
-----------
NET ASSETS -- 100.0%.................................................................. $14,596,335
-----------
-----------
</TABLE>
- ------------------------
* Interest rate shown reflects current rate on instrument with variable rates
or step coupon rates.
(a) Payment-in-kind security for which all or part of the interest earned is
paid by the issuance of additional bonds.
(b) When and if issued. Security issued pursuant to the Republic of the Ivory
Coast's Brady Plan debt restructuring. The investment advisor believes that
the Brady Plan will be finalized and the related bonds issued. Accordingly,
the Fund has marked-to-market its investment in this security at year end.
(c) Participation interest was acquired through the financial institutions
indicated parenthetically.
(d) All or part of the security is segregated as collateral for when and if
issued securities.
(e) Non-income producing security.
(f) Interest rate shown reflects yield to maturity on date of purchase.
Abbreviations used in this statement:
DCB -- Debt Conversion Bond.
FLIRB -- Front-Loaded Interest Reduction Bond.
FRN -- Foating Rate Note.
IAB -- Interest Arrears Bond.
IRB -- Interest Reduction Bond.
OTC -- Over the Counter.
PDI -- Past Due Interest.
See accompanying notes to financial statements.
PAGE 44
<PAGE>
<PAGE>
SALOMON BROTHERS INSTITUTIONAL SERIES FUNDS INC
STATEMENTS OF ASSETS AND LIABILITIES
FEBRUARY 28, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EMERGING
HIGH YIELD MARKETS
BOND FUND DEBT FUND
----------- -----------
<S> <C> <C>
ASSETS:
Investments, at value (Note A)................................................ $16,931,537 $12,092,161
Repurchase agreement, at value and cost....................................... 2,678,000 --
Cash.......................................................................... 408 2,432,020
Receivable for securities sold................................................ 242,587 162,139
Receivable for Fund shares sold............................................... 5,564,234 --
Interest receivable........................................................... 253,294 249,397
Receivable from investment manager............................................ 27,725 36,009
Deferred organization expense................................................. 40,899 46,313
----------- -----------
Total assets............................................................. 25,738,684 15,018,039
----------- -----------
LIABILITIES:
Payable for securities purchased.............................................. 3,007,575 303,717
Accrued expenses and other liabilities........................................ 67,349 117,987
----------- -----------
Total liabilities........................................................ 3,074,924 421,704
----------- -----------
NET ASSETS......................................................................... $22,663,760 $14,596,335
----------- -----------
----------- -----------
NET ASSETS CONSIST OF:
Paid-in capital............................................................... $22,309,592 $14,552,565
Undistributed net investment income........................................... 134,910 63,023
Accumulated net realized gain (loss) on investments and foreign currency
transactions................................................................. 111,156 (471,443)
Net unrealized appreciation (depreciation) on investments, foreign currency
translation and other assets................................................. 108,102 452,190
----------- -----------
NET ASSETS......................................................................... $22,663,760 $14,596,335
----------- -----------
----------- -----------
SHARES OUTSTANDING (Note B)........................................................ 2,343,699 2,023,065
----------- -----------
----------- -----------
NET ASSET VALUE PER SHARE.......................................................... $ 9.67 $ 7.21
----------- -----------
----------- -----------
Note A: Cost of investments........................................................ $16,823,435 $11,638,475
----------- -----------
----------- -----------
Note B: Par value.................................................................. $ 0.001 $ 0.001
----------- -----------
----------- -----------
</TABLE>
Authorized shares of 10,000,000,000 for the Institutional Series Funds.
See accompanying notes to financial statements.
PAGE 45
<PAGE>
<PAGE>
SALOMON BROTHERS INSTITUTIONAL SERIES FUNDS INC
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED FEBRUARY 28, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
HIGH EMERGING
YIELD MARKETS
BOND FUND DEBT FUND
--------- ----------
<S> <C> <C>
INCOME:
Interest.......................................................................... $623,048 $1,009,041
--------- ----------
EXPENSES:
Management fee.................................................................... 32,193 75,783
Custody and administration fees................................................... 165,100 177,600
Audit and tax return preparation fees............................................. 20,000 52,001
Registration and filing fees...................................................... 14,300 17,719
Amortization of organization expenses............................................. 12,749 12,749
Printing.......................................................................... 7,000 15,001
Directors' fees and expenses...................................................... 5,999 5,000
Shareholder services.............................................................. 1,000 999
Legal............................................................................. 1,000 5,000
Other............................................................................. 1,000 999
--------- ----------
260,341 362,851
Management fee waived and expenses absorbed by investment manager................. (224,929) (281,655)
--------- ----------
Net expenses...................................................................... 35,412 81,196
--------- ----------
NET INVESTMENT INCOME.................................................................. 587,636 927,845
--------- ----------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain on:
Investments....................................................................... 314,821 909,672
Foreign currency transaction...................................................... -- 10,739
--------- ----------
314,821 920,411
--------- ----------
Net change in unrealized appreciation (depreciation) on:
Investments....................................................................... (125,232) 200,132
Foreign currency translation and other assets..................................... -- 355
--------- ----------
(125,232) 200,487
--------- ----------
NET REALIZED AND UNREALIZED GAIN....................................................... 189,589 1,120,898
--------- ----------
NET INCREASE IN NET ASSETS FROM OPERATIONS............................................. $777,225 $2,048,743
--------- ----------
--------- ----------
</TABLE>
See accompanying notes to financial statements.
PAGE 46
<PAGE>
<PAGE>
SALOMON BROTHERS INSTITUTIONAL SERIES FUNDS INC
STATEMENTS OF CHANGES IN NET ASSETS
HIGH YIELD BOND FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE PERIOD
ENDED ENDED
FEBRUARY 28, FEBRUARY 28,
1998 1997(a)
------------ --------------
<S> <C> <C>
OPERATIONS:
Net investment income........................................................ $ 587,636 $ 401,544
Net realized gain on investments and foreign currency transactions........... 314,821 179,876
Net change in unrealized appreciation (depreciation) on investments, foreign
currency translation and other assets....................................... (125,232) 233,334
------------ --------------
Net increase in net assets from operations................................... 777,225 814,754
------------ --------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from net investment income......................................... (572,322) (275,246)
Distributions from net realized gains........................................ (380,672) (9,571)
------------ --------------
(952,994) (284,817)
------------ --------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from sales of shares................................................ 21,239,234 10,905,307
Net asset value of shares issued in reinvestment of dividends................ 945,321 284,817
Payment for redemption of shares............................................. (5,919,811) (5,178,606)
------------ --------------
Change in net assets from capital share transactions......................... 16,264,744 6,011,518
------------ --------------
NET INCREASE IN NET ASSETS........................................................ 16,088,975 6,541,455
------------ --------------
NET ASSETS:
Beginning of year............................................................ 6,574,785 33,330
------------ --------------
End of year*................................................................. $ 22,663,760 $ 6,574,785
------------ --------------
------------ --------------
*Including undistributed net investment income of............................ $ 134,910 $ 126,298
------------ --------------
------------ --------------
</TABLE>
- ------------
(a) The High Yield Bond Fund's commencement of investment operations was May 15,
1996.
See accompanying notes to financial statements.
PAGE 47
<PAGE>
<PAGE>
SALOMON BROTHERS INSTITUTIONAL SERIES FUNDS INC
STATEMENTS OF CHANGES IN NET ASSETS
EMERGING MARKETS DEBT FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE PERIOD
ENDED FEBRUARY ENDED FEBRUARY
28, 1998 28, 1997(a)
--------------- --------------
<S> <C> <C>
OPERATIONS:
Net investment income....................................................... $ 927,845 $ 195,671
Net realized gain on investments, options, and foreign currency
transactions.............................................................. 920,411 221,919
Net change in unrealized appreciation on investments, foreign currency
translation and other assets.............................................. 200,487 251,703
--------------- --------------
Net increase in net assets from operations.................................. 2,048,743 669,293
--------------- --------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from net investment income........................................ (869,966) (110,456)
Distributions from net realized gains....................................... (1,682,804) (11,040)
--------------- --------------
(2,552,770) (121,496)
--------------- --------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from sales of shares............................................... 18,263,159 8,800,000
Net asset value of shares issued in reinvestment of dividends............... 2,493,021 121,496
Payment for redemption of shares............................................ (11,866,441) (3,292,000)
--------------- --------------
Change in net assets from capital share transactions........................ 8,889,739 5,629,496
--------------- --------------
NET INCREASE IN NET ASSETS....................................................... 8,385,712 6,177,293
--------------- --------------
NET ASSETS:
Beginning of period......................................................... 6,210,623 33,330
--------------- --------------
End of period*.............................................................. $ 14,596,335 $ 6,210,623
--------------- --------------
--------------- --------------
*Including undistributed net investment income of........................... $ 63,023 $ 85,215
--------------- --------------
--------------- --------------
</TABLE>
- ------------
(a) The Emerging Markets Debt Fund's commencement of investment operations was
October 17, 1996.
See accompanying notes to financial statements.
PAGE 48
<PAGE>
<PAGE>
SALOMON BROTHERS INSTITUTIONAL SERIES FUNDS INC
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
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') are portfolios constituting the Salomon Brothers
Institutional Series Funds Inc (the 'Institutional Series'). The Institutional
Series is an open-end investment company incorporated in Maryland on January 19,
1996. Each Fund has a specific investment objective: the High Yield Bond Fund's
objective is to maximize total return by investing primarily in a portfolio of
high yield fixed-income securities that offer a yield above that generally
available on debt securities in the four highest rating categories of the
recognized rating services; the Emerging Markets Debt Fund's objective is to
maximize total return by investing primarily in debt securities of government,
government related and corporate issuers located in emerging market countries.
The following is a summary of significant accounting policies followed by the
Institutional Series in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles
('GAAP'). The preparation of financial statements in accordance with GAAP
requires management to make estimates of certain reported amounts in the
financial statements. Actual results could differ from those estimates.
(A) INVESTMENT VALUATION. Portfolio securities listed or traded on national
securities exchanges, or reported on the NASDAQ national market system, are
valued at the last sale price, or if there have been no sales on that day,
at the mean of the current bid and asked price which represents the current
value of the security. Over-the-counter securities are valued at the mean
of the current bid and asked price. Debt securities are valued by using
either market quotations or independent pricing services which use prices
provided by market-makers or estimates of market values obtained from yield
data relating to instruments or securities with similar characteristics.
Publicly traded sovereign bonds are typically traded internationally on the
over-the-counter market and are valued at the mean of the last current bid
and asked price as of the close of business of that market. Short-term
securities with less than 60 days remaining to maturity when acquired by a
Fund are valued at amortized cost which approximates market value. If a
Fund acquires such securities with more than 60 days remaining to maturity,
they will be valued at current market value until the 60th day prior to
maturity, and will then be valued on an amortized cost basis.
Securities for which reliable quotations or prices from pricing services
are not readily available (as may be the case for securities of limited
marketability) and all other assets are valued at their respective fair
value as determined in good faith by, or under procedures established by,
the Board of Directors.
(B) OPTION CONTRACTS. When a Fund writes or purchases a call or a put
option, an amount equal to the premium received or paid by the Fund is
recorded as a liability or asset, the value of which is marked-to-market
daily to reflect the current market value of the option. When the option
expires, the Fund realizes a gain or loss equal to the amount of the
premium received or paid. When the Fund exercises an option or enters into
a closing transaction by purchasing or selling an offsetting option, it
realizes a gain or loss without regard to any unrealized gain or loss on
the underlying security. When a written call option is exercised, the Fund
realizes a gain or loss from the sale of the underlying security and the
proceeds from such sale are increased by the premium originally received.
When a written put option is exercised, the amount of the premium received
reduces the cost of the security that the Fund purchased upon exercise of
the option.
(C) REPURCHASE AGREEMENTS. When entering into repurchase agreements, it is
each Fund's policy that the Fund take possession, through its custodian, of
the underlying collateral and monitor the collateral's value at the time
the agreement is entered into and on a daily basis during the term of the
repurchase agreement to ensure that it equals or exceeds the repurchase
price. In the event of default or bankruptcy by the other party to the
agreement, realization and/or retention of the collateral may be subject to
legal proceedings.
PAGE 49
<PAGE>
<PAGE>
SALOMON BROTHERS INSTITUTIONAL SERIES FUNDS INC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
(d) FOREIGN CURRENCY TRANSLATION. The accounting records of each Fund are
maintained in U.S. dollars. Investment securities and other assets and
liabilities of the Funds denominated in a foreign currency are translated
into U.S. dollars at the prevailing rates of exchange each day. Purchases
and sales of securities, income receipts and expense payments are
translated into U.S. dollars at the prevailing exchange rate on the
respective dates of the transactions. Net realized gains and losses on
foreign currency transactions represent net gains and losses from sales and
maturities of forward foreign currency contracts, disposition of foreign
currencies, currency gains and losses realized between the trade and
settlement dates on securities transactions and the difference between the
amount of net investment income accrued and the U.S. dollar amount actually
received. The effect of changes in foreign currency exchange rates on
investments in securities are not segregated in the Statements of
Operations from the effects of changes in market prices of those
securities, but are included with the net realized and unrealized gain or
loss on investments.
(e) FORWARD FOREIGN CURRENCY CONTRACTS. Each Fund may enter into forward
foreign currency contracts in connection with planned purchases or sales of
securities or to hedge the value of portfolio securities. A forward foreign
currency contract is an agreement between two parties to buy and sell a
currency at a set price on a future date. The contract is marked-to-market
daily and the change in value is recorded by the Fund as an unrealized gain
or loss. When a forward foreign currency contract is extinguished, through
either delivery or offset by entering into another forward foreign currency
contract, the Fund records a realized gain or loss equal to the difference
between the value of the contract at the time it was opened and the value
of the contract at the time it was extinguished or offset.
(f) LOAN PARTICIPATIONS. Each Fund may invest in fixed and floating rate
loans arranged through private negotiations between a foreign sovereign
entity and one or more financial institutions ('lender'). The market value
of the Emerging Markets Debt Fund's loan participations at February 28,
1998 was $566,501.
(g) FEDERAL INCOME TAXES. Each Fund intends to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies
by distributing all of its income, including any net realized gains, to
shareholders. Therefore, no Federal income tax or excise tax provision is
required.
(h) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Each Fund declares
dividends from net investment income annually. Distributions of net
realized gains to shareholders of each Fund, if any, are declared at least
annually. Dividends and distributions to shareholders of each Fund are
recorded on the ex-dividend date and are determined in accordance with
federal income tax regulations which may differ from GAAP. These
differences are due primarily to differences in the treatment of foreign
currency gains/losses, deferral of wash sales, and post-October losses
incurred by each Fund. Permanent book/tax differences are reclassified
within the capital accounts based on their federal income tax basis
treatment; temporary differences do not require reclassifications.
Dividends and distributions which exceed net investment income and net
realized gains for financial reporting purposes but not for tax purposes
are reported as dividends in excess of net investment income and
distributions in excess of net realized capital gains.
(i) EXPENSES. Direct expenses are charged to the Fund that incurred them,
and general expenses of the Institutional Series are allocated to the Funds
based on each Fund's relative net assets.
(j) ORGANIZATIONAL COSTS. Certain costs incurred in connection with each
Fund's organization have been deferred and are being amortized by the Funds
over a 60 month period from the date each Fund commenced investment
operations. In the event that any of the initial shares purchased by SBAM
are redeemed, proceeds of such redemption will be reduced by the
proportionate amount of the unamortized deferred organization costs which
the number of shares redeemed bears to the total number of initial shares
purchased.
PAGE 50
<PAGE>
<PAGE>
SALOMON BROTHERS INSTITUTIONAL SERIES FUNDS INC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
(K) OTHER. Investment transactions are recorded as of the trade date.
Interest income, including the accretion of discounts or amortization of
premiums, is recognized when earned. Gains or losses on sales of securities
are calculated for financial accounting and Federal income tax purposes on
the identified cost basis.
2. MANAGEMENT FEE AND OTHER AGREEMENTS
Each Fund retains SBAM, an indirect, wholly-owned subsidiary of Travelers Group
Inc. ('Travelers'), to act as investment manager of each Fund, subject to the
supervision by the Board of Directors of the Institutional Series. The
management agreement with SBAM was most recently approved by shareholders at a
special meeting held on January 14, 1998. Approval of the agreement was
necessary due to the merger of Salomon Inc, which had been the ultimate parent
company of the investment manager, with and into Smith Barney Holdings Inc., a
subsidiary of Travelers, which occurred on November 28, 1997. Travelers is now
the ultimate parent company of the investment manager. Among other things, SBAM
furnishes the Funds with office space and certain services and facilities
required for conducting the business of the Funds, and pays the compensation of
its officers. The management fee for these services for each Fund is payable
monthly and is based on the following annual percentages of each Fund's average
daily net assets: .50% for the High Yield Bond Fund and .70% for the Emerging
Markets Debt Fund.
For the year ended February 28, 1998, SBAM waived management fees of $32,193
and $75,783 for the High Yield Bond Fund and Emerging Markets Debt Fund,
respectively, and voluntarily absorbed expenses of $192,736 and $205,872 for
the High Yield Bond Fund and Emerging Markets Debt Fund, respectively.
Investors Bank & Trust Company ('IBT') serves as custodian and administrator for
each Fund, which includes performing certain administrative services in
connection with the operation of each Fund.
3. CAPITAL STOCK
At February 28, 1998, the Institutional Series had 10,000,000,000 shares of
authorized capital stock, par value $.001 per share. Transactions in Fund shares
for the periods indicated were as follows:
For the Year Ended February 28, 1998.
<TABLE>
<CAPTION>
HIGH EMERGING
YIELD MARKETS
BOND FUND DEBT FUND
--------- ---------
<S> <C> <C>
Shares sold........................................................ 2,215,772 2,206,977
Shares issued as reinvestment...................................... 95,040 341,053
Shares redeemed.................................................... 558,020 1,094,258
--------- ---------
Net increase....................................................... 1,752,792 1,453,772
--------- ---------
--------- ---------
</TABLE>
For the Period Ended February 28, 1997.
<TABLE>
<CAPTION>
HIGH EMERGING
YIELD MARKETS
BOND FUND DEBT FUND
--------- ---------
<S> <C> <C>
Shares sold........................................................ 1,041,101 868,547
Shares issued as reinvestment...................................... 26,445 11,716
Shares redeemed.................................................... 479,972 314,303
--------- ---------
Net increase....................................................... 587,574 565,960
--------- ---------
--------- ---------
</TABLE>
PAGE 51
<PAGE>
<PAGE>
SALOMON BROTHERS INSTITUTIONAL SERIES FUNDS INC
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
4. PORTFOLIO ACTIVITY
Cost of purchases and proceeds from sales of securities, excluding short-term
obligations, for the year ended February 28, 1998, were as follows:
<TABLE>
<CAPTION>
PURCHASES SALES
----------- -----------
<S> <C> <C>
High Yield Bond Fund........................................... $22,220,771 $11,757,325
----------- -----------
----------- -----------
Emerging Markets Debt Fund..................................... $60,702,312 $55,422,291
----------- -----------
----------- -----------
</TABLE>
5. PORTFOLIO INVESTMENT RISKS
CREDIT AND MARKET RISK. Funds that invest in emerging markets and high yield
debt instruments are subject to certain credit and market risks. The yields of
debt obligations reflect, among other things, perceived credit risk. Securities
rated below investment grade typically involve risks not associated with higher
rated securities including, among others, greater risk of timely and ultimate
payment of interest and principal, greater market price volatility and less
liquid secondary market trading. The consequences of political, social, economic
or diplomatic changes in emerging market countries may have disruptive effects
on the market prices of investments held by the Funds.
The Funds' investment in non-dollar denominated securities may also result in
foreign currency losses caused by devaluations and exchange rate fluctuations.
Foreign securities and currency transactions involve certain considerations and
risks not typically associated with those of U.S. Dollar denominated
transactions as a result of, among other factors, the possibility of lower
levels of governmental supervision and regulation of foreign securities markets
and the possibility of political or economic instability.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK. Each Fund may enter into
forward foreign currency contracts ('forward contracts') to facilitate
settlement of foreign currency denominated portfolio transactions or to manage
foreign currency exposure associated with foreign currency denominated
securities. Forward contracts involve elements of market risk in excess of the
amounts reflected in the Statements of Assets and Liabilities. The Funds bear
the risk of an unfavorable change in the foreign exchange rate underlying the
forward contract. Risks may also arise upon entering into these contracts from
the potential inability of the counterparties to meet the terms of their
contracts.
The High Yield Bond Fund and Emerging Markets Debt Fund may invest in
instruments whose values and interest rates may be linked to foreign currencies,
interest rates, indices or some other financial indicator. The value at maturity
or interest rates for these instruments will increase or decrease according to
the change in the indicator to which it is indexed. These securities are
generally more volatile in nature and the risk of loss of principal is greater.
A risk in writing a covered call option is that the Fund may forego the
opportunity of profit if the market price of the underlying security increases
and the option is exercised. A risk in writing a put option is that the Fund may
incur a loss if the market price of the underlying security decreases and the
option is exercised. In addition, there is the risk that the Fund may not be
able to enter into a closing transaction because of an illiquid secondary
market.
In connection with purchasing participations, the Fund generally will have no
right to enforce compliance by the borrower, and the Fund may not benefit
directly from any collateral supporting the loan in which it has purchased the
participation. As a result, 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 the 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.
PAGE 52
<PAGE>
<PAGE>
SALOMON BROTHERS INSTITUTIONAL SERIES FUNDS INC
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
- --------------------------------------------------------------------------------
6. TAX INFORMATION
At February 28, 1998, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in value of investments held in each
Fund were as follows:
<TABLE>
<CAPTION>
GROSS GROSS NET
AGGREGATE UNREALIZED UNREALIZED UNREALIZED
COST APPRECIATION DEPRECIATION APPRECIATION
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
High Yield Bond Fund........................ $16,823,435 $230,090 $121,988 $108,102
Emerging Markets Debt Fund.................. 11,698,632 436,801 43,272 393,529
</TABLE>
During the year ended February 28, 1998, as permitted under Federal income tax
regulations, the Emerging Markets Debt Fund had elected to defer $71,325 of
Post-October net foreign currency losses and $411,687 of Post-October net
capital losses to the next taxable year.
At February 28, 1998, undistributed net investment income and accumulated net
realized gain (loss) on investments have been adjusted for current period
book/tax differences which arose principally from differing book/tax treatments
of foreign currency transactions. The Emerging Markets Debt Fund and High Yield
Bond Fund reclassified $80,071 and $6,702, respectively, from undistributed net
investment income to accumulated net realized gain (loss) on investments. Net
investment income, net realized gain on investments and net assets were not
affected by these reclassifications.
PAGE 53
<PAGE>
<PAGE>
SALOMON BROTHERS INSTITUTIONAL SERIES FUNDS INC
FINANCIAL HIGHLIGHTS
SELECTED DATA PER SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EMERGING MARKETS
HIGH YIELD BOND FUND DEBT FUND
---------------------------- ----------------------------
YEAR PERIOD YEAR PERIOD
ENDED ENDED ENDED ENDED
FEBRUARY 28 FEBRUARY 28 FEBRUARY 28 FEBRUARY 28
1998 1997(a) 1998 1997(b)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period................. $ 11.13 $ 10.00 $ 10.91 $ 10.00
------------ ------------ ------------ ------------
Net investment income........................... 1.51 0.57 1.69 0.35
Net gain (loss) on investments (both realized
and unrealized)............................... (0.34) 0.93 (0.27) 0.78
------------ ------------ ------------ ------------
Total from investment operations........... 1.17 1.50 1.42 1.13
------------ ------------ ------------ ------------
Dividends from net investment income............ (1.66) (0.36) (1.77) (0.20)
Distributions from net realized gain on
investments................................... (0.97) (0.01) (3.35) (0.02)
------------ ------------ ------------ ------------
Total dividends and distributions.......... (2.63) (0.37) (5.12) (0.22)
------------ ------------ ------------ ------------
Net asset value, end of period....................... $ 9.67 $ 11.13 $ 7.21 $ 10.91
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Net assets, end of period (thousands)................ $ 22,664 $ 6,575 $ 14,596 $ 6,211
Total return*........................................ +11.1% +15.1% +14.6% +11.4%
Ratios to average net assets:
Expenses........................................ 0.55% 0.55%** 0.75% 0.75%**
Net investment income........................... 9.10% 9.36%** 8.53% 8.94%**
Portfolio turnover rate.............................. 189% 151% 549% 136%
Before applicable waiver of management fee, expenses
absorbed by SBAM and credits earned from and fees
waived by the custodian, net investment income per
share and expense ratios would have been:
Net investment income per share................. $ 0.93 $ 0.29 $ 1.18 $ 0.08
Expense ratio................................... 4.03% 5.22%** 3.34% 7.57%**
</TABLE>
- ------------
(a) The High Yield Bond Fund's commencement of investment operations was May 15,
1996.
(b) The Emerging Markets Debt Fund's commencement of investment operations was
October 17, 1996.
* Total return is calculated assuming a $1,000 investment on the first day of
each period reported, reinvestment of all dividends at the net asset value on
the ex-dividend date, and a sale at net asset value on the last day of each
period reported. Total return calculated for a period of less than one year
is not annualized.
** Annualized.
See accompanying notes to financial statements.
PAGE 54
<PAGE>
<PAGE>
SALOMON BROTHERS INSTITUTIONAL SERIES FUNDS INC
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Board of Directors and Shareholders of
SALOMON BROTHERS INSTITUTIONAL SERIES FUNDS INC
In our opinion, the accompanying statements of assets and liabilities, including
the portfolios of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of the Salomon Brothers Institutional
High Yield Bond Fund and Salomon Brothers Institutional Emerging Markets Debt
Fund (constituting Salomon Brothers Institutional Series Funds Inc, hereafter
referred to as the 'Fund') at February 28, 1998, the results of each of their
operations, the changes in each of their net assets and the financial highlights
for each of the periods indicated, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as 'financial statements') are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at February 28, 1998 by correspondence with the
custodian and brokers and the application of alternative auditing procedures
where confirmations from brokers were not received, provide a reasonable basis
for the opinion expressed above.
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
April 20, 1998
PAGE 55
<PAGE>
<PAGE>
SALOMON BROTHERS INSTITUTIONAL SERIES FUNDS INC
SHAREHOLDER VOTING RESULTS AND FEDERAL TAX NOTICE
(UNAUDITED)
- --------------------------------------------------------------------------------
The Funds held a Special Meeting of Stockholders on January 14, 1998. The
following table provides information concerning the matter voted on at the
meeting:
Approval of new management contract between SBAM and the Funds.
<TABLE>
<CAPTION>
VOTES FOR VOTES AGAINST VOTES ABSTAINED
---------- -------------- ----------------
<S> <C> <C> <C>
Institutional High Yield Bond Fund................................. 382,206 0 0
Institutional Emerging Markets Debt Fund........................... 439,594 0 0
</TABLE>
Federal Tax Notice
For the year ended February 28, 1998, the High Yield Bond Fund distributed
long-term capital gains totaling $4,121, all of which are 20% long-term capital
gains.
See accompanying notes to financial statements.
PAGE 56
<PAGE>
<PAGE>
SALOMON BROTHERS INSTITUTIONAL MONEY MARKET FUND
- ------------------------------------------------
Portfolio of Investments
December 31, 1997
<TABLE>
<CAPTION>
YIELD TO
MATURITY
PRINCIPAL ON DATE OF MATURITY VALUE
AMOUNT DESCRIPTION PURCHASE* DATE (NOTE 1a)
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
ASSET-BACKED SECURITIES -- 14.1%
FINANCIAL SERVICES -- 14.1%
$5,000,000 Contimortgage Home Equity Loan Trust..................... 5.906% 12/15/98 $ 5,000,000
3,786,809 Ford Credit Auto Owner Trust............................. 5.748 10/15/98 3,786,809
5,000,000 SMM Trust................................................ 6.000 12/14/98 5,000,000
5,000,000 Triangle Funding......................................... 5.750 11/15/98 5,000,000
------------
TOTAL ASSET-BACKED SECURITIES (cost $18,786,809)......... 18,786,809
------------
CERTIFICATES OF DEPOSIT -- 21.4%
BANKS -- 19.2%
1,000,000 Australia & New Zealand Banking Group.................... 5.810 01/30/98 999,925
5,000,000 Bankers Trust............................................ 5.950 09/09/98 4,998,884
3,000,000 Bayerische Landesbank.................................... 5.775 07/27/98 2,997,638
1,000,000 Canadian Imperial Bank................................... 5.880 01/14/98 999,877
3,000,000 Deutsche Bank............................................ 5.630 01/05/98 2,999,872
2,000,000 Nurinchukin Bank......................................... 5.840 02/06/98 1,999,780
2,000,000 Societe Generale......................................... 5.620 01/07/98 2,000,003
1,000,000 Societe Generale......................................... 5.850 01/13/98 999,873
3,000,000 Swiss Bank............................................... 5.980 03/19/98 3,000,373
4,500,000 Westpac Banking.......................................... 5.920 08/28/98 4,497,738
------------
25,493,963
------------
FINANCIAL SERVICES -- 2.2%
3,000,000 Credit Agricole Indosuez................................. 5.690 01/23/98 2,999,822
------------
TOTAL CERTIFICATES OF DEPOSIT (cost $28,493,785)......... 28,493,785
------------
COMMERCIAL PAPER -- 26.6%
BANKS -- 3.8%
5,000,000 Nordbanken N.A. ......................................... 5.520 01/12/98 4,991,567
------------
ELECTRICAL COMPONENTS -- 3.7%
4,870,000 Sharp Electric........................................... 5.920 01/16/98 4,857,987
------------
</TABLE>
See accompanying notes to financial statements.
PAGE 57
<PAGE>
<PAGE>
SALOMON BROTHERS INSTITUTIONAL MONEY MARKET FUND
- ------------------------------------------------
Portfolio of Investments
December 31, 1997
<TABLE>
<CAPTION>
YIELD TO
MATURITY ON
PRINCIPAL DATE OF MATURITY VALUE
AMOUNT DESCRIPTION PURCHASE* DATE (NOTE 1a)
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
COMMERCIAL PAPER -- 26.6% (CONTINUED)
FINANCIAL SERVICES -- 7.6%
$5,687,000 BIL North America........................................ 5.820% 01/14/98 $ 5,675,048
1,413,000 Fountain Square.......................................... 5.650 02/27/98 1,400,359
1,000,000 Gatx Capital............................................. 6.125 01/07/98 998,979
1,000,000 Nissan Capital America................................... 6.700 01/08/98 998,698
1,000,000 Textron Financial........................................ 6.100 01/02/98 999,831
------------
10,072,915
------------
MUNICIPAL -- 10.1%
1,100,000 Emory University, Georgia................................ 5.850 02/03/98 1,100,000
2,535,000 Emory University, Georgia................................ 5.870 02/03/98 2,535,000
2,250,000 New York City, New York GO............................... 5.850 02/03/98 2,250,000
2,000,000 New York City, New York GO............................... 5.850 02/03/98 2,000,000
2,000,000 New York City, New York
Housing Development Corporation........................ 5.790 01/05/98 2,000,000
3,550,000 Tennessee State School Board............................. 5.920 01/16/98 3,550,000
------------
13,435,000
------------
TELECOMMUNICATIONS -- 0.7%
1,000,000 Comsat................................................... 6.100 01/05/98 999,322
------------
TRANSPORTATION EQUIPMENT -- 0.7%
1,000,000 Cummins Engine........................................... 6.020 01/22/98 996,488
------------
TOTAL COMMERCIAL PAPER (cost $35,353,279)................ 35,353,279
------------
CORPORATE BONDS -- 3.8%
FINANCIAL SERVICES -- 3.8%
2,500,000 General Electric Capital................................. 5.800 02/05/98 2,504,413
1,000,000 General Electric Capital................................. 5.800 02/27/98 1,002,391
1,500,000 Household Finance........................................ 5.972 02/06/98 1,502,809
------------
TOTAL CORPORATE BONDS (cost $5,009,613).................. 5,009,613
------------
FLOATING RATE NOTES -- 33.0%
CALIFORNIA -- 4.9%
4,000,000 Fontana, California VR................................... 6.500 01/07/98 4,000,000
2,515,000 Pasadena, California Certificates of Participation VR.... 7.000 01/06/98 2,515,000
------------
6,515,000
------------
</TABLE>
See accompanying notes to financial statements.
PAGE 58
<PAGE>
<PAGE>
SALOMON BROTHERS INSTITUTIONAL MONEY MARKET FUND
<TABLE>
<CAPTION>
YIELD TO
MATURITY ON
PRINCIPAL DATE OF MATURITY VALUE
AMOUNT DESCRIPTION PURCHASE* DATE (NOTE 1a)
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
FLOATING RATE NOTES -- 33.0% (CONTINUED)
FLORIDA -- 5.9%
$1,900,000 Baptist Health Systems VR MBIA........................... 5.900% 01/07/98 $ 1,900,000
6,000,000 Dade County, Florida Expressway Authority VR............. 6.150 01/08/98 6,000,000
------------
7,900,000
------------
HEALTH CARE -- 2.6%
3,400,000 Barton Healthcare VR..................................... 5.800 01/07/98 3,400,000
------------
ILLINOIS -- 1.3%
1,800,000 Illinois Student Assistance Commission VR................ 5.870 01/07/98 1,800,000
------------
KENTUCKY -- 1.1%
1,500,000 Scottsville, Kentucky Industrial Building Revenue VR..... 6.050 01/08/98 1,500,000
------------
MINNESOTA -- 2.3%
3,000,000 Catholic Health Initiatives VR........................... 5.900 01/07/98 3,000,000
------------
NEW YORK -- 6.3%
3,740,000 Clinton County, New York
Industrial Development Agency VR....................... 5.906 01/08/98 3,740,000
1,200,000 Health Insurance Plan, Greater New York VR............... 6.150 01/07/98 1,200,000
505,000 New York City, New York
Industrial Development Agency VR....................... 6.000 01/07/98 505,000
350,000 New York City, New York
Industrial Development Agency VR....................... 6.000 01/07/98 350,000
2,000,000 New York State, Housing Finance Agency VR................ 5.970 01/07/98 2,000,000
600,000 New York State, Housing Finance Agency VR................ 5.900 01/07/98 600,000
------------
8,395,000
------------
NORTH CAROLINA -- 5.7%
3,500,000 Community Health Systems VR.............................. 6.150 01/07/98 3,500,000
2,925,000 Greensboro, North Carolina GO VR......................... 6.000 01/07/98 2,925,000
1,135,000 North Carolina Assisted Living VR........................ 5.900 01/02/98 1,135,000
------------
7,560,000
------------
</TABLE>
See accompanying notes to financial statements.
PAGE 59
<PAGE>
<PAGE>
SALOMON BROTHERS INSTITUTIONAL MONEY MARKET FUND
- ------------------------------------------------
Portfolio of Investments
December 31, 1997
<TABLE>
<CAPTION>
YIELD TO
MATURITY ON
PRINCIPAL DATE OF MATURITY VALUE
AMOUNT DESCRIPTION PURCHASE* DATE (NOTE 1a)
- ----------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
FLOATING RATE NOTES -- 33.0% (CONTINUED)
PENNSYLVANIA -- 2.9%
$1,095,000 Moon, Pennsylvania
Industrial Development Authority VR.................... 6.000% 01/08/98 $ 1,095,000
2,775,000 Union County, Pennsylvania Hospital Authority VR......... 5.900 01/02/98 2,775,000
------------
3,870,000
------------
TOTAL FLOATING RATE NOTES (cost $43,940,000)............. 43,940,000
------------
TOTAL INVESTMENTS -- 98.9% (cost $131,583,486)........... 131,583,486
REPURCHASE AGREEMENT -- 0.3%
374,236 Repurchase Agreement dated 12/31/97, with J.P. Morgan
Securities, collateralized by $374,000 U.S. Treasury
Bonds, 5.875%, due 02/28/99, valued at $381,948;
proceeds: $374,366 (cost $374,236)..................... 6.250 01/02/98 374,236
Other assets in excess of liabilities -- 0.8%............ 1,054,208
------------
NET ASSETS -- 100.0%..................................... $133,011,930
------------
------------
</TABLE>
* Yield to maturity on date of purchase, except in the case of Variable Rate
Demand Notes (VR), whose yields are determined on date of last interest rate
change. For Variable Rate Demand Notes, maturity date shown is the date of
next interest rate change.
Abbreviations used in this statement:
GO -- General Obligation.
MBIA -- Insured as to principal and interest by the MBIA Insurance Corporation.
See accompanying notes to financial statements.
PAGE 60
<PAGE>
<PAGE>
SALOMON BROTHERS INSTITUTIONAL MONEY MARKET FUND
- ---------------------------------------------------------------
Statement of Assets and Liabilities
December 31, 1997
<TABLE>
<S> <C>
ASSETS
Investments, at value (cost $131,583,486)..................................................... $131,583,486
Repurchase Agreement, at value (cost $374,236)................................................ 374,236
Receivable from investment manager............................................................ 47,012
Interest receivable........................................................................... 1,275,035
Other assets.................................................................................. 558
------------
Total assets............................................................................ 133,280,327
------------
LIABILITIES
Dividend payable.............................................................................. 156,547
Payable for Fund shares repurchased........................................................... 26,777
Accrued expenses.............................................................................. 85,073
------------
Total liabilities..................................................................... 268,397
------------
NET ASSETS (equivalent to $1.00 per share on 133,013,641 shares of $.001 par value capital
stock outstanding).......................................................................... $133,011,930
------------
------------
</TABLE>
- ------------------------------------------------
Statement of Operations
For the Year Ended December 31, 1997
<TABLE>
<S> <C> <C>
INCOME
Interest................................................................................... $ 9,928,222
EXPENSES
Management fee.................................................................. $350,642
Custody, shareholder services and administration fees........................... 189,460
Audit and tax return preparation fees........................................... 67,320
Registration and filing fees.................................................... 48,260
Printing........................................................................ 35,870
Legal........................................................................... 5,295
Directors' fees and expenses.................................................... 2,575
Other........................................................................... 13,810
--------
713,232
Management fee waived and expenses absorbed by investment manager............... (397,654) 315,578
-------- ------------
Net investment income........................................................... 9,612,644
NET REALIZED LOSS ON SECURITIES SOLD........................................................... (1,975)
------------
NET INCREASE IN NET ASSETS FROM OPERATIONS..................................................... $ 9,610,669
------------
------------
</TABLE>
See accompanying notes to financial statements.
PAGE 61
<PAGE>
<PAGE>
SALOMON BROTHERS INSTITUTIONAL MONEY MARKET FUND
- ------------------------------------------------------------------
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996(a)
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------------
OPERATIONS
Net investment income................................................... $ 9,612,644 $ 3,441,173
Net realized gain (loss) on securities sold............................. (1,975) 554
------------- -------------
Net increase in net assets from operations.............................. 9,610,669 3,441,727
------------- -------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income.................................... (9,612,644) (3,441,173)
Distributions from net realized gains................................... (378) --
------------- -------------
(9,613,022) (3,441,173)
------------- -------------
CAPITAL SHARE TRANSACTIONS
Proceeds from sales of shares........................................... 446,027,534 267,128,203
Net asset value of shares issued in reinvestment of dividends........... 7,267,767 2,994,052
Payment for redemption of shares........................................ (479,931,796) (121,897,499)
------------- -------------
Net increase (decrease) in net assets derived from share transactions... (26,636,495) 148,224,756
------------- -------------
Net increase (decrease) in net assets................................... (26,638,848) 148,225,310
NET ASSETS
Beginning of year....................................................... 159,650,778 11,425,468
------------- -------------
End of year............................................................. $ 133,011,930 $159,650,778
------------- -------------
------------- -------------
</TABLE>
- -------------------------------------------
Financial Highlights
SELECTED DATA PER SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1997 1996(A) 1995 1994 1993
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year........................ $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
-------- -------- -------- ------- -------
Net investment income..................................... 0.055 0.050 0.049 0.036 0.028
Dividends from net investment income...................... (0.055) (0.050) (0.049) (0.036) (0.028)
-------- -------- -------- ------- -------
Net asset value, end of year.............................. $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
-------- -------- -------- ------- -------
-------- -------- -------- ------- -------
Net assets, end of year (thousands)....................... $133,012 $159,651 $ 11,425 $27,667 $34,120
Total investment return................................... +5.6 % +5.1 % +5.0 % +3.6 % +2.9 %
Ratios to average net assets:
Expenses.............................................. 0.18% 0.20% 0.65% 0.45% 0.35%
Net investment income................................. 5.48% 5.29% 4.89% 3.53% 2.83%
Before waiver of management fee and expenses absorbed
by SBAM, net investment income per share and
expense ratios would have been:
Net investment income per share....................... $ 0.052 $ 0.048 $ 0.049 -- --
Expense ratios........................................ 0.41% 0.46% 0.70% -- --
</TABLE>
(a) The Fund changed its name and objective on April 29, 1996. See Note 1.
See accompanying notes to financial statements.
PAGE 62
<PAGE>
<PAGE>
SALOMON BROTHERS INSTITUTIONAL MONEY MARKET FUND
- ---------------------------------------------------------
Notes to Financial Statements
1. Organization and Significant Accounting Policies
Salomon Brothers Series Funds Inc (the 'Company') was incorporated in Maryland
on April 17, 1990 as an open-end management investment company, and currently
operates as a series company comprised of ten portfolios. Only information with
respect to Salomon Brothers Institutional Money Market Fund (the 'Fund') is
included in this report. The other portfolios of the Company are reported in a
separate report and are not included herein. The Fund changed its name from
Salomon Brothers U.S. Treasury Securities Money Market Fund to its current name
on April 29, 1996. Prior to April 29, 1996, the Fund's objective was to seek a
high level of current income by investing only in short-term United States
government and government agency securities. The Fund's current objective is to
seek as high a level of current income as is consistent with liquidity and the
stability of principal.
Following is a summary of significant accounting policies followed by the Fund
in the preparation of its financial statements. The policies are in conformity
with generally accepted accounting principles ('GAAP'). The preparation of
financial statements in accordance with GAAP requires management to make
estimates of certain reported amounts in the financial statements. Actual
amounts could differ from those estimates.
(A) SECURITIES VALUATION. Portfolio securities are valued using the
amortized cost method, which involves initially valuing an investment at
its cost and thereafter assuming a constant amortization to maturity of any
premium or discount. This method results in a value approximating market
value and does not include unrealized gains or losses.
(B) FEDERAL INCOME TAXES. The Fund has complied and intends to
continue to comply with the requirements of the Internal Revenue Code
applicable to regulated investment companies, including the distribution
requirements of the Tax Reform Act of 1986, and to distribute all of its
income, including any net realized gains, to shareholders. Therefore, no
Federal income tax or excise tax provision is required.
(C) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends on the
shares of the Fund are declared each business day to shareholders of record
at twelve noon (New York time) on that day, and paid on the last business
day of the month. Distributions of net realized gains to shareholders, if
any, are declared annually and recorded on the ex-dividend date. Dividends
and distributions are determined in accordance with income tax regulations,
which may differ from GAAP.
(D) EXPENSES. Direct expenses are charged to the Fund, and general
expenses of the Company are allocated to the Fund based on relative average
net assets for the period in which the expense was incurred.
PAGE 63
<PAGE>
<PAGE>
SALOMON BROTHERS INSTITUTIONAL MONEY MARKET FUND
- ---------------------------------------------------------
Notes to Financial Statements
(E) OTHER. Investment transactions are recorded as of the trade date.
Interest income, including the accretion of discounts or the amortization
of premiums, is recognized when earned. Gains or losses on sales of
securities are calculated on the identified cost basis.
2. Management Fee and Other Agreements
The Company retains Salomon Brothers Asset Management Inc ('SBAM'), an indirect,
wholly-owned subsidiary of Travelers Group Inc. ('Travelers'), to act as
investment manager of the Fund, subject to the supervision by the Board of
Directors of the Company. SBAM furnishes the Company with office space and
certain services and facilities required for conducting the business of the
Company and pays the compensation of its officers. At a special meeting of
shareholders held on January 14, 1998, shareholders approved a new management
agreement between SBAM and the Fund by a vote of 321,655,827 for, 0 against and
17,744 abstained. Approval of the agreement was necessary due to the merger of
Salomon Inc, which had been the ultimate parent company of the investment
manager, with and into Smith Barney Holdings Inc., a subsidiary of Travelers,
which occurred on November 28, 1997. Travelers is now the ultimate parent
company of the investment manager. The management fee for these services is
payable monthly and is based on an annual rate of .20% of the Fund's average
daily net assets. Prior to April 29, 1996, the management fee was based on an
annual rate of .10% of the Fund's average daily net assets.
Under a voluntary agreement between SBAM and the Fund, SBAM has agreed to reduce
or otherwise limit the expenses of the Fund (exclusive of taxes, interest, and
extraordinary expenses such as litigation and indemnification expenses), on an
annualized basis to .18% of the Fund's average daily net assets. For the year
ended December 31, 1997, SBAM voluntarily waived management fees of $350,642 and
voluntarily absorbed $47,012 of expenses.
Investors Bank & Trust Company ('IBT') serves as custodian and administrator for
the Fund, which includes performing custodial and certain administrative
services in connection with the operation of the Fund.
The Fund has an agreement with Salomon Brothers Inc, an affiliate of SBAM, to
distribute its shares.
PAGE 64
<PAGE>
<PAGE>
SALOMON BROTHERS INSTITUTIONAL MONEY MARKET FUND
3. Capital Stock
At December 31, 1997, the Company had 10,000,000,000 shares of authorized
capital stock, par value $.001 per share, of which the Fund had 1,000,000,000
shares authorized.
Because the Fund has maintained a $1.00 net asset value per share from
inception, the number of shares sold, shares issued in reinvestment of dividends
declared, and shares repurchased, are equal to the dollar amount shown in the
Statement of Changes in Net Assets for the corresponding capital share
transactions.
Net assets consist of:
<TABLE>
<S> <C>
Par value..................................................................................... $ 133,014
Paid-in capital in excess of par.............................................................. 132,880,626
Undistributed net investment income........................................................... 881
Accumulated net realized loss on investments.................................................. (2,591)
------------
Net assets.................................................................................... $133,011,930
------------
------------
</TABLE>
4. Portfolio Activity
The Fund invests in money market instruments maturing in thirteen months or less
whose credit ratings are within the two highest ratings categories of two
nationally recognized statistical rating organizations ('NRSROs') or, if rated
by only one NRSRO, that NRSRO, or, if not rated, are believed by the investment
manager to be of comparable quality.
At December 31, 1997, the Fund had net capital loss carry-forwards available to
offset future capital gains of $949, of which $616 expire on December 31, 2004
and $333 expire on December 31, 2005. In addition, as permitted under Federal
income tax regulations, the Fund has elected to defer $1,642 of Post-October net
capital losses to the next taxable year.
5. Other
In response to recent amendments to Maryland corporate law, the Board of
Directors recently reviewed various corporate governance provisions in the
Company's By-Laws and approved amendments to the Company's By-Laws to (1)
increase the percentage of stockholder voting power that is required to call a
special meeting of its stockholders to a majority of the votes entitled to be
cast at the meeting and (2) reduce the minimum permissible board committee size
to one director.
PAGE 65
<PAGE>
<PAGE>
SALOMON BROTHERS INSTITUTIONAL MONEY MARKET FUND
- ----------------------------------------------------------------
Report of Independent Accountants
To the Board of Directors and Shareholders of
Salomon Brothers Institutional Money Market Fund
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Salomon Brothers Institutional
Money Market Fund (one of the portfolios constituting Salomon Brothers Series
Funds Inc, hereafter referred to as the 'Fund') at December 31, 1997, the
results of its operations for the year then ended, the changes in its net assets
for each of the two years in the period then ended and the financial highlights
for each of the five years in the period then ended, in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as 'financial statements') are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 1997 by
correspondence with the custodian, provide a reasonable basis for the opinion
expressed above.
PRICE WATERHOUSE LLP
New York, New York
February 23, 1998
PAGE 66
<PAGE>
<PAGE>
SALOMON BROTHERS INSTITUTIONAL SERIES FUNDS INC
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements included in Part A:
For the Salomon Brothers Institutional Money Market Fund ('Money
Market Fund') (formerly known as 'U.S. Treasury Securities Money Market
Fund'), Salomon Brothers Institutional High Yield Bond Fund ('High Yield
Bond Fund') and Salomon Brothers Institutional Emerging Markets Debt Fund
('Emerging Markets Fund'): Selected Per Share Data and Ratios for the
specified periods are presented under the heading 'Financial Highlights' in
the Prospectus.
Financial Statements included in Part B:
1. For Salomon Brothers Institutional Money Market Fund
(i) Portfolio of Investments at December 31, 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
2. 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
(b) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ----------------------------------------------------------------------------------------------------------
<C> <S>
1(a) -- Articles of Incorporation of Registrant (filed as Exhibit 1(a) to the Registration Statement on Form
N-1A and incorporated herein by reference).
2(a) -- Registrant's By-Laws (filed as Exhibit 2(a) to the Registration Statement on Form N-1A and incorporated
herein by reference).
3 -- None.
4(a) -- None.
5(a) -- 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 is filed herein.
5(b) -- Management Contract between Registrant and SBAM dated November 28, 1997 relating to the Salomon Brothers
Institutional Emerging Markets Debt Fund is filed herein.
6 -- Distribution Agreement between Registrant and Salomon Brothers Inc dated November 28, 1997 is filed herein.
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).
</TABLE>
C-1
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ----------------------------------------------------------------------------------------------------------
<C> <S>
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).
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).
11 -- Consents of Independent Accountants are filed herewith.
12 -- None.
13 -- Share Purchase Agreement relating to Salomon Brothers Institutional High Yield Bond Fund, Salomon
Brothers Institutional Emerging Markets Debt Fund and Salomon Brothers Institutional Asia Growth Fund
(filed as Exhibit 13 to Pre-Effective Amendment No. 1 to the Registration Statement on Form N-1A and
incorporated herein by reference).
14 -- None.
15 -- None.
16 -- None.
17 -- Financial Data Schedules for Salomon Brothers Institutional High Yield Bond Fund and Salomon Brothers
Institutional Emerging Markets Debt Fund are filed herewith.
18 -- None.
19 -- Power of Attorney (filed as Exhibit 19 to Pre-Effective Amendment No. 1 to the Registration Statement
on Form N-1A and incorporated herein by reference).
</TABLE>
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Not Applicable.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
<TABLE>
<CAPTION>
NUMBER OF
RECORD HOLDERS
TITLE OF CLASS AT APRIL 29, 1998
- ------------------------------------------------------------------------------------------------- ----------------
<S> <C>
Shares of Salomon Brothers Institutional High Yield Bond Fund, par value $.001 per share......... 5
Shares of Salomon Brothers Institutional Emerging Markets Debt Fund, par value $.001 per share... 8
</TABLE>
ITEM 27. INDEMNIFICATION
Reference is made to Article VII of Registrant's Articles of Incorporation,
Article V of Registrant's By-Laws and Section 4 of the Distribution Agreements
between the Registrant and Salomon Brothers Inc.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the 'Securities Act'), may be permitted to directors,
officers and controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant understands that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such
C-2
<PAGE>
<PAGE>
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) Salomon Brothers Inc ('Salomon Brothers') currently acts as distributor
for, in addition to the Registrant, Salomon Brothers Capital Fund Inc, Salomon
Brothers Investors Fund Inc, Salomon Brothers Opportunity Fund Inc, Salomon
Brothers Variable Series Funds Inc and Salomon Brothers Series Funds Inc.
(b) The information required by this Item 29 with respect to each director,
officer or partner of Salomon Brothers is incorporated by reference to Schedule
A of Form BD filed by Salomon Brothers pursuant to the Securities Exchange Act
of 1934 (SEC File No. 8-26920).
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
(1) Salomon Brothers Asset Management Inc, 7 World Trade Center, New York,
New York 10048
(2) 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-3
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, and
the Investment Company Act of 1940, as amended, the Registrant hereby certifies
that it meets all of the requirements for effectiveness of this Post-Effective
Amendment to the Registration Statement pursuant to Rule 485(b) under the
Securities Act of 1933, as amended, and has duly caused this Post-Effective
Amendment to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, and State of
New York, on the 30th day of April, 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
- ----------------------------------------- ---------------------------------------------------- ---------------
<C> <S> <C>
/S/ HEATH B. MCLENDON Director and President (Principal Executive Officer) April 30, 1998
.........................................
(HEATH B. MCLENDON)
* Director April 30, 1998
.........................................
(CHARLES F. BARBER)
* Director April 30, 1998
.........................................
(CAROL L. COLMAN)
* Director April 30, 1998
.........................................
(DANIEL P. CRONIN)
/S/ ALAN M. MANDEL Treasurer (Principal Financial and Accounting April 30, 1998
......................................... Officer)
(ALAN M. MANDEL)
*By /s/ ALAN M. MANDEL
.....................................
ALAN M. MANDEL
ATTORNEY-IN-FACT
</TABLE>
C-4
<PAGE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ------------------------------------------------------------------------------------------------------------
<C> <S>
5(a) -- Management Contract.
5(b) -- Management Contract.
6 -- Distribution Agreement.
11 -- Consents of Independent Accountants.
17 -- Financial Data Schedule for the Salomon Brothers Institutional High Yield Bond Fund and Salomon Brothers
Institutional Emerging Markets Debt Fund.
</TABLE>
STATEMENT OF DIFFERENCES
The dagger symbol shall be expressed as..................................'D'
Characters normally expressed as superscript shall be preceded by........'pp'
<PAGE>
<PAGE>
MANAGEMENT CONTRACT
SALOMON BROTHERS INSTITUTIONAL SERIES FUNDS INC
7 World Trade Center
New York, New York 10048
November 28, 1997
Salomon Brothers Asset Management Inc
7 World Trade Center
New York, New York 10048
Dear Sirs:
This will confirm the agreement between the undersigned (the
"Company") and you (the "Investment Manager") as follows:
1. The Company is an open-end investment company which currently
has three investment portfolios -- Salomon Brothers Institutional High Yield
Bond Fund, Salomon Brothers Institutional Emerging Markets Debt Fund and Salomon
Brothers Institutional Asia Growth Fund. The Company proposes to engage in the
business of investing and reinvesting the assets of Salomon Brothers
Institutional High Yield Bond Fund (the "High Yield Bond Fund" or the "Fund") in
the manner and in accordance with the investment objective and limitations
specified in the Company's Articles of Incorporation, as amended (the
"Articles") and the currently effective prospectus, including the documents
incorporated by reference therein (the "Prospectus"), relating to the Company
and the Fund, included in the Company's Registration Statement, as amended from
time to time (the "Registration Statement"), filed by the Company under the
Investment Company Act of 1940, as amended (the "1940 Act"), and the Securities
Act of 1933, as amended. Copies of the documents referred to in the preceding
sentence have been furnished to the Investment Manager. Any amendments to these
documents shall be furnished to the Investment Manager.
2. The Company employs the Investment Manager to (a) make
investment strategy decisions for the Fund, (b) manage the investing and
reinvesting of the Fund's assets as specified in paragraph 1, (c) place purchase
and sale orders on behalf of the Fund and (d) provide continuous supervision of
the Fund's investment portfolio.
3. (a) The Investment Manager shall, at its expense, (i) provide
the Fund with office space, office facilities and personnel reasonably necessary
for performance of the services to be provided by the Investment Manager
pursuant to this Agreement, (ii) provide the Fund with persons satisfactory to
the Company's Board of Directors to serve as officers and employees of the Fund
and (iii) provide the office space, facilities, equipment and personnel
necessary to perform the following services for the Fund: (A) review purchases
and sales of portfolio instruments and review the Fund's portfolio to assess
compliance with the
<PAGE>
<PAGE>
2
Fund's stated investment objective and limitations and compliance with the 1940
Act and other applicable laws and regulations, (B) record keeping and reporting
to the extent such records and reports are not maintained or furnished by the
Fund's transfer agent, custodian, administrative and accounting services agent,
or other agents employed by the Fund, (C) supervision of Fund operations,
including coordination of functions of administrator, transfer agent, custodian,
administrative and accounting services agent, accountants, counsel and other
parties performing services or operational functions for the Fund; and (D)
certain administrative and clerical services not otherwise provided by the
Fund's transfer agent, custodian, administrative and accounting services agent,
or other agents employed by the Fund.
(b) Except as provided in subparagraph (a), the Company shall be
responsible for all of the Fund's expenses and liabilities, including
organizational expenses; taxes; interest; fees (including fees paid to its
directors who are not affiliated with the Investment Manager or any of its
affiliates); fees payable to the Securities and Exchange Commission; state
securities qualification fees; costs of preparing and printing prospectuses for
regulatory purposes and for distribution to existing shareholders; advisory and
administration fees; charges of the custodian, transfer agent; administrative
and accounting services agent and any other agent employed by the Fund;
insurance premiums; auditing and legal expenses; costs of shareholders' reports
and shareholders' meetings; charges and expenses of any entity used for pricing
the Fund's portfolio securities and calculating the net asset value of the
Fund's shares; any extraordinary expenses; and brokerage fees and commissions,
if any, in connection with the purchase or sale of portfolio securities; and
payments to the Fund's distributor for activities intended to result in the sale
of Fund shares.
4. As manager of the Fund's assets, the Investment Manager shall
make investments for the Fund's account in accordance with the investment
objective and limitations set forth in the Articles, the Prospectus, the 1940
Act, the provisions of the Internal Revenue Code of 1986, as amended, relating
to regulated investment companies, applicable banking laws and regulations, and
policy decisions adopted by the Company's Board of Directors from time to time.
The Investment Manager shall advise the Company's officers and Board of
Directors, at such times as the Company's Board of Directors may specify, of
investments made for the Fund's account and shall, when requested by the
Company's officers or Board of Directors, supply the reasons for making such
investments.
5. The Investment Manager is authorized on behalf of the Company,
from time to time when deemed to be in the best interests of the Company and to
the extent permitted by applicable law, to purchase and/or sell securities in
which the Investment Manager or any of its affiliates underwrites, deals in
and/or makes a market and/or may perform or seek to perform investment banking
services for issuers of such securities. The Investment Manager is further
authorized, to the extent permitted by applicable law, to select brokers for the
execution of trades for the Company, which broker may be an affiliate of the
Investment Manager, provided that the best competitive execution price is
obtained at the time of the trade execution.
<PAGE>
<PAGE>
3
6. In consideration of the Investment Manager's undertaking to
render the services described in this agreement, the Company agrees that the
Investment Manager shall not be liable under this agreement for any error of
judgment or mistake of law or for any loss suffered by the Company in connection
with the performance of this agreement, provided that nothing in this agreement
shall be deemed to protect or purport to protect the Investment Manager against
any liability to the Company or its stockholders to which the Investment Manager
would otherwise be subject by reason of willful misfeasance, bad faith or gross
negligence in the performance of its duties under this agreement or by reason of
its reckless disregard of its obligations and duties hereunder ("disabling
conduct"). The Fund will indemnify the Investment Manager against, and hold it
harmless from, any and all losses, claims, damages, liabilities or expenses,
including reasonable counsel fees and expenses and any amounts paid in
satisfaction of judgments, in compromise or as fines or penalties, not resulting
from disabling conduct by the Investment Manager. Indemnification shall be made
only following: (i) a final decision on the merits by a court or other body
before whom the proceeding was brought that the Investment Manager was not
liable by reason of disabling conduct, or (ii) in the absence of such a
decision, a reasonable determination, based upon a review of the facts, that the
Investment Manager was not liable by reason of disabling conduct by (a) the vote
of a majority of a quorum of directors of the Company who are neither
"interested persons" of the Company nor parties to the proceeding
("disinterested non-party directors"), or (b) an independent legal counsel in a
written opinion. The Investment Manager shall be entitled to advances from the
Fund for payment of the reasonable expenses incurred by it in connection with
the matter as to which it is seeking indemnification in the manner and to the
fullest extent permissible under law. The Investment Manager shall provide to
the Fund a written affirmation of its good faith belief that the standard of
conduct necessary for indemnification by the Fund has been met and a written
undertaking to repay any such advance if it should ultimately be determined that
the standard of conduct has not been met. In addition, at least one of the
following additional conditions shall be met: (a) the Investment Manager shall
provide security in form and amount acceptable to the Fund for its undertaking;
(b) the Fund is insured against losses arising by reason of the advance; or (c)
a majority of a quorum of disinterested non-party directors, or independent
legal counsel, in a written opinion, shall have determined, based on a review of
facts readily available to the Fund at the time the advance is proposed to be
made, that there is reason to believe that the Investment Manager will
ultimately be found to be entitled to indemnification. For purposes of this
paragraph 6 only, the term "Investment Manager" shall be deemed to include
affiliates of the Investment Manager to whom the Investment Manager has
delegated the exercise of all or any of its powers, discretion and duties under
this agreement.
7. In consideration of the services to be rendered by the
Investment Manager under this agreement, the Company shall pay the Investment
Manager a monthly fee on the first business day of each month at an annual rate
of 0.50% of the average daily value (as determined on the days and at the time
set forth in the Prospectus for determining net asset value per share) of the
Fund's net assets during the preceding month. If the fee payable to the
Investment Manager pursuant to this paragraph 7 begins to accrue before the end
of any month or if this agreement terminates before the end of any month, the
fee for the period from such date to the end of such month or from the beginning
of such month to the date of termination, as the case may be, shall be prorated
according to the proportion which such
<PAGE>
<PAGE>
4
period bears to the full month in which such effectiveness or termination
occurs. For purposes of calculating each such monthly fee, the value of the
Fund's net assets shall be computed in the manner specified in the Prospectus
and the Articles for the computation of the value of the Fund's net assets in
connection with the determination of the net asset value of shares of the Fund's
capital stock.
8. If the aggregate expenses incurred by, or allocated to, the
Fund in any fiscal year shall exceed the expense limitations applicable to the
Fund imposed by state securities laws or regulations thereunder, as such
limitations may be raised or lowered from time to time, the Investment Manager
shall reimburse the Fund for such excess. The Investment Manager's reimbursement
obligation will be limited to the amount of fees it received under this
agreement during the period in which such expense limitations were exceeded,
unless otherwise required by applicable laws or regulations. With respect to
portions of a fiscal year in which this contract shall be in effect, the
foregoing limitations shall be prorated according to the proportion which that
portion of the fiscal year bears to the full fiscal year. Any payments required
to be made by this paragraph 8 shall be made once a year promptly after the end
of the Company's fiscal year.
9. This agreement shall continue in effect until two years from
the date hereof and thereafter for successive annual periods, provided that such
continuance is specifically approved at least annually (a) by the vote of a
majority of the Fund's outstanding voting securities (as defined in the 1940
Act) or by the Company's Board of Directors and (b) by the vote, cast in person
at a meeting called for the purpose, of a majority of the Company's directors
who are not parties to this agreement or "interested persons" (as defined in the
1940 Act) of any such party. This agreement may be terminated at any time,
without the payment of any penalty, by a vote of a majority of the Fund's
outstanding voting securities (as defined in the 1940 Act) or by a vote of a
majority of the Company's entire Board of Directors on 60 days' written notice
to the Investment Manager or by the Investment Manager on 60 days' written
notice to the Company. This agreement shall terminate automatically in the event
of its assignment (as defined in the 1940 Act). The respective agreements,
covenants, indemnities and other statements set forth in Section 6 hereof shall
remain in full force and effect regardless of any termination or cancellation of
this agreement. All property of the Fund shall be returned to the Fund as soon
as reasonably practicable after the termination of this agreement.
10. Upon expiration or earlier termination of this agreement, the
Company shall, if reference to "Salomon Brothers" is made in the corporate name
of the Company or in the name of the Fund and if the Investment Manager requests
in writing, as promptly as practicable change its corporate name and the name of
the Fund so as to eliminate all reference to "Salomon Brothers", and thereafter
the Company and the Fund shall cease transacting business in any corporate name
using the words "Salomon Brothers" or any other reference to the Investment
Manager or "Salomon Brothers". The foregoing rights of the Investment Manager
and obligations of the Company shall not deprive the Investment Manager, or any
affiliate thereof which has "Salomon Brothers" in its name, of, but shall be in
addition to, any other rights or remedies to which the Investment Manager and
any such affiliate may be entitled in law or equity by reason of any breach of
this agreement by the
<PAGE>
<PAGE>
5
Company, and the failure or omission of the Investment Manager to request a
change of the Company's or the Fund's name or a cessation of the use of the name
of "Salomon Brothers" as described in this paragraph 10 shall not under any
circumstances be deemed a waiver of the right to require such change or
cessation at any time thereafter for the same or any subsequent breach.
11. Except to the extent necessary to perform the Investment
Manager's obligations under this agreement, nothing herein shall be deemed to
limit or restrict the right of the Investment Manager, or any affiliate of the
Investment Manager, or any employee of the Investment Manager, to engage in any
other business or to devote time and attention to the management or other
aspects of any other business, whether of a similar or dissimilar nature, or to
render services of any kind to any other corporation, firm, individual or
association.
12. This agreement shall be governed by the laws of the State of
New York.
If the foregoing correctly sets forth the agreement between the
Company and the Investment Manager, please so indicate by signing and returning
to the Company the enclosed copy hereof.
Very truly yours,
SALOMON BROTHERS INSTITUTIONAL
SERIES FUNDS INC
By:
-------------------------------
Name: Michael S. Hyland
Title: President
ACCEPTED:
SALOMON BROTHERS ASSET
MANAGEMENT INC
By:
-------------------------------
Name: Michael S. Hyland
Title: President
<PAGE>
<PAGE>
MANAGEMENT CONTRACT
SALOMON BROTHERS INSTITUTIONAL SERIES FUNDS INC
7 World Trade Center
New York, New York 10048
November 28, 1997
Salomon Brothers Asset Management Inc
7 World Trade Center
New York, New York 10048
Dear Sirs:
This will confirm the agreement between the undersigned (the
"Company") and you (the "Investment Manager") as follows:
1. The Company is an open-end investment company which currently
has three investment portfolios -- Salomon Brothers Institutional High Yield
Bond Fund, Salomon Brothers Institutional Emerging Markets Debt Fund and Salomon
Brothers Institutional Asia Growth Fund. The Company proposes to engage in the
business of investing and reinvesting the assets of Salomon Brothers
Institutional Emerging Markets Debt Fund (the "Emerging Markets Debt Fund" or
the "Fund") in the manner and in accordance with the investment objective and
limitations specified in the Company's Articles of Incorporation, as amended
(the "Articles") and the currently effective prospectus, including the documents
incorporated by reference therein (the "Prospectus"), relating to the Company
and the Fund, included in the Company's Registration Statement, as amended from
time to time (the "Registration Statement"), filed by the Company under the
Investment Company Act of 1940, as amended (the "1940 Act"), and the Securities
Act of 1933, as amended. Copies of the documents referred to in the preceding
sentence have been furnished to the Investment Manager. Any amendments to these
documents shall be furnished to the Investment Manager.
2. The Company employs the Investment Manager to (a) make
investment strategy decisions for the Fund, (b) manage the investing and
reinvesting of the Fund's assets as specified in paragraph 1, (c) place purchase
and sale orders on behalf of the Fund and (d) provide continuous supervision of
the Fund's investment portfolio.
3. (a) The Investment Manager shall, at its expense, (i) provide
the Fund with office space, office facilities and personnel reasonably necessary
for performance of the services to be provided by the Investment Manager
pursuant to this Agreement, (ii) provide the Fund with persons satisfactory to
the Company's Board of Directors to serve as officers and employees of the Fund
and (iii) provide the office space, facilities, equipment and personnel
necessary to perform the following services for the Fund: (A) review purchases
and sales of portfolio instruments and review the Fund's portfolio to assess
compliance with the
<PAGE>
<PAGE>
2
Fund's stated investment objective and limitations and compliance with the 1940
Act and other applicable laws and regulations, (B) record keeping and reporting
to the extent such records and reports are not maintained or furnished by the
Fund's transfer agent, custodian, administrative and accounting services agent,
or other agents employed by the Fund, (C) supervision of Fund operations,
including coordination of functions of administrator, transfer agent, custodian,
administrative and accounting services agent, accountants, counsel and other
parties performing services or operational functions for the Fund; and (D)
certain administrative and clerical services not otherwise provided by the
Fund's transfer agent, custodian, administrative and accounting services agent,
or other agents employed by the Fund.
(b) Except as provided in subparagraph (a), the Company shall be
responsible for all of the Fund's expenses and liabilities, including
organizational expenses; taxes; interest; fees (including fees paid to its
directors who are not affiliated with the Investment Manager or any of its
affiliates); fees payable to the Securities and Exchange Commission; state
securities qualification fees; costs of preparing and printing prospectuses for
regulatory purposes and for distribution to existing shareholders; advisory and
administration fees; charges of the custodian, transfer agent; administrative
and accounting services agent and any other agent employed by the Fund;
insurance premiums; auditing and legal expenses; costs of shareholders' reports
and shareholders' meetings; charges and expenses of any entity used for pricing
the Fund's portfolio securities and calculating the net asset value of the
Fund's shares; any extraordinary expenses; and brokerage fees and commissions,
if any, in connection with the purchase or sale of portfolio securities; and
payments to the Fund's distributor for activities intended to result in the sale
of Fund shares.
4. As manager of the Fund's assets, the Investment Manager shall
make investments for the Fund's account in accordance with the investment
objective and limitations set forth in the Articles, the Prospectus, the 1940
Act, the provisions of the Internal Revenue Code of 1986, as amended, relating
to regulated investment companies, applicable banking laws and regulations, and
policy decisions adopted by the Company's Board of Directors from time to time.
The Investment Manager shall advise the Company's officers and Board of
Directors, at such times as the Company's Board of Directors may specify, of
investments made for the Fund's account and shall, when requested by the
Company's officers or Board of Directors, supply the reasons for making such
investments.
5. The Investment Manager is authorized on behalf of the Company,
from time to time when deemed to be in the best interests of the Company and to
the extent permitted by applicable law, to purchase and/or sell securities in
which the Investment Manager or any of its affiliates underwrites, deals in
and/or makes a market and/or may perform or seek to perform investment banking
services for issuers of such securities. The Investment Manager is further
authorized, to the extent permitted by applicable law, to select brokers for the
execution of trades for the Company, which broker may be an affiliate of the
Investment Manager, provided that the best competitive execution price is
obtained at the time of the trade execution.
<PAGE>
<PAGE>
3
6. In consideration of the Investment Manager's undertaking to
render the services described in this agreement, the Company agrees that the
Investment Manager shall not be liable under this agreement for any error of
judgment or mistake of law or for any loss suffered by the Company in connection
with the performance of this agreement, provided that nothing in this agreement
shall be deemed to protect or purport to protect the Investment Manager against
any liability to the Company or its stockholders to which the Investment Manager
would otherwise be subject by reason of willful misfeasance, bad faith or gross
negligence in the performance of its duties under this agreement or by reason of
its reckless disregard of its obligations and duties hereunder ("disabling
conduct"). The Fund will indemnify the Investment Manager against, and hold it
harmless from, any and all losses, claims, damages, liabilities or expenses,
including reasonable counsel fees and expenses and any amounts paid in
satisfaction of judgments, in compromise or as fines or penalties, not resulting
from disabling conduct by the Investment Manager. Indemnification shall be made
only following: (i) a final decision on the merits by a court or other body
before whom the proceeding was brought that the Investment Manager was not
liable by reason of disabling conduct, or (ii) in the absence of such a
decision, a reasonable determination, based upon a review of the facts, that the
Investment Manager was not liable by reason of disabling conduct by (a) the vote
of a majority of a quorum of directors of the Company who are neither
"interested persons" of the Company nor parties to the proceeding
("disinterested non-party directors"), or (b) an independent legal counsel in a
written opinion. The Investment Manager shall be entitled to advances from the
Fund for payment of the reasonable expenses incurred by it in connection with
the matter as to which it is seeking indemnification in the manner and to the
fullest extent permissible under law. The Investment Manager shall provide to
the Fund a written affirmation of its good faith belief that the standard of
conduct necessary for indemnification by the Fund has been met and a written
undertaking to repay any such advance if it should ultimately be determined that
the standard of conduct has not been met. In addition, at least one of the
following additional conditions shall be met: (a) the Investment Manager shall
provide security in form and amount acceptable to the Fund for its undertaking;
(b) the Fund is insured against losses arising by reason of the advance; or (c)
a majority of a quorum of disinterested non-party directors, or independent
legal counsel, in a written opinion, shall have determined, based on a review of
facts readily available to the Fund at the time the advance is proposed to be
made, that there is reason to believe that the Investment Manager will
ultimately be found to be entitled to indemnification. For purposes of this
paragraph 6 only, the term "Investment Manager" shall be deemed to include
affiliates of the Investment Manager to whom the Investment Manager has
delegated the exercise of all or any of its powers, discretion and duties under
this agreement.
7. In consideration of the services to be rendered by the
Investment Manager under this agreement, the Company shall pay the Investment
Manager a monthly fee on the first business day of each month at an annual rate
of 0.70% of the average daily value (as determined on the days and at the time
set forth in the Prospectus for determining net asset value per share) of the
Fund's net assets during the preceding month. If the fee payable to the
Investment Manager pursuant to this paragraph 7 begins to accrue before the end
of any month or if this agreement terminates before the end of any month, the
fee for the period from such date to the end of such month or from the beginning
of such month to the date of termination, as the case may be, shall be prorated
according to the proportion which such
<PAGE>
<PAGE>
4
period bears to the full month in which such effectiveness or termination
occurs. For purposes of calculating each such monthly fee, the value of the
Fund's net assets shall be computed in the manner specified in the Prospectus
and the Articles for the computation of the value of the Fund's net assets in
connection with the determination of the net asset value of shares of the Fund's
capital stock.
8. If the aggregate expenses incurred by, or allocated to, the
Fund in any fiscal year shall exceed the expense limitations applicable to the
Fund imposed by state securities laws or regulations thereunder, as such
limitations may be raised or lowered from time to time, the Investment Manager
shall reimburse the Fund for such excess. The Investment Manager's reimbursement
obligation will be limited to the amount of fees it received under this
agreement during the period in which such expense limitations were exceeded,
unless otherwise required by applicable laws or regulations. With respect to
portions of a fiscal year in which this contract shall be in effect, the
foregoing limitations shall be prorated according to the proportion which that
portion of the fiscal year bears to the full fiscal year. Any payments required
to be made by this paragraph 8 shall be made once a year promptly after the end
of the Company's fiscal year.
9. This agreement shall continue in effect until two years from
the date hereof and thereafter for successive annual periods, provided that such
continuance is specifically approved at least annually (a) by the vote of a
majority of the Fund's outstanding voting securities (as defined in the 1940
Act) or by the Company's Board of Directors and (b) by the vote, cast in person
at a meeting called for the purpose, of a majority of the Company's directors
who are not parties to this agreement or "interested persons" (as defined in the
1940 Act) of any such party. This agreement may be terminated at any time,
without the payment of any penalty, by a vote of a majority of the Fund's
outstanding voting securities (as defined in the 1940 Act) or by a vote of a
majority of the Company's entire Board of Directors on 60 days' written notice
to the Investment Manager or by the Investment Manager on 60 days' written
notice to the Company. This agreement shall terminate automatically in the event
of its assignment (as defined in the 1940 Act). The respective agreements,
covenants, indemnities and other statements set forth in Section 6 hereof shall
remain in full force and effect regardless of any termination or cancellation of
this agreement. All property of the Fund shall be returned to the Fund as soon
as reasonably practicable after the termination of this agreement.
10. Upon expiration or earlier termination of this agreement, the
Company shall, if reference to "Salomon Brothers" is made in the corporate name
of the Company or in the name of the Fund and if the Investment Manager requests
in writing, as promptly as practicable change its corporate name and the name of
the Fund so as to eliminate all reference to "Salomon Brothers", and thereafter
the Company and the Fund shall cease transacting business in any corporate name
using the words "Salomon Brothers" or any other reference to the Investment
Manager or "Salomon Brothers". The foregoing rights of the Investment Manager
and obligations of the Company shall not deprive the Investment Manager, or any
affiliate thereof which has "Salomon Brothers" in its name, of, but shall be in
addition to, any other rights or remedies to which the Investment Manager and
any such affiliate may be entitled in law or equity by reason of any breach of
this agreement by the
<PAGE>
<PAGE>
5
Company, and the failure or omission of the Investment Manager to request a
change of the Company's or the Fund's name or a cessation of the use of the name
of "Salomon Brothers" as described in this paragraph 10 shall not under any
circumstances be deemed a waiver of the right to require such change or
cessation at any time thereafter for the same or any subsequent breach.
11. Except to the extent necessary to perform the Investment
Manager's obligations under this agreement, nothing herein shall be deemed to
limit or restrict the right of the Investment Manager, or any affiliate of the
Investment Manager, or any employee of the Investment Manager, to engage in any
other business or to devote time and attention to the management or other
aspects of any other business, whether of a similar or dissimilar nature, or to
render services of any kind to any other corporation, firm, individual or
association.
12. This agreement shall be governed by the laws of the State
of New York.
If the foregoing correctly sets forth the agreement between the
Company and the Investment Manager, please so indicate by signing and returning
to the Company the enclosed copy hereof.
Very truly yours,
SALOMON BROTHERS INSTITUTIONAL
SERIES FUNDS INC
By:
--------------------------------
Name: Michael S. Hyland
Title: President
ACCEPTED:
SALOMON BROTHERS ASSET
MANAGEMENT INC
By:
------------------------------------
Name: Michael S. Hyland
Title: President
<PAGE>
<PAGE>
DISTRIBUTION AGREEMENT
November 28, 1997
Salomon Brothers Inc
7 World Trade Center
New York, New York 10048
Dear Sirs:
This is to confirm that, in consideration of the agreements
hereinafter contained, Salomon Brothers Institutional High Yield Bond Fund,
Salomon Brothers Institutional Emerging Markets Debt Fund and Salomon Brothers
Institutional Asia Growth Fund (together, the "Funds") each an investment
portfolio of Salomon Brothers Institutional Series Funds Inc (the "Company"), an
open-end, professionally managed investment company organized as a corporation
under the laws of the State of Maryland, has agreed that Salomon Brothers Inc
("Salomon Brothers") shall be, for the period of this Agreement, the distributor
of shares of the Company (the "Shares").
1. Services as Distributor
1.1 Salomon Brothers will act as agent for the distribution of
the Shares covered by the registration statement, prospectus and statement of
additional information then in effect under the Securities Act of 1933, as
amended (the "1933 Act"), and the Investment Company Act of 1940, as amended
(the "1940 Act").
1.2 Salomon Brothers agrees to use its best efforts to solicit
orders for the sale of the Shares at the public offering price, as determined in
accordance with the registration statement, and will undertake such advertising
and promotion as it believes is reasonable in connection with such solicitation.
1.3 All activities by Salomon Brothers as distributor of the
Shares shall comply with all applicable laws, rules and regulations, including,
without limitation, all rules and regulations made or adopted by the Securities
and Exchange Commission (the "SEC") or by any securities association registered
under the Securities Exchange Act of 1934, as amended.
1.4 Salomon Brothers will transmit any orders received by it
for purchase or redemption of shares of the Company to [First Data Investment
Services, Inc. ("First Data") (formerly, The Shareholder Services Group, Inc.)],
the Company's transfer agent and
<PAGE>
<PAGE>
2
dividend disbursing agent, or any successor to First Data of which the Company
has notified Salomon Brothers in writing.
1.5 Salomon Brothers acknowledges that, whenever in the judgment
of the Fund's officers such action is warranted for any reason, including,
without limitation, market, economic or political conditions, those officers may
decline to accept any orders for, or make any sales of, the Shares until such
time as those officers deem it advisable to accept such orders and to make such
sales.
1.6 Salomon Brothers will act only on its own behalf as principal
should it choose to enter into selling agreements in the form of Exhibit A
attached hereto with selected dealers or others.
1.7 As compensation for its services hereunder, Salomon Brothers
shall be entitled to such compensation as is described in the Fund's current
registration statement.
2. Duties of the Funds
2.1 Each Fund agrees at its own expense to execute any and all
documents, to furnish any and all information and to take any other actions that
may be reasonably necessary in connection with the qualification of the Shares
for sale in those states that Salomon Brothers may designate.
2.2 Each Fund shall furnish from time to time, for use in
connection with the sale of the Shares, such information reports with respect to
such Fund and its Shares as Salomon Brothers may reasonably request, all of
which shall be signed by one or more of such Fund's duly authorized officers;
and each Fund warrants that the statements contained in any such reports, when
so signed by one or more of the Fund's officers, shall be true and correct. Each
Fund shall also furnish Salomon Brothers upon request with: (a) annual audits of
such Fund's books and accounts made by independent public accountants regularly
retained by such Fund, (b) semiannual unaudited financial statements pertaining
to such Fund, (c) quarterly earnings statements prepared by such Fund, (d) a
monthly itemized list of the securities in the portfolio of such Fund, (e)
monthly balance sheets as soon as practicable after the end of each month and
(f) from time to time such additional information regarding such Fund's
financial condition as Salomon Brothers may reasonably request.
3. Representations and Warranties
The Fund represents to Salomon Brothers 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
of the Fund have been carefully prepared in conformity with the requirements of
the 1933 Act, the 1940 Act and the rules and regulations of the SEC thereunder.
As used in this Agreement the terms "registration statement", "prospectus" and
"statement of additional information" shall mean any registration statement,
prospectus and statement of additional information filed by the Fund with the
SEC and any amendments and supplements thereto which at any time shall have been
filed with
<PAGE>
<PAGE>
3
the SEC. The Fund represents and warrants to Salomon Brothers that any
registration statement, prospectus and statement of additional information, when
such registration statement becomes effective, will include all statements
required to be contained therein in conformity with the 1933 Act, the 1940 Act
and the rules and regulations of the SEC; that all statements of fact contained
in any registration statement, prospectus or statement of additional information
will be true and correct when such registration statement becomes effective; and
that neither any registration statement nor any prospectus or statement of
additional information when such registration statement becomes effective will
include an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading to a purchaser of the Fund's shares. Salomon Brothers may, but shall
not be obligated to, propose from time to time such amendment or amendments to
any registration statement and such supplement or supplements to any prospectus
or statement of additional information as, in the light of future developments,
may, in the opinion of Salomon Brothers' counsel, be necessary or advisable. If
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 Salomon Brothers to do so, Salomon Brothers may, at its option, terminate
this Agreement. The Fund shall not file any amendment to any registration
statement or supplement to any prospectus or statement of additional information
without giving Salomon Brothers reasonable notice thereof in advance; provided,
however, that nothing contained in this Agreement shall in any way limit 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 Salomon Brothers and any dealers with
whom Salomon Brothers has entered into dealer agreements to use any prospectus
or statement of additional information furnished by the Fund from time to time,
in connection with the sale of the Fund's shares. The Fund agrees to indemnify,
defend and hold Salomon Brothers, its several officers and directors, and any
person who controls Salomon Brothers within the meaning of Section 15 of the
1933 Act, free and harmless from and against any and all claims, demands,
liabilities and expenses (including the cost of investigating or defending such
claims, demands or liabilities and any counsel fees incurred in connection
therewith) which Salomon Brothers, its officers and directors, or any such
controlling person, may incur under the 1933 Act, the 1940 Act or common law or
otherwise, arising out of or based upon any untrue statement or alleged untrue
statement of a material fact contained in any 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 Salomon
Brothers, its officers or directors, and any such controlling person shall not
be deemed to cover any claims, demands, liabilities or expenses arising out of
or based upon any statements or representations made by Salomon Brothers or its
representatives or agents other than such statements and representations as are
contained in any registration statement, prospectus or statement of additional
information and in such
<PAGE>
<PAGE>
4
financial and other statements as are furnished to Salomon Brothers pursuant to
paragraph 2.2 hereof; and further provided that the Fund's agreement to
indemnify Salomon Brothers and the Fund's representations and warranties
hereinbefore set forth in paragraph 3 shall not be deemed to cover any liability
to the Fund or its shareholders to which Salomon Brothers would otherwise be
subject by reason of willful misfeasance, bad faith or gross negligence in the
performance of its duties, or by reason of Salomon Brothers' reckless disregard
of its obligations and duties under this Agreement. The Fund's agreement to
indemnify Salomon Brothers, its officers and directors, and any such controlling
person, as aforesaid, is expressly conditioned upon the Fund's being notified of
any action brought against Salomon Brothers, its officers or directors, or any
such controlling person, such notification to be given by letter or by telegram
addressed to 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'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 Salomon Brothers, its 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 Salomon
Brothers' benefit, to the benefit of its several officers and directors, and
their respective estates, and to the benefit of the controlling persons and
their successors. The Fund agrees to notify Salomon Brothers promptly of the
commencement of any litigation or proceedings against the Fund or any of its
officers or directors in connection with the issuance and sale of any of the
Fund's shares.
4.2 Salomon Brothers agrees to indemnify, defend and hold the
Fund, its several officers and directors, 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
directors or any such controlling person may incur under the 1933 Act, the 1940
Act or common law or otherwise, but only to the extent that such liability or
expense incurred by the Fund, its officers or directors or such controlling
person resulting from such claims or demands shall arise out of or be based upon
(a) any unauthorized sales literature, advertisements, information, statements
or representations or (b) any untrue or alleged untrue statement of a material
fact contained in information, furnished in writing by Salomon Brothers to the
Fund and used in the answers to any of these items of the registration statement
or in the corresponding statements made in the prospectus or statement of
additional information, or shall arise out of or be based upon any omission or
alleged omission to state a material fact in connection with such information
furnished in writing by Salomon Brothers to the Fund and required to be stated
in such answers or necessary to make such information not misleading. Salomon
Brothers' agreement to indemnify the Fund, its officers and directors, and any
such controlling person, as aforesaid, is expressly conditioned upon Salomon
Brothers' being notified of any action brought against the Fund, its officers or
directors, or
<PAGE>
<PAGE>
5
any such controlling person, such notification to be given by letter or telegram
addressed to Salomon Brothers at its principal office in New York, New York and
sent to Salomon Brothers by the person against whom such action is brought,
within ten days after the summons or other first legal process shall have been
served. The failure so to notify Salomon Brothers of any such action shall not
relieve Salomon Brothers from any liability that Salomon Brothers may have to
the Fund, its officers or directors, or to such controlling person by reason of
any such untrue or alleged untrue statement or omission or alleged omission
otherwise than on account of Salomon Brothers' indemnity agreement contained in
this paragraph 4.2. Salomon Brothers agrees to notify the Fund promptly of the
commencement of any litigation or proceedings against Salomon Brothers or any of
its officers or directors in connection with the issuance and sale of any of the
Fund's shares.
4.3 In case any action shall be brought against any indemnified
party under paragraph 4.1 or 4.2, and it shall notify the indemnifying party of
the commencement thereof, the indemnifying party shall be entitled to
participate in, and, to the extent that it shall wish to do so, to assume the
defense thereof with counsel satisfactory to such indemnified party. If the
indemnifying party opts to assume the defense of such action, the indemnifying
party will not be liable to the indemnified party for any legal or other
expenses subsequently incurred by the indemnified party in connection with the
defense thereof other than (a) reasonable costs of investigation or the
furnishing of documents or witnesses and (b) all reasonable fees and expenses of
separate counsel to such indemnified party if (i) the indemnifying party and the
indemnified party shall have agreed to the retention of such counsel or (ii) the
indemnified party shall have concluded reasonably that representation of the
indemnifying party and the indemnified party by the same counsel would be
inappropriate due to actual or potential differing interests between them in the
conduct of the defense of such action.
5. Effectiveness of Registration
None of the Shares shall be offered by either Salomon Brothers or
the Fund under any of the provisions of this Agreement and no orders for the
purchase or sale of the Shares hereunder shall be accepted by the 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 an
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 articles of incorporation.
6. Notice to Salomon Brothers
The Fund agrees to advise Salomon Brothers immediately in
writing:
<PAGE>
<PAGE>
6
(a) of any request by the SEC for amendments to the
registration statement, prospectuses or statements of additional information
then in effect or for additional information;
(b) in the event of the issuance by the SEC of any stop order
suspending the effectiveness of the registration statement, prospectus or
statement of additional information then in effect or the initiation of any
proceeding for that purpose;
(c) of the happening of any event that makes untrue any statement
of a material fact made in the registration statement, prospectus or statement
of additional information then in effect or that requires the making of a change
in such registration statement, prospectus or statement of additional
information in order to make the statements therein not misleading; and
(d) of all actions of the SEC with respect to any amendment to
any registration statement, prospectus or statement of additional information
which may from time to time be filed with the SEC.
7. Term of Agreement
This Agreement shall continue for two years from the date hereof
and thereafter shall continue automatically for successive annual periods,
provided such continuance is specifically approved at least annually by (i) the
Fund's Board of Directors with respect to the Fund, or (ii) 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
the majority of the Directors 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, without penalty, on 60 days' notice by the Fund's Board of
Directors, by vote of the holders of a majority of the Fund's shares, or on 90
days' notice by Salomon Brothers. This Agreement will also terminate
automatically in the event of its assignment (as defined in the 1940 Act).
8. Miscellaneous
The Fund recognizes that directors, officers and employees of
Salomon Brothers may from time to time serve as directors, trustees,
officers and employees of corporations and business trusts (including
other investment companies) and that such other corporations and trusts may
include the name "Salomon" or "Salomon Brothers" as part of their names, and
that Salomon Brothers or its affiliates may enter into distribution or other
agreements with such other corporations and trusts. If Salomon Brothers, or an
affiliate, ceases to act as the distributor of the Fund's shares, the Fund
agrees that, at Salomon Brothers' request, the Fund's license to use the words
"Salomon Brothers" will terminate and that the Fund will take all necessary
action to change the name of the Fund to a name not including the words
"Salomon" or "Salomon Brothers."
<PAGE>
<PAGE>
7
Please confirm that the foregoing is in accordance with your
understanding by indicating your acceptance thereof at the place below
indicated, whereupon it shall become a binding agreement between us.
Very truly yours,
SALOMON BROTHERS INSTITUTIONAL
SERIES FUNDS INC
By:
-------------------------------
Michael S. Hyland
President
Accepted:
SALOMON BROTHERS INC
By:
-------------------------------
Michael S. Hyland
Managing Director
<PAGE>
<PAGE>
EXHIBIT 11
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 3 to the Registration
Statement of Form N-1A (the 'Registration Statement') of our report dated April
20, 1998, relating to the financial statements and financial highlights of
Salomon Brothers Institutional High Yield Bond Fund and Salomon Brothers
Institutional Emerging Markets Debt Fund (constituting Salomon Brothers
Institutional Series Funds Inc), which appears in such Statement of Additional
Information, and to the incorporation by reference of our report into the
Prospectus which constitutes part of this Registration Statement. We also
consent to the reference to us under the heading 'Independent Accountants' in
such Statement of Additional Information and to the reference to us under the
heading 'Financial Highlights' in such Prospectus.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
April 27, 1998
<PAGE>
<PAGE>
EXHIBIT 11
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 3 to the Registration
Statement of Form N-1A (the 'Registration Statement') of our report dated
February 23, 1998, relating to the financial statements and financial highlights
of Salomon Brothers Institutional Money Market Fund (one of the portfolios
constituting Salomon Brothers Series Funds Inc), which appears in such Statement
of Additional Information, and to the incorporation by reference of our report
into the Prospectus which constitutes part of this Registration Statement.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
April 27, 1998
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information
extracted from The Salomon Brothers Institutional Series
Funds Inc form N-SAR for the period ended February 28, 1998 and
is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<SERIES>
<NUMBER> 03
<NAME> Institutional Emerging Markets Debt Fund
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-END> FEB-28-1998
<INVESTMENTS-AT-COST> 11,638,475
<INVESTMENTS-AT-VALUE> 12,092,161
<RECEIVABLES> 447,545
<ASSETS-OTHER> 2,478,333
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 15,018,039
<PAYABLE-FOR-SECURITIES> 303,717
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 117,987
<TOTAL-LIABILITIES> 421,704
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 14,552,565
<SHARES-COMMON-STOCK> 2,023,065
<SHARES-COMMON-PRIOR> 569,293
<ACCUMULATED-NII-CURRENT> 63,023
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (471,443)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 452,190
<NET-ASSETS> 14,596,335
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,009,041
<OTHER-INCOME> 0
<EXPENSES-NET> 81,196
<NET-INVESTMENT-INCOME> 927,845
<REALIZED-GAINS-CURRENT> 920,411
<APPREC-INCREASE-CURRENT> 200,487
<NET-CHANGE-FROM-OPS> 2,048,743
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 869,966
<DISTRIBUTIONS-OF-GAINS> 1,682,804
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,206,977
<NUMBER-OF-SHARES-REDEEMED> 1,094,258
<SHARES-REINVESTED> 341,053
<NET-CHANGE-IN-ASSETS> 8,385,712
<ACCUMULATED-NII-PRIOR> 85,215
<ACCUMULATED-GAINS-PRIOR> 210,879
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 75,783
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 362,851
<AVERAGE-NET-ASSETS> 10,875,031
<PER-SHARE-NAV-BEGIN> 10.91
<PER-SHARE-NII> 1.69
<PER-SHARE-GAIN-APPREC> (0.27)
<PER-SHARE-DIVIDEND> (1.77)
<PER-SHARE-DISTRIBUTIONS> (3.35)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 7.21
<EXPENSE-RATIO> 0.75
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information
extracted from The Salomon Brothers Institutional Series Funds
Inc form N-SAR for the period ended February 28, 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> 12-MOS
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-END> FEB-28-1998
<INVESTMENTS-AT-COST> 19,501,435
<INVESTMENTS-AT-VALUE> 19,609,537
<RECEIVABLES> 6,087,840
<ASSETS-OTHER> 41,307
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 25,738,684
<PAYABLE-FOR-SECURITIES> 3,007,575
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 67,349
<TOTAL-LIABILITIES> 3,074,924
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 22,309,592
<SHARES-COMMON-STOCK> 2,343,699
<SHARES-COMMON-PRIOR> 590,907
<ACCUMULATED-NII-CURRENT> 141,612
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 104,454
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 108,102
<NET-ASSETS> 22,663,760
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 623,048
<OTHER-INCOME> 0
<EXPENSES-NET> 35,412
<NET-INVESTMENT-INCOME> 587,636
<REALIZED-GAINS-CURRENT> 314,821
<APPREC-INCREASE-CURRENT> (125,232)
<NET-CHANGE-FROM-OPS> 777,225
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 572,322
<DISTRIBUTIONS-OF-GAINS> 380,672
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,215,772
<NUMBER-OF-SHARES-REDEEMED> 558,020
<SHARES-REINVESTED> 95,040
<NET-CHANGE-IN-ASSETS> 16,088,975
<ACCUMULATED-NII-PRIOR> 126,298
<ACCUMULATED-GAINS-PRIOR> 170,305
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 32,193
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 260,341
<AVERAGE-NET-ASSETS> 6,454,016
<PER-SHARE-NAV-BEGIN> 11.13
<PER-SHARE-NII> 1.51
<PER-SHARE-GAIN-APPREC> (0.34)
<PER-SHARE-DIVIDEND> (1.66)
<PER-SHARE-DISTRIBUTIONS> (0.97)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 9.67
<EXPENSE-RATIO> 0.55
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
