<PAGE>
<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 30, 1999
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. 6 [X]
AND/OR
REGISTRATION STATEMENT
UNDER
THE INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 7 [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):
[X] immediately upon filing pursuant to paragraph (b)
[ ] on (date) 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 INVESTMENT SERIES
COMBINED PROSPECTUS
===============================================
Emerging Markets Debt Fund
High Yield Bond Fund
(Class I Shares)
Money Market Fund
===============================================
April 30, 1999
SALOMON BROTHERS
ASSET MANAGEMENT
ABOUT THE MANAGER
The funds' investment manager is Salomon Brothrs Asset Management Inc, a
subsidiary of Citigroup Inc.
The Securities and Exchange Commission has not approved or disapproved
these securities or determined whether this prospectus is accurate
or complete. Any statement to the contrary is a crime.
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
CONTENTS
<TABLE>
<S> <C>
Fund goals, strategies and risks:
Emerging Markets Debt Fund....................................................................... 4
High Yield Bond Fund............................................................................. 7
Money Market Fund................................................................................ 9
More on the funds' investments........................................................................ 11
Management............................................................................................ 12
Buying shares......................................................................................... 14
Exchanging and redeeming shares....................................................................... 15
Other things to know about share transactions......................................................... 16
Dividends, distributions and taxes.................................................................... 17
Financial highlights.................................................................................. 18
</TABLE>
- --------------------------------------------------------------------------------
THINGS YOU SHOULD KNOW BEFORE INVESTING
ABOUT MUTUAL FUND RISKS
An investment in any of the funds is not a bank deposit and is not insured or
guaranteed by the FDIC or any other government agency.
Although the Money Market Fund seeks to preserve the value of your investment at
$1.00 per share, it is possible to lose money by investing in the fund.
Salomon Brothers Institutional Investment Series - 3
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
EMERGING MARKETS DEBT FUND
<TABLE>
<S> <C>
INVESTMENT The fund seeks to maximize total return.
OBJECTIVE
- ---------------------------------------------------------------------------------------------------------------------
KEY INVESTMENTS The fund invests primarily in U.S. dollar denominated fixed income securities issued by
governments, government-related entities and corporations located in emerging markets. The
fund also invests in instruments designed to restructure outstanding emerging market debt
such as participations in loans between governments and financial institutions and Brady
Bonds. The manager invests in at least three emerging market countries, which are those
defined by the World Bank at the time of investment as emerging or developing economies.
CREDIT QUALITY: The fund may invest without limit in higher risk, below-investment grade
debt securities. Below-investment grade debt securities are equivalent to U.S. corporate
debt securities commonly known as 'junk bonds.'
MATURITY AND DURATION: The fund may hold securities of any maturity. The manager attempts to
manage interest rate risk of the fund by maintaining the fund's duration between 2 and 7
years. Duration measures in years the sensitivity of the fund's portfolio to interest rate
risk. A higher duration means the fund is more sensitive to interest rate risk.
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C>
HOW THE The manager uses a 'top-down' approach and allocates the fund's investments among various
MANAGER emerging market countries. In allocating among different countries, the following are some
SELECTS THE of the factors the manager considers:
FUND'S
INVESTMENTS
Currency, inflation and interest rate trends Fiscal policies
Growth rate forecasts Political outlook
Liquidity of markets for that country's debt Tax environment
The manager then selects those individual securities that appear to be most undervalued and
to offer the highest potential returns relative to the amount of credit, interest rate,
liquidity and other risks presented by these securities. The manager engages in independent
fundamental analysis to evaluate the creditworthiness of corporate and governmental
issuers.
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
PRINCIPAL RISKS Investors could lose money on their investment in the fund, or the fund may not perform as
OF INVESTING IN well as other investments, if any of the following occurs:
THE FUND
Adverse governmental action or political, economic or market instability affects an emerging
Many emerging market country or region or disrupts its principal financial markets.
market countries The economies of emerging market countries grow at slower rates than expected or suffer a
in which the fund downturn, recession, rapid inflation or hyperinflation.
invests have The currency in which a security is priced declines in value relative to the U.S. dollar.
markets that are Interest rates rise, causing the prices of fixed income securities to decline and reducing
less liquid and the value of the fund's portfolio.
more volatile than The issuer of a security owned by the fund defaults on its obligation to pay principal
markets in the and/or interest or has its credit rating downgraded. This risk is higher for
U.S. and other below-investment grade fixed income securities, which are considered speculative because
developed they have a higher risk of issuer default, are subject to greater price volatility and may
countries. be illiquid.
</TABLE>
Salomon Brothers Institutional Investment Series - 4
<PAGE>
<PAGE>
<TABLE>
<S> <C>
The fund is not The manager's judgment about the attractiveness, relative value or credit quality of a
diversified, which particular security proves to be incorrect.
means that it can In many emerging market countries, there is also less information available about foreign
invest a higher issuers and markets because of less rigorous accounting and regulatory standards than in the
percentage of its U.S.
assets in any one
issuer than a
diversified fund.
Being non-diversified
may magnify the fund's
losses from adverse
events affecting a
particular issuer.
</TABLE>
Salomon Brothers Institutional Investment Series - 5
<PAGE>
<PAGE>
<TABLE>
<S> <C>
Past performance does not [GRAPHIC]
necessarily indicate how the fund
will perform in the future.
QUARTERLY RETURNS: Highest:
17.93% in 4th quarter 1998;
Lowest: -28.91% in 3rd quarter 1998
YEAR TO DATE: 5.98%
(through 3/31/99)
<CAPTION>
<S> <C>
TOTAL RETURN
The bar chart indicates
the risk of investing in
the fund by showing the
performance of the fund's
shares for each of the
past 2 calendar years.
</TABLE>
<TABLE>
- ---------------------------------------------------------------------------------------------------------------------
THIS TABLE ASSUMES REDEMPTION OF SHARES AT THE END OF THE PERIOD, AND THE REINVESTMENT OF
DISTRIBUTIONS AND DIVIDENDS.
<CAPTION>
- --------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS (CALENDAR YEARS ENDED DECEMBER 31, 1998)
Inception Date 1 Year Since Inception
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Emerging Markets Debt Fund 10/17/96 -19.87% -.53
J.P. Morgan Emerging Markets Bond Index Plus n/a -14.36% 1.00%
<CAPTION>
<S> <C>
COMPARATIVE
PERFORMANCE
The table indicates the
risk of investing in
the fund by comparing
the average annual
total return of the
fund for the periods
shown to that of the
J.P. Morgan Emerging
Markets Bond Index
Plus, an unmanaged
index of emerging
market bonds.
---------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
SHAREHOLDER FEES (PAID DIRECTLY FROM YOUR INVESTMENT)
<S> <C>
Maximum sales charge on purchases None
Maximum deferred sales charge on redemptions None
- -------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (PAID BY THE FUND AS A % OF NET ASSETS)
Management fees 0.70%
- -------------------------------------------------------------------------------------------
Distribution and service (12b-1) fee None
Other expenses 0.80%
- -------------------------------------------------------------------------------------------
Total annual fund operating expenses 1.50%
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
<CAPTION>
<S> <C>
FEES AND EXPENSES
This table sets forth
the fees and expenses
you will pay if you
invest in shares of the
fund.
Because the manager
waived a portion of its
management fee and
reimbursed the fund for
certain expenses during
the fiscal year ended
February 28, 1999,
actual total operating
expenses were 0.75%.
The manager may change
or eliminate these
expense limits at any
time.
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------
NUMBER OF YEARS YOU OWN
YOUR SHARES 1 YEAR 3 YEARS 5 YEARS 10 YEARS
Your costs would be $153 $474 $818 $1,791
THE EXAMPLE ASSUMES: You invest $10,000 for the period shown
You reinvest all distributions and dividends without a sales charge
The fund's operating expenses remain the same
Your investment has a 5% return each year
Redemption of your shares at the end of the period
<CAPTION>
<S> <C>
EXAMPLE
This example helps you
compare the costs of
investing in the fund
with other mutual
funds. Your actual
costs may be higher or
lower.
</TABLE>
Salomon Brothers Institutional Investment Series - 6
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
HIGH YIELD BOND FUND
<TABLE>
<S> <C>
INVESTMENT The fund seeks to maximize total return.
OBJECTIVE
- ---------------------------------------------------------------------------------------------------------------------
KEY The fund invests primarily in high yield fixed income securities, including bonds,
INVESTMENTS debentures, notes, equipment trust certificates, commercial paper, preferred stock and other
obligations. It may invest up to 10% of its assets in foreign securities.
CREDIT QUALITY: The fund invests at least 80% of its assets in fixed income securities rated
below investment grade by a recognized rating agency, or if unrated, of equivalent quality
as determined by the manager. Below investment grade securities are commonly referred to as
'junk bonds.'
MATURITY: The fund's average maturity will generally vary from 6 to 12 years depending on
the manager's outlook for interest rates. Individual securities may be of any maturity.
- ---------------------------------------------------------------------------------------------------------------------
HOW THE Individual security selection is driven by the manager's economic view, industry outlook and
MANAGER rigorous credit analysis. The manager then selects those individual securities that appear
SELECTS THE to be most undervalued and to offer the highest potential returns relative to the amount of
FUND'S credit, interest rate, liquidity and other risk presented by these securities. The manager
INVESTMENTS allocates the fund's investments across a broad range of issuers and industries, which can
help to reduce risk.
In evaluating the issuer's creditworthiness, the manager uses fundamental analysis and
considers the following factors:
The strength of the issuer's financial resources
The issuer's sensitivity to economic conditions and trends
The issuer's operating history
Experience and track record of issuer's management
- ---------------------------------------------------------------------------------------------------------------------
PRINCIPAL RISKS OF Investors could lose money on their investment in the fund, or the fund may not perform as
INVESTING IN THE FUND well as other investments, if any of the following occurs:
Investments in high The issuer of a security owned by the fund defaults on its obligation to pay principal
yield securities and/or interest or has its credit rating downgraded.
involve a substantial Interest rates increase, causing the prices of fixed income securities to decline and
risk of loss reducing the value of the fund's portfolio.
The manager's judgment about the attractiveness, value or credit quality of a particular
security proves to be incorrect.
High yield securities are considered speculative and, compared to investment grade
securities, tend to have more volatile prices and are more susceptible to the following
risks:
Increased price sensitivity to changing interest rates and to adverse economic and
business developments
Greater risk of loss due to default or declining credit quality
Greater likelihood that adverse economic or company specific events will make the
issuer unable to make interest and/or principal payments
Negative market sentiment towards high yield securities depresses the price and
liquidity of high yield securities
</TABLE>
Salomon Brothers Institutional Investment Series - 7
<PAGE>
<PAGE>
<TABLE>
<S> <C>
Past performance does not
necessarily indicate how the fund [GRAPHIC]
will perform in the future.
QUARTERLY RETURNS:
Highest: 5.54% in 2nd quarter 1997;
Lowest: -6.36% in 3rd quarter 1998
YEAR TO DATE: 2.72% (through
3/31/99)
<CAPTION>
<S> <C>
TOTAL RETURN
The bar chart indicates
the risk of investing
in the fund by showing
the performance of the
fund's shares for each
of the past 2 calendar
years.
</TABLE>
<TABLE>
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
THIS TABLE ASSUMES REDEMPTION OF SHARES AT THE END OF THE PERIOD, AND THE REINVESTMENT OF
DISTRIBUTIONS AND DIVIDENDS.
-------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS (CALENDAR YEARS ENDED DECEMBER 31, 1998)
Inception Date 1 Year Since
Inception
-------------------------------------------------------------------------------------------
High Yield Bond Fund 5/15/96 -0.34% 9.15%
Salomon Smith Barney High Yield Market
Index n/a 3.60% 9.96%
<CAPTION>
<S> <C>
COMPARATIVE
PERFORMANCE
The table indicates the
risk of investing in
the fund by comparing
the average annual
total return of the
fund for the periods
shown to that of the
Salomon Smith Barney
High Yield Market
Index, an unmanaged
index of high yield
securities.
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
SHAREHOLDER FEES (PAID DIRECTLY FROM YOUR INVESTMENT)
<S> <C> <C>
Maximum sales charge on purchases None
Maximum deferred sales charge on redemptions None
-------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (PAID BY THE FUND AS A % OF NET ASSETS)
Management fees 0.50%
-------------------------------------------------------------------------------------------
Distribution and service (12b-1) fee None
Other expenses 0.89%
- -------------------------------------------------------------------------------------------
Total annual fund operating expenses 1.39%
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
<CAPTION>
<S> <C>
FEES AND EXPENSES
This table sets forth
the fees and expenses
you will pay if you
invest in shares of the
fund.
Because the manager
waived a portion of its
management fee and
reimbursed the fund for
certain expenses for
the fiscal year ended
February 28, 1999,
actual total fund
operating expenses were
0.55%.
The manager may change
or eliminate these
expense limits at any
time.
--------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------
NUMBER OF YEARS YOU OWN YOUR SHARES 1 YEAR 3 YEARS 5 YEARS 10 YEARS
Your costs would be $142 $440 $761 $1,669
THE EXAMPLE ASSUMES: You invest $10,000 for the period shown
You reinvest all distributions and dividends without a sales charge
The fund's operating expenses remain the same
Your investment has a 5% return each year
Redemption of your shares at the end of the period
<CAPTION>
<S> <C>
EXAMPLE
This example helps you
compare the costs of
investing in the fund
with other mutual
funds. Your actual
costs may be higher or
lower.
</TABLE>
Salomon Brothers Institutional Investment Series - 8
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
MONEY MARKET FUND
<TABLE>
<S> <C>
INVESTMENT The fund seeks as high a level of current income as is consistent with liquidity and
OBJECTIVE stability of principal.
- ---------------------------------------------------------------------------------------------------------------------
KEY INVESTMENTS The fund invests in high quality, U.S. dollar denominated short term debt securities. These
may include obligations issued by U.S. and foreign banks, the U.S. government, its agencies
or instrumentalities, U.S. states and municipalities and U.S. and foreign corporate issuers.
The fund may invest in all types of money market securities including commercial paper,
certificates of deposit, bankers' acceptances, mortgage-backed and asset-backed securities,
repurchase agreements, fixed time deposits and other short term debt securities. The fund
may also invest in variable rate master demand notes and enter into short term borrowing
arrangements with corporations.
MINIMUM CREDIT QUALITY: The fund invests primarily in securities rated in the highest short
term rating category, or if unrated, of equivalent quality. The fund may invest up to 5% of
its assets in securities rated in the second highest short term rating category or, if
unrated, of equivalent quality.
MAXIMUM MATURITY: The fund invests in securities having remaining maturities of 397 days or
less. The fund maintains a dollar-weighted average portfolio maturity of 90 days or less.
- ---------------------------------------------------------------------------------------------------------------------
HOW THE In selecting investments for the fund, the manager looks for:
MANAGER The best relative values based on an analysis of yield, price, interest rate sensitivity
SELECTS THE and credit quality
FUND'S Maturities consistent with the manager's outlook for interest rates
INVESTMENTS Eligible issuers with the most desirable credit quality
- ---------------------------------------------------------------------------------------------------------------------
PRINCIPAL Although the fund seeks to preserve the value of an investment at $1 per share, it is
RISKS OF possible to lose money by investing in the fund, or the fund could underperform other short
INVESTING IN term debt instruments or money market funds if any of the following occurs:
THE FUND Interest rates rise sharply.
An issuer or guarantor of the fund's securities defaults, or has its credit rating
downgraded.
The manager's judgment about the value or credit quality of a particular security proves to
be incorrect.
The value of the fund's foreign securities go down because of unfavorable government
actions or political instability.
</TABLE>
Salomon Brothers Institutional Investment Series - 9
<PAGE>
<PAGE>
<TABLE>
<S> <C>
Past performance does not [GRAPHIC]
necessarily indicate how the fund
will perform in the future.
QUARTERLY RETURNS: Highest:
1.51% in 1st quarter 1991;
Lowest: 0.67% in 1st quarter 1994
Prior to April 29, 1996, the fund
was called Salomon Brothers U.S.
Treasury Securities Money Market
Fund and invested exclusively in
U.S. Treasury bonds, notes and
bills.
<CAPTION>
<S> <C>
TOTAL RETURN
The bar chart indicates
the risk of investing
in the fund by showing
the performance of the
fund's shares for each
of the past 8 calendar
years.
</TABLE>
<TABLE>
- --------------------------------------------------------------------------------------------
THIS TABLE ASSUMES REDEMPTION OF SHARES AT THE END OF THE PERIOD, AND THE REINVESTMENT OF
DISTRIBUTIONS AND DIVIDENDS.
- -------------------------------------------------------------------------------------------
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS (CALENDAR YEARS ENDED DECEMBER 31, 1998)
Inception 1 Year 5 Years Since Inception
Date
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Money Market Fund 12/7/90 5.6% 5.0% 4.62%
The fund's 7-day yield as of December 31, 1998 was 5.33%
<CAPTION>
<S> <C>
COMPARATIVE
PERFORMANCE
The table indicates the
average annual total
return of the fund for
the periods.
</TABLE>
<TABLE>
<Caption
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
SHAREHOLDER FEES (PAID DIRECTLY FROM YOUR INVESTMENT)
<S> <C>
Maximum sales charge on purchases None
Maximum deferred sales charge on redemptions None
- -------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (PAID BY THE FUND AS A % OF FUND NET ASSETS)
Management fees 0.20%
- -------------------------------------------------------------------------------------------
Distribution and service (12b-1) fee None
Other expenses 0.17%
-------
- -------------------------------------------------------------------------------------------
Total annual fund operating expenses 0.37%
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
FEES AND EXPENSES
This table sets forth
the fees and expenses
you will pay if you
invest in shares of the
fund.
Because the manager
waived a portion of its
management fee and
reimbursed the fund for
certain expenses during
the fiscal year ended
December 31, 1998,
actual total fund
operating expenses were
0.18%.
The manager may change
or eliminate these
expense limits at any
time.
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
NUMBER OF YEARS YOU OWN YOUR SHARES 1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
Your costs would be $38 $119 $208 $468
THE EXAMPLE ASSUMES: You invest $10,000 for the period shown
You reinvest all distributions and dividends without a sales charge
The fund's operating expenses remain the same
Your investment has a 5% return each year
Redemption of your shares at the end of the period.
<CAPTION>
<S> <C>
EXAMPLE
This example helps you
compare the cost of
investing in the fund
with other mutual
funds. Your actual cost
may be higher or lower.
</TABLE>
Salomon Brothers Institutional Investment Series - 10
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
MORE ON THE FUNDS' INVESTMENTS
<TABLE>
<S> <C>
FIXED INCOME Fixed income securities include bonds, notes, bills, debentures, bank debt obligations,
SECURITIES short-term paper, mortgage and other asset-backed securities, preferred stock, loan
participations and assignments.
- ---------------------------------------------------------------------------------------------------------------------
EQUITY High Yield Bond Fund may invest up to 10% of its assets in common stocks, convertible
SECURITIES securities, warrants or other equity securities. The fund holds these equity securities
High Yield Bond generally as a result of buying fixed income securities with an attached equity component.
Fund Equity securities provide the fund with opportunities for appreciation but expose the fund
to the risk of stock market downturns and adverse events affecting particular companies that
may depress the price of their common stock.
- ---------------------------------------------------------------------------------------------------------------------
SECURITIES OF Investments in securities of foreign entities and securities denominated in foreign
FOREIGN currencies involve special risks. These include possible political and economic instability
ISSUERS and the possible imposition of exchange controls or other restrictions on investments.
each fund Emerging market investments offer the potential for significant gains but also involve
greater risks than investing in more developed countries. Political or economic instability,
lack of market liquidity and government actions such as currency controls or seizure of
private business or property may be more likely in emerging markets.
Since Emerging Markets Debt Fund and High Yield Bond Fund may invest in securities
denominated or quoted in currencies other than the U.S. dollar, changes in foreign currency
rates relative to the U.S. dollar will affect the U.S. dollar value of these funds' assets.
Money Market Fund may only invest in U.S. dollar denominated investments issued by foreign
branches of U.S. banks and by U.S. and foreign branches of foreign banks.
- ---------------------------------------------------------------------------------------------------------------------
DERIVATIVE The funds may, but need not, use derivative contracts, such as futures and options on
TRANSACTIONS securities, securities indices or currencies; options on these futures; forward currency
each fund except contracts; and interest rate or currency swaps for any of the following purposes:
Money Market To hedge against the economic impact of adverse changes in the market value of portfolio
Fund securities because of changes in market prices, currency exchange rates or interest rates
As a substitute for buying or selling securities
A derivative contract will obligate or entitle a fund to deliver or receive an asset or cash
payment based on the change in value of one or more securities, currencies or indices. Even
a small investment in derivative contracts can have a big impact on a fund's market,
currency and interest rate exposure. Therefore, using derivatives can disproportionately
increase losses and reduce opportunities for gains when market prices, currency rates or
interest rates are changing. A fund may not fully benefit from or may lose money on
derivatives if changes in their value do not correspond accurately to changes in the value
of the fund's holdings. The other parties to certain derivative contracts present the same
types of default risk as issuers of fixed income securities. Derivatives can also make a
fund less liquid and harder to value, especially in declining markets.
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Salomon Brothers Institutional Investment Series - 11
<PAGE>
<PAGE>
<TABLE>
<S> <C>
TEMPORARY Each of the funds may depart from its principal investment strategies in response to adverse
DEFENSIVE market, economic or political conditions by taking temporary defensive positions in all
INVESTMENTS types of money market and short term debt securities. If a fund takes a temporary defensive
each fund except position, it may be unable to achieve its investment objective.
Money Market
Fund
- ---------------------------------------------------------------------------------------------------------------------
PORTFOLIO Although neither the Emerging Market Debt Fund or the High Yield Bond Fund purchases or
TURNOVER sells securities for short-term profits, each fund may engage in active and frequent trading
each fund except to achieve its principal investment strategies. Frequent trading increases transaction
Money Market costs, which could decrease the fund's performance, and may result in increased net
Fund short-term capital gains, distributions of which are taxable to shareholders as ordinary
income.
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
MANAGEMENT
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
FUND PORTFOLIO MANAGER SINCE PAST 5 YEARS' BUSINESS EXPERIENCE
<S> <C> <C> <C>
Emerging Markets Peter J. Wilby inception Managing Director of Manager
Debt Fund
- ---------------------------------------------------------------------------------------------
High Yield Peter J. Wilby inception Managing Director of Manager
Bond Fund
Money Market Nancy A. Noyes inception Director of Manager
Fund
<CAPTION>
<S> <C>
THE PORTFOLIO
MANAGERS
The portfolio managers
are primarily
responsible for the
day-to-day operation of
the funds indicated
beside their names.
</TABLE>
<TABLE>
<S> <C>
- ----------------------------------------------------------------------------------------------------------------
SBAM serves as the funds' manager. For its services for the fiscal year ended December 31, MANAGEMENT FEES
1998, SBAM received a fee from Money Market Fund equal to 0.20% of the fund's average daily
net assets. For its services for the fiscal year ended February 28, 1999, SBAM received a fee
from Emerging Markets Debt Fund and High Yield Bond Fund equal to 0.00% and 0.00% of each
fund's average daily net assets, respectively.
- ----------------------------------------------------------------------------------------------------------------
SSBC Fund Management Inc. ('SSBC'), an affiliate of the manager, is the funds' administrator. ADMINISTRATOR
For its services, each fund pays an administration fee to SSBC of 0.05% of the fund's average
daily net assets.
- ----------------------------------------------------------------------------------------------------------------
CFBDS, Inc. serves as the funds' distributor. DISTRIBUTOR
</TABLE>
Salomon Brothers Institutional Investment Series - 12
<PAGE>
<PAGE>
<TABLE>
<S> <C>
Information technology experts are concerned about computer systems' ability to process YEAR 2000 ISSUE
date-related information on and after January 1, 2000. This situation, commonly known as the
'Year 2000' issue, could have an adverse impact on the funds. The cost of addressing the Year
2000 issue, if substantial, could adversely affect companies and governments that issue
securities held by the funds. Issuers located outside of the U.S. may be more susceptible to
the risks associated with the year 2000 issue. The manager, administrator and distributor are
addressing the Year 2000 issue for their systems. Each fund has been informed by its other
service providers that they are taking similar measures. Although the funds do not expect the
Year 2000 issue to adversely affect them, the funds cannot guarantee that the efforts of the
funds (limited to requesting and receiving reports from their service providers) or their
service providers to correct the problem will be successful.
</TABLE>
Salomon Brothers Institutional Investment Series - 13
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
BUYING SHARES
<TABLE>
<CAPTION>
INVESTMENT EMERGING MARKETS DEBT
MINIMUMS FUND HIGH YIELD BOND FUND MONEY MARKET FUND
-------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$1,000,000 $1,000,000 $250,000
There is no subsequent investment minimum for any fund.
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
BUYING SHARES For initial purchases of each fund's shares, complete the appropriate application and send
BY MAIL it with your check to First Data Investor Services Group, the funds' transfer agent.
Send completed purchase applications along with a check to:
Initial purchases Salomon Brothers Institutional Investment Series
(specify fund)
c/o First Data Investor Services Group
P.O Box 5127
Westborough, MA 01581-5127
Initial purchases may not be made by third party check.
Checks drawn on foreign banks must be payable in U.S. dollars and have the routing number
of the U.S. bank encoded on the check.
Subsequent Send checks for subsequent purchases by mail directly to the transfer agent.
purchases Be sure to include your fund and account number on checks for subsequent investments.
---------------------------------------------------------------------------------------------------------------------
BUYING SHARES Call the transfer agent at (800) 446-1013 to tell it about your incoming wire transfer. You
BY WIRE should instruct your bank to transmit your purchase in federal funds to:
Initial and Boston Safe Deposit and Trust Company
subsequent Boston, Massachusetts
purchases ABA No. 011-001-234
Account #: 142743
Attn: (specify fund)
Name of Account:
Account # (As assigned):
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
EMERGING MARKETS DEBT FUND PURCHASE IS EFFECTIVE
HIGH YIELD BOND FUND
<S> <C> <C>
If order and federal funds or check
received by fund or its agent before
4:00 p.m. Eastern time: On that day
Payment wired in federal funds or
check received If order and federal funds or check
received by fund or its agent after
the close of New York Stock Exchange: On the next business day
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
MONEY MARKET FUND PURCHASE IS EFFECTIVE DIVIDENDS BEGIN
<S> <C> <C> <C>
If order and federal At noon, Eastern time, on
funds or check received that day On that day
by fund or its agent
before noon, Eastern
time:
Payment wired in federal
funds or check received
If order and federal
funds or check received
by fund or its agent At close of New York On the next business day
after noon, Eastern time: Stock Exchange on after effectiveness
that day
</TABLE>
Salomon Brothers Institutional Investment Series - 14
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
EXCHANGING AND REDEEMING SHARES
<TABLE>
<S>
You should contact the transfer agent to exchange into other eligible mutual funds in
Salomon Brothers Institutional Investment Series. An exchange is a taxable transaction,
although no gain or loss is generally realized upon an exchange at net asset value out of
Money Market Fund.
You may exchange shares only for shares of another fund in Salomon Brothers Institutional
Investment Series.
You must meet the minimum investment amount for each fund.
Your fund may suspend or terminate your exchange privilege if you engage in an excessive
pattern of exchanges.
You may only exchange shares of a fund 30 days after purchase.
<CAPTION>
<S> <C>
EXCHANGE
PRIVILEGE
To learn more about the
exchange privilege
contact the transfer
agent or consult the
statement of additional
information.
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S>
You may redeem some or all of your shares by sending a written request
in proper form to:
Salomon Brothers Institutional Investment Series
(specify fund)
c/o First Data Investor Services Group
P.O Box 9764
Providence, RI 02940-9764
The written request for redemption must be in good order. This means that you have provided
the following information. Your request will not be processed without this information.
Name of the fund
Account number
Dollar amount or number of shares being redeemed
Signature of each owner exactly as account is registered
Other documentation required by First Data Investor Services Group
To be in good order, your request must also include a signature guarantee if you are
redeeming over $50,000 or instruct that the proceeds be sent to an address other than the
address of record. You can obtain a signature guarantee from most banks, dealers, brokers,
credit unions and federal savings and loans, but not from a notary public.
<CAPTION>
<S> <C>
REDEMPTIONS
BY MAIL
Generally, a properly
completed written
request for redemption
with any required
signature guarantee is
all that is required
for a redemption. In
some cases, however,
other documents may be
necessary.
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<PAGE>
<TABLE>
<S> <C>
You may redeem shares by fax only if a signature guarantee or other documentary evidence is REDEMPTIONS BY FAX
not required. Redemption requests should be properly signed by all owners of the account
and faxed to First Data Investor Services Group at (800) 446-1013. If fax redemptions are
not available for any reason, you may use the fund's redemption by mail procedure described
above.
- ---------------------------------------------------------------------------------------------------------------------
You may redeem shares by telephone. The proceeds can be sent by check to your address of REDEMPTIONS BY
record or by wire transfer to a bank account designated in your application. In addition, TELEPHONE
you may be asked to provide proper identification information. Telephone redemption
requests may be made by calling the transfer agent at (800) 446-1013 between 9:00 a.m. and
4:00 p.m. Eastern time on any day the New York Stock Exchange is open. If telephone
redemptions are not available for any reason, you may use the fund's redemption by mail
procedure described above.
- ---------------------------------------------------------------------------------------------------------------------
In all cases, your redemption price is the net asset value per share next determined after
your request is received in good order. Redemption proceeds normally will be sent within
seven days. However, if you recently purchased your shares by check, your redemption
proceeds will not be sent to you until your original check clears which may take up to 15
days. Your redemption proceeds can be sent by check to your address of record or by wire
transfer to a bank account designated on your application. Your bank may charge you a fee
for wire transfers.
If shares of Money Market Fund are redeemed before noon, Eastern time, you will not receive
that day's dividends. You will receive that day's dividends if you redeem after noon,
Eastern time.
<CAPTION>
<S> <C>
REDEMPTION
PAYMENTS
Any request that your
redemption proceeds be
sent to a destination
other than your bank
account or address of
record must be in
writing and must
include a signature
guarantee.
</TABLE>
Salomon Brothers Institutional Investment Series - 15
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
OTHER THINGS TO KNOW ABOUT SHARE TRANSACTIONS
<TABLE>
<S> <C>
SMALL ACCOUNT BALANCES If your account falls below $10,000 because of a redemption of fund shares, the fund may ask
you to bring your account up to the minimum requirement. If your account is still below
$10,000 after 30 days, the fund may close your account and send you the redemption proceeds.
- ---------------------------------------------------------------------------------------------------------------------
SHARE CERTIFICATES The funds do not issue share certificates.
- ---------------------------------------------------------------------------------------------------------------------
SHARE PRICE You may buy, exchange or redeem shares at the net asset value per share next determined
after receipt of your request in good order. Each fund's net asset value per share is the
value of its assets minus its liabilities divided by the total shares outstanding. Each fund
calculates its net asset value every day the New York Stock Exchange is open. Emerging
Markets Debt Fund and High Yield Bond Fund each calculates its net asset value when regular
trading closes on the New York Stock Exchange (normally 4:00 p.m., Eastern time). Money
Market Fund calculates its net asset value twice daily at 12:00 noon, Eastern time and at
4:00 p.m., Eastern time.
Emerging Markets Debt Fund and High Yield Bond Fund generally value their securities based
on market prices or quotations. The funds' currency conversions are done when the London
stock exchange closes, which is 12:00 noon Eastern time. When market prices are not
available, or when the manager believes they are unreliable or that the value of a security
has been materially affected by events occurring after a foreign exchange closes, the funds
may price those securities at fair value. Fair value is determined in accordance with
procedures approved by the funds' board. A fund that uses fair value to price securities may
value those securities higher or lower than another fund using market quotations to price
the same securities. International markets may be open on days when U.S. markets are closed
and the value of foreign securities owned by a fund could change on days when you cannot buy
or redeem shares.
Money Market Fund uses the amortized cost method to value its portfolio securities. Using
this method, the fund constantly amortizes over the remaining life of a security the
difference between the principal amount due at maturity and the cost of the security to the
fund.
In order to buy, redeem or exchange shares at that day's price, you must place your order
with the transfer agent before the New York Stock Exchange closes. If the New York Stock
Exchange closes early, you must place your order prior to the actual closing time.
Otherwise, you will receive the next business day's price.
Salomon Smith Barney or members of the funds' selling group must transmit all orders to buy,
exchange or redeem shares to the funds' agent before the agent's close of business.
- ---------------------------------------------------------------------------------------------------------------------
Each fund has the right to:
Suspend the offering of shares
Waive or change minimum and additional investment amounts
Reject any purchase or exchange order
Change, revoke or suspend the exchange privilege
Suspend telephone transactions
Suspend or postpone redemptions of shares on any day when trading on the New York Stock
Exchange is restricted, or as otherwise permitted by the Securities and Exchange Commission
- ---------------------------------------------------------------------------------------------------------------------
REDEMPTIONS IN KIND Each fund may make payment for shares wholly or in part by distributing portfolio securities
to the shareholder. The redeeming shareholder must pay transaction costs to sell these
securities.
</TABLE>
Salomon Brothers Institutional Investment Series - 16
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES
<TABLE>
<CAPTION>
The funds normally pay dividends and distribute capital gain, if any, as follows:
- ----------------------------------------------------------------------------------------
FUND INCOME DIVIDEND CAPITAL GAIN DISTRIBUTIONS
DISTRIBUTIONS DISTRIBUTIONS MOSTLY FROM
<S> <C> <C> <C>
Emerging Markets Debt Annually Annually Income
- ----------------------------------------------------------------------------------------
High Yield Bond Annually Annually Income
Money Market Declared Daily/Distributed Annually Income
Monthly
The funds may pay additional distributions and dividends at other times if necessary for
a fund to avoid a federal tax. Money Market Fund anticipates that it will normally not
earn or distribute any long-term capital gains. Capital gain distributions and dividends
are reinvested in additional fund shares. Alternatively, you can instruct the transfer
agent to have your distributions and/or dividends paid in cash. You can change your
choice at any time to be effective as of the next distribution or dividend, except that
any change given to the transfer agent less than five days before the payment date will
not be effective until the next distribution or dividend is made.
<CAPTION>
<S> <C>
DIVIDENDS AND
DISTRIBUTIONS
Annual distributions of
income and capital gain
are made at the end of
the year in which the
income or gain is
realized, or the
beginning of the next
year.
- ---------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
TRANSACTION FEDERAL INCOME TAX STATUS
<S> <C>
Redemption or exchange of shares Usually capital gain or loss (except no gain
or loss for Money Market Fund); long-term
only if shares owned more than one year
- --------------------------------------------------------------------------------------
Long-term capital gain distributions Long-term capital gain
Short-term capital gain distributions Ordinary income
- --------------------------------------------------------------------------------------
Dividends Ordinary income
Long-term capital gain distributions are taxable to you as long-term capital gain
regardless of how long you have owned your shares. You may want to avoid buying
shares when a fund is about to declare a capital gain distribution or a dividend,
because it will be taxable to you even though it may actually be a return of a
portion of your investment.
After the end of each year, the funds will provide you with information about the
distributions and dividends that you received and, except for Money Market Fund, any
redemptions of shares during the previous year. If you do not provide a fund with
your correct taxpayer identification number and any required certifications, you may
be subject to back-up withholding of 31% of your distributions, dividends and, except
for Money Market Fund, redemption proceeds. Because each shareholder's circumstances
are different and special tax rules may apply, you should consult your tax adviser
about your investment in a fund.
<CAPTION>
<S> <C>
TAXES
In general, redeeming
and exchanging shares
(except Money Market
Fund shares) and
receiving distributions
(whether in cash or
additional shares) are
all taxable events.
</TABLE>
Salomon Brothers Institutional Investment Series - 17
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
The financial highlights tables are intended to help you understand the
performance of each share for the past 5 years (or since inception if less than
5 years). Certain information reflects financial results for a single share.
Total return represents the rate that a shareholder would have earned (or lost)
on a fund share assuming reinvestment of all dividends and distributions. The
information in the following tables was audited by PricewaterhouseCoopers LLP,
independent accountants, whose report, along with the fund's financial
statements, are included in the annual report (available upon request).
For a share of capital stock outstanding throughout each year:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
EMERGING MARKETS DEBT FUND HIGH YIELD BOND FUND
FOR THE YEAR ENDED FOR THE YEAR ENDED
FEBRUARY 28 FEBRUARY 28
1999 1998 1997(1) 1999 1998 1997(2)
NET ASSET VALUE BEGINNING OF PERIOD $ 7.21 $ 10.91 $ 10.00 $ 9.67 $ 11.13 $ 10.00
--------- --------- --------- --------- --------- ---------
Net investment income 0.62 1.69 0.35 1.04 1.51 0.57
Net realized and unrealized gain (loss) on
investments (2.29 ) (0.27 ) 0.78 (1.05 ) (0.34 ) 0.93
--------- --------- --------- --------- --------- ---------
Total from investment operations 1.67 1.42 1.13 (0.01 ) 1.17 1.50
--------- --------- --------- --------- --------- ---------
Dividends from net investment income (0.59 ) (1.77 ) (0.20 ) (1.00 ) (1.66 ) (0.36 )
Distributions from net realized gain on
investments (0.00 ) (3.35 ) (0.02 ) (0.06 ) (0.97 ) (0.01 )
--------- --------- --------- --------- --------- ---------
Total dividends and distributions (0.59 ) (5.12 ) (0.22 ) (1.06 ) (2.63 ) (0.37 )
--------- --------- --------- --------- --------- ---------
NET ASSET VALUE, END OF PERIOD $ 4.95 $ 7.21 $ 10.91 $ 8.60 $ 9.67 $ 11.13
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
NET ASSETS, END OF PERIOD (000S) $ 30,523 $ 14,596 $ 6,211 $ 37,367 $ 22,664 $ 6,575
Total return (3) (23.1)% +14.6% +11.4% 0.1% +11.1% +15.1%
Ratios to average net assets:
Expenses 0.75% 0.75% 0.75% (4) 0.55% 0.55% 0.55% (4)
Net investment income 13.61% 8.53% 8.94% (4) 8.80% 9.10% 9.36% (4)
Portfolio turnover rate 295% 549% 136% 102% 189% 151%
Before waiver of management fee, expenses
absorbed by manager and credits on custodian
cash balances, net investment income per share
and expense ratios would have been:
Net investment income (loss) $ 0.59 $ 1.18 $ 0.08 $ 0.94 $ 0.93 $ 0.29
Expense ratio 1.50% 3.34% 7.57%(4 ) 1.39% 4.03% 5.22%(4 )
</TABLE>
---------------------------------------------------------------
(1) Emerging Markets Debt Fund's commencement of investment operations was
October 17, 1996.
(2) High Yield Bond Fund's commencement of investment operations was May 15,
1996.
(3) 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.
(4) Annualized.
Salomon Brothers Institutional Investment Series - 18
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
For a share of capital stock outstanding throughout each year ended:
<TABLE>
<S> <C> <C> <C> <C> <C>
MONEY MARKET FUND
YEAR ENDED DECEMBER 31,
1998 1997 1996(1) 1995 1994
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
--------- --------- --------- --------- ---------
Net investment income (loss) 0.054 0.055 0.050 0.049 0.036
Dividends from net investment income (0.054 ) (0.055 ) (0.050 ) (0.049) (0.036)
NET ASSET VALUE, END OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
NET ASSETS, END OF PERIOD (000S) $138,941 $133,012 $159,651 $11,425 $27,667
Total return 5.6% 5.6% 5.1% 5.0% 3.6%
RATIOS TO AVERAGE NET ASSETS
Expenses 0.18% 0.18% 0.20% 0.65% 0.45%
Net investment income (loss) 5.45% 5.48% 5.29% 4.89% 3.53%
Before waiver of management fee, expenses absorbed by the
manager and credits earned on custodian cash balances, net
investment income per share and expense ratios would have
been:
Expense ratio 0.37% 0.41% 0.46% 0.70% --
Net investment income per share $ 0.053 $ 0.052 $ 0.048 $ 0.049 --
</TABLE>
------------------------
(1) The fund changed its name and objective on April 29, 1996. Prior to April
29, 1996, the fund was called Salomon Brothers U.S. Treasury Securities
Money Market Fund and invested principally in United States Treasury bonds,
notes and bills.
Salomon Brothers Institutional Investment Series - 19
<PAGE>
<PAGE>
SALOMON BROTHERS INSTITUTIONAL INVESTMENT SERIES
- --------------------------------------------------------------------------------
Emerging Markets Debt Fund
High Yield Bond Fund
Money Market Fund
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION ABOUT THE FUNDS
SHAREHOLDER REPORTS. Annual and semiannual reports to shareholders provide
additional information about the funds' investments. These reports discuss the
market conditions and investment strategies that significantly affected each
fund's performance during its last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION. The statement of additional information
provides more detailed information about each fund. It is incorporated by
reference into (is legally a part of) this combined prospectus.
The funds send only one report to a household if more than one account has the
same address. Contact the transfer agent if you do not want this policy to apply
to you.
HOW TO OBTAIN ADDITIONAL INFORMATION.
You can make inquiries about the fund or obtain shareholder reports or the
statement of additional information (without charge) by contacting First Data
Services Group at 1-800-446-1013, by calling Salomon Brothers Asset Management
or writing the funds at 7 World Trade Center, 38th Floor, New York, NY 10013.
You can also review the funds' shareholder reports, prospectus and statement of
additional information at the Securities and Exchange Commission's Public
Reference Room in Washington, D.C. You can get copies of these materials for a
fee by writing to the Public Reference Section of the Commission, Washington,
D.C. 20549-6009. Information about the public reference room may be obtained by
calling 1-800-SEC-0330. You can get the same reports and information free from
the Commission's Internet web site -- http://www.sec.gov
If someone makes a statement about the funds that is not in this prospectus, you
should not rely upon that information. Neither the funds nor the distributor is
offering to sell shares of the funds to any person to whom the funds may not
lawfully sell their shares.
(Investment Company Act file no. 811-07497)
Salomon Brothers Institutional Investment Series - 20
<PAGE>
<PAGE>
April 30, 1999
STATEMENT OF ADDITIONAL INFORMATION
SALOMON BROTHERS INSTITUTIONAL INVESTMENT SERIES
WORLD TRADE CENTER
7 NEW YORK, NEW YORK 10048
(800) 446-1013
Salomon Brothers Institutional Investment Series consists of:
Salomon Brothers Institutional Emerging Markets Debt Fund (the 'Emerging
Markets Debt Fund');
Salomon Brothers Institutional High Yield Bond Fund (the 'High Yield Bond
Fund'); and
Salomon Brothers Institutional Money Market Fund (the 'Money Market Fund')
(each, a 'fund' and collectively, the 'funds').
This Statement of Additional Information ('SAI') is not a prospectus and is only
authorized for distribution when preceded or accompanied by the funds' current
Prospectus dated April 30, 1999, as supplemented from time to time (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.
CONTENTS
<TABLE>
<S> <C>
Investment Objectives and Policies........................................................................ 2
Risk Factors.............................................................................................. 21
Investment Limitations.................................................................................... 32
Portfolio Turnover........................................................................................ 35
Portfolio Transactions.................................................................................... 35
Purchase, Redemption and Exchange of Shares............................................................... 37
Directors and Officers.................................................................................... 40
Institutional Series Funds and Series Funds............................................................... 41
Investment Manager........................................................................................ 44
Net Asset Value........................................................................................... 46
Taxes..................................................................................................... 47
Performance Data.......................................................................................... 51
Other Information about the Funds......................................................................... 53
Appendix A................................................................................................ A-1
</TABLE>
<PAGE>
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The Prospectus discusses the funds' investment objectives and strategies they
employ to achieve those objectives. 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.' The discussion
below supplements the information set forth in the Prospectus under 'Investment
Objectives and Policies.' References herein to the investment manager mean
Salomon Brothers Asset Management Inc. ('SBAM').
EMERGING MARKETS DEBT FUND
General. 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. 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.
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 emerging market countries.
Emerging Market Countries. 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:
Algeria
Argentina
Azerbaijan
Brazil
Bulgaria
Chile
China
Colombia
Costa Rica
Croatia
Czech Republic
Dominican Republic
Ecuador
Egypt
Estonia
Ghana
Greece
Hong Kong
Hungary
India
Indonesia
Israel
Ivory Coast
Jamaica
Jordan
Kazakhstan
Kenya
Korea
Latvia
Lebanon
Lithuania
Malaysia
Mexico
Moldava
Morocco
Nicaragua
Nigeria
Pakistan
Panama
Paraguay
Peru
Philippines
Poland
Portugal
Romania
Russia
Saudi Arabia
Singapore
Slovakia
Slovenia
South Africa
Taiwan
Thailand
Trinidad & Tobago
Tunisia
Turkey
Turkmenistan
Ukraine
Uruguay
Uzbekistan
Venezuela
Vietnam
Yugoslavia
Zaire
Zimbabwe
<PAGE>
<PAGE>
Emerging Market Country Debt Securities. Emerging market country debt securities
in which Emerging Markets Debt Fund may invest are U.S. dollar denominated and
non-U.S. dollar denominated debt securities, including bonds, notes, bills,
debentures, convertible securities, warrants, bank debt obligations, short-term
paper, mortgage and other asset-backed securities, preferred stock, loan
participations, 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.
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 Investment Company Act of
1940 (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. 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.
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.
Equity Investments. 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.
Other Investments. In order to maintain liquidity, 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
3
<PAGE>
<PAGE>
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) with respect to securities in
which the fund may invest.
HIGH YIELD BOND FUND
General. 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 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
High Yield Bond Fund should not be considered as a complete investment program.
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.
Foreign Securities. 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
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.
Equity Investments. High Yield Bond 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 100% of its total assets in preferred stock. The fund will
generally, but not exclusively, hold equity securities or 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.
Other Investments. 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
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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.
MONEY MARKET FUND
General. 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.
Money Market Fund may also invest in the following types of securities:
Repurchase Agreements
U.S. Government Securities
Bank Obligations
Corporate Debt Securities
FIXED INCOME SECURITIES
U.S. GOVERNMENT SECURITIES (EACH FUND)
Money Market Fund may invest without limit in securities issued or guaranteed by
the U.S. government or by its agencies or instrumentalities include obligations
of several kinds. U.S. government 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.
ASSET-BACKED SECURITIES (EACH FUND)
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.
Floating and Variable Rate Securities
Variable Amount Master Demand Notes
Asset-Backed Securities
Municipal Obligations
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FLOATING AND VARIABLE RATE INSTRUMENTS (EACH FUND)
Emerging Markets Debt Fund and High Yield Bond Fund may each invest in floating
and variable rate obligations. Money Market Fund may invest in floating and
variable rate instruments 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 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.
Demand Instruments. 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 the 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.
ZERO COUPON SECURITIES, PAY-IN-KIND BONDS AND DEFERRED PAYMENT SECURITIES
(EMERGING MARKETS DEBT FUND AND HIGH YIELD BOND FUND)
Emerging Markets Debt Fund and High Yield Bond 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.
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LOAN PARTICIPATIONS AND ASSIGNMENTS (EMERGING MARKETS DEBT FUND AND HIGH YIELD
BOND FUND)
Emerging Markets Debt Fund and High Yield Bond Fund may invest in loan
participations and assignments. The funds consider these investments to be
investments in debt securities. Loan participations typically will result in a
fund having a contractual relationship only with the lender, not with the
borrower. A fund will have the right to receive payments of principal, interest
and any fees to which it is entitled only from the lender selling the
participation and only upon receipt by the lender of the payments from the
borrower. In connection with purchasing loan participations, a fund generally
will have no right to enforce compliance by the borrower with the terms of the
loan agreement relating to the loan, nor any rights of set-off against the
borrower, and the fund may not benefit directly from any collateral supporting
the loan in which it has purchased the participation. As a result, a fund will
assume the credit risk of both the borrower and the lender that is selling the
participation. In the event of the insolvency of the lender selling a
participation, a fund may be treated as a general creditor of the lender and may
not benefit from any set-off between the lender and the borrower. A fund will
acquire loan participations only if the lender interpositioned between the fund
and the borrower is determined by SBAM to be creditworthy. When a fund purchases
assignments from lenders, the fund will acquire direct rights against the
borrower on the loan, except that under certain circumstances such rights may be
more limited than those held by the assigning lender.
FIRM COMMITMENTS AND WHEN-ISSUED SECURITIES (EACH FUND)
A fund may purchase securities on a firm commitment basis, including when-issued
securities. Securities purchased on a firm commitment basis are purchased for
delivery beyond the normal settlement date at a stated price and yield. No
income accrues to the purchaser of a security on a firm commitment basis prior
to delivery. Such securities are recorded as an asset and are subject to changes
in value based upon changes in the general level of interest rates. Purchasing a
security on a firm commitment basis can involve a risk that the market price at
the time of delivery may be lower than the agreed upon purchase price, in which
case there could be an unrealized loss at the time of delivery. A fund will only
make commitments to purchase securities on a firm commitment basis with the
intention of actually acquiring the securities, but may sell them before the
settlement date if it is deemed advisable. A fund will establish a segregated
account in which it will maintain liquid assets in an amount at least equal in
value to the fund's commitments to purchase securities on a firm commitment
basis. If the value of these assets declines, the fund will place additional
liquid assets in the account on a daily basis so that the value of the assets in
the account is equal to the amount of such commitments.
MUNICIPAL OBLIGATIONS (MONEY MARKET FUND)
Money Market Fund may 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. Municipal obligations are debt
securities, the interest from which is, in the opinion of bond counsel to their
issuer, excluded from gross income for regular Federal income tax purposes.
Municipal obligations include 'public purpose' obligations, which generate
interest that is exempt from regular Federal income tax and for individual
taxpayers, is not subject to the alternative minimum tax. Municipal obligations
also include qualified 'private activity bond' which generate interest that is
exempt from regular Federal income tax but that is subject to the alternative
minimum tax. Variations exist in the security of municipal obligations, both
within a particular classification and between classifications.
BRADY BONDS (EMERGING MARKETS DEBT FUND AND HIGH YIELD BOND FUND)
Brady Bonds are debt securities, generally denominated in U.S. dollars, issued
under the framework of the Brady Plan. 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
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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.
Brady Bonds which have been issued to date are rated in the categories 'BB' or
'B' by S&P or 'Ba' or 'B' by Moody's or, in cases in which a rating by S&P or
Moody's has not been assigned, are generally considered by the investment
manager to be of comparable quality.
Agreements implemented under the Brady Plan to date are designed to achieve debt
and debt-service reduction through specific options negotiated by a debtor
nation with its creditors. As a result, the financial packages offered by each
country differ. The types of options have included the exchange of outstanding
commercial bank debt for bonds issued at 100% of face value of such debt which
carry a below-market stated rate of interest (generally known as par bonds),
bonds issued at a discount from the face value of such debt (generally known as
discount bonds), bonds bearing an interest rate which increases over time and
bonds issued in exchange for the advancement of new money by existing lenders.
Discount bonds issued to date under the framework of the Brady Plan have
generally borne interest computed semiannually at a rate equal to 13/16 of one
percent above the then current six month LIBOR rate. Regardless of the stated
face amount and stated interest rate of the various types of Brady Bonds, the
applicable funds will purchase Brady Bonds in secondary markets, as described
below, in which the price and yield to the investor reflect market conditions at
the time of purchase. Brady Bonds issued to date have traded at a deep discount
from their face value. Certain sovereign bonds are entitled to 'value recovery
payments' in certain circumstances, which in effect constitute supplemental
interest payments but generally are not collateralized. Certain Brady Bonds have
been collateralized as to principal due at maturity (typically 30 years from the
date of issuance) by U.S. Treasury zero coupon bonds with a maturity equal to
the final maturity of such Brady Bonds, although the collateral is not available
to investors until the final maturity of the Brady Bonds. Collateral purchases
are financed by the IMF, the World Bank and the debtor nations' reserves. In
addition, interest payments on certain types of Brady Bonds may be
collateralized by cash or high-grade securities in amounts that typically
represent between 12 and 18 months of interest accruals on these instruments
with the balance of the interest accruals being uncollateralized. The applicable
funds may purchase Brady Bonds with no or limited collateralization, and will be
relying for payment of interest and (except in the case of principal
collateralized Brady Bonds) principal primarily on the willingness and ability
of the foreign government to make payment in accordance with the terms of the
Brady Bonds. Brady Bonds issued to date are purchased and sold in secondary
markets through U.S. securities dealers and other financial institutions and are
generally maintained through European transnational securities depositories. A
substantial portion of the Brady Bonds and other sovereign debt securities in
which the fund invests are likely to be acquired at a discount, which involves
certain considerations discussed below under 'Taxes.'
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STRUCTURED INVESTMENTS (EMERGING MARKETS DEBT FUND)
Included among the issuers of emerging market country debt securities in which
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 Emerging Markets Debt Fund anticipates investing typically
involve no credit enhancement, their credit risk will generally be equivalent to
that of the underlying instruments.
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 'Risk Factors.'
1940 Act Limitations. 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 under 'Other Investment Companies.'
Structured Investments are typically sold in private placement transactions, and
there currently is no active trading market for Structured Investments.
RULE 144A SECURITIES (EMERGING MARKETS DEBT FUND AND HIGH YIELD BOND FUND)
Emerging Markets Debt Fund and High Yield Bond Fund may each 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 fund'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 fund's Board of Directors periodically reviews fund purchases and
sales of Rule 144A securities.
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VARIABLE AMOUNT MASTER DEMAND NOTES (MONEY MARKET FUND)
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.
BANK OBLIGATIONS (EACH FUND)
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 banker's acceptance is a short-term draft drawn on a commercial bank by
a borrower, usually in connection with an international commercial transaction.
The borrower is liable for payment as is the bank, which unconditionally
guarantees to pay the draft at its face amount on the maturity date. Fixed time
deposits are obligations of branches of U.S. banks or foreign banks which are
payable at a stated maturity date and bear a fixed rate of interest. Although
fixed time deposits do not have a market, there are no contractual restrictions
on the right to transfer a beneficial interest in the deposit to a third party.
Bank obligations may be general obligations of the parent bank or may be limited
to the issuing branch by the terms of the specific obligations or by government
regulation.
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.
EQUITY INVESTMENTS
COMMON STOCK (EMERGING MARKETS DEBT FUND AND HIGH YIELD BOND FUND)
Common stocks are shares of a corporation or other entity that entitle the
holder to a pro rata share of the profits of the corporation, if any, without
preference over any other shareholder or class of shareholders, including
holders of the entity's preferred stock and other senior equity. Common stock
usually carries with it the right to vote and frequently an exclusive right to
do so.
WARRANTS (EMERGING MARKET DEBT FUND AND HIGH YIELD BOND FUND)
Emerging Market Debt Fund and High Yield Bond Fund may each 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.
PREFERRED STOCK (EMERGING MARKETS DEBT FUND AND HIGH YIELD BOND FUND)
Preferred stocks, like debt obligations, are generally fixed-income securities.
Shareholders of preferred stocks normally have the right to receive dividends at
a fixed rate when and as declared by the issuer's board of directors, but do not
participate in other amounts available for distribution by the issuing
corporation. Dividends on the preferred stock may be cumulative, and all
cumulative dividends usually must be paid prior to common shareholders receiving
any dividends. Preferred stock dividends must be paid before common stock
dividends and, for that reason, preferred stocks generally entail less risk than
common stocks. Upon liquidation, preferred stocks are entitled to a specified
liquidation preference, which is generally the same as the par or stated value,
and are senior in right of payment to common stock. Preferred stocks are,
however, equity securities in the sense that they do not represent a liability
of the issuer and, therefore, do not
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offer as great a degree of protection of capital or assurance of continued
income as investments in corporate debt securities. In addition, preferred
stocks are subordinated in right of payment to all debt obligations and
creditors of the issuer, and convertible preferred stocks may be subordinated to
other preferred stock of the same issuer.
OTHER INVESTMENT COMPANIES (EACH FUND)
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.
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.
DERIVATIVES (EMERGING MARKETS DEBT FUND AND HIGH YIELD BOND FUND)
A fund will not be obligated to use derivatives and makes no representation as
to the availability of these techniques at this time or at any time in the
future. 'Derivatives,' as used in the Prospectus and this SAI, 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.
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
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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.
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.
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.
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
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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 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
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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. 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 (if the
option is exercised), 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 call option,
upon payment of a premium, gives the purchaser of the option the right to buy
(if the option is exercised), 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.
In order to hedge against adverse market shifts or to increase income or gain,
the 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.
In all cases except for certain options on interest rate futures contracts, by
writing a call, a fund will limit its opportunity to profit from an increase in
the market value of the underlying investment above the exercise price of the
option for as long as the fund's obligation as writer of the option continues.
By writing a put, a fund will limit its opportunity to profit from a decrease in
the market value of the underlying investment below the exercise price of the
option for as long as the fund's obligation as writer of the option continues.
Upon the exercise of a put option written by a fund, the fund may suffer an
economic loss equal to the difference between the price at which the fund is
required to purchase the underlying investment and its market value at the time
of the option exercise, less the premium received for writing the option. Upon
the exercise of
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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.
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.
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
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and security, are determined by negotiation of the parties. It is anticipated
that any fund authorized to use OTC options will generally only enter into OTC
options that have cash settlement provisions, although it will not be required
to do so.
Unless the parties provide for it, no central clearing or guaranty function is
involved in an OTC option. As a result, if a counterparty fails to make or take
delivery of the security, currency or other instrument underlying an OTC option
it has entered into with the fund or fails to make a cash settlement payment due
in accordance with the terms of that option, the fund will lose any premium it
paid for the option as well as any anticipated benefit of the transaction. Thus,
the investment manager must assess the creditworthiness of each such
counterparty or any guarantor or credit enhancement of the counterparty's credit
to determine the likelihood that the terms of the OTC option will be met. A fund
will enter into OTC option transactions only with U.S. government securities
dealers recognized by the Federal Reserve Bank of New York as 'primary dealers,'
or broker-dealers, domestic or foreign banks, or other financial institutions
that the investment manager deems to be creditworthy. In the absence of a change
in the current position of the staff of the SEC, OTC options purchased by a fund
and the amount of a fund's obligation pursuant to an OTC option sold by the fund
(the cost of the sell-back plus the in-the-money amount, if any) or the value of
the assets held to cover such options will be deemed illiquid.
If a fund sells a call option, the premium that it receives may serve as a
partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments held by the fund or will
increase the fund's income. Similarly, the sale of put options can also provide
gains for a fund.
A fund may purchase and sell call options on securities that are traded on U.S.
and foreign securities exchanges and in the OTC markets, and on securities
indices, currencies and futures contracts. All calls sold by a fund must be
'covered' (that is, the fund must own the securities or futures contract subject
to the call), or must otherwise meet the asset segregation requirements
described below for so long as the call is outstanding. Even though the fund
will receive the option premium to help protect 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.
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. 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
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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.
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.'
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. Emerging Markets Debt
Fund and High Yield Debt Fund may each 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
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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.
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 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.
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.
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 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's investment objective.
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
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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 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 securities 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 securities 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 securities 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 securities 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 as 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 as 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 PRACTICES
REPURCHASE AGREEMENTS (EACH FUND)
Each fund may enter into repurchase agreements for cash management purposes.
Money Market Fund may also enter into repurchase agreements with terms less than
397 days. A repurchase
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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 fund'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
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 (HIGH YIELD BOND FUND AND EMERGING MARKETS DEBT
FUND)
High Yield Bond Fund and 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 (EMERGING MARKETS DEBT FUND AND HIGH YIELD BOND
FUND)
Emerging Markets Debt Fund and High Yield Bond Fund may each lend portfolio
securities to brokers or dealers or other financial institutions to generate
income. 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. 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. 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. Voting rights may pass with the lending of portfolio
securities. 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. 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.
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RISK FACTORS
FOREIGN SECURITIES (EACH FUND)
General. 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.
Emerging Market Countries. 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.
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.
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.
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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.
Other investment risks include the possible imposition of foreign taxes on
certain amounts of a fund's income which may reduce the net return on foreign
investments as compared to income received from a U.S. issuer, the possible
seizure or nationalization of foreign assets and the possible establishment of
exchange controls, expropriation, confiscatory taxation, other foreign
governmental laws or restrictions which might affect adversely payments due on
securities held by a fund, the lack of extensive operating experience of
eligible foreign subcustodians and legal limitations on the ability of a fund to
recover assets held in custody by a foreign subcustodian in the event of the
subcustodian's bankruptcy. Moreover, brokerage commissions and other
transactions costs on foreign securities exchanges are generally higher than in
the United States.
In addition, there may be less publicly-available information about a foreign
issuer than about a U.S. issuer, and foreign issuers may not be subject to the
same accounting, auditing and financial record-keeping standards and
requirements as U.S. issuers. In particular, the assets and profits appearing on
the financial statements of an emerging market country issuer may not reflect
its financial position or results of operations in the way they would be
reflected had the financial statements been prepared in accordance with U.S.
generally accepted accounting principles. In addition, for an issuer that keeps
accounting records in local currency, inflation accounting rules may require,
for both tax and accounting purposes, that certain assets and liabilities be
restated on the issuer's balance sheet in order to express items in terms of
currency of constant purchasing power. Inflation accounting may indirectly
generate losses or profits. Consequently, financial data may be materially
affected by restatements for inflation and may not accurately reflect the real
condition of those issuers 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.
The manner in which foreign investors may invest in companies in certain
emerging market countries, as well as limitations on such investments, also may
have an adverse impact on the operations of a fund. For example, the fund may be
required in certain of such countries to invest initially through a local broker
or other entity and then have the shares purchased re-registered in the name of
the fund. Re-registration may in some instances not be able to occur on a timely
basis, resulting in a delay during which the fund may be denied certain of its
rights as an investor.
Foreign markets have different clearance and settlement procedures, and in
certain markets there have been times when settlements have failed to keep pace
with the volume of securities transactions, making it difficult to conduct such
transactions. Further, satisfactory custodial services for investment securities
may not be available in some countries having smaller, emerging capital markets,
which may result in a fund incurring additional costs and delays in transporting
and custodying such securities outside such countries. Delays in settlement or
other problems could result in periods when assets of a fund are uninvested and
no return is earned thereon. The inability of a fund to make intended security
purchases due to settlement problems or the risk of intermediary counterparty
failures could cause a fund to miss attractive investment opportunities. The
inability to dispose of a portfolio security due to settlement problems could
result either in losses to a fund due to subsequent declines in the value of
such portfolio security or, if the fund has entered into a contract to sell the
security, could result in possible liability to the purchaser.
Securities Related Activities. 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 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.
Foreign Subcustodians. 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.
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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.
Credit Rating. The securities in which Emerging Markets Debt 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 Emerging Markets Debt Fund should not be considered as a complete
investment program for all investors. Moreover, substantial investments in
foreign securities may have adverse tax implications as described under '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
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.
FIXED-INCOME SECURITIES (EMERGING MARKETS DEBT FUND AND HIGH YIELD BOND FUND)
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 Emerging Markets Debt Fund and High Yield
Bond 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.
Call or Buy-Back Features. 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
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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 (EMERGING MARKETS DEBT FUND AND HIGH YIELD BOND FUND)
High Yield Bond Fund and 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 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 in Credit Ratings. 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.
Liquidity. 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.
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Legislative and Regulatory Developments. 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 (EMERGING MARKETS DEBT FUND AND HIGH YIELD BOND
FUND)
While the market values of securities rated below investment grade and
comparable unrated securities tend to react less to fluctuations in interest
rate levels than do those of higher-rated securities, the values of certain of
these securities also tend to be more sensitive to individual corporate
developments and changes in economic conditions than higher-rated securities. In
addition, such securities present a higher degree of credit risk. Issuers of
these securities are often highly leveraged and may not have more traditional
methods of financing available to them, so that their ability to service their
debt obligations during an economic downturn or during sustained periods of
rising interest rates may be impaired. The risk of loss due to default by such
issuers is significantly greater than with investment grade securities because
such securities generally are unsecured and subordinated to the prior payment of
senior indebtedness. 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 (EMERGING MARKETS DEBT FUND AND
HIGH YIELD BOND FUND)
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. 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
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obligor's balance of payments, including export performance, its access to
international credits and investments, fluctuations in interest rates and the
extent of its foreign reserves. A country whose exports are concentrated in a
few commodities or whose economy depends on certain strategic imports could be
vulnerable to fluctuations in international prices of these commodities or
imports. To the extent that a country receives payment for its exports in
currencies other than dollars, its ability to make debt payments denominated in
dollars could be adversely affected. If a foreign sovereign obligor cannot
generate sufficient earnings from foreign trade to service its external debt, it
may need to depend on continuing loans and aid from foreign governments,
commercial banks and multilateral organizations, and inflows of foreign
investment. The commitment on the part of these foreign governments,
multilateral organizations and others to make such disbursements may be
conditioned on the government's implementation of economic reforms and/or
economic performance and the timely service of its obligations. Failure to
implement such reforms, achieve such levels of economic performance or repay
principal or interest when due may result in the cancellation of such third
parties' commitments to lend funds, which may further impair the obligor's
ability or willingness to timely service its debts. The cost of servicing
external debt will also generally be adversely affected by rising international
interest rates, because many external debt obligations bear interest at rates
which are adjusted based upon international interest rates. The ability to
service external debt will also depend on the level of the relevant government's
international currency reserves and its access to foreign exchange. Currency
devaluations may affect the ability of a sovereign obligor to obtain sufficient
foreign exchange to service its external debt. 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.
BRADY BONDS (EMERGING MARKETS DEBT FUND AND HIGH YIELD BOND FUND)
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
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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 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 taxes.
Sovereign obligors in developing and emerging market countries are among the
world's largest debtors to commercial banks, other governments, international
financial organizations and other financial institutions. These obligors have in
the past experienced substantial difficulties in servicing their external debt
obligations, which led to defaults on certain obligations and the restructuring
of certain indebtedness. Restructuring arrangements have included, among other
things, reducing and rescheduling interest and principal payments by negotiating
new or amended credit agreements or converting outstanding principal and unpaid
interest to Brady Bonds, and obtaining new credit to finance interest payments.
Holders of certain foreign sovereign debt securities may be requested to
participate in the restructuring of such obligations and to extend further loans
to their issuers. There can be no assurance that the Brady Bonds and other
foreign sovereign debt securities in which the funds may invest will not be
subject to similar restructuring arrangements or to requests for new credit
which may adversely affect a fund's holdings. Furthermore, certain participants
in the secondary market for such debt may be directly involved in negotiating
the terms of these arrangements and may therefore have access to information not
available to other market participants.
ASSET-BACKED SECURITIES (EACH FUND)
Asset-backed securities present certain risks which are, generally, related to
limited interests, if any, in related collateral. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. Most issuers of automobile receivables permit the servicers to
retain possession of the underlying obligations. If the servicer were to sell
these obligations to another party, there is a risk that the purchaser would
acquire an interest superior to that of the holders of the related automobile
receivables. In addition, because of the large number of vehicles involved in a
typical issuance and technical requirements under state laws, the trustee for
the holders of the automobile receivables may not have a proper security
interest in all of the obligations backing such receivables. Therefore, there is
the possibility that recoveries on repossessed collateral may not, in some
cases, be available to support payments on these securities. Other types of
asset-backed securities will be subject to the risks associated with the
underlying assets. If a letter of credit or other form of credit enhancement is
exhausted or otherwise unavailable, holders of asset-backed securities may also
experience delays in payments or losses if the full amounts due on underlying
assets are not realized. Because asset-backed securities are relatively new, the
market experience in these securities is limited and the market's ability to
sustain liquidity through all phases of the market cycle has not been tested.
ZERO COUPON SECURITIES, PAY-IN-KIND BONDS AND DEFERRED PAYMENT SECURITIES
(EMERGING MARKETS DEBT FUND AND HIGH YIELD BOND FUND)
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
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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 (EMERGING MARKETS DEBT FUND AND HIGH YIELD
BOND FUND)
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 High Yield Bond Fund and 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.
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)
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
acquire substantial positions in securities with limited trading markets, the
activities of the fund could have an adverse effect upon the liquidity and
marketability of such securities and the fund might not be able to dispose of
its holdings in those securities at then current market prices. Circumstances
could also exist (to satisfy
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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 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. 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.
BANK OBLIGATIONS (EACH FUND)
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.
LOANS OF PORTFOLIO SECURITIES (EMERGING MARKETS DEBT FUND AND HIGH YIELD BOND
FUND)
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. 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. Portfolio
securities purchased with cash collateral are subject to possible depreciation.
BORROWING (EACH FUND)
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. 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.
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NON-DIVERSIFICATION (EMERGING MARKETS DEBT FUND)
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.
DERIVATIVES (EMERGING MARKETS DEBT FUND AND HIGH YIELD BOND FUND)
General. 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. 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. The degree of a fund's use of
derivatives may be limited by certain provisions of the Code. See 'Taxes.'
Currency Transactions. Currency hedging involves some of the same risks and
considerations as other transactions with similar instruments. Currency
transactions can result in losses to a fund if the currency being hedged
fluctuates in value to a degree or in a direction that is not anticipated.
Further, the risk exists that the perceived linkage between various currencies
may not be present or may not be present during the particular time that the
fund is engaging in proxy hedging. Currency transactions are also subject to
risks different from those of other portfolio transactions. Because currency
control is of great importance to the issuing governments and influences
economic planning and policy, purchases and sales of currency and related
instruments can be adversely affected by government exchange controls,
limitations or restrictions on repatriation of currency, and manipulations or
exchange restrictions imposed by governments. These forms of governmental
actions can result in losses to a fund if it is unable to deliver or receive
currency or monies in settlement of obligations and could also cause hedges it
has entered into to be rendered useless, resulting in full currency exposure as
well as incurring transaction costs. Buyers and sellers of currency futures
contracts are subject to the same risks that apply to the use of futures
contracts generally. Further, settlement of a currency futures contract for the
purchase of most currencies must occur at a bank based in the issuing nation.
Trading options on currency futures contracts is relatively new, and the ability
to establish and close out positions on these options is subject to the
maintenance of a liquid market that may not always be available. Currency
exchange rates may fluctuate based on factors extrinsic to that country's
economy.
Futures Contracts. The use of options and futures transactions entails certain
special risks. In particular, the variable degree of correlation between price
movements of futures contracts and price movements in the related portfolio
position of a fund could create the possibility that losses on the derivative
will be greater than gains in the value of the fund's position. In addition,
futures and options markets could be illiquid in some circumstances and certain
over-the-counter options could have no markets. A fund might not be able to
close out certain positions without incurring substantial losses. To the extent
a fund utilizes futures and options transactions for hedging, such transactions
should tend to minimize the risk of loss due to a decline in the value of the
hedged position and, at the same time, limit any potential gain to the fund that
might result from an increase in value of the position. 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 and
transaction costs.
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Options. 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 or sell a security it might otherwise hold.
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.
Interest Rate and Equity Swaps and Related Transactions. 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.
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.
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.
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
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may purchase and sell caps, floors and collars without limitation, subject to
the segregated account requirement described above.
Indexed Securities. 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.
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
SAI 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 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 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
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
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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.
(5) invest more than 10% of the value of its net assets in securities which
are illiquid;
(6) 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;
(7) 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);
(8) sell securities short;
(9) purchase or sell commodities or commodity contracts, including futures
contracts;
(10) invest for the purpose of exercising control over management of any
company;
(11) 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;
(12) 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;
(13) purchase real estate or real estate limited partnership interests
(other than securities issued by companies that invest in real estate or
interests therein);
(14) invest directly in interests in oil, gas or other mineral exploration
development programs or mineral leases;
(15) purchase warrants; or
(16) issue senior securities except as permitted by the 1940 Act.
Each of the above restrictions is a fundamental policy of 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.
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.
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EMERGING MARKETS DEBT FUND AND HIGH YIELD BOND FUND
The High Yield Bond Fund and Emerging Markets Debt Fund may not:
(1) With respect to 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).
(4) 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;
(5) 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;
(6) 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 SAI;
(7) 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;
(8) purchase the securities of other investment companies except as
permitted under the 1940 Act or in connection with a merger, consolidation,
acquisition or reorganization;
(9) 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);
(10) sell securities short; provided that short positions in a futures
contract or forward contract are permitted;
(11) 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;
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(12) 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;
(13) 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;
(14) 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;
(15) 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;
(16) 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; or
(17) issue senior securities except as permitted by the 1940 Act.
Investment restrictions (1) through (9) described above are fundamental policies
and restrictions (10) through (17) are non-fundamental policies of Emerging
Market Debt Fund and High Yield Bond 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.'
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. A fund's distributions of any net short-
term capital 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 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. 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.'
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.
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<PAGE>
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 or 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 1934 Act, 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.
36
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<PAGE>
PURCHASE, REDEMPTION AND EXCHANGE OF SHARES
General. 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.).
PURCHASE OF SHARES
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.
Subsequent investments may be made at any time by mailing a check to the funds'
transfer agent and dividend disbursing agent, along with a detachable stub from
the Statement of Account (or a letter providing the account number).
Shareholders should be sure to write the fund's account number on the check.
Initial purchases of fund shares may not be made by third party check.
Shares of each fund may be purchased on any business day at the net asset value
per share next determined after receipt of a purchase order. Shares certificates
will not be issued. Share purchase orders are effective on the date the fund
receives a completed Account Application Form (and other required documents) and
federal funds become available.
Initial and subsequent investments may also be made by wire transfer.
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. (Eastern
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
(Eastern 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 (Eastern time) that day. Purchase orders received after 12:00 noon (Eastern
time) or for which payment is received in or converted into federal funds after
12:00 noon (Eastern time) will be executed and begin to earn dividends on the
following business day.
REDEMPTION OF SHARES
If the Board of Directors of Institutional Series Funds or Series Funds
determines 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
37
<PAGE>
<PAGE>
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.
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.
Signature guarantees by an acceptable guarantor are required to redeem amounts
greater than $50,000 or to have proceeds sent to an address other than the
address of record. The transfer agent has adopted standards and procedures
pursuant to which signature-guarantees in proper form generally will be accepted
from domestic banks, brokers, dealers, credit unions, national securities
exchanges, registered securities associations, clearing agencies and savings
associations, as well as from participants in the New York Stock Exchange
Medallion Signature Program, the Securities Transfer Agents Medallion Program
('STAMP') and the Stock Exchanges Medallion Program. Shareholders with any
questions regarding signature-guarantees should contact the transfer agent.
In certain instances, the transfer agent may require additional documents such
as, but not limited to, trust instruments, death certificates, appointments as
executor or administrator or certificates of corporate authority.
Checks for redemption proceeds will be mailed to the address of record within
seven days of redemption.
Redemption By Wire. If redemption by wire has been elected in the Purchase
Application, shares may be redeemed on any business day upon request made by
telephone or letter. A shareholder or any authorized agent (so designated on the
Account Application Form) must provide [Investors Bank] with the dollar or share
amount to be redeemed, the account to which the redemption proceeds should be
wired, the name of the shareholder and the shareholder's account number.
Shareholders should note that their bank may charge a fee in connection with
transferring money by wire.
A shareholder may change its authorized agent, the address of record or the
account designated to receive redemption proceeds at any time by providing the
transfer agent with written instructions signature guaranteed as described
above.
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<PAGE>
<PAGE>
Telephone Redemption. A shareholder may request redemption by calling the
transfer agent at (800) 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 OF SHARES
Shareholders may exchange all or part of their shares for shares of other funds
in the Salomon Brothers Institutional Investment Series. The value of the shares
exchanged must meet the investment minimum of the fund into which the investor
is exchanging. Shares of a fund are eligible for exchange 30 days after
purchase.
Each fund reserves the right to refuse a telephone request for exchange if it is
believed advisable to do so. Procedures for exchanging shares by telephone may
be modified or terminated at any time by a fund. None of the funds, the transfer
agent nor Salomon Brothers will be liable for following exchange instructions
received by telephone, which are reasonably believed to be genuine, and the
shareholder will bear the risk of loss in the event of unauthorized or
fraudulent telephone instructions. The funds, the transfer agent and Salomon
Brothers may employ reasonable procedures to confirm that instructions
communicated by telephone are genuine. The funds, the transfer agent and Salomon
Brothers may be liable for any losses due to unauthorized or fraudulent
instructions if they do not follow such procedures. When requesting an exchange
by telephone, shareholders should have available the correct account
registration and account numbers or tax identification number.
The exchange 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.
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 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.
Exercise of the exchange privilege is treated as a taxable disposition of the
shares surrendered in the exchange and purchase of the shares received for
federal income tax purposes. The price of the shares of the fund into which
shares are exchanged will be the new cost basis for tax purposes.
39
<PAGE>
<PAGE>
The exchange privilege is not designed for investors trying to catch short-term
swings in market prices by making frequent exchanges. 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. 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.
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 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.
40
<PAGE>
<PAGE>
INSTITUTIONAL SERIES FUNDS AND SERIES FUNDS
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION(S) HELD PRINCIPAL OCCUPATION(S) PAST 5 YEARS
- ------------------------------------ ------------------- ----------------------------------------------------
<S> <C> <C>
Charles F. Barber .................. Director and Consultant; formerly, Chairman of the Board, ASARCO
66 Glenwood Drive Chairman, Audit Incorporated
Greenwich, CT 06830 Committee
Age: 82
Carol L. Colman .................... Director and Audit President, Colman Consulting Co., Inc.
Colman Consulting Co., Inc. Committee Member
278 Hawley Road
North Salem, NY 10560
Age: 53
Daniel P. Cronin ................... Director and Audit Vice President and General Counsel, Pfizer
Pfizer, Inc. Committee Member International Inc., Senior Assistant General
253 East 42nd Street Counsel, Pfizer Inc.
New York, NY 10017
Age: 53
Heath B. McLendon* ................. Director, Chairman Managing Director, Salomon Smith Barney, Inc.
Age: 65 and President ('SSB'); President and Director, SSBC Fund
Management Inc. and Travelers Investment Adviser,
Inc.; Chairman of Smith Barney Strategy Advisers
Inc.
Peter J. Wilby ..................... Executive Vice Managing Director of SBAM and SSB since January
Age: 40 President 1996. Prior to January 1996, Director of SBAM and
SBI.
Beth A. Semmel ..................... Executive Vice Managing Director of SBAM and SSB since January
Age: 38 President 1996. From May 1993 to December 1995, Vice President
of SBAM and SSB. From January 1989 to May 1993, Vice
President of Morgan Stanley Asset Management.
Maureen O'Callaghan ................ Executive Vice Director of SBAM and SSB since October 1988.
Age: 35 President
James E. Craige .................... Executive Vice Director, SBAM and SSB since 1992.
Age: 31 President
Thomas K. Flanagan ................. Executive Vice Director, SBAM and SSB since 1991.
Age: 46 President
Robert E. Amadeo ................... Vice President Vice President of SBAM since 1996. Prior to January
Age: 34 (Series Funds Only) 1996 he was an analyst at SBAM for more than three
years.
Charles K. Bardes .................. Vice President Vice President of SBAM since 1997. He has been
Age: 39 (Series Funds Only) employed by SBAM since 1986.
Thomas A. Croak .................... Vice President Vice President of SBAM since 1991.
Age: 38 (Series Funds Only)
John B. Cunningham ................. Vice President Vice President of SBAM since 1991.
Age: 35 (Series Funds Only)
</TABLE>
41
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION(S) HELD PRINCIPAL OCCUPATION(S) PAST 5 YEARS
- ------------------------------------ ------------------- ----------------------------------------------------
<S> <C> <C>
Nancy Noyes ........................ Vice President Director, SBAM and SBI since January 1996. From
Age: 40 (Series Funds Only) August 1992 to January 1996, Vice President, SBAM
and SBI.
George J. Williamson ............... Vice President Vice President of SBAM since 1990.
Age: 66 (Series Funds Only)
Christina T. Sydor ................. Secretary Managing Director of SSB; General Counsel and
388 Greenwich Street Secretary of SSBC Fund Management Inc. and Travelers
New York, New York 10013 Investment Adviser, Inc.
Age: 48
Lewis E. Daidone ................... Vice President and Managing Director of Salomon Smith Barney; Director
388 Greenwich Street Treasurer and Senior Vice President of SSBC and TIA.
New York, New York 10013
Age: 41
</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, 1999. 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, 1999, Salomon Brothers
Asset Management Inc. and its affiliates, own 0% and 0% of the outstanding
shares of the Emerging Markets Debt Fund and the High Yield Bond Fund,
respectively.
<TABLE>
<CAPTION>
FUND SHAREHOLDER PERCENTAGE HELD
- -------------------------------------------- -------------------------------------------------- ---------------
<S> <C> <C>
Money Market Fund........................... State Street Bank & Trust TTEE 41.399%
388 Greenwich Street
New York, NY 10013
Saturn & Co. 30.510%
c/o Investors Bank & Trust Co
Boston, MA 02117
Silicon Alley Management Inc 8.128%
103 Faulk Rd., Ste. 260
Wilmington, DE 19803
High Yield Bond Fund........................ LaSalle National Bank TTEE 55.865%
FBO Ahold USA Inc Pension Trust
950 East Paces Ferry Road, Ste. 2575
Atlanta, GA 30326
L-3 Communications Corp Master Trust 34.270%
600 Third Avenue
New York, NY 10016
Town of Plymouth Contributory Retirement System 5.234%
11 Lincoln Street
Plymouth, MA 02360
</TABLE>
42
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
FUND SHAREHOLDER PERCENTAGE HELD
- -------------------------------------------- -------------------------------------------------- ---------------
<S> <C> <C>
Emerging Markets Debt Fund.................. American National Can Company 49.878%
8770 West Bryn Mawr Avenue
Chicago, IL 60631-3542
L-3 Communications Corp Master Trust 29.605%
600 Third Avenue
New York, NY 10016
Carnegie Mellon University 12.170%
5000 Forbes Avenue
Pittsburgh, PA 15116
</TABLE>
As of April 1, 1999, directors and officers of the Institutional Series Funds
beneficially owned less than 1% of the outstanding shares of any series of the
Institutional Series Funds.
COMPENSATION TABLE
The following table provides information concerning the compensation paid to
each director of the Series Funds during the fiscal year ended December 31, 1998
and the Institutional Series Funds for the fiscal year ended February 28, 1999.
Neither Company provides any pension or retirement benefits to directors. In
addition, no remuneration was paid by the Series Funds during the fiscal year
ended December 31, 1998 or the Institutional Series Funds for the fiscal year
ended February 28, 1999 to officers of either Company including to Mr. McLendon,
who is affiliated with SBAM. Accordingly, Mr. McLendon is an 'interested
person,' as defined in the 1940 Act.
SERIES FUNDS
<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION TOTAL COMPENSATION
FROM THE SERIES FROM OTHER FUNDS
NAME OF PERSON, POSITION FUNDS ADVISED BY SBAM(A) TOTAL COMPENSATION(A)
- -------------------------------------------------- --------------- ------------------ ---------------------
<S> <C> <C> <C>
Charles F. Barber, Director....................... $ 11,450.00 $ 135,015.00 $146,465.00(16)
Daniel P. Cronin, Director........................ 10,950.00 49,565.00 60,515.00(7)
Carol L. Colman, Director......................... 11,450.00 63,017.00 74,467.00(6)
</TABLE>
- ------------
(A) The numbers in parentheses indicate the applicable number of investment
company directorships held by that director.
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....................... $5,833.00 $ 140,632.00 $146,465.00(16)
Daniel P. Cronin, Director........................ 5,833.00 54,682.00 60,515.00(7)
Carol L. Colman, Director......................... 5,833.00 68,634.00 74,467.00(6)
</TABLE>
- ------------
(A) The numbers in parentheses indicate the applicable number of investment
company directorships held by that director.
43
<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. SBAM is a wholly owned subsidiary of Citigroup.
SBAM serves as investment manager to each fund pursuant to management contracts
dated as of November 28, 1997. The management contract between SBAM and each
respective fund provides that SBAM shall manage the operations of each fund,
subject to policies 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, Money Market Fund pays SBAM a monthly fee at
an annual rate of .20% of the fund's average daily net assets. SBAM has
voluntarily agreed to reduce or otherwise limit the expenses of the fund
(exclusive of taxes, interest and extraordinary expenses such as litigation and
indemnification expenses), on an annualized basis, to .25% of the fund's average
daily net assets and for a period of at least one year from the date of the
Prospectus such expenses shall not exceed .18% of the fund's average daily net
assets. For the fiscal years ended December 31, 1996, 1997 and 1998, Money
Market Fund paid SBAM $0 (which reflects a waiver of $126,986, $0 (which
reflects a waiver of $350,642) and $14,911 (which reflects a waiver of
$304,989), 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, High Yield Bond Fund pays SBAM a monthly fee
at an annual rate of .50% of the fund's average daily net assets and 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, 1998 and 1999, SBAM waived all
investment management fees from each of High Yield Bond Fund and Emerging
Markets Debt Fund, totalling $21,438, $32,193 and $126,508 and $15,317, $75,783,
and $159,813, respectively. SBAM also absorbed an additional $147,817 and
$192,736, $173,188 and $205,872 and $84,986 and $10,382 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 Money Market, 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
44
<PAGE>
<PAGE>
either SBAM or its affiliates or from reckless disregard by it of its
obligations and duties under the Management Contract ('disabling conduct'). In
addition, High Yield Bond Fund and Emerging Markets Debt Fund will indemnify
SBAM and its affiliates and hold each of them harmless against any losses or
damages not resulting from disabling conduct.
Investment decisions for a particular fund are made independently from those for
other funds and accounts advised or managed by SBAM. Such other funds and
accounts may also invest in the same securities as a fund. If those funds or
accounts are prepared to invest in, or desire to dispose of, the same security
at the same time as a fund, however, transactions in such securities will be
made, insofar as feasible, for the respective funds and accounts in a manner
deemed equitable to all. In some cases, this procedure may adversely affect the
size of the position obtained for or disposed of by a fund or the price paid or
received by a fund. In addition, because of different investment objectives, a
particular security may be purchased for one or more funds or accounts when one
or more funds or accounts are selling the same security.
Rule 17j-1 under the 1940 Act requires all registered investment companies and
their investment advisers and principal underwriters to adopt written codes of
ethics and institute procedures designed to prevent 'access persons' (as defined
in Rule 17j-1) from engaging in any fraudulent, deceptive or manipulative
trading practices. Each Company's Board of Directors has adopted a code of
ethics (the 'Fund Code') that incorporates personal trading policies and
procedures applicable to access persons of each fund, which includes officers,
directors and other specified persons who may make, participate in or otherwise
obtain information concerning the purchase or sale of securities by the fund. In
addition, the Fund Code attaches and incorporates personal trading policies and
procedures applicable to access persons of SBAM, as the investment adviser to
each fund, which policies serve as SBAM's code of ethics (the 'Adviser Code').
The Fund and Adviser Codes have been designed to address potential conflicts of
interest that can arise in connection with the personal trading activities of
investment company and investment advisory personnel.
Pursuant to the Fund and Adviser Codes, access persons are generally permitted
to engage in personal securities transactions, provided that a transaction does
not involve securities that are being purchased or sold, are being considered
for purchase or sale, or are being recommended for purchase or sale by or for a
fund. In addition, the Adviser Codes contains specified prohibitions and
blackout periods for certain categories of securities and transactions,
including a prohibition on short-term trading and purchasing securities during
an initial public offering. The Adviser Codes also require that access persons
obtain preclearance to engage in personal securities transactions with certain
exceptions. Finally, the Fund and Adviser Codes require access persons to report
all personal securities transactions periodically. The restrictions contained in
the Fund and Adviser Codes are generally inapplicable to transactions in money
market securities.
ADMINISTRATOR
Institutional Series Funds and Series Funds currently employ SSBC Fund
Management Inc. ('SSBC') under their applicable administration agreement to
provide certain administrative services to the respective funds. Prior to
January 1, 1999, Investors Bank and Trust Company ('IBT') provided such
administrative services to the Institutional Series. For the fiscal years ended
December 31, 1996, 1997 and 1998, Money Market Fund paid fees of $69,483 (which
reflects a waiver of $20,267), $189,460 and $174,815 to Investors Bank & Trust
Company ('IBT') under a prior administration agreement. Fees paid to IBT by High
Yield Bond Fund for the period May 15, 1996 through February 28, 1997, for the
year ended February 28, 1998 and February 28, 1999 were $95,000 (which reflects
a waiver of $30,875), $165,100 and $130,310, respectively. Fees paid to IBT by
Emerging Markets Debt Fund for the period October 17, 1996 through February 28,
1997 and for the years ended February 28, 1998 and February 28, 1999 were
$98,700 (which reflects a waiver of $885), $177,600 and $119,048 respectively.
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DISTRIBUTOR
Shares of the funds are offered on a continuous basis and without a sales charge
through CFBDS as distributor pursuant to a distribution agreement between CFBDS
and the funds. CFBDS 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 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, 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
Money Market Fund, reasonably designed, taking into account current market
conditions and Money Market Fund's investment objective, to stabilize the net
asset value per share as computed for the
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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 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.
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 that may be applicable to the funds or to all categories of investors,
some of which may be subject to special tax rules. The discussions set forth
here and in the Prospectus do not constitute tax advice. Investors are urged to
consult their own tax advisers with specific questions relating to federal,
state, local or foreign taxes.
Each fund has elected and intends to continue to qualify to be treated as a
regulated investment company ('RIC') under Subchapter M of 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 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 the sum of its investment company taxable
income and any net tax-exempt interest for such taxable year in accordance with
the Code's timing and other requirements. Investment company taxable income
generally includes a fund's taxable net investment income plus the excess, if
any, of its net short-term capital gain over its long-term capital loss.
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 capital gain 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 gain
included
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in the shareholder's income. Money Market Fund does not expect to recognize any
net capital gain.
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 its capital gain net
income (the excess of its capital gains over its capital losses) for the one
year period ending, as a general rule, on October 31 of each year; and (c) 100%
of the undistributed income and gains from the preceding calendar year (if any)
pursuant to the calculations in (a) and (b). For this purpose any income or gain
retained by a fund that is subject to corporate income tax will be considered to
have been distributed by year-end.
Emerging Markets Debt Fund and High Yield Bond Fund may each 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. 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 and, if capital, whether long-term or
short-term), 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 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 each year (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 in pay-in-kind
bonds, zero-coupon securities or other obligations, such as certain Brady Bonds,
having original issue discount (i.e., an amount generally 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 generally equal to the excess of the stated
redemption price or revised issue 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. 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 of.
If Emerging Markets Debt Fund or High Yield Bond Fund acquires an equity
interest in certain foreign investment entities, referred to as 'passive foreign
investment companies,' the fund itself may be subject to U.S. federal income tax
and an additional charge in the nature of interest on a portion of any 'excess
distribution' from such company or gain from the disposition of its equity
interest, even if the distribution or gain is distributed by the fund to its
shareholders in a manner that satisfies the requirements referred to above. If
the fund were able and elected to treat a passive foreign investment company as
a 'qualified electing fund,' in lieu of the treatment described above, the fund
would be required each year to include in income, and distribute to shareholders
in accordance with the distribution requirements referred to above, the fund's
pro rata share of the ordinary earnings and net capital gains of the company,
whether or not actually
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received by the fund. The fund generally should be able to make an alternative
election to mark these investments to market annually, resulting in the
recognition of ordinary income (rather than capital gain) or ordinary loss,
subject to certain limitations on the ability to use any such loss.
Under Section 988 of the Code, gains or losses attributable to fluctuations in
exchange rates between the time Emerging Markets Debt Fund or High Yield Bond
Fund accrues income or receivables or expenses or other liabilities denominated
in a foreign currency and the time the fund actually collects such income or
pays such liabilities are generally treated as ordinary income or loss.
Similarly, gains or losses on foreign currency, foreign currency forward
contracts, certain foreign currency options or futures contracts and the
disposition of debt securities denominated in foreign currency, to the extent
attributable to fluctuations in exchange rates between the acquisition and
disposition dates, are also treated as ordinary income or loss.
Each fund is permitted to carry forward any unused capital losses to be utilized
to offset capital gains realized during the eight-year period following the year
in which the losses arose, which will reduce the net realized capital gains (if
any) required to be distributed to shareholders for those years.
At December 31, 1998 Money Market Fund had net capital loss carry-forwards
available to offset future gains of $2,697, of which $616 expires on December
31, 2004, $333 expires on December 31, 2005, and $1,748 expires on December 31,
2006. At February 28, 1999, the High Yield Fund and the Emerging Market Debt
Fund had a net capital loss carry-forward of $112,289 and $6,128,591,
respectively.
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
Emerging Markets Fund qualifies as a RIC 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. High Yield
Bond Fund and Money Market Fund will generally not satisfy the 50% requirement
for making this election and therefore will be unable to make it.
For any year that Emerging Markets Debt 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 qualified income taxes paid by such fund
to a foreign country's government and shareholders will be entitled, subject to
certain holding period requirements and other 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. Investors (except in the case of
Money Market Fund) should consider the tax implications of buying shares just
prior to a distribution. Although the price of shares purchased at that time may
reflect the amount of the forthcoming distribution, those purchasing just prior
to a distribution will receive a distribution which will nevertheless be taxable
to them.
Shareholders receiving a distribution in the form of additional shares will be
treated for federal income tax purposes as receiving a distribution in an amount
equal to the amount of cash that would have been received had they elected to
receive cash and will have a cost basis in each
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share received equal to such amount divided by the number of shares received.
Shareholders will be notified annually as to the federal tax status of
distributions.
Gain or loss on the redemption, exchange or other disposition of fund shares
that is treated as a sale under the Code will result in capital gain or loss to
shareholders who hold their fund shares as capital assets. Generally,
transactions in shares of Money Market Fund are not expected to result in gains
or losses, except to the extent that any sales charge is imposed on the
redemption of certain shares acquired in an exchange from another fund in which
such a charge is applied. 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 mutual fund shares held for more than one
year 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 or capital gain dividends. The maximum federal
income tax rate imposed on individuals with respect to net realized short-term
capital gain (which is taxed at ordinary income rates) will be 39.6%. With
respect to corporate taxpayers, long-term capital gain is taxed at the same
federal income tax rates as ordinary income and 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 allowable 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.
Additionally, any loss realized on a redemption or exchange of fund shares
generally will be disallowed under 'wash sale' rules to the extent the shares
disposed of are replaced with other shares of the same fund within a period of
61 days beginning 30 days before and ending 30 days after such disposition, such
as pursuant to reinvestment of dividends in fund shares.
If, for any full fiscal year, a fund's total distributions exceed its investment
company taxable income and net 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. In the event a fund distributes a return of capital in excess of a
shareholder's adjusted basis, the excess amount will generally be taxable as
capital gain.
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.
All dividends and distributions to shareholders will be taxable to shareholders
as ordinary income or long-term capital gain, whether paid in cash or reinvested
in additional shares. For federal income tax purposes, distributions from
investment company taxable income and from net tax-exempt interest, if any, are
taxable to shareholders as ordinary income. A portion of High Yield Bond Fund's
dividends may qualify for the dividends received deduction available to
corporations to the extent it receives dividends from U.S. corporations and
satisfies certain holding period and other requirements.
Availability of the deduction to corporate shareholders is also subject to
holding period requirements, limitations on debt financing, and other tax
consequences. Dividends from the other funds will generally not qualify for the
dividends-received deduction.
A fund's distributions from its net capital gain that it properly designates as
'capital gain dividends' are taxable to shareholders as long-term capital gain,
without regard to how long they have held their fund shares. Capital gain
dividends do not qualify for any dividends-received deduction.
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 on December 31 of the year in
which the dividend or distribution is declared.
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Each fund may be required to withhold federal income tax at a rate of 31%
('backup withholding') from dividends (including capital gain dividends) and,
except in the case of Money Market Fund, redemption proceeds paid to
shareholders who fail to provide certain information or certifications or are
otherwise subject to backup withholding. This tax may be withheld from dividends
if (i) the payee fails to furnish the fund with the payee's correct and, when
required, properly certified taxpayer identification number (e.g., an
individual's social security number), (ii) the Internal Revenue Service ('IRS')
or a broker 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. 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, for certain foreign investors,
other federal withholding taxes. Statements detailing the tax status of each
shareholders' dividends and distributions will be mailed annually.
The foregoing is intended to be general information to shareholders and
potential investors in a fund and does not constitute tax advice. Shareholders
and potential investors should consult their own tax advisers regarding federal,
state, local and foreign tax consequences of ownership of shares in a fund.
PERFORMANCE DATA
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.
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).
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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.
The following table sets forth the average annual total return for Emerging
Markets Debt Fund and High Yield Bond Fund for certain periods of time ending
February 28, 1999 (in each case, after management fee waiver and reimbursement
of certain expenses).
<TABLE>
<CAPTION>
FROM INCEPTION
YEAR ENDED YEAR ENDED FEBRUARY 28,
FUND FEBRUARY 28, 1999 FEBRUARY 28, 1998 1999(1)(2)
- --------------------------------------------------------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
Emerging Markets Debt Fund............................... -23.07% 14.61% -0.81%
High Yield Bond Fund..................................... 0.05% 11.12% 9.24%
</TABLE>
(1) Emerging Markets Debt Fund's inception was October 17, 1996
(2) High Yield Bond Fund's inception was May 15, 1996
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 Emerging Markets
Debt Fund and High Yield Bond Fund for certain periods of time ending February
28, 1999 (in each case, after management fee waiver and reimbursement of certain
expenses).
<TABLE>
<CAPTION>
FROM INCEPTION
YEAR ENDED YEAR ENDED FEBRUARY 28,
FUND FEBRUARY 28, 1999 FEBRUARY 28, 1998 1999(1)(2)
- --------------------------------------------------------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
Emerging Markets Debt Fund............................... -23.07% 14.61% -1.92%
High Yield Bond Fund..................................... 0.05% 11.12% 27.98%
</TABLE>
(1) Emerging Markets Debt Fund's inception was October 17, 1996
(2) High Yield Bond Fund's inception was May 15, 1996
YIELD
With respect to Money Market Fund, yield quotations are expressed in annualized
terms and may be quoted on a compounded basis.
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The current yield for Money Market Fund is computed by (a) determining the net
change in the value of a hypothetical pre-existing account in the fund having a
balance of one share at the beginning of a seven calendar day period for which
yield is to be quoted; (b) dividing the net change by the value of the account
at the beginning of the period to obtain the base period return; and (c)
annualizing the results (i.e., multiplying the base period return by 365/7). The
net change in the value of the account reflects the value of additional shares,
but does not include realized gains and losses or unrealized appreciation and
depreciation. In addition, the Money Market Fund may calculate a compound
effective annualized yield by adding 1 to the base period return (calculated as
described above), raising the sum to a power equal to 365/7 and subtracting 1.
For the seven-day period ended December 31, 1998, the annualized yield and
effective yield of the Money Market Fund were 5.33% and 5.48%, respectively.
In periods of declining interest rates 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
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.
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.
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.
OTHER INFORMATION ABOUT THE FUNDS
Capital Stock. As used in the Prospectus and this SAI, 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
53
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(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. PNC Bank, N.A. currently serves as custodian for Money Market Fund
and High Yield Bond Fund. The Chase Manhattan Bank, N.A. ('Chase') serves as
custodian for Emerging Markets Debt Fund ('PNC' and together with Chase in such
capacity, the 'Custodian'). The Custodian, among other things: maintains a
custody account or accounts in the name each fund; receives and delivers all
assets for the fund upon purchase and upon sale or maturity; collects and
receives all income and other payments and distributions on account of the
assets of the fund; and makes disbursements on behalf of the fund. The custodian
does not determine the investment policies of a fund, nor decide which
securities a fund will buy or sell. For its services, the Custodian receives a
monthly fee based upon the daily average market value of securities held in
custody and also receives securities transaction charges, including
out-of-pocket expenses. The assets of each fund are held under bank
custodianship in compliance with the 1940 Act. A fund may also periodically
enter into arrangements with other qualified custodians with respect to certain
types of securities or other transactions such as repurchase agreements or
derivatives transactions.
Transfer Agent. FDISG, a subsidiary of First Data Corporation, located at P.O.
Box 9764, Providence, RI 02940-9764, 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. PricewaterhouseCoopers LLP serves as each fund's
independent accountants. PricewaterhouseCoopers 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 SAI have been
included in reliance upon the report of PricewaterhouseCoopers given on the
authority of that firm as experts in auditing and accounting.
PricewaterhouseCoopers' 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 LLP of Baltimore, Maryland has issued an opinion regarding the
valid issuance of shares being offered for sale pursuant to the funds'
Prospectus.
Financial Statements. The audited financial statements for Money Market Fund for
the fiscal year ended December 31, 1998 as well as the audited financial
statements for High Yield Bond Fund and Emerging Markets Debt Fund for the
fiscal year ended February 28, 1999 are incorporated herein by reference.
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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.
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.
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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.
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
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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.
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.
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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.
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+.
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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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ITEM 22. FINANCIAL STATEMENTS.
REGISTRANT'S ANNUAL REPORTS FOR THE FISCAL YEAR ENDED FEBRUARY 28, 1999
IS INCORPORATED HEREIN BY REFERENCE TO THE REGISTRANT'S DEFINITIVE
RULE 30b2-1 FILED ON APRIL 29, 1999 AS ACCESSION NO. 91155-99-000170
WILL BE FILED BY AMENDMENT
SALOMON BROTHERS INSTITUTIONAL SERIES FUNDS INC
PART C. OTHER INFORMATION
ITEM 23. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------------------------------------------------------------------------------------------------------
<S> <C>
(a) -- Articles of Incorporation of Registrant (filed as Exhibit 1(a) to the Registration Statement on Form
N-1A and incorporated herein by reference).
(b) -- Registrant's By-Laws (filed as Exhibit 2(a) to the Registration Statement on Form N-1A and incorporated
herein by reference).
(c) -- None.
(d)(1) -- Management Contract between Registrant and Salomon Brothers Asset Management Inc ('SBAM') dated November
28, 1997 relating to the Salomon Brothers Institutional High Yield Bond Fund (filed as Exhibit 5(a) to
Post-Effective Amendment No. 3 to the Registration Statement on Form N-1A and incorporated herein by
reference).
(d)(2) -- Management Contract between Registrant and SBAM dated November 28, 1997 relating to the Salomon Brothers
Institutional Emerging Markets Debt Fund (filed as Exhibit 5(b) to Post-Effective Amendment No. 3 to the
Registration Statement on Form N-1A and incorporated herein by reference).
(e) -- Distribution Agreement between Registrant and CFBDS, Inc. dated September 1, 1998 (filed as Exhibit (e)
to Post-Effective Amendment No. 5 to the Registration Statement on Form N-1A and incorporated herein by
reference).
(f) -- None.
(g)(1) -- Form of Custodian Agreement between Registrant and PNC Bank National Association ('PNC') will be filed
by amendment.
(g)(2) -- Form of Custodian Agreement between Registrant and The Chase Manhattan Bank, N.A. ('Chase') will be
filed by amendment.
(h)(1) -- Form of Transfer Agency Agreement between Registrant and First Data Investor Services Group, Inc. will
be filed by amendment.
(h)(2) -- Form of Administration Agreement between Registrant and SBAM (filed as Exhibit (h)(2) to Post-Effective
Amendment No. 5 to the Registration Statement on Form N-1A and incorporated herein by reference).
(h)(3) -- 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).
(i) -- 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).
(j) -- Consents of Independent Accountants is filed herein.
(k) -- None.
(l) -- 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).
(m) -- None.
(n) -- Financial Data Schedules for Salomon Brothers Institutional High Yield Bond Fund and Salomon Brothers
Institutional Emerging Markets Debt Fund is filed herein.
(o) -- None.
</TABLE>
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Certain portfolios of The Registrant may be deemed to be under common
control with Salomon Brothers Capital Fund Inc because the same (or an
affiliated) entity owns greater than 25% of the outstanding shares of one or
more classes of shares of such portfolios and such fund.
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ITEM 25. 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 CFBDS, Inc.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the 'Securities Act'), may be permitted to directors,
officers and controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant understands that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
ITEM 26. 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 27. PRINCIPAL UNDERWRITERS
(a) CFBDS, Inc., ('CFBDS') the Registrant's Distributor, is also the
distributor for the following Smith Barney funds: Concert Investment Series,
Consulting Group Capital Markets Funds, Greenwich Street Series Fund, Smith
Barney Adjustable Rate Government Income Fund, Smith Barney Aggressive Growth
Fund Inc., Smith Barney Appreciation Fund, Inc., Smith Barney Arizona Municipals
Fund Inc., Smith Barney California Municipals Fund Inc., Smith Barney Concert
Allocation Series Inc., Smith Barney Equity Funds, Smith Barney Fundamental
Value Fund Inc., Smith Barney Funds, Inc., Smith Barney Income Funds, Smith
Barney Institutional Cash Management Fund, Inc., Smith Barney Investment Funds
Inc., Smith Barney Investment Trust, Smith Barney Managed Governments Fund Inc.,
Smith Barney Managed Municipals Fund Inc., Smith Barney Massachusetts Municipals
Fund, Smith Barney Money Funds, Inc., Smith Barney Muni Funds, Smith Barney
Municipal Money Market Fund, Inc., Smith Barney Natural Resources Fund Inc.,
Smith Barney New Jersey Municipals Fund Inc., Smith Barney Oregon Municipals
Fund Inc., Smith Barney Principal Return Fund, Smith Barney Small Cap Blend
Fund, Inc., Smith Barney Telecommunications Trust, Smith Barney Variable Account
Funds, Smith Barney World Funds, Inc., Travelers Series Fund Inc., and various
series of unit investment trusts.
CFBDS also serves as the distributor for the following funds: The Travelers
Fund UL for Variable Annuities, The Travelers Fund VA for Variable Annuities,
The Travelers Fund BD for Variable Annuities, The Travelers Fund BD II for
Variable Annuities, The Travelers Fund BD III for Variable Annuities, The
Travelers Fund BD IV for Variable Annuities, The Travelers Fund ABD for Variable
Annuities, The Travelers Fund ABD II for Variable Annuities, The Travelers
Separate Account PF for Variable Annuities, The Travelers Separate Account PF II
for Variable Annuities, The Travelers Separate Account QP for Variable
Annuities, The Travelers Separate Account TM for Variable Annuities, The
Travelers Separate Account TM II for Variable Annuities, The Travelers Separate
Account Five for Variable Annuities, The Travelers Separate Account Six for
Variable Annuities, The Travelers Separate Account Seven for Variable Annuities,
The Travelers Separate Account Eight for Variable Annuities, The Travelers Fund
UL for Variable Annuities, The Travelers Fund UL II for Variable Annuities, The
Travelers Variable Life Insurance Separate Account One, The Travelers Variable
Life Insurance Separate Account Two, The Travelers Variable Life Insurance
Separate Account Three, The Travelers Variable Life Insurance Separate Account
Four, The Travelers Separate Account MGA, The Travelers Separate Account MGA II,
The Travelers Growth and Income Stock Account for Variable Annuities, The
Travelers Quality Bond Account for Variable Annuities, The Travelers Money
Market Account for Variable Annuities, The Travelers Timed Growth and Income
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Stock Account for Variable Annuities, The Travelers Timed Short-Term Bond
Account for Variable Annuities, The Travelers Timed Aggressive Stock Account for
Variable Annuities, The Travelers Timed Bond Account for Variable Annuities.
CFBDS, is also the distributor for CitiFunds Multi-State Tax Free Trust,
CitiFunds Premium Trust, CitiFunds Institutional Trust, CitiFunds Tax Free
Reserves, CitiFunds Trust I, CitiFunds Trust II, CitiFunds Trust III, CitiFunds
International Trust, CitiFunds Fixed Income Trust, CitiSelect VIP Folio 200,
CitiSelect VIP Folio 300, CitiSelect VIP Folio 400, CitiSelect VIP Folio 500,
CitiFunds Small Cap Growth VIP Portfolio. CFBDS is also the placement agent for
Large Cap Value Portfolio, Small Cap Value Portfolio, International Portfolio,
Foreign Bond Portfolio, Intermediate Income Portfolio, Short-Term Portfolio,
Growth & Income Portfolio, U.S. Fixed Income Portfolio, Large Cap Growth
Portfolio, Small Cap Growth Portfolio, International Equity Portfolio, Balanced
Portfolio, Government Income Portfolio, Tax Free Reserves Portfolio, Cash
Reserves Portfolio and U.S. Treasury Reserves Portfolio.
In addition, CFBDS is also the distributor for the following Salomon
Brothers funds: Salomon Brothers Opportunity Fund Inc., Salomon Brothers
Investors Fund Inc., Salomon Brothers Capital Fund Inc., Salomon Brothers Series
Funds Inc., Salomon Brothers Institutional Series Funds Inc., Salomon Brothers
Variable Series Funds Inc.
In addition, CFBDS is also the distributor for the Centurion Funds, Inc.
(b) The information required by this Item 27 with respect to each director
and officer of CFBDS is incorporated by reference to Schedule A of Form BD filed
by CFBDS pursuant to the Securities and Exchange Act of 1934 (File No. 8-32417).
(c) Not applicable.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
(1) Salomon Brothers Asset Management Inc, 7 World Trade Center, New York,
New York 10048
(2) PNC Bank, National Association Airport Business Center, International
Court 2, 200 Stevens Drive, Lester, PA 19113.
(3) The Chase Manhattan Bank, N.A., Chase Metrotech Center, Brooklyn, NY
11245.
(4) First Data Investors Services Group, Inc. P.O. Box 5127, Westborough,
MA 01581-5127.
ITEM 29. MANAGEMENT SERVICES
Not applicable.
ITEM 30. UNDERTAKINGS
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 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, 1999.
SALOMON BROTHERS INSTITUTIONAL SERIES
FUNDS INC (Registrant)
By /s/ HEATH B. MCLENDON
...................................
HEATH B. MCLENDON
PRESIDENT
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------------- ------------------------------------------------ ------------------
<S> <C> <C>
/S/ HEATH B. MCLENDON Director and President (Principal Executive April 30, 1999
......................................... Officer)
(HEATH B. MCLENDON)
* Director April 30, 1999
.........................................
(CHARLES F. BARBER)
* Director April 30, 1999
.........................................
(CAROL L. COLMAN)
* Director April 30, 1999
.........................................
(DANIEL P. CRONIN)
/S/ LEWIS E. DAIDONE Executive Vice President and Treasurer April 30, 1999
......................................... (Principal Financial and Accounting Officer)
(LEWIS E. DAIDONE)
*By /s/ LEWIS E. DAIDONE
.....................................
LEWIS E. DAIDONE
ATTORNEY-IN-FACT
</TABLE>
C-4
<PAGE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- ----------------------------------------------------------
<S> <C>
(j) -- Consent of PricewaterhouseCoopers LLP
(n) -- Financial Data Schedules
</TABLE>
STATEMENT OF DIFFERENCES
------------------------
Characters normally expressed as superscript shall be preceded by...... 'pp'
<PAGE>
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus and
Statement of Additional Information constituting parts of this Post-Effective
Amendment No. 6 to the Registration Statement on Form N-1A (the "Registration
Statement") of our report dated April 20, 1999, relating to the financial
statements and financial highlights appearing in the February 28, 1999 Annual
Report to Shareholders of Salomon Brothers Institutional High Yield Bond Fund
and Salomon Brothers Institutional Emerging Markets Debt Fund (two of the
portfolios constituting Salomon Brothers Institutional Series Funds Inc), which
is also incorporated by reference into the Registration Statement. We also
consent to the references to us under the heading "Financial Highlights" in the
Prospectus and under the heading "Independent Accountants" in the Statement of
Additional Information.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York, 10036
April 27, 1999
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus and
Statement of Additional Information constituting parts of this Post-Effective
Amendment No. 6 to the Registration Statement on Form N-1A (the "Registration
Statement") of our report dated February 9, 1999, relating to the financial
statements and financial highlights appearing in the December 31, 1998 Annual
Report to Shareholders of Salomon Brothers Institutional Money Market Fund (one
of the portfolios constituting Salomon Brothers Series Funds Inc), which is also
incorporated by reference into the Registration Statement.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York, 10036
April 27, 1999
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 862501
<NAME> INSTITUTIONAL FUNDS
<SERIES>
<NUMBER> 1
<NAME> INSTITUTIONAL HIGH YIELD
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-28-1999
<PERIOD-END> FEB-28-1999
<INVESTMENTS-AT-COST> 37,155,660
<INVESTMENTS-AT-VALUE> 35,654,147
<RECEIVABLES> 1,711,480
<ASSETS-OTHER> 847
<OTHER-ITEMS-ASSETS> 28,219
<TOTAL-ASSETS> 37,394,693
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 28,100
<TOTAL-LIABILITIES> 28,100
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 39,201,616
<SHARES-COMMON-STOCK> 4,346,436
<SHARES-COMMON-PRIOR> 2,343,699
<ACCUMULATED-NII-CURRENT> 2,225,924
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (745,282)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (1,501,513)
<NET-ASSETS> 37,366,593
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 2,365,083
<OTHER-INCOME> 0
<EXPENSES-NET> 139,159
<NET-INVESTMENT-INCOME> 2,225,924
<REALIZED-GAINS-CURRENT> (745,282)
<APPREC-INCREASE-CURRENT> (1,609,615)
<NET-CHANGE-FROM-OPS> (128,973)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1,949,062
<DISTRIBUTIONS-OF-GAINS> 111,156
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4,118,675
<NUMBER-OF-SHARES-REDEEMED> 2,359,589
<SHARES-REINVESTED> 243,651
<NET-CHANGE-IN-ASSETS> (128,973)
<ACCUMULATED-NII-PRIOR> 134,973
<ACCUMULATED-GAINS-PRIOR> 111,156
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 126,508
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 350,653
<AVERAGE-NET-ASSETS> 25,411,003
<PER-SHARE-NAV-BEGIN> 9.67
<PER-SHARE-NII> 1.04
<PER-SHARE-GAIN-APPREC> (1.05)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 1.06
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 08.60
<EXPENSE-RATIO> 01.39
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 862501
<NAME> INSTITUTIONAL FUNDS
<SERIES>
<NUMBER> 2
<NAME> INSTITUTIONAL EMERGING MARKET DEBT FUND
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-28-1999
<PERIOD-END> FEB-28-1999
<INVESTMENTS-AT-COST> 27,520,516
<INVESTMENTS-AT-VALUE> 27,341,767
<RECEIVABLES> 4,118,263
<ASSETS-OTHER> 51,647
<OTHER-ITEMS-ASSETS> 33,633
<TOTAL-ASSETS> 31,545,310
<PAYABLE-FOR-SECURITIES> 898,486
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 123,466
<TOTAL-LIABILITIES> 1,021,952
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 40,146,446
<SHARES-COMMON-STOCK> 6,162,939
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 3,107,909
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (10,018,738)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (178,749)
<NET-ASSETS> 30,523,358
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 3,279,137
<OTHER-INCOME> 0
<EXPENSES-NET> 171,228
<NET-INVESTMENT-INCOME> 3,107,909
<REALIZED-GAINS-CURRENT> (9,546,894)
<APPREC-INCREASE-CURRENT> (630,939)
<NET-CHANGE-FROM-OPS> (7,069,924)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 572,322
<DISTRIBUTIONS-OF-GAINS> 380,672
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 5,392,844
<NUMBER-OF-SHARES-REDEEMED> 1,783,891
<SHARES-REINVESTED> 530,921
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 63,023
<ACCUMULATED-GAINS-PRIOR> (471,443)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 159,813
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 341,423
<AVERAGE-NET-ASSETS> 22,956,216
<PER-SHARE-NAV-BEGIN> 07.21
<PER-SHARE-NII> 00.62
<PER-SHARE-GAIN-APPREC> (02.29)
<PER-SHARE-DIVIDEND> (01.67)
<PER-SHARE-DISTRIBUTIONS> 00.59
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 04.95
<EXPENSE-RATIO> 01.50
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
