<PAGE> 1
As filed with the Securities and Exchange Commission
on March 29, 1996
Registration Nos. 33-34423
811-06087
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
Pre-Effective Amendment No. / /
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Post-Effective Amendment No. 18 /X/
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and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
Amendment No. 20 /X/
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SALOMON BROTHERS SERIES FUNDS INC
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(Exact Name of Registrant as Specified in Charter)
7 World Trade Center
New York, New York 10048
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(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: (800) 725-6666
Lawrence H. Kaplan, Esq.
Salomon Brothers Asset Management Inc
7 World Trade Center
New York, New York 10048
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(Name and Address of Agent for Service)
Copies to:
Gary Schpero, Esq.
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, NY 10017
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<PAGE> 2
2
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:
/ / immediately upon filing pursuant to Rule 485(b)
/x/ on May 1, 1996 pursuant to Rule 485(b)
/ / 60 days after filing pursuant to Rule 485(a)
/ / 75 days after filing pursuant to Rule 485(a)
/ / on _______ pursuant to Rule 485(a)
The Registrant has previously registered an
indefinite number of its shares under the Securities Act of 1933, as amended,
pursuant to Rule 24f-2 under the Investment Company Act of 1940, as amended.
The Registrant filed its Rule 24f-2 Notice for the fiscal year ended December
31, 1995 on February 28, 1996.
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3
PRELIMINARY NOTE
The prospectus and statement of additional information for Salomon Brothers New
York Municipal Money Market Fund is incorporated by reference to Post-Effective
Amendment No. 13 as filed with the Securities and Exchange Commission on May 1,
1995.
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4
SALOMON BROTHERS SERIES FUNDS INC
Registration Statement on Form N-1A
CROSS REFERENCE SHEET APPLICABLE TO:
SALOMON BROTHERS CASH MANAGEMENT FUND, SALOMON BROTHERS NEW YORK MUNICIPAL BOND
FUND, SALOMON BROTHERS NATIONAL INTERMEDIATE MUNICIPAL FUND, SALOMON BROTHERS
U.S. GOVERNMENT INCOME FUND, SALOMON BROTHERS HIGH YIELD BOND FUND, SALOMON
BROTHERS STRATEGIC BOND FUND, SALOMON BROTHERS TOTAL RETURN FUND AND SALOMON
BROTHERS INVESTORS FUND INC
Pursuant to Rule 495(b)
under the Securities Act of 1933
<TABLE>
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N-1A Item No. Location
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Part A Prospectus Caption
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<S> <C> <C>
Item 1. Cover Page Cover Page
Item 2. Synopsis Summary; Expense Information
Item 3. Condensed Financial
Information Financial Highlights;
Performance Information
Item 4. General Description of
Registrant Investment Objectives and Policies; Additional Investment
Activities and Risk Factors; Investment Limitations; Capital
Stock
Item 5. Management of the Fund Summary; Expense Information; Management; Purchase of
Shares; Back Cover
Item 5A. Management's Discussion of
Performance Not Applicable
Item 6. Capital Stock and Other
</TABLE>
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5
<TABLE>
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Securities Multiple Pricing System; Dividends and Distributions;
Taxation; Account Services; Capital Stock
Item 7. Purchase of Securities
Being Offered Multiple Pricing System; Purchase of Shares; Determination
of Net Asset Value; Dividends and Distributions; Shareholder
Services
Item 8. Redemption or Repurchase Multiple Pricing System; Redemption of Shares
Item 9. Pending Legal Proceedings Not Applicable
<CAPTION>
Statement of Additional
Part B Information Caption
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<S> <C> <C>
Item 10. Cover Page Cover Page
Item 11. Table of Contents Table of Contents
Item 12. General Information and
History Not applicable
Item 13. Investment Objectives and
Policies Additional Information on Portfolio Instruments and
Investment Policies; Investment Limitations
Item 14. Management of the Fund Management
Item 15. Control Persons and
Principal Holders
of Securities Management; Capital Stock
Item 16. Investment Advisory and
Other Services Management; Custodian and Transfer Agent; Independent
Accountants
Item 17. Brokerage Allocation and
Other Practices Portfolio Transactions
</TABLE>
<PAGE> 6
6
<TABLE>
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Item 18. Capital Stock and Other
Securities Capital Stock
Item 19. Purchase, Redemption and
Pricing of Securities
Being Offered Management; Net Asset Value; Additional Purchase
Information; Additional Redemption Information
Item 20. Tax Status Additional Information Concerning Taxes
Item 21. Underwriters Management; Additional Purchase Information
Item 22. Calculation of Performance
Data Performance Data
Item 23. Financial Statements Financial Statements
</TABLE>
Part C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C of this Registration Statement.
<PAGE> 7
7
SALOMON BROTHERS SERIES FUNDS INC
Registration Statement on Form N-1A
CROSS REFERENCE SHEET APPLICABLE TO:
SALOMON BROTHERS INSTITUTIONAL MONEY MARKET FUND
(formerly known as Salomon Brothers U.S. Treasury Securities
Money Market Fund)
Pursuant to Rule 495(b)
under the Securities Act of 1933
<TABLE>
<CAPTION>
N-1A Item No. Location Prospectus Caption
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<S> <C> <C>
Part A
Item 1. Cover Page Cover Page
Item 2. Synopsis Fee Table
Item 3. Condensed Financial
Information Financial Highlights; Performance Information
Item 4. General Description of
Registrant Highlights; Investment Objective and Policies; Additional
Investment Activities and Risk Factors; Investment
Limitations
Item 5. Management of the Fund Highlights; Fee Table; Management; Purchase and Redemption
of Shares
Item 5A. Management's Discussion of
Performance Not Applicable
Item 6. Capital Stock and Other
Securities Highlights; Dividends, Distributions and
Taxes; Capital Stock; Account Services
</TABLE>
<PAGE> 8
8
<TABLE>
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Item 7. Purchase of Securities
Being Offered Highlights; Purchase and Redemption of Shares; Management;
Dividends, Distributions and Taxes
Item 8. Redemption or Repurchase Highlights; Dividends, Distributions and Taxes; Purchase and
Redemption of Shares; Management
Item 9. Pending Legal Proceedings Not Applicable
Statement of Additional Information
<CAPTION>
Part B Caption
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<S> <C> <C>
Item 10. Cover Page Cover Page
Item 11. Table of Contents Table of Contents
Item 12. General Information and
History Not applicable.
Item 13. Investment Objectives and
Policies Additional Information on Portfolio Instruments and
Investment Policies; Investment Limitations
Item 14. Management of the Fund Management
Item 15. Control Persons and Principal
Holders of Securities Management
Item 16. Investment Advisory and
Other Services Management; Custodian and Transfer Agent;
Independent Accountants
Item 17. Brokerage Allocation and
Other Practices Portfolio Transactions
Item 18. Capital Stock and Other
Securities Capital Stock
</TABLE>
<PAGE> 9
9
<TABLE>
<S> <C> <C>
Item 19. Purchase, Redemption and
Pricing of Securities
Being Offered Management; Net Asset Value; Additional Purchase and
Redemption Information
Item 20. Tax Status Additional Information Concerning Taxes
Item 21. Underwriters Management; Additional Purchase and Redemption Information
Item 22. Calculation of Performance
Data Performance Data
Item 23. Financial Statements Financial Statements
</TABLE>
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SALOMON BROTHERS
INVESTMENT SERIES
- --------------------------------------------------------------------------------
PROSPECTUS &
APPLICATION
, 1996
-CASH MANAGEMENT FUND
-NEW YORK MUNICIPAL BOND FUND
-NATIONAL INTERMEDIATE MUNICIPAL
FUND
-U.S. GOVERNMENT INCOME FUND
-HIGH YIELD BOND FUND
-STRATEGIC BOND FUND
-TOTAL RETURN FUND
-ASIA GROWTH FUND
-INVESTORS FUND
For Information About Salomon Brothers Investment Series Consult The Following
Prospectus
<PAGE> 11
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH
THE U.S. SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE
SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION
STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER
TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE
OF THESE SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER, SOLICITATION
OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE
SECURITIES LAWS OF SUCH JURISDICTION.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS
DATED MARCH 29, 1996
<PAGE> 12
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SALOMON BROTHERS
INVESTMENT SERIES
7 WORLD TRADE CENTER - NEW YORK, NEW YORK 10048 - (800) SALOMON OR
(800) 725-6666
SALOMON BROTHERS INVESTMENT SERIES CONSISTS OF SALOMON BROTHERS CASH MANAGEMENT
FUND (THE "CASH MANAGEMENT FUND"), SALOMON BROTHERS NEW YORK MUNICIPAL BOND FUND
(THE "NEW YORK MUNICIPAL BOND FUND"), SALOMON BROTHERS NATIONAL INTERMEDIATE
MUNICIPAL FUND (THE "NATIONAL INTERMEDIATE MUNICIPAL FUND"), SALOMON BROTHERS
U.S. GOVERNMENT INCOME FUND (THE "U.S. GOVERNMENT INCOME FUND"), SALOMON
BROTHERS HIGH YIELD BOND FUND (THE "HIGH YIELD BOND FUND"), SALOMON BROTHERS
STRATEGIC BOND FUND (THE "STRATEGIC BOND FUND"), SALOMON BROTHERS TOTAL RETURN
FUND (THE "TOTAL RETURN FUND"), SALOMON BROTHERS ASIA GROWTH FUND (THE "ASIA
GROWTH FUND") AND SALOMON BROTHERS INVESTORS FUND INC (THE "INVESTORS FUND")
(EACH A "FUND" AND COLLECTIVELY, THE "FUNDS"). EACH OF THE FUNDS, EXCEPT FOR THE
INVESTORS FUND, IS AN INVESTMENT PORTFOLIO OF SALOMON BROTHERS SERIES FUNDS INC,
AN OPEN-END MANAGEMENT INVESTMENT COMPANY. THE INVESTORS FUND IS AN OPEN-END
MANAGEMENT INVESTMENT COMPANY. EACH OF THE FUNDS HAS A SPECIFIC INVESTMENT
OBJECTIVE.
continued on next page-
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THERE CAN BE NO ASSURANCE THAT ANY FUND WILL ACHIEVE ITS INVESTMENT OBJECTIVE(S)
AND EACH OF THE FUNDS MAY EMPLOY CERTAIN INVESTMENT PRACTICES WHICH INVOLVE
SPECIAL RISK CONSIDERATIONS. CERTAIN FUNDS MAY INVEST IN HIGH YIELD SECURITIES,
COMMONLY REFERRED TO AS JUNK BONDS, WHICH PRESENT A HIGH DEGREE OF RISK.
HIGH-YIELDING, LOWER-QUALITY SECURITIES INVOLVE COMPARATIVELY GREATER RISKS,
INCLUDING PRICE VOLATILITY AND THE RISK OF DEFAULT IN THE TIMELY PAYMENT OF
INTEREST AND PRINCIPAL, THAN HIGHER-QUALITY SECURITIES. SEE "ADDITIONAL
INVESTMENT ACTIVITIES AND RISK FACTORS."
This Prospectus sets forth concisely the information a prospective investor
should know before investing in a Fund. This Prospectus should be read and
retained for ready reference to information about a Fund. A Statement of
Additional Information dated , 1996, containing additional information
about each Fund (the "Statement of Additional Information") has been filed with
the Securities and Exchange Commission (the "SEC") and is hereby incorporated by
reference into this Prospectus. It is available without charge and can be
obtained by writing or calling at the address and telephone number printed
above.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
SALOMON BROTHERS ASSET MANAGEMENT INC--INVESTMENT MANAGER
SALOMON BROTHERS INC--DISTRIBUTOR
, 1996
PAGE 1
<PAGE> 13
continued from previous page
- - The CASH MANAGEMENT FUND seeks as high a level of current income as is
consistent with liquidity and the stability of principal. The Fund invests in
high-quality, short-term U.S. dollar-denominated money market instruments, and
seeks to maintain a stable net asset value of $1.00 per share. THERE IS NO
ASSURANCE THAT A STABLE NET ASSET VALUE OF $1.00 PER SHARE WILL BE MAINTAINED.
INVESTMENTS IN THE FUND ARE NOT GUARANTEED OR INSURED BY THE U.S. GOVERNMENT.
- - The NEW YORK MUNICIPAL BOND FUND seeks to achieve a high level of current
income which is exempt from regular federal income taxes and New York State and
New York City personal income taxes, consistent with the preservation of
capital. The Fund invests primarily in a portfolio of municipal obligations the
interest on which is exempt from regular federal income taxes and from the
personal income taxes of New York State and New York City. The Fund will not
invest in municipal obligations that are rated below investment grade at the
time of purchase.
- - The NATIONAL INTERMEDIATE MUNICIPAL FUND seeks a high level of current income
which is exempt from regular federal income taxes. The Fund seeks to achieve its
objective by investing primarily in a portfolio of municipal obligations. The
Fund will not invest in municipal obligations that are rated below investment
grade at the time of purchase.
- - The U.S. GOVERNMENT INCOME FUND seeks a high level of current income. The Fund
seeks to achieve its objective by investing in securities issued or guaranteed
by the U.S. government, its agencies or instrumentalities.
- - The HIGH YIELD BOND FUND seeks to maximize current income. The Fund seeks to
achieve its objective by investing primarily in a diversified portfolio of high
yield fixed-income securities rated in medium or lower rating categories or
determined by the investment manager to be of comparable quality. As a secondary
objective, the Fund will seek capital appreciation.
- - The STRATEGIC BOND FUND seeks a high level of current income. As a secondary
objective, the Fund will seek capital appreciation. The Fund seeks to achieve
its objectives by investing in a globally diverse portfolio of fixed-income
investments and by giving the investment manager broad discretion to deploy the
Fund's assets among certain segments of the fixed-income market that the
investment manager believes will best contribute to achievement of the Fund's
investment objectives. In pursuing its investment objectives, the Strategic Bond
Fund reserves the right to invest predominantly in securities rated in medium or
lower rating categories or as determined by the investment manager to be of
comparable quality. Although the Fund's investment manager has the ability to
invest up to 100% of the Fund's assets in lower-rated securities, the Fund's
investment manager does not anticipate investing in excess of 75% of the Fund's
assets in such securities.
- - The TOTAL RETURN FUND seeks to obtain above-average income (compared to a
portfolio entirely invested in equity securities). As a secondary objective, the
Fund seeks to take advantage of opportunities for growth of capital and income.
The Fund seeks to achieve its objectives primarily through investments in a
broad variety of securities, including equity securities, fixed-income
securities and short-term obligations.
- - The ASIA GROWTH FUND seeks long-term capital appreciation. The Fund seeks to
achieve its objective by investing at least 65% of its total assets in equity
and equity-related securities of Asian Companies (as defined in this
Prospectus).
- - The INVESTORS FUND seeks long-term growth of capital. Current income is a
secondary objective. The Fund seeks to achieve its objectives primarily through
investments in common stocks of well-known companies.
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TABLE OF CONTENTS
<TABLE>
<S> <C>
Summary 4
Expense Information 9
Financial Highlights 14
Investment Objectives and Policies 22
Additional Investment Activities and Risk Factors 48
Multiple Pricing System 67
Investment Limitations 72
Management 75
Determination of Net Asset Value 81
Purchase of Shares 82
Redemption of Shares 89
Performance Information 93
Dividends and Distributions 95
Taxation 97
Shareholder Services 101
Account Services 104
Capital Stock 104
Appendix A A-1
Appendix B B-1
</TABLE>
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SUMMARY
THE FUNDS
Each of the Funds, except for the Investors Fund, is an investment portfolio of
the Salomon Brothers Series Funds Inc (the "Series Funds"), an open-end
investment company incorporated in Maryland on April 17, 1990. The National
Intermediate Municipal Fund, the U.S. Government Income Fund, the High Yield
Bond Fund, the Strategic Bond Fund, the Total Return Fund and the Asia Growth
Fund are newly or recently organized portfolios of the Series Funds. The
Investors Fund is an open-end management investment company incorporated in
Maryland on April 2, 1958.
Each of the Funds, except the Asia Growth Fund, is diversified within the
meaning of the Investment Company Act of 1940, as amended (the "1940 Act").
THE FUNDS' OBJECTIVES AND POLICIES
CASH MANAGEMENT FUND. The objective of the Cash Management Fund is to seek as
high a level of current income as is consistent with liquidity and the stability
of principal. The Fund seeks to maintain a stable net asset value of $1.00 per
share. The Fund will seek to attain its objective by investing in a broad range
of high-quality, short-term U.S. dollar-denominated money market instruments
which are deemed to mature in thirteen months or less, including the following:
(1) securities issued or guaranteed as to principal and interest by the U.S.
government or by agencies or instrumentalities thereof, (2) obligations issued
or guaranteed by U.S. banks with total assets of at least $1 billion (including
obligations of foreign branches of such banks) and by the 75 largest foreign
commercial banks in terms of total assets, (3) high quality commercial paper and
other high-quality short-term debt obligations, and (4) obligations of the
International Bank for Reconstruction and Development, other supranational
organizations and foreign governments and their agencies and instrumentalities.
The Cash Management Fund may also enter into repurchase agreements with respect
to the obligations identified above.
NEW YORK MUNICIPAL BOND FUND. The objective of the New York Municipal Bond Fund
is to achieve a high level of current income which is exempt from regular
federal income taxes and New York State and New York City personal income taxes,
consistent with the preservation of capital. The Fund invests primarily in a
portfolio of municipal obligations the interest on which is exempt from regular
federal income taxes and from the personal income taxes of New York State and
New York City. The Fund will not invest in municipal obligations that are rated
below investment grade at the time of purchase.
NATIONAL INTERMEDIATE MUNICIPAL FUND. The objective of the National Intermediate
Municipal Fund is to achieve a high level of current income which is exempt from
regular federal income taxes. The Fund seeks to achieve its objective by
investing primarily in a portfolio of municipal obligations. The Fund will not
invest in municipal obligations that are rated below investment grade at the
time of purchase.
U.S. GOVERNMENT INCOME FUND. The objective of the U.S. Government Income Fund is
to seek a high level of current income. The Fund seeks to achieve its objective
by investing in securities issued or guaranteed by the U.S. government, its
agencies or instrumentalities. From time to time, a significant portion of the
Fund's assets may be invested in mortgage-backed securities. The Fund will not
knowingly
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SALOMON BROTHERS INVESTMENT SERIES
invest in "high risk mortgage securities" (as defined herein).
HIGH YIELD BOND FUND. The objective of the High Yield Bond Fund is to maximize
current income. The Fund seeks to achieve its objective by investing primarily
in a diversified portfolio of high yield fixed-income securities rated in medium
or lower rating categories or determined by the investment manager to be of
comparable quality. As a secondary objective, the Fund will seek capital
appreciation.
STRATEGIC BOND FUND. The primary objective of the Strategic Bond Fund is to seek
a high level of current income. As a secondary objective, the Fund will seek
capital appreciation. The Fund seeks to achieve its objectives by investing in a
globally diverse portfolio of fixed-income investments and by giving the
investment manager broad discretion to deploy the Fund's assets among certain
segments of the fixed-income market that the investment manager believes will
best contribute to achievement of the Fund's investment objectives. In pursuing
its investment objectives, the Strategic Bond Fund reserves the right to invest
predominantly in securities rated in medium or lower rating categories or as
determined by the investment manager to be of comparable quality. Although the
investment manager has the ability to invest up to 100% of the Strategic Bond
Fund's assets in lower-rated securities, the investment manager does not
anticipate investing in excess of 75% of the assets in such securities.
TOTAL RETURN FUND. The Total Return Fund seeks to obtain above-average income
(compared to a portfolio entirely invested in equity securities). As a secondary
objective, the Fund seeks to take advantage of opportunities for growth of
capital and income. The Fund seeks to achieve its objectives primarily through
investments in a broad variety of securities, including equity securities,
fixed-income securities and short-term obligations.
ASIA GROWTH FUND. The Asia Growth Fund's objective is long-term capital
appreciation. The Fund seeks to achieve its objective by investing at least 65%
of its total assets in equity and equity-related securities of Asian Companies
(as defined under "Investment Objectives and Policies").
INVESTORS FUND. The Investors Fund's primary objective is long-term growth of
capital. Current income is a secondary objective. The Fund seeks to achieve its
objectives primarily through investments in common stocks of well-known
companies.
There can be no assurance that the investment objective(s) of any Fund will be
achieved. See "Investment Objectives and Policies."
INVESTMENT MANAGER
Salomon Brothers Asset Management Inc ("SBAM"), an affiliate of Salomon Brothers
Inc ("Salomon Brothers"), is the investment manager of the Funds. SBAM also
serves as investment manager to other investment companies and numerous
individuals and institutions. For its services as investment manager, the Cash
Management Fund pays SBAM a monthly fee at an annual rate of .20% of the Fund's
average daily net assets; the New York Municipal Bond Fund pays SBAM a monthly
fee at an annual rate of .50% of the Fund's average daily net assets; the
National Intermediate Municipal Fund pays SBAM a monthly fee at an annual rate
of .50% of the Fund's average daily net assets; the U.S. Government Income Fund
pays SBAM a monthly fee at an annual rate of .60% of the Fund's average daily
net assets; the High Yield Bond Fund pays SBAM a monthly fee at an annual rate
of .75% of the Fund's average daily net assets; the Strategic Bond Fund pays
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SALOMON BROTHERS INVESTMENT SERIES
SBAM a monthly fee at an annual rate of .75% of the Fund's average daily net
assets; the Total Return Fund pays SBAM a monthly fee at an annual rate of .55%
of the Fund's average daily net assets; the Asia Growth Fund pays SBAM a monthly
fee at an annual rate of .80% of the Fund's average daily net assets and the
Investors Fund pays SBAM a performance-based fee which consists of a quarterly
base fee, based on the Fund's average daily net assets, at an annual rate of
.50% of the Fund's first $350 million, .40% on the next $150 million, .375% on
the next $250 million, .35% on the next $250 million and .30% on the amount in
excess of $1 billion, and which may be increased or decreased based on the
performance of the Investors Fund relative to the investment record of the
Standard & Poor's 500 Index of Composite Stocks (the "S&P 500 Index"). See
"Management."
With respect to the Strategic Bond Fund, SBAM has entered into a subsidiary
consulting agreement with its affiliate, Salomon Brothers Asset Management
Limited ("SBAM Limited") pursuant to which SBAM Limited will provide certain
advisory services to SBAM relating to currency transactions and investments in
non-dollar denominated debt securities for the benefit of the Fund. Subject to
the supervision of SBAM, Salomon Brothers Asia Pacific Limited ("SBAM AP") will
serve as a sub-adviser to the Asia Growth Fund. SBAM Limited and SBAM AP are
compensated by SBAM at no additional cost to the Funds.
PURCHASE OF SHARES
Shares of each Fund may be purchased at their next determined net asset value
plus, in the case of Class A shares, a front end sales charge, from a selected
dealer or as otherwise set forth under "Purchase of Shares." The minimum initial
investment in any class of shares in any Fund is $500 and the minimum subsequent
investment is $50. However, for Individual Retirement Accounts ("IRAs") and
Self-Employed Retirement Plans (formerly Keogh Plans), the minimum initial
investment in any class of shares of any Fund is $50. In addition, an account
can be established with a minimum of $50 if the account will be receiving
periodic, regular investments through programs such as Automatic Investment
Plans, Automatic Dividend Diversification and Systematic Investing. See
"Purchase of Shares" and "Shareholder Services."
REDEMPTION OF SHARES
Each Fund redeems shares at the applicable next determined net asset value, less
the applicable contingent deferred sales charge ("CDSC"), if any. The value of
shares at the time of redemption may be more or less than the shareholder's
cost, depending on the market value of the securities held by the Fund at such
time. See "Redemption of Shares."
CLASSES OF SHARES
Each Fund offers three classes of shares ("Class A" shares, "Class B" shares and
"Class C" shares) to the general public, with each class having different sales
charge structures and expense levels (the "Multiple Pricing System"). In
addition, each Fund has Class O shares which are offered only to existing Class
O shareholders. Each class has distinct advantages and disadvantages for
different investors, and investors may choose the class that best suits their
circumstances and objectives. See "Multiple Pricing System."
CLASS A SHARES. Class A shares are offered for sale at net asset value per share
plus a front end sales charge of up to 4.75% (with the exception of Class A
shares of the Cash Management Fund, which are offered without such a charge). In
addition, Class A shares are subject to an ongoing 12b-1 service fee at an
annual rate of .25% of their respective average
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<PAGE> 18
SALOMON BROTHERS INVESTMENT SERIES
daily net assets (with the exception of Class A shares of the Cash Management
Fund, which bear no such fees). Certain purchases of Class A shares qualify for
a waived or reduced front end sales charge. Certain Class A shares for which the
front end sales charge is waived may be subject to a CDSC of 1% within one year
after the date of purchase. See "Purchase of Shares--Class A Shares" and
"Redemption of Shares--Class A Share Purchases of $1 million or more."
CLASS B SHARES. Class B shares are offered for sale for purchases of less than
$250,000. Class B shares are sold at net asset value without a front end sales
charge but are subject to a CDSC of 5% of the dollar amount subject thereto
during the first and second year after purchase, and declining each year
thereafter to 0% after the sixth year (with the exception of Class B shares of
the Cash Management Fund, which are not subject to any CDSC upon redemption).
The applicable percentage is assessed on an amount equal to the lesser of the
original purchase price or the redemption price of the shares redeemed. Class B
shares are also subject to an ongoing 12b-1 distribution fee at an annual rate
of .75% of their respective average daily net assets and an ongoing 12b-1
service fee at an annual rate of .25% of their respective average daily net
assets (with the exception of Class B shares of the Cash Management Fund, which
bear no such fees). Class B shares (except for shares of the Cash Management
Fund) will automatically convert, based upon relative net asset value, to Class
A shares of the same Fund six years after purchase. Upon conversion, these
shares will no longer be subject to an annual distribution fee.
CLASS C SHARES. Class C shares are offered for sale for purchases of less than
$1,000,000, are offered at net asset value without a front end sales charge and
are subject to a CDSC of 1% of the dollar amount subject thereto on redemptions
made within one year of purchase (with the exception of Class C shares of the
Cash Management Fund, which are not subject to any CDSC upon redemption). The
CDSC is assessed on an amount equal to the lesser of the original purchase price
or the redemption price of the shares redeemed. Class C shares are subject to an
ongoing 12b-1 distribution fee at an annual rate of .75% of their respective
average daily net assets and an ongoing 12b-1 service fee at an annual rate of
.25% of their respective average daily net assets (with the exception of Class C
shares of the Cash Management Fund, which bear no such fees). Class C shares
(except for shares of the Cash Management Fund) will automatically convert,
based upon relative net asset value, to Class A shares of the same Fund ten
years after purchase. Upon conversion, these shares will no longer be subject to
an annual distribution fee.
CLASS O SHARES. Each Fund also offers Class O shares. However, only Class O
shareholders are permitted to purchase additional Class O shares. Class O shares
are not subject to any sales charges or 12b-1 fees.
For a discussion of factors to consider in selecting the most beneficial class
of shares for a particular investor, see "Multiple Pricing System--Factors for
Consideration."
DIVIDENDS AND DISTRIBUTIONS
Substantially all of the net investment income of the Cash Management Fund, the
New York Municipal Bond Fund, the National Intermediate Municipal Fund, the U.S.
Government Income Fund, the High Yield Bond Fund, the Strategic Bond Fund and
the Total Return Fund will be declared as a daily dividend, and shareholders
will receive such dividends monthly. The Asia Growth Fund will declare dividends
from net investment income annually and pay them annually. The Investors Fund
will pay dividends from net investment income quarterly. Each Fund will pay net
realized long-term
PAGE 7
<PAGE> 19
SALOMON BROTHERS INVESTMENT SERIES
capital gains annually. It is anticipated that the expenses incurred by each
class of each fund (other than Cash Management Fund) will differ and accordingly
the dividends distributed by each such class will differ. See "Dividends and
Distributions." Dividends and distributions are reinvested in additional shares
of the same class of a Fund unless a shareholder requests otherwise. Shares
acquired by dividend and distribution reinvestments will not be subject to any
sales charge or CDSC. Class B and Class C shares acquired through dividend and
distribution reinvestments will become eligible for conversion to Class A shares
on a pro rata basis. A portion of the dividends of the New York Municipal Bond
Fund and the National Intermediate Municipal Fund may be subject to the federal
alternative minimum tax. See "Multiple Pricing System," "Dividends and
Distributions" and "Taxation."
RISK FACTORS
Prospective investors should consider certain risks associated with an
investment in each Fund. Certain Funds may use various investment practices that
involve special considerations, including investing in high yield and/or
illiquid securities, investing in foreign securities (including emerging market
securities), investing in warrants, investing in municipal obligations, entering
into repurchase and reverse repurchase agreements, entering into securities
transactions on a firm commitment or when issued basis, investing in zero coupon
securities, investing in loan participations and assignments, lending portfolio
securities and high portfolio turnover rates. Certain Funds may engage in
derivatives which involve special risks. Because the New York Municipal Bond
Fund intends to significantly invest in New York municipal obligations it is
more susceptible to factors adversely affecting issuers of such obligations than
a comparable municipal securities fund that is not so concentrated. See
"Investment Objectives and Policies" and "Additional Investment Activities and
Risk Factors."
PAGE 8
<PAGE> 20
- --------------------------------------------------------------------------------
EXPENSE INFORMATION
Each Fund offers multiple classes of shares. Each share of a Fund accrues income
in the same manner, but certain expenses differ based upon the class. The
following tables are intended to assist investors in understanding the various
costs and expenses applicable to each class of shares of each Fund:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS O(D)
-------------------------------------------------------------
<S> <C> <C> <C> <C>
SHAREHOLDERS TRANSACTION EXPENSES
Maximum Sales Charge Imposed on
Purchases of Shares (as a percentage
of offering price)
All Funds except Cash Management 4.75%(a) None None None
Fund
Cash Management Fund None None None None
Sales Charge Imposed on Reinvested
Dividends
All Funds None None None None
Contingent Deferred Sales Charge
(as a percentage of original
purchase price or redemption
price, whichever is lower)
All Funds except Cash Management 1% during the 5% first year, 1% during None
Fund first year for 5% second year, the first
purchases of 4% third year, year(c)
$1 million or 3% fourth year,
more(b) 2% fifth year,
1% sixth year, and
0% after sixth year(c)
Cash Management Fund None None None None
Redemption Fees
All Funds None None None None
Exchange Fee
All Funds None None None None
</TABLE>
------------------------------------------------------------------
(a) Reduced for purchases of $50,000 and over, decreasing to 0% for purchases
of $1,000,000 and over. See "Purchase of Shares--Class A Shares."
(b) See "Purchase of Shares--Class A Shares" and "Redemption of Shares--Class A
Shares."
(c) See "Purchase of Shares--Class B Shares" and "--Class C Shares" and
"Redemption of Shares--Class B Shares" and "--Class C Shares."
(d) Only Class O shareholders are permitted to purchase additional Class O
shares.
PAGE 9
<PAGE> 21
SALOMON BROTHERS INVESTMENT SERIES
ANNUAL FUND OPERATING EXPENSES
Information in the table below is given as a percentage of average daily net
assets after fee waivers and expense reimbursements in certain cases, as
indicated. Each of the National Intermediate Municipal Fund, U.S. Government
Income Fund, High Yield Bond Fund and Strategic Bond Fund commenced investment
operations on February 22, 1995 and Total Return Fund commenced investment
operations on September 11, 1995. Information shown in the table below with
respect to these Funds, therefore, is annualized.
<TABLE>
<CAPTION>
FUND CLASS A CLASS B CLASS C CLASS O
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------
CASH MANAGEMENT
Management fees (after waiver)+ -- -- -- --
Rule 12b-1 fees -- -- -- --
Other expenses (after reimbursement)*+ .55% .55% .55% .55%
--- --- --- ---
Total fund operating expenses (after waiver and reimbursement)+ .55% .55% .55% .55%
NEW YORK MUNICIPAL BOND
Management fees (after waiver)+ -- -- -- --
Rule 12b-1 fees** .25% 1.00% 1.00% --
Other expenses (after reimbursement)*+ .50% .50% .50% .50%
--- --- --- ---
Total fund operating expenses (after waiver and reimbursement)+ .75% 1.50% 1.50% .50%
NATIONAL INTERMEDIATE MUNICIPAL
Management fees (after waiver)+ -- -- -- --
Rule 12b-1 fees** .25% 1.00% 1.00% --
Other expenses (after reimbursement)*+ .50% .50% .50% .50%
--- --- --- ---
Total fund operating expenses (after waiver and reimbursement)+ .75% 1.50% 1.50% .50%
U.S. GOVERNMENT INCOME
Management fees (after waiver)+ -- -- -- --
Rule 12b-1 fees** .25% 1.00% 1.00% --
Other expenses (after reimbursement)*+ .60% .60% .60% .60%
--- --- --- ---
Total fund operating expenses (after waiver and reimbursement)+ .85% 1.60% 1.60% .60%
HIGH YIELD BOND
Management fees (after waiver)++ .20% .20% .20% .20%
Rule 12b-1 fees** .25% 1.00% 1.00% --
Other expenses*+ .79% .76% .78% .80%
--- --- --- ---
Total fund operating expenses (after waiver)++ 1.24% 1.96% 1.98% 1.00%
STRATEGIC BOND
Management fees (after waiver)+ -- -- -- --
Rule 12b-1 fees** .25% 1.00% 1.00% --
Other expenses (after reimbursement)*+ .98% .97% .99% .99%
--- --- --- ---
Total fund operating expenses (after waiver and reimbursement)+ 1.23% 1.97% 1.99% .99%
TOTAL RETURN
Management fees (after waiver)+ -- -- -- --
Rule 12b-1 fees** .25% 1.00% 1.00% --
Other expenses (after reimbursement)*+ .49% .49% .51% .51%
--- --- --- ---
Total fund operating expenses (after waiver and reimbursement)+ .74% 1.49% 1.51% .51%
ASIA GROWTH
Management fees .80% .80% .80% .80%
Rule 12b-1 fees** .25% 1.00% 1.00% --
Other expenses (after reimbursement)***+++ .19% .19% .19% .19%
--- --- --- ---
Total fund operating expenses (after reimbursement)*** 1.24% 1.99% 1.99% .99%
INVESTORS
Management fees**** .41% .41% .41% .41%
Rule 12b-1 fees** .25% 1.00% 1.00% --
Other expenses* .28% .30% .27% .28%
--- --- --- ---
Total fund operating expenses .94% 1.71% 1.68% .69%
</TABLE>
PAGE 10
<PAGE> 22
SALOMON BROTHERS INVESTMENT SERIES
------------------------------------------------------------------
+ Reflects the voluntary waiver of management fees and reimbursement of
certain expenses by SBAM for the period ended December 31, 1995. Absent
such waiver and reimbursement, the ratio of management fees to the
average daily net assets for each class of shares of Cash Management,
New York Municipal Bond, National Intermediate Municipal, U.S.
Government Income, Strategic Bond and Total Return would be .20%, .50%,
.50%, .60%, .75% and .55% respectively, the ratio of other expenses to
average daily net assets of (i) Cash Management would be 1.15%, 1.14%,
1.14% and 1.14% for Class A, Class B, Class C and Class O, respectively,
(ii) New York Municipal Bond would be 2.21%, 2.20%, 2.21% and 2.21% for
Class A, Class B, Class C and Class O, respectively, (iii) National
Intermediate would be .96%, .95%, .96% and .96% for Class A, Class B,
Class C and Class O, respectively, (iv) U.S. Government Income would be
1.05%, 1.04%, 1.04% and 1.04% for Class A, Class B, Class C and Class O,
respectively, (v) Strategic Bond would be 1.11%, 1.10%, 1.12% and 1.12%
for Class A, Class B, Class C and Class O, respectively and (vi) Total
Return would be .65%, .64%, .67% and .67%, respectively, and the ratio
of total fund operating expenses to the average daily net assets of (i)
Cash Management would be 1.35%, 1.34%, 1.34% and 1.34% for Class A,
Class B, Class C and Class O, respectively, (ii) New York Municipal Bond
would be 2.96%, 3.70%, 3.71% and 2.71% for Class A, Class B, Class C and
Class O, respectively, (iii) National Intermediate Municipal would be
1.71%, 2.45%, 2.46% and 1.46% for Class A, Class B, Class C and Class O,
respectively, (iv) U.S. Government Income would be 1.90%, 2.64%, 2.64%
and 1.64% for Class A, Class B, Class C and Class O, respectively, (v)
Strategic Bond would be 2.11%, 2.85%, 2.87% and 1.87% for Class A, Class
B, Class C and Class O, respectively, and (vi) Total Return would be
1.45%, 2.19%, 2.22% and 1.22%, respectively. For the fiscal year ended
December 31, 1996, SBAM has voluntarily agreed to impose an expense cap
on each Fund's total fund operating expenses at the amounts shown for
each Fund in the table above through reimbursement of expenses and, to
the extent necessary, waiver of management fees.
* The amounts set forth for "Other expenses" are based on the Fund's
operating expenses for the fiscal year ended December 31, 1995 which are
calculated as a percentage of average daily net assets and includes fees
for shareholder services, administrative fees, custodial fees, legal and
accounting fees, printing costs and registration fees.
** Upon conversion, Class B and Class C shares will no longer be subject to
a distribution fee. Salomon Brothers receives an annual 12b-1 service
fee of .25% of the value of average daily net assets of Class A shares,
and receives an annual 12b-1 fee of 1.00% of the value of average daily
net assets of Class B and Class C shares, consisting of a .75%
distribution fee and a .25% service fee. See "Multiple Pricing
System--Conversion Feature."
++ Reflects the voluntary partial waiver of the management fees by SBAM for
the fiscal year ended December 31, 1995. Absent such waiver, the ratio
of management fees to the average daily net assets for each class of
shares of the High Yield Bond Fund would be .75% and the ratio of total
fund operating expenses to the average daily net assets would be 1.80%,
2.51%, 2.54% and 1.55% for Class A, Class B, Class C and Class O,
respectively. For the fiscal year ended December 31, 1996, SBAM has
voluntarily agreed to impose an expense cap on the total fund operating
expenses at the amount shown in the table above through reimbursement of
expenses and, to the extent necessary, waiver of management fees.
*** Reflects a voluntary expense cap which SBAM has agreed to impose for the
fiscal year ended December 31, 1996. Absent such expense cap, the ratio
of other expenses to average daily net assets would be .77%, .77%, .77%
and .77% for Class A, Class B, Class C and Class O, respectively, and
the ratio of total fund operating expenses to the average daily net
assets would be 1.82%, 2.57%, 2.57% and 1.57% for Class A, Class B,
Class C and Class O, respectively.
+++ As of the date of this Prospectus, the Fund had not yet commenced
investment operations. The amounts set forth for "Other Expenses" are
therefore based on estimates for the current fiscal year and will
include fees for shareholder services, administrative fees, custodial
fees, legal and accounting fees, printing costs and registration fees.
**** The Investors Fund pays a performance-based management fee. Management
fees included in the table above reflect the performance of the Fund
through the year ended December 31, 1995. See "Management."
The fees and expenses listed under the caption "Annual Fund Operating Expenses"
are described in this Prospectus under the captions "Management" and "Purchase
of Shares--Distributor."
For additional information with respect to the expenses identified in the table
above, see "Management" in the Statement of Additional Information.
PAGE 11
<PAGE> 23
SALOMON BROTHERS INVESTMENT SERIES
EXAMPLE:
The following table demonstrates the projected dollar amount of total cumulative
expenses that would be incurred over various periods with respect to a
hypothetical investment in each class of each Fund. The example assumes payment
by each Fund of operating expenses at the levels set forth in the preceding
table and are also based upon the following assumptions:
An investor would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time period, with the
exception of the lines marked "Class B No redemption," in which case it is
assumed that no redemption is made at the end of each time period:
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CASH MANAGEMENT
Class A Shares $ 6 $ 18 $ 31 $ 69
Class B Shares $ 6 $ 18 $ 31 $ 69
Class C Shares $ 6 $ 18 $ 31 $ 69
Class O Shares $ 6 $ 18 $ 31 $ 69
NEW YORK MUNICIPAL BOND
Class A Shares* $55 $ 70 $ 87 $ 136
Class B Shares** $65 $ 87 $102 $ 140***
Class B No redemption $15 $ 47 $ 82 $ 140***
Class C Shares** $25 $ 47 $ 82 $ 179
Class O Shares $ 5 $ 16 $ 28 $ 63
NATIONAL INTERMEDIATE MUNICIPAL
Class A Shares* $55 $ 70 $ 87 $ 136
Class B Shares** $65 $ 87 $102 $ 140***
Class B No redemption $15 $ 47 $ 82 $ 140***
Class C Shares** $25 $ 47 $ 82 $ 179
Class O Shares $ 5 $ 16 $ 28 $ 63
U.S. GOVERNMENT INCOME
Class A Shares* $56 $ 73 $ 92 $ 147
Class B Shares** $66 $ 90 $107 $ 151***
Class B No redemption $16 $ 50 $ 87 $ 151***
Class C Shares** $26 $ 50 $ 87 $ 190
Class O Shares $ 6 $ 19 $ 33 $ 75
HIGH YIELD BOND
Class A Shares* $60 $ 85 $112 $ 190
Class B Shares** $70 $102 $126 $ 193***
Class B No redemption $20 $ 62 $106 $ 193***
Class C Shares** $30 $ 62 $107 $ 231
Class O Shares $10 $ 32 $ 55 $ 122
STRATEGIC BOND
Class A Shares* $59 $ 85 $112 $ 189
Class B Shares** $70 $102 $126 $ 193***
Class B No redemption $20 $ 62 $106 $ 193***
Class C Shares** $30 $ 62 $107 $ 231
Class O Shares $10 $ 32 $ 55 $ 122
TOTAL RETURN
Class A Shares* $55 $ 70 N/A N/A
Class B Shares** $65 $ 87 N/A N/A
Class B No redemption $15 $ 47 N/A N/A
Class C Shares** $25 $ 48 N/A N/A
Class O Shares $ 5 $ 16 N/A N/A
</TABLE>
PAGE 12
<PAGE> 24
SALOMON BROTHERS INVESTMENT SERIES
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------
ASIA GROWTH
Class A Shares* $60 $ 85 N/A N/A
Class B Shares** $70 $102 N/A N/A
Class B No redemption $20 $ 62 N/A N/A
Class C Shares** $30 $ 62 N/A N/A
Class O Shares $10 $ 32 N/A N/A
INVESTORS
Class A Shares* $57 $ 76 $ 97 $ 157
Class B Shares** $67 $ 94 $113 $ 163***
Class B No redemption $17 $ 54 $ 93 $ 163***
Class C Shares** $27 $ 53 $ 91 $ 199
Class O Shares $ 7 $ 22 $ 38 $ 86
</TABLE>
------------------------------------------------------------------
* Assumes deduction at the time of purchase of the maximum 4.75% sales
charge.
** Assumes deduction at the time of redemption of the maximum CDSC applicable
for that time period.
*** Reflects the conversion to Class A shares six years after purchase, and
therefore years seven through ten reflect Class A expenses.
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES FOR ANY OF THE FUNDS MAY BE HIGHER OR LOWER THAN THE
AMOUNTS SHOWN IN THE FEE TABLES. Moreover, while the example assumes a 5% annual
return, each Fund's performance will vary and may result in a return greater or
less than 5%.
Because a portion of the 12b-1 fees payable by Class B and Class C shares is
considered an asset based sales charge by the National Association of Securities
Dealers, Inc. ("NASD"), long-term shareholders in Class B and Class C of each
Fund (other than the Cash Management Fund) may pay more than the economic
equivalent of the maximum front end sales charges permitted by the NASD.
The information in the foregoing summary is qualified in its entirety by the
more detailed information appearing elsewhere in this Prospectus and in the
Statement of Additional Information.
PAGE 13
<PAGE> 25
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
The following data per share of capital stock outstanding throughout each period
and ratios should be read in conjunction with the financial statements of the
applicable Fund contained in the Statement of Additional Information. The
financial statements and financial highlights of the Cash Management Fund, the
New York Municipal Bond Fund, National Intermediate Fund, U.S. Government Income
Fund, High Yield Bond Fund, Strategic Bond Fund, Total Return Fund and the
Investors Fund for each of the periods indicated for the applicable Fund have
been audited by Price Waterhouse LLP, whose unqualified reports thereon are
included in the Statement of Additional Information. The Statement of Additional
Information may be obtained by shareholders by writing or calling at the address
or telephone number printed on the front cover. Financial highlights are not
presented for any class of shares of the Asia Growth Fund since no such shares
were outstanding during those periods. As of the close of business on December
31, 1994, all existing shares of the Cash Management Fund, the New York
Municipal Bond Fund and the Investors Fund were reclassified as Class O shares.
PAGE 14
<PAGE> 26
(THIS PAGE INTENTIONALLY LEFT BLANK)
PAGE 15
<PAGE> 27
SALOMON BROTHERS INVESTMENT SERIES
CASH MANAGEMENT FUND
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
----------------------------------
YEAR ENDED DECEMBER 31, 1995
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period $1.000 $1.000 $1.000
-------- -------- --------
Net investment income 0.044 0.043 0.043
Dividends from net investment income (0.044) (0.043) (0.043)
-------- -------- --------
Net asset value, end of period $1.000 $1.000 $1.000
======== ======== ========
Net assets, end of period (thousands) $1,756 $2,238 $ 183
Total return* +4.5% +4.4% +4.4%
Ratio to average net assets:
Expenses 0.55% 0.55% 0.55%
Net investment income 5.42% 5.38% 5.40%
Before waiver of management fee, expenses absorbed by
SBAM and credits earned on custodian cash balances,
net investment income per share would have been:
Net investment income per share $0.037 $0.037 $0.036
Expense ratio 1.35% 1.34% 1.34%
</TABLE>
NEW YORK MUNICIPAL BOND FUND
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
----------------------------------
YEAR ENDED DECEMBER 31, 1995
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period $ 8.96 $ 8.96 $ 8.96
-------- -------- --------
Net investment income 0.42 0.36 0.36
Net gain (loss) on securities and futures
(both realized and unrealized) 1.14 1.14 1.14
-------- -------- --------
Total from investment operations 1.56 1.50 1.50
-------- -------- --------
Dividends from net investment income (0.41) (0.35) (0.35)
Distributions from net realized gain on securities and
futures -- -- --
-------- -------- --------
Total dividends and distributions (0.41) (0.35) (0.35)
-------- -------- --------
Net asset value, end of period $10.11 $10.11 $10.11
======== ======== ========
Net assets, end of period (thousands) $ 546 $ 528 $ 266
Total return* +17.7% +17.0% +17.0%
Ratios to average net assets:
Expenses 0.75% 1.50% 1.50%
Net investment income 5.12% 4.30% 4.38%
Portfolio turnover rate 22% 22% 22%
Before waiver of management fee, expenses absorbed by
SBAM and credits earned on custodian cash balances,
net investment income per share and expense ratios
would have been:
Net investment income per share $0.24 $0.17 $0.18
Expense ratio 2.96% 3.70% 3.71%
</TABLE>
------------------------------------------------------------------
(a) February 1, 1993, commencement of investment operations, through December
31, 1993.
(b) October 2, 1990, commencement of operations, through December 31, 1990.
* 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 payable date, and a sale at net asset value on the last day of each
period reported. Initial sales charge or contingent deferred sales charge is
not reflected in the calculation of total return. Total return calculated
for a period of less than one year is not annualized.
** Annualized.
PAGE 16
<PAGE> 28
SALOMON BROTHERS INVESTMENT SERIES
<TABLE>
<CAPTION>
CLASS O
- -------------------------------------------------------------------
PERIOD
ENDED
YEAR ENDED DECEMBER 31, DECEMBER
- ------------------------------------------------------- 31,
1995 1994 1993 1992 1991 1990(b)
- -------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
------ ------ ------ ------ ------ ------
0.055 0.038 0.027 0.033 0.055 0.019
(0.055) (0.038) (0.027) (0.033) (0.055) (0.019)
------ ------ ------ ------ ------ ------
$ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
====== ====== ====== ====== ====== ======
$ 6,684 $19,127 $15,049 $11,613 $22,982 $10,293
+5.6% +3.9% +2.7% +3.4% +5.7% +1.9%
0.55% 0.61% 0.65% 0.65% 0.65% 0.65%**
5.46% 3.79% 2.68% 3.41% 5.43% 7.46%**
$ 0.047 $ 0.036 $ 0.025 $ 0.030 $ 0.053 $ 0.018
1.34% 0.81% 0.85% 0.85% 0.85% 0.97%**
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------
CLASS O
- --------------------------------
PERIOD
YEAR ENDED DECEMBER ENDED
31, DECEMBER
- ------------------- 31,
1995 1994 1993(a)
- --------------------------------
<S> <C> <C>
$ 8.98 $ 10.44 $ 10.00
------ ------ ------
0.53 0.55 0.46
1.12 (1.46) 0.46
------ ------ ------
1.65 (0.91) 0.92
------ ------ ------
(0.52) (0.55) (0.46)
-- -- (0.02)
------ ------ ------
(0.52) (0.55) (0.48)
------ ------ ------
$ 10.11 $ 8.98 $ 10.44
====== ====== ======
$ 2,494 $ 3,333 $ 8,364
+18.8% -8.8% +9.4%
0.50% 0.50% 0.50%**
5.50% 5.72% 4.99%**
22% 63% 24%
$ 0.32 $ 0.49 $ 0.40
2.71% 1.17% 1.24%**
</TABLE>
PAGE 17
<PAGE> 29
SALOMON BROTHERS INVESTMENT SERIES
NATIONAL INTERMEDIATE MUNICIPAL FUND
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS O
-----------------------------------------------
PERIOD ENDED DECEMBER 31, 1995(a)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $10.00 $10.00 $10.00 $10.00
-------- -------- -------- --------
Net investment income 0.40 0.34 0.34 0.42
Net gain on investments (both realized and
unrealized) 0.46 0.45 0.45 0.46
-------- -------- -------- --------
Total from investment operations 0.86 0.79 0.79 0.88
-------- -------- -------- --------
Dividends from net investment income (0.40) (0.34) (0.34) (0.42)
Distributions from net realized gain on investments (0.03) (0.03) (0.03) (0.03)
-------- -------- -------- --------
Total dividends and distributions (0.43) (0.37) (0.37) (0.45)
-------- -------- -------- --------
Net asset value, end of period $10.43 $10.42 $10.42 $10.43
========= ======== ========= =========
Net assets, end of period (thousands) $ 569 $ 432 $ 271 $9,675
Total return* +8.7% +8.0% +8.0% +9.0%
Ratios to average net assets:
Expenses 0.75%** 1.50%** 1.50%** 0.50%**
Net investment income 4.63%** 3.85%** 3.85%** 4.86%**
Portfolio turnover rate 29% 29% 29% 29%
Before waiver of management fee, expenses absorbed
by SBAM and credits earned on custodian cash
balances, net investment income per share and
expense ratios would have been:
Net investment income per share $0.32 $ 0.25 $ 0.25 $ 0.34
Expense ratio 1.71%** 2.45%** 2.46%** 1.46%**
</TABLE>
U.S. GOVERNMENT INCOME FUND
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS O
-----------------------------------------------
PERIOD ENDED DECEMBER 31, 1995(a)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $10.00 $10.00 $10.00 $10.00
-------- -------- -------- --------
Net investment income 0.49 0.43 0.43 0.52
Net gain on investments
(both realized and unrealized) 0.43 0.43 0.43 0.42
-------- -------- -------- --------
Total from investment operations 0.92 0.86 0.86 0.94
-------- -------- -------- --------
Dividends from net investment income (0.49) (0.43) (0.43) (0.52)
Distributions from net realized gain on investments (0.10) (0.10) (0.10) (0.10)
Distributions in excess of net realized gain on
investments (0.01) (0.01) (0.01) --
-------- -------- -------- --------
Total dividends and distributions (0.60) (0.54) (0.54) (0.62)
-------- -------- -------- --------
Net asset value, end of period $10.32 $10.32 $10.32 $10.32
========= ======== ========= =========
Net assets, end of period (thousands) $ 278 $ 572 $ 273 $9,552
Total return* +9.5% +8.8% +8.8% +9.7%
Ratios to average net assets:
Expenses 0.85%** 1.60%** 1.60%** 0.60%**
Net investment income 5.67%** 4.85%** 4.92%** 5.92%**
Portfolio turnover rate 230% 230% 230% 230%
Before waiver of management fee, expenses absorbed
by SBAM and credits earned on custodian cash
balances, net investment income per share and
expense ratios would have been:
Net investment income per share $0.40 $ 0.34 $ 0.34 $ 0.42
Expense ratio 1.90%** 2.64%** 2.64%** 1.64%**
</TABLE>
------------------------------------------------------------------
(a) February 22, 1995, commencement of investment operations, through December
31, 1995.
* 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 payable date, and a sale at net asset value on the last day of each
period reported. Initial sales charge or contingent deferred sales charge is
not reflected in the calculation of total return. Total return calculated
for a period of less than one year is not annualized.
** Annualized.
PAGE 18
<PAGE> 30
SALOMON BROTHERS INVESTMENT SERIES
HIGH YIELD BOND FUND
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS O
-----------------------------------------------
PERIOD ENDED DECEMBER 31, 1995(a)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $10.00 $10.00 $10.00 $10.00
-------- -------- -------- --------
Net investment income 0.92 0.85 0.85 0.95
Net gain on investments
(both realized and unrealized) 0.67 0.68 0.68 0.67
-------- -------- -------- --------
Total from investment operations 1.59 1.53 1.53 1.62
-------- -------- -------- --------
Dividends from net investment income (0.91) (0.85) (0.85) (0.93)
Distributions from net realized gain on investments (0.15) (0.15) (0.15) (0.15)
-------- -------- -------- --------
Total dividends and distributions (1.06) (1.00) (1.00) (1.08)
-------- -------- -------- --------
Net asset value, end of period $10.53 $10.53 $10.53 $10.54
========= ======== ========= =========
Net assets, end of period (thousands) $10,789 $10,108 $1,274 $7,854
Total return* +16.6% +15.7% +15.8% +16.8%
Ratios to average net assets:
Expenses 1.24%** 1.96%** 1.98%** 1.00%**
Net investment income 10.58%** 9.53%** 9.61%** 10.59%**
Portfolio turnover rate 109% 109% 109% 109%
Before waiver of management fee by SBAM and credits
earned on custodian cash balances, net investment
income per share and expense ratios would have
been:
Net investment income per share $ 0.87 $ 0.80 $ 0.80 $ 0.90
Expense ratio 1.80%** 2.51%** 2.54%** 1.55%**
</TABLE>
STRATEGIC BOND FUND
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS O
-----------------------------------------------
PERIOD ENDED DECEMBER 31, 1995(a)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $10.00 $10.00 $10.00 $10.00
-------- -------- -------- --------
Net investment income 0.84 0.76 0.77 0.87
Net gain on investments
(both realized and unrealized) 0.78 0.79 0.78 0.77
-------- -------- -------- --------
Total from investment operations 1.62 1.55 1.55 1.64
-------- -------- -------- --------
Dividends from net investment income (0.85) (0.78) (0.78) (0.87)
Distributions from net realized gain on investments (0.24) (0.24) (0.24) (0.24)
-------- -------- -------- --------
Total dividends and distributions (1.09) (1.02) (1.02) (1.11)
-------- -------- -------- --------
Net asset value, end of period $10.53 $10.53 $10.53 $10.53
========= ======== ========= =========
Net assets, end of period (thousands) $ 513 $1,879 $ 411 $9,763
Total return* +16.8% +16.1% +16.1% +17.0%
Ratios to average net assets:
Expenses 1.23%** 1.97%** 1.99%** 0.99%**
Net investment income 9.51%** 8.75%** 8.77%** 9.74%**
Portfolio turnover rate 161% 161% 161% 161%
Before waiver of management fee, expenses absorbed
by SBAM and credits earned on custodian cash
balances, net investment income per share and
expense ratios would have been:
Net investment income per share $ 0.76 $ 0.69 $ 0.70 $ 0.79
Expense ratio 2.11%** 2.85%** 2.87%** 1.87%**
</TABLE>
------------------------------------------------------------------
(a) February 22, 1995, commencement of investment operations, through December
31, 1995.
* 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 payable date, and a sale at net asset value on the last day of each
period reported. Initial sales charge or contingent deferred sales charge is
not reflected in the calculation of total return. Total return calculated
for a period of less than one year is not annualized.
** Annualized.
PAGE 19
<PAGE> 31
SALOMON BROTHERS INVESTMENT SERIES
TOTAL RETURN FUND
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS O
<S> <C> <C> <C> <C>
---------------------------------------------
PERIOD ENDED DECEMBER 31, 1995(A)SEC.
- ---------------------------------------------------
Net asset value, beginning of period $10.00 $10.00 $10.00 $10.00
-------- -------- -------- --------
Net investment income 0.15 0.13 0.14 0.17
Net gain on investments
(both realized and unrealized) 0.52 0.51 0.51 0.52
-------- -------- -------- --------
Total from investment operations 0.67 0.64 0.65 0.69
-------- -------- -------- --------
Dividends from net investment income (0.11) (0.09) (0.08) (0.11)
Distributions from net realized gain on investments (0.01) (0.01) (0.01) (0.01)
-------- -------- -------- --------
Total dividends and distributions (0.12) (0.10) (0.09) (0.12)
-------- -------- -------- --------
Net asset value, end of period $10.55 $10.54 $10.56 $10.57
========= ======== ========= =========
Net assets, end of period (thousands) $3,658 $5,378 $ 445 $4,494
Total return* +6.7% +6.4% +6.5% +6.9%
Ratios to average net assets:
Expenses 0.74%** 1.49%** 1.51%** 0.51%**
Net investment income 4.82%** 4.06%** 4.26%** 5.30%**
Portfolio turnover rate 16% 16% 16% 16%
Before waiver of management fee, expenses absorbed
by SBAM and credits earned on custodian cash
balances, net investment income per share and
expense ratios would have been:
Net investment income per share $ 0.13 $ 0.11 $ 0.11 $ 0.15
Expense ratio 1.45%** 2.19%** 2.22%** 1.22%**
</TABLE>
INVESTORS FUND
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
<S> <C> <C> <C>
----------------------------------
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995
- -------
<S> <C> <C> <C>
Net
asset
value,
beginning
of
period $13.61 $13.61 $13.61
-------- -------- --------
Net
investment
income 0.19 0.10 0.09
Net
gain
(loss)
on
investments
(both
realized
and
unrealized) 4.55 4.54 4.55
-------- -------- --------
Total
from
investment
operations 4.74 4.64 4.64
-------- -------- --------
Dividends
from
net
investment
income (0.23) (0.14) (0.14)
Distributions
from net
realized
gain on
investments (1.50) (1.50) (1.50)
-------- -------- --------
Total
dividends
and
distributions (1.73) (1.64) (1.64)
-------- -------- --------
Net
asset
value,
end
of
period $16.62 $16.61 $16.61
========= ======== =========
Net
assets,
end
of
period
(thousands) $ 441 $ 716 $ 306
Total
return* +35.3% +34.5% +34.5%
Ratios
to
average
net
assets:
Expenses 0.94% 1.71% 1.68%
Net
investment
income 1.41% 0.63% 0.66%
Portfolio
turnover
rate 86% 86% 86%
</TABLE>
------------------------------------------------------------------
(a) September 11, 1995, commencement of investment operations, through December
31, 1995.
sec. Per share information calculated using the average shares outstanding
method, which more accurately represent amounts.
* 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. Initial sales charge or contingent deferred sales charge is
not reflected in the calculation of total return. Total return calculated for
a period of less than one year is not annualized.
** Annualized.
*** Includes $.05 per share of non cash income and special dividends received in
1989.
+ Since May 1, 1990, the Fund has been managed by SBAM. Prior thereto, the
Lehman Management Co. division of Shearson Lehman Brothers Inc. served as the
Fund's investment manager.
PAGE 20
<PAGE> 32
SALOMON BROTHERS INVESTMENT SERIES
<TABLE>
<CAPTION>
CLASS O
----------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990+ 1989 1988 1987 1986
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 13.63 $ 15.60 $ 16.10 $ 17.10 $ 14.54 $ 16.65 $ 15.55 $ 14.77 $ 17.37 $ 19.86
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
0.27 0.27 0.32 0.41 0.44 0.49 0.66*** 0.52 0.49 0.51
4.48 (0.48) 2.03 0.79 3.68 (1.555) 2.66 1.885 (.32) 2.085
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
4.75 (0.21) 2.35 1.20 4.12 (1.065) 3.32 2.405 .17 2.595
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
(0.27) (0.27) (0.33) (0.41) (0.46) (0.55) (.63) (.525) (.51) (.535)
(1.50) (1.49) (2.52) (1.79) (1.10) (0.495) (1.59) (1.10) (2.26) (4.55)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
(1.77) (1.76) (2.85) (2.20) (1.56) (1.045) (2.22) (1.625) (2.77) (5.085)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
$ 16.61 $ 13.63 $ 15.60 $ 16.10 $ 17.10 $ 14.54 $ 16.65 $ 15.55 $ 14.77 $ 17.37
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
$428,950 $348,214 $386,147 $370,350 $378,615 $330,814 $393,747 $362,742 $352,272 $396,610
+35.4% -1.3% +15.1% +7.4% +29.3% -6.5% +21.8% +16.9% +0.7% +14.4%
0.69% 0.69% 0.68% 0.68% 0.70% 0.68% 0.63% 0.67% 0.58% 0.57%
1.67% 1.75% 1.90% 2.47% 2.67% 3.13% 3.76% 3.32% 2.37% 2.56%
86% 66% 79% 48% 44% 22% 36% 54% 80% 62%
</TABLE>
- --------------------------------------------------------------------------------
PAGE 21
<PAGE> 33
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVES
AND POLICIES
The investment objective(s) of each Fund are deemed to be fundamental policies
and may not be changed without the affirmative vote of the holders of a majority
of its outstanding shares as defined in the 1940 Act. There is no assurance that
any particular Fund will achieve its investment objective(s).
CASH MANAGEMENT FUND
The investment objective of the Cash Management Fund is to seek as high a level
of current income as is consistent with liquidity and the stability of
principal. The Fund invests in high-quality, short-term U.S. dollar-denominated
money market instruments which are deemed to mature in thirteen months or less,
and is managed so that the average portfolio maturity of all portfolio
instruments (on a dollar-weighted basis) will not exceed 90 days. The Fund will
be "diversified" within the meaning of the 1940 Act, and will seek to maintain a
stable net asset value of $1.00 per share.
The types of obligations in which the Cash Management Fund may invest include
the following:
(1) Securities issued or guaranteed by the U.S. government or by agencies or
instrumentalities thereof;
(2) Obligations issued or guaranteed by U.S. banks with total assets of at least
$1 billion (including obligations of foreign branches of such banks) and by the
75 largest foreign commercial banks in terms of total assets;
(3) High-quality commercial paper and other high-quality short-term debt
obligations; and
(4) Obligations of the International Bank for Reconstruction and Development,
other supranational organizations and foreign governments and their agencies and
instrumentalities.
The Cash Management Fund may also enter into repurchase agreements with respect
to the obligations identified above. While the maturity of the underlying
securities in a repurchase agreement transaction may be more than thirteen
months, the term of the repurchase agreement will always be less than thirteen
months. For a description of repurchase agreements and their associated risks,
see "Additional Investment Activities and Risk Factors-- Repurchase Agreements."
Securities issued or guaranteed by the U.S. government or by its agencies or
instrumentalities include obligations of several kinds. Such securities in
general include a wide variety of U.S. Treasury obligations consisting of bills,
notes and bonds, which principally differ only in their interest rates,
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 the investment manager is satisfied
that the credit risk with respect to the issuer is minimal.
The Cash Management Fund will, as a fundamental policy, invest at least 25% of
the current value of its total assets in bank obligations (including bank
obligations subject to repurchase agreements). However, if at some future date
adverse conditions prevail in the banking industry or in the market for bank
obligations, the
PAGE 22
<PAGE> 34
SALOMON BROTHERS INVESTMENT SERIES
Fund, for temporary defensive purposes, may temporarily invest less than 25% of
its assets in bank obligations. Bank obligations that may be purchased by the
Fund consist of obligations issued or guaranteed by U.S. banks with total assets
of at least $1 billion (including obligations issued by foreign branches of such
banks) and by the 75 largest foreign commercial banks in terms of total assets.
Such obligations include certificates of deposit, commercial paper, bankers'
acceptances and fixed time deposits. Fixed time deposits are obligations of
branches of U.S. banks or foreign banks which are payable at a stated maturity
date and bear a fixed rate of interest. Although fixed time deposits do not have
a market, there are no contractual restrictions on the right to transfer a
beneficial interest in the deposit to a third party. For a discussion of the
risks associated with investing in bank obligations, see "Additional Investment
Activities and Risk Factors--Bank Obligations."
The commercial paper that may be purchased by the Cash Management Fund consists
of direct obligations of domestic issuers which are (i) rated in the highest
short-term rating category by at least two nationally recognized statistical
rating organizations ("NRSROs") or by the only NRSRO that has rated the
security; or (ii) if not rated, are of an investment quality comparable to rated
commercial paper in which the Fund may invest.
The Cash Management Fund's investments in corporate debt securities will consist
of non-convertible corporate debt securities such as bonds and debentures of
domestic issuers that have thirteen months or less remaining to maturity and are
of an investment quality comparable to rated commercial paper in which the Fund
may invest.
Obligations of the International Bank for Reconstruction and Development (also
known as the "World Bank") and certain other supranational organizations are
supported by subscribed but unpaid commitments of member countries. There is no
assurance that these commitments will be undertaken or complied with in the
future. The Cash Management Fund limits its investments in obligations of
foreign governments and their agencies and instrumentalities to U.S. dollar-
denominated commercial paper and other short-term notes issued or guaranteed by
the governments or agencies and instrumentalities of Western Europe, including
the United Kingdom, Spain, Portugal, Greece, Austria, France, West Germany,
Belgium, the Netherlands, Italy, Switzerland, Denmark, Norway, Sweden, Finland
and Ireland, and of Australia, New Zealand, Japan and Canada. The Fund will
purchase these obligations only if such obligations, in the opinion of the
investment manager based on guidelines established by the Fund's Board of
Directors, are of comparable quality to corporate obligations in which the Fund
may invest.
The Cash Management Fund may also invest in high quality, short-term municipal
obligations that carry yields that are competitive with those of other types of
money market instruments in which the Fund may invest. Dividends paid by the
Fund derived from interest on municipal obligations that may be purchased by it
will be taxable to shareholders for federal income tax purposes because the Fund
will not qualify as an entity that can pass through the tax-exempt character of
such interest.
The Cash Management Fund may invest in floating and variable rate obligations
with stated maturities in excess of thirteen months upon compliance with certain
conditions contained in Rule 2a-7 promulgated under the 1940 Act, in which case
such obligations will be treated, in accordance with Rule 2a-7, as having
maturities not exceeding thirteen months. For a further discussion of such
obligations, see "Additional Investment Activities and Risk Factors--Floating
and Variable Rate Instruments."
PAGE 23
<PAGE> 35
SALOMON BROTHERS INVESTMENT SERIES
The Cash Management Fund may also invest in variable amount master demand notes.
A variable amount master demand note differs from ordinary commercial paper in
that it is issued pursuant to a written agreement between the issuer and the
holder, its amount may from time to time be increased by the holder (subject to
an agreed maximum) or decreased by the holder or the issuer, it is payable on
demand, the rate of interest payable on it varies with an agreed formula and it
is not typically rated by a rating agency.
The Cash Management Fund may also purchase asset-backed securities. Asset-backed
securities represent defined interests in an underlying pool of assets. Such
securities may be issued as pass-through certificates, which represent undivided
fractional interests in the underlying pool of assets. Alternatively,
asset-backed securities may be issued as interests, generally in the form of
debt securities, in a special purpose entity organized solely for the purpose of
owning the underlying assets and issuing such securities. In the latter case,
such securities are secured by and payable from a stream of payments generated
by the underlying assets. The assets underlying asset-backed securities are
often a pool of assets similar to one another, such as motor vehicle receivables
or credit card receivables. Alternatively, the underlying assets may be
particular types of securities, various contractual rights to receive payments
and/or other types of assets. Asset-backed securities frequently carry credit
protection in the form of extra collateral, subordinate certificates, cash
reserve accounts, letters of credit or other enhancements. Any asset-backed
securities held by the Fund must comply with its portfolio maturity and credit
quality requirements. For a further discussion of asset backed securities and
the risks associated therewith, see "Additional Information on Portfolio
Instruments and Investment Policies-- Asset-Backed Securities" in the Statement
of Additional Information.
Among the municipal obligations that the Cash Management Fund may invest in are
participation certificates in a lease, an installment purchase contract or a
conditional sales contract (hereinafter collectively called "lease obligations")
entered into by a State or a political subdivision to finance the acquisition or
construction of equipment, land or facilities. For a further discussion of
municipal lease obligations, see "Additional Investment Activities and Risk
Factors--Municipal Lease Obligations." Certain investments in lease obligations
may be illiquid. The Fund may not invest in illiquid lease obligations if such
investments, together with all other illiquid investments, would exceed 10% of
the Fund's net assets. The Fund may, however, invest without regard to such
limitation in lease obligations which the investment manager, pursuant to
guidelines which have been adopted by the Board of Directors and subject to the
supervision of the Board, determines to be liquid.
The Cash Management Fund may purchase securities on a firm commitment basis,
including when-issued securities. See "Additional Investment Activities and Risk
Factors--Firm Commitments and When-Issued Securities" for a description of such
securities and their associated risks.
In view of the fundamental policy of the Cash Management Fund to invest at least
25% of its assets in bank obligations, except for temporary defensive purposes
as described above, an investment in the Cash Management Fund should be made
with an understanding of the characteristics of the banking industry and the
risks which such an investment may entail. See "Additional Investment Activities
and Risk Factors--Bank Obligations."
The Cash Management Fund is not authorized to use any of the various investment
strategies referred to under
PAGE 24
<PAGE> 36
SALOMON BROTHERS INVESTMENT SERIES
"Additional Investment Activities and Risk Factors--Derivatives."
Except with respect to investment by the Cash Management Fund of at least 25% of
its assets in bank obligations, as described above, the foregoing investment
policies and activities are not fundamental and may be changed by the Board of
Directors of the Cash Management Fund without the approval of shareholders.
NEW YORK MUNICIPAL BOND FUND
The New York Municipal Bond Fund's investment objective is to achieve a high
level of current income which is exempt from regular federal income taxes and
New York State and New York City personal income taxes, consistent with the
preservation of capital. The Fund invests primarily in a portfolio of municipal
obligations that are issued (i) by the State of New York and its cities,
municipalities and other public authorities, and (ii) by territories and
possessions of the United States and their respective authorities, agencies,
instrumentalities and political subdivisions, the interest on which is exempt
from regular federal income taxes and from personal income taxes of New York
State and New York City. All or a portion of the Fund's dividends paid in
respect of its shares may be subject to the federal alternative minimum tax. See
"Taxation." Under normal market conditions, the Fund will invest at least 65% of
its net assets in obligations the interest on which is exempt from personal
income taxes of New York State and New York City and at least 80% of its net
assets in obligations the interest on which is exempt from regular federal
income taxes.
The New York Municipal Bond Fund will not invest in municipal obligations that
are rated below investment grade at the time of purchase. However, the Fund may
retain in its portfolio a municipal obligation whose rating drops below Baa or
BBB after its acquisition by the Fund, if the investment manager considers the
retention of such obligation advisable. The Fund intends to emphasize
investments in municipal obligations with long-term maturities and expects to
maintain an average portfolio maturity of 20 to 30 years and an average
portfolio duration of 8 to 11 years. Duration is an approximate measure of the
sensitivity of the value of a fixed income security to changes in interest
rates. In general, the percentage change in a fixed income security's value in
response to changes in interest rates is a function of that security's duration
multiplied by the percentage point change in interest rates. The average
portfolio maturity and duration, however, may be shortened from time to time
depending on market conditions.
The types of obligations in which the New York Municipal Bond Fund may invest
include municipal bonds and municipal notes. The Fund may invest in municipal
bonds that are rated at the time of purchase within the four highest ratings
assigned by Moody's Investors Service, Inc. ("Moody's") or Standard and Poor's
Corporation ("S&P"), or determined by the investment manager to be of comparable
quality. The four highest ratings currently assigned by Moody's to municipal
bonds are Aaa, Aa, A and Baa; the four highest ratings assigned by S&P to
municipal bonds are AAA, AA, A and BBB. A description of the ratings used by
Moody's and S&P is set forth in Appendix A to this Prospectus.
Although municipal obligations rated in the fourth highest rating category by
Moody's (i.e., Baa) or S&P (i.e., BBB) are considered investment grade, they may
be subject to greater risks than other higher rated investment grade securities.
Municipal obligations rated Baa by Moody's, for example, are considered medium
grade obligations that lack outstanding investment characteristics and have
speculative characteristics as well. Municipal obligations rated BBB by S&P are
regarded as having an adequate
PAGE 25
<PAGE> 37
SALOMON BROTHERS INVESTMENT SERIES
capacity to pay principal and interest. Municipal bonds are debt obligations
that are typically issued to obtain funds for various public purposes, such as
construction of public facilities (e.g., airports, highways, bridges and
schools). Municipal bonds at the time of issuance are generally long-term
securities with maturities of as much as thirty years or more, but may have
remaining maturities of shorter duration at the time of purchase by the Fund.
The New York Municipal Bond Fund may invest in municipal notes rated at the time
of purchase MIG1, MIG2 (or VMIG-1 or VMIG-2, in the case of variable rate demand
notes), P-1, P-2 or better by Moody's or SP-1, SP-2, A-1, A-2 or better by S&P,
or determined by the investment manager to be of comparable quality.
Municipal notes are issued to meet the short-term funding requirements of local,
regional and state governments. Municipal notes generally have maturities at the
time of issuance of three years or less. Municipal notes that may be purchased
by the Fund include, but are not limited to tax anticipation notes ("TANs"),
bond anticipation notes ("BANs") and revenue anticipation notes ("RANs").
TANs are sold as interim financing in anticipation of collection of taxes. An
uncertainty in a municipal issuer's capacity to raise taxes as a result of such
things as a decline in its tax base or a rise in delinquencies could adversely
affect the issuer's ability to meet its obligations on outstanding TANs.
BANs are sold as interim financing in anticipation of a bond sale. The ability
of a municipal issuer to meet its obligations on its BANs is primarily dependent
on the issuer's adequate access to the longer term municipal bond market and the
likelihood that the proceeds of such bond sales will be used to pay the
principal of, and interest on, BANs.
RANs are sold as interim financing in anticipation of receipt of other revenues.
A decline in the receipt of certain revenues, such as anticipated revenues from
another level of government, could adversely affect an issuer's ability to meet
its obligations on outstanding RANs.
TANs, BANs and RANs are usually general obligations of the issuer.
Municipal obligations are debt obligations issued by or on behalf of states,
cities, municipalities and other public authorities. The two principal
classifications of municipal obligations that may be held by the New York
Municipal Bond Fund are "general obligation" securities and "revenue"
securities. General obligation securities are secured by the issuer's pledge of
its full faith, credit and taxing power for the payment of principal and
interest. Revenue securities are payable only from the revenues derived from a
particular facility or class of facilities or, in some cases, from the proceeds
of a special excise tax or other specific revenue source as the user of a
facility being financed. Revenue securities may include private activity bonds.
Such bonds may be issued by or on behalf of public authorities to finance
various privately operated facilities and are not payable from the unrestricted
revenues of the issuer. As a result, the credit quality of private activity
bonds is frequently related directly to the credit standing of private
corporations or other entities. In addition, the interest on private activity
bonds issued after August 7, 1986 is subject to the federal alternative minimum
tax. The Fund will not be restricted with respect to the proportion of its
assets that may be invested in such obligations. Accordingly, the Fund may not
be a suitable investment vehicle for individuals or corporations that are
subject to the federal alternative minimum tax.
The New York Municipal Bond Fund's portfolio may also include "moral obligation"
securities, which are normally issued by special purpose public authorities. If
the issuer of moral obligation securities is unable to meet its
PAGE 26
<PAGE> 38
SALOMON BROTHERS INVESTMENT SERIES
debt service obligations from current revenues, it may draw on a reserve fund,
the restoration of which is a moral commitment but not a legal obligation of the
state or municipality that created the issuer.
In addition, the New York Municipal Bond Fund may invest in municipal lease
obligations. Municipal lease obligations are not fully backed by the
municipality's credit and their interest may become taxable if the lease is
assigned. For a further discussion of municipal lease obligations, see
"Additional Investment Activities and Risk Factors--Municipal Lease
Obligations". The Fund also may invest in resource recovery bonds, which may be
general obligations of the issuing municipality or supported by corporate or
bank guarantees. The viability of the resource recovery project, environmental
protection regulations and project operator tax incentives may affect the value
and credit quality of resource recovery bonds.
The New York Municipal Bond Fund currently intends to invest substantially all
of its assets in obligations that are exempt from regular federal income taxes
and New York State and New York City personal income taxes. See "Taxation." To
the extent that the unavailability of suitable obligations for investment by the
Fund prevents it from investing substantially all of its assets in such
obligations, the Fund may purchase municipal obligations issued by other states,
their agencies or instrumentalities. Under normal market conditions, however,
the Fund will invest at least 65% of its net assets in obligations that are
exempt from regular federal income tax and New York State and New York City
personal income taxes, as described above. In addition, it is a fundamental
policy of the Fund to invest, under normal market conditions, at least 80% of
its net assets in obligations that are exempt from regular federal income tax.
If at some future date, in the opinion of the investment manager, adverse
conditions prevail in the market for obligations exempt from regular federal
income tax and from the personal income taxes of New York State and New York
City (including conditions under which such obligations are unavailable for
investment), the New York Municipal Bond Fund may, for temporary defensive
purposes, invest more than 35% of its assets in municipal obligations issued by
other states, their agencies or instrumentalities. Moreover, if at some future
date, in the opinion of the investment manager, adverse conditions should
prevail in the market for municipal bonds generally, the Fund may temporarily
invest without limitation in taxable high-quality short-term money market
instruments in order to maintain a defensive posture. To the extent that the
Fund deviates from its investment policies as a result of the unavailability of
suitable obligations or for other defensive purposes, its investment objective
of seeking income exempt from regular federal income taxes and the personal
income taxes of New York State and New York City may not be achieved.
The New York Municipal Bond Fund may purchase the following taxable high-quality
short-term money market instruments: obligations of the U.S. government or its
agencies or instrumentalities; commercial paper of issuers rated, at the time of
purchase, A-2 or better by S&P or P-2 or better by Moody's or which, in the
opinion of the investment manager, is of comparable quality; certificates of
deposit, banker's acceptances or time deposits of U.S. banks with total assets
of at least $1 billion (including obligations of foreign branches of such banks)
and of the 75 largest foreign commercial banks in terms of total assets
(including domestic branches of such banks), and repurchase agreements with
respect to such obligations.
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The New York Municipal Bond Fund may also purchase municipal commercial paper
that is rated at the time of purchase P-1 or P-2 or better by Moody's or A-1 or
A-2 or better by S&P, or determined by the investment manager to be of
comparable quality. Municipal commercial paper that may be purchased by the Fund
consists of short-term obligations of a municipality. Such paper is likely to be
issued to meet seasonal working capital needs of a municipality or as interim
construction financing. Municipal commercial paper, in many cases, is backed by
a letter of credit lending agreement, note repurchase agreement or other credit
facility agreement offered by banks or other institutions.
Certain of the obligations that the New York Municipal Bond Fund may purchase
may have a floating or variable rate of interest. For a description of these
obligations, see "Additional Investment Activities and Risk Factors--Floating
and Variable Rate Instruments."
The New York Municipal Bond Fund may purchase participation certificates issued
by a bank, insurance company or other financial institution in obligations that
may otherwise be purchased by the Fund. For a further discussion of
participation certificates, see "Additional Investment Activities and Risk
Factors--Participation Certificates."
The New York Municipal Bond Fund may invest in variable rate auction securities
and inverse floaters which are instruments created when an issuer or dealer
separates the principal portion of a long-term, fixed-rate municipal bond into
two long-term, variable-rate instruments. For a further discussion see
"Additional Investment Activities and Risk Factors--Variable Rate Auction
Securities and Inverse Floaters."
Because the New York Municipal Bond Fund will invest primarily in obligations
issued (i) by the State of New York and its cities, municipalities and other
public authorities, and (ii) by territories and possessions of the United States
and their respective authorities, agencies, instrumentalities and political
subdivisions the interest on which is exempt from regular federal income taxes
and from personal income taxes of New York State and New York City, it is more
susceptible to factors adversely affecting issuers of such obligations than a
comparable municipal securities fund that is not so concentrated. New York
State, New York City and other New York public bodies at times have encountered
and are encountering financial difficulties. Although New York State's financial
operations improved during the most recent fiscal years, the State incurred
budget deficits during the period 1989 through 1992 and both the State and the
City continue to face increasing debt levels. In the recent national recession,
the State has been more heavily impacted than the nation as a whole and has been
slower in recovering. The City and other State localities have required and
continue to require significant financial assistance from the State. In recent
years, the ratings on State and City general obligation bonds were downgraded by
Moody's and S&P. If either New York State or any of its local governmental
entities is unable to meet its financial obligations, the Fund's net asset value
per share and liquidity could be significantly adversely affected. See "Special
Factors Affecting New York Municipal Securities" in the Statement of Additional
Information for further information.
In addition, from time to time the New York Municipal Bond Fund may invest 25%
or more of its assets in municipal obligations that are related in such a way
that an economic, business or political development or change affecting one such
obligation could also affect the other obligations; for example, municipal
obligations the interest on which is paid from revenues of similar types of
projects.
Opinions relating to the validity of municipal obligations and to the
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SALOMON BROTHERS INVESTMENT SERIES
exemption of interest thereon from federal income tax and New York State and New
York City personal income taxes are rendered by bond counsel to the respective
issuers at the time of issuance. Neither the New York Municipal Bond Fund nor
the investment manager will review the proceedings relating to the issuance of
municipal obligations or the basis for such opinions.
The New York Municipal Bond Fund may purchase securities on a when-issued or
delayed delivery basis. See "Additional Investment Activities and Risk Factors--
Firm Commitments and When-Issued Securities" for a description of such
securities and their associated risks.
The New York Municipal Bond Fund may purchase securities for which there is a
limited trading market or which are subject to restrictions on resale to the
public. The Fund will not invest more than 15% of the value of its total assets
in illiquid securities, such as "restricted securities" which are illiquid, and
securities that are not readily marketable. For further discussion of illiquid
securities and their associated risks, see "Additional Investment Activities and
Risk Factors-- Restricted Securities and Securities with Limited Trading
Markets."
The New York Municipal Bond Fund is currently authorized to use only certain of
the various investment strategies referred to under "Additional Investment
Activities and Risk Factors--Derivatives." Specifically, the Fund may, in order
to further its objective, purchase or sell futures contracts on (a) debt
securities that are backed by the full faith and credit of the U.S. government,
such as long-term U.S. Treasury Bonds and Treasury Notes ("U.S. debt
securities") and (b) municipal bond indices. Currently, at least one exchange
trades futures contracts on an index of long-term municipal bonds, and the Fund
reserves the right to conduct futures transactions based on an index which may
be developed in the future to correlate with price movements in municipal
obligations. The Fund will only enter into futures contracts traded on
recognized domestic exchanges. The Fund does not intend to enter into futures
contracts on a regular basis, and will not do so if, as a result, the Fund will
have more than 25% of the value of its total assets committed to the completion
of such contracts. The Fund will not engage in futures transactions for
leveraging purposes. The Fund's ability to pursue these strategies may be
limited by applicable regulations of the SEC, the Commodity Futures Trading
Commission ("CFTC") and the federal income tax requirements applicable to
regulated investment companies. For a discussion of futures transactions,
including certain risks associated therewith, see "Additional Investment
Activities and Risk Factors-- Derivatives," Appendix B to this Prospectus and
the Statement of Additional Information.
The foregoing policies, other than the New York Municipal Bond Fund's investment
objective and its policy to invest at least 65% of its net assets, under normal
market conditions, in obligations the interest on which is exempt from personal
income taxes of New York State and New York City and at least 80% of its net
assets, under normal market conditions, in obligations the interest on which is
exempt from regular federal income taxes, are not fundamental and may be changed
by the Fund's Board of Directors without the approval of shareholders.
NATIONAL INTERMEDIATE MUNICIPAL FUND
The National Intermediate Municipal Fund's investment objective is to achieve a
high level of current income which is exempt from regular federal income taxes.
The Fund seeks to achieve its objective by investing primarily in a portfolio of
municipal obligations. The Fund will invest under normal circumstances, at least
80% of its net assets in municipal obligations the interest on which is
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SALOMON BROTHERS INVESTMENT SERIES
exempt from regular federal income tax. All or a portion of the Fund's dividends
paid in respect of its shares may be subject to the federal alternative minimum
tax. See "Taxation."
The National Intermediate Municipal Fund will not invest in municipal
obligations that are rated below investment grade at the time of purchase.
However, the Fund may retain in its portfolio a municipal obligation whose
rating drops below "Baa" or "BBB" after its acquisition by the Fund, if the
investment manager considers the retention of such obligation advisable. The
Fund intends to emphasize investments in municipal obligations with intermediate
maturities and expects to maintain a dollar-weighted average portfolio maturity
of 3 to 10 years. The average portfolio maturity, however, may be shortened from
time to time depending on market conditions.
The types of obligations in which the National Intermediate Municipal Fund may
invest include municipal bonds, municipal notes, municipal obligations, "moral
obligation" securities, resource recovery bonds, taxable high quality short-term
money market instruments and municipal commercial paper which are described
above under the investment objectives and policies of the New York Municipal
Bond Fund. The Fund may also invest in municipal lease obligations, floating and
variable rate obligations, participation certificates, variable rate auction
securities and inverse floaters which are described under "Additional Investment
Activities and Risk Factors." It is not presently anticipated that the Fund will
invest in variable rate auction securities or inverse floaters to any
significant degree.
The Fund may invest in municipal bonds that are rated at the time of purchase
within the four highest ratings assigned by Moody's, S&P or Fitch, or determined
by the investment manager to be of comparable quality. The four highest ratings
currently assigned by Moody's to municipal bonds are Aaa, Aa, A and Baa; the
four highest ratings assigned by S&P and Fitch to municipal bonds are AAA, AA, A
and BBB. A description of the ratings used by Moody's, S&P and Fitch is included
in Appendix A to this Prospectus, and the risks associated with municipal
obligations rated in the fourth highest rating category are described above
under the investment objectives and policies of the New York Municipal Bond
Fund.
The National Intermediate Municipal Fund may invest in municipal notes rated at
the time of purchase MIG1, MIG2 (or VMIG-1 or VMIG-2, in the case of variable
rate demand notes), P-2 or better by Moody's, SP-2, A-2 or better by S&P, or F-2
or better by Fitch, or determined by the investment manager to be of comparable
quality.
The National Intermediate Municipal Fund currently intends to invest
substantially all of its assets in obligations the interest on which is exempt
from regular federal income taxes. See "Taxation." However, in order to maintain
liquidity, the Fund may invest up to 20% of its assets in taxable obligations,
including taxable high-quality short-term money market instruments.
If at some future date, in the opinion of the investment manager, adverse
conditions prevail in the market for obligations exempt from regular federal
income taxes, the National Intermediate Municipal Fund may invest its assets
without limit in taxable high-quality short-term money market instruments, the
types and characteristics of which are set forth above in the discussion of
investment objectives and policies of the New York Municipal Bond Fund.
Dividends paid by the Fund that are attributable to interest derived from
taxable money market instruments will be taxable to investors.
Certain of the obligations that the National Intermediate Municipal Fund may
purchase may have a floating or
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SALOMON BROTHERS INVESTMENT SERIES
variable rate of interest. For a description of these obligations, see the
discussion set forth above of the investment objective and policies of the Cash
Management Fund.
From time to time, the National Intermediate Municipal Fund may invest more than
25% of its assets in obligations whose interest payments are from revenues of
similar projects (such as utilities or hospitals) or whose issuers share the
same geographic location. As a result, the Fund may be more susceptible to a
single economic, political or regulatory development than would a portfolio of
securities with a greater variety of issuers. These developments include
proposed legislation or pending court decisions affecting the financing of such
projects and market factors affecting the demand for their services or products.
Opinions relating to the validity of municipal obligations and to the exemption
of interest thereon from regular federal income tax are rendered by bond counsel
to the respective issuers at the time of issuance. Neither the National
Intermediate Municipal Fund nor the investment manager will review the
proceedings relating to the issuance of municipal obligations or the basis for
such opinions.
The National Intermediate Municipal Fund may purchase securities on a when-
issued or delayed delivery basis. See "Additional Investment Activities and Risk
Factors--Firm Commitments and When-Issued Securities" for a description of such
securities and their associated risks.
The National Intermediate Municipal Fund may purchase securities for which there
is a limited trading market or which are subject to restrictions on resale to
the public. The Fund will not invest more than 15% of the value of its total
assets in illiquid securities, such as "restricted securities" which are
illiquid, and securities that are not readily marketable. For further discussion
of illiquid securities and their associated risks, see "Additional Investment
Activities and Risk Factors-- Restricted Securities and Securities with Limited
Trading Markets."
The National Intermediate Municipal Fund is currently authorized to use only
certain of the various investment strategies referred to under "Additional
Investment Activities and Risk Factors-- Derivatives." Specifically, the Fund
may purchase or sell futures contracts on (a) debt securities that are backed by
the full faith and credit of the U.S. Government, such as long-term U.S.
Treasury Bonds and Treasury Notes and (b) municipal bond indices. Currently, at
least one exchange trades futures contracts on an index of long-term municipal
bonds, and the Fund reserves the right to conduct futures transactions based on
an index which may be developed in the future to correlate with price movements
in municipal obligations. The Fund will only enter into futures contracts traded
on recognized domestic exchanges. The Fund does not intend to enter into futures
contracts on a regular basis, and will not do so if, as a result, the Fund will
have more than 25% of the value of its total assets committed to the completion
of such contracts. The Fund will not engage in futures transactions for
leveraging purposes. The Fund's ability to pursue these strategies may be
limited by applicable regulations of the SEC, the CFTC and the federal income
tax requirements applicable to regulated investment companies. For a discussion
of futures transactions, including certain risks associated therewith, see
"Additional Investment Activities and Risk Factors-- Derivatives," Appendix B to
this Prospectus and the Statement of Additional Information.
The foregoing policies, other than the National Intermediate Municipal Fund's
investment objective, are not fundamental and may be changed by the Fund's Board
of Directors without the approval of shareholders.
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SALOMON BROTHERS INVESTMENT SERIES
U.S. GOVERNMENT INCOME FUND
The investment objective of the U.S. Government Income Fund is to obtain a high
level of current income. The Fund seeks to attain its objective by investing
under normal circumstances 100% of its assets in debt obligations and
mortgage-backed securities issued or guaranteed by the U.S. government, its
agencies or instrumentalities. The securities in which the U.S. Government
Income Fund may invest are:
(1) U.S. Treasury obligations;
(2) obligations issued or guaranteed by agencies or instrumentalities of the
U.S. government which are backed by their own credit and may not be backed by
the full faith and credit of the U.S. government;
(3) mortgage-backed securities guaranteed by the Government National Mortgage
Association ("GNMA"), popularly known as "Ginnie Maes," that are supported by
the full faith and credit of the U.S. government. Such securities entitle the
holder to receive all interest and principal payments due whether or not
payments are actually made on the underlying mortgages;
(4) mortgage-backed securities guaranteed by agencies or instrumentalities of
the U.S. government which are supported by their own credit but not the full
faith and credit of the U.S. government, such as the Federal Home Loan Mortgage
Corporation ("FHLMC") and the Federal National Mortgage Association; and
(5) collateralized mortgage obligations issued by private issuers for which the
underlying mortgage-backed securities serving as collateral are backed (i) by
the credit alone of the U.S. government agency or instrumentality which issues
or guarantees the mortgage-backed securities, or (ii) by the full faith and
credit of the U.S. government.
Any guarantee of the securities in which the U.S. Government Income Fund invests
runs only to principal and interest payments on the securities and not to the
market value of such securities or the principal and interest payments on the
underlying mortgages. In addition, the guarantee only runs to the portfolio
securities held by the U.S. Government Income Fund and not to the purchase of
shares of the Fund.
The U.S. Government Income Fund currently expects that it will maintain an
average portfolio effective duration of three to five years. Duration is an
approximate measure of the sensitivity of the value of a fixed income security
to changes in interest rates. In general, the percentage change in a fixed
income security's value in response to changes in interest rates is a function
of that security's duration multiplied by the percentage point change in
interest rates. The Fund may, however, invest in securities of any maturity or
effective duration and accordingly, the composition and weighted average
maturity of the Fund's portfolio will vary from time to time, based upon the
investment manager's determination of how best to achieve the Fund's investment
objective. With respect to mortgage-backed securities in which the Fund invests,
average maturity and duration are determined by using mathematical models that
incorporate prepayment assumptions and other factors that involve estimates of
future economic parameters. These estimates may vary from actual results,
particularly during periods of extreme market volatility. In addition, the
average maturity and duration of mortgage-backed derivative securities may not
accurately reflect the price volatility of such securities under certain market
conditions.
From time to time, a significant portion of the Fund's assets may be invested in
mortgage-backed securities. The mortgage-backed securities in which the U.S.
Government Income Fund invests
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SALOMON BROTHERS INVESTMENT SERIES
represent participating interests in pools of fixed rate and adjustable rate
residential mortgage loans issued or guaranteed by agencies or instrumentalities
of the U.S. government. Mortgage-backed securities are issued by lenders such as
mortgage bankers, commercial banks, and savings and loan associations. Mortgage-
backed securities generally provide monthly payments which are, in effect, a
"pass-through" of the monthly interest and principal payments (including any
prepayments) made by the individual borrowers on the pooled mortgage loans.
Principal prepayments result from the sale of the underlying property or the
refinancing or foreclosure of underlying mortgages.
The yield of the mortgage securities is based on the prepayment rates
experienced over the life of the security. Prepayments tend to increase during
periods of falling interest rates, while during periods of rising interest rates
prepayments will most likely decline. Reinvestment by the U.S. Government Income
Fund of scheduled principal payments and unscheduled prepayments may occur at
higher or lower rates than the original investment, thus affecting the yield of
the Fund. Monthly interest payments received by the Fund have a compounding
effect which will increase the yield to shareholders as compared to debt
obligations that pay interest semiannually. For further discussion of
mortgage-backed securities and collateralized mortgage obligations and their
associated risks, see "Additional Investment Activities and Risk Factors--
Mortgage-Backed Securities and "Additional Information on Portfolio Instruments
and Investment Policies--Mortgage-Backed Securities" in the Statement of
Additional Information.
While the U.S. Government Income Fund seeks a high level of current income, it
cannot invest in instruments such as lower grade corporate obligations which
offer higher yields but are subject to greater credit risks. The Fund will not
knowingly invest in a high risk mortgage security. The term "high risk mortgage
security" is defined generally as any mortgage security that exhibits
significantly greater price volatility than a benchmark security, the Federal
National Mortgage Association current coupon 30-year mortgage-backed pass
through security. Shares of the Fund are neither insured nor guaranteed by the
U.S. government, its agencies or instrumentalities. Neither the issuance by nor
the guarantee of a U.S. government agency for a security constitutes assurance
that the security will not significantly fluctuate in value or that the U.S.
Government Income Fund will receive the originally anticipated yield on the
security.
The U.S. Government Income Fund may enter into repurchase agreements and reverse
repurchase agreements, may purchase securities on a firm commitment basis,
including when-issued securities and may lend portfolio securities. The Fund
does not currently intend to make loans of portfolio securities with a value in
excess of 33% of the value of its total assets. The Fund may also enter into
mortgage "dollar rolls." For a description of these investment practices and the
risks associated therewith, see "Additional Investment Activities and Risk
Factors."
The U.S. Government Income Fund may purchase securities for which there is a
limited trading market or which are subject to restrictions on resale to the
public. The Fund will not invest more than 15% of the value of its total assets
in illiquid securities, such as "restricted securities" which are illiquid, and
securities that are not readily marketable. For further discussion of illiquid
securities and their associated risks, see "Additional Investment Activities and
Risk Factors--Restricted Securities and Securities with Limited Trading
Markets."
The U.S. Government Income Fund is not currently authorized to use any of the
various investment strategies referred to under "Additional Investment
Activities and Risk Factors--Derivatives." However,
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SALOMON BROTHERS INVESTMENT SERIES
such strategies may be used in the future by the Fund. The Fund's ability to
pursue certain of these strategies may be limited by applicable regulations of
the SEC, the CFTC and the federal income tax requirements applicable to
regulated investment companies. Appendix B to this Prospectus and the Statement
of Additional Information contain descriptions of these strategies and of
certain risks associated therewith.
The foregoing investment policies, other than the U.S. Government Income Fund's
investment objective, are not fundamental and may be changed by the Fund's Board
of Directors without the approval of shareholders.
HIGH YIELD BOND FUND
The High Yield Bond Fund's investment objective is to maximize current income.
The Fund seeks to achieve its objective by investing primarily in a diversified
portfolio of high yield fixed-income securities rated in medium or lower rating
categories or determined by the investment manager to be of comparable quality.
As a secondary objective, the High Yield Bond Fund will seek capital
appreciation.
The High Yield Bond Fund intends to invest, under normal market conditions, at
least 65% of its assets in securities rated "Baa" or lower by Moody's or "BBB"
or lower by S&P, or in securities determined by the investment manager to be of
comparable quality. The Fund may invest up to 35% of its total assets in foreign
fixed-income securities as more fully described below. 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. The lower-rated bonds in which the
Fund may invest are commonly referred to as "junk bonds."
An investment in the High Yield Bond Fund should not be considered as a complete
investment program for all investors. For further discussion of high yield
securities and the special risks associated therewith, see "Additional
Investment Activities and Risk Factors--High Yield Securities."
In light of the risks associated with high yield corporate and sovereign debt
securities, the investment manager will take various factors into consideration
in evaluating the creditworthiness of an issuer. For corporate debt securities,
these will typically include the issuer's financial resources, its sensitivity
to economic conditions and trends, the operating history of the issuer, and the
experience and track record of the issuer's management. For sovereign debt
instruments, these will typically include the economic and political conditions
within the issuer's country, the issuer's overall and external debt levels and
debt service ratios, the issuer's access to capital markets and other sources of
funding, and the issuer's debt service payment history. The investment manager
will also review the ratings, if any, assigned to the security by any recognized
rating agencies, although the investment manager's judgment as to the quality of
a debt security may differ from that suggested by the rating published by a
rating service. The High Yield Bond Fund's ability to achieve its investment
objective may be more dependent on the investment manager's credit analysis than
would be the case if it invested in higher quality debt securities. A
description of the ratings used by Moody's and S&P is set forth in Appendix A to
this Prospectus.
The investment manager will have discretion to select the range of maturities
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SALOMON BROTHERS INVESTMENT SERIES
of the fixed-income securities in which the High Yield Bond Fund may invest. The
investment manager anticipates that under current market conditions, the Fund
will have an average portfolio maturity of 10 to 15 years. However, the average
portfolio maturity may vary substantially from time to time depending on
economic and market conditions.
The High Yield Bond Fund may invest up to 35% of its total assets in foreign
fixed-income securities all or a portion of which may be non-U.S. dollar
denominated and which 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 (both dollar and non-dollar
denominated); and (e) U.S. corporate issuers (both Eurodollar and non-dollar
denominated). There is no minimum rating criteria for the Fund's investments in
such securities. A description of Brady Bonds is set forth in the discussion of
investment objectives and policies of the Strategic Bond Fund. The risks
associated with these investments are described under the captions "Additional
Investment Activities and Risk Factors--Foreign Securities" and "--High Yield
Debt Securities." Moreover, substantial investments in foreign securities may
have adverse tax implications as described under "Taxation."
The High Yield Bond Fund may also invest in zero coupon securities and pay-
in-kind bonds, which involve special risk considerations. See "Additional
Investment Activities and Risk Factors--Zero Coupon Securities, Pay-in-Kind
Bonds and Deferred Payment Securities."
The High Yield Bond Fund may invest in fixed and floating rate loans ("Loans")
arranged through private negotiations between a corporate borrower or a foreign
sovereign entity and one or more financial institutions ("Lenders"). The Fund
may invest in such Loans in the form of participations in Loans
("Participations") and assignments of all or a portion of Loans from third
parties ("Assignments"). See "Additional Investment Activities and Risk
Factors-- Loan Participations and Assignments."
The High Yield Bond Fund may invest up to 20% of its assets in common stock,
convertible securities, warrants, preferred stock or other equity securities
when consistent with the Fund's objectives. The Fund will generally hold such
equity investments as a result of purchases of unit offerings of fixed-income
securities which include such securities or in connection with an actual or
proposed conversion or exchange of fixed-income securities, but may also
purchase equity securities not associated with fixed-income securities when, in
the opinion of the investment manager, such purchase is appropriate.
There may be times when, in the judgment of the investment manager, conditions
in the securities markets would make pursuing the Fund's basic investment
strategy inconsistent with the best interests of the Fund's shareholders. At
such times, the Fund's investment manager may employ alternative strategies,
including investment of a substantial portion of the Fund's assets in securities
rated higher than "Baa" by Moody's or "BBB" by S&P, or of comparable quality. In
addition, in order to maintain liquidity, the Fund may invest up to 35% of its
assets in high-quality short-term money market instruments. Such instruments may
include obligations of the U.S. government or its agencies or instrumentalities;
commercial paper of issuers rated, at the time of purchase, A-2 or better by S&P
or P-2 or better by Moody's or which, in the opinion of the investment manager,
are of comparable
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SALOMON BROTHERS INVESTMENT SERIES
quality; certificates of deposit, banker's acceptances or time deposits of U.S.
banks with total assets of at least $1 billion (including obligations of foreign
branches of such banks) and of the 75 largest foreign commercial banks in terms
of total assets (including domestic branches of such banks), and repurchase
agreements with respect to such obligations.
If at some future date, in the opinion of the investment manager, adverse
conditions prevail in the securities markets which makes the High Yield Bond
Fund's investment strategy inconsistent with the best interests of the Fund's
shareholders, the Fund may invest its assets without limit in high-quality
short-term money market instruments.
The High Yield Bond Fund may enter into repurchase agreements and reverse
repurchase agreements, may purchase securities on a firm commitment basis,
including when-issued securities and may lend portfolio securities. For a
description of these investment practices and the risks associated therewith,
see "Additional Investment Activities and Risk Factors."
The High Yield Bond Fund may purchase securities for which there is a limited
trading market or which are subject to restrictions on resale to the public. The
Fund will not invest more than 15% of the value of its total assets in illiquid
securities, such as "restricted securities" which are illiquid, and securities
that are not readily marketable. As more fully described in the Statement of
Additional Information, the Fund may purchase certain restricted securities
("Rule 144A securities") for which there is a secondary market of qualified
institutional buyers as contemplated by Rule 144A under the Securities Act of
1933, as amended (the "1933 Act"). The Fund's holdings of Rule 144A securities
which are liquid securities will not be subject to the 15% limitation on
investments in illiquid securities. For further discussion of illiquid
securities and their associated risks, see "Additional Investment Activities and
Risk Factors--Restricted Securities and Securities with Limited Trading
Markets."
The High Yield Bond Fund is currently authorized to use all of the various
investment strategies referred to under "Additional Investment Activities and
Risk Factors--Derivatives." It is not presently anticipated that any of these
strategies will be used to a significant degree by the Fund. The Fund's ability
to pursue certain of these strategies may be limited by applicable regulations
of the SEC, the CFTC and the federal income tax requirements applicable to
regulated investment companies. Appendix B to this Prospectus and the Statement
of Additional Information contain descriptions of these strategies and of
certain risks associated therewith.
The foregoing investment policies, other than the High Yield Bond Fund's
investment objectives, are not fundamental and may be changed by the Fund's
Board of Directors without the approval of shareholders.
STRATEGIC BOND FUND
The primary investment objective of the Strategic Bond Fund is to seek a high
level of current income. As a secondary objective, the Fund will seek capital
appreciation. The Strategic Bond Fund seeks to achieve its objectives by
investing in a globally diverse portfolio of fixed-income investments and by
giving the investment manager broad discretion to deploy the Strategic Bond
Fund's assets among certain segments of the fixed-income market that the
investment manager believes will best contribute to the achievement of the
Fund's objectives. At any point in time, the investment manager will deploy the
Fund's assets based on the investment manager's analysis of current economic and
market conditions and the relative risks and opportunities present in the
following market segments: U.S. government
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SALOMON BROTHERS INVESTMENT SERIES
obligations, investment grade domestic corporate debt, high yield domestic
corporate debt securities, mortgage-backed securities and investment grade and
high yield foreign corporate and sovereign debt securities. The investment
manager has entered into a subadvisory consulting agreement with its London
based affiliate, Salomon Brothers Asset Management Limited ("SBAM Limited")
pursuant to which SBAM Limited will provide certain advisory services to the
investment manager relating to currency transactions and investments in non-
dollar-denominated debt securities for the benefit of the Fund.
The investment manager will determine the amount of assets to be allocated to
each type of security in which it invests based on its assessment of the maximum
level of income and capital appreciation that can be achieved from a portfolio
which is invested in these securities. In making this determination, the
investment manager will rely in part on quantitative analytical techniques that
measure relative risks and opportunities of each type of security based on
current and historical economic, market, political and technical data for each
type of security, as well as on its own assessment of economic and market
conditions both on a global and local (country) basis. In performing
quantitative analysis, the investment manager will employ prepayment analysis
and option adjusted spread technology to evaluate mortgage securities, mean
variance optimization models to evaluate foreign debt securities, and total rate
of return analysis to measure relative risks and opportunities in other
fixed-income markets. Economic factors considered will include current and
projected levels of growth and inflation, balance of payment status and monetary
policy. The allocation of assets to foreign debt securities will further be
influenced by current and expected currency relationships and political and
sovereign factors. The investment manager will continuously review this
allocation of assets and make such adjustments as it deems appropriate. The Fund
does not plan to establish a minimum or a maximum percentage of the assets which
it will invest in any particular type of fixed-income security.
In addition, the investment manager will have discretion to select the range of
maturities of the various fixed-income securities in which the Strategic Bond
Fund invests. The investment manager anticipates that under current market
conditions, the Fund's portfolio securities will have a weighted average life of
6 to 10 years. However, the weighted average life of the portfolio securities
may vary substantially from time to time depending on economic and market
conditions.
The investment grade corporate debt securities and the investment grade foreign
debt securities to be purchased by the Fund are domestic and foreign debt
securities rated within the four highest bond ratings of either Moody's or S&P,
or, if unrated, deemed to be of equivalent quality in the investment manager's
judgment. While debt securities carrying the fourth highest quality rating
("Baa" by Moody's or "BBB" by S&P) are considered investment grade and are
viewed to have adequate capacity for payment of principal and interest,
investments in such securities involve a higher degree of risk than that
associated with investments in debt securities in the higher rating categories
and such debt securities lack outstanding investment characteristics and in fact
have speculative characteristics as well. For example, 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 debt
securities.
The types and characteristics of the U.S. government obligations and mortgage
backed securities to be purchased by the Strategic Bond Fund are set forth above
in the discussion of investment objectives and policies for the U.S. Government
Income Fund. In addition, the Fund may
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purchase privately issued mortgage securities which are not guaranteed by the
U.S. government or its agencies or instrumentalities and may purchase stripped
mortgage securities, including interest-only and principal-only securities. The
Strategic Bond Fund does not currently intend to invest more than 10% of its
total assets in interest-only and principal-only securities. Additional
information with respect to securities to be purchased by the Fund is set forth
below in the section entitled "Additional Investment Activities and Risk
Factors" and in the section entitled "Additional Information on Portfolio
Instruments and Investment Policies" in the Statement of Additional Information.
The Strategic Bond Fund may invest in debt obligations issued or guaranteed by a
foreign sovereign government or one of its agencies or political subdivisions
and debt obligations issued or guaranteed by supranational organizations.
Supranational entities include international organizations designated or
supported by governmental entities to promote economic reconstruction or
development and international banking institutions and related government
agencies. Examples include the International Bank for Reconstruction and
Development (the "World Bank"), the European Coal and Steel Community, the Asian
Development Bank and the Inter-American Development Bank. Such supranational
issued instruments may be denominated in multi-national currency units. The
Strategic Bond Fund will not invest more than 10% of its total assets in issuers
located in any one country (other than issuers located in the United States).
In pursuing the Strategic Bond Fund's investment objectives, the Fund reserves
the right to invest predominantly in medium or lower-rated securities.
Investments of this type involve significantly greater risks, including price
volatility and risk of default in the payment of interest and principal, than
higher-quality securities. Although the investment manager does not anticipate
investing in excess of 75% of the Strategic Bond Fund's assets in domestic and
developing country debt securities that are rated below investment grade, the
Strategic Bond Fund may invest a greater percentage in such securities when, in
the opinion of the investment manager, the yield available from such securities
outweighs their additional risks. The investment manager anticipates that under
current market conditions, a significant portion of the Fund's assets will be
invested in such securities. By investing a portion of the Strategic Bond Fund's
assets in securities rated below investment grade as well as through investments
in mortgage securities and foreign debt securities, the investment manager
expects to provide investors with a higher yield than a high-quality domestic
corporate bond fund. Certain of the debt securities in which the Strategic Bond
Fund may invest 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. "Additional Investment
Activities and Risk Factors-- High Yield Securities."
In light of the risks associated with high yield corporate and sovereign debt
securities, the investment manager will take various factors into consideration
in evaluating the creditworthiness of an issuer. For corporate debt securities,
these will typically include the issuer's financial resources, its sensitivity
to economic conditions and trends, the operating history of the issuer, and the
experience and track record of the issuer's management. For sovereign debt
instruments, these will typically include the economic and political conditions
within the issuer's country, the issuer's overall and external debt levels and
debt service ratios, the issuer's access to capital markets and other sources of
funding, and the issuer's debt service payment history. The investment manager
will also review the ratings, if any, assigned to the security
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SALOMON BROTHERS INVESTMENT SERIES
by any recognized rating agencies, although the investment manager's judgment as
to the quality of a debt security may differ from that suggested by the rating
published by a rating service. The Strategic Bond Fund's ability to achieve its
investment objective may be more dependent on the investment manager's credit
analysis than would be the case if it invested in higher quality debt
securities. A description of the ratings used by Moody's and S&P is set forth in
Appendix A to this Prospectus.
The high yield sovereign debt securities in which the Strategic Bond Fund may
invest are U.S. dollar-denominated and non-dollar-denominated debt securities,
including Brady Bonds, that are issued or guaranteed by governments or
governmental entities of developing and emerging market countries. The
investment manager expects that these countries will consist primarily of those
which have issued or have announced plans to issue Brady Bonds, but the Fund is
not limited to investing in the debt of such countries. Brady Bonds are debt
securities issued under the framework of the Brady Plan, an initiative announced
by former U.S. Treasury Secretary Nicholas F. Brady in 1989 as a mechanism for
debtor nations to restructure their outstanding external indebtedness. For a
description of Brady Bonds, see "Additional Investment Activities and Risk
Factors--High Yield Securities" and "Additional Information on Portfolio
Instruments and Investment Policies--Brady Bonds" in the Statement of Additional
Information. The investment manager anticipates that the Fund's investments in
sovereign debt will be concentrated in Latin American countries, including
Central and South American and Caribbean countries. The investment manager also
expects to take advantage of additional opportunities for investment in the debt
of North African countries, such as Nigeria and Morocco, Eastern European
countries, such as Poland and Hungary, and Southeast Asian countries, such as
the Philippines. Sovereign governments may include national, provincial, state,
municipal or other foreign governments with taxing authority. Governmental
entities may include the agencies and instrumentalities of such governments, as
well as state-owned enterprises. For a more detailed discussion on high yield
sovereign debt securities, see "Additional Investment Activities and Risk
Factors-- High Yield Securities."
The Strategic Bond Fund will be subject to special risks as a result of its
ability to invest up to 100% of its assets in foreign securities (including
emerging market securities). Such securities may be non-U.S. dollar denominated
and there is no limit on the percentage of the Fund's assets that can be
invested in non-dollar denominated securities. The investment manager
anticipates that under current market conditions, a significant portion of the
Fund's assets will be invested in foreign securities. These risks are described
under the captions "Additional Investment Activities and Risk Factors-- Foreign
Securities." Moreover, substantial investments in foreign securities may have
adverse tax implications as described under "Taxation." The ability to spread
its investments among the fixed-income markets in a number of different
countries may, however, reduce the overall level of market risk to the extent it
may reduce the Strategic Bond Fund's exposure to a single market.
The Strategic Bond Fund may invest in zero coupon securities, pay-in-kind bonds,
Loan Participations and Assignments. See "Additional Investment Activities and
Risk Factors-Zero Coupon Securities, Pay-in-Kind Bonds and Deferred Payment
Securities" and "--Loan Participations and Assignments."
The Strategic Bond Fund may invest up to 20% of its assets in common stock,
convertible securities, warrants, preferred stock or other equity securities
when consistent with the Fund's objectives. The Fund will generally hold such
equity investments as a result of purchases of
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SALOMON BROTHERS INVESTMENT SERIES
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 the investment manager, such
purchase is appropriate.
The Strategic Bond Fund currently intends to invest substantially all of its
assets in fixed-income securities. In order to maintain liquidity, the Strategic
Bond Fund may invest up to 20% of its assets in high-quality short-term money
market instruments. If at some future date, in the opinion of the investment
manager, adverse conditions prevail in the market for fixed-income securities,
the Strategic Bond Fund for temporary defensive purposes may invest its assets
without limit in high-quality short-term money market instruments. The types and
characteristics of the money market securities to be purchased by the Fund are
set forth in the discussion of investment objectives and policies of the Cash
Management Fund.
The Strategic Bond Fund may enter into repurchase agreements and reverse
repurchase agreements, may purchase securities on a firm commitment basis,
including when-issued securities and may lend portfolio securities. The Fund
does not currently intend to make loans of portfolio securities with a value in
excess of 33% of the value of its total assets. The Fund may also enter into
mortgage "dollar rolls." For a description of these investment practices and the
risks associated therewith, see "Additional Investment Activities and Risk
Factors."
The Strategic Bond Fund may purchase securities for which there is a limited
trading market or which are subject to restrictions on resale to the public. The
Fund will not invest more than 15% of the value of its total assets in illiquid
securities, such as "restricted securities" which are illiquid, and securities
that are not readily marketable. As more fully described in the Statement of
Additional Information, the Fund may purchase Rule 144A securities for which
there is a secondary market of qualified institutional buyers as contemplated by
Rule 144A under the 1933 Act. The Fund's holdings of Rule 144A securities which
are liquid securities will not be subject to the 15% limitation on investments
in illiquid securities. For further discussion of illiquid securities and their
associated risks, see "Additional Investment Activities and Risk
Factors--Restricted Securities and Securities with Limited Trading Markets."
The Strategic Bond Fund is currently authorized to use all of the various
investment strategies referred to under "Additional Investment Activities and
Risk Factors--Derivatives." With the exception of currency transactions,
however, it is not presently anticipated that any of these strategies will be
used to a significant degree by the Fund. The Fund's ability to pursue certain
of these strategies may be limited by applicable regulations of the SEC, the
CFTC and the federal income tax requirements applicable to regulated investment
companies. Appendix B to this Prospectus and the Statement of Additional
Information contain descriptions of these strategies and of certain risks
associated therewith.
The foregoing investment policies, other than the Strategic Bond Fund's
investment objectives, are not fundamental and may be changed by the Fund's
Board of Directors without the approval of shareholders.
TOTAL RETURN FUND
The primary investment objective of the Total Return Fund is to obtain above
average income (compared to a portfolio entirely invested in equity securities).
The Fund's secondary objective is to take advantage of opportunities for growth
of capital and income. The policy of the
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Total Return Fund is to invest in a broad variety of securities, including
equity securities, fixed-income securities and short-term obligations. The Fund
may vary the percentage of assets invested in any one type of security in
accordance with the SBAM's view of existing and anticipated economic and market
conditions, fiscal and monetary policy and underlying security values. Under
current market conditions, it is anticipated that at least 40% of the Fund's
total assets will be invested in equity securities.
Equity securities include common and preferred stock (including convertible
preferred stock), bonds, notes and debentures convertible into common or
preferred stock, stock purchase warrants and rights, equity interests in trusts,
partnerships, joint ventures or similar enterprises and American, Global or
other types of depositary receipts. Most of the equity securities purchased by
the Fund are expected to be traded on a stock exchange or in an over-the-counter
market.
SBAM will have discretion to invest in the full range of maturities of
fixed-income securities. Generally, most of the Fund's long-term debt
investments will consist of "investment grade" securities (rated Baa or better
by Moody's or BBB or better by S&P or Fitch or determined by the investment
manager to be of comparable quality). See Appendix A to this Prospectus for a
description of these ratings. Certain risks associated with investment in debt
securities carrying the fourth highest quality rating ("Baa" by Moody's or "BBB"
by S&P) are described above in the investment objectives and policies for the
Strategic Bond Fund.
Up to 20% of the Fund's net assets may be invested in nonconvertible fixed
income securities that are rated Ba or lower by Moody's or BB or lower by S&P or
Fitch or determined by the investment manager to be of comparable quality
(commonly known as "junk bonds"). There is no limit on the amount of the Total
Return Fund's assets that can be invested in convertible securities rated below
investment grade. For additional information on these lower rated, high yield
debt securities, which may involve a high degree of risk, see the discussion
above under the investment objectives and policies for the High Yield Bond Fund
and "Additional Investment Activities and Risk Factors--High Yield Securities."
In addition to corporate debt securities, the Total Return Fund may invest in
U.S. Government securities and mortgage-backed securities, the types and
characteristics of which are set forth above in the discussion of investment
objectives and policies for the U.S. Government Income Fund. The Fund may also
purchase privately issued mortgage securities which are not guaranteed by the
U.S. government or its agencies or instrumentalities. For a description of these
securities and the risks associated therewith see "Additional Investment
Activities and Risk Factors." The Total Return Fund may invest in corporate
asset-backed securities, the characteristics and risks of which are described
above under the investment objective and policies of the Cash Management Fund.
Other fixed income securities in which the Total Return Fund may invest include
zero coupon bonds, deferred interest bonds and bonds on which the interest is
payable in kind ("PIK bonds"). For additional information on zero coupon bonds
and PIK bonds, see "Additional Investment Activities and Risk Factors-- Zero
Coupon Securities, Pay-in-Kind Bonds and Deferred Payment Securities." Deferred
interest bonds are debt obligations which are issued or purchased at a
significant discount from face value and provide for a period of delay before
the regular payment of interest begins. The characteristics and related risks of
these bonds are similar to those of zero coupon bonds.
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SALOMON BROTHERS INVESTMENT SERIES
The Total Return Fund may invest up to 20% (and generally expects to invest
between 10% and 20%) of its total assets in foreign securities (including
American Depositary Receipts). For a discussion of the risks associated with
investment in foreign securities, see "Additional Investment Activities and Risk
Factors-- Foreign Securities."
The Total Return Fund may invest a portion of its assets in Loan Participations
and Assignments. For a discussion of Loan Participations and Assignments and
their associated risks, see "Additional Investment Activities and Risk Factors--
Loan Participation and Assignments."
The Total Return Fund may enter into repurchase agreements and reverse
repurchase agreements, may purchase securities on a firm commitment basis,
including when-issued securities, and may lend portfolio securities. For a
description of these investment practices, see "Additional Investment Activities
and Risk Factors." The Fund will not invest more than 10% of its assets in
repurchase agreements maturing in more than seven days.
The Total Return Fund may purchase securities for which there is a limited
trading market or which are subject to restrictions on resale to the public. The
Fund will not invest more than 15% of the value of its total assets in illiquid
securities, such as "restricted securities" which are illiquid, and securities
that are not readily marketable. As more fully described in the Statement of
Additional Information, the Fund may purchase Rule 144A securities for which
there is a secondary market of qualified institutional buyers as contemplated by
Rule 144A under the 1933 Act. The Fund's holdings of Rule 144A securities which
are liquid securities will not be subject to the 15% limitation on investments
in illiquid securities. For further discussion of illiquid securities and their
associated risks, see "Additional Investment Activities and Risk
Factors--Restricted Securities and Securities with Limited Trading Market."
The Total Return Fund is currently authorized to use all of the various
investment strategies referred to under "Additional Investment Activities and
Risk Factors-- Derivatives." With the exception of currency transactions,
however, it is not presently anticipated that any of these strategies will be
used to a significant degree by the Fund. The Fund's ability to pursue certain
of these strategies may be limited by applicable regulations of the SEC, the
CFTC and the federal income tax requirements applicable to regulated investment
companies. Appendix B to this Prospectus and the Statement of Additional
Information contain descriptions of these strategies and of certain risks
associated therewith.
The foregoing investment policies, other than the Total Return Fund's investment
objectives, are not fundamental and may be changed by the Board of Directors
without the approval of shareholders.
ASIA GROWTH FUND
The Asia Growth Fund's objective is to achieve long-term capital appreciation.
The Fund seeks to achieve its objective by investing at least 65% of its total
assets in equity and equity-related securities of Asian Companies. Asian
Companies include companies that (i) are organized under the laws of Bangladesh,
China, Hong Kong, India, Indonesia, Korea, Malaysia, Pakistan, the Philippines,
Singapore, Sri Lanka, Taiwan, Thailand or any other country in the Asian region
(other than Japan, Australia and New Zealand) that currently or in the future
permits foreign investment (collectively, "Asian Countries") or (ii) regardless
of where organized and as determined by SBAM AP, (a) derive at least 50% of
their revenues from goods produced or sold, investments made, or services
performed in or with one or more of the Asian
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SALOMON BROTHERS INVESTMENT SERIES
Countries, (b) maintain at least 50% of their assets in one or more of the Asian
Countries, or (c) have securities which are traded principally on a stock
exchange in an Asian Country. The Fund is non-diversified within the meaning of
the 1940 Act. See "Additional Investment Activities and Risk
Factors--Non-Diversification."
Equity securities in which the Asia Growth Fund may invest include common and
preferred stocks (including convertible preferred stock), bonds, notes and
debentures convertible into common and preferred stock, stock purchase warrants
and rights, equity interests in trusts, partnerships, joint ventures or similar
enterprises, and American, Global or other types of Depositary Receipts. Equity-
linked debt securities are debt instruments whose prices are indexed to the
prices of equity securities or securities indices. In other words, the value at
maturity or coupon rate of these equity-linked debt instruments is determined by
reference to a specific instrument or statistic. The performance of
equity-linked debt instruments depends to a great extent on the performance of
the security or index to which they are indexed, and may also be influenced by
interest rate changes in the United States and abroad. At the same time, these
instruments are subject to the credit risks associated with the issuer of the
security, and their values may decline substantially if the issuer's
creditworthiness deteriorates. Indexed instruments may be more volatile than the
underlying instruments.
There are no prescribed limits on geographic asset distributions among Asian
Countries and from time to time, SBAM AP expects to invest a significant portion
of the Asia Growth Fund's assets in Hong Kong, Malaysia, Singapore and Thailand.
Investments in each of these countries may from time to time exceed 25% of the
Fund's total assets. In addition, more than 25% of the Fund's total assets may
be denominated or quoted in the currencies of any one or more of such countries.
In this connection, SBAM AP anticipates that up to 35% of the Fund's initial
investments will be in Hong Kong. Although SBAM AP expects that most of the
equity securities purchased by the Fund will be traded on a stock exchange or in
an over-the-counter market, most of the Asian securities markets have
substantially less volume than U.S. or other established markets and some of the
stock exchanges in the Asian Countries are in the early stages of their
development. Concentration of the Fund's assets in one or a few of the Asian
countries and Asian currencies will subject the Fund, to a greater extent than
if the Fund's assets were less geographically concentrated, to the risks of
adverse changes in the securities and foreign exchange markets of such countries
and social, political or economic events which may occur in those countries. For
a more detailed discussion of the special risks which the Fund is subject to by
virtue of its investment in foreign securities, see "Additional Investment
Activities and Risk Factors--Foreign Securities." An investment in the Asia
Growth Fund should not be considered as a complete investment program for all
investors.
In pursuing the Asia Growth Fund's investment objective, SBAM AP will combine a
traditional fundamental approach towards evaluating industry sectors and
individual securities of Asian Companies with a risk management driven approach
seeking to keep the Fund's volatility of return in line with or lower than that
currently experienced in the Asian markets.
SBAM AP expects to focus on certain industry groups across Asian Countries in an
attempt to identify and capture the relative value of such groups on a pan-
regional basis. SBAM AP will research individual companies in an effort to
identify the investment opportunities within these industry groups which will
provide long-term capital appreciation. In
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SALOMON BROTHERS INVESTMENT SERIES
addition, SBAM AP intends to meet the management of individual companies on a
periodic basis. As part of the Asia Growth Fund's risk management objective,
SBAM AP will also concentrate on macroeconomic issues and other variables
influencing the direction of monetary policies followed by Asian Central Banks.
The investment process to be implemented by SBAM AP will consist of the three
following principal (and potentially overlapping) types of approaches.
PAN REGIONAL INDUSTRY GROUP DECISIONS. SBAM AP will seek to identify the pan--
regional industrial sectors which are likely to exhibit attractive returns over
the long-term. In selecting such industrial sectors, SBAM AP will focus on
industry cycles and competitiveness as well as the industrial characteristics of
the Asian economies. In addition, SBAM AP will review government regulations,
industrial policies, access to technology and industrial research reports
provided by industrial companies or associations and securities dealers in Asian
Countries. SBAM AP will focus on those industries which represent meaningful
weightings in the total market capitalization of the Asian Countries including,
but not limited to, telecommunications, consumer durables and nondurables, food
and beverage, electronics, hotels, power engineering and generation, basic
industries, public utilities, property and financial sectors. SBAM AP believes
that an investment process that places emphasis on industry groups is
appropriate given the current state of economic and financial integration being
achieved by the Asian Countries and the relatively significant concentration of
market capitalization in Asian Countries toward certain industrial sectors.
FUNDAMENTAL ANALYSIS. Individual Security Decisions. In order to identify the
most attractive investment opportunities within industry groups, SBAM AP will
employ extensive research to select investments in Asian Countries that offer
long-term growth potential for investors. While the Asia Growth Fund generally
seeks to invest in securities of larger companies within the particular Asian
market, it may also invest in the securities of medium and smaller companies
that, in the opinion of SBAM AP, have potential for growth. In particular, SBAM
AP will employ the following three-step process to evaluate particular
investment opportunities for the Fund.
SCREENING PROCESS. SBAM AP will implement a systematic screening process in an
effort to identify individual securities it believes likely to exhibit
attractive returns over the long term. SBAM AP will screen companies according
to factors such as the perceived quality of their management and business,
overall sustainable competitiveness, historical earnings, dividend records over
at least a full business cycle, liquidity, trading volumes and historical and
expected volatility.
FINANCIAL ANALYSIS PROCESS. The financial analysis of selected companies will
focus on evaluating the fundamental value of the enterprise. SBAM AP will use a
value-driven process which will emphasize quantitative analysis based on return
on equity ("ROE") and its components, such as operating margins, financial
leverage, asset turnover and interest and tax burdens. In addition, the
company's cash flow generating capabilities and return on assets will be
considered. SBAM AP believes that ROE and cash flow dynamics are appropriate
variables when analyzing companies which operate in high growth markets, such as
Asia, as the ability of such companies to capture this growth by using the right
allocation of resources and asset financing is of utmost importance.
VALUATION PROCESS AND VOLATILITY ANALYSIS. The valuation process will focus on
Price Earnings Ratio ("PER")
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calculations and comparisons with historical relative PER bands and local market
conditions. SBAM AP will use measures such as PER/growth, and will evaluate
whether the security enjoys accelerating earnings growth momentum due to
management changes or the introduction of new products and/or services. In
addition, where appropriate, SBAM AP will conduct specific dividend discount
model and discount cash flow analyses for specific securities with predictable
cash flows or dividend streams. Through the use of this analysis, SBAM AP will
attempt to identify companies with strong potential for appreciation relative to
their downside exposure. Lastly, SBAM AP will conduct a volatility analysis on
selected securities in an effort to forecast the expected risk of such
securities and compare the results of such risk analysis with these securities'
expected returns. Investments may be made in companies that do not have
extensive operating experience provided that SBAM AP believes such companies
nevertheless have significant growth potential.
RISK MANAGEMENT AND MACROECONOMIC/TOP-DOWN ANALYSIS. SBAM AP will also consider
macroeconomic variables, such as liquidity and capital flows, foreign equity and
industrial investments and the direction of monetary policies in the Asian
Countries in an effort to capture individual market movements as well as attain
an optimal asset allocation mix and to identify the appropriate risk management
parameters for the Asia Growth Fund. The macroeconomic data SBAM AP will monitor
and analyze includes, but is not limited to, gross domestic product growth,
balance of payments and current account balances, budget deficits or surpluses,
inflation and interest rates. SBAM AP intends to meet with central bankers,
regional economists and strategists on a regular basis to assess the present and
future direction of monetary policies and their likely impact on the markets of
the Asian Countries.
As part of the Fund's risk management approach and in an attempt to better
assess and control the Fund's overall risk level on an ongoing basis, SBAM AP
will employ a quantitative analysis at each stage of the investment process
which will consist of analyzing and forecasting volatilities of the Asian
markets and securities. SBAM AP will use a number of volatility-control
strategies, including derivative instruments (as discussed below), in an effort
to attain an optimal asset allocation mix, for hedging purposes in an attempt to
control the Fund's overall risk level and to obtain exposure to markets in the
Asian Countries which have restrictions on foreign investment.
The Asia Growth Fund from time to time may invest up to 10% of its total assets
in non-convertible debt securities, which may include securities rated below
investment grade by S&P and Moody's with no minimum rating required or
comparable unrated securities. There is no limit on the amount of the Fund's
assets that can be invested in convertible securities rated below investment
grade. For additional information on these high yield debt securities, which may
involve a high degree of risk, see "Additional Investment Activities and Risk
Factors-- High Yield Securities."
In order to maintain liquidity, the Asia Growth Fund may hold and/or invest up
to 35% of its total assets in debt securities denominated in U.S. dollars or in
another freely convertible currency including: (1) short-term (less than 12
months to maturity) and medium-term (not greater than five years to maturity)
obligations issued or guaranteed by (a) the U.S. government or the government of
an Asian Country, their agencies or instrumentalities or (b) international
organizations designated or supported by multiple foreign governmental entities
to promote economic reconstruction or development ("supranational entities");
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SALOMON BROTHERS INVESTMENT SERIES
(2) finance company obligations, corporate commercial paper and other short-term
commercial obligations, in each case rated, or issued by companies with similar
securities outstanding that are rated, "Prime-1" or "A" or better by Moody's or
"A-1" or "A" or better by S&P or, if unrated, of comparable quality as
determined by SBAM AP; (3) obligations (including certificates of deposit, time
deposits, demand deposits and bankers' acceptances) of banks; and (4) repurchase
agreements (as described below under "Additional Investment Activities and Risk
Factors--Repurchase Agreements") with respect to securities in which the Fund
may invest. If at some future date, in the opinion of SBAM AP, adverse
conditions prevail in the securities markets which makes the Asia Growth Fund's
investment strategy inconsistent with the best interests of the Fund's
shareholders, the Fund may invest its assets without limit in such instruments.
The Asia Growth Fund may enter into repurchase agreements and reverse repurchase
agreements, may purchase securities on a firm commitment basis, including
when-issued securities and may lend portfolio securities. The Fund may also
invest in investment funds. For a description of these investment practices and
the risks associated therewith, see "Additional Investment Activities and Risk
Factors."
The Asia Growth Fund may purchase securities for which there is a limited
trading market or which are subject to restrictions on resale to the public. The
Fund will not invest more than 15% of the value of its total assets in illiquid
securities, such as "restricted securities" which are illiquid, and securities
that are not readily marketable. For further discussion of illiquid securities
and their associated risks, see "Additional Investment Activities and Risk
Factors-- Restricted Securities and Securities With Limited Trading Markets." As
more fully described in the Statement of Additional Information, the Fund may
purchase Rule 144A securities. The Fund's holdings of Rule 144A securities which
are liquid securities will not be subject to the 15% limitation on investments
in illiquid securities.
The Asia Growth Fund is currently authorized and intends to use the various
investment strategies referred to under "Additional Investment Activities and
Risk Factors--Derivatives." The Fund's ability to pursue certain of these
strategies may be limited by applicable regulations of the SEC, the CFTC and the
federal income tax requirements applicable to regulated investment companies.
Appendix B to this Prospectus and the Statement of Additional Information
contain descriptions of these strategies and of certain risks associated
therewith.
The foregoing investment policies and activities, other than the Asia Growth
Fund's investment objective, are not fundamental and may be changed by the
Fund's Board of Directors without the approval of shareholders.
The investment objective of each Fund is deemed to be a fundamental policy and
may not be changed without the affirmative vote of the holders of a majority of
its outstanding shares as defined in the 1940 Act. There is no assurance that a
Fund will achieve its investment objective.
INVESTORS FUND
The primary investment objective of the Investors Fund is to seek long-term
growth of capital. Current income is a secondary objective. The Fund seeks to
achieve its objectives primarily through investments in common stocks of
wellknown companies.
The Investor Fund's policy is to retain flexibility in the management of its
portfolio, without restrictions as to the proportion of assets which may be
invested in any class of securities. It is
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anticipated that the Fund's portfolio will generally consist of common and
preferred stocks. The Fund may purchase securities of companies located in
foreign countries which the Fund's investment manager deems consistent with the
investment objectives and policies of the Fund, but not if upon such purchase
more than 20% of the Fund's net assets would be so invested. For a discussion of
the risks associated with investment in foreign securities, see "Additional
Investment Activities and Risk Factors--Foreign Securities."
Under normal conditions, the selection of common stock or securities convertible
into common stock, such as convertible preferred stock or convertible
debentures, with growth possibilities will be favored. Income-producing
securities are a secondary consideration in portfolio selection. To meet
operating expenses, to serve as collateral in connection with certain investment
techniques and to meet anticipated redemption requests, the Investors Fund
generally holds a portion of its assets in short-term fixed-income securities
(governmental obligations or investment grade debt securities) or cash or cash
equivalents. As described below, short-term investments may include repurchase
agreements with banks or broker-dealers. When management deems it appropriate,
consistent with the Investors Fund secondary objective of current income, or
during temporary defensive periods due to economic or market conditions, the
Fund may invest without limitation in fixed-income securities or hold assets in
cash or cash equivalents. The types and characteristics of investment grade
corporate debt securities and investment grade foreign debt securities which may
be purchased by the Fund are set forth above in the discussion of investment
objectives and policies for the Strategic Bond Fund. Investments in such
investment grade fixed-income securities may also be made for the purpose of
capital appreciation, as in the case of purchases of bonds traded at a
substantial discount, or when interest rates are expected to decline.
The Investors Fund from time to time may invest up to 5% of its net assets in
non-convertible debt securities rated below investment grade by S&P and Moody's
with no minimum rating required or comparable unrated securities. There is no
limit on the amount of Investors Fund's assets that can be invested in
convertible securities rated below investment grade. For additional information
on these high yield debt securities, which may involve a high degree of risk,
see the description above of investment objectives and polices for the High
Yield Bond Fund and "Additional Investment Activities and Risk Factors--High
Yield Securities."
The Investors Fund maintains a carefully selected portfolio of securities
diversified among industries and companies. The Fund may invest up to 25% of its
net assets in any one industry. The Fund generally purchases marketable
securities, primarily those traded on the New York Stock Exchange ("NYSE") or
other national securities exchanges, but also issues traded in the
over-the-counter market. The Fund will not invest more than 10% of the value of
its total assets in illiquid securities, such as "restricted securities" which
are illiquid, and securities that are not readily marketable. As more fully
described in the Statement of Additional Information, the Fund may purchase
certain Rule 144A securities for which there is a secondary market of qualified
institutional buyers as contemplated by Rule 144A under the 1933 Act. The Fund's
holdings of Rule 144A securities which are liquid securities will not be subject
to the 10% limitation on investments in illiquid securities. For further
discussion of illiquid securities and their associated risks, see "Additional
Investment Activities and Risk Factors--Restricted Securities and Securities
with Limited Trading Markets."
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From time to time, the Investors Fund may lend portfolio securities to brokers
or dealers or other financial institutions. Such loans will not exceed 10% of
the Fund's total assets, taken at value. For a discussion of the risks
associated with lending portfolio securities, see "Additional Investment
Activities and Risk Factors--Loans of Portfolio Securities."
As indicated under "Investment Limitations" below, the Investors Fund may invest
in repurchase agreements in an amount up to 25% of its total assets. For a
description of repurchase agreements and their associated risks, see "Additional
Investment Activities and Risk Factors-- Repurchase Agreements."
As a hedge against either a decline in the value of securities included in the
Investors Fund's portfolio or against an increase in the price of securities
which it plans to purchase or in order to preserve to 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, the
Investors Fund may use all of the various investment strategies referred to
under "Additional Investment Activities and Risk Factors--Derivatives." The
Fund's ability to pursue certain of these strategies may be limited by
applicable regulations of the SEC, the CFTC and the federal income tax
requirements applicable to regulated investment companies. Appendix B to this
Prospectus and the Statement of Additional Information contain descriptions of
these strategies and of certain risks associated therewith.
The foregoing investment policies, other than the Investors Fund's investment
objectives, are not fundamental and may be changed by the Board of Directors
without the approval of shareholders.
- --------------------------------------------------------------------------------
ADDITIONAL INVESTMENT ACTIVITIES
AND RISK FACTORS
BANK OBLIGATIONS. Banks are subject to extensive governmental regulations which
may limit both the amounts and types of loans and other financial commitments
which may be made and interest rates and fees which may be charged. The
profitability of this industry is largely dependent upon the availability and
cost of capital funds for the purpose of financing lending operations under
prevailing money market conditions. Also, general economic conditions play an
important part in the operations of this industry and exposure to credit losses
arising from possible financial difficulties of borrowers might affect a bank's
ability to meet its obligations.
Investors should also be aware that securities issued or guaranteed by foreign
banks, foreign branches of U.S. banks, and foreign government and private
issuers may involve investment risks in addition to those relating to domestic
obligations. See "--Foreign Securities" below. None of the Funds will purchase
bank obligations which the investment manager believes, at the time of purchase,
will be subject to exchange controls or foreign withholding
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taxes; however, there can be no assurance that such laws may not become
applicable to certain of the Funds' investments. In the event unforeseen
exchange controls or foreign withholding taxes are imposed with respect to a
Fund's investments, the effect may be to reduce the income received by the Fund
on such investments.
FLOATING AND VARIABLE RATE INSTRUMENTS. Certain Funds may invest in floating and
variable rate obligations. Floating or variable rate obligations bear interest
at rates that are not fixed, but vary with changes in specified market rates or
indices, such as the prime rate, and at specified intervals. Certain of the
floating or variable rate obligations that may be purchased by a Fund may carry
a demand feature that would permit the holder to tender them back to the issuer
at par value prior to maturity. Such obligations include variable rate master
demand notes, which are unsecured instruments issued pursuant to an agreement
between the issuer and the holder that permit the indebtedness thereunder to
vary and provide for periodic adjustments in the interest rate. A Fund will
limit its purchases of floating and variable rate obligations to those of the
same quality as it otherwise is allowed to purchase. The investment manager will
monitor on an ongoing basis the ability of an issuer of a demand instrument to
pay principal and interest on demand. For a further discussion of floating and
variable rate obligations, see "Additional Information on Portfolio Instruments
and Investment Policies-- Floating and Variable Rate Instruments" in the
Statement of Additional Information.
MUNICIPAL LEASE OBLIGATIONS. Certain of the Funds may invest in municipal lease
obligations. Although lease obligations do not constitute general obligations of
the issuer for which the lessee's unlimited taxing power is pledged, a lease
obligation is frequently backed by the lessee's covenant to budget for,
appropriate and make the payments due under the lease obligation. However,
certain lease obligations contain "nonappropriation" clauses which provide that
the lessee has no obligation to make lease or installment purchase payments in
future years unless money is appropriated for such purpose on a yearly basis.
Although "nonappropriation" lease obligations are secured by the leased
property, disposition of the property in the event of foreclosure might prove
difficult. These securities represent a relatively new type of financing that
has not yet developed the depth of marketability associated with more
conventional securities.
REPURCHASE AGREEMENTS. Each Fund may enter into repurchase agreements for cash
management purposes. A repurchase agreement is a transaction in which the seller
of a security commits itself at the time of the sale to repurchase that security
from the buyer at a mutually agreed upon time and price.
Each Fund will enter into repurchase agreements only with dealers, domestic
banks or recognized financial institutions which, in the opinion of the
investment manager based on guidelines established by the Fund's Board of
Directors, are deemed creditworthy. The investment manager will monitor the
value of the securities underlying the repurchase agreement at the time the
transaction is entered into and at all times during the term of the repurchase
agreement to ensure that the value of the securities always equals or exceeds
the repurchase price. 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.
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To the extent that, in the meantime, the value of the securities that a Fund has
purchased has decreased, the Fund could experience a loss. Repurchase agreements
with maturities of more than seven days will be treated as illiquid securities
by a Fund.
REVERSE REPURCHASE AGREEMENTS. Certain of the Funds may enter into "reverse"
repurchase agreements to avoid selling securities during unfavorable market
conditions to meet redemptions. Pursuant to a reverse repurchase agreement, a
Fund will sell portfolio securities and agree to repurchase them from the buyer
at a particular date and price. Whenever a Fund enters into a reverse repurchase
agreement, it will establish a segregated account in which it 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.
PARTICIPATION CERTIFICATES. The New York Municipal Bond Fund and the National
Intermediate Municipal Fund may invest in participation certificates. A
participation certificate gives a Fund an undivided interest in the underlying
obligations in the proportion that a Fund's interest bears to the total
principal amount of such obligations. Certain of such participation certificates
may carry a demand feature that would permit the holder to tender them back to
the issuer or to a third party prior to maturity.
LOANS OF PORTFOLIO SECURITIES. Certain of the Funds may lend portfolio
securities to generate income. In the event of the bankruptcy of the other party
to a securities loan, a Fund could experience delays in recovering the
securities it lent. To the extent that, in the meantime, the value of the
securities a Fund lent has increased, the Fund could experience a loss. The
value of securities loaned will be marked to market daily. Any securities that a
Fund may receive as collateral will not become a part of its portfolio at the
time of the loan and, in the event of a default by the borrower, the Fund will,
if permitted by law, dispose of such collateral except that the Fund may retain
any such part thereof that is a security in which the Fund is permitted to
invest. The Fund may invest the cash collateral and earn additional income or
receive an agreed-upon fee from a borrower that has delivered cash equivalent
collateral. Cash collateral received by a Fund may be invested in securities in
which the Fund is permitted to invest. Portfolio securities purchased with cash
collateral are subject to possible depreciation. Voting rights may pass with the
lending of portfolio securities. Loans of securities by a Fund will be subject
to termination at the Fund's or the borrower's option. A Fund may pay
administrative and custodial fees in connection with a securities loan and may
pay a negotiated portion of the interest or fee earned with respect to the
collateral to the borrower or a placing broker.
FIRM COMMITMENTS AND WHEN-ISSUED SECURITIES. A Fund may purchase securities on a
firm commitment basis, including when-issued securities. Securities purchased on
a firm commitment basis are purchased for delivery beyond the normal settlement
date at a stated price and yield. No income accrues to the purchaser of a
security on a firm commitment basis prior to delivery. Such securities are
recorded as an asset and are subject to changes in value based upon changes in
the general level of interest rates. Purchasing a security on a firm commitment
basis can involve a risk that the market price at the time of delivery may be
lower than the agreed upon purchase price, in which case
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SALOMON BROTHERS INVESTMENT SERIES
there could be an unrealized loss at the time of delivery. A Fund will only make
commitments to purchase securities on a firm commitment basis with the intention
of actually acquiring the securities, but may sell them before the settlement
date if it is deemed advisable. A Fund will establish a segregated account in
which it will maintain liquid assets in an amount at least equal in value to the
Fund's commitments to purchase securities on a firm commitment basis. If the
value of these assets declines, the Fund will place additional liquid assets in
the account on a daily basis so that the value of the assets in the account is
equal to the amount of such commitments.
ZERO COUPON SECURITIES, PAY-IN-KIND BONDS AND DEFERRED PAYMENT SECURITIES.
Certain of the Funds may invest in zero coupon securities, pay-in-kind bonds and
deferred payment securities.
Zero coupon securities are debt securities that pay no cash income but are sold
at substantial discounts from their value at maturity. When a zero coupon
security is held to maturity, its entire return, which consists of the
amortization of discount, comes from the difference between its purchase price
and its maturity value. This difference is known at the time of purchase, so
that investors holding zero coupon securities until maturity know at the time of
their investment what the expected return on their investment will be. Certain
zero coupon securities also are sold at substantial discounts from their
maturity value and provide for the commencement of regular interest payments at
a deferred date. Zero coupon securities may have conversion features. A Fund
also may purchase pay-in-kind bonds. Pay-in-kind bonds pay all or a portion of
their interest in the form of debt or equity securities. Deferred payment
securities are securities that remain zero coupon securities until a
predetermined date, at which time the stated coupon rate becomes effective and
interest becomes payable at regular intervals.
Zero coupon securities, pay-in-kind bonds and deferred payment securities tend
to be subject to greater price fluctuations in response to changes in interest
rates than are ordinary interest-paying debt securities with similar maturities.
The value of zero coupon securities appreciates more during periods of declining
interest rates and depreciates more during periods of rising interest rates than
ordinary interest-paying debt securities with similar maturities. Zero coupon
securities, pay-in-kind bonds and deferred payment securities may be issued by a
wide variety of corporate and governmental issuers. Although these instruments
are generally not traded on a national securities exchange, they are widely
traded by brokers and dealers and, to such extent, will not be considered
illiquid for the purposes of a Fund's 15% limitation on investments in illiquid
securities discussed below.
Current federal income tax law requires the holder of a zero coupon security,
certain pay-in-kind bonds, deferred payment securities and certain other
securities acquired at a discount (such as Brady Bonds) to accrue income with
respect to these securities prior to the receipt of cash payments. Accordingly,
to avoid liability for federal income and excise taxes, a Fund may be required
to distribute income accrued with respect to these securities and may have to
dispose of portfolio securities under disadvantageous circumstances in order to
generate cash to satisfy these distribution requirements.
LOAN PARTICIPATIONS AND ASSIGNMENTS. Certain of the Funds may invest in Loan
Participations and Assignments. The Funds consider these investments to be
investments in debt securities for purposes of this Prospectus. Loan
Participations typically will result in a Fund having a contractual relationship
only with the
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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 (or in the case of the Asia Growth
Fund, SBAM AP) to be creditworthy. When a Fund purchases Assignments from
Lenders, the Fund will acquire direct rights against the borrower on the Loan,
except that under certain circumstances such rights may be more limited than
those held by the assigning Lender.
A Fund may have difficulty disposing of Assignments and Loan Participations.
Because the market for such instruments is not highly liquid, the Funds
anticipate that such instruments could be sold only to a limited number of
institutional investors. The lack of a highly liquid secondary market may have
an adverse impact on the value of such instruments and will have an adverse
impact on a Fund's ability to dispose of particular Assignments or Loan
Participations in response to a specific economic event, such as deterioration
in the creditworthiness of the borrower.
The Board of Directors adopted policies and procedures for the purpose of
determining whether Assignments and Loan Participation are liquid or illiquid
for purposes of a Fund's limitation on investment in illiquid securities.
Pursuant to those policies and procedures, the Board of Directors has delegated
to the investment manager the determination as to whether a particular Loan
Participation or Assignment is liquid or illiquid, requiring that consideration
be given to, among other things, the frequency of quotes, the number of dealers
willing to sell and the number of potential purchasers, the nature of the Loan
Participation or Assignment and the time needed to dispose of it and the
contractual provisions of the relevant documentation. The Board of Directors
periodically reviews purchases and sales of Assignments and Loan Participations.
To the extent that liquid Assignments and Loan Participation 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. The investment manager under the supervision of the Board of
Directors, will monitor Fund investments in Assignments and Loan Participations
and will consider appropriate measures to enable a Fund to maintain sufficient
liquidity for operating purposes and to meet redemption requests.
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,
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SALOMON BROTHERS INVESTMENT SERIES
(iii) recent prices in the market for similar Loans and (iv) recent prices in
the market for instruments of similar quality, rate, period until next interest
rate reset and maturity. See "Net Asset Value."
RESTRICTED SECURITIES AND SECURITIES WITH LIMITED TRADING MARKETS. Each Fund may
purchase securities for which there is a limited trading market or which are
subject to restrictions on resale to the public. Investments in securities which
are "restricted" may involve added expenses to a Fund should the Fund be
required to bear registration costs with respect to such securities and could
involve delays in disposing of such securities which might have an adverse
effect upon the price and timing of sales of such securities and the liquidity
of the Fund with respect to redemptions. Restricted securities and securities
for which there is a limited trading market may be significantly more difficult
to value due to the unavailability of reliable market quotations for such
securities, and investment in such securities may have an adverse impact on net
asset value. As more fully described in the Statement of Additional Information,
certain Funds may purchase Rule 144A securities for which there may be a
secondary market of qualified institutional buyers as contemplated by recently
adopted 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 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. The Board of Directors will be
responsible for monitoring the liquidity of Rule 144A securities and the
selection by the investment manager of such securities.
VARIABLE RATE AUCTION SECURITIES AND INVERSE FLOATERS. The New York Municipal
Bond Fund and the National Intermediate Municipal Fund may invest in variable
rate auction securities and inverse floaters which are instruments created when
an issuer or dealer separates the principal portion of a long-term, fixed-rate
municipal bond into two long-term, variable-rate instruments. The interest rate
on the variable rate auction portion reflects short-term interest rates, while
the interest rate on the inverse floater portion is typically higher than the
rate available on the original fixed-rate bond. Changes in the interest rate
paid on the portion of the issue relative to short-term interest rates inversely
affect the interest rate paid on the latter portion of the issue. The latter
portion therefore is subject to greater price volatility than the original
fixed-rate bond, and the market value can be extremely volatile. Since the
market for these instruments is new, the holder of one portion may have
difficulty finding a ready purchaser. Depending on market availability, the two
portions may be recombined to form a fixed-rate municipal bond.
WARRANTS. Certain of the Funds may invest in warrants, which are securities
permitting, but not obligating, their holder to subscribe for other securities.
Warrants do not carry the right to dividends or voting rights with respect to
their underlying securities, and they do not represent any rights in assets of
the issuer. An investment in warrants may be considered speculative. In
addition, the value of a warrant does not necessarily change with the value of
the underlying securities and a warrant ceases to have value if it is not
exercised prior to its expiration date.
FOREIGN SECURITIES. Investors should recognize that investing in the securities
of foreign issuers involves special considerations which are not typically
associated with investing in the securities
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of U.S. issuers. Investments in securities of foreign issuers may involve risks
arising from differences between U.S. and foreign securities markets, including
less volume, much greater price volatility in and relative illiquidity of
foreign securities markets, different trading and settlement practices and less
governmental supervision and regulation, from changes in currency exchange
rates, from high and volatile rates of inflation, from economic, social and
political conditions and, as with domestic multinational corporations, from
fluctuating interest rates.
Investment in certain emerging market securities is restricted or controlled to
varying degrees which may at times limit or preclude investment in certain
emerging market securities and increase the costs and expenses of a Fund.
Certain emerging market countries require governmental approval prior to
investments by foreign persons, limit the amount of investment by foreign
persons in a particular issuer, limit the investment by foreign persons only to
a specific class of securities of an issuer that may have less advantageous
rights than other classes, restrict investment opportunities in issuers in
industries deemed important to national interests and/or impose additional taxes
on foreign investors.
Certain emerging market countries may require governmental approval for the
repatriation of investment income, capital or the proceeds of sales of
securities by foreign investors which could adversely affect a Fund. In
addition, if a deterioration occurs in the country's balance of payments, it
could impose temporary restrictions on foreign capital remittances. Investing in
local markets in emerging market countries may require a Fund to adopt special
procedures, seek local government approvals or take other actions, each of which
may involve additional costs to the Fund.
Other investment risks include the possible imposition of foreign withholding
taxes on certain amounts of a Fund's income, 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 and 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. See "--High Yield
Securities."
Finally, in the event of a default in any such foreign obligations, it may be
more difficult for a Fund to obtain or enforce a judgment against the issuers of
such
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obligations. For a further discussion of certain risks involved in investing
foreign securities, particularly of emerging market issuers, see "Additional
Information on Portfolio Instruments and Investment Policies--Foreign
Securities" in the Statement of Additional Information.
FIXED-INCOME SECURITIES. Changes in market yields will affect a Fund's net asset
value as prices of fixed-income securities generally increase when interest
rates decline and decrease when interest rates rise. 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 New York Municipal Bond
Fund, National Intermediate Municipal Fund, U.S. Government Income Fund, the
High Yield Bond Fund and the Strategic Bond Fund will invest primarily in
fixed-income securities and the Total Return Fund may from time to time invest
in a substantial amount of fixed-income securities, the net asset value of these
Fund's shares can be expected to change as general levels of interest rates
fluctuate. It should be noted that the market values of securities rated below
investment grade and comparable unrated securities tend to react less to
fluctuations in interest rate levels than do those of higher-rated securities.
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.
In addition, many fixed-income securities contain call or buy-back features that
permit their issuers to call or repurchase the securities from their holders.
Such securities may present risks based on payment expectations. Although a Fund
would typically receive a premium if an issuer were to redeem a security, if an
issuer exercises such a "call option" and redeems the security during a time of
declining interest rates, a Fund may realize a capital loss on its investment if
the security was purchased at a premium and a Fund may have to replace the
called security with a lower yielding security, resulting in a decreased rate of
return to the Fund.
Because the New York Municipal Bond Fund and the National Intermediate Municipal
Fund invest primarily in municipal obligations, they are more susceptible to
factors adversely affecting issuers of such obligations than funds that are not
so concentrated. The secondary market for municipal obligations may be less
liquid than for most taxable fixed-income securities. Consequently, the ability
of the New York Municipal Bond Fund and the National Intermediate Municipal Fund
to buy and sell municipal obligations may, at any particular time and with
respect to any particular securities, be limited. The amount of information
about the financial condition of an issuer of municipal obligations may not be
as extensive as information about corporations whose securities are publicly
traded. Obligations of issuers of municipal obligations may be subject to the
provisions of bankruptcy, insolvency and other laws affecting the rights and
remedies of creditors, such as the U.S. Bankruptcy Code and applicable state
laws, which could limit the ability of such Funds to recover payments of
principal or interest on such securities.
MORTGAGE-BACKED SECURITIES. The yield characteristics of the mortgage-backed
securities in which the U.S. Government Income Fund, the Strategic Bond Fund and
the Total Return Fund may invest differ from those of traditional debt
securities. Among the major differences are that interest and principal payments
are made more frequently on mortgage-backed securities, usually monthly, and
that principal may be prepaid at any time
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because the underlying mortgage loans generally may be prepaid at any time. As a
result, if these securities are purchased at a premium, faster than expected
prepayments will reduce yield to maturity, while slower than expected
prepayments will increase yield to maturity. Conversely, if these securities are
purchased at a discount, faster than expected prepayments will increase yield to
maturity, while slower than expected prepayments will reduce yield to maturity.
Accelerated prepayments on securities purchased at a premium also impose a risk
of loss of principal because the premium may not have been fully amortized at
the time the principal is prepaid in full. Because of the reinvestment of
prepayments of principal at current rates, mortgage-backed securities may be
less effective than Treasury bonds of similar maturity at maintaining yields
during periods of declining interest rates. When interest rates rise, the value
and liquidity of mortgage-backed securities may decline sharply and generally
will decline more than would be the case with other fixed-income securities;
however, when interest rates decline, the value of mortgage-backed securities
may not increase as much as other fixed-income securities due to the prepayment
feature. Certain market conditions may result in greater than expected
volatility in the prices of mortgage-backed securities. For example, in periods
of supply and demand imbalances in the market for such securities and/or in
periods of sharp interest rate movements, the prices of mortgage-backed
securities may fluctuate to a greater extent than would be expected from
interest rate movements alone. For a description of multiple class mortgage
pass-through securities, see "-- Collateralized Mortgage Obligations and
Multiclass Pass-Through Securities" below.
ADJUSTABLE RATE MORTGAGE SECURITIES. Unlike fixed rate mortgage securities,
adjustable rate mortgage securities are collateralized by or represent interests
in mortgage loans with variable rates of interest. These variable rates of
interest reset periodically to align themselves with market rates. A Fund will
not benefit from increases in interest rates to the extent that interest rates
rise to the point where they cause the current coupon of the underlying
adjustable rate mortgages to exceed any maximum allowable annual or lifetime
reset limits (or "cap rates") for a particular mortgage. In this event, the
value of the mortgage securities in a Fund would likely decrease. Also, a Fund's
net asset value could vary to the extent that current yields on adjustable rate
mortgage securities are different than market yields during interim periods
between coupon reset dates or if the timing of changes to the index upon which
the rate for the underlying mortgages is based lags behind changes in market
rates. During periods of declining interest rates, income to a Fund derived from
adjustable rate mortgages which remain in a mortgage pool will decrease in
contrast to the income on fixed rate mortgages, which will remain constant.
Adjustable rate mortgages also have less potential for appreciation in value as
interest rates decline than do fixed rate investments.
PRIVATELY-ISSUED MORTGAGE SECURITIES. The Strategic Bond Fund and the Total
Return Fund may also purchase mortgage-backed securities issued by private
issuers which may entail greater risk than mortgage-backed securities that are
guaranteed by the U.S. government, its agencies or instrumentalities.
Privately-issued mortgage securities are issued by private originators of, or
investors in, mortgage loans, including mortgage bankers, commercial banks,
investment banks, savings and loan associations and special purpose subsidiaries
of the foregoing. Since privately-issued mortgage certificates are not
guaranteed by an entity having the credit status of GNMA or FHLMC, such
securities generally are structured with one or more types of credit
enhancement. Such credit support falls into two categories: (i) liquidity
protection and (ii) protection against
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losses resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the pass-through of
payments due on the underlying pool occurs in a timely fashion. Protection
against losses resulting from ultimate default enhances the likelihood of
ultimate payment of the obligations on at least a portion of the assets in the
pool. Such protection may be provided through guarantees, insurance policies or
letters of credit obtained by the issuer or sponsor from third parties, through
various means of structuring the transaction or through a combination of such
approaches.
The ratings of mortgage securities for which third-party credit enhancement
provides liquidity protection or protection against losses from default are
generally dependent upon the continued creditworthiness of the provider of the
credit enhancement. The ratings of such securities could be subject to reduction
in the event of deterioration in the creditworthiness of the credit enhancement
provider even in cases where the delinquency and loss experience on the
underlying pool of assets is better than expected. There can be no assurance
that the private issuers or credit enhancers of mortgage-backed securities can
meet their obligations under the relevant policies or other forms of credit
enhancement.
Examples of credit support arising out of the structure of the transaction
include "senior-subordinated securities" (multiple class securities with one or
more classes subordinate to other classes as to the payment of principal thereof
and interest thereon, with the result that defaults on the underlying assets are
borne first by the holders of the subordinated class), creation of "reserve
funds" (where cash or investments sometimes funded from a portion of the
payments on the underlying assets are held in reserve against future losses) and
"over-collateralization" (where the scheduled payments on, or the principal
amount of, the underlying assets exceed those required to make payment of the
securities and pay any servicing or other fees). The degree of credit support
provided for each issue is generally based on historical information with
respect to the level of credit risk associated with the underlying assets.
Delinquency or loss in excess of that which is anticipated could adversely
affect the return on an investment in such security.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH SECURITIES. The
U.S. Government Income Fund and the Strategic Bond Fund may invest in
collateralized mortgage obligations. Collateralized mortgage obligations or
"CMOS" are debt obligations collateralized by mortgage loans or mortgage
pass-through securities. Typically, CMOs are collateralized by Ginnie Mae,
Fannie Mae or Freddie Mac Certificates, but also may be collateralized by whole
loans or private pass-throughs (such collateral collectively hereinafter
referred to as "Mortgage Assets"). Multiclass pass-through securities are
interests in a trust composed of Mortgage Assets. Unless the context indicates
otherwise, all references herein to CMOs include multiclass pass-through
securities. Payments of principal and of interest on the Mortgage Assets, and
any reinvestment income thereon, provide the funds to pay debt service on the
CMOs or make scheduled distributions on the multiclass pass-through securities.
CMOs may be issued by agencies or instrumentalities of the U.S. government, or
by private originators of, or investors in, mortgage loans, including savings
and loan associations, mortgage banks, commercial banks, investment banks and
special purpose subsidiaries of the foregoing. CMOs acquired by the U.S.
Government Income Fund will be limited to those issued or guaranteed by agencies
or instrumentalities of the U.S. government
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and, if available in the future, the U.S. government.
In a CMO, a series of bonds or certificates is issued in multiple classes. Each
class of CMOs, often referred to as a "tranche", is issued at a specified fixed
or floating coupon rate and has a stated maturity or final distribution date.
Principal prepayments on the Mortgage Assets may cause the CMOs to be retired
substantially earlier than their stated maturities or final distribution dates.
Interest is paid or accrues on all classes of the CMOs on a monthly, quarterly
or semi-annual basis. The principal of and interest on the Mortgage Assets may
be allocated among the several classes of a series of a CMO in innumerable ways.
In one structure, payments of principal, including any principal prepayments, on
the Mortgage Assets are applied to the classes of a CMO in the order of their
respective stated maturities or final distribution dates, so that no payment of
principal will be made on any class of CMOs until all other classes having an
earlier stated maturity or final distribution date have been paid in full. The
U.S. Government Income and Strategic Bond Funds have no present intention to
invest in CMO residuals. As market conditions change, and particularly during
periods of rapid or unanticipated changes in market interest rates, the
attractiveness of the CMO classes and the ability of the structure to provide
the anticipated investment characteristics may be significantly reduced. Such
changes can result in volatility in the market value, and in some instances
reduced liquidity, of the CMO class.
The U.S. Government Income and Strategic Bond Funds may also invest in, among
others, parallel pay CMOs and Planned Amortization Class CMOs ("PAC Bonds").
Parallel pay CMOs are structured to provide payments of principal on each
payment date to more than one class. These simultaneous payments are taken into
account in calculating the stated maturity date or final distribution date of
each class, which, as with other CMO structures, must be retired by its stated
maturity date or a final distribution date but may be retired earlier. PAC Bonds
are a type of CMO tranche or series designed to provide relatively predictable
payments of principal provided that, among other things, the actual prepayment
experience on the underlying mortgage loans falls within a predefined range. If
the actual prepayment experience on the underlying mortgage loans is at a rate
faster or slower than the predefined range or if deviations from other
assumptions occur, principal payments on the PAC Bond may be earlier or later
than predicted. The magnitude of the predefined range varies from one PAC Bond
to another; a narrower range increases the risk that prepayments on the PAC Bond
will be greater or smaller than predicted. Because of these features, PAC Bonds
generally are less subject to the risks of prepayment than are other types of
mortgage-backed securities.
STRIPPED MORTGAGE SECURITIES. The Strategic Bond Fund may purchase stripped
mortgage securities which are derivative multiclass mortgage securities.
Stripped mortgage securities may be issued by agencies or instrumentalities of
the U.S. government, or by private originators of, or investors in, mortgage
loans, including savings and loan associations, mortgage banks, commercial
banks, investment banks and special purpose subsidiaries of the foregoing.
Stripped mortgage securities have greater volatility than other types of
mortgage securities. Although stripped mortgage securities are purchased and
sold by institutional investors through several investment banking firms acting
as brokers or dealers, the market for such securities has not yet been fully
developed. Accordingly, stripped mortgage securities are generally illiquid and
to such extent, together with any other illiquid investments, will be subject to
the Strategic Bond Fund's applicable restriction on investments in illiquid
securities.
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Stripped mortgage securities are structured with two or more classes of
securities that receive different proportions of the interest and principal
distributions on a pool of mortgage assets. A common type of stripped mortgage
security will have at least one class receiving only a small portion of the
interest and a larger portion of the principal from the mortgage assets, while
the other class will receive primarily interest and only a small portion of the
principal. In the most extreme case, one class will receive all of the interest
("IO" or interest-only), while the other class will receive all of the principal
("PO" or principal-only class). The yield to maturity on IOs, POs and other
mortgage-backed securities that are purchased at a substantial premium or
discount generally are extremely sensitive not only to changes in prevailing
interest rates but also to the rate of principal payments (including
prepayments) on the related underlying mortgage assets, and a rapid rate of
principal payments may have a material adverse effect on such securities' yield
to maturity. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, a Fund may fail to fully recoup its
initial investment in these securities even if the securities have received the
highest rating by a nationally recognized statistical rating organizations.
In addition to the stripped mortgage securities described above, the Strategic
Bond Fund may invest in similar securities such as Super POs and Levered IOs
which are more volatile than POs, IOs and IOettes. Risks associated with
instruments such as Super POs are similar in nature to those risks related to
investments in POs. Risks connected with Levered IOs and IOettes are similar in
nature to those associated with IOs. The Strategic Bond Fund may also invest in
other similar instruments developed in the future that are deemed consistent
with its investment objective, policies and restrictions. POs may generate
taxable income from the current accrual of original issue discount, without a
corresponding distribution of cash to the Fund. See "Taxation" and "Additional
Information Concerning Taxes" in the Statement of Additional Information.
MORTGAGE ROLLS. The U.S. Government Income Fund and the Strategic Bond Fund may
enter into mortgage "dollar rolls" in which a Fund sells mortgage-backed
securities for delivery in the current month and simultaneously contracts to
repurchase substantially similar (same type, coupon and maturity) securities on
a specified future date. During the roll period, a Fund foregoes principal and
interest paid on the mortgage-backed securities. A Fund is compensated by the
difference between the current sales price and the lower forward price for the
future purchase (often referred to as the "drop") as well as by the interest
earned on the cash proceeds of the initial sale. A Fund may only enter into
covered rolls. A "covered roll" is a specific type of dollar roll for which
there is an offsetting cash position which matures on or before the forward
settlement date of the dollar roll transaction. At the time a Fund enters into a
mortgage "dollar roll", it will establish a segregated account with its
custodian bank in which it will maintain cash, U.S. government securities or
other liquid high grade debt obligations equal in value to its obligations in
respect of dollar rolls, and accordingly, such dollar rolls will not be
considered borrowings. Mortgage dollar rolls involve the risk that the market
value of the securities the Fund is obligated to repurchase under the agreement
may decline below the repurchase price. In the event the buyer of securities
under a mortgage dollar roll files for bankruptcy or becomes insolvent, the
Fund's use of proceeds of the dollar roll may be restricted pending a
determination by the other party, or its trustee or receiver, whether to enforce
the Fund's obligation to repurchase the securities.
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HIGH YIELD SECURITIES. The High Yield Bond Fund and the Strategic Bond Fund may
invest without limitation in domestic and foreign "high yield" securities. The
Investors Fund and the Total Return Fund may invest without limitation in
convertible securities of this type and up to 5% and 20%, respectively, of their
net assets in non-convertible securities of this type. The Asia Growth Fund may
invest without limitation in convertible non-U.S. high yield securities and up
to 10% of its total assets in non-convertible non-U.S. high yield securities.
Under rating agency guidelines, medium-and lower-rated securities and comparable
unrated securities will likely have some quality and protective characteristics
that are outweighed by large uncertainties or major risk exposures to adverse
conditions. Medium and lower rated securities are considered to have extremely
poor prospects of ever attaining any real investment standing, to have a current
identifiable vulnerability to default or are in default, to be unlikely to have
the capacity to pay interest and repay principal when due in the event of
adverse business, financial or economic conditions, and/or to be in default or
not current in the payment of interest or principal. Such securities are
considered speculative with respect to the issuer's capacity to pay interest and
repay principal in accordance with the terms of the obligations. Accordingly, it
is possible that these types of factors could, in certain instances, reduce the
value of securities held by a Fund with a commensurate effect on the value of
the Fund's shares.
Changes by recognized rating services in their ratings of any fixed-income
security and in the ability of an issuer to make payments of interest and
principal may also affect the value of these investments. A description of the
ratings used by Moody's and S&P is set forth in Appendix A to this Prospectus.
The ratings of Moody's and S&P generally represent the opinions of those
organizations as to the quality of the securities that they rate. Such ratings,
however, are relative and subjective, are not absolute standards of quality, are
subject Lo change and do not evaluate the market risk or liquidity of the
securities. Ratings of a non-U.S. debt instrument, to the extent that those
ratings are undertaken, are related to evaluations of the country in which the
issuer of the instrument is located. Ratings generally take into account the
currency in which a non-U.S. debt instrument is denominated. Instruments issued
by a foreign government in other than the local currency, for example, typically
have a lower rating than local currency instruments due to the existence of an
additional risk that the government will be unable to obtain the required
foreign currency to service its foreign currency-denominated debt. In general,
the ratings of debt securities or obligations issued by a non-U.S. public or
private entity will not be higher than the rating of the currency or the foreign
currency debt of the central government of the country in which the issuer is
located, regardless of the intrinsic creditworthiness of the issuer.
The secondary markets for high yield securities are not as liquid as the
secondary markets for higher rated securities. The secondary markets for high
yield securities are concentrated in relatively few market makers and
participants in the market are mostly institutional investors, including
insurance companies, banks, other financial institutions and mutual funds. In
addition, the trading volume for high yield securities is generally lower than
that for higher-rated securities and the secondary markets could contract under
adverse market or economic conditions independent of any specific adverse
changes in the condition of a particular issuer. These factors may have an
adverse effect on the ability of a Fund holding such securities to dispose of
particular portfolio investments, may adversely affect the Fund's net asset
value per share and
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may limit the ability of such a Fund to obtain accurate market quotations for
purposes of valuing securities and calculating net asset value. If a Fund is not
able to obtain precise or accurate market quotations for a particular security,
it will become more difficult for the Board of Directors to value such Fund's
portfolio securities, and the Directors may have to use a greater degree of
judgment in making such valuations. Less liquid secondary markets may also
affect the ability of a Fund to sell securities at their fair value. If the
secondary markets for high yield securities contract due to adverse economic
conditions or for other reasons, certain liquid securities in a Fund's portfolio
may become illiquid and the proportion of the Fund's assets invested in illiquid
securities may significantly increase.
Prices for high yield securities may be affected by legislative and regulatory
developments. These laws could adversely affect a Fund's net asset value and
investment practices, the secondary market for high yield securities, the
financial condition of issuers of these securities and the value of outstanding
high yield securities. For example, federal legislation requiring the
divestiture by federally insured savings and loan associations of their
investments in high yield bonds and limiting the deductibility of interest by
certain corporate issuers of high yield bonds adversely affected the market in
recent years.
HIGH YIELD CORPORATE SECURITIES. While the market values of securities rated
below investment grade and comparable unrated securities tend to react less to
fluctuations in interest rate levels than do those of higher-rated securities,
the market values of certain of these securities also tend to be more sensitive
to individual corporate developments and changes in economic conditions than
higher-rated securities. In addition, such securities present a higher degree of
credit risk. Issuers of these securities are often highly leveraged and may not
have more traditional methods of financing available to them, so that their
ability to service their debt obligations during an economic downturn or during
sustained periods of rising interest rates may be impaired. The risk of loss due
to default by such issuers is significantly greater than with investment grade
securities because such securities generally are unsecured and frequently are
subordinated to the prior payment of senior indebtedness. A Fund also may incur
additional expenses to the extent that it is required to seek recovery upon a
default in the payment of principal or interest on its portfolio holdings.
The development of a market for high yield 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 non-U.S. and U.S. corporate securities in which the applicable Funds
may invest include bonds, debentures, notes, commercial paper and preferred
stock and will generally be unsecured. Most of the debt securities will bear
interest at fixed rates. However, a Fund may also invest in corporate debt
securities with variable rates of interest or which involve equity features,
such as contingent interest or participations based on revenues, sales or
profits (i.e., interest or other payments, often in addition to a fixed rate of
return, that are based on the borrower's attainment of specified levels of
revenues, sales or profits and thus enable the holder of the security to share
in the potential success of the venture).
HIGH YIELD FOREIGN SOVEREIGN DEBT SECURITIES. Investing in fixed and floating
rate high yield foreign sovereign debt securities will expose Funds investing in
such securities to the direct or indirect consequences of political, social or
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economic changes in the countries that issue the securities. See "--Foreign
Securities" above. The ability and willingness of sovereign obligors in
developing and emerging market countries or the governmental authorities that
control repayment of their external debt to pay principal and interest on such
debt when due may depend on general economic and political conditions within the
relevant country. Countries such as those in which a Fund may invest have
historically experienced, and may continue to experience, high rates of
inflation, high interest rates, exchange rate trade difficulties and extreme
poverty and unemployment. Many of these countries are also characterized by
political uncertainty or instability. Additional factors which may influence the
ability or willingness to service debt include, but are not limited to, a
country's cash flow situation, the availability of sufficient foreign exchange
on the date a payment is due, the relative size of its debt service burden to
the economy as a whole, and its government's policy towards the International
Monetary Fund, the World Bank and other international agencies.
The ability of a foreign sovereign obligor to make timely payments on its
external debt obligations will also be strongly influenced by the obligor's
balance of payments, including export performance, its access to international
credits and investments, fluctuations in interest rates and the extent of its
foreign reserves. A country whose exports are concentrated in a few commodities
or whose economy depends on certain strategic imports could be vulnerable to
fluctuations in international prices of these commodities or imports. To the
extent that a country receives payment for its exports in currencies other than
dollars, its ability to make debt payments denominated in dollars could be
adversely affected. If a foreign sovereign obligor cannot generate sufficient
earnings from foreign trade to service its external debt, it may need to depend
on continuing loans and aid from foreign governments, commercial banks and
multilateral organizations, and inflows of foreign investment. The commitment on
the part of these foreign governments, multilateral organizations and others to
make such disbursements may be conditioned on the government's implementation of
economic reforms and/ or economic performance and the timely service of its
obligations. Failure to implement such reforms, achieve such levels of economic
performance or repay principal or interest when due may result in the
cancellation of such third parties' commitments to lend funds, which may further
impair the obligor's ability or willingness to timely service its debts. The
cost of servicing external debt will also generally be adversely affected by
rising international interest rates, because many external debt obligations bear
interest at rates which are adjusted based upon international interest rates.
The ability to service external debt will also depend on the level of the
relevant government's international currency reserves and its access to foreign
exchange. Currency devaluations may affect the ability of a sovereign obligor to
obtain sufficient foreign exchange to service its external debt.
As a result of the foregoing, a governmental obligor may default on its
obligations. If such an event occurs, a Fund may have limited legal recourse
against the issuer and/or guarantor. Remedies must, in some cases, be pursued in
the courts of the defaulting party itself, and the ability of the holder of
foreign sovereign debt securities to obtain recourse may be subject to the
political climate in the relevant country. In addition, no assurance can be
given that the holders of commercial bank debt will not contest payments to the
holders of other foreign sovereign debt obligations in the event of default
under their commercial bank loan agreements.
Certain debt obligations, customarily referred to as "Brady Bonds," are created
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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 collateralized or uncollateralized and issued in
various currencies (although most are dollar-denominated) and they are actively
traded in the over-the-counter secondary market. 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. 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. In the event of a default with respect to collateralized Brady
Bonds as a result of which the payment obligations of the issuer are
accelerated, the U.S. Treasury zero coupon obligations held as collateral for
the payment of principal will not be distributed to investors, nor will such
obligations be sold and the proceeds distributed. The collateral will be held by
the collateral agent to the scheduled maturity of the defaulted Brady Bonds,
which will continue to be outstanding, at which time the face amount of the
collateral will equal the principal payments which would have then been due on
the Brady Bonds in the normal course. Based upon current market conditions, a
Fund would not intend to purchase Brady Bonds which, at the time of investment,
are in default as to payments. However, in light of the residual risk of the
Brady Bonds and, among other factors, the history of default with respect to
commercial bank loans by public and private entities of countries issuing Brady
Bonds, investments in Brady Bonds are to be viewed as speculative. A substantial
portion of the Brady Bonds and other sovereign debt securities in which the High
Yield Bond and Strategic Bond Funds invest are likely to be acquired at a
discount, which involves certain considerations discussed below under
"Taxation."
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 certain of the Funds may invest
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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.
INVESTMENT FUNDS. A Fund may invest in unaffiliated investment funds which
invest principally in securities in which that Fund is authorized to invest.
Under the 1940 Act, the Fund may invest a maximum of 10% of its total assets in
the securities of other investment companies. In addition, under the 1940 Act,
not more than 5% of the Fund's total assets may be invested in the securities of
any one investment company. To the extent a Fund invests in other investment
funds, the Fund's shareholders will incur certain duplicative fees and expenses,
including investment advisory fees. A Fund's investment in certain investment
funds will result in special U.S. Federal income tax consequences described
below under "Taxation."
BORROWING. Each of the Funds may borrow in certain limited circumstances. See
"Investment Limitations." Borrowing creates an opportunity for increased return,
but, at the same time, creates special risks. For example, borrowing may
exaggerate changes in the net asset value of a Fund's shares and in the return
on the Fund's portfolio. Although the principal of any borrowing will be fixed,
a Fund's assets may change in value during the time the borrowing is
outstanding. A Fund may be required to liquidate portfolio securities at a time
when it would be disadvantageous to do so in order to make payments with respect
to any borrowing, which could affect the investment manager's strategy and the
ability of the Fund to comply with certain provisions of the Internal Revenue
Code of 1986, as amended (the "Code") in order to provide "pass-though" tax
treatment to shareholders. Furthermore, if a Fund were to engage in borrowing,
an increase in interest rates could reduce the value of the Fund's shares by
increasing the Fund's interest expense.
NON-DIVERSIFICATION. The Asia Growth Fund is classified as a non-diversified
investment company 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 Asia Growth 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 widely diversified fund and may be subject to greater
risk of loss with respect to its portfolio securities. See "Taxation" and
"Investment Limitations."
DERIVATIVES. Certain of the Funds may be authorized to use various investment
strategies described below to hedge market risks (such as broad or specific
market movements, interest rates and currency exchange rates), to manage the
effective maturity or duration of debt instruments held by a Fund, or to seek to
increase a Fund's income or gain. The description in this Prospectus of each
Fund indicates which, if any, of these types of transactions may be used by that
Fund. Although these strategies are regularly used by some investment companies
and other institutional investors, it is not presently anticipated that any of
these strategies will be used to a significant degree by any Fund unless
otherwise specifically indicated in the description of the particular Fund
contained in this Prospectus. Over time, however, techniques and instruments may
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change as new instruments and strategies are developed or regulatory changes
occur.
Subject to the constraints described above, a Fund may (if and to the extent so
authorized) purchase and sell interest rate, currency or stock or bond index
futures contracts and enter into currency forward contracts and currency swaps;
purchase and sell (or write) exchange listed and over-the-counter put and call
options on securities, currencies, futures contracts, indices and other
financial instruments, and a Fund may enter into interest rate transactions,
equity swaps and related transactions and other similar transactions which may
be developed to the extent the investment manager determines that they are
consistent with the applicable Fund's investment objective and policies and
applicable regulatory requirements (collectively, these transactions are
referred to in this Prospectus as "Derivatives"). A Fund's interest rate
transactions may take the form of swaps, caps, floors and collars, and a Fund's
currency transactions may take the form of currency forward contracts, currency
futures contracts, currency swaps and options on currencies or currency futures
contracts.
Derivatives may be used to attempt to protect against possible changes in the
market value of securities held or to be purchased for a Fund's portfolio
resulting from securities markets or currency exchange rate fluctuations, to
protect a Fund's unrealized gains in the value of its securities, to facilitate
the sale of those securities for investment purposes, to manage the effective
maturity or duration of a Fund's portfolio or to establish a position in the
derivatives markets as a temporary substitute for purchasing or selling
particular securities or to seek to enhance a Fund's income or gain. A Fund may
use any or all types of Derivatives which it is authorized to use at any time;
no particular strategy will dictate the use of one type of transaction rather
than another, as use of any authorized Derivative will be a function of numerous
variables, including market conditions. The ability of a Fund to utilize
Derivatives successfully will depend on, in addition to the factors described
above, the investment manager's ability to predict pertinent market movements,
which cannot be assured. These skills are different from those needed to select
a Fund's portfolio securities. None of the Funds is a "commodity pool" (i.e., a
pooled investment vehicle which trades in commodity futures contracts and
options thereon and the operator of which is registered with the CFTC), and
Derivatives involving futures contracts and options on futures contracts will be
purchased, sold or entered into only for bona fide hedging purposes, provided
that a Fund may enter into such transactions for purposes other than bona fide
hedging if, immediately thereafter, the sum of the amount of its initial margin
and premiums on open contracts and options would not exceed 5% of the
liquidation value of the Fund's portfolio, after taking into account unrealized
profits and losses on existing contracts provided, further, that, in the case of
an option that is in-the-money, the in-the-money amount may be excluded in
calculating the 5% limitation. The use of certain Derivatives in certain
circumstances will require that a Fund segregate cash, liquid high grade debt
obligations or other assets to the extent a Fund's obligations are not otherwise
"covered" through ownership of the underlying security, financial instrument or
currency.
Derivatives involve special risks, including possible default by the other party
to the transaction, illiquidity and, to the extent the investment manager's view
as to certain market movements is incorrect, the risk that the use of
Derivatives could result in significantly greater losses than if it had not been
used. Use of put and call options could result in losses to a Fund, force the
purchase or sale of portfolio securities at inopportune times or for
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prices higher or lower than current market values, or cause a Fund to hold a
security it might otherwise sell. The use of currency transactions could result
in a Fund's incurring losses as a result of the imposition of exchange controls,
suspension of settlements, or the inability to deliver or receive a specified
currency in addition to exchange rate fluctuations. The use of options and
futures transactions entails certain special risks. In particular, the variable
degree of correlation between price movements of futures contracts and price
movements in the related portfolio position of a Fund could create the
possibility that losses on the Derivative will be greater than gains in the
value of the Fund's position. In addition, futures and options markets could be
illiquid in some circumstances and certain over-the-counter options could have
no markets. A Fund might not be able to close out certain positions without
incurring substantial losses. To the extent a Fund utilizes futures and options
transactions for hedging, such transactions should tend to minimize the risk of
loss due to a decline in the value of the hedged position and, at the same time,
limit any potential gain to the Fund that might result from an increase in value
of the position. Finally, the daily variation margin requirements for futures
contracts create a greater ongoing potential financial risk than would purchases
of options, in which case the exposure is limited to the cost of the initial
premium and transaction costs. Losses resulting from the use of Derivatives will
reduce a Fund's net asset value, and possibly income, and the losses may be
significantly greater than if Derivatives had not been used. Additional
information regarding the risks and special considerations associated with
Derivatives appears in Appendix B to this Prospectus and the Statement of
Additional Information.
The degree of a Fund's use of Derivatives may be limited by certain provisions
of the Code. See "Taxation."
PORTFOLIO TURNOVER. Purchases and sales of portfolio securities may be made as
considered advisable by each Fund's investment manager in the best interests of
the shareholders. Each Fund intends to limit portfolio trading to the extent
practicable and consistent with its investment objectives. Each Fund's portfolio
turnover rate may vary from year to year, as well as within a year. The Total
Return Fund anticipates that its annual portfolio turnover rate will not exceed
120% and the Asia Growth Fund anticipates that its annual portfolio turnover
rate generally will not exceed 100%. However, the expected portfolio rates may
be exceeded if conditions warrant. The portfolio turnover of the New York
Municipal Bond Fund for the years ended December 31, 1995 and 1994 were 22% and
63%, respectively. The portfolio turnover for the National Intermediate
Municipal Fund, U.S. Government Income Fund, High Yield Bond Fund and Strategic
Bond Fund for the period from February 22, 1995 (commencement of investment
operations) through December 31, 1995 was 29%, 230%, 109%, and 161%,
respectively. The portfolio turnover for the Total Return Fund for the period
from September 11, 1995 (commencement of investment operations) through December
31, 1995 was 16%. The portfolio turnover of the Investors Fund for the years
ended December 31, 1995 and 1994 were 86% and 66%, respectively. Short-term
gains realized from portfolio transactions are taxable to shareholders as
ordinary income. In addition, higher portfolio turnover rates can result in
corresponding increases in portfolio transaction costs for a Fund.
With respect to the Cash Management Fund, the investment manager seeks to
enhance the Fund's yield by taking advantage of yield disparities or other
factors that occur in the money market. For example, market conditions
frequently result in similar securities trading at different prices. The Cash
Management
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SALOMON BROTHERS INVESTMENT SERIES
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 the investment manager'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 the investment manager
will consider such an event in determining whether the Cash Management Fund
should continue to hold the security. The policy of the Cash Management Fund
regarding dispositions of portfolio securities and its policy of investing in
securities deemed to have maturities of thirteen months or less will result in
high portfolio turnover. A higher rate of portfolio turnover results in
increased transaction costs to the Cash Management Fund in the form of dealer
spreads.
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MULTIPLE PRICING SYSTEM
The Funds' Multiple Pricing System permits an investor to choose the method of
purchasing shares that is most beneficial given the amount of the purchase and
the length of time the investor expects to hold the shares.
CLASS A SHARES. Class A shares are offered for sale at net asset value per share
plus a front end sales charge of up to 4.75% payable at the time of purchase
(with the exception of Class A shares of the Cash Management Fund, which are
offered without such a charge). The initial sales charge may be reduced or
waived for certain purchases of Class A shares. Certain Class A shares for which
the front end sales charge is waived may be subject to a CDSC of 1% within one
year after the date of purchase. In addition, Class A shares are subject to a
12b-1 service fee at an annual rate of .25% of their respective average daily
net assets (with the exception of Class A shares of the Cash Management Fund,
which bear no such fees). The annual service fee is compensation for ongoing
services provided by Salomon Brothers to shareholders, including payments to
compensate selected securities dealers for such services. See "Purchase of
Shares-- Class A Shares--Reduced Sales Charges" and "-- Distributor" and
"Redemption of Shares--Class A Share Purchases of $1 million or more."
CLASS B SHARES. Class B shares are offered for sale for purchases of less than
$250,000. Class B shares are sold at net asset value without a front end sales
charge, but are subject to a CDSC of 5% of the dollar amount subject thereto
during the first and second year after purchase, and declining each year
thereafter to 0% after the sixth year. The applicable percentage is assessed on
an amount equal to the lesser of the original purchase price or the redemption
price of the shares redeemed. Any CDSC applicable to Class B shares excludes the
time the shares were held in the Cash Management Fund. The CDSC is not
applicable with respect to redemptions of Class B shares of the Cash Management
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Fund which were initially purchased as such and which were never exchanged for
Class B shares of another Fund. However, in the case of Class B shares of the
Cash Management Fund which were obtained through an exchange, such shares are
subject to any applicable CDSC due at redemption. Similarly, shares initially
purchased as Class B shares of the Cash Management Fund which are subsequently
exchanged for Class B Shares of other Funds will be subject to any applicable
CDSC due at redemption. See "Shareholder Services--Exchange Privilege." In
addition, Class B shares are subject to a 12b-1 distribution fee at an annual
rate of .75% of their respective average daily net assets and a 12b-1 service
fee at an annual rate of .25% of their respective average daily net assets (with
the exception of Class B shares of the Cash Management Fund, which bear no such
fees). Like the service fee applicable to Class A shares, the Class B service
fee is compensation for ongoing services provided by Salomon Brothers to
shareholders, including payments to compensate selected securities dealers for
such services. Additionally, the distribution fee paid with respect to Class B
shares compensates Salomon Brothers for selling those shares. The Class B shares
enjoy the benefit of permitting all of the investor's dollars to work from the
time the investment is made. The ongoing distribution fees paid by Class B
shares will cause such shares to have a higher expense ratio and to pay lower
dividends than Class A shares. See "Purchase of Shares--Class B Shares" and
"--Distributor." Class B shares will automatically convert to Class A shares six
years after the end of the calendar month in which the shareholder's order to
purchase was accepted. See "--Conversion Feature" below.
CLASS C SHARES. Class C shares are offered for purchases of less than
$1,000,000, are offered at net asset value without a front end sales charge and
are subject to a CDSC of 1% if redeemed within the first year of purchase (with
the exception of Class C shares of the Cash Management Fund, which are not
subject to any CDSC upon redemption if they were initially purchased as such and
were never exchanged for Class C shares of another Fund). Any CDSC applicable to
Class C shares excludes the time the shares were held in the Cash Management
Fund. See "Shareholder Services-- Exchange Privilege." Class C shares are
subject to a 12b-1 distribution fee at an annual rate of .75% of their
respective average daily net assets and a 12b-1 service fee at an annual rate of
.25% of their respective average daily net assets (with the exception of Class C
shares of the Cash Management Fund, which bear no such fees). Like the services
fees applicable to Class A and Class B shares, the Class C service fee is
compensation for ongoing services provided by Salomon Brothers to shareholders,
including payments to compensate selected securities dealers for such services,
and like the distribution fee applicable to Class B shares, the Class C
distribution fee compensates Salomon Brothers for selling shares of that class.
Class C shares, like Class B shares, enjoy the benefit of permitting all of the
investor's dollars to work from the time the investment is made. The ongoing
distribution fees paid by Class C shares will cause such shares to have a higher
expense ratio and to pay lower dividends than Class A shares. See "Purchase of
Shares--Class C Shares" and "--Distributor." Class C shares will automatically
convert to Class A shares ten years after the end of the calendar month in which
the shareholder's order to purchase was accepted. See "--Conversion Feature"
below.
CLASS O SHARES. Each Fund also offers Class O shares. However, only Class O
shareholders are permitted to purchase additional Class O shares. In connection
with the implementation of the Multiple Pricing System, shares outstanding as of
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SALOMON BROTHERS INVESTMENT SERIES
the close of business on December 31, 1994 of each of the Cash Management Fund,
the New York Municipal Bond Fund and the Investors Fund were reclassified as
shares of Class O of each such Fund. Class O shares are not subject to any sales
charges, distribution or service fees.
CONVERSION FEATURE. Class B shares and Class C shares will automatically convert
to Class A shares six years and ten years, respectively, after the end of the
calendar month in which the shareholder's order to purchase was accepted and
will thereafter no longer be subject to a distribution fee. Such conversion will
be on the basis of the relative net asset values of each class, without the
imposition of any sales charge, fee or other charge. The purpose of the
conversion feature is to relieve the holders of Class B shares and Class C
shares from most of the burden of distribution-related expenses at such time as
when the shares have been outstanding for a duration sufficient for the Fund's
distributor, Salomon Brothers (in such capacity, the "Distributor"), to have
been substantially compensated for distribution-related expenses incurred in
connection with Class B shares or Class C shares, as the case may be.
Accordingly, Class B shares and Class C shares of the Cash Management Fund do
not convert to Class A shares of the Cash Management Fund at any time, as shares
of all classes of the Cash Management Fund do not bear any distribution or
service fees. If a shareholder effects one or more exchanges among Class B
shares or Class C shares, as the case may be, of the Funds during the applicable
conversion period, the period of time during which Class B shares or Class C
shares were held prior to an exchange will be added to the holding period of
Class B shares or Class C shares acquired in an exchange. However, because Class
B shares and Class C shares of the Cash Management Fund are not subject to any
distribution or service fees, the applicable conversion period is tolled for any
period of time in which Class B shares or Class C shares are held in the Cash
Management Fund. For example, if Class B shares of a Fund other than the Cash
Management Fund are exchanged for Class B shares of the Cash Management Fund two
years after purchase and are subsequently exchanged one year later for Class B
shares of a Fund other than the Cash Management Fund, the one year of ownership
in the Cash Management Fund does not count in the determination of the time of
conversion to Class A shares.
For purposes of the conversion of Class B shares and Class C shares to Class A
shares, shares purchased through the reinvestment of dividends and distributions
paid on Class B shares or Class C shares, as the case may be, in a shareholder's
Fund account will be considered to be held in a separate sub-account. Each time
any Class B shares or Class C shares in the shareholder's Fund account (other
than those in the sub-account) convert to Class A shares, a pro rata portion of
the Class B shares or Class C shares, as the case may be, in the sub-account
will also convert to Class A shares.
The conversion of Class B shares to Class A shares and the conversion of Class C
shares to Class A shares of the Total Return Fund and the Asia Growth Fund are
both subject to the availability of a ruling of the Internal Revenue Service
that payment of different dividends on Class A shares, Class B shares and Class
C shares, does not result in the Funds' dividends or distributions constituting
"preferential dividends" under the Code, and the continuing availability of an
opinion of counsel to the effect that the conversion of shares does not
constitute a taxable event under federal income tax law. Each of the other Funds
has obtained such a ruling. The Total Return Fund has applied for such a ruling;
and the Asia Growth Fund intends to apply for such a ruling; however, there can
be no assurance that the Funds' ruling
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SALOMON BROTHERS INVESTMENT SERIES
request will be granted. The conversion of Class B shares and Class C shares of
the Total Return Fund and the Asia Growth Fund may be suspended if such a ruling
or opinion is not available. In that event, no further conversions of Class B
shares or Class C shares would occur, and those shares might continue to be
subject to distribution fees for an indefinite period which may extend beyond
the period ending six years or ten years, respectively, after the end of the
calendar month in which the shareholder's order to purchase was accepted.
FACTORS FOR CONSIDERATION. The Funds' Multiple Pricing System is designed to
offer different classes of shares to investors. Although the different classes
of shares of a particular Fund represent an interest in the same portfolio of
investments, each class is subject to a different distribution structure and, as
a result, differing expenses. The Multiple Pricing System provides investors
with the option of choosing the class of shares which is best suited to their
needs and objectives. In evaluating the options offered by the Multiple Pricing
System, investors should consider the different sales charges, distribution and
service fees and conversion features applicable to each class, and other
factors, including the amount of the purchase and the length of time the
investor expects to hold the shares. To assist investors in making their
determination, the information provided above under the caption "Expense
Information" sets forth the charges applicable to each class of shares and
presents an example of a hypothetical investment in each class of shares of each
Fund.
There are distinct advantages and disadvantages among the classes of shares that
investors should consider in evaluating the options offered by the Multiple
Pricing System. Class A, Class B and Class C shares all pay an annual 12b-1
service fee of .25% of average daily net assets, but Class A shares are not
subject to the annual 12b-1 distribution fee of .75% of average daily net assets
paid by Class B and Class C shares, and, accordingly, Class A shares pay
correspondingly higher dividends per share. However, because a front end sales
charge is deducted at the time of purchase of Class A shares, the entire
purchase price is not immediately invested and, therefore, investors purchasing
Class A shares initially own fewer shares than they would own if they had
invested the same amount in Class B shares or Class C shares. Investors may,
however, benefit from the reduction or waiver of the front end sales charge
applicable to Class A shares for certain purchases.
Although investors purchasing Class B or Class C shares benefit from the
advantage of having all their funds invested initially, Class B and Class C
shares remain subject to an ongoing distribution fee which causes them to have
higher expenses and pay lower dividends than Class A shares and may be subject
to a CDSC upon redemption. Class B shares differ from Class C shares, however,
in that Class B shares may be subject to a CDSC upon redemption if redeemed
within six years of purchase, whereas Class C shares are subject to a CDSC only
if they are redeemed within one year after purchase. In addition, Class B shares
automatically convert to Class A shares six years after the end of the month in
which the shares were purchased and thereafter are not subject to an ongoing
distribution fee, whereas Class C shares, which automatically convert to Class A
shares ten years after the end of the month in which the shares were purchased,
remain subject to an ongoing distribution fee for a longer time period. The
purchase of Class C shares may therefore prove beneficial for an investor
expecting to hold Fund shares for less than six years.
Because of the differences among the classes of shares, in deciding which class
of shares to purchase, investors should
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SALOMON BROTHERS INVESTMENT SERIES
consider, in addition to other facts and circumstances, the following factors:
(i) Class A shares are, in general, the most beneficial for the investor who
qualifies for a waiver or certain reductions of the front end sales charges, as
described herein under "Purchase of Shares--Class A Shares."
(ii) Class B and Class C shareholders may pay a CDSC upon redemption. Investors
who expect to redeem during the six year CDSC period applicable to Class B
shares or the one year CDSC period applicable to Class C shares should consider
the cost of the applicable CDSC plus the aggregate annual distribution and
service fees applicable to Class B and Class C shares, as compared with the cost
of the front end sales charge plus the aggregate annual service fees applicable
to Class A shares.
(iii) Over time, the cumulative distribution and service fees applicable to
Class B and Class C shares will approach and may exceed the 4.75% maximum front
end sales charge plus the service fee applicable to Class A shares. For example,
assuming a constant net asset value, the aggregate distribution and service fees
applicable to Class B and Class C shares would equal the front end sales charge
and aggregate service fees applicable to Class A shares at the end of the sixth
year after purchase. Because Class B shares convert to Class A shares (which
bear the same service fees as Class B and Class C shares but do not bear the
expense of ongoing distribution fees) approximately six years after purchase, an
investor expecting to hold Fund shares for longer than six years would generally
pay lower cumulative expenses by purchasing Class A or Class B shares than by
purchasing Class C shares. An investor expecting to hold Fund shares for less
than six years would generally pay lower cumulative expenses by purchasing Class
C shares than by purchasing Class A shares and, due to the CDSC that would
become payable on redemption of Class B shares, such an investor would generally
pay lower cumulative expenses by purchasing Class C shares than Class B shares.
(iv) Because Class B and Class C shareholders pay no front end sales charge, the
entire purchase price is immediately invested in Fund shares. Any return
realized on the additional funds initially invested may partially or wholly
offset the ongoing distribution fees applicable to Class B and Class C shares.
There can be no assurance, however, as to the investment return, if any, which
will be realized on such additional funds.
Investors should consult their investment representatives for assistance in
evaluating the relative benefits of the different classes of shares.
Sales personnel of broker-dealers distributing each Fund's shares and any other
persons entitled to receive compensation for selling or servicing a Fund's
shares may receive different compensation for selling or servicing one class of
shares over another. The distribution and shareholder service expenses incurred
by the Distributor and dealers in connection with the sale of shares will be
paid, in the case of Class A shares, from the proceeds of front end sales
charges and the ongoing service fees; and in the cases of Class B and Class C
shares, from the proceeds of applicable CDSCs and ongoing distribution and
service fees. Investors should understand that the purpose of the front end
sales charge and ongoing service fees applicable to Class A shares is the same
as that of the CDSCs and ongoing distribution and service fees applicable to
Class B and Class C shares.
Dividends paid by each Fund with respect to all classes of shares will be
calculated in substantially the same manner at the same time on the same day,
except that distribution and service fees and any other costs specifically
attributable to a particular class of shares will be borne exclusively by the
applicable class. See
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SALOMON BROTHERS INVESTMENT SERIES
"Dividends and Distributions." Net asset value per share will also differ among
the classes. Shares of each Fund may be exchanged for shares of the same class
of any other Fund, but not for shares of other classes of any Fund. See
"Shareholder Services--Exchange Privilege."
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INVESTMENT LIMITATIONS
The following investment restrictions and those described in the Statement of
Additional Information are fundamental policies applicable to the individual
Funds which may be changed only when permitted by law and approved by the
holders of a majority of each Fund's outstanding voting securities, as defined
in the 1940 Act. Except for the investment restrictions set forth below and in
the Statement of Additional Information and each Fund's investment objective(s),
the other policies and percentage limitations referred to in this Prospectus and
in the Statement of Additional Information are not fundamental policies of the
Funds and may be changed by the applicable Fund's Board of Directors without
shareholder approval.
If a percentage restriction on investment or use of assets set forth below is
adhered to at the time a transaction is effected, later changes in percentages
resulting from changing values will not be considered a violation.
CASH MANAGEMENT FUND. The Cash Management Fund may not:
(1) purchase the securities of any one issuer, other than the U.S. government,
its agencies or instrumentalities, if immediately after such purchase, more than
5% of the value of the Fund's total assets would be invested in such issuer;
provided, however, that such 5% limitation shall not apply to repurchase
agreements collateralized by obligations of the U.S. government, its agencies or
instrumentalities; and provided, further, that the Fund may invest more than 5%
(but no more than 25%) of the value of the Fund's total assets in the securities
of a single issuer for a period of up to three business days;
(2) borrow money except as a temporary measure from banks for extraordinary or
emergency purposes, and in no event in excess of 15% of the value of its total
assets, except that for the purpose of this restriction, short-term credits
necessary for settlement of securities transactions are not considered
borrowings (the Fund will not purchase any securities at any time while such
borrowings exceed 5% of the value of its total assets);
(3) invest more than 10% of the value of its net assets in securities which are
illiquid, including repurchase agreements having notice periods of more than
seven days, fixed time deposits subject to withdrawal penalties and having
notice periods of more than seven days, receivables-backed obligations and
variable amount master demand notes that are not readily saleable in the
secondary market and with respect to which principal and interest may not be
received within seven days, and securities that would be illiquid by virtue of
legal or contractual restrictions on resale;
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(4) invest less than 25% of the current value of its total assets in bank
obligations (including bank obligations subject to repurchase agreements),
provided that if at some future date adverse conditions prevail in the banking
industry or in the market for bank obligations, the Fund, for defensive
purposes, may invest temporarily less than 25% of its assets in bank
obligations; or
(5) pledge, hypothecate, mortgage or otherwise encumber its assets in excess of
20% of the value of its total assets, and then only to secure borrowings
permitted by (2) above.
NEW YORK MUNICIPAL BOND FUND. The New York Municipal Bond Fund may not:
(1) purchase the securities of any one issuer, other than the U.S. government,
its agencies or instrumentalities, if immediately after such purchase, more than
5% of the value of the Fund's total assets would be invested in such issuer;
provided, however, that up to 25% of the assets of the Fund may be invested
without regard to this limitation; or
(2) borrow money except as a temporary measure from banks for extraordinary or
emergency purposes, and in no event in excess of 20% 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).
NATIONAL INTERMEDIATE MUNICIPAL FUND, U.S. GOVERNMENT INCOME FUND, HIGH YIELD
BOND FUND, STRATEGIC BOND FUND AND TOTAL RETURN FUND. The National Intermediate
Municipal Fund, the U.S. Government Income Fund, the High Yield Bond Fund, the
Strategic Bond Fund and the Total Return Fund may not:
(1) purchase securities of any issuer if the purchase would cause more than 5%
of the value of each Fund's total assets to be invested in the securities of any
one issuer (excluding securities issued or guaranteed by the U.S. government,
its agencies or instrumentalities and bank obligations) or cause more than 10%
of the voting securities of the issuer to be held by a Fund, except that up to
25% of the value of each Fund's total assets may be invested without regard to
this restriction and provided that each Fund may invest all or substantially all
of its assets in another registered investment company having substantially the
same investment objective(s) and policies and substantially the same investment
restrictions as those with respect to such Fund;
(2) borrow money (including entering into reverse repurchase agreements), except
for temporary or emergency purposes and then not in excess of 10% 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 (a Fund
will not purchase additional securities at any time its borrowings exceed 5% of
total assets, provided, however, that a Fund may increase its interest in
another registered investment company having substantially the same investment
objective(s) and policies and substantially the same investment restrictions as
those with respect to such Fund while such borrowings are outstanding); 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
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SALOMON BROTHERS INVESTMENT SERIES
(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), provided, however, that each Fund may invest all or
substantially all of its assets in another registered investment company having
substantially the same investment objective(s) and policies and substantially
the same investment restrictions as those with respect to such Fund.
For purposes of investment limitations (1) and (3) above, both the borrower
under a Loan and the Lender selling a Participation will be considered an
"issuer." See "Additional Investment Activities and Risk Factors--Loan
Participations and Assignments."
ASIA GROWTH FUND. The Asia Growth Fund may not:
(1) borrow money, except for temporary or emergency purposes and then not in
excess of 5% of the value of the total assets of the applicable Fund at the time
the borrowing is made, except that for the purpose of this restriction,
short-term credits necessary for settlement of securities transactions are not
considered borrowings (no Fund will purchase additional securities at any time
its borrowing exceed 5% of total assets); or
(2) 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).
INVESTORS FUND. The Investors Fund may not:
(1) purchase any securities of another issuer (other than the United States of
America) if upon said purchase more than 5% of its net assets would consist of
securities of such issuer, or purchase more than 10% of any class of securities
of such issuer;
(2) borrow money, except as a temporary measure for extraordinary or emergency
purposes and then only from banks and only in an amount not to exceed 5% of its
total assets taken at cost or value, whichever is less, or mortgage or pledge
any of its assets and except that for purposes of this restriction, collateral
arrangements with respect to the writing of options on stocks and stock indices,
the purchase and sale of futures contracts and options on futures contracts, and
forward currency contracts are not deemed a pledge of assets or a borrowing of
money;
(3) lend its funds or other assets to any other person other than through the
purchase of liquid debt securities pursuant to the Fund's investment policies,
except that (a) the Fund may lend its portfolio securities as described in the
Statement of Additional Information and (b) the Fund may enter into repurchase
agreements in an amount up to an aggregate of 25% of its total assets; or
(4) invest in the securities of issuers which have been in operation for less
than three years if such purchase at the time thereof would cause more than 5%
of the net assets of the Fund to be so invested.
Each Fund may, in the future, seek to achieve its investment objective(s) by
investing all of its assets in a no-load, open-end management investment company
for which SBAM serves as investment manager and which has substantially the same
investment objective(s) and policies and substantially the same investment
restrictions as those applicable to such Fund. In such event, the Fund's
applicable investment advisory
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SALOMON BROTHERS INVESTMENT SERIES
agreement would be terminated since the investment management would be performed
by or on behalf of such other registered investment company.
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MANAGEMENT
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 a Fund are delegated
to the Fund's investment manager and administrator. The Statement of Additional
Information contains general background information regarding each director and
executive officer of each Fund.
INVESTMENT MANAGER
Each Fund retains SBAM, a wholly owned subsidiary of Salomon Brothers Holding
Company Inc, which is in turn wholly owned by Salomon Inc, as its investment
manager under an investment management contract. SBAM was incorporated in 1987
and together with affiliates in London, Frankfurt, Tokyo and Hong Kong SBAM
provides a broad range of fixed-income and equity investment advisory services
to various individuals and institutional clients located throughout the world,
and serves as investment adviser to various investment companies. As of January
31, 1996, SBAM had approximately $14 billion of assets under management of which
approximately $1.15 billion is invested in high yield securities and
approximately $459 million is invested in mortgage backed securities. Michael S.
Hyland serves as President of SBAM. SBAM has access to Salomon Inc's more than
250 economists, mortgage, bond, sovereign, and equity analysts. The business
address of SBAM is 7 World Trade Center, New York, New York 10048.
In connection with SBAM's service as investment manager to the Strategic Bond
Fund, SBAM Limited, whose business address is Victoria Plaza, 111 Buckingham
Palace Road, London SW1W OSB, England, provides certain advisory services to
SBAM relating to currency transactions and investments in non-dollar-denominated
debt securities for the benefit of the Strategic Bond Fund. SBAM Limited is
compensated by SBAM at no additional expense to the Fund. Like SBAM, SBAM
Limited is a direct, wholly-owned subsidiary of Salomon Brothers Holding Company
Inc. SBAM Limited is a member of the Investment Management Regulatory
Organization Limited in the United Kingdom and is registered as an investment
adviser in the United States pursuant to the Investment Advisers Act of 1940, as
amended. David J. Scott is primarily responsible for a portion of the Strategic
Bond Fund relating to currency transactions and investments in non-dollar
denominated debt securities. Prior to joining SBAM Limited in April, 1994, Mr.
Scott worked for four years at JP Morgan Investment Management where he was
responsible for global and non-dollar portfolios. Before joining JP Morgan
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SALOMON BROTHERS INVESTMENT SERIES
Investment Management, Mr. Scott worked for three years at Mercury Asset
Management where he was responsible for captive insurance portfolios and
products.
Pursuant to a subadvisory agreement, SBAM has retained SBAM AP to act as
sub-adviser to the Asia Growth Fund, subject to the supervision of SBAM. SBAM AP
is compensated by SBAM at no additional cost to the Fund. Like SBAM, SBAM AP is
an indirect, wholly-owned subsidiary of Salomon Inc. SBAM AP, which was formed
in 1995, is a member of the Hong Kong Securities and Futures Commission and is
registered as an investment adviser in the United States pursuant to the
Investment Advisers Act of 1940, as amended. The business address of SBAM AP is
Three Exchange Square, Hong Kong. References to investment manager in this
Prospectus include SBAM Limited and SBAM AP when the context requires.
Marybeth Whyte is primarily responsible for the day-to-day management of the New
York Municipal Bond Fund's portfolio and the National Intermediate Municipal
Fund's portfolio. Prior to joining SBAM on July 25, 1994, Ms. Whyte was a Senior
Vice President and head of the Municipal Bond Area at Fiduciary Trust Company
International, where her responsibilities included managing and advising
portfolios with assets of approximately $1.3 billion.
Steven Guterman is primarily responsible for the day-to-day management of the
U.S. Government Income Fund and the mortgage-backed securities and U.S.
government securities portions of the Strategic Bond Fund. Mr. Guterman is
assisted by Roger Lavan in the management of the two foregoing Funds. Mr.
Guterman joined SBAM in 1990 and is currently a Senior Portfolio Manager,
responsible for SBAM's investment company and institutional portfolios which
invest primarily in mortgage-backed securities and U.S. government issues. Mr.
Guterman also serves as portfolio manager for two offshore mortgage funds. In
addition, Mr. Guterman serves as portfolio manager for a number of SBAM's
institutional clients. Mr. Guterman joined Salomon Brothers in 1983. He
initially worked in the mortgage research group where he became a Research
Director and later traded derivative mortgage-backed securities for Salomon
Brothers. Mr. Lavan joined SBAM in 1990 and is a Portfolio Manager and
Quantitative Fixed Income Analyst. He is responsible for working with senior
portfolio managers to monitor and analyze market relationships and identify and
implement relative value transactions in SBAM's investment company and
institutional portfolios which invest in mortgage-backed securities and U.S.
Government securities. Prior to joining SBAM, Mr. Lavan spent four years
analyzing portfolios for Salomon Brothers' Fixed Income Sales Group and Product
Support Divisions.
Peter J. Wilby is primarily responsible for the day-to-day management of the
High Yield Bond Fund and the high yield and sovereign bond portions of the
Strategic Bond Fund. Mr. Wilby, who joined SBAM in 1989, is a Senior Portfolio
Manager, responsible for SBAM's investment company and institutional portfolios
which invest in high yield non-U.S. and U.S. corporate debt securities and high
yield foreign sovereign debt securities. Mr. Wilby is the portfolio manager for
Salomon Brothers Institutional High Yield Bond Fund and Salomon Brothers
Institutional Emerging Markets Debt Fund, each a portfolio of Salomon Brothers
Institutional Series Funds Inc ("Institutional Series Funds"), Global Partners
Income Fund Inc., The Emerging Markets Income Fund Inc, The Emerging Markets
Income Fund II Inc, The Emerging Markets Floating Rate Fund Inc, Salomon
Brothers Worldwide Income Fund Inc, Salomon Brothers High Income Fund Inc, and
the foreign sovereign debt component of Salomon Brothers 2008 Worldwide Dollar
Government Term Trust Inc. From 1984 to 1989, Mr. Wilby
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SALOMON BROTHERS INVESTMENT SERIES
was employed by Prudential Capital Management Group ("PCMG"). He served as
director of PCMG's credit research unit and as a corporate and sovereign credit
analyst with PCMG. Mr. Wilby later managed high yield bonds and leveraged
equities in the mutual funds and institutional portfolios at PCMG.
Giampaolo G. Guarnieri will be primarily responsible for the day-to-day
management of the Asia Growth Fund. Mr. Guarnieri has been employed by SBAM AP
as a Vice President and Senior Portfolio Manager since April 1995. Prior to
joining SBAM AP, Mr. Guarnieri spent five years as a Senior Portfolio Investment
Manager at Credit Agricole Asset Management (South East Asia) Limited in Hong
Kong, a wholly-owned subsidiary of the Credit Agricole Group as a senior
portfolio manager since 1992 and as head of direct investment activities prior
to that. Mr. Guarnieri is the portfolio manager for Salomon Brothers
Institutional Asia Growth Fund, a portfolio of Institutional Series Funds.
Allan R. White III is primarily responsible for day-to-day management of the
Investors Fund's portfolio. Mr. White has been Executive Vice President and
portfolio manager for the Investors Fund since April of 1992. Since 1989 he has
been a Vice President of SBAM and prior to 1989 he was a Vice President at The
First Boston Corporation. Mr. White is also Executive Vice President and
portfolio manager for The Salomon Brothers Fund Inc.
Richard E. Dahlberg is primarily responsible for the day-to-day management of
the Total Return Fund. Prior to joining SBAM in 1995, Mr. Dahlberg was employed
by Massachusetts Financial Services Company since 1968. For the last 10 years,
Mr. Dahlberg has been primarily responsible for the day-to-day management of the
MFS Total Return Funds.
Subject to policy established by the Board of Directors, which has overall
responsibility for the business and affairs of each Fund, SBAM manages the
investment and reinvestment of each Fund's assets pursuant to the applicable
management contract. SBAM also furnishes office space, personnel and certain
facilities required for the performance by SBAM of certain additional services
provided by it to each Fund under the applicable management contract, including
Commission compliance, supervision of Fund operations and certain administrative
and clerical services, and pays the compensation of the Funds' officers,
employees and directors affiliated with SBAM. Except for the expenses paid by
SBAM that are described herein, each Fund bears all costs of its operations.
As compensation for its services, the Cash Management Fund pays SBAM a monthly
fee at an annual rate of .20% of the Fund's average daily net assets. The New
York Municipal Bond Fund pays SBAM a monthly fee at an annual rate of .50% of
the Fund's average daily net assets. The National Intermediate Municipal Fund
pays SBAM a monthly fee at an annual rate of .50% of the Fund's average daily
net assets; the U.S. Government Income Fund pays SBAM a monthly fee at an annual
rate of .60% of the Fund's average daily net assets; the High Yield Bond Fund
pays SBAM a monthly fee at an annual rate of .75% of the Fund's average daily
net assets; the Strategic Bond Fund pays SBAM a monthly fee at an annual rate of
.75% of the Fund's average daily net assets; the Total Return Fund pays SBAM a
monthly fee at an annual rate of .55% of the Fund's average daily net assets and
the Asia Growth Fund pays SBAM a monthly fee at an annual rate of .80% of the
Fund's average daily net assets. With respect to each Fund other than Investors
Fund, for the 1996 fiscal year, SBAM has voluntarily agreed to impose an expense
cap on total Fund operating expenses at the amount of such Fund's total Fund
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SALOMON BROTHERS INVESTMENT SERIES
operating expenses shown under "Expense Information--Annual Fund Operating
Expense." See "Expense Information-- Annual Fund Operating Expenses." The
Investors Fund pays SBAM a quarterly fee (the "Base Fee") at the end of each
calendar quarter based on the following rates:
<TABLE>
<CAPTION>
ANNUAL FEE
AVERAGE DAILY NET ASSETS RATE
- ------------------------------ -----------
<S> <C>
First $350 million .500%
Next $150 million .400%
Next $250 million .375%
Next $250 million .350%
Over $1 billion .300%
</TABLE>
The Base Fee for the Investors Fund may be increased or decreased based on the
performance of the Investors Fund relative to the investment record of the S&P
500 Index. At the end of each calendar quarter, for each percentage point by
which the investment performance of the Investors Fund exceeds or is exceeded by
the investment record of the S&P 500 Index over the one year period ending on
the last day of the calendar quarter for which the adjustment is being
calculated, the Base Fee will be adjusted upward or downward by the product of
(i) 1/4 of .01% multiplied by (ii) the average daily net assets of the Investors
Fund for the one year period preceding the end of the calendar quarter. If the
amount by which the Investors Fund outperforms or underperforms the S&P 500
Index is not a whole percentage point, a pro rata adjustment shall be made.
However, there will be no performance adjustment unless the investment
performance of the Investors Fund exceeds or is exceeded by the investment
record of the S&P 500 Index by at least one percentage point. The maximum
quarterly adjustment is 1/4 of .10%, which would occur if the Investors Fund's
performance exceeds or is exceeded by the S&P 500 Index by ten or more
percentage points. The first performance adjustment will be paid on September
30, 1995 for the one year period ending on that date. Thereafter, the
performance adjustment will be paid quarterly based on a rolling one year
period.
With respect to the Strategic Bond Fund and in connection with the subadvisory
consulting agreement between SBAM and SBAM Limited, SBAM will pay SBAM Limited,
as full compensation for all services provided under the subadvisory consulting
agreement, a portion of its investment management fee. The amount payable to
SBAM Limited will be equal to the fee payable under SBAM's management agreement
multiplied by the portion of the assets of the Strategic Bond Fund that SBAM
Limited has been delegated to manage divided by the current value of the net
assets of the Strategic Bond Fund.
With respect to the Asia Growth Fund, SBAM will pay SBAM AP as full compensation
for its services provided under the subadvisory agreement, a portion of its
investment management fee.
SBAM may waive all or part of its fee from time to time in order to increase
each Fund's net investment income available for distribution to shareholders.
The Funds will not be required to reimburse SBAM for any advisory fees waived.
SBAM may from time to time, at its own expense, provide compensation to certain
selected dealers for performing administrative services for their customers.
These services include maintaining account records, processing orders to
purchase, redeem and exchange Fund shares and responding to certain customer
inquiries. The amount of such compensation may be up to .12% annually of the
average net assets of a Fund attributable to shares of such Fund held by
customers of such selected dealers. Such compensation does not represent an
additional expense to a Fund or its shareholders, since it will be paid from the
assets of SBAM.
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SALOMON BROTHERS INVESTMENT SERIES
The services of SBAM, SBAM Limited and SBAM AP are not deemed to be exclusive,
and nothing in the relevant agreements will prevent either of them or their
affiliates from providing similar services to other investment companies and
other clients (whether or not their investment objectives and policies are
similar to those of any of the Funds) or from engaging in other activities.
Consistent with the Rules of Fair Practice of the NASD, and subject to seeking
the most favorable price and execution available, the investment manager may
consider sales of shares of the Funds as a factor in the selection of brokers to
execute portfolio transactions for the Funds. The Funds may use Salomon Brothers
and its affiliates to execute portfolio transactions when the investment manager
believes that the broker's charge for the transaction does not exceed the usual
and customary levels charged by other brokers in connection with comparable
transactions involving similar securities. See the Statement of Additional
Information for a more complete description of the Funds' policies with respect
to portfolio transactions.
PERFORMANCE OF ACCOUNTS
ASIA GROWTH FUND. Set forth in the chart below is performance data provided by
SBAM AP relating, for the period from January 1, 1992 to February 28, 1995 to a
non-U.S. collective investment vehicle (the "Offshore Fund I") managed by the
portfolio manager of the Asia Growth Fund while he was employed by a different
investment adviser unaffiliated with SBAM and, for the period from September 1,
1995 to December 31, 1995, to a non-U.S. collective investment vehicle managed
by the portfolio manager after commencement of employment with an affiliate of
SBAM (the "Offshore Fund II"). Both Offshore Fund I and Offshore Fund II have
substantially similar, though not identical, investment objectives, policies and
strategies as those of the Fund. With respect to Offshore Fund I, the period
shown reflects the period for which the portfolio manager was primarily
responsible for the day-to-day management of the portfolio of Offshore Fund I.
During the period shown for Offshore Fund I, the size of the fund ranged from
approximately $45 million to $95 million and during the period shown for
Offshore Fund II, the size of the fund ranged from approximately $8 million to
$10 million.
The Morgan Stanley Capital International Combined Asia Ex-Japan Index is a
widely recognized market index of Asian country equity issues. The index is
composed of a sample of companies from the following ten countries: Hong Kong,
India, Indonesia, Korea, Malaysia, Pakistan, Philippines, Singapore, Sri Lanka
and Thailand. Constituent stocks are selected for the index on the basis of
industry representation, liquidity and sufficient float. The index is unmanaged
and accordingly, does not reflect the effect of operating expenses, including
advisory fees, transaction costs and other expenses but does reflect
reinvestment of dividends.
The performance data shown below should be read in conjunction with the
information in "General" that follows.
<TABLE>
<CAPTION>
1/1/92- 1/1/93- 1/1/94-
12/31/92 12/31/93 12/31/94
-------- -------- --------
<S> <C> <C> <C>
Offshore Fund I............ 29.50% 95.05% (13.55)%
Morgan Stanley Capital
International............. 18.45 98.80 (18.38)
Combined Asia Ex-Japan
Index.....................
<CAPTION>
[DATES]
<S> <C> <C> <C>
Offshore Fund II...........
Morgan Stanley Capital
International.............
Combined Asia Ex-Japan
Index.....................
</TABLE>
(cont'd)
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SALOMON BROTHERS INVESTMENT SERIES
<TABLE>
<CAPTION>
AVERAGE
ANNUAL
TOTAL TOTAL
1/1/95- RETURN RETURN
2/28/95 1/1/92- 1/1/92-
(ANNUALIZED) 2/28/95 2/28/95
------------ ------ -------
<S> <C> <C> <C>
Offshore Fund I............ (5.47)% 106.42% 25.72%
Morgan Stanley Capital
International............. (3.01) 86.42 21.74
Combined Asia Ex-Japan
Index.....................
<CAPTION>
[DATES]
<S> <C> <C> <C>
Offshore Fund II...........
Morgan Stanley Capital
International.............
Combined Asia Ex-Japan
Index.....................
</TABLE>
GENERAL. The performance results shown above are based on total returns
reflecting realized and unrealized gains and losses and income, including that
derived from cash positions. Returns are calculated monthly for Offshore Fund I
and Offshore Fund II and are compounded monthly. The investment results are
time-weighted based on market values determined as of the last business day of
each month. The performance results are net of transaction costs and advisory
and other fees incurred and reflect reinvestment of dividends and capital gains
distributions, if any.
The performance results shown above are not performance results for the Asia
Growth Fund, which has no history of operations. The results shown above should
not be deemed to be indicative of future results for the Asia Growth Fund owing
to differences in brokerage commissions and dealer spreads, expenses, including
investment advisory fees, the size of positions taken in relation to fund size,
timing of purchases and sales and market conditions at the time of a
transaction, timing of cash flows and availability of cash for new investments.
Although substantially similar, the investment objectives, policies and
strategies for Offshore Fund I and Offshore Fund II differ in certain respects
from those of the Asia Growth Fund. Such accounts were managed without regard to
certain tax requirements applicable to U.S. registered investment companies that
limit the proportions of short-term gains that such companies may realize to
maintain their tax status. See "Dividends, Distributions and Taxes."
Accordingly, the performance results shown above and that of the Asia Growth
Fund are expected to differ.
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. INVESTORS SHOULD ALSO BE
AWARE THAT THE USE OF METHODS OF DETERMINING PERFORMANCE DIFFERENT THAN THAT
USED BY SBAM AP WOULD RESULT IN DIFFERENT PERFORMANCE DATA. NO ADJUSTMENT HAS
BEEN MADE FOR ANY INCOME TAXES WHICH ARE PAYABLE ON INCOME DIVIDENDS OR CAPITAL
GAINS DISTRIBUTIONS. THE EFFECT OF TAXES ON ANY INVESTOR WILL DEPEND ON SUCH
INVESTOR'S TAX STATUS. SEE "DIVIDENDS, DISTRIBUTIONS AND TAXES."
ADMINISTRATOR
Each Fund employs Investors Bank & Trust Company ("Investors Bank") under its
applicable administration agreement to provide certain administrative services
to the respective Fund. The administrator is not involved in the investment
decisions made with respect to the Funds.
The services provided by Investors Bank under the applicable administration
agreements include certain accounting, clerical and bookkeeping services, Blue
Sky compliance, corporate secretarial services and assistance in the preparation
and filing of tax returns and reports to shareholders and the SEC. For its
services as administrator, each Fund, other than the Investors Fund, pays
Investors Bank a fee, calculated daily and payable monthly, at an annual rate of
.08% of the applicable Fund's aggregate average daily net assets. As
compensation for its services to the Investors Fund and at no additional cost to
the Investors Fund, SBAM pays Investors Bank a fee each month at an annual rate
of .08% of the average daily value of the Investors Fund's net assets.
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SALOMON BROTHERS INVESTMENT SERIES
EXPENSES
Each Fund's expenses include taxes, interest, fees and salaries of the directors
and officers who are not directors, officers or employees of the Fund's service
contractors, SEC fees, state securities qualification fees, costs of preparing
and printing prospectuses for regulatory purposes and for distribution to
existing shareholders, advisory and administration fees, charges of the
custodian, transfer agent and dividend disbursing agent, certain insurance
premiums, outside auditing and legal expenses, costs of shareholder reports and
shareholder meetings and any extraordinary expenses. Each Fund also pays for
brokerage fees and commissions (if any) in connection with the purchase and sale
of portfolio securities. Fund expenses are allocated to a particular class based
on either expenses identifiable to the class or relative net assets of the class
and other classes of Fund shares.
- -------------------------------------------------------------------------------
DETERMINATION
OF NET ASSET VALUE
For the purpose of pricing purchase and redemption orders, the net asset value
per share of each class of each Fund is calculated separately and is determined
once daily as of the close of regularly scheduled trading on the NYSE (except
with respect to the Cash Management Fund for which the determination is made at
12:00 noon (New York time)). With respect to each Fund, such calculation is
determined on each day that the NYSE is open for trading, i.e., Monday through
Friday, except for New Year's Day, President's Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day, and the
preceding Friday or subsequent Monday when one of those holidays falls on a
Saturday or Sunday, respectively. Net asset value per share of each class of
each Fund is calculated by dividing the value of the portion of the Fund's
securities and other assets attributable to that class, less the liabilities
attributable to that class, by the number of shares of that class outstanding.
In calculating net asset value, all portfolio securities will be valued at
market value when there is a reliable market quotation available for the
securities and otherwise pursuant to procedures adopted by each Fund's Board of
Directors. Securities that are primarily traded on foreign exchanges generally
are valued at the preceding closing values of such securities on their
respective exchanges, except that when an occurrence subsequent to the time a
value was so established is likely to have changed such value, then the fair
value of those securities will be determined by consideration of other factors
by or under the direction of the Board of Directors. Securities may be valued by
independent pricing services which use prices provided by market-makers or
estimates of market values obtained from yield data relating to instruments or
securities with similar characteristics. In valuing a Fund's assets, any assets
or liabilities initially expressed in terms of a foreign currency are
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SALOMON BROTHERS INVESTMENT SERIES
converted to U.S. dollar equivalents at the then current exchange rate.
Corporate actions by issuers of foreign securities held by the Fund, such as
payment of dividends or distributions, are reflected in the net asset value on
the ex-dividend date therefor, except that such actions will be so reflected on
the date the Fund is actually advised of the corporate action if subsequent to
the ex-dividend date. Further information regarding the Funds' valuation
policies is contained in the Statement of Additional Information.
The Cash Management Fund uses the amortized cost method to value its portfolio
securities and, with respect to each class of shares of the Fund, seeks to
maintain a stable net asset value of $1.00 per share. Each of the other Funds
values short-term investments that mature in 60 days or less at amortized cost
whenever the Board of Directors determines that amortized cost is the fair value
of those investments. If a Fund acquires securities with more than sixty days
remaining to maturity, they will be valued at current market value (using the
bid price) until the 60th day prior to maturity, and will then be valued on an
amortized cost basis based upon the value on such date unless the Board
determines during such 60-day period that this amortized cost basis does not
represent fair value. The amortized cost method involves valuing a security at
its cost and amortizing any discount or premium over the period until maturity,
regardless of the impact of fluctuating interest rates on the market value of
the security. See the Statement of Additional Information for a more complete
description of the amortized cost method.
- --------------------------------------------------------------------------------
PURCHASE OF SHARES
Shares of each Fund may be purchased from any dealer that has a selling
agreement with Salomon Brothers. Purchases of shares made through a selected
dealer should be made in accordance with the procedures prescribed by such
selected dealer.
HOW TO OPEN AN ACCOUNT
In order to purchase shares of any Fund, an investor must submit a fully
completed Purchase Application form.
MINIMUM INVESTMENT
The minimum initial investment in any class of shares in any Fund is $500 and
the minimum subsequent investment is $50. However, for IRAs and Self-Employed
Retirement Plans (formerly Keogh Plans), the minimum initial investment in any
class of shares of any Fund is $50. In addition, an account can be established
with a minimum of $50 if the account will be receiving periodic, regular
investments through programs such as Automatic Investment Plans, Automatic
Dividend Diversification and Systematic Investing. See "Shareholder Services."
When purchasing shares of any Fund, investors must specify the class of shares.
Each Fund and the investment manager reserve the right to reject any purchase
order, to suspend the offering of shares for a period of time or to waive or
lower the minimum investment requirements.
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SALOMON BROTHERS INVESTMENT SERIES
TIMING OF PURCHASE ORDERS
Orders for the purchase of Fund shares (other than the Cash Management Fund)
received by selected dealers by the close of regular trading on the NYSE on any
day that a Fund calculates its net asset value and either transmitted to Salomon
Brothers by the close of its business day (normally 5:00 p.m., New York time) or
transmitted by dealers to First Data Investor Services Group, Inc. ("FDISG"),
formerly The Shareholder Services Group, Inc., through the facilities of the
National Securities Clearing Corporation ("NSCC") by 7:00 p.m., New York time on
that day will be priced according to the net asset value determined on that day
plus any applicable sales charge. Otherwise, the orders will be priced as of the
time the net asset value is next determined. Purchase orders for shares of the
Cash Management Fund will be executed at the net asset value per share next
determined after the order has become effective, i.e., payment has been received
in or converted into federal funds. See "Determination of Net Asset Value." It
is the dealers' responsibility to ensure that orders are transmitted on a timely
basis to Salomon Brothers or FDISG through the facilities of NSCC. Any loss
resulting from a dealer's failure to submit an order within the prescribed time
frame will be borne by that dealer. See "Purchases by Wire" below for
information on obtaining a reference number for wire orders, which will
facilitate the handling of such orders and ensure prompt credit to the
investor's account.
Funds transmitted by a wire system other than the Federal Reserve Wire System
generally take one business day to be converted into federal funds. In those
cases in which an investor pays for shares by a check drawn on a member bank of
the Federal Reserve System, federal funds generally will become available on the
business day after the check is deposited. Checks drawn on banks which are not
members of the Federal Reserve System or foreign banks may take substantially
longer to be converted into federal funds.
PURCHASES BY WIRE
Shares of the Funds may be purchased by wiring federal funds to FDISG. Prior to
making an initial investment by wire, an investor must call (800) SALOMON or
(800) 725-6666 to open an account. Please supply the following information: (i)
the name(s) in which the shares are to be registered, (ii) address, (iii) social
security or tax identification number (where applicable), (iv) dividend payment
election, (v) class of shares, (vi) amount to be wired, (vii) name of the wiring
bank, and (viii) name and telephone number of the person to be contacted in
connection with the order. An account number will be assigned. The investor
should instruct the wiring bank to transmit the specified amount in federal
funds to:
Boston Safe Deposit and Trust Company
Boston, Massachusetts
ABA No. 011-001-234
Account #142743
Attn: (Name of Fund)
Name of Account:
Account # (As assigned):
Investors making initial investments by wire must promptly complete a Purchase
Application and forward it to FDISG. Shareholders should note that their bank
may charge a fee in connection with transferring money by bank wire.
Subsequent investments can be made by wire at any time by wiring federal funds
to FDISG as set forth above. Prior notification by telephone is not required in
the case of subsequent wire purchases. To ensure prompt credit to their
accounts, investors or their dealers should call (800) SALOMON or (800) 725-6666
prior to sending a wire to receive a reference number for the wire. If wires are
received after 4:15 p.m. New York time or during a bank holiday, purchases will
be confirmed
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SALOMON BROTHERS INVESTMENT SERIES
at the price determined on the next business day of the applicable Fund.
STOCK CERTIFICATES
Although most shareholders elect not to receive stock certificates, certificates
for full shares can be obtained on specific written request at no cost to the
shareholder. No certificates will be issued for fractional shares.
OTHER PURCHASE METHODS
Shares may also be purchased initially by completing a Purchase Application and
mailing it, together with a check payable to FDISG, to:
(Name of Fund)
c/o FDISG
P.O. Box 9109
Boston, MA 02205-9109
Subsequent investments may be made at any time through a selected dealer or by
mailing a check to FDISG at the address set forth above, along with the
detachable stub from the Statement of Account (or a letter providing the account
number). Shareholders should be sure to write the Fund account number on the
check. If an investor's purchase check is not collected, the purchase will be
cancelled and FDISG will charge a fee of $10 to the shareholder's account. FDISG
does not intend to resubmit such checks for collection.
MULTIPLE PRICING SYSTEM
Each Fund currently offers three classes of shares to the general public through
the Multiple Pricing System. Although the Class A, Class B and Class C shares of
a particular Fund represent an interest in the same portfolio of investments,
each class is subject to different sales charge structures and expense levels.
Class A shares of all Funds are sold with a front end sales charge (with the
exception of Class A shares of the Cash Management Fund, which are sold at net
asset value) and may, under limited circumstances, be subject to a CDSC upon
redemption. Class B shares and Class C shares of all Funds are sold without a
front end sales charge but may be subject to a CDSC upon redemption (with the
exception of sales of Class B shares and Class C shares of the Cash Management
Fund, which are not subject to a CDSC). The Multiple Pricing System allows
investors to select the class that is best suited to their needs and objectives.
In considering the options afforded by the Multiple Pricing System, investors
should consider both the applicable front end sales charge or CDSC, as well as
the applicable service or distribution fee, and other relevant factors such as
whether their investment goals are long-term or short-term in order to determine
the class that best suits their circumstances and objectives. See "Multiple
Pricing System" for a discussion of factors to consider in selecting which class
of shares to purchase. In addition, Class O shareholders may purchase additional
Class O shares which are sold at net asset value and are not subject to any
sales charges, distribution or service fees.
CLASS A SHARES
The public offering price for Class A shares of each Fund is the per share net
asset value of that class plus a front end sales charge, expressed as a
percentage of the offering price as set forth in the table below. No front end
sales charge is imposed on the purchase of Class A shares of the Cash Management
Fund. However, when Class A shares of the Cash Management Fund on which no sales
charge has been paid or waived are exchanged for Class A shares of another Fund,
the sales charge applicable to purchases of Class A shares will be assessed at
that time.
PAGE 84
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SALOMON BROTHERS INVESTMENT SERIES
CLASS A SALES CHARGE TABLE
<TABLE>
<CAPTION>
CONCESSION
TO
BROKER-DEALER
PERCENTAGE AS
PERCENTAGE OF A
OF THE PERCENTAGE
THE NET OF
AMOUNT OF OFFERING AMOUNT OFFERING
PURCHASE PAYMENT PRICE INVESTED PRICE
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $50,000 4.75% 4.99% 4.25%
$50,000 but less than $100,000 4.50% 4.71% 4.00%
$100,000 but less than $250,000 4.00% 4.17% 3.50%
$250,000 but less than $500,000 2.50% 2.56% 2.25%
$500,000 but less than 1 million 2.00% 2.04% 1.75%
$1 million or more None* None **
</TABLE>
------------------------------------------------------------------
* With respect to purchases of Class A shares of $1 million or more, a CDSC
will apply if the shares are redeemed within one year after purchase. See
"Redemption of Shares--Class A Share Purchases of $1 million or more."
** The Distributor may in its discretion compensate selected dealers in
connection with the sale of Class A Shares in an aggregate amount of $1
million or more up to the following amounts:
<TABLE>
<CAPTION>
DEALER'S
AMOUNT OF PURCHASE CONCESSION
--------------------------------- ----
<S> <C>
1 million up to $2 million 1.00%
Over $2 million up to $3 million .75%
Over $3 million up to $5 million .50%
Over $5 million .25%
</TABLE>
The Distributor may reallow concessions to selected dealers and retain the
balance over such concessions, and at times the Distributor may reallow the
entire front end sales charge to such dealers. In such circumstances, dealers
may be deemed to be "underwriters" as that term is defined under the 1933 Act.
The Distributor has determined to reallow the entire front end sales charge to
dealers for sales of Class A shares until further notice.
REDUCED SALES CHARGES
Investors purchasing Class A shares may be able to benefit from a reduction or
elimination of the front end sales charge through several purchase plans.
RIGHT OF ACCUMULATION. For the purposes of determining which sales charge level
in the table above is applicable to a purchase of Class A shares, investors may
combine the total of the value of the shares being purchased with the amount
equal to the current net asset value of the investor's holdings of Class A
shares in all Funds, excluding Class A shares purchased or held in the Cash
Management Fund. Also, for purposes of the foregoing calculation, Class A shares
(excluding Class A shares purchased or held in the Cash Management Fund)
beneficially owned by the investor's spouse and the investor's children under
the age of 21 may, upon written notice to the transfer agent, also be included
in the investor's beneficial holdings at the current net asset value to reach a
level specified in the above table. The investor must notify the transfer agent
in writing of all share accounts to be considered in exercising the right of
accumulation described above.
LETTER OF INTENT. For the purposes of determining which sales charge level in
the table above is applicable to a purchase of Class A shares, investors may
also establish a total investment goal in shares of the Funds to be achieved
over a thirteen-month period and may purchase Class A shares during such period
at the applicable reduced front end sales charge. All Class A shares, (excluding
Class A shares purchased or held in the Cash Management Fund), previously
purchased and still beneficially owned by the investor and his or her spouse and
children under the age of 21 may, upon written notice to the transfer agent,
also be included at the current net asset value to reach a level specified in
the table above.
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SALOMON BROTHERS INVESTMENT SERIES
Shares totaling 5% of the dollar amount of the Letter of Intent will be held in
escrow by the transfer agent in the name of the purchaser. The effective date of
a Letter of Intent may be back-dated up to 90 days, in order that any
investments made during this 90-day period, valued at the purchaser's cost, can
be applied to the fulfillment of the Letter of Intent goal.
The Letter of Intent does not obligate the investor to purchase, nor any Fund to
sell, the indicated amount. In the event the Letter of Intent goal is not
achieved within the thirteen-month period, the investor is required to pay the
difference between the front end sales charge otherwise applicable to the
purchases of Class A shares made during this period and the sales charge
actually paid. If a payment is due under the preceding sentence, it must be made
directly to the transfer agent within twenty days of notification or, if not
paid, the transfer agent will liquidate sufficient escrowed shares to obtain
such difference. For additional information, shareholders should contact the
applicable Fund, the transfer agent or eligible securities dealers.
GROUP PURCHASES. A reduced sales charge is available to employees (and partners)
of the same employer purchasing as a group. The sales charge applicable to
purchases by each member of such a group will be determined by the table set
forth above and will be based upon the aggregate sales of Class A shares to, and
share holdings of, all members of the group. To be eligible for such reduced
sales charges, all purchases must be pursuant to an employer or partnership
sanctioned plan meeting certain requirements; one such requirement is that the
plan must be open to specified partners or employees of the employer and its
subsidiaries, if any. Such plans include but are not limited to plans which
provide for payroll deductions and retirement plans under Sections 401 or 408 of
the Code. The Distributor may also offer a reduced sales charge for aggregating
related fiduciary accounts under such conditions that the Distributor will
realize economies of sales efforts and sales related expenses. An individual who
is a member of a qualified group may also purchase Class A shares of the Fund at
the reduced sales charge applicable to the group as a whole. The sales charge is
based upon the aggregate dollar value of Class A shares previously purchased and
still owned by the group, plus the amount of the current purchase. A "qualified
group" is one which (i) has been in existence for more than six months, (ii) has
a purpose other than acquiring Fund shares at a discount and (iii) satisfies
uniform criteria which enables the Distributor to realize economies of scale in
its costs of distributing shares. A qualified group must have more than 10
members, must be available to arrange for group meetings between representatives
of a Fund and the members, and must agree to include sales and other materials
related to the Funds in its publications and mailings to members at no cost to
the Distributor. In order to obtain such reduced sales charge, the purchases
must provide sufficient information at the time of purchase to permit
verification that the purchase qualifies for the reduced sales charge. Approval
of group purchase reduced sales charge plans is subject to the discretion of the
Distributor.
CERTAIN QUALIFIED PURCHASERS. No front end sales charge is applicable to any
sale of Class A shares to a Director or officer of a Fund and to their immediate
families (i.e., the spouse, children, mother or father of such persons),
employees of SBAM and their immediate families, or any full-time employee or
registered representative of the Distributor or of broker-dealers having dealer
agreements with the Distributor ("Selling Broker") and their immediate families
(or any trust, pension, profit sharing or other benefit plan for the benefit of
such persons), any
PAGE 86
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SALOMON BROTHERS INVESTMENT SERIES
full-time employee of a bank, savings and loan, credit union or other financial
institution that utilizes a Selling Broker to clear purchases of the Funds'
shares and their immediate families, participants in certain "wrap-fee" or asset
allocation programs sponsored by broker-dealers and other financial institutions
that have entered into agreements with Salomon Brothers or investors who
purchase Class A shares with proceeds from the sale of shares of any other
investment company with respect to which the investor previously paid a
commission, whether a front-end sales charge or CDSC or otherwise.
CLASS B SHARES
Class B shares of each Fund are offered for sale at net asset value and are
offered for purchases of less than $250,000. No initial sales charge is imposed
at the time of purchase. A CDSC is imposed, however, on certain redemptions of
Class B shares. See "Redemption of Shares" which describes the CDSC in greater
detail.
In general, a sales commission of 4% of the amount of Class B share purchases
(other than Class B shares of the Cash Management Fund) will be paid by the
Distributor to broker-dealers at the time of sale.
CLASS C SHARES
Class C shares of each Fund are offered for sale at net asset value and are
offered for purchases of less than $1,000,000. Class C shares are sold without a
front end sales charge and are subject to a CDSC of 1% within the first year of
purchase.
A sales commission of 1% of the amount of Class C share (other than Class C
shares of the Cash Management Fund) will be paid by the Distributor to broker
dealers at the time of sale.
CLASS O SHARES
Class O shares of each Fund are offered for sale at net asset value and are not
subject to any sales charges. Only Class O shareholders may purchase additional
Class O shares.
DISTRIBUTOR
Salomon Brothers, located at 7 World Trade Center, New York, New York 10048,
serves as each Fund's distributor. Salomon Brothers is a wholly owned subsidiary
of Salomon Brothers Holding Company Inc, which is in turn wholly owned by
Salomon Inc. It is also one of the largest securities dealers in the world and a
registered broker-dealer. Salomon Brothers makes markets in securities and
provides a broad range of underwriting, research, and financial advisory
services to governments, international corporations, and institutional
investors. Salomon Brothers from time to time may receive fees from SBAM in
connection with processing and other services that it provides for certain
shareholder accounts and may from time to time receive fees from the Funds in
connection with the execution of portfolio transactions on behalf of the Funds.
Each class of each Fund (other than the Cash Management Fund) is authorized
pursuant to a services and distribution plan applicable to that class of shares
(the "Class A Plan," the "Class B Plan" and the "Class C Plan," collectively,
the "Plans") adopted pursuant to Rule 12b-1 under the 1940 Act to pay Salomon
Brothers an annual service fee with respect to Class A, Class B and Class C
shares of the applicable Fund (other than the Cash Management Fund) at the rate
of .25% of the value of the average daily net assets of the respective class.
Salomon Brothers is also paid an annual distribution fee with respect to Class B
and Class C shares of each Fund (other than the Cash Management Fund) at the
rate of .75% of the value of the average daily net assets of
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SALOMON BROTHERS INVESTMENT SERIES
the respective class. Class O shares are not subject to a services and
distribution plan. The service fees are used for servicing shareholder accounts,
including payments by Salomon Brothers to selected securities dealers. The
distribution fees are paid to Salomon Brothers to compensate for activities
primarily intended to result in the sale of Class B and Class C shares. The
expenses incurred in connection with these activities include: costs of printing
and distributing the Funds' Prospectus, Statement of Additional Information and
sales literature to prospective investors; an allocation of overhead and other
Salomon Brothers' branch office distribution-related expenses; payments to and
expenses of other persons who provide support services in connection with the
distribution of the shares; any other costs and expenses relating to
distribution or sales support activities; compensation for the Distributor's
initial expense of paying investment representatives or introducing brokers a
commission upon the sale of the Funds' shares; and accruals for interest on the
amount of the foregoing expenses that exceed the amount of the distribution fee
and the CDSC received by the Distributor. Under the Plans, Salomon Brothers may
retain all or a portion of the service and distribution fees. The payments to
selected securities dealers may include a commission paid at the time of sale
and a continuing fee based upon the value of the average daily net assets of the
applicable class of shares that remain invested in a Fund (a "trail fee") with
respect to accounts that dealers continue to service. With respect to Class B
shares, Salomon Brothers will pay broker-dealers at the time of sale a
commission of 4% (or, in the limited circumstances described above under
"-- --Class B Shares", 5%) of the purchase price and a quarterly trail fee at an
annual rate of .25% which will begin to accrue in the thirteenth month after
settlement. With respect to Class C shares, Salomon Brothers will pay
broker-dealers at the time of sale a commission of 1% of the purchase price and
a quarterly trail fee at an annual rate of .90% which will begin to accrue in
the thirteenth month after settlement. In addition, with respect to Class A
shares, Salomon Brothers will pay broker-dealers at the time of sale a
commission as discussed above under "Purchase of Shares--Class A Shares" and a
quarterly trail commission at an annual rate of .25% which will begin to accrue
immediately after settlement.
The Plans provide that Salomon Brothers may make payments to assist in the
distribution of a Fund's shares out of the other fees received by it or its
affiliates from such Fund, its past profits or any other sources available to
it. From time to time, Salomon Brothers may waive receipt of fees under a Plan
while retaining the ability to be paid under such Plan thereafter. The fees
payable to Salomon Brothers under the Plans and payments by Salomon Brothers to
selected securities dealers are payable without regard to actual expenses
incurred.
The Distributor may, from time to time, assist dealers by, among other things,
providing sales literature to, and holding informational programs for the
benefit of, dealers' registered representatives which may include payment for
travel expenses, including lodging, incurred in connection with trips taken by
qualifying registered representatives and members of their families within or
outside the United States. Participation of registered representatives in such
informational programs may require the sale of minimum dollar amounts of shares
of the Funds. In addition, the Distributor may also, from time to time, at its
expense or as an expense for which it may be compensated under a distribution
plan, if applicable, pay a bonus or other consideration or incentives to dealers
who sell a minimum dollar amount of shares of the Funds during a specified
period of time. In some instances, these incentives may be offered only to
certain dealers who have sold or may sell significant
PAGE 88
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SALOMON BROTHERS INVESTMENT SERIES
amounts of shares. Any such bonus or incentive programs will not change the
price paid by investors for the purchase of the applicable Fund's shares or the
amount that any particular Fund will receive as proceeds from such sales.
Dealers may not use sales of the Funds' shares to qualify for any incentives to
the extent that such incentives may be prohibited by the laws of any state.
Incentive payments will be provided for out of the front end sales charges and
CDSCs retained by the Distributor, any applicable Plan payments or the
Distributor's other resources. Other than Plan payments, the Funds do not bear
distribution expenses.
- --------------------------------------------------------------------------------
REDEMPTION OF SHARES
Shareholders may redeem all or any part of their shareholdings on any business
day at the applicable net asset value next determined after the receipt of
proper redemption instructions. The value of shares on redemption may be more or
less than the investor's cost.
Payment of redemption proceeds may be made in securities, subject to regulation
by some state securities commissions. Payment of the redemption price will be
made within seven days after receipt of the redemption instructions in good
order (or such shorter time period as may be required), but each Fund may
suspend the right of redemption during any period when (i) trading on the NYSE
is restricted or the NYSE is closed, other than customary weekend and holiday
closings, (ii) the SEC has by order permitted such suspension, or (iii) an
emergency, as defined by rules of the SEC, exists, making disposal of portfolio
securities or determination of the value of the net assets of each Fund not
reasonably practicable.
For the shareholder's convenience each Fund has established several different
redemption procedures. No redemption requests will be processed until the
applicable Fund has received a completed Purchase Application. If a shareholder
holds shares in more than one class, any request for redemption must specify the
class being redeemed. Each Fund will not credit redemption proceeds for any
shares until checks received in payment for such shares have been collected,
which may take up to 15 days or more. A shareholder who anticipates the need for
more immediate access to his or her investment should purchase shares by federal
funds or bank wire, or by a certified or cashier's check.
REDEMPTION BY MAIL
Shares may be redeemed by submitting a written request to FDISG which meets all
the following requirements:
(1) Written instructions from registered owner(s), signed exactly as shares are
registered (facsimile instructions will not be accepted);
(2) All certificates, if any, to be redeemed;
(3) If shares to be redeemed have a net asset value of $50,000 or more, a letter
or a stock power signed by the registered
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SALOMON BROTHERS INVESTMENT SERIES
owner(s) with the signature(s) guaranteed by an acceptable guarantor. A
guarantee of each shareholder's signature is required for all redemptions,
regardless of the amount involved, when the proceeds are to be paid to someone
other than the registered owner(s) of the shares redeemed, are to be wired to a
bank or are to be sent to other than the registered address. Signature
guarantees must be in accordance with FDISG's standards and procedures. Any one
of the following guarantors is normally acceptable: (a) a commercial or savings
bank which is a member of the Federal Deposit Insurance Corporation; (b) a trust
company; (c) a member firm of a domestic stock exchange; or (d) a foreign branch
of any of the above (FDISG will not accept dated guarantees or guarantees from a
notary public); and
(4) In the case of shares of record held in the name of a corporation, trust,
fiduciary or partnership, the redemption agent requires evidence of authority to
sign and a stock power with signature(s) guaranteed.
To expedite processing of redemptions by mail, shareholders should submit
redemption requests and all related documents directly to First Data Investor
Services Group, Inc., P.O. Box 9109, Boston, MA 02205-9109.
Checks for redemption proceeds will normally be mailed within seven days after
redemption. Unless other instructions are given in proper form, checks for
redemption proceeds will be sent to the shareholder's address of record if the
shareholder does not have a brokerage account. If a shareholder has a brokerage
account, redemption proceeds will be credited to such account.
Upon request, the proceeds of a redemption amounting to $500 or more will be
sent by federal funds or bank wire to the shareholder's predesignated bank
account.
TELEPHONE REDEMPTION PRIVILEGE
Shareholders having direct accounts with FDISG may redeem shares by means of the
Telephone Redemption Privilege. The Application for Telephone Redemption
Privilege must be completed by the shareholder with the signature(s) guaranteed
in the manner described above under "Redemption by Mail" prior to initiating a
telephone redemption.
Shareholders cannot apply the Telephone Redemption Privilege to shares held in
certificate form or for accounts requiring additional supporting documentation
for redemptions such as trust, corporate, estate and guardian accounts.
Proceeds from the telephone redemption will be forwarded to the shareholder by
check unless the shareholder has requested redemption by wire in the manner
described below under "Redemption by Wire." The check will be made payable to
the registered shareholder(s) and sent to the address of record on file with
FDISG.
Shareholders should realize that by making redemption requests by telephone,
they may be giving up a measure of security that they may have if they were to
redeem their shares in writing. Each Fund reserves the right to refuse a
telephone request for redemption if it is believed advisable to do so.
Procedures for redeeming shares by telephone may be modified or terminated at
any time by the applicable Fund. None of the Funds or FDISG 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 and FDISG
will employ reasonable procedures to confirm that instructions communicated by
telephone are genuine. Each Fund and/or FDISG may be liable for any losses due
to unauthorized or fraudulent instructions in the absence of following these
procedures.
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SALOMON BROTHERS INVESTMENT SERIES
When requesting a redemption by telephone, shareholders should have available
the correct account registration and account numbers or tax identification
number.
REDEMPTION BY WIRE
If redemption by wire has been elected on the Purchase Application, shares may
be redeemed, in the amount of $500 or more, on any business day upon request
made by telephone or letter. No signature guarantee is required on such a
redemption request. To elect this service subsequent to opening an account, call
SBAM or FDISG for further information.
You may either:
Telephone the redemption request to FDISG at the following number:
(800) SALOMON or (800) 725-6666 or
Mail the request to FDISG at the following address:
(Name of Fund)
c/o FDISG
P.O. Box 9109
Boston, MA 02205-9109
Proceeds of wire redemptions of $500 or more will be wired to the shareholder's
bank indicated in the Purchase Application or by letter which has been properly
guaranteed. With respect to the Cash Management Fund, if a wire redemption
request is received by FDISG by 12:00 noon (New York time) on any business day,
the redemption proceeds generally will be transmitted to the shareholder's bank
that same day. Checks for redemption proceeds of less than $500 will be mailed
to the shareholder's address of record.
CHECKWRITING
Checkwriting is available only to Class A and Class O shareholders of the Cash
Management Fund. If redemption by check has been elected on the Purchase
Application, the redemption of shares may be made by using redemption checks
provided by FDISG. There is no charge for this service. Checks may be made
payable to the order of any person or organization designated by the shareholder
and must be for amounts of $500 or more. Shareholders will continue to earn
dividends on the shares redeemed until the check clears the banking system. If a
shareholder's account does not contain an available amount sufficient to cover
the amount of a check, the check will be returned marked insufficient funds and
a $10 charge per returned check will be imposed. If checks are improperly
signed, they will not be honored. Checks cannot be used to close an account.
Redemption by check may be terminated at any time by FDISG or the applicable
Fund.
SMALL ACCOUNTS
Under each Fund's present policy, it reserves the right to redeem upon not less
than 30 days' notice, the shares in an account which has a value of $500 or less
or, in the case of an IRA or Self-Employed Retirement Plan, $250 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.
CONTINGENT DEFERRED SALES CHARGES
Redemptions may be subject to a CDSC as described below. The CDSC is not
applicable with respect to redemptions of shares of the Cash Management Fund
which have never been exchanged from another Fund. However, in the case of
shares of the Cash Management Fund which were obtained through an exchange from
another Fund, such shares will be subject to any applicable CDSC due at
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SALOMON BROTHERS INVESTMENT SERIES
redemption. Similarly, shares initially purchased in the Cash Management Fund
which are subsequently exchanged for shares of other Funds will be subject to
any applicable CDSC due at redemption. Shares of any Fund may be exchanged for
shares of any other Fund without the imposition of a CDSC, although a CDSC may
apply upon redemption of the shares acquired through the exchange. See
"Shareholder Services--Exchange Privilege."
Because shares of the Cash Management Fund are not subject to any distribution
or service fees, any applicable CDSC period is tolled for the period of time in
which shares of other Funds are held in the Cash Management Fund. For example,
if shares subject to a CDSC of a Fund other than the Cash Management Fund are
exchanged for shares of the Cash Management Fund two years after purchase and
are subsequently redeemed one year later, only the first two years of ownership
count in the determination of the applicable CDSC percentage to be applied to
that redemption.
The CDSC is assessed on an amount equal to the lesser of the net asset value at
redemption or the initial purchase price of the shares being redeemed. In
determining the amount of the CDSC that may be applicable to a redemption, the
calculation is determined in the manner that results in the lowest possible rate
being charged. Therefore, any shares in the redeeming shareholder's account that
may be redeemed without charge will be assumed to be redeemed prior to those
subject to a charge. In addition, if the CDSC is determined to be applicable to
redeemed shares, it will be assumed that shares held for the longest duration
are redeemed first. No CDSC is imposed on: (i) amounts representing increases in
the net asset value per share and (ii) shares acquired through reinvestment of
income dividends or capital gains distributions.
The CDSC may be waived on a redemption of shares in connection with: (a)
redemptions made following the death or disability (as defined in the Code) of a
shareholder; (b) redemptions effected pursuant to each Fund's right to liquidate
a shareholder's account if the aggregate net asset value of the shares held in
the account is less than the applicable minimum account size; (c) a tax-free
return of an excess contribution to any retirement plan; (d) exchanges; (e)
automatic cash withdrawals in amounts equal to or less than 12% annually or 2%
monthly of their initial account balances (see "Shareholder Services--Automatic
Withdrawal Plan"); (f) redemptions of shares in connection with certain post-
retirement distributions and withdrawals from retirement plans or IRAs; (g)
redemptions proceeds from other Funds that are reinvested within 60 days of the
redemption (see "Shareholder Services-- Reinstatement Privilege"); (h) certain
redemptions of shares of a Fund in connection with lump-sum or other
distributions made by eligible retirement plans; and (i) redemption of shares by
participants in certain "wrap-fee" or asset allocation programs sponsored by
broker-dealers and other financial institutions that have entered into
agreements with Salomon Brothers or SBAM.
CLASS A SHARE PURCHASES OF $1 MILLION OR MORE
Class A shares that were purchased without a sales charge by reason of a
purchase of $1 million or more within one year after the date of purchase are
subject to a CDSC of 1% if redeemed within the first year of purchase (with the
exception of Class A shares of the Cash Management Fund, which are not subject
to any CDSC upon redemption).
CLASS B SHARES
Class B shares that are redeemed within six years of purchase are subject to a
CDSC at the rates set forth in the table below, charged as a percentage of the
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SALOMON BROTHERS INVESTMENT SERIES
dollar amount subject thereto (with the exception of Class B shares of the Cash
Management Fund, which are not subject to any CDSC upon redemption). The amount
of any CDSC payable upon redemption varies depending on the number of years
elapsed from the time of the purchase of Class B shares until the time of
redemption. Solely for purposes of determining the number of years from the time
of any payment for the purchase of shares until redemption, all orders accepted
during a month are aggregated and deemed to have been made on the last business
day of that month.
CLASS B CDSC TABLE
<TABLE>
<CAPTION>
CDSC
AS A
PERCENTAGE
OF
DOLLAR
AMOUNT
SUBJECT
TO
YEAR(S) SINCE PURCHASE ORDER CHARGE
- ------------------------------------------------------------- ----
<S> <C>
Up to 2 years 5%
2 years or more but less than 3 years 4%
3 years or more but less than 4 years 3%
4 years or more but less than 5 years 2%
5 years or more but less than 6 years 1%
6 or more years 0%
</TABLE>
CLASS C SHARES
Class C shares are subject to a CDSC of 1% if redeemed within the first year of
purchase (with the exception of Class C shares of the Cash Management Fund,
which are not subject to any CDSC upon redemption).
- --------------------------------------------------------------------------------
PERFORMANCE INFORMATION
From time to time, a Fund may advertise its "yield," "tax-equivalent yield,"
"effective yield" and/or standardized and nonstandardized "average annual total
return" over various periods of time. Total return and yield quotations are
computed separately for each class of shares of a Fund. 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 class. Total return figures for
Class A shares include the maximum initial 4.75% sales charge (except for the
Cash Management Fund which has no sales charge) and for Class B and Class C
shares include any applicable CDSC during the measuring period. These figures
also take into account the service and distribution fees, if any, payable with
respect to each class of a Fund's shares.
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
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SALOMON BROTHERS INVESTMENT SERIES
presented in the aggregate rather than as an annual average.
Total return figures will be given for the most current one-, five- and ten-year
periods, or the life of the relevant class 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 calculated either with or without the effect of the maximum 4.75%
sales charge for the Class A shares (except for the Cash Management Fund which
has no sales charge) or any applicable CDSC for Class B and Class C shares, and
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). Because of the
differences in sales charges, distribution fees and certain other expenses, the
performance for each of the classes will differ.
Yield is calculated in accordance with the SEC's formula. The tax-equivalent
yield is calculated by determining the portion of the yield which is tax-exempt
and calculating the equivalent taxable yield and adding to such amount any fully
taxable yield. Yield differs from total return in that it does not consider
changes in net asset value.
From time to time the Cash Management Fund may make available information as to
its "yield" and "effective yield." The "yield" of the Cash Management Fund
refers to the income generated by an investment in the Fund over a seven-day
period. This income is then "annualized." That is, the amount of income
generated by the investment during that week is assumed to be generated each
week over a 52-week period and is shown as a percentage of the investment. The
"effective yield" is calculated similarly but, when annualized, the income
earned by an investment in the Fund is assumed to be reinvested in shares of the
same class. The effective yield will be slightly higher than the yield because
of the compounding effect of this assumed reinvestment.
Distribution rate differs from yield in that it is calculated by dividing the
annualization of the most recent month's distribution by the maximum offering
price at the end of the month.
Furthermore, in reports or other communications to shareholders or in
advertising materials, performance of Fund shares may be compared with that of
other mutual funds or classes of shares of other mutual funds, as listed in the
rankings prepared by Lipper Analytical Services, Inc. or similar independent
services that monitor the performance of mutual funds, financial indices such as
the S&P 500 Index or other industry or financial publications such as Bank Rate
Monitor, Barron's, Business Week, CDA Investment Technologies, Inc., Changing
Times, Forbes, Fortune, ICB Donaghue'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 annual reports to shareholders
for each of the Series Funds, other than the total Return Fund and the Asia
Growth Fund which recently commenced operations, and the Investors Fund for the
fiscal year ended December 31, 1994 containing additional performance
information are available without charge and can be obtained by writing or
calling the address or telephone number printed on the front
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SALOMON BROTHERS INVESTMENT SERIES
cover. The yield of the Cash Management 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. Performance figures are based on historical earnings and are not
intended to indicate future performance. See "Performance Data" in the Statement
of Additional Information.
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DIVIDENDS AND DISTRIBUTIONS
The Cash Management Fund intends to declare as a dividend substantially all of
its net investment income at the close of each business day to the Fund's
shareholders of record at 12:00 noon (New York time) on that day, and will pay
such dividends monthly. The New York Municipal Bond Fund, the National
Intermediate Municipal Fund, the U.S. Government Income Fund, the High Yield
Bond Fund, the Strategic Bond Fund and the Total Return Fund will declare
dividends from net investment income daily and pay them monthly. The Asia Growth
Fund will declare dividends from net investment income annually and pay them
annually. The Investors Fund present policy is to pay quarterly dividends from
net investment income.
Net investment income is a Fund's investment company taxable income, as that
term is defined in the Code determined without regard to the deduction for
dividends paid and excluding any net realized capital gains. For the purpose of
calculating dividends, net investment income shall consist of interest earned,
which includes, where applicable, any discount accreted or premium amortized to
the date of maturity, minus estimated expenses.
Shares of a Fund (other than the Cash Management Fund, as described below) are
entitled to dividends declared beginning on the day after the purchase order is
received in good order. Purchase orders for shares of the Cash Management Fund
for which payment is received in or converted into federal funds by 12:00 noon
(New York time) on any business day will become effective and begin to earn
dividends that same day. Purchase orders for shares of the Cash Management Fund
for which payment is received in or converted into federal funds after 12:00
noon (New York time) on any business day will become effective and begin to earn
dividends on the following business day. With respect to the Cash Management
Fund, shares redeemed by 12:00 noon (New York time) will accrue dividends
through the day prior to redemption and shares redeemed after 12:00 noon will
accrue dividends through the day of redemption. The New York Municipal Bond
Fund, the National Intermediate Municipal Fund, the U.S. Government Income Fund,
the High Yield Bond Fund, the Strategic Bond Fund, the Total Return Fund and the
Asia Growth Fund will accrue dividends on settled shares through the day of
redemption. For Funds that will declare dividends daily, net investment income
for a Saturday, Sunday or holiday will be declared as a dividend on the previous
business day.
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SALOMON BROTHERS INVESTMENT SERIES
Dividends are determined in the same manner and are paid in the same amount for
each Fund share, except certain expenses borne differ by class. In addition, the
maximum distribution and service fees payable by the Class B and Class C shares
of each Fund (other than the Cash Management Fund, which bears no such fees) are
more than the maximum fees payable by such Fund's Class A and Class O shares.
Moreover, Class O shares are not subject to any distribution or service fees. As
a result, the per share dividends on the Class O shares will generally be higher
than Class A, Class B and Class C shares of each Fund (other than the Cash
Management Fund) and the per share dividends on Class A shares of each Fund will
generally be higher than those on Class B and Class C shares (other than the
Cash Management Fund).
Net realized short-term capital gains of each Fund, if any, will be distributed
whenever the Directors determine that such distributions would be in the best
interest of shareholders, but in any event at least once a year. Each Fund
distributes annually any net realized long-term capital gains from the sale of
securities (after deducting any net realized losses that may be carried forward
from prior years). The Cash Management Fund does not expect to realize any
long-term capital gains.
If a shareholder elects to receive dividends and/or distributions in cash and
the check cannot be delivered to a shareholder due to an invalid address or
otherwise remains uncashed by the shareholder for a period of six months, each
Fund reserves the right to reinvest the dividend and/or distribution in a
shareholder's account at the then-current net asset value and to convert the
shareholder's election to automatic reinvestment in shares of the Fund from
which the distributions were made.
If, for any full fiscal year, a Fund's total distributions exceed net investment
income and net realized capital gains, the excess distributions generally will
be treated as a tax-free return of capital (up to the amount of the
shareholder's tax basis in his or her shares). The amount treated as a tax-free
return of capital will reduce a shareholder's adjusted basis in his or her
shares. Pursuant to the requirements of the 1940 Act and other applicable laws,
a notice will accompany any distribution paid from sources other than net
investment income. In the event a Fund distributes amounts in excess of its net
investment income and net realized capital gains, such distributions may have
the effect of decreasing the Fund's total assets, which may increase the Fund's
expense ratio.
Dividend and/or capital gains distributions will be reinvested automatically in
additional shares of the same class of a Fund at the applicable net asset value
per share and such shares will be automatically credited to a shareholder's
account, unless a shareholder elects to receive either dividends or capital
gains distributions in cash. A shareholder who does not have a brokerage account
may inform FDISG, by notice sent to P.O. Box 9109, Boston, Massachusetts
02205-9109, that he or she wishes to receive such dividends or distributions in
cash directly from FDISG. If such distribution is to be sent to an address other
than the address on record, a signature guarantee is required. See "Redemptions
by Mail" above for instructions concerning signature guarantees. Such signature
must be signed exactly as registered with FDISG. Shareholders may change the
distribution option at any time by notification to FDISG or calling 1-800-
SALOMON prior to the record date of any such dividend or distribution.
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TAXATION
FEDERAL INCOME TAX MATTERS. Each Fund intends to qualify and elect to be treated
as a regulated investment company under Subchapter M of the Internal Revenue
Code of 1986, as amended (the "Code"). If it so qualifies, a Fund will not be
subject to U.S. federal income taxes on its net investment income (i.e., its
investment company taxable income, as that term is defined in the Code,
determined without regard to the deduction for dividends paid) and net capital
gain (i.e., the excess of a Fund's net realized long-term capital gain over its
net realized short-term capital loss), if any, that it distributes to its
shareholders in each taxable year, provided that it distributes to its
shareholders (i) at least 90% of its net investment income for such taxable
year, and (ii) with respect to the New York Municipal Bond Fund and the National
Intermediate Municipal Fund at least 90% of its net tax-exempt interest income
for such taxable year. If in any year a Fund fails to qualify as a regulated
investment company, such Fund would incur regular corporate federal income tax
on its taxable income for that year and be subject to certain additional
distribution requirements upon requalification.
Each Fund will be subject to federal corporate income tax (currently at a
maximum rate of 35%) on any undistributed income other than tax-exempt income
from municipal obligations and to alternative minimum tax (currently at a
maximum rate of 28%) on alternative minimum taxable income, which includes
interest income on certain "private activity" obligations that is otherwise
exempt from tax.
Each Fund is subject to a nondeductible 4% excise tax calculated as a percentage
of certain undistributed amounts of ordinary income and net realized capital
gains. To the extent possible, each Fund intends to make sufficient
distributions to avoid the application of both the corporate income and excise
taxes.
All dividends and distributions to shareholders of a Fund of investment company
taxable income will be taxable to shareholders whether paid in cash or
reinvested in additional shares. For federal income tax purposes, distributions
of net investment income which includes the excess of the Fund's net realized
short-term capital gains over net realized long-term capital losses, are taxable
to shareholders as ordinary income.
Distributions of net realized long-term capital gains designated by a Fund as
"capital gain dividends" will be taxable as long-term capital gains, whether
paid in cash or additional shares, regardless of how long the shares have been
held by such shareholders, and such distributions will not be eligible for the
dividends received deduction. With respect to each Fund, a portion of each
Fund's dividends may qualify for the dividends received deduction available to
corporations. In general, the maximum federal income tax rate imposed on
individuals with respect to capital gain dividends will be limited to 28%,
whereas the maximum federal income tax rate imposed on individuals with respect
to ordinary income (and short-term capital gains, which currently are taxed at
the same rates as ordinary income) will be 39.6%. With respect to corporate
taxpayers, long-term capital gains currently are taxed at the same federal
income tax rates as ordinary income and short-term capital gains. Investors
should consider the tax implications of buying shares shortly before the record
date of a distribution because distributions of net capital gain will be taxable
even though the net asset value of shares of a Fund is reduced by the
distribution.
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SALOMON BROTHERS INVESTMENT SERIES
Funds investing in foreign securities or currencies may be required to pay
withholding or other taxes to foreign governments on dividends and interest. The
investment yield of a Fund investing in foreign securities or currencies will be
reduced by these foreign taxes. Shareholders will bear the cost of any foreign
taxes but may not be able to claim a foreign tax credit or deduction for these
foreign taxes. In addition, a Fund investing in securities of passive foreign
investment companies may be subject to U.S. federal income taxes (and interest
on such taxes) as a result of such investments. The investment yield of a Fund
making such investments will be reduced by these taxes and interest.
Shareholders will bear the cost of these taxes and interest, but will not be
able to claim a deduction for these amounts.
The redemption, sale or exchange of shares of one Fund for shares of another is
a taxable event and may result in a gain or loss. Gain or loss, if any,
recognized on the sale or other disposition of shares of a Fund will be taxed as
capital gain or loss if the shares are capital assets in the shareholder's
hands. Generally, a shareholder's gain or loss will be a long-term gain or loss
if the shares have been held for more than one year. If a shareholder sells or
otherwise disposes of shares of a Fund before holding them for more than six
months, any loss on the sale or other disposition of such shares shall be (i)
treated as a long-term capital loss to the extent of any capital gain dividends
received by the shareholder with respect to such shares or (ii) disallowed to
the extent of any exempt-interest dividends received by the shareholder with
respect to such shares. A loss realized on a sale or exchange of shares may be
disallowed if other shares are acquired within a 61-day period beginning 30 days
before and ending 30 days after the date that the shares are disposed of.
Generally, shareholders will be taxable on dividends or distributions in the
year of receipt. However, if a Fund declares a dividend or distribution in
October, November or December to shareholders of record on a specified date in
such a month which is actually paid during the following January, it will be
deemed to have been received by the shareholders and paid by the Fund no later
than December 31 of the year in which the dividend or distribution is declared.
A Fund may make investments that produce income that is not matched by a
corresponding cash distribution to the Fund, such as investments in pay-in-kind
bonds or in obligations such as certain Brady Bonds or zero coupon securities
having original issue discount (i.e., an amount equal to the excess of the
stated redemption price of the security at maturity over its issue price), or
market discount (i.e., an amount equal to the excess of the stated redemption
price of the security over the basis of such bond immediately after it was
acquired) if the Fund elects to accrue market discount on a current basis. In
addition, income may continue to accrue for federal income tax purposes with
respect to a non-performing investment. Any such income would be treated as
income earned by a Fund and therefore would be subject to the distribution
requirements of the Code. Because such income may not be matched by a
corresponding cash distribution to a Fund, such Fund may be required to borrow
money or dispose of other securities to be able to make distributions to its
investors. The extent to which a Fund may liquidate securities at a gain may be
limited by the requirement that less than 30% of its annual gross income be
derived from the sale or other disposition of securities and certain other
investments held for less than three months (the "short-short test"). In
addition, if an election is not made to currently accrue market discount with
respect to a market discount bond, all or a portion of any deduction or any
interest expense incurred to purchase or hold such
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SALOMON BROTHERS INVESTMENT SERIES
bond may be deferred until such bond is sold or otherwise disposed.
Each Fund may be required to withhold federal income tax at a rate of 31%
("backup withholding") from dividends (other than exempt-interest dividends) and
redemption proceeds paid to non-corporate shareholders. This tax may be withheld
from dividends if (i) the payee fails to furnish the Fund with the payee's
correct taxpayer identification number (e.g., an individual's social security
number), (ii) the Internal Revenue Service ("IRS") notifies the Fund that the
payee has failed to report properly certain interest and dividend income to the
IRS and to respond to notices to that effect, or (iii) when required to do so,
the payee fails to certify that he or she is not subject to backup withholding.
Redemption proceeds may be subject to withholding under the circumstances
described in (i) above. Backup withholding is not an additional tax and any
amounts withheld may be credited against the shareholder's federal income tax
liability.
HONG KONG TAX MATTERS. The Asia Growth Fund would be subject to Hong Kong
profits tax, which is currently charged at the rate of 16.5% for corporations
and 15% for individuals, if, by virtue of the fact that SBAM AP is located in
Hong Kong, (a) the Fund or its agents were deemed to carry on a trade,
profession or business in Hong Kong and (b) profits from that trade, profession
or business were to arise in or be derived from Hong Kong. Hong Kong profits tax
will not be payable in respect of profits from the sale of shares and other
securities transacted outside Hong Kong, interest arising or derived from
outside Hong Kong and profits in the nature of capital gains. The sale of
securities will not be treated as the sale of capital assets if the profit or
loss from such sale is regarded as attributable to a trade or business carried
on in Hong Kong. The Asia Growth Fund does not currently believe that it will be
subject to Hong Kong profits tax.
Dividends which the Fund pays to its shareholders are not taxable in Hong Kong
(whether through withholding or otherwise) under current legislation and
practice. No Hong Kong stamp duty will be payable in respect of transactions in
shares of the Asia Growth Fund provided that the register of shareholders is
maintained outside of Hong Kong.
STATE AND LOCAL TAX MATTERS. Depending on the residence of the shareholder for
tax purposes, distributions may also be subject to state and local taxes or
withholding taxes.
Most states provide that a regulated investment company may pass through
(without restriction) to its shareholders state and local income tax exemptions
available to direct owners of certain types of U.S. government securities (such
as U.S. Treasury obligations). Thus, for residents of these states,
distributions derived from a Fund's investment in certain types of U.S.
government securities should be free from state and local income taxes to the
extent that the interest income from such investments would have been exempt
from state and local income taxes if such securities had been held directly by
the respective shareholders themselves. Certain states, however, do not allow a
regulated investment company to pass through to its shareholders the state and
local income tax exemptions available to direct owners of certain types of U.S.
government securities unless the regulated investment company holds at least a
required amount of U.S. government securities. Accordingly, for residents of
these states, distributions derived from a Fund's investment in certain types of
U.S. government securities may not be entitled to the exemptions from state and
local income taxes that would be available if the shareholders had purchased
U.S. government securities directly. Shareholders' dividends
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SALOMON BROTHERS INVESTMENT SERIES
attributable to a Fund's income from repurchase agreements generally are subject
to state and local income taxes, although states and regulations vary in their
treatment of such income. The exemption from state and local income taxes does
not preclude states from asserting other taxes on the ownership of U.S.
government securities. To the extent that a Fund invests to a substantial degree
in U.S. government securities which are subject to favorable state and local tax
treatment, shareholders of such Fund will be notified as to the extent to which
distributions from the Fund are attributable to interest on such securities.
NEW YORK MUNICIPAL BOND FUND AND NATIONAL INTERMEDIATE MUNICIPAL FUND. The New
York Municipal Bond Fund and the National Intermediate Municipal Fund each
intends to qualify to pay "exempt-interest dividends," as that term is defined
in the Code, by holding at the end of each quarter of its taxable year at least
50% of the value of its total assets in the form of obligations described in
section 103(a) of the Code. Each Fund's policy is to pay in each taxable year
exempt-interest dividends equal to at least 90% of such Fund's interest from
tax-exempt obligations net of certain deductions. Except as discussed below,
exempt-interest dividends will be exempt from regular federal income tax. In
addition, dividends from the New York Municipal Bond Fund will not be subject to
New York State and New York City personal income taxes to the extent that such
distributions qualify as exempt-interest dividends and represent interest income
attributable to federally tax-exempt obligations of the State of New York and
its political subdivisions (as well as certain other federally tax-exempt
obligations the interest on which is exempt from New York State and New York
City personal income taxes). Dividends from the New York Municipal Bond Fund,
however, are not excluded in determining New York State or New York City
franchise taxes on corporations and financial institutions.
All or a portion of the gain from sale or redemption of tax-exempt obligations
acquired after April 30, 1993 attributable to market discount will be treated as
ordinary income rather than capital gain. This rule may increase the amount of
ordinary income dividends received by shareholders of the New York Municipal
Bond Fund and the National Intermediate Municipal Fund.
Although exempt-interest dividends may be excluded from a shareholder's gross
income for federal income tax purposes, a portion of the exempt-interest
dividends may be a specific preference item for purposes of determining the
shareholder's liability (if any) under the federal individual and corporate
alternative minimum tax provisions of the Code. Exempt-interest dividends will
constitute a specific preference item for purposes of the federal alternative
minimum tax to the extent that such dividends are derived from certain types of
private activity bonds issued after August 7, 1986. In addition, all
exempt-interest dividends will be a component of the "adjusted current earnings"
adjustment item for purposes of the federal corporate alternative minimum tax.
Moreover, the receipt of exempt-interest dividends may increase a corporate
shareholder's liability for environmental taxes under Section 59A of the Code
and a foreign corporate shareholder's liability under the branch profits tax,
and may also affect the federal tax liability of certain Subchapter S
corporations and insurance companies. Furthermore, the receipt of exempt-
interest dividends may be a factor in determining the extent to which a
shareholder's Social Security benefits are taxable.
With respect to the New York Municipal Bond Fund, the exemption of interest
income for regular federal income tax purposes and for New York State and New
York City personal income tax purposes
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SALOMON BROTHERS INVESTMENT SERIES
may not result in similar exemptions under the tax law of state and local taxing
authorities outside New York. In general, a state exempts from state income tax
only interest earned on obligations issued by that state or its political
subdivisions and instrumentalities.
Under the Code, interest on indebtedness incurred or continued to purchase or
carry shares of the New York Municipal Bond Fund, which interest is deemed to
relate to exempt-interest dividends, will not be deductible by shareholders of
the Fund for federal income tax purposes.
The New York Municipal Bond Fund and the National Intermediate Municipal Fund
each intends that substantially all dividends and distributions it pays to its
respective shareholders will be designated as exempt-interest dividends and as
such will be exempt from regular federal income taxes. However, to the extent
the New York Municipal Bond Fund and the National Intermediate Municipal Fund
each earns income from taxable investments or realizes capital gains, some
portion of its respective dividends and distributions may not qualify as exempt-
interest dividends and may be subject to regular federal income taxes.
Statements detailing the tax status of each shareholder's 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.
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SHAREHOLDER SERVICES
Each Fund offers the following shareholder services. See the Statement of
Additional Information for further details about these services or call or write
the Fund.
AUTOMATIC INVESTMENT PLAN
An investor who opens an account and wishes to make subsequent, periodic
investments in a Fund by electronic funds transfer from a bank account may
establish an Automatic Investment Plan on the account. The bank at which the
bank account is maintained must be a member of the Automated Clearing House
(ACH). The investor specifies the frequency with which the investments occur
(monthly, every alternate month, quarterly, etc.) with the exception that no
more than one investment will be processed each month. On or about the tenth of
the month, the Fund will debit the bank account in the specified amount (minimum
of $25 per draft) and the proceeds will be invested at the applicable offering
price determined on the date of the debit. In the event of a full exchange, this
plan will follow into the new Fund unless otherwise specified.
AUTOMATIC DIVIDEND DIVERSIFICATION (ADD)
The ADD program allows an investor to have all dividends and any other
distributions from a Fund automatically
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SALOMON BROTHERS INVESTMENT SERIES
used to purchase shares of the same class of any other Fund. The receiving
account must be in the same name as the investor's existing account. The
purchase of shares to the Fund receiving the cross-investment of the dividends
will be using the net asset value at the close of business of the dividend
payable date.
SYSTEMATIC INVESTING
An investor may request that shares of any class of a Fund be exchanged monthly
for shares of the same class of any other Fund. A predetermined dollar amount of
at least $50 per exchange will then occur on or about the 15th of each month in
accordance with the instructions provided on the initial account application or
on the Systematic Investing application. This Systematic Investing program is
also referred to as "Dollar Cost Averaging."
EXCHANGE PRIVILEGE
Shareholders of any Fund may exchange all or part of their shares for shares of
the same class of any other Fund at the applicable relative net asset value per
share without the imposition of any front end sales charge or CDSC, except as
described below. Shares of a Fund are eligible for exchange 30 days after
purchase. Shares of one class may not be exchanged for shares of any other class
of any Fund.
A front end sales charge will be imposed with respect to Class A shares of a
Fund which are issued upon an exchange from Class A Cash Management Fund shares
and as to which no front end sales charge had been previously paid or waived.
For purposes of determining a shareholder's holding period in the calculation of
any applicable CDSC, the period of time during which shares were held prior to
an exchange will be added to the holding period of shares acquired in an
exchange. However, the CDSC period is tolled for any period of time in which
shares are held in the Cash Management Fund. For example, if shares subject to a
CDSC of a Fund other than the Cash Management Fund are exchanged for shares of
the Cash Management Fund two years after purchase and are subsequently redeemed
one year later, only the first two years of ownership count in the determination
of the applicable CDSC percentage to be applied to that redemption. Furthermore,
when Cash Management Fund shares are exchanged for shares of any other Fund, the
CDSC becomes (or, in the case of Cash Management Fund shares which were subject
to a CDSC prior to a previous exchange for Cash Management Fund shares, again
becomes) applicable to those shares commencing at the time of exchange. If such
shares are subsequently redeemed, only time of ownership spent in Funds other
than the Cash Management Fund counts toward determining the applicable CDSC.
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 or FDISG will
be liable for following exchange instructions received by telephone, which are
reasonably believed to be genuine, and the shareholder will bear the risk of
loss in the event of unauthorized or fraudulent telephone instructions. The
Funds and FDISG may employ reasonable procedures to confirm that instructions
communicated by telephone are genuine. The Funds and/or FDISG may be liable for
any losses due to unauthorized or fraudulent instructions in the absence of
following these procedures. When requesting an exchange by telephone,
shareholders should have available the correct account registration and account
numbers or tax identification number.
The exchange of shares of one Fund for shares of another Fund is treated for
federal income tax purposes as a sale of
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SALOMON BROTHERS INVESTMENT SERIES
the shares given in exchange by the shareholder, and an exchanging shareholder
may, therefore, realize a taxable gain or loss in connection with an exchange.
See "Taxation" above.
The exchange privilege is available to shareholders residing in any state in
which the shares of the Fund being acquired may be legally sold. Salomon
Brothers reserves the right to reject any exchange request. The exchange
privilege may be modified or terminated at any time after notice to
shareholders.
AUTOMATIC WITHDRAWAL PLAN
A shareholder may establish a plan for redemptions to be made automatically at
monthly, quarterly, semiannual or annual intervals with payments sent directly
to him or her or to persons designated by the shareholders as recipients of the
withdrawals. Requests for this service not made on the initial application
require signature guarantees unless the payments are to be made to the
shareholder and mailed to the address of record on the account. Investors are
required to have a minimum account value of $10,000 in a single account in order
to establish a monthly withdrawal plan, and a minimum of $5,000 in a single
account for quarterly, semiannual and annual withdrawal plans. Each withdrawal
constitutes a redemption of shares on which a gain or loss may be recognized.
Class B and Class C shareholders may redeem 12% annually or no more than 2%
monthly of their initial account balances without incurring a CDSC. With respect
to the New York Municipal Bond Fund and the Investors Fund, a Withdrawal Plan
may be opened with an account having a total value of at least $7,500, and a
shareholder can arrange for automatic distributions to be made monthly or
quarterly in amounts not less than $250 and $50 from the New York Municipal Bond
Fund and the Investors Fund, respectively. Maintenance of an Automatic
Withdrawal Plan concurrently with purchases of additional shares may be
disadvantageous to an investor because of the sales charges on certain purchases
and redemptions.
The redemptions will occur on or about the 10th day or the 25th day of the month
and the checks will generally be mailed within two days after the redemption
occurs. No redemption will occur if the account balance falls below the amount
required to meet the requested withdrawal amount. This service may be terminated
at any time.
REINSTATEMENT PRIVILEGE
A shareholder may return any dividend, capital gain or redemption check to a
Fund within 60 days of the transaction and have it reinvested at the applicable
net asset value without incurring a sales charge. With regard to Class A shares,
a shareholder may reinstate at net asset value any portion of shares which have
been previously redeemed if the redemption occurred within 60 days of the
request. With regard to Class B and Class C shares, if an investor redeems Class
B or Class C shares and pays a CDSC upon redemption, and then uses those
proceeds to purchase Class B or Class C shares of any Fund within 60 days, the
Class B or Class C shares purchased will be credited with any CDSC paid in
connection with the prior redemption. There are no restrictions on the number of
times a shareholder may use the Reinstatement Privilege.
Any gain recognized on a redemption or repurchase is taxable despite the
reinstatement in the Fund. Any loss realized as a result of the redemption or
repurchase may not be allowed as a deduction for federal income tax purposes but
may be applied, depending on the amount reinstated, to adjust the cost basis of
the shares acquired upon reinstatement. In addition, if the shares redeemed or
repurchased had been acquired within the 60 days preceding the redemption or
repurchase, the amount of any gain or loss
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SALOMON BROTHERS INVESTMENT SERIES
on the redemption or repurchase may have to be computed without regard to any
sales charges incurred on the redeemed or repurchased shares (except to the
extent those sales charges exceed the sales charges waived in connection with
the reinstatement).
SELF-EMPLOYED RETIREMENT PLAN
A prototype defined contribution retirement plan is available for self-employed
individuals who wish to contribute earned income on behalf of themselves and
each of their employees to purchase shares of a Fund and/or certain other mutual
funds managed by SBAM. Shareholders should consult with a financial adviser
regarding such plan.
IRAS
A prototype IRA is available generally for all working individuals who receive
compensation (which for self-employed individuals includes earned income) for
services rendered and for certain individuals who receive alimony or separate
maintenance payments pursuant to a divorce or separation instrument.
Contributions to an IRA made available by the Funds may be invested in shares of
a Fund and/or certain other mutual funds managed by SBAM. Shareholders should
consult with a financial adviser regarding an IRA.
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ACCOUNT SERVICES
Shareholders of each Fund are kept informed through semi-annual reports showing
diversification of investments and other financial data for such Fund. Annual
reports for all Funds include audited financial statements. Shareholders of each
Fund will receive a Statement of Account following each share transaction,
except for shareholders of the Cash Management Fund, the New York Municipal Bond
Fund and the National Intermediate Municipal Fund who will receive a Statement
of Account at least monthly showing transactions in the account, the total
number of shares owned, and any dividends or distributions paid. Shareholders
can write or call a Fund at the address and telephone number on the first page
of this Prospectus with any questions relating to their investment in shares of
such Fund.
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CAPITAL STOCK
The Series Funds was incorporated in Maryland on April 17, 1990. The authorized
capital stock of the Series Funds consists of 10,000,000,000 shares having a par
value of $.001 per share. Pursuant to the Series Funds' Articles of
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SALOMON BROTHERS INVESTMENT SERIES
Incorporation and Articles Supplementary, the Directors have authorized the
issuance of ten series of shares, each representing shares in one of ten
separate Funds. The National Intermediate Municipal Fund, U.S. Government Income
Fund, High Yield Bond Fund, Strategic Bond Fund, Total Return Fund and Asia
Growth Fund are newly or recently organized portfolios of the Series Funds. In
addition, the Series Funds includes the Cash Management Fund, New York Municipal
Bond Fund, Salomon Brothers New York Municipal Money Market Fund and Salomon
Brothers Institutional Money Market Fund (formerly called the U.S. Treasury
Securities Money Market Fund). The assets of each Fund are segregated and
separately managed. The Series Funds' Board of Directors may, in the future,
authorize the issuance of additional classes of capital stock representing
shares of additional investment portfolios. As of the date of this Prospectus,
Salomon Brothers Holding Company Inc, the parent company of SBAM, owns a
significant percentage of the outstanding shares of the National Intermediate
Municipal Fund, U.S. Government Income Fund, High Yield Bond Fund, Strategic
Bond Fund, Total Return Fund and Asia Growth Fund and consequently is a
controlling person of such Funds.
The Investors Fund was incorporated in Maryland on April 2, 1958. The authorized
capital stock of the Fund consists of 50,000,000 shares having a par value of
$1.00 per share.
Although each Fund is offering only its own shares, it is possible that a Fund
could become liable for a misstatement in this Prospectus about another Fund.
The Directors of the Series Funds and the Investors Fund have considered this
factor in approving the use of a combined Prospectus.
Shares of each class of a Fund represent interests in that Fund in proportion to
each share's net asset value. The per share net asset value of each class of
shares in a Fund is calculated separately and may differ as between classes as a
result of the differences in distribution and service fees payable by the
classes and the allocation of certain incremental class-specific expenses to the
appropriate class to which such expenses apply.
All shares of each Fund have equal voting rights and will be voted in the
aggregate, and not by series or class, except where voting by series or class is
required by law or where the matter involved affects only one series or class.
Each shareholder is entitled to cast, at all meetings of shareholders, such
number of votes as is equal to the number of full and fractional shares held by
such shareholder. All shares of each Fund will, when issued, be fully paid and
nonassessable. None of the Funds will issue any senior securities. Under the
corporate law of Maryland, the state of incorporation of both the Series Funds
and the Investors Fund, and the By-Laws of each of the Series Funds and the
Investors Fund, neither the Series Fund nor the Investors Fund is required and
does not currently intend to hold annual meetings of shareholders for the
election of directors except as required under the 1940 Act. A more complete
statement of the voting rights of shareholders is contained in the Statement of
Additional Information.
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APPENDIX A:
DESCRIPTION OF RATINGS
A DESCRIPTION OF THE RATING POLICIES OF MOODY'S, S&P AND FITCH WITH RESPECT TO
BONDS AND COMMERCIAL PAPER APPEARS BELOW.
MOODY'S INVESTORS SERVICE'S CORPORATE BOND RATINGS
Aaa--Bonds which are rated "Aaa" are judged to be of the best quality and carry
the 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 present
which make the long-term risks appear somewhat larger than in Aaa securities.
A--Bonds which are rated "A" possess many favorable investment qualities and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa--Bonds which are rated "Baa" are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba--Bonds which are rated "Ba" are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B--Bonds which are rated "B" generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of maintenance and
other terms of the contract over any long period of time may be small.
Caa--Bonds which are rated "Caa" are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca--Bonds which are rated "Ca" represent obligations which are speculative to a
high degree. Such issues are often in default or have other marked shortcomings.
C--Bonds which are rated "C" are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Moody's applies numerical modifiers "1", "2" and "3" to certain of its rating
classifications. The modifier "1" indicates that the security ranks in the
higher end of its
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SALOMON BROTHERS INVESTMENT SERIES
generic rating category; the modifier "2" indicates a mid-range ranking; and the
modifier "3" indicates that the issue ranks in the lower end of its generic
rating category.
STANDARD & POOR'S RATINGS GROUP CORPORATE BOND RATINGS
AAA--This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to repay principal and pay
interest.
AA--Bonds rated "AA" also qualify as high quality debt obligations. Capacity to
pay principal and interest is very strong, and differs from "AAA" issues only in
small degree.
A--Bonds rated "A" have a strong capacity to repay principal and pay interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher-rated categories.
BBB--Bonds rated "BBB" are regarded as having an adequate capacity to repay
principal and pay interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to repay principal and pay interest for
bonds in this category than for higher-rated categories.
BB-B-CCC-CC-C--Bonds rated "BB", "B", "CCC", "CC" 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 forth above may be modified by the addition of a plus or minus
to show relative standing within the major rating categories.
MOODY'S INVESTORS SERVICE'S COMMERCIAL PAPER RATINGS
PRIME-1--Issuers (or related supporting institutions) rated "Prime-1" have a
superior ability for repayment of senior short-term debt obligations. "Prime-1"
repayment ability will often be evidenced by many of the following
characteristics: leading market positions in well-established industries, high
rates of return on funds employed, conservative capitalization structures with
moderate reliance on debt and ample asset protection, broad margins in earnings
coverage of fixed financial charges and high internal cash generation, and
well-established access to a range of financial markets and assured sources of
alternate liquidity.
PRIME-2--Issuers (or related supporting institutions) rated "Prime-2" have a
strong ability for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, will be more subject
to variation. Capitalization
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SALOMON BROTHERS INVESTMENT SERIES
characteristics, while still appropriate, may be more affected by external
conditions. Ample alternative liquidity is maintained.
PRIME-3--Issuers (or related supporting institutions) rated "Prime-3" have an
acceptable ability for repayment of senior short-term obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and the requirement for relatively high financial
leverage. Adequate alternate liquidity is maintained.
NOT PRIME--Issuers rated "Not Prime" do not fall within any of the Prime rating
categories.
STANDARD & POOR'S RATINGS GROUP COMMERCIAL PAPER RATINGS
A S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.
Ratings are graded into several categories, ranging from "A-1" for the highest
quality obligations to "D" for the lowest. The four categories are as follows:
A-1--This highest category indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus (+) sign designation.
A-2--Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1".
A-3--Issues carrying this designation have adequate capacity for timely payment.
They are, however, somewhat more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
B--Issues rated "B" are regarded as having only speculative capacity for timely
payment.
C--This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D--Debt rated "D" is in payment default. The "D" rating category is used when
interest payments or principal payments are not made on the date due, even if
the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period.
MOODY'S INVESTORS SERVICE'S MUNICIPAL BOND RATINGS
Aaa--Bonds which are rated Aaa are judged to be of the best quality and carry
the smallest degree of investment risk. Interest payments are protected by a
large or by an exceptionally stable margin, and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues.
Aa--Bonds which are rated Aa are judged to be of high-quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long term risks appear somewhat larger than in Aaa securities.
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SALOMON BROTHERS INVESTMENT SERIES
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.
STANDARD & POOR'S MUNICIPAL BOND RATINGS
AAA--This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA--Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong, and in the majority of instances they
differ from AAA issues only in small degrees.
A--Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB--Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.
The ratings set forth above may be modified by the addition of a plus or minus
to show relative standing within the major rating categories.
MOODY'S INVESTORS SERVICE'S RATINGS OF STATE AND MUNICIPAL NOTES
MIG-1/VMIG-1--Notes rated MIG-1/VMIG-1 are of the best quality. There is present
strong protection by established cash flows, superior liquidity support or
broad-based access to the market for refinancing.
MIG-2/VMIG-2--Notes which are rated MIG-2/VMIG-2 are of high-quality. Margins of
protection are ample though not so large as in the preceding group.
STANDARD & POOR'S RATINGS OF STATE AND MUNICIPAL NOTES
SP-1--Notes which are rated SP-1 have a very strong or strong capacity to pay
principal and interest. Those issues determined to possess overwhelming safety
characteristics will be given a plus (+) designation.
SP-2--Notes which are rated SP-2 have a satisfactory capacity to pay principal
and interest.
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SALOMON BROTHERS INVESTMENT SERIES
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's short-term ratings apply to debt obligations that are payable on demand
or have original maturities of generally up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
The short-term rating places greater emphasis than a long-term rating on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.
Fitch's short-term ratings are as follows:
F-1+--Issues assigned this rating are regarded as having the strongest degree of
assurance for timely payment.
F-1--Issues assigned this rating reflect an assurance of timely payment only
slightly less in degree than issues rated F-1+.
F-2--Issues assigned this rating have a satisfactory degree of assurance for
timely payment but the margin of safety is not as great as for issues assigned
F-1+ and F-1 ratings.
F-3--Issues assigned this rating have characteristics suggesting that the degree
of assurance for timely payment is adequate, although near-term adverse changes
could cause these securities to be rated below investment grade.
LOC--The symbol LOC indicates that the rating is based on a letter of credit
issued by a commercial bank.
Like higher-rated bonds, bonds rated in the Baa or BBB categories are considered
to have adequate capacity to pay principal and interest. However, such bonds may
have speculative characteristics, and changes in economic conditions or other
circumstances
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SALOMON BROTHERS INVESTMENT SERIES
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, a Fund's investment manager
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, S&P
or Fitch 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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APPENDIX B:
GENERAL CHARACTERISTICS
AND RISKS OF DERIVATIVES
A detailed discussion of Derivatives (as defined below) that may be used by the
investment manager on behalf of certain Funds follows below. The description in
this Prospectus of each Fund indicates which, if any, of these types of
transactions may be used by that Fund. A Fund will not be obligated, however, to
use any Derivatives and makes no representation as to the availability of these
techniques at this time or at any time in the future. "Derivatives," as used in
this Appendix B, refers to interest rate, currency or stock or bond index
futures contracts, currency forward contracts and currency swaps, the purchase
and sale (or writing) of exchange listed and over-the-counter ("OTC") put and
call options on debt and equity securities, currencies, interest rate, currency
or stock index futures and fixed-income and stock indices and other financial
instruments, entering into various interest rate transactions such as swaps,
caps, floors, collars, entering into equity swaps, caps, floors or trading in
other similar types of instruments.
A Fund's ability to pursue certain of these strategies may be limited by the
Commodity Exchange Act, as amended, applicable regulations of the Commodity
Futures Trading Commission ("CFTC") thereunder and the federal income tax
requirements applicable to regulated investment companies which are not operated
as commodity pools.
GENERAL CHARACTERISTICS OF OPTIONS
Put options and call options typically have similar structural characteristics
and operational mechanics regardless of the underlying instrument on which they
are purchased or sold. Thus, the following general discussion relates to each of
the particular types of options discussed in greater detail below. In addition,
many Derivatives involving options require segregation of Fund assets in special
accounts, as described below under "Use of Segregated and Other Special
Accounts."
A put option gives the purchaser of the option, upon payment of a premium, the
right to sell, and the writer of the obligation to buy, the underlying security,
index, currency or other instrument at the exercise price. A Fund's purchase of
a put option on a security, for example, might be designed to protect its
holdings in the underlying instrument (or, in some cases, a similar instrument)
against a substantial decline in the market value of such instrument by giving
the Fund the right to sell the instrument at the option exercise price. A call
option, upon payment of a premium, gives the purchaser of the option the right
to buy, and the seller the obligation to sell, the underlying instrument at the
exercise price. A Fund's purchase of a call option on a security, financial
futures contract, index, currency or other instrument might be intended to
protect the Fund against an increase in the price of the underlying instrument
that it intends to purchase in the future by fixing the price at which it may
purchase the instrument. An "American" style put or call option may be exercised
at any time during the option period, whereas a "European" style put or call
option may be exercised only upon expiration or during a fixed period prior to
expiration. Exchange-listed options are issued by a regulated intermediary such
as the Options Clearing Corporation ("OCC"), which guarantees the
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SALOMON BROTHERS INVESTMENT SERIES
performance of the obligations of the parties to the options. The discussion
below uses the OCC as an example, but is also applicable to other similar
financial intermediaries.
OCC-issued and exchange-listed options, with certain exceptions, generally
settle by physical delivery of the underlying security or currency, although in
the future, cash settlement may become available. Index options are cash settled
for the net amount, if any, by which the option is "in-the-money" (that is, the
amount by which the value of the underlying instrument exceeds, in the case of a
call option, or is less than, in the case of a put option, the exercise price of
the option) at the time the option is exercised. Frequently, rather than taking
or making delivery of the underlying instrument through the process of
exercising the option, listed options are closed by entering into offsetting
purchase or sale transactions that do not result in ownership of the new option.
A Fund's ability to close out its position as a purchaser or seller of an
OCC-issued or exchange-listed put or call option is dependent, in part, upon the
liquidity of the particular option market. Among the possible reasons for the
absence of a liquid option market on an exchange are: (1) insufficient trading
interest in certain options, (2) restrictions on transactions imposed by an
exchange, (3) trading halts, suspensions or other restrictions imposed with
respect to particular classes or series of options or underlying securities,
including reaching daily price limits, (4) interruption of the normal operations
of the OCC or an exchange, (5) inadequacy of the facilities of an exchange or
the OCC to handle current trading volume or (6) a decision by one or more
exchanges to discontinue the trading of options (or a particular class or series
of options), in which event the relevant market for that option on that exchange
would cease to exist, although any such outstanding options on that exchange
would continue to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours during
which the underlying financial instruments are traded. To the extent that the
option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that would not be reflected in the corresponding option
markets.
Over-the-counter ("OTC") options are purchased from or sold to securities
dealers, financial institutions or other parties (collectively referred to as
"Counterparties" and individually referred to as a "Counterparty") through a
direct bilateral agreement with the Counterparty. In contrast to exchange-listed
options, which generally have standardized terms and performance mechanics, all
of the terms of an OTC option, including such terms as method of settlement,
term, exercise price, premium, guaranties and security, are determined by
negotiation of the parties. It is anticipated that any Portfolio authorized to
use OTC options will generally only enter into OTC options that have cash
settlement provisions, although it will not be required to do so.
Unless the parties provide for it, no central clearing or guaranty function is
involved in an OTC option. As a result, if a Counterparty fails to make or take
delivery of the security, currency or other instrument underlying an OTC option
it has entered into with the Fund or fails to make a cash settlement payment due
in accordance with the terms of that option, the Fund will lose any premium it
paid for the option as well as any anticipated benefit of the transaction. Thus,
the investment manager must assess the creditworthiness of each such
Counterparty or any guarantor or credit enhancement of the Counterparty's credit
to determine the likelihood that the terms of the OTC option will be met. A Fund
will enter into OTC option transactions only with U.S. Government securities
dealers recognized by the Federal Reserve Bank of New York as "primary dealers,"
or broker-dealers, domestic or foreign banks, or other financial institutions
that
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SALOMON BROTHERS INVESTMENT SERIES
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.
GENERAL CHARACTERISTICS OF FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
A Fund may trade financial futures contracts or purchase or sell put and call
options on those contracts as a hedge against anticipated interest rate,
currency or market changes, and for risk management purposes, or a Fund may seek
to increase its income or gain. Futures contracts are generally bought and sold
on the commodities 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). Options on futures contracts are similar to options on securities
except that an option on a futures contract gives the purchaser the right, in
return for the premium paid, to assume a position in a futures contract and
obligates the seller to deliver that position.
A Fund's use of financial futures contracts and options thereon will in all
cases be consistent with applicable regulatory requirements and in particular
the rules and regulations of the CFTC. Maintaining a futures contract or selling
an option on a futures contract will typically require the Fund to deposit with
a financial intermediary, as security for its obligations, an amount of cash or
other specified 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
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SALOMON BROTHERS INVESTMENT SERIES
fluctuates. The purchase of an option on a financial futures contract involves
payment of a premium for the option without any further obligation on the part
of the Fund. If the Fund exercises an option on a futures contract it will be
obligated to post initial margin (and potentially variation margin) for the
resulting futures position just as it would for any futures position. Futures
contracts and options thereon are generally settled by entering into an
offsetting transaction, but no assurance can be given that a position can be
offset prior to settlement or that delivery will occur.
A Fund will not enter into a futures contract or option thereon if, immediately
thereafter, the sum of the amount of its initial margin and premiums required to
maintain permissible non-bona fide hedging positions in futures contracts and
options thereon would exceed 5% of the liquidation value of the Fund's
portfolio, after taking into account unrealized profits and losses on existing
contracts; however, in the case of an option that is in-the-money at the time of
the purchase, the in-the-money amount may be excluded in calculating the 5%
limitation. The value of all futures contracts sold by the Fund (adjusted for
the historical volatility relationship between the Fund and the contracts) will
not exceed the total market value of the Fund's securities. The segregation
requirements with respect to futures contracts and options thereon are described
below under "Use of Segregated and Other Special Accounts."
OPTIONS ON SECURITIES INDICES AND OTHER FINANCIAL INDICES
A Fund may purchase and sell call and put options on securities indices and
other financial indices. In so doing, the Fund can achieve many of the same
objectives it would achieve through the sale or purchase of options on
individual securities or other instruments. Options on securities indices and
other financial indices are similar to options on a security or other instrument
except that, rather than settling by physical delivery of the underlying
instrument, options on indices settle by cash settlement; that is, an option on
an index gives the holder the right to receive, upon exercise of the option, an
amount of cash if the closing level of the index upon which the option is based
exceeds, in the case of a call, or is less than, in the case of a put, the
exercise price of the option (except if, in the case of an OTC option, physical
delivery is specified). This amount of cash is equal to the excess of the
closing price of the index over the exercise price of the option, which also may
be multiplied by a formula value. The seller of the option is obligated, in
return for the premium received, to make delivery of this amount. The gain or
loss on an option on an index depends on price movements in the instruments
comprising the market, market segment, industry or other composite on which the
underlying index is based, rather than price movements in individual securities,
as is the case with respect to options on securities.
CURRENCY TRANSACTIONS
A Fund may engage in currency transactions with Counterparties to hedge the
value of portfolio securities denominated in particular currencies against
fluctuations in relative value or to generate income or gain. Currency
transactions include currency forward contracts, exchange-listed currency
futures contracts and options thereon, exchange-listed and OTC options on
currencies, and currency swaps. A forward currency contract involves a privately
negotiated obligation to purchase or sell (with delivery generally required) a
specific currency at a future date, which may be any fixed number of days from
the date of the contract agreed upon by the parties, at a price set at the time
of the contract. A currency swap is an agreement to exchange cash flows based on
the notional
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SALOMON BROTHERS INVESTMENT SERIES
difference among two or more currencies and operates similarly to an interest
rate swap, which is described below under "Swaps, Caps, Floors and Collars." A
Fund may enter into currency transactions only with Counterparties that the
investment manager deems to be creditworthy.
Transaction hedging is entering into a currency transaction with respect to
specific assets or liabilities of the Fund, which will generally arise in
connection with the purchase or sale of the Fund's portfolio securities or the
receipt of income from them. Position hedging is entering into a currency
transaction with respect to portfolio securities positions denominated or
generally quoted in that currency. A Fund will not enter into a transaction to
hedge currency exposure to an extent greater, after netting all transactions
intended wholly or partially to offset other transactions, than the aggregate
market value (at the time of entering into the transaction) of the securities
held by the Fund that are denominated or generally quoted in or currently
convertible into the currency, other than with respect to proxy hedging as
described below.
A Fund may cross-hedge currencies by entering into transactions to purchase or
sell one or more currencies that are expected to increase or decline in value
relative to other currencies to which the Fund has or in which the Fund expects
to have exposure. To reduce the effect of currency fluctuations on the value of
existing or anticipated holdings of its securities, a Fund may also engage in
proxy hedging. Proxy hedging is often used when the currency to which the Fund's
holdings is exposed is difficult to hedge generally or difficult to hedge
against the dollar. Proxy hedging entails entering into a forward contract to
sell a currency, the changes in the value of which are generally considered to
be linked to a currency or currencies in which some or all of the Fund's
securities are or are expected to be denominated, and to buy dollars. The amount
of the contract would not exceed the market value of the Fund's securities
denominated in linked currencies.
Currency transactions are subject to risks different from other portfolio
transactions, as discussed below under "Risk Factors." If a Fund enters into a
currency hedging transaction, the Fund will comply with the asset segregation
requirements described below under "Use of Segregated and Other Special
Accounts."
COMBINED TRANSACTIONS
A Fund may enter into multiple transactions, including multiple options
transactions, multiple futures transactions, multiple currency transactions
(including forward currency contracts), multiple interest rate transactions and
any combination of futures, options, currency and interest rate transactions,
instead of a single Derivative, as part of a single or combined strategy when,
in the judgment of the investment manager, it is in the best interests of the
Fund to do so. A combined transaction will usually contain elements of risk that
are present in each of its component transactions. Although combined
transactions will normally be entered into by a Fund based on the investment
manager's judgment that the combined strategies will reduce risk or otherwise
more effectively achieve the desired portfolio management goal, it is possible
that the combination will instead increase the risks or hinder achievement of
the Fund management objective.
SWAPS, CAPS, FLOORS AND COLLARS
A Fund may enter into interest rate, currency and equity swaps, the purchase or
sale of related caps, floors and collars and other similar arrangements. A Fund
will enter into these transactions primarily to seek to preserve a return or
spread on a particular
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SALOMON BROTHERS INVESTMENT SERIES
investment or portion of its portfolio, to protect against currency
fluctuations, as a duration management technique, to protect against any
increase in the price of securities the Fund anticipates purchasing or selling
at a later date or to generate income or gain. Interest rate swaps involve the
exchange by the Fund with another party of their respective commitments to pay
or receive interest (for example, an exchange of floating rate payments for
fixed rate payments with respect to a notional amount of principal). An equity
swap is an agreement to exchange cash flows on a national principal amount based
on changes in the values of the reference index. A currency swap is an agreement
to exchange cash flows on a notional amount based on changes in the values of
the currency exchange rates. The purchase of a cap entitles the purchaser to
receive payments on a notional principal amount from the party selling the cap
to the extent that a specified interest rate, currency exchange rate or index
exceeds a predetermined rate or amount. The purchase of a floor entitles the
purchaser to receive payments on a notional principal amount from the party
selling the floor to the extent that a specified interest rate, currency
exchange rate or index falls below a predetermined rate or amount. A collar is a
combination of a cap and a floor that preserves a certain return with a
predetermined range of rates or values.
A Fund will usually enter into swaps on a net basis, that is, the two payments
streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch as these swaps, caps,
floors, collars and other similar types of instruments are entered into for good
faith hedging or other non-speculative purposes, they do not constitute senior
securities under the 1940 Act, and, thus, will not be treated as being subject
to the Fund's applicable borrowing restrictions. A Fund will not enter into any
swap, cap, floor, collar or other similar type of transaction unless the
investment manager deems the Counterparty to be creditworthy. If a Counterparty
defaults, the Fund may have contractual remedies pursuant to the agreements
related to the transaction. The swap market has grown substantially in recent
years with a large number of banks and investment banking firms acting both as
principals and as agents utilizing standardized swap documentation. As a result,
the swap market has become relatively liquid. Caps, floors and collars are more
recent innovations for which standardized documentation has not yet been fully
developed and, for that reason, they are less liquid than swaps.
The liquidity of swap agreements will be determined by the investment manager
based on various factors, including (1) the frequency of trades and quotations,
(2) the number of dealers and prospective purchasers in the marketplace, (3)
dealer undertakings to make a market, (4) the nature of the security (including
any demand or tender features), and (5) the nature of the marketplace for trades
(including the ability to assign or offset the Fund's rights and obligations
relating to the investment). Such determination will govern whether a swap will
be deemed within the 10% restriction on investments in securities that are not
readily marketable.
A Fund will maintain cash and appropriate liquid assets (i.e., high grade debt
securities) in a segregated custodial account to cover its current obligations
under swap agreements. If a Fund enters into a swap agreement on a net basis, it
will segregate assets with a daily value at least equal to the excess, if any,
of the Fund's accrued obligations under the swap agreement over the accrued
amount the Fund is entitled to receive under the agreement. If a Fund enters
into a swap agreement on other than a net basis, it will segregate assets with a
value equal to the full amount of the Fund's accrued obligations under the
agreement. See "Use of Segregated and Other Special Accounts" below.
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SALOMON BROTHERS INVESTMENT SERIES
RISK FACTORS
Derivatives have special risks associated with them, including possible default
by the Counterparty to the transaction, illiquidity and, to the extent the
investment manager's view as to certain market movements is incorrect, the risk
that the use of the Derivatives could result in losses greater than if they had
not been used. Use of put and call options could result in losses to a Fund,
force the sale or purchase of portfolio securities at inopportune times or for
prices higher than (in the case of put options) or lower than (in the case of
call options) current market values, or cause a Fund to hold a security it might
otherwise sell.
The use of futures and options transactions entails certain special risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related securities position of a
Fund could create the possibility that losses on the hedging instrument are
greater than gains in the value of the Fund's position. In addition, futures and
options markets could be illiquid in some circumstances and certain
over-the-counter options could have no markets. As a result, in certain markets,
a Fund might not be able to close out a transaction without incurring
substantial losses. Although a Fund's use of futures and options transactions
for hedging should tend to minimize the risk of loss due to a decline in the
value of the hedged position, at the same time it will tend to limit any
potential gain to the Fund that might result from an increase in value of the
position. There is also the risk of loss by a Fund of margin deposits in the
event of bankruptcy of a broker with whom the Fund has an open position in a
futures contract or option thereon. Finally, the daily variation margin
requirements for futures contracts create a greater ongoing potential financial
risk than would purchases of options, in which case the exposure is limited to
the cost of the initial premium. However, because option premiums paid by a Fund
are small in relation to the market value of the investments underlying the
options, buying options can result in large amounts of leverage. The leverage
offered by trading in options could cause a Fund's net asset value to be subject
to more frequent and wider fluctuation than would be the case if the Fund did
not invest in options.
As is the case with futures and options strategies, the effective use of swaps
and related transactions by a Fund may depend, among other things, on a Fund's
ability to terminate the transactions at times when SBAM deems it desirable to
do so. To the extent a Fund does not, or cannot, terminate such a transaction in
a timely manner, a Fund may suffer a loss in excess of any amounts that it may
have received, or expected to receive, as a result of entering into the
transaction.
Currency hedging involves some of the same risks and considerations as other
transactions with similar instruments. Currency transactions can result in
losses to a Fund if 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
PAGE B-7
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SALOMON BROTHERS INVESTMENT SERIES
costs. Buyers and sellers of currency futures contracts are subject to the same
risks that apply to the use of futures contracts generally. Further, settlement
of a currency futures contract for the purchase of most currencies must occur at
a bank based in the issuing nation. Trading options on currency futures
contracts is relatively new, and the ability to establish and close out
positions on these options is subject to the maintenance of a liquid market that
may not always be available. Currency exchange rates may fluctuate based on
factors extrinsic to that country's economy.
Losses resulting from the use of Derivatives will reduce a Fund's net asset
value, and possibly income, and the losses can be greater than if Derivatives
had not been used.
RISKS OF DERIVATIVES OUTSIDE THE UNITED STATES
When conducted outside the United States, Derivatives may not be regulated as
rigorously as in the United States, may not involve a clearing mechanism and
related guarantees, and will be subject to the risk of governmental actions
affecting trading in, or the prices of, foreign securities, currencies and other
instruments. In addition, the price of any foreign futures or foreign options
contract and, therefore, the potential profit and loss thereon, may be affected
by any variance in the foreign exchange rate between the time an order is placed
and the time it is liquidated, offset or exercised. The value of positions taken
as part of non-U.S. Derivatives also could be adversely affected by: (1) other
complex foreign political, legal and economic factors, (2) lesser availability
of data on which to make trading decisions than in the United States, (3) delays
in the Fund's ability to act upon economic events occurring in foreign markets
during nonbusiness hours in the United States, (4) the imposition of different
exercise and settlement terms and procedures and margin requirements than in the
United States and (5) lower trading volume and liquidity.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS
Use of many Derivatives by a Fund will require, among other things, that the
Fund segregate cash, liquid high grade debt obligations or other assets with its
custodian, or a designated sub-custodian, to the extent the Fund's obligations
are not otherwise "covered" through ownership of the underlying security,
financial instrument or currency. In general, either the full amount of any
obligation by a Fund to pay or deliver securities or assets must be covered at
all times by the securities, instruments or currency required to be delivered,
or, subject to any regulatory restrictions, an amount of cash or liquid high
grade debt obligations at least equal to the current amount of the obligation
must be segregated with the custodian or sub-custodian. The segregated assets
cannot be sold or transferred unless equivalent assets are substituted in their
place or it is no longer necessary to segregate them. A call option on
securities written by a Fund, for example, will require the Fund to hold the
securities subject to the call (or securities convertible into the needed
securities without additional consideration) or to segregate liquid high grade
debt obligations sufficient to purchase and deliver the securities if the call
is exercised. A call option sold by a Fund on an index will require the Fund to
own portfolio securities that correlate with the index or to segregate liquid
high grade debt obligations equal to the excess of the index value over the
exercise price on a current basis. A put option on securities written by a Fund
will require the Fund to segregate liquid high grade debt obligations equal to
the exercise price. Except when a Fund enters into a forward contract in
connection with the purchase or sale of a security denominated in a foreign
currency or for other non-speculative purposes, which requires
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SALOMON BROTHERS INVESTMENT SERIES
no segregation, a currency contract that obligates the Fund to buy or sell a
foreign currency will generally require the Fund to hold an amount of that
currency or liquid securities denominated in that currency equal to the Fund's
obligations or to segregate liquid high grade debt obligations equal to the
amount of the Fund's obligations.
OTC options entered into by a Fund, including those on securities, currency,
financial instruments or indices, and OCC-issued and exchange-listed index
options will generally provide for cash settlement, although the Fund will not
be required to do so. As a result, when a Fund sells these instruments it will
segregate an amount of assets equal to its obligations under the options.
OCC-issued and exchange-listed options sold by a Fund other than those described
above generally settle with physical delivery, and the Fund will segregate an
amount of assets equal to the full value of the option. OTC options settling
with physical delivery or with an election of either physical delivery or cash
settlement will be treated the same as other options settling with physical
delivery.
In the case of a futures contract or an option on a futures contract, a Fund
must deposit initial margin and, in some instances, daily variation margin in
addition to segregating assets sufficient to meet its obligations to purchase or
provide securities or currencies, or to pay the amount owed at the expiration of
an index-based futures contract. These assets may consist of cash, cash
equivalents, liquid debt or equity securities or other acceptable assets. A Fund
will accrue the net amount of the excess, if any, of its obligations relating to
swaps over its entitlements with respect to each swap on a daily basis and will
segregate with its custodian, or designated sub-custodian, an amount of cash or
liquid high grade debt obligations having an aggregate value equal to at least
the accrued excess. Caps, floors and collars require segregation of assets with
a value equal to the Fund's net obligation, if any.
Derivatives may be covered by means other than those described above when
consistent with applicable regulatory policies. A Fund may also enter into
offsetting transactions so that its combined position, coupled with any
segregated assets, equals its net outstanding obligation in related Derivatives.
A Fund could purchase a put option, for example, if the strike price of that
option is the same or higher than the strike price of a put option sold by the
Fund. Moreover, instead of segregating assets if it holds a futures contract or
forward contract, a Fund could purchase a put option on the same futures
contract or forward contract with a strike price as high or higher than the
price of the contract held. Other Derivatives may also be offset in
combinations. If the offsetting transaction terminates at the time of or after
the primary transaction, no segregation is required, but if it terminates prior
to that time, assets equal to any remaining obligation would need to be
segregated.
PAGE B-9
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TELEPHONES
(800) SALOMON
(800) 725-6666
DISTRIBUTOR
Salomon Brothers Inc
Seven World Trade Center
New York, New York 10048
INVESTMENT MANAGER
Salomon Brothers Asset
Management Inc
Seven World Trade Center
New York, New York 10048
CUSTODIAN
Investors Bank & Trust Company
89 South Street
Boston, Massachusetts 02111
TRANSFER AGENT AND
DIVIDEND DISBURSING AGENT
First Data Investor Services Group, Inc.
P.O. Box 9109
Boston, Massachusetts 02205-9109
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
New York, New York 10036
LEGAL COUNSEL
Simpson Thacher & Bartlett
New York, New York 10017
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION
OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS,
IN CONNECTION WITH THE OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY A FUND, THE DISTRIBUTOR OR THE INVESTMENT MANAGER.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY STATE IN WHICH SUCH
OFFERING MAY NOT LAWFULLY BE MADE.
- ------------------------------------------------------------------
SALOMON BROTHERS ASSET MANAGEMENT
- ------------------------------------------------------------------
<PAGE> 133
Subject to Completion
Preliminary Statement of Additional Information
dated March 29, 1996
SALOMON BROTHERS INVESTMENT SERIES
7 World Trade Center
New York, New York 10048
(800) SALOMON
(800) 725-6666
STATEMENT OF ADDITIONAL INFORMATION
Salomon Brothers Investment Series consists of Salomon Brothers Cash Management
Fund (the "Cash Management Fund"), Salomon Brothers New York Municipal Bond
Fund (the "New York Municipal Bond Fund"), Salomon Brothers National
Intermediate Municipal Fund (the "National Intermediate Municipal Fund"),
Salomon Brothers U.S. Government Income Fund (the "U.S. Government Income
Fund"), Salomon Brothers High Yield Bond Fund (the "High Yield Bond Fund"),
Salomon Brothers Strategic Bond Fund (the "Strategic Bond Fund"), Salomon
Brothers Total Return Fund (the "Total Return Fund"), Salomon Brothers Asia
Growth Fund (the "Asia Growth Fund") and Salomon Brothers Investors Fund Inc
(the "Investors Fund") (each a "Fund" and collectively, the "Funds"). Each of
the Funds, except for the Investors Fund, is an investment portfolio of the
Salomon Brothers Series Funds Inc (the "Series Funds"), an open-end investment
company incorporated in Maryland on April 17, 1990. The Asia Growth Fund is a
non-diversified portfolio and the other Funds which are part of the Series
Funds are diversified portfolios. The National Intermediate Municipal Fund,
U.S. Government Income Fund, High Yield Bond Fund, the Strategic Bond Fund,
Total Return Fund and Asia Growth Fund are newly or recently organized
portfolios of the Series Funds. The Investors Fund is a diversified open-end
management investment company incorporated in Maryland on April 2, 1958. The
investment objective of each Fund is described in the Prospectus dated
____________, 1996, as the same may be amended or supplemented from time to
time (the "Prospectus").
This Statement of Additional Information is not a prospectus and is only
authorized for distribution when preceded or accompanied by the Prospectus.
This Statement of Additional Information contains additional information to
that set forth in the Prospectus and should be read in conjunction with the
Prospectus, additional copies of which may be obtained without charge by
writing or calling the Funds at the address and telephone number printed above.
_______________, 1996
<PAGE> 134
2
TABLE OF CONTENTS
<TABLE>
<S> <C>
ADDITIONAL INFORMATION ON PORTFOLIO INSTRUMENTS AND INVESTMENT POLICIES . . . . . . . 2
SPECIAL FACTORS AFFECTING THE FUND'S INVESTMENT
IN NEW YORK MUNICIPAL OBLIGATIONS . . . . . . . . . . . . . . . . . . . . . . . 19
INVESTMENT LIMITATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
PORTFOLIO TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
NET ASSET VALUE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
ADDITIONAL PURCHASE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
ADDITIONAL REDEMPTION INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . 80
ADDITIONAL INFORMATION CONCERNING TAXES . . . . . . . . . . . . . . . . . . . . . . . 81
PERFORMANCE DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
SHAREHOLDER SERVICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
CAPITAL STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
CUSTODIAN AND TRANSFER AGENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
VALIDITY OF SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
INDEPENDENT ACCOUNTANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
COUNSEL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
</TABLE>
ADDITIONAL INFORMATION ON PORTFOLIO INSTRUMENTS AND INVESTMENT POLICIES
The Prospectus indicates the extent to which each of the Funds may
purchase the instruments or engage in the investment activities described
below. The discussion below supplements the information set forth in the
Prospectus under "Investment Objectives and Policies" and "Additional
Investment Activities and Risk Factors". References herein to the investment
manager means Salomon Brothers Asset Management Inc ("SBAM"), except with
respect to the Asia Growth Fund, in which case it means Salomon Brothers Asset
Management Asia Pacific Limited ("SBAM AP").
<PAGE> 135
3
FOREIGN SECURITIES. Investors should recognize that investing in the
securities of foreign issuers generally, and particularly in emerging market
issuers, involves special considerations which are not typically associated
with investing in securities of U.S. issuers. Investments in securities of
foreign issuers may involve risks arising from differences between U.S. and
foreign securities markets, including less volume, much greater price
volatility in and relative illiquidity of foreign securities markets, different
trading and settlement practices and less governmental supervision and
regulation, from changes in currency exchange rates, from high and volatile
rates of inflation, from economic, social and political conditions and, as with
domestic multinational corporations, from fluctuating interest rates.
Investment in certain emerging market securities is restricted or
controlled to varying degrees which may at times limit or preclude investment
in certain emerging market securities and increase the costs and expenses of a
Fund. Certain emerging market countries require governmental approval prior to
investments by foreign persons, limit the amount of investment by foreign
persons in a particular issuer, limit the investment by foreign persons only to
a specific class of securities of an issuer that may have less advantageous
rights than other classes, restrict investment opportunities in issuers in
industries deemed important to national interests and/or impose additional
taxes on foreign investors.
Certain emerging market countries may require governmental approval for
the repatriation of investment income, capital or the proceeds of sales of
securities by foreign investors which could adversely affect a Fund, in
addition, if a deterioration occurs in an emerging market country's balance of
payments, it could impose temporary restrictions on foreign capital
remittances. Investing in local markets in emerging market countries may
require a Fund to adopt special procedures, seek local government approvals or
take other actions, each of which may involve additional costs to the Fund.
Other investment risks include the possible imposition of foreign taxes on
certain amounts of a Fund's income which may reduce the net return on foreign
investments as compared to income received from a U.S. issuer, the possible
seizure or nationalization of foreign assets and the possible establishment of
exchange controls, expropriation, confiscatory taxation, other foreign
governmental laws or restrictions which might affect adversely payments due on
securities held by a Fund, the lack of extensive operating experience of
eligible foreign subcustodians and legal limitations on the ability of a Fund
to recover assets held in custody by a foreign subcustodian in the event of the
subcustodian's bankruptcy. Moreover, brokerage commissions and other
transactions costs on foreign securities exchanges are generally higher than in
the United States.
In addition, there may be less publicly-available information about a
foreign issuer than about a U.S. issuer, and foreign issuers may not be subject
to the same accounting, auditing and financial record-keeping standards and
requirements as U.S. issuers. In particular, the assets and profits appearing
on the financial statements of an emerging market country issuer may not
reflect its financial position or results of operations in the way they would
be reflected had the financial statements been prepared in accordance with U.S.
generally accepted accounting principles. In addition, for an issuer that
keeps accounting records in local currency, inflation accounting rules may
require, for both tax and accounting purposes,
<PAGE> 136
4
that certain assets and liabilities be restated on the issuer's balance sheet
in order to express items in terms of currency of constant purchasing power.
Inflation accounting may indirectly generate losses or profits. Consequently,
financial data may be materially affected by restatements for inflation and may
not accurately reflect the real condition of those issuers and securities
markets. Finally, in the event of a default in any such foreign obligations,
it may be more difficult for a Fund to obtain or enforce a judgment against the
issuers of such obligations. See "--High Yield Securities".
U.S. GOVERNMENT OBLIGATIONS
In addition to the U.S. Treasury obligations described in the Prospectus,
a Fund may invest in separately traded interest components of securities issued
or guaranteed by the U.S. Treasury. The interest components of selected
securities are traded independently under the Separate Trading of Registered
Interest and Principal of Securities program ("STRIPS"). Under the STRIPS
program, the interest components are individually numbered and separately
issued by the U.S. Treasury at the request of depository financial
institutions, which then trade the component parts independently.
Securities issued or guaranteed by U.S. government agencies and
instrumentalities include obligations that are supported by (a) the full faith
and credit of the U.S. Treasury (e.g., direct pass-through certificates of the
Government National Mortgage Association); (b) the limited authority of the
issuer or guarantor to borrow from the U.S. Treasury (e.g., obligations of
Federal Home Loan Banks); or (c) only the credit of the issuer or guarantor
(e.g., obligations of the Federal Home Loan Mortgage Corporation). In the
case of obligations not backed by the full faith and credit of the U.S.
Treasury, the agency issuing or guaranteeing the obligation is principally
responsible for ultimate repayment.
Agencies and instrumentalities that issue or guarantee debt securities and
that have been established or sponsored by the U.S. government include, in
addition to those identified above, the Bank for Cooperatives, the
Export-Import Bank, the Federal Farm Credit System, the Federal Intermediate
Credit Banks, the Federal Land Banks, the Federal National Mortgage Association
and the Student Loan Marketing Association.
BANK OBLIGATIONS
As stated in the Prospectus, bank obligations that may be purchased by a
Fund include certificates of deposit, banker's acceptances and fixed time
deposits. A certificate of deposit is a short-term negotiable certificate
issued by a commercial bank against funds deposited in the bank and is either
interest-bearing or purchased on a discount basis. A bankers' acceptance is a
short-term draft drawn on a commercial bank by a borrower, usually in
connection with an international commercial transaction. The borrower is
liable for payment as is the bank, which unconditionally guarantees to pay the
draft at its face amount on the maturity date. Fixed time deposits are
obligations of branches of U.S. banks or foreign banks which are payable at a
stated maturity date and bear a fixed rate of interest. Although fixed
<PAGE> 137
5
time deposits do not have a market, there are no contractual restrictions on
the right to transfer a beneficial interest in the deposit to a third party.
Bank obligations may be general obligations of the parent bank or may be
limited to the issuing branch by the terms of the specific obligations or by
government regulation.
FLOATING AND VARIABLE RATE INSTRUMENTS
As stated in the Prospectus, certain of the floating or variable rate
obligations that may be purchased by a Fund may carry a demand feature that
would permit the holder to tender them back to the issuer of the instrument or
to a third party at par value prior to maturity. Some of the demand
instruments purchased by a Fund are not traded in a secondary market and derive
their liquidity solely from the ability of the holder to demand repayment from
the issuer or third party providing credit support. If a demand instrument is
not traded in a secondary market, each Fund will nonetheless treat the
instrument as "readily marketable" for the purposes of its investment
restriction limiting investments in illiquid securities unless the demand
feature has a notice period of more than seven days; if the notice period is
greater than seven days, the demand instrument will be characterized as "not
readily marketable" for such purpose.
A Fund's right to obtain payment at par on a demand instrument could be
affected by events occurring between the date such Fund elects to demand
payment and the date payment is due that may affect the ability of the issuer
of the instrument or 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 such Fund between that bank and the Fund's custodian.
ASSET-BACKED SECURITIES
Asset-backed securities are generally issued as pass through certificates,
which represent undivided fractional ownership interests in the underlying pool
of assets, or as debt instruments, which are generally issued as the debt of a
special purpose entity organized solely for the purpose of owning such assets
and issuing such debt. Asset-backed securities are often backed by a pool of
assets representing the obligations of a number of different parties.
Asset-backed securities frequently carry credit protection in the form of extra
collateral, subordinated certificates, cash reserve accounts, letters of credit
or other enhancements. For example, payments of principal and interest may be
guaranteed up to certain amounts and for a certain time period by a letter of
credit or other enhancement issued by a financial institution unaffiliated with
the entities issuing the securities. Assets which, to date, have been used to
back asset-backed securities include motor vehicle installment sales contracts
or installment loans secured by motor vehicles, and receivables from revolving
credit (credit card) agreements.
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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.
MUNICIPAL LEASE OBLIGATIONS
Municipal lease obligations are secured by revenues derived from the lease
of property to state and local government units. The underlying leases
typically are renewable annually by the governmental user, although the lease
may have a term longer than one year. If the governmental user does not
appropriate sufficient funds for the following year's lease payments, the lease
will terminate, with the possibility of default on the lease obligations and
significant loss to a Fund. In the event of a termination, assignment or
sublease by the governmental user, the interest paid on the municipal lease
obligation could become taxable, depending upon the identity of the succeeding
user.
LOANS OF PORTFOLIO SECURITIES
Certain Funds may lend portfolio securities to brokers or dealers or other
financial institutions. The procedure for the lending of securities will
include the following features and conditions. The borrower of the securities
will deposit cash with the Fund in an amount equal to a minimum of 100% of the
market value of the securities lent. The Fund will invest the collateral in
short-term debt securities and earn the interest thereon. A negotiated portion
of the income so earned may be paid to the borrower or the broker who arranged
the loan. If the deposit drops below the required minimum at any time, the
borrower may be called upon to post additional cash. If the additional cash is
not paid, the loan will be immediately due and the Fund may use the collateral
or its own cash to replace the securities by purchase in the open market
charging any loss to the borrower. These will be "demand" loans and may be
terminated by the Fund at any time. A Fund will receive any dividends and
interest paid
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on the securities lent and the loans will be structured to assure that the Fund
will be able to exercise its voting rights on the securities. Such loans will
be authorized only to the extent that the receipt of income from such activity
would not cause any adverse tax consequences to a Fund's shareholders and only
in accordance with applicable rules and regulations. The borrowers may not be
affiliated, directly or indirectly, with a Fund. The Investors Fund did not
lend any of its portfolio securities during 1995 and has no present intention
to do so. Each of the U.S. Government Income Fund, the High Yield Bond Fund,
the Strategic Bond Fund, the Total Return Fund and the Asia Growth Fund has no
present intention to lend its portfolio securities.
RULE 144A SECURITIES
As indicated in the Prospectus, certain Funds may purchase certain
restricted securities ("Rule 144A securities") for which there is a secondary
market of qualified institutional buyers, as contemplated by Rule 144A under
the Securities Act of 1933, as amended (the "1933 Act"). Rule 144A provides an
exemption from the registration requirements of the 1933 Act for the resale of
certain restricted securities to qualified institutional buyers.
One effect of Rule 144A is that certain restricted securities may now be
liquid, though there is no assurance that a liquid market for Rule 144A
securities will develop or be maintained. In promulgating Rule 144A the
Securities and Exchange Commission (the "Commission") stated that the ultimate
responsibility for liquidity determinations is that of an investment company's
board of directors. However, the Commission stated that the board may delegate
the day-to-day function of determining liquidity to the fund's investment
adviser, provided that the board retains sufficient oversight. The Board of
Directors of each Fund has adopted policies and procedures for the purpose of
determining whether securities that are eligible for resale under Rule 144A are
liquid or illiquid for purposes of a Fund's limitation on investment in
illiquid securities. Pursuant to those policies and procedures, each Board of
Directors has delegated to the investment manager the determination as to
whether a particular security is liquid or illiquid, requiring that
consideration be given to, among other things, the frequency of trades and
quotes for the security, the number of dealers willing to sell the security and
the number of potential purchasers, dealer undertakings to make a market in the
security, the nature of the security and the time needed to dispose of the
security. The Board of Directors periodically reviews Fund purchases and sales
of Rule 144A securities.
To the extent that liquid Rule 144A securities that a Fund holds become
illiquid, due to the lack of sufficient qualified institutional buyers or
market or other conditions, the percentage of a Fund's assets invested in
illiquid assets would increase. The investment manager, under the supervision
of the Boards of Directors, will monitor Fund investments in Rule 144A
securities and will consider appropriate measures to enable a Fund to maintain
sufficient liquidity for operating purposes and to meet redemption requests.
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MORTGAGE-BACKED SECURITIES
The following describes certain characteristics of mortgage-backed
securities. Mortgage-backed securities acquired by the U.S. Government Income
Fund will be limited to those issued or guaranteed by the U.S. government, its
agencies and instrumentalities. The Strategic Bond Fund and the Total Return
Fund may, in addition, purchase privately issued mortgage securities which are
not guaranteed by the U.S. government, its agencies or instrumentalities. It
should be noted that new types of mortgage-backed securities are developed and
marketed from time to time and that, consistent with its investment
limitations, a Fund may invest in those new types of mortgage-backed securities
that the investment manager believes may assist it in achieving its investment
objective(s).
BACKGROUND. Mortgage-backed securities were introduced in the 1970s when
the first pool of mortgage loans was converted into a mortgage pass-through
security. Since the 1970s, the mortgage-backed securities market has vastly
expanded and a variety of structures have been developed to meet investor
needs.
YIELD CHARACTERISTICS. Interest and principal payments on mortgage-backed
securities are typically made monthly, and principal may be prepaid at any time
because the underlying mortgage loans or other assets generally may be prepaid
at any time. As a result, if a Fund purchases such a security at a premium, a
prepayment rate that is faster than expected will reduce yield to maturity,
while a prepayment rate that is slower than expected will have the opposite
effect of increasing yield to maturity. Conversely, if a Fund purchases these
securities at a discount, faster than expected prepayments will increase, while
slower than expected prepayments will reduce, yield to maturity.
Prepayments on a pool of mortgage loans are influenced by a variety of
economic, geographic, social and other factors, including changes in
mortgagors' housing needs, job transfers, unemployment, mortgagors' net equity
in the mortgaged properties and servicing decisions. Generally, however,
prepayments on fixed rate mortgage loans will increase during a period of
falling interest rates. Accordingly, amounts available for reinvestment by a
Fund are likely to be greater during a period of relatively low interest rates
and, as a result, likely to be reinvested at lower interest rates than during a
period of relatively high interest rates. This prepayment effect has been
particularly pronounced during recent years as borrowers have refinanced higher
interest rate mortgages into lower interest rate mortgages available in the
marketplace. Mortgage-backed securities may decrease in value as a result of
increases in interest rates and may benefit less than other fixed income
securities from declining interest rates because of the risk of prepayment.
GUARANTEED MORTGAGE PASS-THROUGH SECURITIES. The U.S. Government Income,
Strategic Bond and Total Return Funds may invest in mortgage pass-through
securities representing participation interests in pools of residential
mortgage loans originated by U.S. governmental or private lenders and
guaranteed, to the extent provided in such securities, by the U.S. government
or one of its agencies or instrumentalities. Any guarantee
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of such securities runs only to principal and interest payments on the
securities and not to the market value of such securities or the principal and
interest payments on the underlying mortgages. In addition, the guarantee only
runs to the portfolio securities held by a Fund and not to the purchase of
shares of the Fund. Such securities, which are ownership interests in the
underlying mortgage loans, differ from conventional debt securities, which
provide for periodic payment of interest in fixed amounts (usually
semi-annually) and principal payments at maturity or on specified call dates.
Mortgage pass-through securities provide for monthly payments that are a
"pass-through" of the monthly interest and principal payments (including any
prepayments) made by the individual borrowers on the pooled mortgage loans, net
of any fees paid to the guarantor of such securities and the servicer of the
underlying mortgage loans. Guaranteed mortgage pass-through securities are
often sold on a to-be-acquired or "TBA" basis. Such securities are typically
sold one to three months in advance of issuance, prior to the identification of
the underlying pools of mortgage securities but with the interest payment
provisions fixed in advance. The underlying pools of mortgage securities are
identified shortly before settlement and must meet certain parameters.
The guaranteed mortgage pass-through securities in which a Fund may invest
may include those issued or guaranteed by Ginnie Mae, Fannie Mae and Freddie
Mac.
Ginnie Mae Certificates. Ginnie Mae is a wholly-owned corporate
instrumentality of the United States within the Department of Housing and Urban
Development. The full faith and credit of the U.S. government is pledged to
the payment of amounts that may be required to be paid under any guarantee, but
not as to the market value of such securities. The Ginnie Mae Certificates
will represent a pro rata interest in one or more pools of the following types
of mortgage loans: (i) fixed rate level payment mortgage loans; (ii) fixed rate
graduated payment mortgage loans; (iii) fixed rate growing equity mortgage
loans; (iv) fixed rate mortgage loans secured by manufactured (mobile) homes;
(v) mortgage loans on multifamily residential properties under construction;
(vi) mortgage loans on completed multifamily projects; (vii) fixed rate
mortgage loans as to which escrowed funds are used to reduce the borrower's
monthly payments during the early years of the mortgage loans ("buydown"
mortgage loans); (viii) mortgage loans that provide for adjustments in payments
based on periodic changes in interest rates or in other payment terms of the
mortgage loans; and (ix) mortgage-backed serial notes. All of these mortgage
loans will be Federal Housing Administration Loans ("FHA Loans") or Veterans'
Administration Loans ("VA Loans") and, except as otherwise specified above,
will be fully-amortizing loans secured by first liens on one- to four-family
housing units.
Fannie Mae Certificates. Fannie Mae is a federally chartered and
privately owned corporation organized and existing under the Federal National
Mortgage Association Charter Act. Each Fannie Mae Certificate will entitle
the registered holder thereof to receive amounts representing such holder's pro
rata interest in scheduled principal payments and interest payments (at such
Fannie Mae Certificate's pass-through rate, which is net of any servicing and
guarantee fees on the underlying mortgage loans), and any principal prepayments
on the mortgage loans in the pool represented by such Fannie Mae Certificate
and such holder's proportionate interest in the full principal amount of any
foreclosed or otherwise finally liquidated mortgage loan. The full and timely
payment of principal of and
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interest on each Fannie Mae Certificate, but not the market value thereof, will
be guaranteed by Fannie Mae, which guarantee is not backed by the full faith
and credit of the U.S. government. Each Fannie Mae Certificate will represent
a pro rata interest in one or more pools of FHA Loans, VA Loans or conventional
mortgage loans (i.e., mortgage loans that are not insured or guaranteed by any
governmental agency) of the following types: (i) fixed rate level payment
mortgage loans; (ii) fixed rate growing equity mortgage loans; (iii) fixed rate
graduated payment mortgage loans; (iv) variable rate California mortgage loans;
(v) other adjustable rate mortgage loans; and (vi) fixed rate mortgage loans
secured by multifamily projects.
Freddie Mac Certificates. Freddie Mac is a corporate instrumentality of
the United States created pursuant to the Emergency Home Finance Act of 1970,
as amended (the "FHLMC Act"). Freddie Mac guarantees to each registered holder
of a Freddie Mac Certificate ultimate collection of all principal of the
related mortgage loans, without any offset or deduction, but does not,
generally, guarantee the timely payment of scheduled principal or the market
value of the securities. Freddie Mac may remit the amount due on account of
its guarantee of collection of principal at any time after default on an
underlying mortgage loan, but not later than 30 days following (i) foreclosure
sale; (ii) payment of a claim by any mortgage insurer; or (iii) the expiration
of any right of redemption, whichever occurs later, but in any event no later
than one year after demand has been made upon the mortgagor for accelerated
payment of principal. The obligations of Freddie Mac under its guarantee are
obligations solely of Freddie Mac and are not backed by the full faith and
credit of the U.S. government.
Freddie Mac Certificates represent a pro rata interest in a group of
mortgage loans (a "Freddie Mac Certificate group") purchased by Freddie Mac.
The mortgage loans underlying the Freddie Mac Certificates will consist of
fixed rate or adjustable rate mortgage loans with original terms to maturity of
between ten and thirty years, substantially all of which are secured by first
liens on one- to four-family residential properties or multifamily projects.
Each mortgage loan must meet the applicable standards set forth in the FHLMC
Act. A Freddie Mac Certificate group may include whole loans, participation
interests in whole loans and undivided interests in whole loans and
participations comprising another Freddie Mac Certificate group.
BRADY BONDS
Brady Bonds are debt securities, generally denominated in U.S. dollars,
issued under the framework of the Brady Plan. The Brady Plan is an initiative
announced by former U.S. Treasury Secretary Nicholas F. Brady in 1989 as a
mechanism for debtor nations to restructure their outstanding external
commercial bank indebtedness. In restructuring its external debt under the
Brady Plan framework, a debtor nation negotiates with its existing bank lenders
as well as multilateral institutions such as the International Bank for
Reconstruction and Development (the "World Bank") and the International
Monetary Fund (the "IMF"). The Brady Plan framework, as it has developed,
contemplates the exchange of external commercial bank debt for newly issued
bonds (Brady Bonds). Brady Bonds may
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also be issued in respect of new money being advanced by existing lenders in
connection with the debt restructuring. The World Bank and/or the IMF support
the restructuring by providing funds pursuant to loan agreements or other
arrangements which enable the debtor nation to collateralize the new Brady
Bonds or to repurchase outstanding bank debt at a discount. Under these
arrangements with the World Bank and/or the IMF, debtor nations have been
required to agree to the implementation of certain domestic monetary and fiscal
reforms. Such reforms have included the liberalization of trade and foreign
investment, the privatization of state-owned enterprises and the setting of
targets for public spending and borrowing. These policies and programs seek to
promote the debtor country's economic growth and development. Investors should
also recognize that the Brady Plan only sets forth general guiding principles
for economic reform and debt reduction, emphasizing that solutions must be
negotiated on a case-by-case basis between debtor nations and their creditors.
SBAM believes that economic reforms undertaken by countries in connection with
the issuance of Brady Bonds make the debt of countries which have issued or
have announced plans to issue Brady Bonds an attractive opportunity for
investment. However, there can be no assurance that SBAM's expectations with
respect to Brady Bonds will be realized.
Investors should recognize that Brady Bonds have been issued only
recently, and accordingly do not have a long payment history. Brady Bonds
which have been issued to date are rated in the categories "BB" or "B" by 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
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on these instruments with the balance of the interest accruals being
uncollateralized. The applicable Funds may purchase Brady Bonds with no or
limited collateralization, and will be relying for payment of interest and
(except in the case of principal collateralized Brady Bonds) principal
primarily on the willingness and ability of the foreign government to make
payment in accordance with the terms of the Brady Bonds. Brady Bonds issued to
date are purchased and sold in secondary markets through U.S. securities
dealers and other financial institutions and are generally maintained through
European transnational securities depositories. A substantial portion of the
Brady Bonds and other sovereign debt securities in which the Fund invests are
likely to be acquired at a discount, which involves certain considerations
discussed below under "Additional Information Concerning Taxes."
INVERSE FLOATING RATE OBLIGATIONS
Certain Funds may invest in inverse floating rate obligations, or "inverse
floaters." Inverse floaters have coupon rates that vary inversely at a multiple
of a designated floating rate (which typically is determined by reference to an
index rate, but may also be determined through a dutch auction or a remarketing
agent) (the "reference rate"). Inverse floaters may constitute a class of CMOs
with a coupon rate that moves inversely to a designated index, such as LIBOR
(London Inter-Bank Offered Rate) or COFI (Cost of Funds Index). Any rise in the
reference rate of an inverse floater (as a consequence of an increase in
interest rates causes a drop in the coupon rate while any drop in the reference
rate of an inverse floater causes an increase in the coupon rate. In addition,
like most other fixed income securities, the value of inverse floaters will
generally decrease as interest rates increase.
Inverse floaters exhibit substantially greater price volatility than fixed
rate obligations having similar credit quality, redemption provisions and
maturity, and inverse floater CMOs exhibit greater price volatility than the
majority of mortgage pass-through securities or CMOs. In addition, some inverse
floater CMOs exhibit extreme sensitivity to changes in prepayments. As a
result, the yield to maturity of an inverse floater CMO is sensitive not only
to changes in interest rates but also to changes in prepayment rates on the
related underlying mortgage assets.
DERIVATIVES
The description in the Prospectus of each Fund indicates which, if any, of
these types of transactions may be used by that Fund.
FORWARD CURRENCY EXCHANGE CONTRACTS. As indicated in the Prospectus, in
order to hedge against currency exchange rate risks or to increase income,
certain Funds may enter into forward currency exchange contracts with
securities dealers, financial institutions or other parties, through direct
bilateral agreements with such counterparties. A Fund will enter into forward
currency exchange contracts only with counterparties which the investment
manager deems creditworthy. In connection with a Fund's forward currency
transactions, the Fund will set aside in a segregated account with its
custodian, cash, cash equivalents or high
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quality debt securities in an amount equal to the amount of the contract, to be
used to pay for the commitment. The segregated account will be
marked-to-market on a daily basis. In addition to the circumstances set forth
in the Prospectus, a Fund may enter into forward currency exchange contracts
when the investment manager believes that the currency of a particular country
may suffer a substantial decline against the U.S. dollar. In those
circumstances, a Fund may enter into a forward contract to sell, for a fixed
amount of U.S. dollars, the amount of that currency approximating the value of
some or all of the Fund's portfolio securities denominated in such currency.
Forward contracts may limit potential gain from a positive change in the
relationship between the U.S. dollar and foreign currencies.
FUTURES CONTRACTS. As indicated in the Prospectus, certain Funds may
trade futures contracts (1) on domestic and foreign exchanges on currencies,
interest rates and bond indices and (2) on domestic and, to the extent
permitted by the Commodity Futures Trading Commission ("CFTC"), foreign
exchanges on stock indices. None of the Funds is a commodity pool, and a Fund
will use futures contracts and options thereon solely (i) for bona fide hedging
purposes and (ii) for other purposes in amounts permitted by the rules and
regulations promulgated by the CFTC. A Fund may not enter into any futures
contract or related option other than for bona fide hedging purposes if,
immediately thereafter, the sum of the amount of aggregate initial margin
deposits on the Fund's existing futures contracts and premiums paid for
options on futures contracts would exceed 5% of the liquidation value of the
Fund's portfolio, after taking into account unrealized profits and losses on
existing contracts. In addition, the value of a Fund's long futures and
options positions (futures contracts on stock or bond indices, interest rates
or foreign currencies and call options on such futures contracts) will not
exceed the sum of (a) cash, cash equivalents or high quality debt securities
segregated for this purpose, (b) cash proceeds on existing investments due
within thirty days and (c) accrued profits on the particular futures or options
positions. Furthermore, with respect to the sale of futures contracts by a
Fund, the value of such contracts may not exceed the total market value of such
Fund's portfolio securities.
Interest Rate Futures Contracts. A Fund may enter into interest rate
futures contracts in order to protect it from fluctuations in interest rates
without necessarily buying or selling fixed income securities. An interest
rate futures contract is an agreement to take or make delivery of either (i) an
amount of cash equal to the difference between the value of a particular index
of debt securities at the beginning and at the end of the contract period or
(ii) a specified amount of a particular debt security at a future date at a
price set at time of the contract. For example, if a Fund owns bonds, and
interest rates are expected to increase, the Fund might sell futures contracts
on debt securities having characteristics similar to those held in the
portfolio. Such a sale would have much the same effect as selling an
equivalent value of the bonds owned by the Fund. If interest rates did
increase, the value of the debt securities in the portfolio would decline, but
the value of the futures contracts to the Fund would increase at approximately
the same rate, thereby keeping the net asset value of the Fund from declining
as much as it otherwise would have. A Fund could accomplish similar results by
selling bonds with longer maturities and investing in bonds with shorter
maturities when interest rates are expected to increase. However, since the
futures market may be more liquid than the cash market, the use of futures
contracts as a risk management technique allows a Fund to maintain a defensive
position without having to sell its portfolio securities.
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Similarly, when the investment manager expects that interest rates may
decline, a Fund may purchase interest rate futures contracts in an attempt to
hedge against having to make subsequently anticipated purchases of bonds at the
higher prices subsequently expected to prevail. Since the fluctuations in the
value of appropriately selected futures contracts should be similar to that of
the bonds that will be purchased, a Fund could take advantage of the
anticipated rise in the cost of the bonds without actually buying them until
the market had stabilized. At that time, a Fund could make the intended
purchase of the bonds in the cash market and the futures contracts could be
liquidated.
At the time of delivery of securities pursuant to an interest rate futures
contract, adjustments are made to recognize differences in value arising from
the delivery of securities with a different interest rate from that specified
in the contract. In some (but not many) cases, securities called for by a
futures contract may have a shorter term than the term of the futures contract
and, consequently, may not in fact have been issued when the futures contract
was entered.
Municipal Bond Index Futures Contracts. A municipal bond index futures
contract is an agreement to take or make delivery of an amount of cash equal to
the difference between the value of the index at the beginning and at the end
of the contract period. Certain Funds may enter into short municipal bond
index futures contracts in anticipation of or during a market decline to
attempt to offset the decrease in market value of securities in its portfolio
that might otherwise result. When a Fund is not fully invested in securities
and anticipates a significant market advance, it may enter into long municipal
bond index futures contracts in order to gain rapid market exposure that may
wholly or partially offset increases in the costs of securities that it intends
to purchase. In a substantial majority of these transactions, a Fund will
purchase such securities upon termination of the futures position but, under
unusual market conditions, a futures position may be terminated without the
corresponding purchase of securities.
OPTIONS. As indicated in the Prospectus, in order to hedge against
adverse market shifts or to increase income, certain Funds may purchase put and
call options or write "covered" put and call options on futures contracts on
stock indices, interest rates and currencies. In addition, in order to hedge
against adverse market shifts or to increase its income, a 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, 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
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"series" (that is, puts on the same underlying investment having the same
exercise prices and expiration dates as those written by the Fund), or an
equivalent number of puts of the same "class" (that is, puts on the same
underlying investment) with exercise prices greater than those that it has
written (or, if the exercise prices of the puts it holds are less than the
exercise prices of those it has written, it will deposit the difference with
its custodian in a segregated account). Parties to options transactions must
make certain payments and/or set aside certain amounts of assets in connection
with each transaction, as described in the Prospectus.
In all cases except for certain options on interest rate futures
contracts, by writing a call, a Fund will limit its opportunity to profit from
an increase in the market value of the underlying investment above the exercise
price of the option for as long as the Fund's obligation as writer of the
option continues. By writing a put, a Fund will limit its opportunity to
profit from a decrease in the market value of the underlying investment below
the exercise price of the option for as long as the Fund's obligation as writer
of the option continues. Upon the exercise of a put option written by a Fund,
the Fund may suffer an economic loss equal to the difference between the price
at which the Fund is required to purchase the underlying investment and its
market value at the time of the option exercise, less the premium received for
writing the option. Upon the exercise of a call option written by a Fund, the
Fund may suffer an economic loss equal to an amount not less than the excess of
the investment's market value at the time of the option exercise over the
Fund's acquisition cost of the investment, less the sum of the premium received
for writing the option and the positive difference, if any, between the call
price paid to the Fund and the Fund's acquisition cost of the investment.
In all cases except for certain options on interest rate futures
contracts, in purchasing a put option, a Fund will seek to benefit from a
decline in the market price of the underlying investment, while in purchasing a
call option, a Fund will seek to benefit from an increase in the market price
of the underlying investment. If an option purchased is not sold or exercised
when it has remaining value, or if the market price of the underlying
investment remains equal to or greater than the exercise price, in the case of
a put, or remains equal to or below the exercise price, in the case of a call,
during the life of the option, the Fund will lose its investment in the option.
For the purchase of an option to be profitable, the market price of the
underlying investment must decline sufficiently below the exercise price, in
the case of a put, and must increase sufficiently above the exercise price, in
the case of a call, to cover the premium and transaction costs.
In the case of certain options on interest rate futures contracts, a Fund
may purchase a put option in anticipation of a rise in interest rates, and
purchase a call option in anticipation of a fall in interest rates. By writing
a covered call option on interest rate futures contracts, a Fund will limit its
opportunity to profit from a fall in interest rates. By writing a covered put
option on interest rate futures contracts, a Fund will limit its opportunity to
profit from a rise in interest rates.
A Fund may choose to exercise the options it holds, permit them to expire
or terminate them prior to their expiration by entering into closing
transactions. A Fund may enter into a
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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.
A Fund's ability to close out its position as a purchaser or seller of an
exchange-listed put or call option is dependent upon the existence of a liquid
secondary market on option exchanges. Among the possible reasons for the
absence of a liquid secondary market on an exchange are: (i) insufficient
trading interest in certain options; (ii) restrictions on transactions imposed
by an exchange; (iii) trading halts, suspensions or other restrictions imposed
with respect to particular classes or series of options or underlying
securities; (iv) interruption of the normal operations on an exchange; (v)
inadequacy of the facilities of an exchange or the Options Clearing Corporation
("OCC") to handle current trading volume; or (vi) a decision by one or more
exchanges to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that exchange (or in
that class or series of options) would cease to exist, although outstanding
options on that exchange that had been listed by the OCC as a result of trades
on that exchange would generally continue to be exercisable in accordance with
their terms.
Over-the-counter options are purchased from or sold to securities dealers,
financial institutions or other parties, through direct bilateral agreement
with such counterparties. A Fund will purchase and sell over-the-counter
options only from and to counterparties which the investment manager deems to
be creditworthy.
The hours of trading for options on securities may not conform to the
hours during which the underlying securities are traded. To the extent that
the option markets close before the markets for the underlying securities,
significant price and rate movements can take place in the underlying markets
that cannot be reflected in the options markets.
(a) Options on Stocks and Stock Indices. A Fund may purchase put and
call options and write covered put and call options on stocks and stock indices
listed on domestic and foreign securities exchanges in order to hedge against
movements in the equity markets or to increase
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17
income to the Fund. In addition, the Fund may purchase options on stocks that
are traded over-the-counter. Options on stock indices are similar to options
on specific securities. However, because options on stock indices do not
involve the delivery of an underlying security, the option represents the
holder's right to obtain from the writer cash in an amount equal to a fixed
multiple of the amount by which the exercise price exceeds (in the case of a
put) or is less than (in the case of a call) the closing value of the
underlying stock index on the exercise date. Currently, options traded include
the Standard & Poor's 100 Index of Composite Stocks, Standard & Poor's 500
Index of Composite Stocks (the "S&P 500 Index"), the New York Stock Exchange
("NYSE") Composite Index, the American Stock Exchange ("AMEX") Market Value
Index, the National Over-the-Counter Index and other standard broadly based
stock market indices. Options are also traded in certain industry or market
segment indices such as the Oil Index, the Computer Technology Index and the
Transportation Index. Stock index options are subject to position and exercise
limits and other regulations imposed by the exchange on which they are traded.
If the investment manager expects general stock market prices to rise, a
Fund might purchase a call option on a stock index or a futures contract on
that index as a hedge against an increase in prices of particular equity
securities it wants ultimately to buy. If in fact the stock index does rise,
the price of the particular equity securities intended to be purchased may also
increase, but that increase would be offset in part by the increase in the
value of the Fund's index option or futures contract resulting from the
increase in the index. If, on the other hand, the investment manager expects
general stock market prices to decline, it might purchase a put option or sell
a futures contract on the index. If that index does in fact decline, the value
of some or all of the equity securities in a Fund's portfolio may also be
expected to decline, but that decrease would be offset in part by the increase
in the value of the Fund's position in such put option or futures contract.
(b) Options on Currencies. A Fund may invest in options on currencies
traded on domestic and foreign securities exchanges in order to hedge against
currency exchange rate risks or to increase income, as described above in
"Forward Currency Exchange Contracts."
(c) Options on Futures Contracts. A Fund may purchase put and call
options and write covered put and call options on futures contracts on stock
indices, interest rates and currencies traded on domestic and, to the extent
permitted by the CFTC, foreign exchanges, in order to hedge all or a portion of
its investments or to increase income and may enter into closing transactions
in order to terminate existing positions. There is no guarantee that such
closing transactions can be effected. An option on a stock index futures
contract, interest rate futures contract or currency futures contract, as
contrasted with the direct investment in such a contract, gives the purchaser
the right, in return for the premium paid, to assume a position in the
underlying contract at a specified exercise price at any time on or before the
expiration date of the option. Upon exercise of an option, the delivery of the
futures position by the writer of the option to the holder of the option will
be accompanied by delivery of the accumulated balance in the writer's futures
margin account. The potential loss related to the purchase of an option on a
futures contract is limited to the premium paid for the option (plus
transaction costs). While the price of the option is fixed at the point of
sale, the value of the
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option does change daily and the change would be reflected in the net asset
value of the Fund.
INTEREST RATE AND EQUITY SWAPS AND RELATED TRANSACTIONS. Certain Funds
may enter into interest rate and equity swaps and may purchase or sell (i.e.,
write) interest rate and equity caps, floors and collars. A Fund expects to
enter into these transactions in order to hedge against either a decline in the
value of the securities included in the Fund's portfolio, or against an
increase in the price of the securities which it plans to purchase, or in order
to preserve or maintain a return or spread on a particular investment or
portion of its portfolio or to achieve a particular return on cash balances, or
in order to increase income. Interest rate and equity swaps involve the
exchange by a Fund with another party of their respective commitments to make
or receive payments based on a notional principal amount. The purchase of an
interest rate or equity cap entitles the purchaser, to the extent that a
specified index exceeds a predetermined level, to receive payments on a
contractually-based principal amount from the party selling the interest rate
or equity cap. The purchase of an interest rate or equity floor entitles the
purchaser, to the extent that a specified index falls below a predetermined
rate, to receive payments on a contractually-based principal amount from the
party selling the interest rate or equity floor. A collar is a combination of
a cap and a floor which preserve a certain return within a predetermined range
of values.
A Fund may enter into interest rate and equity swaps, caps, floors and
collars on either an asset-based or liability-based basis, depending on whether
it is hedging its assets or its liabilities, and will usually enter into
interest rate and equity swaps on a net basis (i.e., the two payment streams
are netted out), with the Fund receiving or paying, as the case may be, only
the net amount of the two payments. The net amount of the excess, if any, of a
Fund's obligations over its entitlements with respect to each interest rate or
equity swap will be accrued on a daily basis, and an amount of cash and/or
liquid high grade debt securities having an aggregate net asset value at least
equal to the accrued excess will be maintained in a segregated account by the
Fund's custodian. If a Fund enters into an interest rate or equity swap on
other than a net basis, the Fund will maintain a segregated account in the full
amount accrued on a daily basis of the Fund's obligations with respect to the
swap. A Fund will only enter into interest rate and equity swap, cap, floor or
collar transactions with counterparties the investment manager deems to be
creditworthy. The investment manager will monitor the creditworthiness of
counterparties to its interest rate and equity swap, cap, floor and collar
transactions on an ongoing basis. If there is a default by the other party to
such a transaction, a Fund will have contractual remedies pursuant to the
agreements related to the transaction. The swap market has grown substantially
in recent years with a large number of banks and investment banking firms
acting both as principals and agents utilizing standardized swap documentation.
The investment manager determined that, as a result, the swap market has become
relatively liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been developed and, accordingly,
they are less liquid than swaps. To the extent a Fund sells caps, floors, and
collars it will maintain in a segregated account cash and/or liquid high grade
debt securities having an aggregate net asset value at least equal to the full
amount, accrued on a daily basis, of the Fund's obligations with respect to the
caps, floors or collars. The use of interest rate
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and equity swaps is a highly specialized activity which involves investment
techniques and risks different from those associated with ordinary portfolio
securities transactions. If the investment manager is incorrect in its
forecasts of market values, interest rates and other applicable factors, the
investment performance of a Fund would diminish compared with what it would
have been if these investment techniques were not utilized. Moreover, even if
the investment manager is correct in its forecasts, there is a risk that the
swap position may correlate imperfectly with the price of the asset or
liability being hedged.
There is no limit on the amount of interest rate and equity swap
transactions that may be entered into by a Fund. These transactions do not
involve the delivery of securities or other underlying assets or principal.
Accordingly, the risk of loss with respect to interest rate and equity swaps is
limited to the net amount of payments that a Fund is contractually obligated to
make, if any. The effective use of swaps and related transactions by a Fund
may depend, among other things on the Fund's ability to terminate the
transactions at times when the investment manager deems it desirable to do so.
Because swaps and related transactions are bilateral contractual arrangements
between a Fund and counterparties to the transactions, the Fund's ability to
terminate such an arrangement may be considerably more limited than in the case
of an exchange traded instrument. To the extent a Fund does not, or cannot,
terminate such a transaction in a timely manner, the Fund may suffer a loss in
excess of any amounts that it may have received, or expected to receive, as a
result of entering into the transaction. If the other party to a swap
defaults, a Fund's risk of loss is the net amount of payments that the Fund
contractually is entitled to receive, if any. A Fund may purchase and sell
caps, floors and collars without limitation, subject to the segregated account
requirement described above.
OTHER INVESTMENT COMPANIES
As indicated under "Investment Limitations" below, a Fund may from time to
time invest in securities of other investment companies. The return on such
investments will be reduced by the operating expenses, including investment
advisory and administration fees, of such investment funds, and will be further
reduced by Fund expenses, including management fees; that is, there will be a
layering of certain fees and expenses.
SPECIAL FACTORS AFFECTING THE FUND'S INVESTMENT
IN NEW YORK MUNICIPAL OBLIGATIONS
Some of the significant financial considerations relating to the
investments of the New York Municipal Bond Fund in New York municipal
securities are summarized below. The following information constitutes only a
brief summary, does not purport to be a complete description and is largely
based on information drawn from official statements relating to securities
offerings of New York municipal obligations available as of the date of this
Statement of Additional Information. The accuracy and completeness of the
information contained in such offering statements has not been independently
verified.
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20
NEW YORK STATE
New York State Financing Activities. There are a number of methods by
which New York State (the "State") may incur debt. Under the State
Constitution, the State may not, with limited exceptions for emergencies,
undertake long-term general obligation borrowing (i.e., borrowing for more than
one year) unless the borrowing is authorized in a specific amount for a single
work or purpose by the New York State Legislature (the "Legislature") and
approved by the voters. There is no limitation on the amount of long-term
general obligation debt that may be so authorized and subsequently incurred by
the State. With the exception of general obligation housing bonds (which must
be paid in equal annual installments or installments that result in
substantially level or declining debt service payments, within 50 years after
issuance, commencing no more than three years after issuance), general
obligation bonds must be paid in equal annual installments or installments that
result in substantially level or declining debt service payments, within 40
years after issuance, beginning not more than one year after issuance of such
bonds.
In April 1993, legislation was also enacted providing for significant
constitutional changes to the long-term financing practices of the State and
the Authorities.
In June 1994, the Legislature passed a proposed constitutional amendment
that would permit the State, within a formula-based cap, to issue revenue
bonds, which would be debt of the State secured solely by a pledge of certain
State tax receipts (including those allocated to State funds dedicated for
transportation purposes), and not by the full faith and credit of the State.
In addition, the proposed amendment would permit multiple purpose general
obligation bond proposals to be proposed on the same ballot, require that State
debt be incurred only for capital projects included in a multi-year capital
financing plan and prohibit, after its effective date, lease-purchase and
contractual-obligation financing mechanisms for State facilities.
Public hearings were held on the proposed constitutional amendment during
1993. Following these hearings, in February 1994, Governor Cuomo and the State
Comptroller recommended a revised constitutional amendment which would further
tighten the ban on lease-purchase and contractual-obligation financing,
incorporate existing lease-purchase and contractual-obligation debt under the
proposed revenue bond cap while simultaneously reducing the size of the cap.
After considering these recommendations, the Legislature passed a revised
constitutional amendment which tightens the ban, and provides for a phase-in to
a lower cap (4.4 percent of personal income).
Although the State Senate and Assembly passed the amendment, the voters
defeated it in November 1995.
The State may undertake short-term borrowings without voter approval (i)
in anticipation of the receipt of taxes and revenues, by issuing tax and
revenue anticipation notes
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21
("TRANs"), and (ii) in anticipation of the receipt of proceeds from the sale of
duly authorized but unissued bonds, by issuing bond anticipation notes
("BANs"). TRANs must mature within one year from their dates of issuance and
may not be refunded or refinanced beyond such period. BANS may only be issued
for the purposes and within the amounts for which bonds may be issued pursuant
to voter authorizations. Such BANs must be paid from the proceeds of the sale
of bonds in anticipation of which they were issued or from other sources within
two years of the date of issuance or, in the case of BANs for housing purposes,
within five years of the date of issuance.
The State may also, pursuant to specific constitutional authorization,
directly guarantee certain public authority obligations. The State
Constitution provides for the State guarantee of the repayment of certain
borrowings for designated projects of the New York State Thruway Authority, the
Job Development Authority and the Port Authority of New York and New Jersey.
The State has never been called upon to make any direct payments pursuant to
such guarantees. The constitutional provisions allowing a State-guarantee of
certain Port Authority of New York and New Jersey debt stipulates that no such
guaranteed debt may be outstanding after December 31, 1996.
Payments of debt service on State general obligation and State-guaranteed
bonds and notes are legally enforceable obligations of the State.
The State employs additional long-term financing mechanisms,
lease-purchase and contractual-obligation financing, which involve obligations
of public authorities or municipalities that are State-supported but not
general obligations of the State. Under these financing arrangements, certain
public authorities and municipalities have issued obligations to finance the
construction and rehabilitation of facilities or the acquisition and
rehabilitation of equipment, and expect to meet their debt service requirements
through the receipt of rental or other contractual payments made by the State.
Although these financing arrangements involve a contractual agreement by the
State to make payments to a public authority, municipality or other entity, the
State's obligation to make such payments is generally expressly made subject to
appropriation by the Legislature and the actual availability of money to the
State for making the payments. The State has also entered into a
contractual-obligation financing arrangement with the New York Local Government
Assistance Corporation ("LGAC") to restructure the way the States makes certain
local aid payments. The State also participates in the issuance of certificates
of participation ("COPs") in a pool of leases entered into by the State's
Office of General Services on behalf of several State departments and agencies
interest in acquiring operational equipment, or in certain cases, real
property.
The State has never defaulted on any of its general obligation
indebtedness or its obligations under lease-purchase or contractual-obligation
financing arrangements and has never been called upon to make any direct
payments pursuant to its guarantees.
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22
The State also employs moral obligations financing. Moral obligation
financing generally involves the issuance of debt by a public authority to
finance a revenue-producing project or other activity. The debt is secured by
project revenues and includes statutory provisions requiring the State, subject
to appropriation by the Legislature, to make up any deficiencies which may
occur in the issuer's debt service reserve fund. There has never been a
default on any moral obligation debt of any public authority.
The State anticipates that its capital programs will be financed, in part,
through borrowings by the State and public authorities in the 1995-96 fiscal
year. The State expects to issue $248 million in general obligation bonds
(including $70 million for purposes of redeeming outstanding BANs) and $186
million in general obligation commercial paper. The Legislature has also
authorized the issuance of up to $33 million in COPs during the State's 1995-96
fiscal year for equipment purchases and $14 million for capital purposes. The
projection of the State regarding its borrowings for the 1995-96 fiscal year
may change if circumstances require.
LGAC is authorized to provide net proceeds of up to $529 million during
the State's 1995-96 fiscal year, to redeem notes sold in June 1995.
Borrowings by other public authorities pursuant to lease-purchase and
contractual-obligation financings for capital programs of the State are
projected to total $2.7 billion, including costs of issuances, reserve funds,
and other costs, net of anticipated refundings and other adjustments for
1994-95 capital projects. Included therein are borrowings by (i) the Dormitory
Authority of the State of New York ("DA") for State University of New York
("SUNY"), The City University of New York ("CUNY"), and health facilities, (ii)
the New York State Medical Care Facilities Finance Agency ("MCFFA") for mental
health facilities; (iii) Thruway Authority for the Dedicated Highway and Bridge
Trust Fund and Consolidated Highway Improvement Program; (iv) UDC for prison
and youth facilities and economic development programs; (v) the Housing Finance
Agency ("HFA") for housing programs; and (vi) other borrowings by the
Environmental Facilities Corporation ("EFC") and the Energy Research and
Development Authority ("ERDA").
In addition to the arrangements described above, State law provides for
State municipal assistance corporations, which are Authorities authorized to
aid financially troubled localities. The Municipal Assistance Corporation for
The City of New York ("MAC"), created to provide financing assistance to New
York City (the "City"), is the only municipal assistance corporation created to
date. To enable MAC to pay debt service on its obligations, MAC receives,
subject to annual appropriation by the Legislature, receipts from the 4% New
York State Sales Tax for the Benefit of New York City, the State-imposed Stock
Transfer Tax and, subject to certain prior liens, certain local assistance
payments otherwise payable to the City. The legislation creating MAC also
includes a moral obligation provision. Under its enabling legislation, MAC's
authority to issue bonds and notes (other than refunding bonds and notes)
expired on December 31, 1984.
State Financial Operations. The State has historically been one of the
wealthiest states in the nation. For decades, however, the State economy has
grown more slowly than that of the
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nation as a whole, gradually eroding the State's relative economic affluence.
Statewide, urban centers have experienced significant changes involving
migration of the more affluent to the suburbs and an influx of generally less
affluent residents. Regionally, the older Northeast cities have suffered
because of the relative success that the South and the West have had in
attracting people and business. The City has also had to face greater
competition as other major cities have developed financial and business
capabilities which make them less dependent on the specialized services
traditionally available almost exclusively in the City.
Although the State ranks 22nd in the nation for its State tax burden, the
State has the second highest combined state and local tax burden in the United
States. In 1991, total State and local taxes in New York were $3,349 per
capita, compared with $1,475 per capita in 1980. Between 1980 and 1991, State
and local taxes per capita increased at approximately the same rate in the
State as in the nation as a whole with per capita taxes in the State increasing
by 127% while such taxes increased 111% in the nation. The State Division of
the Budget ("DOB") believes, however, that it is more informative to describe
the state and local tax burden in terms of its relationship to personal income.
In 1992, total State and local taxes in New York were $154.70 per $1,000 of
personal income, compared with $152.70 in 1980. Between 1980 and 1992, State
and local taxes per $1,000 of personal income increased at a slower rate in the
State than in the nation as a whole with such taxes in the State increasing by
1.3 percent while such taxes increased 4 percent in the nation. The burden of
State and local taxation, in combination with the many other causes of regional
economic dislocation, may have contributed to the decisions of some businesses
and individuals to relocate outside, or not locate within the State. The State
and its localities have used these taxes to develop and maintain their
respective transportation networks, public schools and colleges, public health
systems, other social services, and recreational facilities. Despite these
benefits, the burden of State and local taxation, in combination with the many
other causes of regional economic dislocation, may have contributed to the
decisions of some businesses and individuals to relocate outside, or not locate
within, the State.
The national economy began expanding in 1991 and has added over 7 million
jobs since early 1992. However, the recession lasted longer in the State and
the State's economic recovery has lagged behind the nation's. Although the
State has added approximately 185,000 jobs since November 1992, employment
growth in the State has been hindered during recent years by significant
cutbacks in the computer and instrument manufacturing, utility, defense, and
banking industries. DOB forecasted that national economic growth would
weaken, but not turn negative, during the course of 1995 before beginning to
rebound. This dynamic is often described as a "soft landing."
The national economy achieved the desired "soft landing" in 1995, as
growth slowed from 6.2 percent in 1994 to a rate sufficiently slow to inhibit
the buildup of inflationary pressures. This was achieved without any material
pause in the economic expansion, although recession worries flared in the late
spring and early summer. Growth in the national economy is expected to
moderate during 1996. Real GDP grew only 0.9 percent in the fourth quarter of
1995, and there were declines in the leading economic indicators in four of the
past five months. It is anticipated that slow economic growth will continue
through the first half of 1996 and inflationary pressures will be modest in
1996. Economic growth will gradually accelerate in the second half of 1996 as
the lower level of interest rates over the last year is expected to stimulate
economic activity. Economic growth, as measured by the nation's nominal GDP, is
projected to expand by 4.3 percent in 1996 versus 4.6 percent in 1995. In 1992
dollars, real GDP is expected to grow 1.8 percent as compared with the 2.1
percent growth in 1995. By either measure, economic growth is projected to be
noticeably slower for 1996 than for 1995.
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24
To stimulate economic growth, the State has developed programs, including
the provision of direct financial assistance, designed to assist businesses to
expand existing operations located within the State and to attract new
businesses to the State. In addition, the State has provided various tax
incentives to encourage business relocation and expansion. These programs
include direct tax abatements from local property taxes for new facilities
(subject to locality approval) and investment tax credits that are applied
against the State corporation franchise tax. Furthermore, the State has
created 40 "economic development zones" in economically distressed regions of
the States. Businesses in these zones are provided a variety of tax and other
incentives to create jobs and make investments in the zones. There can be no
assurance that these programs will be successful.
From 1994 to 1995 the annual growth rates of most economic indicators for
the State improved. The pace of private sector employment expansion and
personal income and wage growth all accelerated. Government employment fell as
workforce reductions were implemented at federal, State and local levels.
Similar to the nation, some moderation of growth is expected in the year ahead.
Private sector employment is expected to continue to rise, although somewhat
more slowly than in 1995, while public employment should continue to fall,
reflecting government budget cutbacks. Anticipated continued restraint in wage
settlements, a lower rate of employment growth and falling interest rates are
expected to slow personal income growth significantly.
The State's current fiscal year commenced on April 1, 1995, and ends on
March 31, 1996, and is referred to herein as the State's 1995-96 fiscal year.
The State's budget for the 1995-96 fiscal year was enacted by the
Legislature on June 7, 1995, more than two months after the start of the fiscal
year. Prior to adoption of the budget, the Legislature enacted appropriations
for disbursements considered to be necessary for State operations and other
purposes, including all necessary appropriations for debt service. The State
Financial Plan for the 1995-96 fiscal year (the "1995-96 State Financial Plan")
was formulated on June 20, 1995 and is based on the State's budget as enacted
by the Legislature and signed into law by the Governor. The State Financial
Plan is updated quarterly pursuant to law in July, October and January.
The 1995-96 budget is the first to be enacted in the administration of
Governor George Pataki, who assumed office on January 1, 1995. It is the first
budget in over half a century which proposed and, as enacted, projects an
absolute year-over-year decline in General Fund disbursements. Spending for
State operations is projected to drop even more sharply, by 4.6 percent.
Nominal spending from all State funding sources (i.e., excluding Federal aid)
is proposed to increase by only 2.5 percent from the prior fiscal year, in
contrast to the prior decade when such spending growth averaged more than 6.0
percent annually.
In his Executive Budget, the Governor indicated that in the 1995-96 fiscal
year, the 1995-96 State Financial Plan, based on then-current law governing
spending and revenues, would be out of balance by almost $4.7 billion, as a
result of the projected structural deficit resulting from the ongoing disparity
between sluggish growth in receipts, the effect of prior-year tax changes, and
the rapid acceleration of spending growth; the impact of unfunded
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1994-95 initiatives, primarily for local aid programs; and the use of one-time
solutions, primarily surplus funds from the prior year, to fund recurring
spending in the 1994-95 budget. The Governor proposed additional tax cuts to
spur economic growth and provide relief for low and middle-income tax payers,
which were larger than those ultimately adopted, and which added $240 million
to the then projected imbalance or budget gap, bringing the total to
approximately $5 billion.
The 1995-96 State Financial Plan contemplates closing this gap based on
the enacted budget, through a series of actions, mainly spending reductions and
cost containment measures and certain reestimates that are expected to be
recurring, but also through the use of one-time solutions. The 1995-96 State
Financial Plan projects (i) nearly $1.6 billion in savings from cost
containment, disbursement reestimates, and other savings in social welfare
programs, including Medicaid, income maintenance and various child and family
care programs; (ii) $2.2 billion in savings from State agency actions to reduce
spending on the State workforce, SUNY and CUNY, mental hygiene programs,
capital projects, the prison system and fringe benefits; (iii) $300 million in
savings from local assistance reforms, including actions affecting school aid
and revenue sharing while proposing program legislation to provide relief from
certain mandates that increase local spending; (iv) over $400 million in
revenue measures, primarily a new Quick Draw Lottery game, changes to tax
payment schedules, and the sale of assets; and (v) $300 million from
reestimates in receipts.
The following discussion summarizes updates to the 1995-96 State
Financial Plan and recent fiscal years with particular emphasis on the
State's General Fund. Pursuant to statute, the State updates the financial
plan at least on a quarterly basis. Due to changing economic conditions and
information, public statements or reports may be released by the Governor,
members of the Legislature, and their respective staffs, as well as others
involved in the budget process from time to time. Those statements or reports
may contain predictions, projections or other items of information relating to
the State's financial condition, including potential operating results for the
current fiscal year and projected baseline gaps for future fiscal years, that
may vary materially and adversely from the information provided herein.
The General Fund is the principal operating fund of the State and is used
to account for all financial transactions, except those required to be
accounted for in another fund. It is the State's largest fund and receives
almost all State taxes and other resources not dedicated to particular
purposes. In the State's 1995-96 fiscal year, the General Fund is expected by
the State to account for approximately 49 percent of total governmental-fund
receipts and 71 percent of total governmental-fund disbursements. General Fund
moneys are also transferred to other funds, primarily to support certain
capital projects and debt service payments in other fund types.
The General Fund is projected to be balanced on a cash basis for the
1995-96 fiscal year. Total receipts are projected to be $33.110 billion, an
increase of $48 million over total receipts in the prior fiscal year. Total
General Fund disbursements are projected to be $33.055 billion, an increase of
$344 million over the total amount disbursed and transferred in the prior
fiscal year.
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In addition to the General Fund, the State Financial Plan includes Special
Revenue Funds, Capital Projects Funds and Debt Service Funds.
Special Revenue Funds are used to account for the proceeds of specific
revenue sources such as Federal grants that are legally restricted, either by
the Legislature or outside parties, to expenditures for specified purposes.
Although activity in this fund type is expected to comprise more than 40
percent of total government funds receipts and disbursements in the 1995-96
fiscal year, about three-quarters of that activity relates to Federally-funded
programs.
Projected receipts in this fund type total $25.547 billion, an increase of
$1.316 billion over the prior year. Projected disbursements in this fund type
total $26.002 billion, an increase of $1.641 billion over 1994-95 levels.
Disbursements from Federal funds, primarily the Federal share of Medicaid and
other social services programs, are projected to total $19.209 billion in the
1995-96 fiscal year. Remaining projected spending of $6.793 billion primarily
reflects aid to SUNY supported by tuition and dormitory fees, education aid
funded from lottery receipts, operating aid payments to the Metropolitan
Transportation Authority (the "MTA") funded from the proceeds of dedicated
transportation taxes, and costs of a variety of self-supporting programs which
deliver services financed by user fees.
Capital Projects Funds are used to account for the financial resources
used for the acquisition, construction, or rehabilitation of major State
capital facilities and for capital assistance grants to certain local
governments or public authorities. This fund type consists of the Capital
Projects Fund, which is supported by tax dollars transferred from the General
Fund, and 37 other capital funds established to distinguish specific capital
construction purposes supported by other revenues. In the 1995-96 fiscal year,
activity in these funds is expected to comprise 7 percent of total governmental
receipts and disbursements.
Disbursements from this fund type are projected to increase by $541
million over prior-year levels, primarily reflecting higher spending for
transportation and mental hygiene projects. The Dedicated Highway and Bridge
Trust Fund is projected to comprise 23 percent of the activity in this fund
type--$936 million in 1995-96--and is the single largest dedicated fund.
Projected disbursements from this dedicated fund reflect an increase of $80
million over 1994-95 levels. Spending for capital projects will be financed
through a combination of sources: Federal grants (25 percent), public
authority bond proceeds (38 percent), general obligation bond proceeds (9
percent), and current revenues (28 percent). Total receipts in this fund type
are projected at $4.170 billion, not including $364 million expected to be
available from the proceeds of general obligation bonds.
Debt Service Funds are used to account for the payment of principal of,
and interest on, long-term debt of the State and to meet commitments under
lease-purchase and other contractual-obligation financing arrangements. This
fund is expected to comprise 4 percent of total governmental fund receipts and
disbursements in the 1995-96 fiscal year. Receipts in these funds in excess of
debt service requirements are transferred to the General Fund and Special
Revenue Funds, pursuant to law.
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The Debt Service Fund type consists of the General Debt Service Fund,
which is supported primarily by tax dollars transferred from the General Fund,
and seven other funds. In the 1995-96 fiscal year, total disbursements in this
fund type are projected at $2.506 billion, an increase of $303 million or 13.8
percent. The transfer from the General Fund of $1.583 billion is expected to
finance 63 percent of these payments.
The State contemplates financing the remaining payments by pledged
revenues, including $1.794 billion in taxes, $228 million in dedicated fees,
and $2.200 billion in patient revenues, including transfers of Federal
reimbursements. After impoundment for debt service, as required, $3.481
billion is expected to be transferred to the General Fund and other funds in
support of State operations. The largest transfer--$1.761 billion--is made to
the Special Revenue Fund type, in support of operations of the mental hygiene
agencies. Another $1.341 billion in excess sales taxes is expected to be
transferred to the General Fund, following payment of projected debt service on
bonds of LGAC.
The State issued the first of the three required quarterly updates to the
1995-96 cash-basis State Financial Plan on July 28, 1995 (the "First Quarter
Update"). The First Quarter Update projected continued balance in the State's
1995-96 Financial Plan, and incorporated few revisions to the initial State
Financial Plan of June 20, 1995. The economic forecast was unchanged. A
number of small, offsetting changes were made to the annual receipts and
disbursements estimates. The First Quarter Update also incorporated the
restatement of three transactions within the budget so that these transactions
conformed with accounting treatments utilized by the Office of the State
Comptroller. These restatements had the net effect of reducing both General
Fund receipts and disbursements by $251 million; therefore, they had no impact
on the closing balance of the General Fund.
The State issued its second quarterly update to the cash-basis 1995-96
State Financial Plan (the "Mid-Year Update") on October 26, 1995. The Mid-Year
Update projected continued balance in the State's 1995-96 Financial Plan, with
estimated receipts reduced by a net $71 million and estimated disbursements
reduced by a net $30 million as compared to the First Quarter Update. The
resulting General Fund balance decreased from $213 million in the First Quarter
Update to $172 million in the Mid-Year Update, reflecting the expected use of
$41 million from the Contingency Reserve Fund for payments of litigation and
disallowance expenses. The Mid-Year Update also incorporated changes resulting
from implementation of the Governor's Management Review Plan which was released
on October 12, 1995. The Management Review Plan is expected to produce savings
of $148 million in State fiscal year 1995-96, primarily through Medicaid
Utilization controls, consolidation of State agency staffing and office space,
controls on staffing, overtime and contractual expenses, and increased
productivity. Of the $148 million in savings attributable to the Management
Review Plan, $146 million was reflected in low spending from the General Fund
and $2 million was reflected in increased General Fund receipts.
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The State revised the cash-basis 1995-96 Financial Plan on December 15,
1995 (the "December 15 Update"), in connection with the release of the
Executive Budget for the 1996-97 fiscal year.
The December 15 Update projected continued balance in the 1995-96 General
Fund Financial Plan, with reductions on projected receipts offset by an
equivalent reduction in projected disbursements. Modest changes were made to
the Mid-Year Update, reflecting two more months of actual results, deficiency
requests by State agencies (the largest of which is for school aid resulting
from revisions to data submitted by school districts), and administrative
efficiencies achieved by State agencies. Total General Fund receipts are
expected to be approximately $73 million lower than estimated at the time of
the Mid-Year Update. Tax receipts are now projected to be $29.57 billion, $8
million less than in the earlier plan. Miscellaneous receipts and transfers
from other funds are estimated at $3.15 billion, $65 million lower than in the
Mid-Year Update. The largest single change in these estimates is attributable
to the lag in achieving $50 million in proceeds from sales of State assets,
which are unlikely to be completed prior to the end of the fiscal year.
Projected General Fund disbursements are reduced by a total of $73
million, with changes made in most major categories of the 1995-96 State
Financial Plan. The reduction in overall spending masks the impact of
deficiency requests totaling more than $140 million, primarily for school aid
and tuition assistance to college students. Offsetting reductions in spending
are attributable to the continued maintenance of strict controls on spending
through the fiscal year by State agencies, yielding savings of $50 million.
Reductions of $49 million in support for capital projects reflect a stringent
review of all capital spending. Reductions of $30 million in debt service
costs reflect savings from refundings undertaken in the current fiscal year, as
well as savings from lower interest rates in the financial market. Finally,
the 1995-96 Financial Plan reflects reestimates based on actual results through
November, the largest of which is a reduction of $70 million in projected costs
for income maintenance. This reduction is consistent with declining caseload
projections.
The balance in the General Fund at the close of the 1995-96 fiscal year is
expected to be $172 million, entirely attributable to monies in the Tax
Stabilization Reserve Fund following the required $15 million payment into
that Fund. A $40 million deposit in the Contingency Reserve Fund included as
part of the enacted 1995-96 budget will not be made, and the minor
balance of $1 million currently in the Fund will be transferred to the General
Fund. These Contingency Reserve Fund monies are expected to support payments
from the General Fund for litigation related to the State's Medicaid program,
and for federal disallowances.
Changes in federal aid programs currently pending in Congress are not
expected to have a material impact on the State's 1995-96 Financial Plan,
although prolonged interruptions in the receipt of federal grants could create
adverse developments, the scope of which can not be estimated at this time.
The major remaining uncertainties in the 1995-96 State Financial Plan continue
to be those related to the economy and tax collections, which could produce
either favorable or unfavorable variances during the balances of the year.
The State issued its third required quarterly update to the 1995-96
cash-basis State Financial Plan on January 30, 1996 (the "Third Quarterly
Update") following those submitted in July and October 1995. The Third
Quarterly Update was published two weeks after the closure of the Governor's
30-day amendment period, during which the Governor revised the 1996-97 State
Financial Plan.
The Third Quarterly Update reflected actual results through the third
quarter of the State's fiscal year, quarterly and year-end tax payments
received in December and January, and modest changes in spending to reflect the
current year impact of certain 30-day amendments. The 1995-96 General Fund
State Financial Plan was projected to remain in balance on a cash basis, with
both receipts and disbursements projected to be $47 million higher than in the
December 15 Update. Total taxes were projected to be $29.66 billion, $88
million higher than in the December 15 Update. Miscellaneous receipts and
transfers were expected to total $3.1 billion, down $41 million from the
December 15 Update. Total disbursements were projected to be $32.75 billion, an
increase of $47 million from the December 15 Update. Spending in Governmental
Funds were projected at $63.31 billion, an increase of $15 million from the
December 15 Update.
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The Governor presented his 1996-97 Executive Budget to the Legislature on
December 15, 1995, one month before the legal deadline. The Executive Budget
also contains financial projections for the State's 1997-98 and 1998-99 fiscal
years and an updated Capital Plan. As provided by the State Constitution, the
Governor submitted amendments to his 1996-97 Executive Budget within 30 days
following submission. Those amendments are reflected in the discussion of the
1996-97 Executive Budget contained in this Statement of Additional Information.
There can be no assurance that the Legislature will enact the Executive Budget
as proposed by the Governor into law, or that the State's adopted budget
projections will not differ materially and adversely from the projections set
forth in this Statement of Additional Information.
The 1996-97 Financial Plan projects balance on a cash basis in the General
Fund. It reflects a continuing strategy of substantially reduced State
spending, including program restructurings, reductions in social welfare
spending, and efficiency and productivity initiatives. Total General Fund
receipts and transfers from other funds are projected to be $31.32 billion, a
decrease of $1.4 billion from total receipts projected in the current fiscal
year. Total General Fund disbursements and transfers to other funds are
projected to be $31.22 billion, a decrease of $1.5 billion from spending totals
projected for the current fiscal year. After adjustments and transfers for
comparability between the 1995-96 and 1996-97 State Financial Plans, the
Executive Budget proposes an absolute year-to-year decline in General Fund
spending of 5.8 percent. Spending from all funding sources (including federal
aid) is proposed to increase by 0.4 percent from the prior fiscal year after
adjustments and transfers for comparability.
The Executive Budget proposes $3.9 billion in actions to balance the
1996-97 Financial Plan. Before reflecting any actions proposed by the Governor
to restrain spending, General Fund disbursements for 1996-97 were projected at
$35 billion, an increase of $2.3 billion or 7 percent from 1995-96. This
increase would have resulted from growth in Medicaid, inflationary increases in
school aid, higher fixed costs such as pensions and debt service, collective
bargaining agreements, inflation, and the loss of non-recurring resources that
offset spending in 1995-96. Receipts would have been expected to fall by $1.6
billion. This reduction would have been attributable to modest growth in the
State's economy and underlying tax base, the loss of non-recurring revenues
available in 1995-96 and implementation of previously enacted tax reduction
programs.
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The Executive Budget proposes to close this gap primarily through a series
of spending reductions and cost containment measures. The Executive Budget
projects (i) over $1.8 billion in savings from cost containment and other
actions in social welfare programs, including Medicaid, welfare and various
health and mental programs; (ii) $1.3 billion in savings from a reduced State
General Fund share of Medicaid made available from anticipated changes in the
federal Medicaid program, including an increase in the federal share of
Medicaid; (iii) over $450 million in savings from reforms and cost avoidance in
educational services (including school aid and higher education), while
providing fiscal relief from certain State mandates that increase local
spending; and (iv) $350 million in savings from efficiencies and reductions in
other State programs. The assumption regarding an increased share of federal
Medicaid funding has received bipartisan Congressional support and would
benefit 32 states, including New York.
The 1996-97 Financial Plan projects receipts of $31.32 billion and
spending of $31.22 billion, allowing for a deposit of $85 million to the
Contingency Reserve Fund and a required repayment of $15 million to the Tax
Stabilization Reserve Fund.
The Governor has submitted several amendments to the Executive Budget.
These amendments have a nominal impact on the State's Financial Plan for 1996-97
and the subsequent years. The net impact of the amendments leaves unchanged
the total estimated amount of General Fund spending in 1996-97, which continues
to be projected at $31.22 billion. All funds spending in 1996-97 is increased
by $68 million, primarily reflecting adjustments to projections of federal
funds, and now totals $63.87 billion.
The budget amendments advanced by the Governor are largely technical
revisions, with General Fund spending increases fully offset by spending
decreases. Reductions in estimated 1996-97 disbursements are recommended
primarily for welfare (associated with updated projections showing a declining
caseload) and debt service (reflecting lower interest rates and recent bond
sales). Disbursement increases are projected for snow and ice control, the
AIDS Institute, Health Department utilization review programs and other items.
Estimated disbursements for other funds are increased to accomodate updated
projections of federal funding in certain categorical grant programs and
reduced for welfare as noted on for the General Fund.
On March 15, 1996, the Governor presented amendments to the 1996-97
Executive Budget which address two potential outcomes of the federal debate on
entitlement reform:
* Contingency Plan--If the federal government fails to adopt entitlement
changes assumed to produce savings in the Executive Budget for the
State's 1996-97 fiscal year, the Governor has identified $2.01 billion
in new or redirected resources to replace these savings in order to
preserve budget balance in the 1996-97 State Financial Plan.
* Balanced Budget Bonus Plan--If the federal government acts, through
legislation or through waivers of existing federal provisions, and any
necessary conforming changes are adopted by the State Legislature, the
State could receive all or a portion of the $2.01 billion benefit
anticipated in the original 1996-97 Executive Budget. As a result, a
portion of the new resources identified in the Contingency Plan would
then be available to make restorations or add new spending to the
1996-97 State budget. The Balanced Budget Bonus Plan sets priorities
for up to $1.42 billion in potential recurring and non-recurring
spending increases.
There can be no assurance that the Legislature will enact the Executive
Budget or any of the amendments proposed by the Governor, or that the State's
adopted budget projections will not differ materially and adversely from the
projections set forth in this Supplement. Further, since the amendments
implementing the Contingency Plan and the Balanced Budget Bonus Plan have been
submitted after the 30-day amendment period, the Legislature must consent to
their introduction.
DOB believes that its economic assumptions and its projections of receipts
and disbursements for the 1996-97 Executive Budget as amended by the Contingency
Plan and the Balanced Budget Bonus Plan are reasonable. However, various
financial, social, economic, and political factors can affect these projections,
of which certain factors, such as action by the federal government, are outside
the State's control. Because of the uncertainty and unpredictably of those
factors, their impact cannot be fully anticipated in the assumptions underlying
the State's projections.
The 1996-97 Executive Budget includes actions that will have an impact on
receipts and disbursements in future fiscal years. The Governor has proposed
closing the 1996-97 budget gap primarily through expenditures reductions and
without increases in taxes or deferrals of scheduled tax reductions. After
accounting for proposed changes to the Executive Budget submitted during the
30-day amendment period, the net impact of these actions is expected to produce
a potential imbalance in the 1997-98 fiscal year of $1.44 billion and in the
1998-99 fiscal year of $2.46 billion, assuming implementation of the 1996-97
Executive Budget recommendations. For 1997-98, receipts are estimated at
$30.62 billion and disbursements at $32.05 billion. For 1998-99, receipts are
estimated at $31.85 billion and disbursements at $34.32 billion.
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For 1996-97 the closing fund balance in the General Fund is projected to
be $272 million. The required deposit to the Tax Stabilization Reserve Fund
adds $15 million to the 1995-96 balance of $172 million in that fund, bringing
the total to $187 million at the close of 1996-97. The remaining General Fund
balance reflects the deposit of $85 million to the Contingency Reserve Fund, to
provide resources to finance potential costs associated with litigation against
the State. This deposit is expected to be made pursuant to legislation
submitted with the Executive Budget which will require the State share of
certain non-recurring federal recoveries to be deposited to the Contingency
Reserve Fund.
For 1996-97, the Financial Plan projects disbursements of $28.93 billion
from this Fund. This includes $7.65 billion from Special Revenue Funds
containing State revenues, and $21.28 billion from funds containing federal
grants, primarily for social welfare programs.
The 1996-97 Executive Budget recommends that all of the SUNY's revenues be
consolidated in a single fund, permitting SUNY more flexibility and control in
the use of its revenues. As a result of this proposal, General Fund support
would be transferred to this fund, rather than spent directly from the General
Fund. SUNY's spending from this fund is projected to total $2.55 billion in
1996-97. The Mass Transportation Operating Assistance Fund and the Dedicated
Mass Transportation Trust Fund, which receive taxes earmarked for mass
transportation programs throughout the State, are projected to have total
disbursements of $1.23 billion in 1996-97. Disbursements also include $1.63
billion in lottery proceeds which, after payment of administrative expenses,
permit the distribution of $1.43 billion for education purposes. One hundred
million dollars of lottery proceeds will be reserved in a separate account for
a local school tax reduction program to be agreed upon by the Governor and the
Legislature for disbursement in State fiscal year 1997-98. Disbursements of
$650 million in 1996-97 from the Disproportionate Share Medicaid Assistance
Fund constitutes most of the remaining estimated State Special Revenue Funds
disbursements.
Federal Special Revenue Fund projections for 1996-97 were developed in the
midst of considerable uncertainty as to the ultimate composition of the federal
budget, including uncertainties regarding major federal entitlement reforms.
Disbursements are estimated at $21.27 billion in 1996-97, an increase of $2.02
billion, or 10.5 percent from 1995-96. The projections included in the 1996-97
State Financial Plan assume that the federal Medicaid program will be reformed
generally along the lines of the congressional MediGrant program. This would
include an increase from 50 percent to 60 percent in the federal share of New
York's Medicaid expenses. A repeal of the federal Boren amendment regarding
provider rates is also anticipated. As a result of these changes, the
Executive Budget projects the receipt of $13.1 billion in total federal
Medicaid reimbursements in 1996-97, an increase of approximately $915 million
from the 1995-96 level.
The second largest projected increase in federal reimbursement is for the
State's welfare program. The State is projected to receive $2.5 billion, up
$421 million from 1995-96 levels, primarily because of increased funding
anticipated from the proposed federal welfare block grant. All other federal
spending is projected at $5.7 billion for 1996-97, an increase of $626 million.
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Disbursements from the Capital Projects Funds in 1996-97 are estimated at
$3.76 billion. This estimate is $332 million less than the 1995-96 projections.
The spending reductions are the result of program restructuring, achieved in
1995-96 and continued in the 1996-97 Financial Plan. The spending plan
includes:
- $2.5 billion in disbursements for the second year of the five-year
$12.6 billion State and local highway and bridge program;
- Environmental Protection Fund spending of $106.5 million;
- Correctional services spending of $153 million; and
- SUNY and CUNY capital spending of $196 million and $87 million,
respectively.
The share of capital projects to be financed by "pay-as-you-go" resources
is projected to hold steady in 1996-97 at approximately 27 percent.
State-supported bond issuances finance 44 percent of capital projects, with
federal grants financing the remaining 29 percent.
Disbursements from the Debt Service Fund are estimated at $2.64 billion in
1996-97, an increase of $206 million or 9 percent from 1995-96. Of this
increase, $85 million is attributable to transportation bonding for the State
and local highway and bridge programs which are financed by the Dedicated
Highway and Bridge Trust Fund, $35 million is for corrections including new
debt service on prisons recently purchased from New York City, and $27 million
is for the mental hygiene programs financed through the Mental Health Services
Fund. Debt service for LGAC bonds increases only slightly after years of
significant increases, as the new-money bond issuance portion of the LGAC
program was completed in State fiscal year 1995-96. Increased debt service
costs primarily reflect prior capital commitments financed by bonds issued by
the State and its public authorities, the reduced use of capitalized interest,
and the use of shorter term bonds, such as the 10 year average maturity for the
Dedicated Highway and Bridge Trust Fund bonds.
The 1995-96 State Financial Plans and the 1996-97 Executive Budget are
based upon forecasts of national and State economic and financial conditions.
The economic and financial condition of the State may be affected by various
financial, social, economic and political factors. Those factors can be very
complex, can vary from fiscal year to fiscal year, and are frequently the
result of actions taken not only by the State but also by entities, such as the
federal government, that are outside the State's control. Because of the
uncertainty and unpredictability of changes in these factors, their impact
cannot be fully included in the assumptions underlying the State's projections.
There can be no assurance that the State economy will not experience results in
the 1995-96 and the 1996-97 fiscal years that are worse than predicted, with
corresponding material and adverse effects on the State's financial
projections.
New York State's financial operations have improved during recent fiscal
years. During the period 1989-90 through 1991-92, the State incurred General
Fund operating deficits that were closed with receipts from the issuance of
TRANs. First, the national recession, and then
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the lingering economic slowdown in the New York and regional economy, resulted
in repeated shortfalls in receipts and three budget deficits. For its 1992-93,
1993-94 and 1994-95 fiscal years, the State recorded balanced budgets on a cash
basis, with substantial fund balances in 1992-93 and 1993-94, and a smaller
fund balance in 1994-95 as described below.
New York State ended its 1994-95 fiscal year with the General Fund in
balance. The closing fund balance of $158 million reflects $157 million in the
Tax Stabilization Reserve Fund and $1 million in the Contingency Reserve Fund
("CRF"). The CRF was established in State fiscal year 1993-94, funded partly
with surplus moneys, to assist the State in financing the 1994-95 fiscal year
costs of extraordinary litigation known or anticipated at that time; the
opening fund balance in State fiscal year 1994-95 was $265 million. The $241
million change in the fund balance reflects the use of $264 million in the CRF
as planned, as well as the required deposit of $23 million to the Tax
Stabilization Reserve Fund. In addition, $278 million was on deposit in the
tax refund reserve account, $250 million of which was deposited at the end of
the State's 1994-95 fiscal year to continue the process of restructuring the
State's cash flow as part of the LGAC program.
Compared to the State Financial Plan for 1994-95 as formulated on June 16,
1994, reported receipts fell short of original projections by $1.163 billion,
primarily in the categories of personal income and business taxes. Of this
amount, the personal income tax accounts for $800 million, reflecting weak
estimated tax collections and lower withholding due to reduced wage and salary
growth, more severe reductions in brokerage industry bonuses than projected
earlier, and deferral of capital gains realizations in anticipation of
potential Federal tax changes. Business taxes fell short by $373 million,
primarily reflecting lower payments from banks as substantial overpayments of
1993 liability depressed net collections in the 1994-95 fiscal year. These
shortfalls were offset by better performance in the remaining taxes,
particularly the user taxes and fees, which exceeded projections by $210
million. Of this amount, $227 million was attributable to certain restatements
for accounting treatment purposes pertaining to the CRF and LGAC; these
restatements had no impact on balance in the General Fund.
Disbursements were also reduced from original projections by $848 million.
After adjusting for the net impact of restatements relating to the CRF and LGAC
which raised disbursements by $38 million, the variance is $886 million. Well
over two-thirds of this variance is in the category of grants to local
governments, primarily reflecting the conservative nature of the original
estimates of projected costs for social services and other programs. Lower
education costs are attributable to the availability of $110 million in
additional lottery proceeds and the use of LGAC bond proceeds.
The spending reductions also reflect $188 million in actions initiated in
January 1995 by the Governor to reduce spending to avert a potential gap in the
1994-95 State Financial Plan. These actions included savings from a hiring
freeze, halting the development of certain services, and the suspension of
non-essential capital projects. These actions, together with $71 million in
other measures comprised the Governor's $259 million gap-closing plan,
submitted to the Legislature in connection with the 1995-96 Executive Budget.
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The State ended its 1993-94 fiscal year with a balance of $1.140 billion
in its tax refund reserve account, $265 million in its CRF and $134 million in
its Tax Stabilization Reserve Fund. These fund balances were primarily the
result of an improving national economy, State employment growth, tax
collections that exceeded earlier projections and disbursements that were below
expectations. Deposits to the personal income tax refund reserve have the
effect of reducing reported personal income tax receipts in the fiscal year
when made and withdrawals from such reserve increase receipts in the fiscal
year when made. The balance in the tax refund reserve account will be used to
pay taxpayer refunds, rather than drawing from 1994-95 receipts.
Of the $1.140 billion deposited in the tax refund reserve account, $1.026
billion was available for budgetary planning purposes in the 1994-95 fiscal
year. The remaining $114 million was redeposited in the tax refund reserve
account at the end of the State's 1994-95 fiscal year to continue the process
of restructuring the State's cash flow as part of the LGAC program. The
balance in the CRF will be used to meet the cost of litigation facing the
State. The Tax Stabilization Reserve Fund may be used only in the event of an
unanticipated General Fund cash-basis deficit during the 1994-95 fiscal year.
Before the deposit of $1.140 billion in the tax refund reserve account,
General Fund receipts in the 1993-94 fiscal year exceeded those originally
projected when the State Financial Plan for that year was formulated on April
16, 1993 by $1.002 billion. Greater-than-expected receipts in the personal
income tax, the bank tax, the corporation franchise tax and the estate tax
accounted for most of this variance, and more than offset weaker-than-projected
collections from the sales and use tax and miscellaneous receipts. Collections
from individual taxes were affected by various factors including changes in
Federal business laws, sustained profitability of banks, strong performance of
securities firms, and higher-than-expected consumption of tobacco products
following price cuts.
The higher receipts resulted, in part, because the State economy performed
better than forecasted. Employment growth started in the first quarter of the
State's 1993-94 fiscal year, and, although this lagged behind the national
economic recovery, the growth in New York began earlier than forecasted. The
State economy exhibited signs of strength in the service sector, in
construction, and in trade. Long Island and the Mid-Hudson Valley continued to
lag behind the rest of the State in economic growth. The State Division of the
Budget (the "DOB") believes that approximately 100,000 jobs were added during
the 1993-94 fiscal year.
Disbursements and transfers from the General Fund were $303 million below
the level that was projected in April 1993, an amount that would have been $423
million had the State not accelerated the payment of Medicaid billings, which
in the April 1993 State Financial Plan were planned to be deferred into the
1994-95 fiscal year. Compared to the estimates included in the State Financial
Plan formulated in April 1993, lower disbursements resulted from lower spending
for Medicaid, capital projects, and debt service (due to refundings) and $114
million used to restructure the State's cash flow as part of the LGAC program.
Disbursements were higher-than-expected for general support for public schools,
the State share of income maintenance, overtime for prison guards, and highway
snow and ice removal. The State also made the first of six required payments to
the State of Delaware related to the
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settlement of Delaware's litigation against the State regarding the disposition
of abandoned property receipts.
During the 1993-94 fiscal year, the State also established and funded the
CRF as a way to assist the State in financing the cost of litigation affecting
the State. The CRF was initially funded with a transfer of $100 million
attributable to the positive margin recorded in the 1992-93 fiscal year. In
addition, the State augmented this initial deposit with $132 million in debt
service savings attributable to the refinancing of State and public authority
bonds during 1993-94. A year-end transfer of $36 million was also made to the
CRF, which, after a disbursement for authorized fund purposes, brought the CRF
balance at the end of 1993-94 to $265 million. This amount was $165 million
higher than the amount originally targeted for this reserve fund.
The State ended its 1992-93 fiscal year with a balance of $671 million in
the tax refund reserve account and $67 million in the Tax Stabilization Reserve
Fund.
The State's 1992-93 fiscal year was characterized by performance that was
better than projected for the national and regional economies. National gross
domestic product, State personal income, and State employment and unemployment
performed better than originally projected in April 1992. This favorable
economic performance, particularly at year end, combined with a tax-induced
acceleration of income into 1992, was the primary cause of the General Fund
surplus. Personal income tax collections were more than $700 million higher
than originally projected (before reflecting the tax refund reserve account
transaction), primarily in the withholding and estimated payment components of
the tax.
There were large, but mainly offsetting, variances in other categories of
receipts. Significantly higher-than-projected business tax collections and the
receipt of unbudgeted payments from the Medical Malpractice Insurance
Association ("MMIA") and the New York Racing Association approximately offset
the loss of an anticipated $200-million Federal reimbursement, the loss of
certain budgeted hospital differential revenue as a result of unfavorable court
decisions, and shortfalls in certain miscellaneous revenues.
Disbursements and transfers to other funds were $45 million above
projections made in April 1992, although this includes a $150 million payment
to health insurers (financed with a receipt from the MMIA made pursuant to
legislation passed in January 1993). All other disbursements were $105 million
lower than projected. This reduction primarily reflected lower costs in
virtually all categories of spending, including Medicaid, local health
programs, agency operations, fringe benefits, capital projects and debt service
as partially offset by higher-than-anticipated costs for education programs.
The financial condition of the State is affected by several factors,
including the strength of the State and regional economy and actions of the
Federal government, as well as State actions affecting the level of receipts
and disbursements. Owing to these and other factors, the State may, in future
years, face substantial potential budget gaps resulting from a significant
disparity between tax revenues projected from a lower recurring receipts base
and the future costs of maintaining State programs at current levels. Any such
recurring
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imbalance would be exacerbated if the State were to use a significant amount of
nonrecurring resources to balance the budget in a particular fiscal year. To
address a potential imbalance for a given fiscal year, the State would be
required to take actions to increase receipts and/or reduce disbursements as it
enacts the budget for that year, and under the State Constitution the Governor
is required to propose a balanced budget each year. To correct recurring
budgetary imbalances, the State would need to take significant actions to align
recurring receipts and disbursements in future fiscal years. There can be no
assurance, however, that the State's actions will be sufficient to preserve
budgetary balance in a given fiscal year or to align recurring receipts and
disbursements in future fiscal years.
In 1990, as part of a State fiscal reform program, legislation was enacted
creating LGAC, a public benefit corporation empowered to issue long-term
obligations to fund certain payments to local governments traditionally funded
through the State's annual seasonal borrowing. The legislation authorized LGAC
to issue its bonds and notes in an amount not in excess of $4.7 billion
(exclusive of certain refunding bonds) plus certain other amounts. Over a
period of years, the issuance of these long-term obligations, which are to be
amortized over no more than 30 years, was expected to eliminate the need for
continued short-term seasonal borrowing. The legislation also dedicated
revenues equal to one-quarter of the four cent State sales and use tax to pay
debt service on these bonds. The legislation also imposed a cap on the annual
seasonal borrowing of the State at $4.7 billion, less net proceeds of bonds
issued by LGAC and bonds issued to provide for capitalized interest, except in
cases where the Governor and the legislative leaders have certified the need
for additional borrowing and provided a schedule for reducing it to the cap.
If borrowing above the cap is thus permitted in any fiscal year, it is required
by law to be reduced to the cap by the fourth fiscal year after the limit was
first exceeded. This provision capping the seasonal borrowing was included as
a covenant with LGAC's bondholders in the resolution authorizing such bonds.
As of June 1995, LGAC had issued bonds and notes to provide net proceeds
of $4.7 billion completing the program. The impact of LGAC's borrowing is that
the State is able to meet its cash flow needs in the first quarter of the
fiscal year without relying on short-term seasonal borrowings. The 1995-96
State Financial Plan includes no spring borrowing nor did the 1994-95 State
Financial Plan, which was the first time in 35 years there was no short-term
seasonal borrowing.
On January 13, 1992, Standard & Poor's ("S&P") lowered its rating on the
State's general obligation bonds from A to A- and, in addition, reduced its
ratings on the State's moral obligation, lease purchase, guaranteed and
contractual obligation debt. S&P also continued its negative rating outlook
assessment on State general obligation debt. On April 26, 1993 S&P revised
the rating outlook assessment to stable. On February 14, 1994, S&P revised
its outlook to positive and, on October 3, 1995 confirmed its A- rating. On
January 6, 1992, Moody's reduced its ratings on outstanding limited-liability
State lease purchase and contractual obligations from A to Baa1. On October 2,
1995, Moody's reconfirmed its A rating on the State's general obligation
long-term indebtedness.
On June 6, 1990, Moody's changed its ratings on all of the State's
outstanding general obligation bonds from A1 to A, the rating having been A1
since May 27, 1986. On
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November 12, 1990, Moody's confirmed the A rating. In 1992, S&P lowered the
State's general obligation bond rating to A-, where it currently remains and
was affirmed on July 13, 1995. Prior to this, on March 26, 1990, S&P lowered
its rating of all of the State's outstanding general obligation bonds from AA-
to A. Previous S&P ratings were AA- from August, 1987 to March, 1990 and A+
from November, 1982 to August, 1987.
Authorities. The fiscal stability of the State is related, in part, to
the fiscal stability of its Authorities, which generally have responsibility
for financing, constructing and operating revenue-producing public benefit
facilities. Authorities are not subject to the constitutional restrictions on
the incurrence of debt which apply to the State itself, and may issue bonds and
notes within the amounts of, and as otherwise restricted by, their legislative
authorization. The State's access to the public credit markets could be
impaired, and the market price of its outstanding debt may be materially
adversely affected, if any of its public authorities were to default on their
respective obligations. As of September 30, 1994, the date of the latest data
available, there were 18 Authorities that had outstanding debt of $100 million
or more, and the aggregate outstanding debt, including refunding bonds, of
these 18 Authorities was $70.3 billion. As of March 31, 1995, aggregate
Authority debt outstanding as State-supported debt was $27.9 billion and as
State-related debt was $36.1 billion.
There are numerous public authorities, with various responsibilities,
including those which finance, construct and/or operate revenue producing
public facilities. Public authority operating expenses and debt service costs
are generally paid by revenues generated by the projects financed or operated,
such as tolls charged for the use of highways, bridges or tunnels, rentals
charged for housing units, and charges for occupancy at medical care
facilities.
In addition, State legislation authorizes several financing techniques for
public authorities. Also, there are statutory arrangements providing for State
local assistance payments otherwise payable to localities to be made under
certain circumstances to public authorities. Although the State has no
obligation to provide additional assistance to localities whose local
assistance payments have been paid to public authorities under these
arrangements if local assistance payments are so diverted, the affected
localities could seek additional State assistance.
Some authorities also receive monies from State appropriations to pay for
the operating costs of certain of their programs. As described below, the MTA
receives the bulk of this money in order to carry out mass transit and commuter
services.
The State's experience has been that if an Authority suffers serious
financial difficulties, both the ability of the State and the Authorities to
obtain financing in the public credit markets and the market price of the
State's outstanding bonds and notes may be adversely affected. The New York
State Housing Finance Agency, the New York State Urban Development Corporation
and certain other Authorities have in the past required and continue to require
substantial amounts of assistance from the State to meet debt service costs or
to pay operating expenses. Further assistance, possibly in increasing amounts,
may be required for these, or other, Authorities in the future. In addition,
certain other statutory arrangements provide for State local assistance
payments otherwise payable to localities to be made under
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certain circumstances to certain Authorities. The State has no obligation to
provide additional assistance to localities whose local assistance payments
have been paid to Authorities under these arrangements. However, in the event
that such local assistance payments are so diverted, the affected localities
could seek additional State funds.
Metropolitan Transportation Authority . The MTA oversees the operation of
the City's subway and bus lines by its affiliates, the New York City Transit
Authority and the Manhattan and Bronx Surface Transit Operating Authority
(collectively, the "TA"). The MTA operates certain commuter rail and bus lines
in the New York Metropolitan area through MTA's subsidiaries, the Long Island
Rail Road Company, the Metro-North Commuter Railroad Company and the
Metropolitan Suburban Bus Authority. In addition, the Staten Island Rapid
Transit Operating Authority, an MTA subsidiary, operates a rapid transit line
on Staten Island. Through its affiliated agency, the Triborough Bridge and
Tunnel Authority (the "TBTA"), the MTA operates certain intrastate toll bridges
and tunnels. Because fare revenues are not sufficient to finance the mass
transit portion of these operations, the MTA has depended, and will continue to
depend for operating support upon a system of State, local government and TBTA
support, and, to the extent available, Federal operating assistance, including
loans, grants and operating subsidies. If current revenue projections are not
realized and/or operating expenses exceed current projections, the TA or
commuter railroads may be required to seek additional State assistance, raise
fares or take other actions.
Since 1980, the State has enacted several taxes -- including a surcharge
on the profits of banks, insurance corporations and general business
corporations doing business in the 12-county Metropolitan Transportation Region
served by the MTA and a special one-quarter of 1 percent regional sales and use
tax -- that provide revenues for mass transit purposes, including assistance to
the MTA. In addition, since 1987, State law has required that the proceeds of
a one quarter of 1% mortgage recording tax paid on certain mortgages in the
Metropolitan transportation Region be deposited in a special MTA fund for
operating or capital expenses. Further, in 1993 the State dedicated a portion
of the State petroleum business tax to fund operating or capital assistance to
the MTA. For the 1995-96 fiscal year, total State assistance to the MTA is
estimated by the State to be approximately $1.1 billion.
In 1993, State legislation authorized the funding of a five-year $9.56
billion MTA capital plan for the five-year period, 1992 through 1996 (the
"1992-96 Capital Program"). The MTA has received approval of the 1992-96
Capital Program based on this legislation from the 1992-96 Capital Program
Review Board, as State law requires. This is the third five-year plan since
the Legislature authorized procedures for the adoption, approval and amendment
of a five-year plan in 1981 for a capital program designed to upgrade the
performance of the MTA's transportation systems and to supplement, replace and
rehabilitate facilities and equipment. The MTA, the TBTA and the TA are
collectively authorized to issue an aggregate of $3.1 billion of bonds (net
certain statutory exclusions) to finance a portion of the 1992-96 Capital
Program. The 1992-96 Capital Program may be financed in significant part
through dedication of State petroleum business taxes referred to above.
However, in December 1994 the proposed bond resolution based on such tax
receipts was not approved by
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the MTA Capital Program Review Board. Further consideration of the resolution
was deferred until 1995.
There can be no assurance that all the necessary governmental actions for
the 1992-96 Capital Program will be taken, that funding sources currently
identified will not be decreased or eliminated, or that the 1992-96 Capital
Program, or parts thereof, will not be delayed or reduced. If the 1992-96
Capital Program is delayed or reduced, ridership and fare revenues may decline,
which could, among other things, impair the MTA's ability to meet its operating
expenses without additional State assistance.
Localities. Certain localities in addition to the City could have
financial problems leading to requests for additional State assistance during
the 1995-96 fiscal years and thereafter. The potential impact on the State of
such actions by localities is not included in the projections of the State
receipts and disbursements for the 1995-96 fiscal year.
Fiscal difficulties experienced by the City of Yonkers ("Yonkers")
resulted in the re-establishment of the Financial Control Board for the City of
Yonkers (the "Yonkers Board") by the State in 1984. The Yonkers Board is
charged with oversight of the fiscal affairs of Yonkers. Future actions taken
by the Governor or the Legislature to assist Yonkers could result in allocation
of State resources in amounts that cannot yet be determined.
Municipal Indebtedness. Municipalities and school districts have engaged
in substantial short-term and long-term borrowings. In 1993, the total
indebtedness of all localities in the State was approximately $17.7 billion. A
small portion (approximately $105 million) of that indebtedness represented
borrowing to finance budgetary deficits and was issued pursuant to enabling
State legislation. State law requires the Comptroller to review and make
recommendations concerning the budgets of those local government units other
than the City authorized by State law to issue debt to finance deficits during
the period that such deficit financing is outstanding. Fifteen localities had
outstanding indebtedness for deficit financing at the close of their fiscal
year ending in 1993.
From time to time, proposed Federal expenditure reductions could reduce,
or in some cases eliminate, Federal funding of some local programs and
accordingly might impose substantial increased expenditure requirements on
affected localities. If the State, the City or any of the Authorities were to
suffer serious financial difficulties jeopardizing their respective access to
the public credit markets, the marketability of notes and bonds issued by
localities within the State could be adversely affected. Localities also face
anticipated and potential problems resulting from certain pending litigation,
judicial decisions and long-range economic trends. Long-range potential
problems of declining urban population, increasing expenditures and other
economic trends could adversely affect certain localities and require
increasing State assistance in the future.
Litigation. Certain litigation pending against the State or its officers
or employees could have a substantial or long-term adverse effect on State
finances. Among the more significant of these cases are those that involve:
(i) a challenge to certain enhanced supplemental pension allowances for members
of the state and local retirement systems; (ii) several
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challenges to provisions of Chapter 81 of the Laws of 1995 which after the
nursing home Medicaid reimbursement methodology; (iii) the validity of
agreements and treaties by which various Indian tribes transferred title to the
State of certain land in central and upstate New York; (iv) a challenge to
State regulations which reduce base prices for the direct and indirect
component of Medicaid reimbursement for rate years commencing 1989; (v) an
action against State and City officials alleging that the present level of
shelter allowance for public assistance recipients is inadequate under
statutory standards to maintain proper housing; (vi) challenges to the practice
of reimbursing certain Office of Mental Health patient care expenses from the
client's Social Security benefits; (vii) alleged responsibility of State
officials to assist in remedying racial segregation in the City of Yonkers;
(viii) alleged responsibility of the State Department of Environmental
Conservation for a plaintiff's inability to complete construction of a
cogeneration facility in a timely fashion and the damages suffered thereby;
(ix) challenges to the promulgation of the State's proposed procedure to
determine the eligibility for and nature of home care services for Medicaid
recipients; (x) a challenge to State implementation of a program which reduces
Medicaid benefits to certain home-relief recipients; (xi) a challenge to the
constitutionality of petroleum business tax assessments authorized by Tax Law
Section 301; and (xii) two cases by commercial insurers, employee welfare
benefit plans, and health maintenance organizations to provisions of Section
2807-c of the Public Health Law which impose 13%, 11%, and 9% surcharges on
inpatient hospital bills and a bad debt and charity care allowance on all
hospital bills paid by such entities were resolved by order dated October 2,
1995, the United States District Court for the Southern District of New York
held that the 11 percent and 13 percent surcharges are preempted by FEBHA and
unenforceable against commercial insurers which provide stop-loss coverage to
self-funded ERISA plans.
Adverse developments in the proceedings described above or the initiation
of new proceedings could affect the ability of the State to maintain a balanced
1995-96 State Financial Plan. In its Notes to its General Purpose Financial
Statements for the fiscal year ended March 31, 1994, the State reports its
estimated liability for awards and anticipated unfavorable judgments at $675
million. There can be no assurance that an adverse decision in any of the
above cited proceedings would not exceed the amount of the 1995-96 State
Financial Plan reserves for the payment of judgments and, therefore, could
affect the ability of the State to maintain a balanced 1995-96 State Financial
Plan.
NEW YORK CITY
The fiscal health of the State may also be impacted by the fiscal health
of its localities, particularly the City, which has required and continues to
require significant financial assistance from the State. The City's
independently audited operating results for each of its fiscal years from 1981
through 1993, which end on June 30, show a General Fund surplus reported in
accordance with generally accepted accounting principles ("GAAP"). In
addition, the City's financial statements for the 1993 fiscal year received an
unqualified opinion from the City's independent auditors, the eleventh
consecutive year the City has received such an opinion.
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In response to the City's fiscal crisis in 1975, the State took action to
assist the City in returning to fiscal stability. Among these actions, the
State established the Municipal Assistance Corporation for the City of New York
("MAC") to provide financing assistance to the City. The State also enacted
the New York State Financial Emergency Act for The City of New York (the
"Financial Emergency Act") which, among other things, established the New York
State Financial Control Board (the "Control Board") to oversee the City's
financial affairs. The State also established the Office of the State Deputy
Comptroller for the City of New York ("OSDC") to assist the Control Board in
exercising its powers and responsibilities; and a "Control Period" from 1975
to 1986 during which the City was subject to certain statutorily-prescribed
fiscal-monitoring arrangements. Although the Control Board terminated the
Control Period in 1986 when certain statutory conditions were met, thus
suspending certain Control Board powers, the Control Board, MAC and OSDC
continue to exercise various fiscal-monitoring functions over the City, and
upon the occurrence or "substantial likelihood and imminence" of the occurrence
of certain events, including, but not limited to a City operating budget
deficit of more than $100 million, the Control Board is required by law to
reimpose a Control Period. Currently, the City and its Covered Organizations
(i.e., those which receive or may receive money from the City directly,
indirectly or contingently) operate under a four-year financial plan which the
City prepares annually and periodically updates.
Although the City has balanced its budget since 1981, estimates of the
City's revenues and expenditures, which are based on numerous assumptions, are
subject to various uncertainties. If, for example, expected Federal or State
aid is not forthcoming, if unforeseen developments in the economy significantly
reduce revenues derived from economically sensitive taxes or necessitate
increased expenditures for public assistance, if the City should negotiate wage
increases for its employees greater than the amounts provided for in the City's
financial plan or if other uncertainties materialize that reduce expected
revenues or increase projected expenditures, then, to avoid operating deficits,
the City may be required to implement additional actions, including increases
in taxes and reductions in essential City services. The City might also seek
additional assistance from the State.
On January 31, 1996, the City published the Financial Plan for the
1996-1999 fiscal years, which is a modification to a financial plan submitted
to the Control Board on July 11, 1995 (the "July Financial Plan") and which
relates to the City, the Board of Education ("BOE") and the City University of
New York ("CUNY"). The Financial Plan sets forth proposed actions by the City
for the 1996 fiscal year to close substantial projected budget gaps resulting
from lower than projected tax receipts and other revenues and greater than
projected expenditures. In addition to substantial proposed agency expenditure
reductions, the Financial Plan reflects a strategy to substantially reduce
spending for entitlements for the 1996 and subsequent fiscal years, and to
decrease the City's costs for Medicaid in the 1997 fiscal year and thereafter by
increasing the Federal share of Medicaid costs otherwise paid by the City. This
strategy is the subject of substantial debate, and implementation of this
strategy will be significantly affected by State and Federal budget proposals
currently being considered. The Financial Plan, which is consistent with the
City's preliminary budget for the 1997 fiscal year, may be changed significantly
by the time the budget for the 1997 fiscal year is adopted.
The July Financial Plan set forth proposed actions to close a previously
projected gap of approximately $3.1 billion for the 1996 fiscal year. The
proposed actions in the July Financial Plan for the 1996 fiscal year included
(i) a reduction in spending of $400 million, primarily affecting public
assistance and Medicaid payments by the City; (ii) agency reduction programs,
totaling $1.2 billion; (iii) transitional labor savings, totaling $600 million;
and (iv) the phase-in of the increased annual pension funding cost due to
revisions resulting from an actuarial audit of the City pension systems, which
would reduce such costs in the 1996 fiscal year. A modification to the July
Financial Plan published on November 29, 1995 (the "November Financial Plan")
included savings from a proposed refunding of outstanding debt and other
expenditure reductions to offset a $129 million increase in projected
expenditures.
The 1996-1999 Financial Plan published on January 31, 1996 reflects actual
receipts and expenditures and changes in forecast revenues and expenditures
since the November Financial Plan, and projects revenues and expenditures for
the 1996 fiscal year balanced in accordance with GAAP. For the 1996 fiscal
year, the Financial Plan includes actions to offset an additional $759 million
budget gap resulting primarily from (i) the failure of the Port Authority of
New York and New Jersey (the "Port Authority") to pay disputed back rent for
the City's airports in the amount included in the November Financial Plan, (ii)
shortfalls in Federal and State aid included in the November Financial Plan,
(iii) shortfalls in revenues and in amounts to be saved through gap-closing
actions at BOE, (iv) shortfalls in projected savings from cost containment
initiatives proposed in the July Financial Plan affecting public assistance and
Medicaid, and (v) the failure of the City and its labor unions to identify
assumed savings in the City's health benefits system. The gap-closing measures
for the 1996 fiscal year set forth in the Financial Plan include (i) additional
proposed agency actions aggregating $207 million, (ii) the receipt of $150
million from MAC, and (iii) the receipt of $120 million from the proposed sale
of mortgages, $75 million from increased revenues from the proposed sale of
City tax liens on real property and $207 million from the proposed sale of the
City's television station.
The receipt of funds from MAC is subject to approval of MAC, the sale of
the tax liens requires adoption of a local law by the City Council and the
proposed sale of the City's television station is subject to Federal regulatory
approval. In addition, the Federal budget negotiation process for the 1996
Federal fiscal year could result in a reduction in, or a delay in the receipt
of, Federal grants in the City's 1996 fiscal year. If such approvals are not
received on a timely basis, the City may be required to identify alternative
measures to balance its 1996 fiscal year budget.
The Financial Plan also sets forth projections for the 1997 through 1999
fiscal years and outlines a proposed gap-closing program to eliminate a
projected gap of $2.0 billion for the 1997 fiscal year, and to reduce projected
gaps of $3.3 billion and $4.1 billion for the 1998 and 1999 fiscal years,
respectively, assuming successful implementation of the gap-closing program for
the 1996 fiscal year. The projected gaps for the 1997 through 1999 fiscal years
have increased from the gaps projected in the November Financial Plan to
reflect (i) reductions in projected property taxes of $177 million, $294
million and $421 million in the 1997, 1998 and 1999 fiscal years, respectively,
due to a lower than forecast increase in the tentative assessment roll
published by the New York City Department of Finance, (ii) reductions in other
forecast tax revenues of $114 million, $216 million and $261 million in the
1997, 1998 and 1999 fiscal years, respectively, (iii) reductions in tax
revenues of $79 million, $224 million and $341 million in the 1997, 1998 and
1999 fiscal years, respectively, as a result of new tax reduction initiatives,
including a proposed sales tax exemption on clothing items under $500, and (iv)
increased agency expenditures.
The proposed gap-closing actions for the 1997 through 1999 fiscal years
include (i) additional agency actions, totalling between $643 million and $691
million in each of the 1997 through 1999 fiscal years; (ii) additional savings
resulting from State and Federal aid and cost containment in entitlement
programs to reduce City expenditures and increase revenues by $650 million in
the 1997 fiscal year and by $727 million in each of the 1998 and 1999 fiscal
years; (iii) additional proposed Federal aid of $50 million in the 1997 fiscal
year and State aid of $100 million in each of the 1997 through 1999 fiscal
years; (iv) the receipt of $300 million in the 1997 fiscal year from
privatization or other initiatives, including the sale of the City's parking
meters and associated revenues, which may require legislative action by the
City Council, or the sale of other assets; and (v) the assumed receipt of
revenues relating to rent payments for the City's airports, totaling $244
million, $226 million and $70 million in the 1997 through 1999 fiscal years,
respectively, which are currently the subject of a dispute with the Port
Authority and the collection of which may depend on the successful completion
of negotiations with the Port Authority or the enforcement of the City's
remedies under the leases through pending legal actions. The City is also
preparing an additional contingency gap-closing program for the 1997 fiscal
year to be comprised of $200 million in additional agency actions.
The Governor has released the 1996-1997 Executive Budget, which will be
considered for adoption by the State Legislature. The City estimates that the
1996-1997 Executive Budget provides the City with $173 million of savings from
Medicaid cost containment proposals and $127 million of savings from proposed
reductions in welfare spending in the 1997 fiscal year. The Financial Plan
assumes that the remaining $350 million of the $650 million of entitlement
reform benefits included in the Financial Plan for the 1997 fiscal year will be
generated by the State providing the City with a portion of the additional
funds received by the State as a result of the increased Federal share of
Medicaid costs proposed in the State Executive Budget. However, the State
Executive Budget does not currently contemplate sharing such funds with the
City. In addition, the President and Congress are currently considering budget
proposals for the 1996 Federal fiscal year. The Federal budget or other factors
may cause substantial amendments to the State Executive Budget.
The Federal and State budgets, when adopted, may result in substantial
reductions in revenues for the City, as well as a reduction in projected
expenditures in entitlement programs, including Medicare, Medicaid and welfare
programs. The Federal and State aid projected in the Financial Plan, and the
substantial savings assumed from cost containment in entitlement programs
included in the Financial Plan gap-closing program for the 1997 through 1999
fiscal years, will be significantly affected both by the outcome of the current
Federal budget negotiations and by the State budget proposals made by the
Governor and to be considered by the State Legislature. The nature and extent
of the impact on the City of the Federal and State budgets, when adopted, is
uncertain, and no assurance can be given that Federal or State actions included
in the Federal and State adopted budgets may not have a significant adverse
impact on the City's budget and its Financial Plan.
The projections for the 1996 through 1999 fiscal years reflect the costs
of the proposed settlement with the United Federation of Teachers ("UFT") and
the recent settlement with a coalition of unions headed by District Council 37
of the American Federation of State, County and Municipal Employees ("District
Council 37"), and assume that the City will reach agreement with its remaining
municipal unions under terms which are generally consistent with such
settlements which are discussed below. The projections for the 1996 through
1999 fiscal years also assume that BOE will be able to identify actions to
offset possible substantial shortfalls in Federal, State and City revenues.
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Contracts with all of the City's municipal unions expired in the 1995
and 1996 fiscal years. In November 1995 the City announced a tentative
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settlement with the UFT and a coalition of unions headed by District Council 37
which represent approximately two-thirds of the City's workforce. The
settlement provides for a wage freeze in the first two years, followed by a
cumulative effective wage increase of 11% by the end of the five year period
covered by the proposed agreements, ending in fiscal years 2000 and 2001.
Additional benefit increases would raise the total cumulative effective
increase to 13% above present costs. The Financial Plan reflects the costs
associated with the settlements, and assumes similar increases for all other
City-funded employees, which total $49 million, $459 million and $1.2 billion
in the 1997, 1998 and 1999 fiscal years, respectively. Such increases exceed
$2 billion in each fiscal year after the 1999 fiscal year. District Council
37 and Local 237, representing approximately 90,000 full-time employees, have
ratified the proposed settlement. On December 7, 1995, the members of the UFT
voted on the proposed settlement with the UFT. Six chapters of the UFT,
representing approximately 18,000 full-time employees, including teaching
paraprofessionals, voted to ratify the proposed settlement, which will apply
to those chapters if approved by BOE. Five chapters, representing
approximately 76,000 full-time employees, including teachers, voted not to
ratify the proposed settlement. A portion of the transitional labor savings
contained in the Financial Plan is dependent upon conclusion of collective
bargaining agreements with the City's workforce. There can be no assurance
that the City will reach an agreement with the chapters of the UFT which
rejected the proposed settlement on the terms contained in the Financial Plan.
In the event of a collective bargaining impasse, the terms of wage
settlements could be determined through statutory impasse procedures, which can
impose a binding settlement except in the case of collective bargaining with
the UFT, which may be subject to non-binding arbitration. On January 23, 1996,
the City requested the Office of Collective Bargaining to declare an impasse
against the Patrolmen's Benevolent Association ("PBA") and the United
Firefighters Association ("UFA").
From time to time, the Control Board staff, MAC, OSDC, the City
Comptroller and others issue reports and make public statements regarding the
City's financial condition, commenting on, among other matters, the City's
financial plans, projected revenues and expenditures and actions by the City to
eliminate projected operating deficits. Some of these reports and statements
have warned that the City may have underestimated certain expenditures and
overestimated certain revenues and have suggested that the City may not have
adequately provided for future contingencies. Certain of these reports have
analyzed the City's future economic and social conditions and have questioned
whether the City has the capacity to generate sufficient revenues in the future
to meet the costs of its expenditure increases and to provide necessary
services. It is reasonable to expect that reports and statements will continue
to be issued and to engender public comment.
It is expected that the staff of the Control Board will issue a report in
March 1996 reviewing the Financial Plan.
On February 29, 1996, the staff of the City Comptroller issued a report on
the Financial Plan. The report projects that there remains $408 million to
$528 million in budget risks for the 1996 fiscal year, before taking into
account the availability of $160 million in the General Reserve. The principal
risks for the 1996 fiscal year identified in the report include $140 million to
$190 million of uncertain revenues and projected savings at BOE and the receipt
by the City of $100 million to $130 million from a proposed MAC refunding. The
report also expressed concern as to whether the required regulatory approval
for the sale of the City's television station would be received before the end
of the 1996 fiscal year.
With respect to the 1997 fiscal year, the report states that the Financial
Plan includes total risks of between $2.05 billion and $2.15 billion. The
report notes that the gap-closing program for the 1997 fiscal year assumes the
implementation of highly uncertain State and Federal actions that would provide
between $1.2 billion and $1.4 billion in relief to the City resulting from
proposed public assistance and medical assistance entitlement reductions, a
proposed increase in Federal Medicaid reimbursements, additional State aid and
various privatization proposals. The report concludes that it is unlikely that
the City will be able to implement most of these initiatives due to Federal and
State budget difficulties. Additional risks for the 1997 fiscal year
identified in the report include (i) risks attributable to BOE relating to
unspecified additional State aid, unspecified expenditure reductions and
proposals to reduce special education spending, which total $415 million,
without taking into account potential reductions that will likely take place
upon adoption of the Federal and State budgets; (ii) proposals for the sale of
parking meters and other assets; and (iii) the receipt of $244 million to $294
million of lease payments from the Port Authority for the City's airports.
The report concluded that the magnitude of the budget risk for the 1997
fiscal year, after two years of large agency cutbacks and work force
reductions, indicates the seriousness of the City's continuing budget
difficulties, and that the Financial Plan will require substantial revision in
order to provide a credible program for dealing with the large projected budget
gap for the 1997 fiscal year. The report further notes that the relative
weakness of the national and City economies makes it unlikely that new jobs and
business expansion will generate significant additional tax revenues and that
proposed Federal and State reductions in funding will reduce the levels of
intergovernmental assistance for the City.
On March 6, 1996, the staff of the OSDC issued a report on the Financial
Plan. The report concluded that there remained a budget gap for the 1996
fiscal year of $44 million, which can be closed with the $200 million General
Reserve, and additional significant risks totalling $507 million involving
actions which require the approval of the State and Federal governments or
other third parties. These risks include (i) potential delays in the sale of
the City's television station; (ii) shortfalls in projected resources from MAC;
and (iii) shortfalls of $100 million in projected State education aid and $50
million in projected Federal assistance. In addition, the report expressed
concern that (i) the City may have to write off a portion of approximately $300
million in State education aid that was included as revenue in prior years'
budgets, since the State has not made payment and neither the current nor the
proposed State budget include an appropriation sufficient to cover most of this
liability, and (ii) the City must complete two transactions before the end of
the fiscal year, the sale of property tax liens and housing mortgages, that
together are expected to produce resources of $267 million.
The report also concluded that the gap for the 1997 fiscal year could be
$544 million greater than the City's projected budget gap of $2 billion,
primarily due to the failure of BOE to specify $304 million of expenditure
reductions or additional resources necessary to bring its spending in line with
the resources allocated to it in the Financial Plan. In addition, the report
noted that gap-closing proposals set forth in the Financial Plan totalling $1.6
billion are at high risk of falling short of target. The proposals identified
in the report as high risk include (i) $800 million in expected State and
Federal assistance, primarily from savings in social service entitlement
programs, which are dependent on the ultimate resolution of the Federal and
State budgets; (ii) $300 million from initiatives to privatize parking meters
and other City assets; (iii) $244 million to be received from the Port
Authority as retroactive lease payments for the City's two airports; and (iv)
$181 million in spending cuts for BOE. Moreover, the report expressed concern
that the potential for budget cuts at BOE could exceed $1 billion after taking
into account the possible loss of $453 million in proposed reductions in State
and Federal funding. The report also stated that non-recurring resources for
the 1996 fiscal year have increased to over $1.7 billion, approaching the
unprecedented $2 billion used in the 1995 fiscal year, and that one-third of
the 1997 fiscal year gap-closing program already relies on one-time resources.
With respect to the economy, the report noted that, in a time of slow
economic growth, revenues continue to stagnate, and that the City's economic
forecast, which is premised on sluggish national growth, does not reflect the
potential for a national recession during the four years of the Financial
Plan. In addition, the report expressed concern that the City's economy, and
City and State tax revenues, are closely tied to swings in the financial
markets, such as rising interest rates, which sharply reduced the profits of
securities firms in 1994, and rising equity markets, which raised personal
income and business tax collections in 1995, as well as economic conditions in
Europe and Japan, which are currently weak.
The report noted that Federal and State assistance is likely to be
significantly reduced and that there is little potential for significant new
revenues beyond those already reflected in the Financial Plan. The report
concluded that, despite the City's success in work force reduction and
entitlement savings, the Financial Plan shows an increasing imbalance between
the City's recurring revenues and expenditures.
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On December 12, 1995, the City Comptroller issued a report noting that the
capacity of the City to issue general obligation debt could be reduced in
future years. The report noted that, under the State constitution, the City is
permitted to issue debt in an amount not greater than 10% of the average full
value of taxable real estate for the current year and preceding four years.
The report concluded that, if the value of taxable real property in each of
1998 and 1999 fiscal years continues to decline, reflecting the continuing
trend of lower values of taxable property, the City would have to continue to
curtail its capital program from the levels projected in the Financial Plan to
remain within the legal debt-incurring limit in those years. The City
Comptroller recommended that the City prioritize and improve the efficiency and
administration of its current capital plan to determine which capital projects
can be delayed or cancelled to further reduce capital expenditures and thus
debt service over the course of the Financial Plan.
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On October 9, 1995, Standard & Poor's issued a report which concluded that
proposals to replace the graduated Federal income tax system with a "flat" tax
could be detrimental to the creditworthiness of certain municipal bonds. The
report noted that the elimination of Federal income tax deductions currently
available, including residential mortgage interest, property taxes and state
and local income taxes, could have a severe impact on funding methods under
which municipalities operate. With respect to property taxes, the report noted
that the total valuation of a municipality's tax base is affected by the
affordability of real estate and that elimination of mortgage interest
deduction would result in a significant reduction in
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47
affordability and, thus, in the demand for, and the valuation of, real estate.
The report noted that rapid losses in property valuations would be felt by many
municipalities, hurting their revenue raising abilities. In addition, the
report noted that the loss of the current deduction for real property and state
and local income taxes from Federal income tax liability would make rate
increases more difficult and increase pressures to lower existing rates, and
that the cost of borrowing for municipalities could increase if the tax-exempt
status of municipal bond interest is worth less to investors. Finally, the
report noted that tax anticipation notes issued in anticipation of property
taxes could be hurt by the imposition of a flat tax, if uncertainty is
introduced with regard to their repayment revenues, until property values fully
reflect the loss of mortgage and property tax deductions.
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The City since 1981 has fully satisfied its seasonal financing needs in
the public credit markets, repaying all short-term obligations within their
fiscal year of issuance. The City's current monthly cash flow forecast for the
1996 fiscal year shows a need of $2.4 billion of seasonal financing for the
1996 fiscal year, a portion of which will be met with the proceeds of notes.
Seasonal financing requirements for the 1995 fiscal year increased to $2.2
billion from $1.75 billion and $1.4 billion in the 1994 and 1993 fiscal years,
respectively. The delay in the adoption of the State's budget for its 1992
fiscal year required the City to issue $1.25 billion in short-term notes on May
7, 1991, and the delay in the adoption of the State's budget for its 1991
fiscal year required the City to issue $900 million in short-term notes on May
15, 1990. Seasonal financing requirements were $2.25 billion and $3.65 billion
in the 1992 and 1991 fiscal years, respectively.
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The 1996-1999 Financial Plan is based on numerous assumptions, including
the condition of the City's and the region's economy and a modest employment
recovery and the concomitant receipt of economically sensitive tax revenues in
the amounts projected. The 1996-1999 Financial Plan is subject to various
other uncertainties and contingencies relating to, among other factors, the
extent, if any, to which wage increases for City employees exceed the annual
wage costs assumed for the 1996 through 1999 fiscal years; continuation of
interest earnings assumptions for pension fund assets and current assumptions
with respect to wages for City employees affecting the City's required pension
fund contributions; the willingness and ability of the State, in the context of
the State's current financial condition, to provide the aid contemplated by the
Financial Plan and to take various other actions to assist the City, including
the proposed entitlement spending reductions; the ability of HHC, BOE and other
such agencies to maintain balanced budgets; the willingness of the Federal
government to provide the amount of Federal aid contemplated in the Financial
Plan; adoption of the City's budgets by the City Council in substantially the
forms submitted by the Mayor; the ability of the City to implement proposed
reductions in City personnel and other cost reduction initiatives and the
success with which the City controls expenditures; approval by MAC of the
projected receipt of funds from MAC; the impact of conditions in the real estate
market on real estate tax revenues; the City's ability to market its securities
successfully in the public credit markets; and unanticipated expenditures that
may be incurred as a result of the need to maintain the City's infrastructure.
Certain of these assumptions have been questioned by the City Comptroller and
other public officials.
On June 7, 1995, the State adopted its Budget for the State's 1996 fiscal
year, commencing April 1, 1995. Prior to adoption of the budget the State had
projected a potential budget gap of approximately $5 billion for its 1996
fiscal year. This gap is projected to be closed in the 1995-1996 State
Financial Plan based on the enacted budget, through a series of actions, mainly
spending reductions and cost containment measures and certain reestimates that
are expected to be recurring, but also through the use of one-time solutions.
The State Financial Plan projects (i) nearly $1.6 billion in savings from cost
containment, disbursement reestimates, and other savings in social welfare
programs, including Medicaid, income maintenance and various child and family
care programs; (ii) $2.2 billion in savings from State agency actions to reduce
spending on the State workforce, SUNY and CUNY, mental hygiene programs,
capital projects, the prison system and fringe benefits; (iii) $300 million in
savings from local assistance reforms, including actions affecting school aid
and revenue sharing while proposing program legislation to provide relief from
certain mandates that increase local spending; (iv) over $400 million in
revenue measures, primarily a new Quick Draw Lottery game, changes to tax
payment schedules, and the sale of assets; and (v) $300 million from
reestimates in receipts.
On January 30, 1996, the State issued an update to the 1995-1996 state
Financial Plan. These projections show continued balance in the State's
1995-1996 Financial Plan.
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A significant risk to the State's projections arises from tax legislation
under consideration by Congress and the President. Congressionally-adopted
retroactive changes to Federal tax treatment of capital gains would flow
through automatically to the State personal income tax. Such changes, if
ultimately enacted, could produce revenue losses in both the 1995-1996 fiscal
year and the 1996-1997 fiscal year. In addition, changes in Federal aid
programs, currently pending in Congress, could result in prolonged
interruptions in the receipt of Federal grants. According to the State
Division of the Budget, the major remaining uncertainties in the 1995-1996
State Financial Plan continue to be those related to the economy and tax
collections, which could produce either favorable or unfavorable variances
during the balance of the year.
The Governor presented his 1996-1997 Executive Budget to the Legislature
on December 15, 1995. The Governor may amend his budget up to 30 days after
its submission. The Legislature and the Comptroller will review the Governor's
Executive Budget and are expected to comment on it. There can be no assurance
that the Legislature will enact the Executive Budget into law, or that the
State's adopted budget projections will not differ materially and adversely
from the projections set forth in the Executive Budget.
The Governor's Executive Budget projects balance on a cash basis in the
General Fund. It reflects a continuing strategy of substantially reduced State
spending, including program restructurings, reductions in social welfare
spending, and efficiency and productivity initiatives. Total General Fund
receipts and transfers from other funds are projected to be $31.3 billion, a
decrease of $1.4 billion from total receipts projected in the current fiscal
year. Total General Fund disbursements and transfers to other funds are
projected to be $31.2 billion, a decrease of $1.5 billion from spending totals
projected for the current fiscal year.
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52
The 1996-1997 Executive Budget proposes $3.9 billion in actions to balance
the 1996-97 State Financial Plan. The Executive Budget proposes to close this
gap primarily through a series of spending reductions and cost containment
measures. The Executive Budget projects (i) over $1.8 billion in savings from
cost containment and other actions in social welfare programs, including
Medicaid, welfare and various health and mental health programs; (ii) $1.3
billion in savings from a reduced State General Fund share of Medicaid made
available from anticipated changes in the Medicaid program, including an
increase in the Federal share of Medicaid, (iii) over $450 million in savings
from reforms and cost avoidance in educational services (including school aid
and higher education), while providing fiscal relief from certain State
mandates that increase local spending; and (iv) $350 million in savings from
efficiencies and reductions in other State programs. The State has noted that
there is considerable uncertainty as to the ultimate composition of the Federal
budget, including uncertainties regarding major Federal entitlement reforms.
The 1996-1997 Executive Budget seeks to lessen the effect of the proposed cuts
on localities by granting certain mandate relief to permit them to exercise
greater flexibility in allocating their resources. However, no assurance can
be given as to the amount of savings which the City might realize from any of
the Medicaid cost containment or welfare reform measures proposed in the
Executive Budget or the size of any reductions in State aid to the City.
Depending upon the amount of such savings or the size of any such reduction in
State aid, the City might be required to make substantial additional changes in
the Financial Plan.
The State Division of the Budget has noted that the economic and financial
condition of the State may be affected by various financial, social, economic
and political factors. Those factors can be very complex, can vary from fiscal
year to fiscal year, and are frequently the result of actions taken not only by
the State but also by entities, such as the Federal government, that are
outside the State's control. Because of the uncertainty and unpredictability
of these changes, their impact cannot be included in the assumptions underlying
the State's projections at this time. There can be no assurance that the State
economy will not experience results that are worse than predicted, with
corresponding material and adverse effects on the State's financial
projections.
To make progress toward addressing recurring budgetary imbalances, the
1996-97 Executive Budget proposes significant actions to align recurring
receipts and disbursements in future fiscal years. However, there can be no
assurance that the Legislature will enact the Governor's proposals or that the
State's actions will be sufficient to preserve budgetary balance or to align
recurring receipts and disbursements in future fiscal years. The 1996-1997
Executive Budget includes actions that will have an impact on receipts and
disbursements in future fiscal years. The net impact of these actions is
expected to produce a potential imbalance in State fiscal year 1997-98 of $1.4
billion and in the 1998-99 fiscal year of $2.5 billion, assuming implementation
of the 1996-97 Executive Budget recommendations. It is expected that the
Governor will propose to close these budget gaps with future spending
reductions.
Uncertainties with regard to both the economy and potential decisions at
the Federal level add further pressure on future budget balance in New York
State. For example, various proposals relating to Federal tax and spending
policies could, if enacted, have a significant impact on the State's financial
condition in the current and future fiscal years. Specific budget and tax
proposals under consideration at the Federal level but not included in the
State's 1996-1997 Executive Budget forecast could also have a
disproportionately negative impact on the longer-term outlook for the State's
economy as compared to other states.
In the State's 1996 fiscal year and in certain recent fiscal years, the
State has failed to enact a budget prior to the beginning of the State's fiscal
year. A delay in the adoption of the State's budget beyond the statutory April
1 deadline could delay the projected receipt by the City of State aid, and
there can be no assurance that State budgets in future fiscal years will be
adopted by the April 1 statutory deadline. In the event that a State budget is
not adopted by the statutory deadline of April 1, 1996, temporary spending
measures may be adopted by the State pending the adoption of a Federal budget.
The projections and assumptions contained in the 1996-1999 Financial Plan
are subject to revision which may involve substantial change, and no assurance
can be given that these estimates and projections, which include actions which
the City expects will be taken but which are not within the City's control,
will be realized. Changes in major assumptions could significantly affect the
City's ability to balance its budget as required by State law and to meet its
annual cash flow and financing requirements. The City's projections are
subject to the City's ability to implement the necessary service and personnel
reduction programs successfully.
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The City is a defendant in a significant number of lawsuits. Such
litigation includes, but is not limited to, actions commenced and claims
asserted against the City arising out of alleged constitutional violations,
alleged torts, alleged breaches of contracts and other violations of law and
condemnation proceedings. While the ultimate outcome and fiscal impact, if
any, on the proceedings and claims are not currently predictable, adverse
determinations in certain of them might have a material adverse effect upon the
City's ability to carry out the 1996-99 Financial Plan. The City is a party to
numerous lawsuits and is the subject of numerous claims and investigations.
The City has estimated that its potential future liability on account of
outstanding claims against it as of June 30, 1995 amounted to approximately
$2.5 billion. This estimate was made by categorizing the various claims and
applying a statistical model, based primarily on actual settlements by type of
claim during the preceding ten fiscal years, and by supplementing the estimated
liability with information supplied by the City's Corporation Counsel.
On July 10, 1995, S&P revised downward its rating on City general
obligation bonds from A- to BBB+ and removed City bonds from CreditWatch. S&P
stated that "structural budgetary balance remains elusive because of persistent
softness in the City's economy, highlighted by weak job growth and a growing
dependence on the historically volatile financial services sector". Other
factors identified by S&P in lowering its rating on City bonds included a trend
of using one-time measures, including debt refinancings, to close projected
budget gaps, dependence on unratified labor savings to help balance the
Financial Plan, optimistic projections of additional federal and State aid or
mandate relief, a history of cash flow difficulties caused by State budget
delays and continued high debt levels.
Fitch Investors Service, Inc. ("Fitch") rates City general obligation bonds
A-. Moody's rating for City general obligation bonds is Baa1. On March 1, 1996,
Moody's put the City's Baa1 general obligation bond rating under review for a
possible downgrade. Moody's ratings of City bonds were revised in November 1981
from B (in effect since 1977) to Ba1, in November 1983 to Baa, in December 1985
to Baa1, in May 1988 to A and again in February 1991 to Baa1. On March 1, 1996,
Moody's stated that the rating for City general obligation bonds Baa1 rating
remains under review pending the outcome of the adoption of the City's budget
for the 1997 fiscal year and in light of the status of the debate on public
assistance and Medicaid reform; the enactment of a State budget, upon which
major assumptions regarding State aid are dependent, which may be extensively
delayed; and the seasoning of the City's economy with regard to its strength and
direction in the face of a potential national economic slowdown. Since July 15,
1993, Fitch has rated City bonds A-. On February 28, 1996, Fitch placed the
City's general obligation bonds on FitchAlert with negative implications. On
February 28, 1996, Fitch Investor's Service put New York City's A- general
obligation bond rating on negative FitchAlert following Moody's announcement.
There is no assurance that such ratings will continue for any given period of
time or that they will not be revised downward or withdrawn entirely. Any such
downward revision or withdrawal could have an adverse effect on the market
prices of the City's general obligation bonds.
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In 1975, S&P suspended its A rating of City bonds. This
suspension remained in effect until March 1981, at which time the City received
an investment grade rating of BBB from S&P. On July 2, 1985,
S&P revised its rating of City bonds upward to BBB+ and on
November 19, 1987, to A-. On July 10, 1995, S&P revised its rating of City
bonds downward to BBB+, as discussed above. Moody's ratings of City bonds were
revised in November 1981 from B (in effect since 1977) to Ba1, in November 1983
to Baa, in December 1985 to Baa1, in May 1988 to A and again in February 1991 to
Baa1. Since July 15, 1993, Fitch has rated City bonds A-. On July 12, 1995,
Fitch stated that the City's credit trend remains "declining."
INVESTMENT LIMITATIONS
Unless otherwise indicated, the investment restrictions described below as
well as those described under "Investment Limitations" in the Prospectus are
fundamental policies which may be changed only when permitted by law, if
applicable, and approved by the holders of a majority of the applicable Fund's
outstanding voting securities, which, as defined by the 1940 Act, means the
lesser of (i) 67% of the shares represented at a meeting at which more than 50%
of the outstanding shares are represented or (ii) more than 50% of the
outstanding shares. Except for (i) the investment restrictions 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(s) as
described in the Prospectus, the other policies and percentage limitations
referred to in this Statement of Additional Information and the Prospectus are
not fundamental policies of the Funds and may be changed by the applicable
Fund's Board of Directors without shareholder approval.
If a percentage restriction on investment or use of assets set forth below
is adhered to at the time a transaction is effected, later changes in
percentages resulting from changing values will not be considered a violation.
CASH MANAGEMENT FUND. The Cash Management Fund may not:
(1) purchase any securities which would cause more than 25% of the value
of its total assets at the time of such purchase to be invested in securities
of one or more issuers conducting their principal business activities in the
same industry, provided that there is no limitation with respect to investment
in obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities, with respect to bank obligations or with respect to
repurchase agreements collateralized by any of such obligations (the
fundamental policy of the Fund to invest at least 25% of its assets in bank
obligations is described under "Investment Limitations" in the Prospectus);
(2) own more than 10% of the outstanding voting stock or other
securities, or both, of any one issuer (other than securities of the U.S.
government or any agency or instrumentality thereof);
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55
(3) purchase shares of other investment companies (except as part of a
merger, consolidation or reorganization or purchase of assets approved by the
Fund's shareholders), provided that the Fund may purchase shares of any
registered open-end investment company that determines its net asset value per
share based on the amortized cost-or penny-rounding method, if immediately
after any such purchase the Fund does not (a) own more than 3% of the
outstanding voting stock of any one investment company, (b) invest more than 5%
of the value of its total assets in any one investment company, or (c) invest
more than 10% of the value of its total assets in the aggregate in securities
of investment companies;
(4) purchase securities on margin (except for delayed delivery or
when-issued transactions or such short-term credits as are necessary for the
clearance of transactions);
(5) sell securities short;
(6) purchase or sell commodities or commodity contracts, including
futures contracts;
(7) invest for the purposes of exercising control over management of any
company;
(8) make loans, except that the Fund may (a) purchase and hold debt
instruments (including bonds, debentures or other obligations and certificates
of deposit, banker's acceptances and fixed time deposits) in accordance with
its investment objectives and policies; and (b) enter into repurchase
agreements with respect to portfolio securities;
(9) underwrite the securities of other issuers, except to the extent that
the purchase of investments directly from the issuer thereof and later
disposition of such securities in accordance with the Fund's investment program
may be deemed to be an underwriting;
(10) purchase real estate or real estate limited partnership interests
(other than money market securities secured by real estate or interests therein
or securities issued by companies that invest in real estate or interests
therein);
(11) invest directly in interests in oil, gas or other mineral
exploration development programs or mineral leases; or
(12) purchase warrants.
With respect to the Cash Management Fund, for the purpose of applying the
above percentage restrictions and the percentage investment limitations set
forth in the Prospectus to receivables-backed obligations, both the special
purpose entity issuing the receivables-backed obligations and the issuer of the
underlying receivables will be considered an issuer.
NEW YORK MUNICIPAL BOND FUND. The New York Municipal Bond Fund may not:
(1) purchase any securities which would cause more than 25% of the value
of its total assets at the time of such purchase to be invested in securities
of one or more issuers conducting their principal business activities in the
same industry, provided that there is no
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limitation with respect to investment in obligations issued or guaranteed by
the U.S. government, its agencies or instrumentalities or by any state,
territory or 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;
(2) own more than 10% of the outstanding voting stock or other
securities, or both, of any one issuer (other than securities of the U.S.
government or any agency or instrumentality thereof), provided, however, that
up to 25% of the assets of the Fund may be invested without regard to this
limitation;
(3) purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments (except for purchasing or selling
futures contracts or from investing in securities or other instruments backed
by physical commodities);
(4) make loans, except that the Fund may (a) purchase and hold debt
instruments (including bonds, debentures or other obligations and certificates
of deposit, banker's acceptances and fixed time deposits) in accordance with
its investment objective and policies; and (b) enter into repurchase agreements
with respect to portfolio securities;
(5) 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;
(6) purchase real estate or real estate limited partnership interests
(other than securities secured by real estate or interests therein or
securities issued by companies that invest in real estate or interests
therein);
(7) purchase more than 3% of the stock of another investment company, or
purchase stock of other investment companies equal to more than 5% of the
Fund's net assets in the case of any one other investment company and 10% of
such net assets in the case of all other investment companies in the aggregate.
This restriction shall not apply to investment company securities received or
acquired by the Fund pursuant to a merger or plan or reorganization. (The
return on such investments will be reduced by the operating expenses, including
investment advisory and administrative fees of such investment funds and will
be further reduced by the Fund's expenses, including management fees);
(8) 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);
(9) sell securities short (except for short positions in a futures
contract or forward contract);
(10) invest for the purposes of exercising control over management of any
company;
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57
(11) invest directly in interests in oil, gas or other mineral
exploration development programs or mineral leases;
(12) purchase warrants;
(13) invest more than 15% of its net assets in securities which are
illiquid; or
(14) 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 the second investment restriction in the Prospectus.
Investment restrictions (1) through (6) described above and in the
Prospectus are fundamental policies of the New York Municipal Bond Fund.
Restrictions (7) through (14) are non-fundamental policies of the Fund.
NATIONAL INTERMEDIATE MUNICIPAL FUND, U.S. GOVERNMENT INCOME FUND, HIGH
YIELD BOND FUND, STRATEGIC BOND FUND, TOTAL RETURN FUND AND ASIA GROWTH FUND.
Each of the National Intermediate Municipal Fund, U.S. Government Income Fund,
High Yield Bond Fund, Strategic Bond Fund, Total Return Fund and Asia Growth
Fund may not:
(1) underwrite securities of other issuers, except to the extent that the
purchase of investments directly from the issuer thereof or from an underwriter
for an issuer and the later disposition of such securities in accordance with a
Fund's investment program may be deemed to be an underwriting;
(2) purchase or sell real estate, although a Fund may purchase and sell
securities of companies which deal in real estate, may purchase and sell
marketable securities which are secured by interests in real estate and may
invest in mortgages and mortgage-backed securities;
(3) purchase or sell commodities or commodity contracts except that a
Fund may engage in hedging and derivative transactions to the extent permitted
by its investment policies as stated in the Prospectus and this Statement of
Additional Information;
(4) make loans, except that (a) a Fund may purchase and hold debt
securities in accordance with its investment objective(s) and policies, (b) a
Fund may enter into repurchase agreements with respect to portfolio securities,
subject to applicable limitations of its investment policies, (c) a Fund may
lend portfolio securities with a value not in excess of one-third of the value
of its total assets, provided that collateral arrangements with respect to
options, forward currency and futures transactions will not be deemed to
involve loans of securities, and (d) delays in the settlement of securities
transactions will not be considered loans;
(5) purchase the securities of other investment companies except as
permitted under the 1940 Act or in connection with a merger, consolidation,
acquisition or reorganization;
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(6) purchase securities on margin (except for delayed delivery or
when-issued transactions or such short-term credits as are necessary for the
clearance of transactions, and except for initial and variation margin payments
in connection with purchases or sales of futures contracts);
(7) sell securities short (except for short positions in a futures
contract or forward contract);
(8) purchase or retain any securities of an issuer if one or more persons
affiliated with a Fund owns beneficially more than 1/2 of 1% of the outstanding
securities of such issuer and such affiliated persons so owning 1/2 of 1%
together own beneficially more than 5% of such securities;
(9) invest in oil, gas and other mineral leases, provided, however, that
this shall not prohibit a Fund from purchasing publicly traded securities of
companies engaging in whole or in part in such activities;
(10) except for the Asia Growth Fund, 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 the issuer's total assets;
(11) purchase securities of issuers which it is restricted from selling
to the public without registration under the 1933 Act if by reason thereof the
value of its aggregate investment in such classes of securities will exceed 10%
of its total assets, provided, however, that this limitation shall not apply to
Rule 144A securities;
(12) invest more than 5% of its total assets in securities of unseasoned
issuers (other than securities issued or guaranteed by U.S. federal or state or
foreign governments or agencies, instrumentalities or political subdivisions
thereof) which, including their predecessors, have been in operation for less
than three years;
(13) purchase puts, calls, straddles, spreads and any combination thereof
if by reason thereof the value of its aggregate investment in such classes of
securities will exceed 5% of its total assets;
(14) invest in warrants (other than warrants acquired by a Fund as part
of a unit or attached to securities at the time of purchase) if, as a result,
the investments (valued at the lower of cost or market) would exceed 5% of the
value of the Fund's net assets or if, as a result, more than 2% of the Fund's
net assets would be invested in warrants that are not listed on AMEX or NYSE;
or
(15) invest for the purpose of exercising control over the management of
any company.
Investment restrictions (1) through (5) described above are fundamental
policies of each of the National Intermediate Municipal Fund, U.S. Government
Income Fund, High Yield
<PAGE> 190
59
Bond Fund, Strategic Bond Fund, Total Return Fund and Asia Growth Fund.
Restrictions (6) through (15) are non-fundamental policies of such Fund.
For the purposes of the investment limitations applicable to the New York
Municipal Bond Fund and the National Intermediate Municipal Fund, the
identification of the issuer of a municipal obligation depends on the terms and
conditions of the obligation. If the assets and revenues of an agency,
authority, instrumentality, or other political subdivision are separate from
those of the government creating the subdivision and the obligation is backed
only by the assets and revenues of the subdivision, such subdivision would be
regarded as the sole issuer. Similarly, in the case of a private activity
bond, if the bond is backed only by the assets and revenues of the
non-governmental user, such non-governmental user would be regarded as the sole
issuer. If in either case the creating government or another entity guarantees
an obligation, the guarantee would be considered a separate security and
treated as an issue of such government or entity.
INVESTORS FUND. The Investors Fund may not:
(1) purchase any securities on margin (except that the Fund may make
deposits in connection with transactions in options on securities), make any
so-called "short" sales of securities or participate in any joint or joint and
several trading accounts;
(2) act as underwriter of securities of other issuers;
(3) purchase the securities of another investment company or investment
trust except in the open market where no profit to a sponsor or dealer, other
than the customary broker's commission, results from such purchase (but the
aggregate of such investments shall not be in excess of 10% of the net assets
of the Fund), or except when such purchase is part of a plan of merger or
consolidation;
(4) buy securities from, or sell securities to, any of its officers,
directors, employees, investment manager or distributor, as principals;
(5) purchase or retain any securities of an issuer if one or more
persons affiliated with the 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;
(6) purchase real estate (not including investments in securities issued
by real estate investment trusts) or commodities or commodity contracts,
provided that the Fund may enter into futures contracts, including futures
contracts on interest rates, stock indices and currencies, and options thereon,
and may engage in forward currency transactions and buy, sell and write options
on currencies;
(7) invest in warrants (other than warrants acquired by the Investors
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 Investors Fund's net assets
<PAGE> 191
60
or if, as a result, more than 2% of the Investors Fund's net assets would be
invested in warrants that are not listed on AMEX or NYSE;
(8) invest in oil, gas and other mineral leases, provided, however, that
this shall not prohibit the Investors Fund from purchasing publicly traded
securities of companies engaging in whole or in part in such activities; or
(9) purchase or sell real property (including limited partnership
interests) except to the extent described in investment restriction number 6
above.
Investment restrictions (1) through (6) described above are fundamental
policies of the Investors Fund. Restrictions (7) through (9) are
non-fundamental policies of the Investors Fund.
MANAGEMENT
DIRECTORS AND OFFICERS
The principal occupations of the directors and executive officers of the
Series Funds and the Investors Fund for the past five years are listed below.
The address of each, unless otherwise indicated, is Seven World Trade Center,
New York, New York 10048. Certain of the directors and officers are also
directors and officers of one or more other investment companies for which
SBAM, the Fund's investment manager, acts as investment adviser.
SERIES FUNDS (OF WHICH THE CASH MANAGEMENT FUND, THE NEW YORK MUNICIPAL
BOND FUND, THE NATIONAL INTERMEDIATE MUNICIPAL FUND, THE U.S. GOVERNMENT INCOME
FUND, THE HIGH YIELD BOND FUND, THE STRATEGIC BOND FUND, THE TOTAL RETURN FUND
AND THE ASIA GROWTH FUND ARE SEPARATE PORTFOLIOS.)
<TABLE>
<CAPTION>
POSITION WITH THE PRINCIPAL OCCUPATIONS DURING PAST 5
NAME, ADDRESS AND AGE COMPANY YEARS AND OTHER AFFILIATIONS
<S> <C> <C>
Charles F. Barber(2) Director Consultant; formerly Chairman of the
66 Glenwood Drive 66 Glenwood Drive Board, ASARCO
Greenwich, CT 06830 Incorporated.
Age: 79
Carol L. Colman (2) Director President, Colman Consulting Co.,
Consulting Co., Inc. Colman Inc.; formerly Managing
P.O. 212 Partner of Inferential Focus Inc.
North Salem, NY 10560
Age: 50
</TABLE>
<PAGE> 192
61
<TABLE>
<S> <C> <C>
Daniel P. Cronin(2) Director Vice President and General Counsel,
Pfizer, Inc Pfizer International Inc since 1987;
235 East 42nd Street Senior Assisting General Counsel,
New York, NY 10017 Pfizer, Inc since 1989.
Age: 50
Michael S. Hyland(1) Director and President President, SBAM and Managing
Age: 50 Director, Salomon Brothers Inc since
1989; formerly Managing Director,
First Boston Asset Managing Corp.
and Managing Director, First Boston
Corporation.
Giampaolo G. Guarnieri Executive Vice President Vice President and Portfolio
Salomon Brothers Asset Manager, SBAM AP Since April 1995;
Management Asia Pacific Limited formerly Senior Portfolio Investment
Three Exchange Square, Hong Kong Manager, Credit Agricole Asset
Age: 32 Management (South East Asia) Limited
since 1992 and head of direct
investment activities from 1990-1992.
Steven Guterman Executive Vice President Managing Director, SBAM and Salomon
Age: 42 Brothers Inc since January 1996;
formerly Vice President, SBAM and
Salomon Brothers Inc.
Peter J. Wilby Executive Vice President Managing Director, SBAM and Salomon
Age: 37 Brothers Inc since January 1996;
formerly Vice President, SBAM and
Salomon Brothers Inc.
Richard E. Dahlberg Executive Vice President Managing Director, SBAM and Salomon
Age: 58 Brothers Inc since January 1996;
formerly Vice President, SBAM and
Salomon Brothers Inc since June
1995; prior to that employed by
Massachusetts Financial Services
Company.
Lawrence H. Kaplan Executive Vice President Vice President and Chief Counsel,
Age: 39 and General Counsel SBAM and Vice President, Salomon
Brothers Inc since May 1995;
formerly Senior Vice President,
Director and General Counsel, Kidder
Peabody Asset Management, Inc. and
Senior Vice President, Kidder,
Peabody & Co. Incorporated since
November 1990.
Nancy Noyes Vice President Director, SBAM and Salomon Brothers
Age: 38 Inc; formerly Vice President, SBAM
and Salomon Brothers Inc.
</TABLE>
<PAGE> 193
62
<TABLE>
<S> <C> <C>
Eliza Lau Vice President Vice President, SBAM since 1995;
Age: 33 previously research analyst, Salomon
Brothers Inc.
Alan M. Mandel Treasurer Vice President, SBAM since January
Age: 38 1995; formerly Chief Financial
Officer, Hyperion Capital Management
since 1991; prior to which he was
Vice President, Mitchell Hutchins
Asset Management ("MHAM").
Tana E. Tselepis Secretary Compliance Officer, SBAM since 1993
Age: 60 and Senior Administrator since 1989;
Vice President, Salomon Brothers Inc
since 1991; formerly Vice President
and Senior Administrator, First
Boston Asset Management Corp. since
1985.
Reji Paul Assistant Treasurer Investment Accounting Manager, SBAM
Age: 33 since 1995; formerly Assistant Vice
President, MHAM, since 1994; prior
to which he was Supervisor of MHAM.
Janet Tolchin Assistant Treasurer Investment Accounting Manager, SBAM.
Age: 37
Jennifer G. Muzzey Assistant Secretary Employee of SBAM since June 1994;
Age: 36 formerly Vice President of
SunAmerica Asset Management
Corporation.
</TABLE>
- ----------------
1. Interested person as defined in the 1940 Act.
2. Audit Committee Member.
COMPENSATION TABLE
The following table provides information concerning the compensation paid
during the fiscal year ended December 31, 1995 to each director of the Series
Funds. The Series Funds does not provide any pension or retirement benefits to
directors. In addition, no remuneration was paid during the fiscal year ended
December 31, 1995 by the Series Funds to officers of the Fund or to Mr.
Hyland, who as an employee of SBAM may be defined as an "interested person"
under the 1940 Act.
<PAGE> 194
63
<TABLE>
<CAPTION>
Aggregate Total Compensation from
Name of Person, Compensation Other Funds
Position from the Fund Advised by SBAM (A) Total Compensation (A)
- -------- ------------- ------------------- ----------------------
<S> <C> <C> <C>
Charles F. Barber $ 4,326 $110,149(12) $114,475(13)
Director
Carol Colman $ 4,416 $ 28,250(3) $ 32,666(4)
Director
Daniel P. Cronin $ 3,544 $ 26,399(3) $ 29,943(4)
Director
</TABLE>
- -----------
(A) The numbers in parenthesis indicate the applicable number of investment
company directorships held by that director.
<PAGE> 195
64
INVESTORS FUND
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS DURING PAST 5
NAME, ADDRESS AND AGE POSITION WITH THE COMPANY YEARS AND OTHER AFFILIATIONS
<S> <C> <C>
Charles F. Barber(2) Director Consultant; formerly Chairman of the
66 Glenwood Drive Board, ASARCO Incorporated.
Greenwich, CT 06830
Age: 79
Andrew L. Breech Director President, Dealer Operating Control
2120 Wilshire Boulevard Service, Inc.
Suite 400
Santa Monica, CA 90403
Age: 43
Thomas W. Brock(1) Director Chairman and Chief Executive
Age: 48 Officer, Salomon Brothers Asset
Management Inc; Managing Director of
Salomon Brothers Inc.
Carol L. Colman (2) Director President, Colman Consulting Co.,
Consulting Co., Inc. Colman Inc.; formerly Managing
P.O. 212 Partner of Inferential Focus Inc.
North Salem, NY 10560
Age: 50
William R. Dill(3) Director Consultant; formerly Director,
25 Birch Lane Office of Global Enterprise and
Cumberland Foreside Adjunct professor, University of
Maine 04110 Southern Maine; prior to which he
Age: 65 was President, Babson College.
Michael S. Hyland(1) Director and President President, SBAM and Managing
Age: 50 Director, Salomon Brothers Inc since
1989; formerly Managing Director,
First Boston Asset Managing Corp.
and Managing Director, First Boston
Corporation.
Clifford M. Kirtland, Jr. (3) Director Formerly Chairman of the Board and
9 North Parkway Square President of Cox Communications
4200 Northside Pkwy, N.W. Inc.; Director CSX Corp., Oxford
Atlanta, GA 30327 Industries, Shaw Industries, Inc.,
Age: 72 Graphic Industries, Inc.
</TABLE>
<PAGE> 196
65
<TABLE>
<S> <C> <C>
Robert W. Lawless Director President and Chief Executive
Box 4349 Officer, Texas Tech University and
Lubbock, TX 79409 Texas Tech University Health
Age: 58 Sciences Center; formerly Executive
Vice President and Chief Operating
Officer, Southwest Airlines Corp.;
Director, Central & Southwest Corp.
Louis P. Mattis Director Chairman and President, Sterling
0024 Harlston Green, No. 31 Winthrop Inc. (pharmaceutical
SnowMass Village, CO 81615 company); formerly Executive Vice
Age: 54 President of Richardson - Vicks,
Inc.
Thomas F. Schlafly (2)(3) Director Of counsel to Peper, Martin, Jensen,
720 Olive Street Maichel & Hetlage (law firm);
St. Louis, Missouri 63101 President, The Saint Louis Brewery,
Age: 47 Inc.
Richard E. Dahlberg Executive Vice President Managing Director, SBAM and Salomon
Age: 58 Brothers Inc since January 1996;
formerly Vice President, SBAM and
Salomon Brothers Inc since June
1995; prior to that employed by
Massachusetts Financial Services
Company.
Allan R. White, III Executive Vice President Director, SBAM and Salomon Brothers
Age: 36 Inc since 1992; formerly Vice
President, SBAM and Salomon Brothers
Inc; prior to which he was Vice
President, First Boston Corporation.
Lawrence H. Kaplan Executive Vice President Vice President and Chief Counsel,
Age: 39 and General Counsel SBAM and Vice President, Salomon
Brothers Inc since May 1995;
formerly Senior Vice President,
Director and General Counsel, Kidder
Peabody Asset Management, Inc. and
Senior Vice President, Kidder,
Peabody & Co. Incorporated since
November 1990.
Pamela Milunovich Vice President Vice President, SBAM and Salomon
Age: Brothers Inc since June 1992;
formerly associate with James Capel.
Alan M. Mandel Treasurer Vice President, SBAM since January
Age: 38 1995; formerly Chief Financial
Officer, Hyperion Capital Management
since 1991; prior to which he was
Vice President, MHAM.
</TABLE>
<PAGE> 197
66
<TABLE>
<S> <C> <C>
Tana E. Tselepis Secretary Compliance Officer, SBAM since 1993
Age: 60 and Senior Administrator since 1989;
Vice President, Salomon Brothers
since 1991; formerly Vice President
and Senior Administrator, First
Boston Asset Management Corp. since
1985.
Reji Paul Assistant Treasurer Investment Accounting Manager, SBAM
Age: 33 since 1995; formerly Assistant Vice
President, MHAM, since 1994; prior
to which he was Supervisor of MHAM.
Janet Tolchin Assistant Treasurer Investment Accounting Manager, SBAM.
Age: 37
Jennifer G. Muzzey Employee of SBAM since June 1994;
Assistant Secretary formerly Vice President of
Age: 36 SunAmerica Asset Management
Corporation.
</TABLE>
- --------------
1. Interested person as defined in the 1940 Act.
2. Audit Committee Member.
3. Nominating Committee Member.
<PAGE> 198
67
COMPENSATION TABLE
The following table provides information concerning the compensation paid
during the fiscal year ended December 31, 1995 to each director of the
Investors Fund. The Investors Fund does not provide any pension or retirement
benefits to directors. In addition, no remuneration was paid during the fiscal
year ended December 31, 1995 by the Investors Fund to officers of the Fund or
to Messrs. Hyland or Brock, who as employees of SBAM may be defined as
"interested persons" under the 1940 Act.
<TABLE>
<CAPTION>
AGGREGATE TOTAL COMPENSATION
COMPENSATION FROM OTHER FUNDS TOTAL
NAME OF PERSON, POSITION FROM THE FUND ADVISED BY SBAM(A) COMPENSATION
<S> <C> <C> <C>
Charles F. Barber, Director $ $(12) $(13)
Andrew L. Breech, Director $ $ (2) $ (3)
Carol L. Colman, Director $ $ (3) $ (4)
William R. Dill, Director $ $ (2) $ (3)
Clifford M. Kirtland, Director $ $ (2) $ (3)
Robert W. Lawless, Director $ $ (2) $ (3)
Louis P. Mattis, Director $ $ (2) $ (3)
Thomas F. Schlafly $ $ (2) $ (3)
</TABLE>
- ----------------
(A) The numbers in parenthesis indicate the applicable number of
investment company directorships held by that director.
Directors of the Series Funds and of the Investors Fund not affiliated with
SBAM receive from their respective Funds 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. In addition, Directors of the
Series Funds and the Investors Fund not affiliated with SBAM receive an annual
fee from their respective Funds. Directors who are affiliated with SBAM do not
receive compensation from their respective Funds but are reimbursed for all
out-of-pocket expenses relating to attendance at meetings.
As of December 31, 1995 directors and officers of the Series Funds and the
Investors Fund each as a group beneficially owned less than 1% of the
outstanding shares of their respective Funds.
<PAGE> 199
68
PRINCIPAL HOLDERS OF SECURITIES
The following lists shareholders of record who held 5% or more of the
outstanding securities of the Funds as of March 16, 1996. Shareholders who own
greater than 25% of the shares of a class are deemed to be controlling persons
of such class.
<TABLE>
<CAPTION>
Fund Class Shareholder Percentage Held
- ---- ----- ----------- ---------------
<S> <C> <C> <C>
Cash Management Fund O STATE STREET BANK & TRUST CO FBO 30.8%
SALOMON BROTHERS NY NUNICIPAL DEPT
7 WORLD TRADE CENTER 38TH FLOOR
NEW YORK NY 10048
SALOMON BROTHERS INC A/C VO300 22.9%
7 WORLD TRADE CENTER 40TH FLOOR
NEW YORK NY 10048
SALOMON BROTHERS A/C XQSSHMF 21.2%
7 WORLD TRADE CENTER 40TH FLOOR
NEW YORK NY 10048
A NORTHSTAR ADVANTAGE FUNDS 84.6%
FBO CLASS A SHAREHOLDERS
2 PICKWICK PLAZA
GREENWICH, CT 06830
CHARLES FLOYD RECHLIN 6.6%
C/O SULLIVAN & CROMWELL
444 SOUTH FLOWER ST
LOS ANGELES, CA 90071
B NORTHSTAR ADVANTAGE FUNDS 92.8%
FBO CLASS T SHAREHOLDERS
2 PICKWICK PLAZA
GREENWICH, CT 06830
C NORTHSTAR ADVANTAGE FUNDS 44.5%
FBO CLASS C SHAREHOLDERS
2 PICKWICK PLAZA
GREENWICH, CT 06830
CARROL C. JONES 18.0%
3907 PERU CIRCLE
PASADENA, TX 77504
SALOMON BROTHERS ASSET MANAGEMENT 9.2%
7 WORLD TRADE CENTER
NEW YORK, NY 10048
BSDT CUS IRA R/O 7.8%
FBO DONALD BURKE
12014 PALMCROFT
HOUSTON, TX 77034
STERLING TRUST CO CUST 5.5%
FBO LILLIE GARCIA AO2045
PO BOX 2526
WACO, TX 76702
JENNIFER WEDGE 5.2%
8733 160TH AVENUE
BRISTOL, WI 53104
New York Municipal O SALOMON BROTHERS INC A/C Y0291 9.1%
Bond 7 WORLD TRADE CENTER 40TH FLOOR
NEW YORK NY 10048
S QUINTUS VON BOWIN 7.7%
HELLA VON BOWIN
131 MERCER ST APT 3A
NEW YORK NY 10048
SALOMON BROTHERS A/C NYE3009 5.3%
7 WORLD TRADE CENTER 40TH FL
NEW YORK, NY 10048
SALOMON BROTHERS A/C NYE4198 5.3%
7 WORLD TRADE CENTER 40TH FL
NEW YORK, NY 10048
A SALOMON BROTHERS HOLDING CO INC 45.5%
7 WORLD TRADE CENTER
NEW YORK NY 10048
SMITH BARNEY INC 36.6%
00130920629
388 GREENWICH ST
NEW YORK NY 10013
C SCOTT BAXTER 13.7%
1675 YORK AVENUE NO 31-D
NEW YORK NY 10120
B SALOMON BROTHERS HOLDING CO INC 49.7%
7 WORLD TRADE CENTER
NEW YORK NY 10048
ALEJANDRO GARCIA & 19.5%
PATRICIA GARCIA JTWROS
245 EAST 40TH ST
APARTMENT 34C
NEW YORK NY 10016-1728
DR GLORIA QUIRANTE 9.7%
63 WETHERSTONE DRIVE
WEST SENECA NY 14224-2538
BERLE N TANDOC 9.7%
63 WETHERSTONE DRIVE
WEST SENECA NY 14224-2538
RICHARD O COLE 7.3%
5575 RIPPLE DRIVE
HAMBURG NY 14075-4941
C SALOMON BROTHERS HOLDING CO INC 100.0%
7 WORLD TRADE CENTER
NEW YORK NY 10048
U.S. Government O SALOMON BROTHERS HOLDING CO INC 100.0%
Income 7 WORLD TRADE CENTER
NEW YORK NY 10048
A SALOMON BROTHERS HOLDING CO INC 64.8%
7 WORLD TRADE CENTER
NEW YORK NY 10048
MARTHA M BAUER & 9.5%
BARBARA J THAYER JTWROS
1 STRECKER RD D108
ELLISVILLE MO 63011
MARTHA M HLADIK OR HENRY L 5.1%
HLADIK TTEES MARTHA M KLADIK TRUST
DATED 12/09/85
10695 W 17TH AVE 0302
LAKEWOOD CO 80215
STERLING TRUST CO CUST 5.0%
LAFE TALLEY
A02166
PO BOX 2526
WACO TX 767022526
B SALOMON BROTHERS HOLDING CO INC 41.2%
7 WORLD TRADE CENTER
NEW YORK NY 10048
KEVIN A MASON & 25.6%
LYNN M PITTS TTEES
DAN E & THELMA M NEWLON TRUST
O/A DTD 11/04/87
6132 CIMARRON WAY
SACRAMENTO CA 95842
SMITH BARNEY INC. 11.5%
80152915017
388 GREENWICH STREET
NEW YORK, NY 10813
C SALOMON BROTHERS HOLDING CO INC 94.4%
7 WORLD TRADE CENTER
NEW YORK NY 10048
CATHERINE S BUTTERFIELD 5.6%
171 PHEASANT RIDGE
HUNTINGTON CT 86484
High Yield Bond O SALOMON BROTHERS HOLDING CO INC 99.3%
7 WORLD TRADE CENTER
NEW YORK NY 10048
A LASALLE NATIONAL TRUST AS CUSTODIAN 18.0%
FBO DOCTORS HOSPITAL FOUNDATION
03-7100609-7954RD707
PO BOX 1443
CHICAGO IL 60609
JUPITER & CO 15.6%
C/O INVESTORS BANK & TRUST CO
PO BOX 1537 TOP57
BOSTON MA 02205-1537
B N/A N/A
C A G EDWARDS & SONS INC C/F 14.5%
JAMES W WILLIAMS
ROLLOVER IRA ACCOUNT
4 WINDWOOD COURT
AUSTIN TX 78738-1518
ALEX BROWN & SONS INC 7.3%
P.O. BOX 1346
BALTIMORE MD 21203
AG EDWARDS & SONS 7.1%
CUSTODIAN FOR
JOHN J MECKLER
ROLLOVER IRA ACCOUNT
5119 FOREST LANE PLACE
DALLAS TX 75244-7984
NFSC FEDO & CL3-340979 6.0%
NFSC/FMTC IRA ROLLOVER
FBO WALTER MESTEL
19707 TURNBERRY WAY #22H
NORTH MIAMI FL 33180
Strategic Bond O SALOMON BROTHERS HOLDING CO INC 100.0%
7 WORLD TRADE CENTER
NEW YORK NY 10048
A SALOMON BROTHERS HOLDING CO INC 26.1%
7 WORLD TRADE CENTER
NEW YORK NY 10048
FIRST SOUTHWEST COMPANY 22.5%
FBO RICHARD O BELTZ
ACCT # 44409031
1700 PACIFIC AVE-SUITE 500
DALLAS TX 75201
BSDT CUST IRA 12.05%
FBO GERALD T BACHNER
11 MCQUADE BROOK ROAD
BEDFORD NH 03110-5018
B SALOMON BROTHERS HOLDING CO INC 7.8%
7 WORLD TRADE CENTER
NEW YORK NY 10048
C SALOMON BROTHERS HOLDING CO INC 64.4%
7 WORLD TRADE CENTER
NEW YORK NY 10048
STERLING TRUST CO CUST 5.3%
FBO LILLIE GARCIA &
LINDA KELLY JTWROS IRA # A02030
P.O. BOX 2526
WACO TX 76702-2526
National Intermediate O SALOMON BROTHERS HOLDING CO INC 99.7%
Municipal 7 WORLD TRADE CENTER
NEW YORK NY 10048
A SALOMON BROTHERS HOLDING CO INC 42.8%
7 WORLD TRADE CENTER
NEW YORK NY 10048
SOUTHWEST SECURITIES INC 24.5%
1201 ELM STREET, SUITE 4300
DALLAS TX 75270
ALICE C ALDRICH 14.2%
2555 HAMLINE AVE APT 213
ROSEVILLE MN 55113-3150
DOROTHY N UNGER TTEE 6.3%
LOUIS A UNGER TRUST
U/A DTD APRIL 25 1991
205 MAGNOLIA STREET
SATELLITE BCH FL 32937-3819
NORTH VERMILION STREET CORP 6.3%
137 NORTH VERMILION STREET
DANVILLE IL 61832
B SALOMON BROTHERS HOLDING CO INC 57.6%
7 WORLD TRADE CENTER
NEW YORK NY 10048
JEANETTE S TOLL 25.8%
C/O MARY TOLL
1530 EAST LASALLE
SOUTH BEND IN 46417
ROSE MAKI 11.8%
7207 210TH ST SW #203
EDMONDS WA 98026
C SALOMON BROTHERS HOLDING CO INC 92.8%
7 WORLD TRADE CENTER
NEW YORK NY 10048
JAMES OMER OLSON & 7.2%
CONNIE N OLSON JTMROS
502 SIXTH AVENUE
HAZEN ND 58545-4627
Total Return O SALOMON BROTHERS HOLDING CO INC 100.0%
7 WORLD TRADE CENTER
NEW YORK NY 10048
A ROBERT FEITLER JR & 6.2%
PAMELA HOEHN-SARIC
JOAN FEITLER 1990 TRUST
U/A DTD 07/11/95
234 EAST RESERVIOR
MILWAUKEE WI 53212
MATTHEW H GATES TTEE 6.0%
MATTHEW H GATES TRUST
U/A DTD 06/27/91
318 LAUREL DRIVE
BELLEVUE NE 66905-4724
B N/A N/A
C SALOMON BROTHERS HOLDING CO INC 33.2%
ATTN: MARK PECKHAM 38TH FLOOR
7 WORLD TRADE CENTER
NEW YORK NY 10048
ALEXANDER EMERGN 12.5%
DEFINED BENEFIT PEN PLAN
DTD 01/01/93
PO BOX 2916
CARSON CITY NV 89702-2026
EDWARD F HOSMER & 11.9%
SUZANNE H HOSMER
UTTEN
38 GRAY ROAD
ANDOVER MA 81010
ALEX BROWN & SONS INC 7.1%
PO BOX 1346
BALTIMORE MD 21203
WALLACE R. PECK & 6.2%
SHIRLEY M. PECK
JTTEN
10939 VIACHA DRIVE
SAN DIEGO CA 92124-3412
</TABLE>
<TABLE>
<CAPTION>
Fund Class Shareholder Percentage Held
- ---- ----- ----------- ---------------
<S> <C> <C> <C>
Investors O N/A N/A
A SALOMON BROTHERS HOLDING CO INC 36.8%
7 WORLD TRADE CENTER
NEW YORK NY 10048
FIRST SOUTHWEST COMPANY 11.6%
FBO ALBERT GIDDENS
ACCT # 34912183
1700 PACIFIC AVE-SUITE 500
DALLAS TX 75201
FIRST SOUTHWEST COMPANY 11.0%
FBO CARROLL CHRISTAIN JONES
ACCT # 44405770
1700 PACIFIC AVE-SUITE 500
DALLAS TX 75201
FIRST SOUTHWEST COMPANY 5.8%
FBO ALBERT LEE GIDDENS MONEY PUR PL
ACCT # 34912178
1700 PACIFIC AVE-SUITE 500
DALLAS TX 75201
FIRST SOUTHWEST COMPANY 5.5%
FBO BRIAN ERIC STEEGE
ACCT # 74909211
1700 PACIFIC AVE SUITE 500
DALLAS TX 75201
B SALOMON BROTHERS HOLDING CO INC 38.8%
7 WORLD TRADE CENTER
NEW YORK NY 10048
LEO T PRINSTER 16.1%
ACCOUNT #2
385 RIDGEWAY DR
GRAND JUNCTION CO 81503-1608
CARROLL SMARR, JR 8.2%
1051 S CENTRAL AVE
LOBI CA 95240-5324
A G EDWARDS & SONS INC C/F 7.4%
ROGER LEWIN
ROLLOVER IRA ACCOUNT
4554 TOTANA DR
TARZANA CA 91354-4944
SMITH BARNEY INC. 6.1%
00118008781
385 GREENWICH STREET
NEW YORK NY 10013
C SALOMON BROTHERS HOLDING CO INC 93.7%
7 WORLD TRADE CENTER
NEW YORK NY 10048
</TABLE>
INVESTMENT MANAGER
Each Fund retains SBAM to act as its investment manager. SBAM, a
wholly-owned subsidiary of Salomon Brothers Holding Company Inc, which in turn
is wholly owned by
<PAGE> 200
69
Salomon Inc, serves as the investment manager to numerous individuals and
institutions and other investment companies. On May 1, 1990, SBAM purchased
substantially all of the assets of Lemco, the Investors Fund's previous
investment adviser, and the Investors Fund changed its name from Lehman
Investors Fund, Inc. to Salomon Brothers Investors Fund Inc.
The management contract between SBAM and each respective Fund provides
that SBAM shall manage the operations of the Fund, subject to policy
established by the Board of Directors. Pursuant to the applicable management
contract, SBAM manages each Fund's investment portfolio, directs purchases and
sales of portfolio securities and reports thereon to the Fund's officers and
directors regularly. SBAM also provides the office space, facilities,
equipment and personnel necessary to perform the following services for each
Fund: Commission compliance, including record keeping, reporting requirements
and registration statement and proxies; supervision of Fund operations,
including coordination of functions of administrator, transfer agent,
custodian, accountants, counsel and other parties performing services or
operational functions for each Fund; certain administrative and clerical
services, including certain accounting services, facilitation of redemption
requests, exchange privileges, and account adjustments, development of new
shareholder services and maintenance of certain books and records; and certain
services to each Fund's shareholders, including assuring that investments and
redemptions are completed efficiently, responding to shareholder inquiries and
maintaining a flow of information to shareholders. In addition, SBAM pays the
compensation of each Fund's officers, employees and directors affiliated with
SBAM. Each Fund bears all other costs of its operations, including the
compensation of its directors not affiliated with SBAM.
In connection with SBAM's service as investment manager to the Strategic
Bond Fund, Salomon Brothers Asset Management Limited ("SBAM Limited"), whose
business address is Victoria Plaza, 111 Buckingham Palace Road, London SW1W
OSB, England, provides certain advisory services to SBAM relating to currency
transactions and investments in non-dollar-denominated debt securities for the
benefit of the Strategic Bond Fund pursuant to a subadvisory consulting
agreement. At no additional expense to the Strategic Bond Fund, SBAM pays SBAM
Limited, as full compensation for all services provided under the subadvisory
consulting agreement, a fee in an amount equal to the fee payable to SBAM under
its management contract with respect to the Strategic Bond Fund multiplied by
the current value of the net assets of the portion of the assets of the
Strategic Bond Fund as SBAM shall allocate and divided by the current value of
the net assets of the Strategic Bond Fund. Like SBAM, SBAM Limited is an
indirect, wholly-owned subsidiary of Salomon Inc. SBAM Limited is a member of
the Investment Management Regulatory Organization Limited in the United Kingdom
and is registered as an investment adviser in the United States pursuant to the
Advisers Act.
Pursuant to a sub-advisory agreement, SBAM has retained Salomon Brothers
Asset Management Asia Pacific Limited as sub-adviser to the Asia Growth Fund.
Subject to the supervision of SBAM, SBAM AP will have responsibility for the
day-to-day management of the Fund's portfolio. SBAM AP is compensated at no
additional cost to the Asia Growth Fund. Like SBAM, SBAM AP is an indirect,
wholly-owned subsidiary of Salomon Inc. SBAM AP is a member of the Hong Kong
Securities and Futures Commission and is
<PAGE> 201
70
registered as an investment adviser in the United States pursuant to the
Investment Advisers Act of 1940, as amended (the "Advisers Act"). Pursuant to
a sub-administration agreement, SBAM has retained SBAM Limited to provide
certain administrative services to SBAM relating to the Asia Growth Fund.
Investment decisions for a particular Fund are made independently from
those of other funds or accounts managed by SBAM, SBAM AP or SBAM Limited. Such
other funds or accounts may also invest in the same securities as a Fund. If
those funds or accounts are prepared to invest in, or desire to dispose of, the
same security at the same time as a Fund, however, transactions in such
securities will be made, insofar as feasible, for the respective funds and
accounts in a manner deemed equitable to all. In some cases, this procedure
may adversely affect the size of the position obtained for or disposed of by a
Fund or the price paid or received by a Fund. In addition, because of
different investment objectives, a particular security may be purchased for one
or more funds or accounts when one or more funds or accounts are selling the
same security.
If in any fiscal year expenses borne by a Fund (excluding interest, taxes,
brokerage commissions and other portfolio transaction expenses and any
extraordinary expenses, but including the management fee) exceed expense
limitations imposed by applicable state securities regulations, SBAM, in its
capacity as investment manager, will reimburse the Fund for any such excess to
the extent required by such regulations up to the amount of its fee. California
is the only state which currently imposes such an expense limitation. The
limitation is, on an annual basis, 2.5% of the first $30 million of average
daily net assets, 2.0% of the next $70 million of average daily net assets and
1.5% of the remaining average net daily assets. Such reimbursement, if any,
will be estimated and paid on a monthly basis. There was no reimbursement to
the Investors Fund, the Cash Management Fund or the New York Municipal Bond
Fund for the years ended December 31, 1995, 1994 or 1993.
As compensation for its services, SBAM receives from the Cash Management
Fund a management fee payable monthly at an annual rate of .20% of the Cash
Management Fund's average daily net assets. For the fiscal years ended
December 31, 1993, 1994 and 1995, SBAM waived all fees payable to it by the
Cash Management Fund, totaling $25,813, $29,088 and $25,505 respectively, and
absorbed expenses of the Cash Management Fund totalling $______, $______ and
$75,716, respectively. SBAM receives from the New York Municipal Bond Fund a
management fee payable monthly at an annual rate of .50% of the New York
Municipal Bond Fund's average daily net assets. For the fiscal period from
February 1, 1993 (commencement of operations) through December 31, 1993 and for
the fiscal years ended December 31, 1994 and 1995, SBAM waived all fees payable
to it by the New York Municipal Bond Fund, totaling $32,857, $36,428 and
$19,069 respectively, and absorbed expenses of the New York Municipal Bond Fund
totaling $15,652, $12,085 and $63,088 , respectively. The National
Intermediate Municipal Fund pays SBAM a monthly fee at an annual rate of .50%
of the Fund's average daily net assets. For the period from February 22, 1995
(commencement of investment operations) through December 31, 1995, SBAM waived
all fees payable to it by the National Intermediate Fund in the amount of
$44,953 and absorbed expenses of the National Intermediate Fund in the amount
of $35,803. The U.S. Government Income Fund pays SBAM a monthly fee at an
annual rate of .60% of
<PAGE> 202
71
the Fund's average daily net assets. For the period from February 22, 1995
(commencement of investment operations) through December 31, 1995, SBAM waived
all fees payable to it by the U.S. Government Income Fund in the amount of
$53,073 and absorbed expenses of the U.S. Government Income Fund in the amount
of $39,324. The High Yield Bond Fund pays SBAM a monthly fee at an annual rate
of .75% of the Fund's average daily net assets. For the period from February
22, 1995 (commencement of investment operations) through December 31, 1995, the
management fee payable to SBAM from the High Yield Bond Fund was $108,535
($79.385 of which was waived by SBAM). The Strategic Bond Fund pays SBAM a
monthly fee at an annual rate of .75% of the Fund's average daily net assets.
For the period from February 22, 1995 (commencement of investment operations)
through December 31, 1995, SBAM waived all fees payable to it by the Strategic
Bond Fund in the amount of $71,026 and absorbed expenses of the Strategic Bond
Fund in the amount of $11,822. The Total Return Fund pays SBAM a monthly fee
at an annual rate of .55% of the Fund's average daily net assets. For the
period from September 11, 1995 (commencement of investment operations) through
December 31, 1995, SBAM waived all fees payable to it by the Total Return Fund
in the amount of $15,069 and absorbed expenses of the Total Return Fund in the
amount of $4,346. The Asia Growth Fund pays SBAM a monthly fee at an annual
rate of .80% of the Fund's average daily net assets. With respect to each
Fund, for the 1996 fiscal year, SBAM has voluntarily agreed to impose a cap on
the total Fund operating expenses for the period ended December 31, 1995
through reimbursement of certain expenses and, to the extent necessary, waiver
of management fees. See "Expense Information -- Annual Fund Operating Expenses"
in the Prospectus. For its services under the Subadvisory Agreement, SBAM AP is
compensated by SBAM at a rate agreed to between SBAM and SBAM AP from time to
time. For its services under the Subadministration Agreement, SBAM Limited is
compensated by SBAM at no additional cost to the Asia Growth Fund at an annual
rate of .10% of the Asia Growth Fund's daily net assets. The Investors Fund
pays SBAM a quarterly fee (the "Base Fee") at the end of each calendar quarter
based on the following rates:
<TABLE>
<CAPTION>
Average Daily Net Assets Annual Fee Rate
------------------------ ---------------
<S> <C>
First $350 million .500%
Next $150 million .400%
Next $250 million .375%
Next $250 million .350%
Over $1 billion .300%
</TABLE>
This fee may be increased or decreased based on the performance of the
Investors Fund relative to the investment record of the S&P 500 Index. At the
end of each calendar quarter, for each percentage point by which the investment
performance of the Investors Fund exceeds or is exceeded by the investment
record of the S&P 500 Index over the one year period ending on the last day of
the calendar quarter for which the adjustment is being calculated, the Base Fee
will be adjusted upward or downward by the product of (i) 1/4 of .01%
multiplied by (ii) the average daily net assets of the Investors Fund for the
one year period preceding the end of the calendar quarter. If the amount by
which the Investors Fund outperforms or underperforms the S&P 500 Index is not
a whole percentage point, a pro rata adjustment shall be made. However, there
will be no performance adjustment unless the investment performance of the
Investors Fund exceeds or is exceeded by the investment
<PAGE> 203
72
record of the S&P 500 Index by at least one percentage point. The maximum
quarterly adjustment is 1/4 of .10%, which would occur if the Investors Fund's
performance exceeds or is exceeded by the S&P 500 Index by ten or more
percentage points. The performance adjustment will be paid quarterly based on
a rolling one year period.
For purposes of determining the performance adjustment, the investment
performance of the Investors Fund for any one year period shall mean the sum of
(i) the change in the Fund's net asset value per share during such period, (ii)
the value of cash distributions per share accumulated to the end of such period
and (iii) the value of capital gains taxes per share (if any) paid or payable
on undistributed realized long-term capital gains accumulated to the end of
such period; expressed as a percentage of its net asset value per share at the
beginning of such period. For this purpose, the value of distributions per
share of realized capital gains and of dividends per share paid from investment
income shall be treated as reinvested in shares of the Investors Fund at the
net asset value per share in effect at the close of business on the record date
for the payment of such distributions and dividends, after giving effect to
such distributions and dividends. In addition, while the Investors Fund does
not anticipate paying any taxes, the value of any capital gains taxes per share
paid or payable on undistributed realized long-term capital gains shall be
treated as reinvested in shares of the Fund at the net asset value per share in
effect at the close of business on the date on which provision is made for such
taxes, after giving effect to such taxes.
For purposes of calculating the performance adjustment, the investment
record of the S&P 500 Index for any one year period shall mean the sum of (i)
the change in the level of the index during such period and (ii) the value,
computed consistently with the index, of cash distributions made by companies
whose securities comprise the index accumulated to the end of such period;
expressed as a percentage of the index level at the beginning of such period.
For this purpose, cash distributions on the securities which comprise the index
shall be treated as reinvested in the index at least as frequently as the end
of each calendar quarter following the payment of the dividend.
Prior to August 1, 1994, the Investors Fund paid SBAM a management fee
each quarter, based upon the average daily value of the Investors Fund's net
assets, at an annual rate computed as follows: none on the first $25 million;
1/8 of 1% (.50% annually) on the next $325 million; 3/40 of 1% (.30% annually)
on the next $150 million; 1/16 of 1% (.25% annually) on the next $250 million;
and 1/20 of 1% (.20% annually) on the amount in excess of $750 million. SBAM
was paid $1,614,897, $1,747,839 and $1,721,023 in management fees for the years
ended December 31, 1995, 1994 and 1993, respectively.
With respect to each of the Funds, other than the Total Return Fund, the
Asia Growth Fund and Investors Fund, the continuance of the management contract
was approved by the Board of Directors on September 6, 1995. With respect to
the Total Return Fund, the management contract was approved by the Board of
Directors on September 6, 1995 and by the sole shareholder, SBAM, on September
6, 1995. With respect to the Asia Growth Fund, the management contract was
approved by the Board of Directors on January 19, 1996 and by the sole
shareholder, SBAM, on ___________, 1996. With respect to the Investors Fund,
the
<PAGE> 204
73
continuance of the management contract was approved by the Board of Directors
on January 23, 1996.
The management contract for each Fund provides that it will continue for
an initial two year period and thereafter for successive annual periods
provided that such continuance is specifically approved at least annually (a)
by the vote of a majority of the 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. The management contract may be terminated on 60 days' written
notice by either party and will terminate automatically if assigned.
Under the terms of management contract between each Fund and SBAM, neither
SBAM nor its affiliates shall be liable for losses or damages incurred by the
Fund (including, with respect to the Asia Growth Fund, the imposition of
certain Hong Kong tax liabilities on the Fund), unless such losses or damages
are attributable to the wilful misfeasance, bad faith or gross negligence on
either the part of SBAM or its affiliate or from reckless disregard by it of
its obligations and duties under the Management Contract ("disabling conduct").
In addition, the Asia Growth Fund will indemnify SBAM and its affiliates and
hold each of them harmless against any losses or damages, including the
imposition of certain Hong Kong tax liabilities on the Fund, not resulting from
disabling conduct.
Rule 17j-1 under the 1940 Act requires all registered investment companies
and their investment advisers and principal underwriters to adopt written codes
of ethics and institute procedures designed to prevent "access persons" (as
defined in Rule 17j-1) from engaging in any fraudulent, deceptive or
manipulative trading practices. The Board of Directors for the Series Fund and
the Investors Fund have each 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 the investment manager and if applicable, any sub-adviser
to each Fund, which policies serve as such adviser's code of ethics (the
"Adviser Code"). The Fund and Adviser Codes have been designed to address
potential conflict of interests 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 Code 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 Code, with certain
exceptions, also requires that access persons obtain preclearance to engage in
personal securities transactions. Finally, the Fund
<PAGE> 205
74
and Adviser Codes require access persons to report all personal securities
transactions periodically.
ADMINISTRATOR
Each Fund employs Investors Bank & Trust Company ("Investors Bank") under
its applicable administration agreement to provide certain administrative
services to the respective Fund. The services provided by Investors Bank under
the applicable administration agreement include certain accounting, clerical
and bookkeeping services, Blue Sky compliance, corporate secretarial services
and assistance in the preparation and filing of tax returns and reports to
shareholders and the Commission.
Investors Bank's business address is 89 South Street, Boston,
Massachusetts 02111.
For its services as administrator, each Fund (except the Investors Fund)
pays Investors Bank a fee, calculated daily and payable monthly, at an annual
rate of .08% of the applicable Fund's average daily net assets. Pursuant to a
sub-administration agreement between SBAM and Investors Bank, for its services
as administrator to the Investors Fund and at no additional cost to the
Investors Fund, SBAM pays Investors Bank a fee each month at an annual rate of
.08% of the average daily net assets of the Investors Fund. For its services
as administrator to the Cash Management Fund, the Series Funds paid The Boston
Company Advisors, Inc. ("Boston Company"), the Fund's previous administrator,
a fee, calculated daily and payable monthly, at an annual rate of .08% of the
Cash Management Fund's average daily net assets. For the fiscal years ended
December 31, 1993 and 1994, Boston Company received fees totaling $10,324 and
$10,499 and Investors Bank received fees totaling $1,136 and $________ for the
fiscal years ended December 31, 1994 and 1995 from the Cash Management Fund.
For its services as administrator to the New York Municipal Bond Fund, the
Series Funds paid Boston Company, the Fund's previous administrator, a fee,
calculated daily and payable monthly, at an annual rate of .08% of the New York
Municipal Bond Fund's average daily net assets. For the fiscal period from
February 1, 1993 (commencement of operations) through December 31, 1993 and the
fiscal year ended December 31, 1994, Boston Company received fees totaling
$5,258, and $5,497, and Investors Bank received fees totaling $328 and
$________ for the fiscal years ended December 31, 1994 and 1995 from the New
York Municipal Bond Fund. For the period from February 22, 1993 (commencement
of investment operations) through December 31, 1995, Investors Bank received
$________ from the National Intermediate Bond Fund, $________ from the U.S.
Government Income Fund, $________ from the High Yield Bond Fund and $________
from the Strategic Bond Fund and for the period from September 11, 1995
(commencement of investment operations) through December 31, 1995, Investors
Bank received $__________ from the Total Return Fund. Pursuant to a previous
sub-administration agreement between SBAM and Boston Company, SBAM paid Boston
Company a fee each month at an annual rate of .08% of the average daily net
assets of the Investors Fund.
<PAGE> 206
75
DISTRIBUTOR
Salomon Brothers, located at 7 World Trade Center, New York, New York
10048, serves as each Fund's distributor. Salomon Brothers is a wholly owned
subsidiary of Salomon Brothers Holding Company Inc, which is in turn wholly
owned by Salomon Inc.
Rule 12b-1 (the "Rule") adopted by the Commission under the 1940 Act
provides, among other things, that an investment company may bear expenses of
distributing its shares only pursuant to a plan adopted in accordance with the
Rule. The Board of Directors of each Fund (other than the Cash Management
Fund) has adopted a services and distribution plan with respect to each class
of shares (other than Class O) of each Fund pursuant to the Rule (the "Plan").
The Board of Directors of each Fund has determined that there is a reasonable
likelihood that the Plan will benefit such Fund and its shareholders.
Under the Plans, each Fund (other than the Cash Management Fund) pays
Salomon Brothers a service fee, accrued daily and paid monthly, calculated at
the annual rate of .25% of the value of the applicable Fund's average daily net
assets attributable to Class A, Class B and Class C shares. In addition, each
Fund (other than the Cash Management Fund) pays Salomon Brothers a distribution
fee with respect to Class B and Class C shares primarily intended to compensate
Salomon Brothers for its initial expense of paying investment representatives a
commission upon sales of Class B shares or Class C shares, as the case may be.
The Class B and Class C distribution fees are each calculated at the annual
rate of .75% of the value of a Fund's average daily net assets attributable to
the Class B or Class C shares, as the case may be. Such fees may be used as
described in the Prospectus. Class O shares and shares of all classes of the
Cash Management Fund pay no Rule 12b-1 distribution or shareholder service fee.
Salomon Brothers is authorized, to the extent indicated in the Prospectus, to
retain all or a portion of the payments made to it pursuant to the applicable
Plan and make payments to third parties that provide assistance in selling Fund
shares, or to institutions that provide certain shareholder support services to
investors. Each Plan provides that Salomon Brothers may make payments to
assist in the distribution of each class of a Fund's shares out of the other
fees received by it or its affiliates from a Fund, its past profits or any
other sources available to it.
A quarterly report of the amounts expended with respect to each Fund under
the applicable Plan, and the purposes for which such expenditures were
incurred, must be made to the Board of Directors for its review. In addition,
each Plan provides that it may not be amended with respect to any class of
shares of the applicable Fund to increase materially the costs which may be
borne for distribution pursuant to the Plan without the approval of
shareholders of that class, and that other material amendments of the Plan must
be approved by the Board of Directors, and by the Directors who are neither
"interested persons" (as defined in the 1940 Act) nor have any direct or
indirect financial interest in the operation of the Plan or any related
agreements, by vote cast in person at a meeting called for the purpose
<PAGE> 207
76
of considering such amendments. Each Plan and any related agreements are
subject to annual approval by such vote cast in person at a meeting called for
the purpose of voting on the Plan. Each Plan may be terminated with respect to
a Fund or any class thereof at any time by vote of a majority of the Directors
who are not "interested persons" and have no direct or indirect financial
interest in the operation of the Plan or in any related agreement or by vote of
a majority of the shares of a Fund or class, as the case may be. For the year
ended December 31, 1995, the Funds spend a total of $1,000,467 under the Rule
12b-1 Plans, $591,372 of which was spent on advertising, $74,733 of which was
spent on printing and mailing of prospectuses, $259,356 of which was spent on
interest, carrying or other financial charges and $75,006 of which was spent
on miscellaneous expenses.
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, Commission fees, state securities qualification
fees, costs of preparing and printing prospectuses for regulatory purposes and
for distribution to existing shareholders, advisory and administration fees,
charges of the custodian and of the transfer and dividend disbursing agent,
certain insurance premiums, outside auditing and legal expenses, costs of
shareholder reports and shareholder meetings and any extraordinary expenses.
Each Fund also pays for brokerage fees and commissions (if any) in connection
with the purchase and sale of portfolio securities. Fund expenses are
allocated to a particular class of Fund shares based on either expenses
identifiable to the class or the relative net assets of the class and other
classes of Fund shares.
PORTFOLIO TRANSACTIONS
Subject to policy established by the Board of Directors, the investment
manager is primarily responsible for each Fund's portfolio decisions and the
placing of the Fund's portfolio transactions.
Fixed-income, certain short-term securities and certain equities normally
will be purchased or sold from or to issuers directly or to dealers serving as
market makers for the securities at a net price, which may include dealer
spreads and underwriting commissions. Equity securities may also be purchased
or sold through brokers who will be paid a commission.
The general policy of each Fund in selecting brokers and dealers is to
obtain the best results taking into account factors such as the general
execution and operational facilities of the broker or dealer, the type and size
of the transaction involved, the creditworthiness of the broker or dealer, the
stability of the broker or dealer, execution and settlement capabilities, time
required to negotiate and execute the trade, research services and SBAM'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
<PAGE> 208
77
SBAM generally seeks the best price in placing its orders, a Fund may not
necessarily be paying the lowest price available.
Notwithstanding the above, in compliance with Section 28(e) of the
Securities Exchange Act of 1934, the investment manager may select brokers who
charge a commission in excess of that charged by other brokers, if the
investment manager determines in good faith that the commission to be charged
is reasonable in relation to the brokerage and research services provided to
the investment manager by such brokers. Research services generally consist of
research or statistical reports or oral advice from brokers and dealers
regarding particular companies, industries or general economic conditions. The
investment manager may also have arrangements with brokers pursuant to which
such brokers provide research services to the investment manager in exchange
for a certain volume of brokerage transactions to be executed by such broker.
While the payment of higher commissions increases a Fund's costs, the
investment manager does not believe that the receipt of such brokerage and
research services significantly reduces its expenses as a Fund's investment
manager. Arrangements for the receipt of research services from brokers may
create conflicts of interest. During the fiscal year ended December 31, 1995,
SBAM, directed brokerage transactions in an amount of $_____ and $_____ with
respect to the Investors Fund and the Total Return Fund, respectively, to
certain brokers that furnished research services to SBAM. Commissions on these
transactions totaled $_______ for the Investors Fund and $____ for the Total
Return Fund.
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 SBAM in servicing a Fund.
Not all of these research services are used by the investment manager in
managing any particular account, including the Funds.
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 Commission.
However, a Fund may purchase securities from underwriting syndicates of which
the investment manager or any of its affiliates (including Salomon Brothers) is
a member under certain conditions, in accordance with the provisions of a rule
adopted under the 1940 Act.
Affiliated persons of a Fund, or affiliated persons of such persons, may
from time to time be selected to execute portfolio transactions for such Fund.
Subject to the considerations discussed above and in accordance with procedures
adopted by the Board of Directors, in order for such an affiliated person to be
permitted to effect any portfolio transactions for a Fund, the commissions,
fees or other remuneration received by such affiliated person must be
reasonable and fair compared to the commissions, fees or other remuneration
received by other brokers in connection with comparable transactions. This
standard would allow such an affiliated person to receive no more than the
remuneration which would be expected to be received by an unaffiliated broker
in a commensurate arm's-length transaction.
<PAGE> 209
78
Each Fund's Board of Directors has determined that Salomon Brothers may
execute portfolio transactions for such Fund so long as the Fund is charged
commission rates consistent with those charged by other brokers in comparable
transactions with clients that are comparable to the Fund.
Total brokerage commissions paid by the Investors Fund amounted to
$998,071 for 1995, $676,229 for 1994 and $854,171 for 1993. During the 1995,
1994 and 1993 fiscal years, the Investors Fund paid $95,179, $61,788 and
$113,090, respectively, in commissions to Salomon Brothers. Commissions to
Salomon Brothers in 1995 represented 9.5% of the total brokerage commissions
paid by the Investors Fund, and Salomon Brothers executed 9.9% of the aggregate
dollar amount of transactions involving commissions during the 1994 fiscal
year. Total brokerage commissions paid by the Total Return Fund amounted to
$9,432 for 1995. During 1995, the Total Return Fund paid $210 in commissions to
Salomon Brothers. Commissions to Salomon Brothers in 1995 represented 2.23% of
the total brokerage commissions paid by the Total Return Fund, and Salomon
Brothers executed 1.60% of the aggregate dollar amount of transactions
involving commissions during 1995.
NET ASSET VALUE
The Prospectus discusses the time at which the net asset value of shares
of each class of a Fund is determined for purposes of sales and redemptions.
Because of the differences in service and distribution fees and class-specific
expenses, the per share net asset value of each class may differ. The following
is a description of the procedures used by a Fund in valuing its assets.
In calculating net asset value, portfolio securities listed or traded on
national securities exchanges, or reported by the NASDAQ National Market
reporting system, are valued at the last sale price, or, if there have been no
sales on that day, at the mean of the current bid and ask price which
represents the current value of the security. Over-the-counter securities are
valued at the mean of the current bid and ask price.
Securities that are primarily traded on foreign exchanges generally are
valued at the preceding closing values of such securities on their respective
exchanges, except that when an occurrence subsequent to the time a value was so
established is likely to have changed such value, then the fair value of those
securities will be determined by consideration of other factors by or under the
direction of the Board of Directors or its delegates. In valuing assets, prices
denominated in foreign currencies are converted to U.S. dollar equivalents at
the current exchange rate. Securities may be valued by independent pricing
services which use prices provided by market-makers or estimates of market
values obtained from yield data relating to instruments or securities with
similar characteristics. Short-term obligations with maturities of 60 days or
less are valued at amortized cost, which constitutes fair value as determined
by the Board of Directors. Amortized cost involves valuing an instrument at
its original cost to a Fund and thereafter assuming a constant amortization to
maturity of any discount or premium, regardless of the impact of fluctuating
interest rates on the market value
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of the instrument. All other securities and other assets of a Fund will be
valued at fair value as determined in good faith pursuant to procedures adopted
by the Board of Directors of each Fund.
As stated in the Prospectus, the Cash Management Fund seeks to maintain a
net asset value of $1.00 per share and, in this connection, 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 the Cash Management Fund has established
procedures reasonably designed, taking into account current market conditions
and the Cash Management Fund's investment objective, to stabilize the net asset
value per share as computed for the purposes of sales and redemptions at $1.00.
These procedures include periodic review, as the Board of Directors deem
appropriate and at such intervals as are reasonable in light of current market
conditions, of the relationship between the amortized cost value per share and
net asset value per share based upon available indications of market value.
In the event of a deviation of 1/2 of 1% between the Cash Management
Fund's net asset value based upon available market quotations or market
equivalents and $1.00 per share based on amortized cost, the Board of Directors
will promptly consider what action, if any, should be taken. The Board of
Directors will also take such action as they deem appropriate to eliminate or
to reduce to the extent reasonably practicable any material dilution or other
unfair result which might arise from differences between the two. Such action
may include redemption in kind, selling instruments prior to maturity to
realize capital gains or losses or to shorten the average maturity, withholding
dividends, or utilizing a net asset value per share as determined by using
available market quotations.
ADDITIONAL PURCHASE INFORMATION
Information on how to purchase and redeem a Fund's shares is included in
the Prospectus. The issuance of shares is recorded on a Fund's books.
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DETERMINATION OF PUBLIC OFFERING PRICE
Each Fund offers its shares to the public on a continuous basis. The
public offering price per Class A share of each Fund is equal to the net asset
value per share at the time of purchase plus a sales charge (except with
respect to the Cash Management Fund) based on the aggregate amount of the
investment. The public offering price per Class B share, Class C share and
Class O share (and Class A share purchases, including applicable rights of
accumulation, equaling or exceeding $1 million) is equal to the net asset value
per share at the time of purchase and no sales charge is imposed at the time of
purchase. A contingent deferred sales charge ("CDSC"), however, is imposed on
certain redemptions of Class A shares, Class B shares and Class C shares.
CLASS A SHARES
VOLUME DISCOUNTS. The schedule of sales charges on Class A shares
described in the Prospectus relating to Class A shares applies to purchases
made by any "purchaser," which is defined to include the following: (a) an
individual; (b) an individual, his or her spouse and their children under the
age of 21 purchasing shares for his or her own account; (c) a trustee or other
fiduciary purchasing shares for a single trust estate or single fiduciary
account; (d) a pension, profit-sharing or other employee benefit plan qualified
under Section 401(a) of the Code, and qualified employee benefit plans of
employers who are "affiliated persons" of each other within the meaning of the
1940 Act; (e) tax-exempt organizations enumerated in Section 501(c)(3) or (13)
of the Code; (f) any other organized group of persons, provided that the
organization has been in existence for at least six months and was organized
for a purpose other than the purchase of investment company securities at a
discount; or (g) a trustee or other professional fiduciary (including a bank,
or an investment adviser registered with the Commission under the Investment
Advisers Act of 1940, as amended) purchasing shares of a Fund for one or more
trust estates or fiduciary accounts. Purchasers who wish to combine purchase
orders to take advantage of volume discounts on Class A shares should call
(800) SALOMON or (800) 725-6666.
RIGHT OF ACCUMULATION. Reduced sales charges, in accordance with the
schedule in the Prospectus relating to Class A shares, apply to any purchase of
Class A shares if the aggregate investment in Class A shares of all Funds in
the Salomon Brothers Investment Series, excluding holdings in Class B and Class
C shares and shares purchased or held in the Cash Management Fund, and
including the purchase being made, of any purchaser is $100,000 or more. The
reduced sales charge is subject to confirmation of the shareholder's holdings
through a check of appropriate records. A Fund reserves the right to terminate
or amend the combined right of accumulation at any time after written notice to
shareholders. For further information regarding the combined right of
accumulation, shareholders should call (800) SALOMON or (800) 725-6666.
ADDITIONAL REDEMPTION INFORMATION
If the Board of Directors shall determine that it is in the best interests
of the remaining shareholders of a Fund, such Fund may pay the redemption price
in whole, or in part, by a
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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 the Board of Directors may deem
fair and equitable. However, each Fund has made an election pursuant to Rule
18f-1 under the 1940 Act requiring that all redemptions be effected in cash to
each redeeming shareholder, during periods of 90 days, up to the lesser of
$250,000 or 1% of the net assets of such Fund. A shareholder who receives a
distribution in kind may incur a brokerage commission upon a later disposition
of such securities and may receive less than the redemption value of such
securities or property upon sale, particularly where such securities are sold
prior to maturity. Redemption in kind is not as liquid as a cash redemption.
Under the 1940 Act, a Fund may suspend the right of redemption or postpone
the date of payment upon redemption for any period during which the New York
Stock Exchange is closed, other than customary weekend and holiday closings, or
during which trading on said Exchange is restricted, or during which (as
determined by the Commission 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 Commission 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.)
ADDITIONAL INFORMATION CONCERNING TAXES
TAXATION OF A FUND
The following discussion is a brief summary of certain additional tax
considerations affecting a Fund and its shareholders. No attempt is made to
present a detailed explanation of all federal, state, local and foreign tax
concerns, and the discussions set forth here and in the Prospectus do not
constitute tax advice. Investors are urged to consult their own tax advisers
with specific questions relating to federal, state, local or foreign taxes.
Each Fund intends to qualify and elect to be treated as a regulated
investment company (a "RIC") under Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"). Qualification as a RIC requires, among other
things, that a Fund: (a) derive at least 90% of its gross income in each
taxable year from dividends, interest, payments with respect to securities
loans and gains from the sale or other disposition of stock or securities,
foreign currencies or other income (including gains from options, futures or
forward contracts) derived with respect to its business of investing in such
stock, securities or currencies; (b) derive less than 30% of its gross income
in each taxable year from the sale or other disposition of any of the following
held for less than three months: stock, securities, options, futures, certain
forward contracts, or foreign currencies (or any options, futures or forward
contracts on foreign currencies) but only if such currencies are not directly
related to a Fund's principal business of investing in stock or securities; and
(c) diversify its holdings so that, at the end of each quarter of each taxable
year, (i) at least 50% of the market value of a Fund's assets is represented by
cash, cash items, U.S. government securities, securities of other
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82
regulated investment companies and other securities with such other securities
limited, in respect of any one issuer, to an amount not greater than 5% of the
value of a Fund's assets and 10% of the outstanding voting securities of such
issuer, and (ii) not more than 25% of the value of its assets is invested in
the securities of any one issuer (other than U.S. government securities or the
securities of other regulated investment companies).
As a RIC, a Fund will not be subject to federal income tax on its net
investment income (i.e., its investment company taxable income, as that term is
defined in the Code, determined without regard to the deduction for dividends
paid) and "net capital gains" (the excess of the Fund's long-term capital gains
over short-term capital losses), if any, that it distributes in each taxable
year to its shareholders, provided that it distributes 90% of its net
investment income for such taxable year. However, a Fund would be subject to
corporate income tax (currently at a maximum rate of 35%) on any undistributed
net investment income and net capital gains. Each Fund expects to designate
amounts retained as undistributed net capital gains in a notice to its
shareholders who (i) will be required to include in income for United States
federal income tax purposes, as long-term capital gains, their proportionate
shares of the undistributed amount, (ii) will be entitled to credit their
proportionate shares of the 35% tax paid by a Fund on the undistributed amount,
against their federal income tax liabilities and to claim refunds to the extent
such credits exceed their liabilities and (iii) will be entitled to increase
their tax basis, for federal income tax purposes, in their shares by an amount
equal to 65% of the amount of undistributed net capital gains included in the
shareholder's income.
A Fund will be subject to a non-deductible 4% excise tax to the extent
that a Fund does not distribute by the end of each calendar year: (a) at least
98% of its ordinary income for such calendar year; (b) at least 98% of the
excess of its capital gains over its capital losses for the one-year period
ending, as a general rule, on October 31 of each year; and (c) 100% of the
undistributed income and gains from the preceding calendar year (if any)
pursuant to the calculations in (a) and (b). For this purpose, any income or
gain retained by a Fund that is subject to corporate tax will be considered to
have been distributed by year-end.
A Fund's investment in options, swaps and related transactions, futures
contracts and forward contracts, options on futures contracts and stock indices
and certain other securities, including transactions involving actual or deemed
short sales or foreign exchange gains or losses are subject to many complex and
special tax rules. For example, over-the-counter options on debt securities
and equity options, including options on stock and on narrow-based stock
indexes, will be subject to tax under Section 1234 of the Code, generally
producing a long-term or short-term capital gain or loss upon exercise, lapse
or closing out of the option or sale of the underlying stock or security. By
contrast, a Fund's treatment of certain other options, futures and forward
contracts entered into by a Fund is generally governed by Section 1256 of the
Code. These "Section 1256" positions generally include listed options on debt
securities, options on broad-based stock indexes, options on securities
indexes, options on futures contracts, regulated futures contracts and certain
foreign currency contracts and options thereon.
Absent a tax election to the contrary, each such Section 1256 position
held by a Fund will be marked-to-market (i.e., treated as if it were sold for
fair market value) on the last
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business day of a Fund's fiscal year, and all gain or loss associated with
fiscal year transactions and mark-to-market positions at fiscal year end
(except certain currency gain or loss covered by Section 988 of the Code) will
generally be treated as 60% long-term capital gain or loss and 40% short-term
capital gain or loss. The effect of Section 1256 mark-to market rules may be
to accelerate income or to convert what otherwise would have been long-term
capital gains into short-term capital gains or short-term capital losses into
long-term capital losses within a Fund. The acceleration of income on Section
1256 positions may require a Fund to accrue taxable income without the
corresponding receipt of cash. In order to generate cash to satisfy the
distribution requirements of the Code, a Fund may be required to dispose of
portfolio securities that they otherwise would have continued to hold or to
use cash flows from other sources such as the sale of Fund shares. In these
ways, any or all of these rules may affect the amount, character and timing of
income earned and in turn distributed to shareholders by a Fund.
When a Fund holds options or contracts which substantially diminish their
risk of loss with respect to other positions (as might occur in some hedging
transactions), this combination of positions could be treated as a "straddle"
for tax purposes, resulting in possible deferral of losses, adjustments in the
holding periods of Fund securities and conversion of short-term capital losses
into long-term capital losses. Certain tax elections exist for mixed straddles
i.e., straddles comprised of at least one Section 1256 position and at least
one non-Section 1256 position which may reduce or eliminate the operation of
these straddle rules.
As a RIC, a Fund is also subject to the requirement that less than 30% of
its annual gross income be derived from the sale or other disposition of
securities and certain other investment held for less than three months (the
"short-short test"). This requirement may limit a Fund's ability to engage in
options, spreads, straddles, hedging transactions, forward or futures contracts
or options on any of these positions because these transactions are often
consummated in less than three months, may require the sale of portfolio
securities held less than three months and may, as in the case of short sales
of portfolio securities reduce the holding periods of certain securities within
a Fund, resulting in additional short-short income for such Fund.
A Fund will monitor its transactions in such options and contracts and may
make certain other tax elections in order to mitigate the effect of the above
rules and to prevent disqualification of the Fund as a RIC under Subchapter M
of the Code.
A Fund may make investments that produce income that is not matched by a
corresponding cash distribution to the Fund, such as investments in pay-in-kind
bonds or in obligations such as certain Brady Bonds or zero-coupon securities
having original issue discount (i.e., an amount equal to the excess of the
stated redemption price of the security at maturity over its issue price), or
market discount (i.e., an amount equal to the excess of the stated redemption
price of the security over the basis of such bond immediately after it was
acquired) if the Fund elects to accrue market discount on a current basis. In
addition, income may continue to accrue for federal income tax purposes with
respect to a non-performing investment. Any such income would be treated as
income earned by a Fund and therefore
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would be subject to the distribution requirements of the Code. Because such
income may not be matched by a corresponding cash distribution to a Fund, such
Fund may be required to borrow money or dispose of other securities to be able
to make distributions to its investors. The extent to which a Fund may
liquidate securities at a gain may be limited by the "short-short test"
discussed above. In addition, if an election is not made to currently accrue
market discount with respect to a market discount bond, all or a portion of any
deduction for any interest expense incurred to purchase or hold such bond may
be deferred until such bond is sold or otherwise disposed.
If a Fund purchases shares in certain foreign investment entities, called
"passive foreign investment companies" ("PFICs"), the Fund may be subject to
U.S. federal income tax on a portion of any "excess distribution" or gain from
the disposition of shares even if the income is distributed as a taxable
dividend by the Fund to its shareholders. Additional charges in the nature of
interest may be imposed on either a Fund or its shareholders with respect to
deferred taxes arising from the distributions or gains. If a fund were to
invest in a PFIC and (if the Fund received the necessary information available
from the PFIC, which may be difficult to obtain) elected to treat the PFIC as a
"qualified electing fund" under the Code (a "QEF"), in lieu of the foregoing
requirements, the Fund might be required to include in income each year a
portion of the ordinary earnings and net capital gains of the PFIC, even if not
distributed to the Fund, and the amounts would be subject to the 90% and excise
tax distribution requirements described above. Because of the expansive
definition of a PFIC, it is possible that a Fund may invest a portion of its
assets in PFICs.
In the case of PFIC stock owned by a RIC, H.R. 2491, as passed by Congress
and vetoed by President Clinton, contained a provision that would have
permitted a RIC to elect to annually mark-to-market stock in the PFIC and
thereby avoid the need for a RIC to make a QEF election. It is unclear whether
similar legislation will be included as part of the 1996 budget compromise.
Moreover, on April 1, 1992 the Internal Revenue Service proposed regulations
providing a mark-to-market election for RICs that would have effects similar to
the proposed legislation. These regulations would be effective for taxable
years ending after promulgation of the regulations as final regulations.
TAXATION OF U.S. SHAREHOLDERS
The Prospectus describes each Fund's policy with respect to distribution
of net investment income and any net capital gains. Shareholders should
consider the tax implications of buying shares just prior to a distribution.
Although the price of shares purchased at that time may reflect the amount of
the forthcoming distribution, those purchasing just prior to a distribution
will receive a distribution which will nevertheless be taxable to them.
Shareholders receiving a distribution in the form of additional shares
will be treated for federal income tax purposes as receiving a distribution in
an amount equal to the fair market value, determined as of the distribution
date, of the shares received and will have a cost basis in each share received
equal to the fair market value of a share of a Fund on the distribution
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date. Shareholders will be notified annually as to the federal tax status of
distributions, and shareholders receiving distributions in the form of shares
will receive a report as to the fair market value of the shares received.
Gain or loss on the sale or other disposition of Fund shares will result
in capital gain or loss to shareholders. Generally, a shareholder's capital
gain or loss will be long-term gain or loss if the shares have been held for
more than one year. In general, the maximum federal income tax rate imposed on
individuals with respect to net realized long-term capital gains will be
limited to 28%, whereas the maximum federal income tax rate imposed on
individuals with respect to net realized short-term capital gains (which are
taxed at ordinary income rates) will be 39.6%. With respect to corporate
taxpayers, long-term capital gains are taxed at the same federal income tax
rates as short-term capital gains, the maximum rate being 35%. If a
shareholder redeems or exchanges shares of a Fund before he or she has held
them for more than six months, any short-term capital loss on such redemption
or exchange will be treated as a long-term capital loss to the extent of any
capital gain dividends received by the shareholder (or credited to the
shareholder as an undistributed capital gain) with respect to such shares.
Under H.R. 2491, as passed by Congress and vetoed by President Clinton,
individual taxpayers would have been permitted a 50 percent deduction for any
capital gains that they recognized, and corporations would have been taxed at a
28 percent rate on capital gains, in lieu of the regular corporate rate. The
provisions generally were to have retroactive effect to January 1, 1995. It is
unclear whether similar legislation will be included as part of the 1996 budget
compromise and, if so, what the effective date will be.
It is expected that a portion of the dividends of net investment income
received by corporate shareholders from a Fund (other than the Cash Management
Fund) will qualify for the federal dividends received deduction generally
available to corporations. The dividends received deduction for corporate
shareholders may be reduced if the securities with respect to which dividends
are received by a Fund are (1) considered to be "debt-financed" (generally,
acquired with borrowed funds), (2) held by a Fund for less than 46 days (91
days in the case of certain preferred stock) or (3) subject to certain forms of
hedges or short sales. The amount of any dividend distribution eligible for
the corporate dividends received deduction will be designated by a Fund in a
written notice within 60 days of the close of the taxable year.
A Fund may be subject to certain taxes, including without limitation,
taxes imposed by foreign countries with respect to its income and capital
gains. If a Fund qualifies as a RIC, certain distribution requirements are
satisfied and more than 50% of the value of the Fund's total assets at the
close of any taxable year consists of stock or securities of foreign
corporations, which for this purpose may include obligations of foreign
governmental issuers, the Fund may elect, for United States federal income tax
purposes, to treat any foreign country's income or withholding taxes paid by
the Fund that can be treated as income taxes under the United States income tax
principles, as paid by its shareholders.
The Asia Growth Fund expects to qualify for and make this election. For
any year that the Asia Growth Fund makes such an election, each shareholder
will be required to include in its income an amount equal to his or her
allocable share of such income taxes paid by the
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Asia Growth Fund to a foreign country's government and shareholders will be
entitled, subject to certain limitations, to credit their portions of these
amounts against their United States federal income tax due, if any, or to
deduct their portions from their United States taxable income, if any. No
deductions for foreign taxes paid by the Asia Growth 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 the Asia Growth Fund generally will not be subject to
United States federal income tax.
THE NEW YORK MUNICIPAL BOND FUND AND NATIONAL INTERMEDIATE MUNICIPAL FUND
The New York Municipal Bond Fund and the National Intermediate Municipal
Fund each intends to qualify to pay "exempt-interest dividends," as that term
is defined in the Code, by holding at the end of each quarter of its taxable
year at least 50% of the value of its total assets in the form of obligations
described in section 103(a) of the Code. Each Fund's policy is to pay in each
taxable year exempt-interest dividends equal to at least 90% of such Fund's
interest from tax-exempt obligations net of certain deductions. Except as
discussed below, exempt-interest dividends will be exempt from regular federal
income tax. In addition, dividends from the New York Municipal Bond Fund will
not be subject to New York State and New York City personal income taxes to the
extent that such distributions qualify as exempt-interest dividends and
represent interest income attributable to federally tax-exempt obligations of
the State of New York and its political subdivisions (as well as certain other
federally tax-exempt obligations the interest on which is exempt from New York
State and New York City personal income taxes). Dividends from the New York
Municipal Bond Fund, however, are not excluded in determining New York State or
New York City franchise taxes on corporations and financial institutions.
Because the New York Municipal Bond Fund and the National Intermediate
Municipal Fund will primarily invest in municipal obligations, dividends from
these Funds will generally be exempt from regular federal income tax in the
hands of shareholders, however, a portion may be subject to the alternative
minimum tax. Federal tax law imposes an alternative minimum tax with respect
to both corporations and individuals based on certain items of tax preference.
Interest on certain municipal obligations, such as bonds issued to make loans
for housing purposes or to private entities (but not to certain tax-exempt
organizations such as universities and non-profit hospitals) is included as an
item of tax preference in determining the amount of a taxpayer's alternative
minimum taxable income. To the extent the New York Municipal Bond Fund or the
National Intermediate Municipal Fund makes such an investment, a portion of the
exempt-interest dividends paid, although otherwise exempt from federal income
tax, will be taxable to shareholders to the extent that their tax liability
will be determined under the alternative minimum tax. The New York Municipal
Bond Fund and the National Intermediate Municipal Fund will annually supply
shareholders with a report
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indicating the percentage of Fund income attributable to municipal obligations
subject to the alternative minimum tax. Additionally, taxpayers must disclose
to the Internal Revenue Service on their tax returns the entire amount of
tax-exempt interest (including exempt-interest dividends on shares of the Fund)
received or accrued during the year.
In addition, for corporations, the alternative minimum taxable income is
increased by a percentage of the amount by which an alternative measure of
income ("adjusted current earnings," referred to as "ACE") exceeds the amount
otherwise determined to be the alternative minimum taxable income. Interest on
all municipal obligations, and therefore all exempt-interest dividends paid by
the New York Municipal Bond Fund or the National Intermediate Municipal Fund,
is included in calculating ACE.
The Superfund Act of 1986 imposes a separate tax on corporations at a rate
of 0.12% of the excess of such corporation's "modified alternative minimum
taxable income" over $2,000,000. A portion of a corporate shareholder's
tax-exempt interest, including exempt-interest dividends from the New York
Municipal Bond Fund or the National Intermediate Municipal Fund, may be
includible in calculating such shareholder's modified alternative minimum
taxable income.
Taxpayers that may be subject to the alternative minimum tax should
consult their tax advisers before investing in the New York Municipal Bond Fund
or the National Intermediate Municipal Fund.
Shares of the New York Municipal Bond Fund and the National Intermediate
Municipal Fund would not be a suitable investment for tax-exempt institutions
and may not be a suitable investment for retirement plans qualified under
Section 401 of the Code, H.R. 10 plans and individual retirement accounts,
because such plans and accounts are generally tax-exempt or tax deferred and,
therefore, would not gain any additional benefit from the receipt of
exempt-interest dividends from the Fund. Moreover, subsequent distributions of
such dividends to the beneficiaries will be taxable.
In addition, the New York Municipal Bond Fund and the National
Intermediate Municipal Fund may not be an appropriate investment for entities
that are "substantial users" of facilities financed by private activity bonds
or "related persons" thereof. A "substantial user" is defined under U.S.
Treasury Regulations to include a non-exempt person who regularly uses a part
of such facilities in his trade or business and, unless such facility, or part
thereof, is constructed, reconstructed or acquired specifically for the
non-exempt person, whose gross revenue derived with respect to the facilities
financed by the issuance of bonds is more than 5% of the total revenue derived
by all users of such facilities. "Related persons" include certain related
natural persons, affiliated corporations, partnerships and their partners and S
Corporations and their shareholders. The foregoing is not a complete statement
of all of the provisions of the Code covering the definitions of "substantial
user" and "related person". For additional information, investors should
consult their tax advisers before investing in the New York Municipal Bond Fund
or the National Intermediate Municipal Fund.
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All or a portion of the exempt-interest dividends received by certain
foreign corporations may be subject to the federal branch profits tax.
Likewise, all or a portion of the exempt-interest dividends may be taxable to
certain Subchapter S Corporations that have Subchapter C earnings and profits
and substantial passive investment income. In addition, the exempt-interest
dividends may reduce the deduction for loss reserves for certain insurance
companies. Such corporations and insurance companies should consult their tax
advisers before investing in the New York Municipal Bond Fund or the National
Intermediate Municipal Fund. The Code may also require shareholders that
receive exempt-interest dividends to treat as taxable income a portion of
certain otherwise nontaxable social security and railroad retirement benefit
payments.
PERFORMANCE DATA
As indicated in the Prospectus, from time to time, a Fund may quote its
"yield," "tax-equivalent yield," "effective yield," "average annual total
return" and/or "aggregate total return" for all classes of shares 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 may
include time periods prior to the implementation of the Multiple Pricing System
described in the Prospectus, and will be calculated as described below.
AVERAGE ANNUAL TOTAL RETURN
A Fund's "average annual total return" figures, as described and shown in
the Prospectus, are computed according to a formula prescribed by the
Commission. The formula can be expressed as follows:
n
P(1+T) = 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.
In calculating the ending redeemable value, for Class A shares, the
current maximum front end sales charge of 4.75% (as a percentage of the
offering price) is deducted from the initial $1,000 payment, and for Class A,
Class B and Class C shares, the applicable CDSC imposed on redemption is
deducted. The schedule of CDSCs due upon redemption is described under
"Redemption of Shares" in the Prospectus.
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The Cash Management Fund, the New York Municipal Bond Fund and the
Investors Fund implemented the Multiple Pricing System by reclassifying the
then existing shares of each such Fund as shares of a particular class of each
such Fund. This reclassification was effected in such a manner so that the
shares of each existing Fund outstanding at December 31, 1994 would be subject
to identical distribution and service fees both before and after the
reclassification. Specifically, all outstanding shares of the Cash Management
Fund, the New York Municipal Bond Fund and the Investors Fund were reclassified
as Class O shares of each such Fund.
The percentages shown in the tables below reflect front end sales charges
and CDSCs, if any, currently payable by each class of shares under the Multiple
Pricing System, and are based on the fees and expenses actually paid by each
Fund for the periods presented. The distribution and service fees currently
payable by each class of shares under the Multiple Pricing System are described
in "Purchase of Shares -- Distributor" in the Prospectus.
The following tables set forth the average annual total returns for each
class of shares of each of the New York Municipal Bond Fund, National
Intermediate Fund, U.S. Government Income Fund, High Yield Bond Fund, Strategic
Bond Fund, Total Return Fund (after management fee waiver and reimbursement of
certain expenses) and the Investors Fund for certain periods of time ending
December 31, 1995 and reflect the effects of the maximum applicable front end
sales charges and any applicable CDSCs payable by an investor under the
Multiple Pricing System.
<PAGE> 221
90
NEW YORK MUNICIPAL BOND FUND
<TABLE>
<CAPTION>
From commencement of
applicable class'
investment operations
Twelve Months through
ended 12/31/95 December 31, 1995**
-------------- -------------------
<S> <C> <C>
Class A N/A 12.05%
Class B N/A 11.95%
Class C N/A 15.95%
Class O 18.76% 5.97%
</TABLE>
** Commencement of investment operations was January 3, 1995 for Class A, B
and C shares and February 1, 1993 for Class O shares.
NATIONAL INTERMEDIATE MUNICIPAL FUND
<TABLE>
<CAPTION>
From February 22, 1995 (commencement of investment
operations through December 31, 1995)
-------------------------------------------------------
<S> <C>
Class A 3.56%
Class B 2.97%
Class C 6.97%
Class O 8.96%
</TABLE>
U.S. GOVERNMENT INCOME FUND
<TABLE>
<CAPTION>
From February 22, 1995 (commencement of investment
operations through December 31, 1995)
---------------------------------------------------------
<S> <C>
Class A 4.27%
Class B 3.79%
Class C 7.79%
Class O 9.71%
</TABLE>
HIGH YIELD BOND FUND
<TABLE>
<CAPTION>
From February 22, 1995 (commencement of investment
operations through December 31, 1995)
--------------------------------------------------------
<S> <C>
Class A 11.01%
Class B 10.73%
Class C 14.75%
Class O 16.76%
</TABLE>
<PAGE> 222
91
STRATEGIC BOND FUND
<TABLE>
<CAPTION>
From February 22, 1995 (commencement of investment
operations through December 31, 1995)
--------------------------------------------------------
<S> <C>
Class A 11.25%
Class B 11.14%
Class C 15.07%
Class O 17.04%
</TABLE>
TOTAL RETURN FUND
<TABLE>
<CAPTION>
From September 11, 1995 (commencement of
investment operations through December 31, 1995)
------------------------------------------------
<S> <C>
Class A 1.58%
Class B 1.44%
Class C 5.54%
Class O 6.89%
</TABLE>
INVESTORS FUND
<TABLE>
<CAPTION>
From Commencement of
Investment operations of
Class A, B and C
(January 3, 1995) through
December 31, 1995 1 year 5 years 10 years
------------------------- ------ ------- --------
<S> <C> <C> <C> <C>
Class A 28.90% N/A N/A N/A
Class B 29.50% N/A N/A N/A
Class C 33.51% N/A N/A N/A
Class O N/A 35.39% 16.42% 12.62%
</TABLE>
As described in the Prospectus under the caption "Expense Information,"
each of the Funds, except Investors Fund, has been and still is subject to
certain fee waivers and expense reimbursements. Absent such waiver and
reimbursement, the returns shown above for such Funds would be lower.
The performance data quoted represents past performance; investment
returns and principal value of an investment will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost.
AGGREGATE TOTAL RETURN
The "aggregate total return" figures for each class of 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:
<PAGE> 223
92
AGGREGATE TOTAL RETURN = ERV - P
-------
P
Where: P = a hypothetical initial payment of $10,000.
ERV = Ending Redeemable Value of a hypothetical $10,000 investment made at
the beginning of a 1-, 5-, or 10-year period at the end of such period (or
fractional portion thereof), assuming reinvestment of all dividends and
distributions.
YIELD
With respect to the Cash Management Fund, yield quotations are expressed
in annualized terms and may be quoted on a compounded basis.
The current yield for the Cash Management 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 Cash Management
Fund may calculate a compound effective annualized yield by adding 1 to the
base period return (calculated as described above), raising the sum to a power
equal to 365/7 and subtracting 1.
For the seven-day period ended December 31, 1995 the annualized yield and
effective yield for each class of shares of the Cash Management Fund were 5.38%
and 5.53%, respectively. Because Class A, B and C shares of the Cash
Management Fund, like Class O shares, are not subject to any sales charges or
service or distribution fees, the yield and effective yield figures for Class
A, B and C shares of the Cash Management Fund would be the same as those for
Class O shares.
In periods of declining interest rates the Cash Management Fund's yield
will tend to be somewhat higher than prevailing market rates on short-term
obligations, and in periods of rising interest rates the Fund's yield will tend
to be somewhat lower. Also, when interest rates are falling, the inflow of net
new money to the Cash Management 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.
THIRTY DAY YIELD
Certain Funds may advertise the yields for each class of such Funds based
on a 30-day (or one month) period according to the following formula:
<PAGE> 224
93
a-b
v
-------------
6
Yield = 2 = [ ( cd + 1) - 1 ]
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends
d = the maximum offering price per share on the last day
of the period
Under this formula, interest earned on debt obligations for purposes of
"a" above, is calculated by (1) computing the yield to maturity of each
obligation held by the New York Municipal Bond Fund or the National
Intermediate Municipal Fund based on the market value of the obligation
(including actual accrued interest) at the close of business on the last day of
each month, or, with respect to obligations purchased during the month, the
purchase price (plus actual accrued interest), (2) dividing that figure by 360
and multiplying the quotient by the market value of the obligation (including
actual accrued interest as referred to above) to determine the interest income
on the obligation in the Fund's portfolio (assuming a month of 30 days) and (3)
computing the total of the interest earned on all debt obligations during the
30-day or one month period. Any amounts representing sales charges will not
be included among these expenses; however, the New York Municipal Bond Fund and
the National Intermediate Municipal Fund will disclose the maximum sales charge
as well as any amount or specific rate of any nonrecurring account charges.
Undeclared dividends, computed in accordance with Commission guidelines, may be
subtracted from the maximum offering price calculation required pursuant to "d"
above.
The thirty day yield of the New York Municipal Bond Fund at December 31,
1995 was 4.56% for Class A, 4.03% for Class B, 4.04% for Class C and 5.04% for
Class O. The thirty day yield of the National Intermediate Municipal Fund at
December 31, 1995 was 4.18% for Class A, 3.63% for Class B, 3.64% for Class C
and 4.68% for Class O.
The tax equivalent yield of the New York Municipal Bond Fund and the
National Intermediate Municipal Fund is computed by dividing that portion of
the respective Fund's yield (computed as described above) that is tax-exempt by
one minus the stated combined regular federal income and, in the case of the
New York Municipal Bond Fund, the New York State personal and, if applicable,
New York City personal income tax rate and adding the result to that portion,
if any, of the yield of the Fund that is not tax-exempt.
The tax equivalent yield of the New York Municipal Bond Fund at December
31, 1995 was 8.54% for Class A, 7.55% for Class B, 7.57% for Class C and
9.44% for Class O. The tax equivalent yield of the National Intermediate
Municipal Fund on December 31, 1995 was 6.92% for Class A, 6.01% for Class B,
6.03% for Class C and 7.68% for Class O.
Any quotation of performance stated in terms of yield (whether or not
based on a 30-day period) will be given no greater prominence than the
information prescribed under
<PAGE> 225
94
Commission 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.
Yield and total return figures are calculated separately for Class A,
Class B, Class C and Class O shares of a Fund. In the examples above, these
calculations adjust for the different front end sales charges and CDSCs
currently payable with respect to each class and are based on expenses actually
paid by each Fund for the periods presented.
Advertisements and communications may compare a Fund's performance with
that of other mutual funds, as reported by Lipper Analytical Services, Inc. or
similar independent services or financial publications. From time to time,
advertisements and other Fund materials and communications may cite statistics
to reflect a Fund's performance over time utilizing, for example, with respect
to the New York Municipal Bond Fund and the National Intermediate Municipal
Fund, comparisons to indices such as the Bond Buyer 40-Bond Index and, with
respect to the New York Municipal Bond Fund, the Lipper Composite New York
Municipal Bond Fund Returns.
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.
SHAREHOLDER SERVICES
EXCHANGE PRIVILEGE. Shareholders may exchange all or part of their Fund
shares for shares of the same class of other Funds in the Salomon Brothers
Investment Series, as indicated in the Prospectus, to the extent such shares
are offered for sale in the shareholder's state of residence.
The exchange privilege enables shareholders of a Fund to acquire shares in
a Fund with different investment objectives when they believe that a shift
between Funds is an appropriate investment decision. This privilege is
available to shareholders residing in any state in which the Fund shares being
acquired may legally be sold.
Exercise of the exchange privilege is treated as a sale and repurchase for
federal income tax purposes and, depending on the circumstances, a short- or
long-term capital gain or loss may be realized. The price of the shares of the
fund into which shares are exchanged will be the new cost basis for tax
purposes.
<PAGE> 226
95
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
plus any applicable sales charge.
All accounts involved in a telephone or telegram exchange must have the
same registration. If a new account is to be established, the dollar amount to
be exchanged must be at least as much as the minimum initial investment of the
Fund whose shares are being purchased. Any new account established by exchange
will automatically be registered in the same way as the account from which
shares are exchanged and will carry the same dividend option.
The exchange privilege is not designed for investors trying to catch
short-term savings in market prices by making frequent exchanges. A Fund
reserves the right to impose a limit on the number of exchanges a shareholder
may make. Call or write the applicable Fund for further details.
AUTOMATIC WITHDRAWAL PLAN. With respect to any Fund, an Automatic
Withdrawal Plan may be opened with an account having a minimum account value as
described in the Prospectus. All dividends and distributions on the shares
held under the Withdrawal Plan are automatically reinvested at net asset value
in full and fractional shares of the same class of a Fund. Withdrawal payments
are made by First Data Investor Services Group, Inc. ("FDISG") formerly. The
Shareholders Services Group, Inc., as agent, from the proceeds of the
redemption of such number of shares as may be necessary to make each periodic
payment. As such redemptions involve the use of capital, over a period of time
they may exhaust the share balance of an account held under a Withdrawal Plan.
Use of a Withdrawal Plan cannot assure realization of investment objectives,
including capital growth or protection against loss in declining markets. A
Withdrawal Plan can be terminated at any time by the investor, a Fund or FDISG
upon notice in writing.
The Withdrawal Plan will not be carried over on exchanges between Funds or
classes. A new Withdrawal Plan application is required to establish the
Withdrawal Plan in the new Fund or class. For additional information,
shareholders should call (800) SALOMON or (800) 725-6666.
SELF EMPLOYED RETIREMENT PLANS. Each Fund offers a prototype retirement
plan for self-employed individuals. Under such plan, self-employed individuals
may contribute out of earned income to purchase shares of a Fund and/or certain
other mutual funds managed by SBAM.
Each Fund's custodian has agreed to serve as custodian and furnish the
services provided for in the plan and the related custody agreement. Each
Fund's custodian will charge individuals adopting a self employed retirement
plan an application fee as well as certain additional fees for its services
under the custody agreement.
<PAGE> 227
96
For information required for adopting a self employed retirement plan,
including information on fees, obtain the form of the plan and custody
agreement available from a Fund. Because application of particular tax
provisions will vary depending on each individual's situation, consultation
with a financial adviser regarding a self employed retirement plan is
recommended.
IRAS. A prototype individual retirement account ("IRA") is available,
which has been approved as to form by the Internal Revenue Service ("IRS").
Contributions to an IRA made available by a Fund may be invested in shares of
such Fund and/or certain other mutual funds managed by SBAM.
Each Fund's custodian has agreed to serve as custodian of the IRA and
furnish the services provided for in the custody agreement. Each Fund's
custodian will charge each IRA an application fee as well as certain additional
fees for its services under the custody agreement. In accordance with IRS
regulations, an individual may revoke an IRA within seven calendar days after
it is established.
Contributions in excess of allowable limits, premature distributions to an
individual who is not disabled before age 59-1/2 or insufficient distributions
after age 70-1/2 will generally result in substantial adverse tax consequences.
For information required for adopting an IRA, including information fees,
obtain the form of custody agreement and related materials, including
disclosure materials, available from a Fund. Consultation with a financial
adviser regarding an IRA is recommended.
CAPITAL STOCK
As used in this Statement of Additional Information and the Prospectus,
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) or
any particular class (e.g., approval of plans of distribution) and requiring a
vote under the 1940 Act means the vote of the lesser of (i) 67% of the shares
of that particular portfolio or class, as appropriate, represented at a meeting
if the holders of more than 50% of the outstanding shares of such portfolio or
class, as appropriate, are present in person or by proxy or (ii) more than 50%
of the outstanding shares of such portfolio or class, as appropriate.
Shareholders are entitled to one vote for each full share held and fractional
votes for fractional shares held.
Shares of each class of each Fund are entitled to such dividends and
distributions out of the assets belonging to that class as are declared in the
discretion of the applicable Board of Directors. In determining the net asset
value of a class of a Fund, assets belonging to a particular class are credited
with a proportionate share of any general assets of the Fund not belonging to a
particular class and are charged with the direct liabilities in respect of that
class of the Fund and with a share of the general liabilities of the investment
company which
<PAGE> 228
97
are normally allocated in proportion to the relative net asset values of the
respective classes of the Funds at the time of allocation.
In the event of the liquidation or dissolution of the investment company,
shares of each class 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 the classes of each Fund, of any general
assets not attributable to a portfolio 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.
Subject to the provisions of the applicable investment company's charter,
determinations by the Board of Directors as to the direct and allocable
liabilities and the allocable portion of any general assets of the investment
company, with respect to a particular Fund or class are conclusive.
The shares of the Investors Fund have non-cumulative voting rights. This
means that the holders of more than 50% of the shares voting for the election
of directors can elect 100% of the directors, if they choose to do so. In such
event, the holders of the remaining less than 50% of the shares voting for such
election will not be able to elect any person or persons to the Board of
Directors.
CUSTODIAN AND TRANSFER AGENT
Investors Bank, which is located at 89 South Street, Boston, Massachusetts
02111, serves as custodian for each Fund. As a Fund's custodian, Investors
Bank, among other things, maintains a custody account or accounts in the name
of the Fund; receives and delivers all assets for the Fund upon purchase and
upon sale or maturity; collects and receives all income and other payments and
distributions on account of the assets of the Fund; and makes disbursements on
behalf of the Fund. The custodian does not determine the investment policies
of a Fund, nor decide which securities a Fund will buy or sell. For its
services, the custodian receives a monthly fee based upon the daily average
market value of securities held in custody and also receives securities
transaction charges, including out-of-pocket expenses. The assets of each Fund
are held under bank custodianship in compliance with the 1940 Act. A Fund may
also periodically enter into arrangements with other qualified custodians with
respect to certain types of securities or other transactions such as repurchase
agreements or derivatives transactions.
FDISG, a subsidiary of First Data Corporation, which is located at One
Exchange Place, Boston, Massachusetts 02109, serves as transfer agent for each
Fund. 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 computed
<PAGE> 229
98
separately for each class of a Fund's shares and is reimbursed separately by
each class for out-of-pocket expenses.
VALIDITY OF SHARES
The validity of the shares of each Fund will be passed upon by Piper &
Marbury L.L.P., Baltimore, Maryland.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP ("Price Waterhouse") provides audit services, tax
return preparation and assistance and consultation in connection with review of
Commission filings. The financial statements and financial highlights included
or incorporated by reference in the Prospectus and included in this Statement
of Additional Information have been included in reliance on the report of Price
Waterhouse, independent accountants, given on the authority of that firm as
experts in auditing and accounting. Price Waterhouse's address is 1177 Avenue
of the Americas, New York, New York 10036.
COUNSEL
Simpson Thacher & Bartlett serves as counsel to each Fund (a partnership
which includes professional corporations), and is located at 425 Lexington
Avenue, New York, New York 10017-3954.
OTHER INFORMATION
The Prospectus and this Statement of Additional Information do not contain
all the information included in the Registration Statement filed with the
Commission under the 1933 Act with respect to the securities offered by the
Prospectus. Certain portions of the Registration Statement have been omitted
from the Prospectus and this Statement of Additional Information pursuant to
the rules and regulations of the Commission. The Registration Statement
including the exhibits filed therewith may be examined at the office of the
Commission in Washington, D.C.
Statements contained in the Prospectus or in this Statement of Additional
Information as to the contents of any contract or other document referred to
are not necessarily complete, and, in each instance, reference is made to the
copy of such contract or other document filed as an exhibit to the Registration
Statement of which the Prospectus and this Statement of Additional Information
form a part, each such statement being qualified in all respects by such
reference.
<PAGE> 230
FINANCIAL STATEMENTS
<PAGE> 231
SALOMON BROTHERS INVESTMENT SERIES
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
December 31, 1995
SALOMON BROTHERS CASH MANAGEMENT FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YIELD TO
MATURITY ON
PRINCIPAL DATE OF MATURITY VALUE (NOTE
AMOUNT DESCRIPTION PURCHASE* DATE 1A)
- --------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
COMMERCIAL PAPER -- 29.4%
CONSUMER NON-CYCLICALS -- 3.6%
$ 400,000 Heinz (HJ)................................. 5.600% 02/06/96 $ 397,760
-----------
FINANCIAL SERVICES -- 7.3%
400,000 BIL North America.......................... 5.750 01/16/96 399,042
400,000 Ford Motor Credit.......................... 5.550 02/13/96 397,348
-----------
796,390
-----------
MEDIA -- 3.7%
400,000 Gannett.................................... 5.630 01/26/96 398,436
-----------
MUNICIPAL -- 7.4%
400,000 De Kalb County, Georgia Development
Authority................................ 5.950 01/25/96 400,000
400,000 Methodist Hospital (Houston, Texas)........ 5.950 01/02/96 400,000
-----------
800,000
-----------
TELECOMMUNICATIONS & UTILITIES -- 3.7%
400,000 U.S. West Communications................... 5.700 01/25/96 398,480
-----------
TRANSPORTATION -- 3.7%
400,000 Daimler-Benz NA............................ 5.670 01/26/96 398,425
-----------
TOTAL COMMERCIAL PAPER
(cost $3,189,491)........................ 3,189,491
-----------
FLOATING RATE NOTES -- 60.0%
ALABAMA -- 3.7%
400,000 Selma, Alabama Industrial Development Board
VR....................................... 6.280 01/09/96 400,000
-----------
CALIFORNIA -- 3.7%
400,000 Pasadena, California Certificates of
Participation VR......................... 6.000 01/02/96 400,000
-----------
FLORIDA -- 3.7%
400,000 Florida Housing Finance Agency VR.......... 5.860 01/03/96 400,000
-----------
ILLINOIS -- 3.7%
400,000 Illinois Student Assistance Commission
VR....................................... 6.160 01/03/96 400,000
-----------
MICHIGAN -- 1.8%
200,000 Genesis Health Systems VR.................. 5.930 01/03/96 200,000
-----------
NEW JERSEY -- 5.1%
260,000 New Jersey Economic Development
Authority VR............................. 6.070 01/02/96 260,000
300,000 New Jersey Economic Development
Authority VR............................. 6.190 01/02/96 300,000
-----------
560,000
-----------
</TABLE>
See accompanying notes to financial statements.
PAGE 11
<PAGE> 232
SALOMON BROTHERS INVESTMENT SERIES
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
December 31, 1995
SALOMON BROTHERS CASH MANAGEMENT FUND (concluded)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YIELD TO
MATURITY ON
PRINCIPAL DATE OF MATURITY VALUE (NOTE
AMOUNT DESCRIPTION PURCHASE* DATE 1A)
- --------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
NEW YORK -- 19.8%
$ 400,000 Fulton County, New York Industrial
Development Agency VR.................... 6.000% 01/04/96 $ 400,000
400,000 Health Insurance Plan,
Greater New York VR...................... 5.950 01/03/96 400,000
400,000 New York, New York
Industrial Development Agency VR......... 6.000 01/03/96 400,000
150,000 New York, New York
Industrial Development Agency VR......... 6.000 01/03/96 150,000
400,000 New York, New York GO VR................... 6.000 01/03/96 400,000
400,000 Syracuse, New York GO VR................... 7.000 01/03/96 400,000
-----------
2,150,000
-----------
NORTH CAROLINA -- 3.7%
400,000 Greensboro, North Carolina GO VR........... 6.050 01/03/96 400,000
-----------
TENNESSEE -- 3.7%
400,000 Community Health Systems VR................ 6.100 01/03/96 400,000
-----------
TEXAS -- 7.4%
400,000 Texas State GO VR.......................... 5.860 01/03/96 400,000
400,000 Tyler, Texas Health Facilities
Development VR........................... 6.100 01/03/96 400,000
-----------
800,000
-----------
VIRGINIA -- 3.7%
400,000 Virginia State, Housing Development
Authority VR............................. 5.950 01/03/96 400,000
-----------
TOTAL FLOATING RATE NOTES
(cost $6,510,000)........................ 6,510,000
-----------
TOTAL INVESTMENTS -- 89.4%
(cost $9,699,491)........................ 9,699,491
REPURCHASE AGREEMENT -- 9.5%
1,036,551 Repurchase Agreement dated 12/29/95, with
J.P. Morgan, collateralized by $795,000
U.S. Treasury Bonds, 8.500%, due
02/15/20, valued at $1,058,344; proceeds:
$1,037,213 (cost $1,036,551)............. 5.750 01/02/96 1,036,551
Other assets in excess of
liabilities -- 1.1%...................... 124,762
-----------
NET ASSETS -- 100.0%....................... $10,860,804
============
</TABLE>
* Yield to maturity on date of purchase, except in the case of Variable Rate
Demand Notes (VR), whose yields are determined on date of last interest rate
change. For Variable Rate Demand Notes, maturity date shown is the date of
next interest rate change.
Abbreviation used in this statement:
GO -- General Obligation
See accompanying notes to financial statements.
PAGE 12
<PAGE> 233
SALOMON BROTHERS INVESTMENT SERIES
SALOMON BROTHERS NEW YORK MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL INTEREST MATURITY VALUE
AMOUNT DESCRIPTION RATE DATE (NOTE 1A)
- -------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL SECURITIES -- 92.2%
NEW YORK -- 78.9%
$150,000 Metropolitan Transportation Authority New
York FSA................................... 5.700% 07/01/24 $ 152,012
300,000 New York City, New York
Municipal Water Finance Authority.......... 6.000 06/15/17 307,992
300,000 New York City, New York GO................... 7.375 08/15/13 340,968
300,000 New York City, New York GO................... 6.750 10/01/17 318,246
200,000 New York State GO............................ 6.000 03/15/20 208,436
250,000 New York State,
Local Government Assistance
Corporation................................ 6.000 04/01/18 261,725
100,000 New York State,
Medical Care Facilities Finance Agency..... 6.000 02/15/11 100,955
100,000 New York State,
Medical Care Facilities Finance Agency
MBIA....................................... 5.900 02/15/21 104,357
150,000 New York State,
Urban Development Corporation.............. 5.500 01/01/19 148,263
100,000 New York State, Dormitory Authority
(City University System of New York)....... 5.750 07/01/18 102,034
315,000 New York State, Dormitory Authority
(State University Educational
Facilities)................................ 6.000 05/15/17 316,777
200,000 New York State, Mortgage Agency.............. 6.500 04/01/13 208,236
250,000 New York State, Thruway Authority............ 6.000 04/01/10 254,083
200,000 Suffolk County, New York
Industrial Development Agency VR........... 5.850 01/02/96 200,000
----------
3,024,084
----------
PUERTO RICO -- 13.3%
250,000 Puerto Rico Commonwealth, GO................. 6.000 07/01/14 258,058
250,000 Puerto Rico Commonwealth, Highway Authority.. 6.000 07/01/20 254,033
----------
512,091
----------
TOTAL INVESTMENTS -- 92.2%
(cost $3,385,615).......................... 3,536,175
Other assets in excess of
liabilities -- 7.8%........................ 297,776
----------
NET ASSETS -- 100.0%......................... $3,833,951
==========
</TABLE>
Abbreviations used in this statement:
FSA -- Insured as to principal and interest by the Financial Security Assurance
Corporation.
GO -- General Obligation
MBIA -- Insured as to principal and interest by the Municipal Bond Insurance
Association.
VR -- Variable Rate Demand Note. Maturity date shown is the date of next
interest rate change.
See accompanying notes to financial statements.
PAGE 13
<PAGE> 234
SALOMON BROTHERS INVESTMENT SERIES
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
December 31, 1995
SALOMON BROTHERS NATIONAL INTERMEDIATE MUNICIPAL FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL INTEREST MATURITY VALUE (NOTE
AMOUNT DESCRIPTION RATE DATE 1A)
- --------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL SECURITIES -- 95.9%
CALIFORNIA -- 2.8%
$ 285,000 Los Angeles, California AMBAC.............. 6.000% 08/01/03 $ 309,162
-----------
CONNECTICUT -- 4.7%
500,000 Connecticut State GO....................... 5.250 03/15/06 518,365
-----------
FLORIDA -- 1.7%
180,000 Florida Housing Finance Agency............. 6.150 07/01/06 187,245
-----------
ILLINOIS -- 6.8%
300,000 Chicago, Illinois Metropolitan Water GO.... 5.900 12/01/06 326,454
400,000 Illinois Student Assistance Commission..... 6.400 03/01/04 418,316
-----------
744,770
-----------
INDIANA -- 9.3%
300,000 Indiana Secondary Market for Education..... 5.550 12/01/05 305,715
650,000 Indiana Transportation Finance Authority... 6.250 11/01/03 709,592
-----------
1,015,307
-----------
LOUISIANA -- 4.5%
450,000 Louisiana Public Facilities Authority...... 6.750 09/01/06 487,548
-----------
MASSACHUSETTS -- 4.1%
400,000 Commonwealth of Massachusetts,
Health & Educational Facilities
Authority................................ 6.500 12/01/05 445,140
-----------
MICHIGAN -- 4.3%
475,000 Michigan State,
Housing Development Authority FGIC....... 6.300 04/01/03 476,036
-----------
MISSISSIPPI -- 4.6%
480,000 Mississippi Higher Education............... 6.050 09/01/07 500,323
-----------
NEW JERSEY -- 4.4%
450,000 Passaic Valley, New Jersey
Sewer Commission AMBAC................... 5.750 12/01/07 478,026
-----------
NEW YORK -- 23.8%
700,000 New York State, Dormitory Authority
MBIA..................................... 5.600 07/01/06 732,249
400,000 New York State, Dormitory Authority
(State University of New York)........... 6.625 07/01/04 454,676
500,000 New York State, Mortgage Agency............ 5.900 10/01/06 508,310
400,000 New York State, Thruway Authority MBIA..... 6.000 01/01/04 435,752
450,000 New York, New York GO...................... 6.500 02/01/02 476,564
-----------
2,607,551
-----------
PENNSYLVANIA -- 8.4%
400,000 Geisinger Authority, Pennsylvania Health
System................................... 6.000 07/01/01 428,168
500,000 Monroeville, Pennsylvania Hospital
Authority................................ 5.750 10/01/05 490,815
-----------
918,983
-----------
</TABLE>
See accompanying notes to financial statements.
PAGE 14
<PAGE> 235
SALOMON BROTHERS INVESTMENT SERIES
SALOMON BROTHERS NATIONAL INTERMEDIATE MUNICIPAL FUND (concluded)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL INTEREST MATURITY VALUE (NOTE
AMOUNT DESCRIPTION RATE DATE 1A)
- --------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
SOUTH CAROLINA -- 7.7%
$ 750,000 South Carolina State,
Public Service Authority FGIC.............. 6.500% 01/01/05 $ 845,257
-----------
TEXAS -- 8.8%
500,000 Austin, Texas Airport Systems MBIA......... 6.500 11/15/05 560,770
400,000 Central Texas Higher Education Authority... 5.200 12/01/04 405,112
-----------
965,882
-----------
TOTAL INVESTMENTS -- 95.9%
(cost $10,075,715)....................... 10,499,595
Other assets in excess of
liabilities -- 4.1%...................... 447,445
-----------
NET ASSETS -- 100.0%....................... $10,947,040
============
</TABLE>
Abbreviations used in this statement:
AMBAC -- Insured as to principal and interest by the American Municipal Bond
Assurance Corporation.
FGIC -- Insured as to principal and interest by the Financial Guaranty
Insurance Company.
GO -- General Obligation
MBIA -- Insured as to principal and interest by the Municipal Bond Insurance
Association.
See accompanying notes to financial statements.
PAGE 15
<PAGE> 236
SALOMON BROTHERS INVESTMENT SERIES
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
December 31, 1995
SALOMON BROTHERS U.S. GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL INTEREST MATURITY VALUE (NOTE
AMOUNT DESCRIPTION RATE DATE 1A)
- -------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
U.S. TREASURY NOTES -- 59.2%
$ 300,000 U.S. Treasury Note........................ 7.750% 01/31/00 $ 325,875
150,000 U.S. Treasury Note........................ 6.750 04/30/00 157,851
1,000,000 U.S. Treasury Note........................ 6.500 08/15/05 1,065,310
1,350,000 U.S. Treasury Note........................ 6.125 05/31/97 1,366,457
3,200,000 U.S. Treasury Note........................ 7.125 02/29/00 3,406,496
-----------
TOTAL U.S. TREASURY NOTES
(cost $6,077,872)....................... 6,321,989
-----------
U.S. GOVERNMENT AGENCY -- 36.1%
100,000 Federal Home Loan Bank.................... 5.940 06/13/00 101,547
78,138 Federal Home Loan Mortgage Corporation.... 6.000 07/01/10 77,306
715,249 Federal Home Loan Mortgage Corporation.... 6.000 08/01/10 707,632
386,959 Federal Home Loan Mortgage Corporation.... 6.000 09/01/10 382,838
565,229 Federal Home Loan Mortgage Corporation.... 6.000 10/01/10 560,096
41,051 Federal Home Loan Mortgage Corporation.... 6.000 10/01/10 40,678
264,190 Federal National Mortgage Association..... 11.500 02/01/20 301,200
1,500,000 Federal National Mortgage
Association(a).......................... 6.500 ** 1,480,781
200,000 Government National Mortgage Association.. 7.000 01/22/26 202,094
-----------
TOTAL U.S. GOVERNMENT AGENCY
(cost $3,772,885)....................... 3,854,172
-----------
TOTAL INVESTMENTS -- 95.3%
(cost $9,850,757)....................... 10,176,161
-----------
REPURCHASE AGREEMENTS -- 19.4%
1,032,000 Repurchase Agreement dated 12/29/95, with
J.P. Morgan, collateralized by $791,000
U.S. Treasury Bonds, 8.500%, due
02/15/20, valued at $1,053,019;
proceeds: $1,032,659.................... 5.750 01/02/96 1,032,000
1,032,000 Repurchase Agreement dated 12/29/95, with
Merrill Lynch, collateralized by
$1,040,000 U.S. Treasury Notes, 5.625%,
due 10/31/97, valued at $1,056,900;
proceeds: $1,032,642.................... 5.600 01/02/96 1,032,000
-----------
TOTAL REPURCHASE AGREEMENTS
(cost $2,064,000)....................... 2,064,000
-----------
Liabilities in excess of other
assets -- (14.7%)....................... (1,565,222)
-----------
NET ASSETS -- 100.0%...................... $10,674,939
============
</TABLE>
(a) Mortgage Dollar Roll. See Note 1.
** TBA -- To be announced.
See accompanying notes to financial statements.
PAGE 16
<PAGE> 237
SALOMON BROTHERS INVESTMENT SERIES
SALOMON BROTHERS HIGH YIELD BOND FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL INTEREST MATURITY VALUE (NOTE
AMOUNT DESCRIPTION RATE DATE 1A)
- -------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CORPORATE BONDS -- 76.9%
BASIC INDUSTRIES -- 19.9%
$ 500,000 Asia Pulp & Paper International Finance... 11.750% 10/01/05 $ 490,000
400,000 Crown Paper............................... 11.000 09/01/05 350,000
250,000 Foamex.................................... 11.875 10/01/04 245,000
500,000 Harris Chemical (Zero Coupon until
01/15/96, 10.25% thereafter)(a)......... 11.109 07/15/01 475,000
250,000 Indah Kiat International Finance.......... 12.500 06/15/06 250,000
1,000,000 International Semi-Technology (Zero Coupon
until 08/15/00, 11.50% thereafter)(a)... 13.420 08/15/03 536,250
500,000 Norcal Waste Systems*..................... 12.500 11/15/05 505,000
500,000 Outdoor Systems........................... 10.750 08/15/03 475,000
500,000 RBX....................................... 11.250 10/15/05 495,000
250,000 Renco Metals.............................. 12.000 07/15/00 271,250
500,000 Repap Wisconsin........................... 9.875 05/01/06 472,500
500,000 Specialty Equipment....................... 11.375 12/01/03 507,500
500,000 Terex..................................... 13.750 05/15/02 433,750
500,000 Valcor.................................... 9.625 11/01/03 460,000
-----------
5,966,250
-----------
CONSUMER CYCLICALS -- 9.4%
500,000 Cole National............................. 11.250 10/01/01 501,250
500,000 Flagstar.................................. 10.750 09/15/01 455,000
500,000 Herff Jones............................... 11.000 08/15/05 533,750
500,000 Hines Horticulture........................ 11.750 10/15/05 518,750
500,000 Revlon Worldwide(a)....................... 13.247 03/15/98 371,250
500,000 Specialty Retailer........................ 11.000 08/15/03 455,000
-----------
2,835,000
-----------
CONSUMER NON-CYCLICALS -- 25.5%
500,000 American Safety Razor..................... 9.875 08/01/05 508,750
500,000 Bally's Grand............................. 10.375 12/15/03 510,000
500,000 Berry Plastics............................ 12.250 04/15/04 537,500
500,000 Borg-Warner............................... 9.125 05/01/03 450,000
500,000 Carr-Gottstein Foods...................... 12.000 11/15/05 505,000
250,000 Dade International........................ 13.000 02/01/05 280,000
500,000 Empress River Casino...................... 10.750 04/01/02 516,250
500,000 Grand Casinos............................. 10.125 12/01/03 524,375
500,000 Hollywood Casino.......................... 12.750 11/01/03 457,500
450,000 Jordan Industries (Zero Coupon until
08/01/98, 11.75% thereafter)(a)......... 14.013 08/01/05 261,000
500,000 Pathmark Stores........................... 9.625 05/01/03 486,250
500,000 Penn Traffic.............................. 9.625 04/15/05 390,000
500,000 Samsonite................................. 11.125 07/15/05 480,000
500,000 Selmer.................................... 11.000 05/15/05 492,500
250,000 Specialty Foods........................... 11.125 10/01/02 242,500
250,000 Telex Communications...................... 12.000 07/15/04 256,875
256,912 Trump Taj Mahal(b)........................ 11.350 11/15/99 247,278
500,000 Williamhouse Regency...................... 13.000 11/15/05 518,750
-----------
7,664,528
-----------
</TABLE>
See accompanying notes to financial statements.
PAGE 17
<PAGE> 238
SALOMON BROTHERS INVESTMENT SERIES
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
December 31, 1995
SALOMON BROTHERS HIGH YIELD BOND FUND (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL INTEREST MATURITY VALUE (NOTE
AMOUNT DESCRIPTION RATE DATE 1A)
- -------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MEDIA -- 15.6%
$ 500,000 Adelphia Communications................... 12.500% 05/15/02 $ 490,000
1,000,000 Comcast UK Cable (Zero Coupon until
11/15/00, 11.20% thereafter)(a)......... 11.200 11/15/07 585,000
1,000,000 Diamond Cable (Zero Coupon until 12/15/00,
11.75% thereafter)(a)................... 11.750 12/15/05 587,500
250,000 Katz...................................... 12.750 11/15/02 267,500
1,000,000 Marcus Cable (Zero Coupon until 12/15/00,
14.25% thereafter)(a)................... 12.867 12/15/05 680,000
500,000 People's Choice TV (Zero Coupon until
06/01/00, 13.125% thereafter)(a)........ 13.125 06/01/04 290,000
500,000 Rogers Cablesystems....................... 10.000 12/01/07 538,750
500,000 Sinclair Broadcast Group.................. 10.000 09/30/05 510,000
750,000 United International Holdings(a).......... 13.371 11/15/99 465,000
250,000 Wireless One.............................. 13.000 10/15/03 261,250
-----------
4,675,000
-----------
TELECOMMUNICATIONS & UTILITIES -- 4.3%
500,000 A+ Network................................ 11.875 11/01/05 505,000
900,000 In Flight Phone, including 900 attached
warrants (Zero Coupon until 05/15/98,
14.00% thereafter)(a)................... 19.691 05/15/02 297,000
300,000 Winstar Communications (Zero Coupon until
10/15/00, 14.00% thereafter)(a)......... 14.000 10/15/05 475,500
-----------
1,277,500
-----------
TRANSPORTATION -- 2.2%
250,000 Petro PSC Properties...................... 12.500 06/01/02 240,000
500,000 Venture Holdings Trust.................... 9.750 04/01/04 417,500
-----------
657,500
-----------
TOTAL CORPORATE BONDS
(cost $23,018,520)...................... 23,075,778
-----------
SOVEREIGN BONDS -- 15.7%
ARGENTINA -- 4.6%
1,750,000 Republic of Argentina FRB*................ 6.813 03/31/05 1,249,063
250,000 Republic of Argentina, Par Bonds, Series
L*...................................... 5.000 03/31/23 141,875
-----------
1,390,938
-----------
BRAZIL -- 3.9%
902,027 Republic of Brazil, C Bond(b)............. 8.000 04/15/14 517,537
142,500 Republic of Brazil, IDU Bonds*............ 6.688 01/01/01 122,906
750,000 Republic of Brazil, Series EI*............ 6.813 04/15/06 515,625
-----------
1,156,068
-----------
BULGARIA -- 1.3%
750,000 Republic of Bulgaria, Discount Bonds,
Series A*............................... 6.750 07/28/24 399,844
-----------
ECUADOR -- 1.5%
1,379,003 Republic of Ecuador, PDI Bonds*(b)........ 6.813 02/27/15 461,966
-----------
</TABLE>
See accompanying notes to financial statements.
PAGE 18
<PAGE> 239
SALOMON BROTHERS INVESTMENT SERIES
SALOMON BROTHERS HIGH YIELD BOND FUND (concluded)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL INTEREST MATURITY VALUE (NOTE
AMOUNT DESCRIPTION RATE DATE 1A)
- -------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MEXICO -- 1.1%
$ 500,000 United Mexican States, Par Bonds, Series
A, including 500,000 attached
warrants................................ 6.250% 12/31/19 $ 328,750
-----------
POLAND -- 3.3%
1,250,000 Republic of Poland, PDI Bonds*............ 3.750 10/27/14 814,063
350,000 Republic of Poland, Series RSTA*.......... 2.750 10/27/24 174,125
-----------
988,188
-----------
TOTAL SOVEREIGN BONDS
(cost $4,340,570)....................... 4,725,754
-----------
LOAN PARTICIPATION -- 1.1%
500,000 Kingdom of Morocco, Tranche A* (c) (Chase
Manhattan Bank, N.A. and Morgan Guaranty
Trust Company)
(cost $317,724)......................... 6.594 01/01/09 336,250
-----------
TOTAL INVESTMENTS -- 93.7%
(cost $27,676,814)...................... 28,137,782
-----------
REPURCHASE AGREEMENTS -- 7.9%
1,187,000 Repurchase Agreement dated 12/29/95, with
J.P. Morgan, collateralized by $910,000
U.S. Treasury Bonds, 8.500%, due
02/15/20, valued at $1,211,438;
proceeds: $1,187,758.................... 5.750 01/02/96 1,187,000
1,187,000 Repurchase Agreement dated 12/29/95, with
Merrill Lynch, collateralized by
$1,195,000 U.S. Treasury Notes, 5.625%,
due 10/31/97, valued at $1,214,419;
proceeds: $1,187,739.................... 5.600 01/02/96 1,187,000
-----------
TOTAL REPURCHASE AGREEMENTS
(cost $2,374,000)....................... 2,374,000
-----------
Liabilities in excess of other
assets -- (1.6%)........................ (486,048)
-----------
NET ASSETS -- 100.0%...................... $30,025,734
============
</TABLE>
* Interest rate shown reflects current rate on instrument with variable rate or
step coupon rate.
(a) Zero or step coupon bond. Interest rate shown reflects yield to maturity on
date of purchase.
(b) Payment-in-kind security for which part of the interest earned is paid by
the issuance of additional bonds.
(c) Participation interest was acquired through the financial institutions
indicated parenthetically.
Abbreviations used in this statement:
EI -- Eligible Interest.
FRB -- Floating Rate Bond.
IDU -- Interest Due and Unpaid.
PDI -- Past Due Interest.
See accompanying notes to financial statements.
PAGE 19
<PAGE> 240
SALOMON BROTHERS INVESTMENT SERIES
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
December 31, 1995
SALOMON BROTHERS STRATEGIC BOND FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL INTEREST MATURITY VALUE (NOTE
AMOUNT DESCRIPTION RATE DATE 1A)
- -------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CORPORATE BONDS -- 49.1%
BASIC INDUSTRIES -- 9.6%
$ 250,000 Foamex.................................... 11.875% 10/01/04 $ 245,000
250,000 RBX....................................... 11.250 10/15/05 247,500
250,000 Renco Metals.............................. 12.000 07/15/00 271,250
250,000 Terex..................................... 13.750 05/15/02 216,875
250,000 Valcor.................................... 9.625 11/01/03 230,000
-----------
1,210,625
-----------
CONSUMER CYCLICALS -- 5.9%
250,000 Cole National............................. 11.250 10/01/01 250,625
250,000 Hines Horticulture........................ 11.750 10/15/05 259,375
200,000 U.S. Leasing International................ 8.450 01/25/05 226,250
-----------
736,250
-----------
CONSUMER NON-CYCLICALS -- 20.5%
250,000 American Safety Razor..................... 9.875 08/01/05 254,375
250,000 Bally's Grand............................. 10.375 12/15/03 255,000
250,000 Berry Plastics............................ 12.250 04/15/04 268,750
250,000 Dade International........................ 13.000 02/01/05 280,000
250,000 Hollywood Casino.......................... 12.750 11/01/03 228,750
450,000 Jordan Industries (Zero Coupon until
08/01/98, 11.75% thereafter)(a)......... 14.013 08/01/05 261,000
250,000 Pathmark Stores........................... 9.625 05/01/03 243,125
250,000 Penn Traffic.............................. 9.625 04/15/05 195,000
100,000 Samsonite................................. 11.125 07/15/05 96,000
250,000 Selmer.................................... 11.000 05/15/05 246,250
256,912 Trump Taj Mahal(b)........................ 11.350 11/15/99 247,278
-----------
2,575,528
-----------
MEDIA -- 8.2%
250,000 Adelphia Communications................... 12.500 05/15/02 245,000
500,000 Marcus Cable (Zero Coupon until 12/15/00,
14.25% thereafter)(a)................... 12.813 12/15/05 340,000
500,000 People's Choice TV (Zero Coupon until
06/01/00, 13.125% thereafter)(a)........ 13.125 06/01/04 290,000
250,000 United International Holdings(a).......... 13.893 11/15/99 155,000
-----------
1,030,000
-----------
TELECOMMUNICATIONS & UTILITIES -- 4.9%
250,000 A+ Network................................ 11.875 11/01/05 252,500
400,000 In Flight Phone, including 400 attached
warrants (Zero Coupon until 05/15/98,
14.00% thereafter)(a)................... 14.000 05/15/02 132,000
150,000 Winstar Communications (Zero Coupon until
10/15/00, 14.00% thereafter)(a)......... 14.000 10/15/05 237,750
-----------
622,250
-----------
TOTAL CORPORATE BONDS
(cost $6,138,570)....................... 6,174,653
-----------
</TABLE>
See accompanying notes to financial statements.
PAGE 20
<PAGE> 241
SALOMON BROTHERS INVESTMENT SERIES
SALOMON BROTHERS STRATEGIC BOND FUND (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL INTEREST MATURITY VALUE (NOTE
AMOUNT DESCRIPTION RATE DATE 1A)
- ------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
SOVEREIGN BONDS -- 25.9%
ARGENTINA -- 1.1%
$ 250,000 Republic of Argentina, Par Bonds,
Series L*......................... 5.000% 03/31/23 $ 141,875
-----------
BELGIUM -- 0.3%
BEF 1,000,000 Kingdom of Belgium, Series 19....... 6.500 03/31/05 33,537
-----------
BRAZIL -- 5.3%
$ 1,167,329 Republic of Brazil, C Bond(b)....... 8.000 04/15/14 669,755
-----------
BULGARIA -- 2.1%
$ 500,000 Republic of Bulgaria, Discount
Bonds, Series A*.................. 6.750 07/28/24 266,563
-----------
CANADA -- 0.4%
CAD 39,000 Government of Canada................ 9.000 12/01/04 32,203
CAD 19,000 Government of Canada................ 6.250 02/01/98 14,004
-----------
46,207
-----------
DENMARK -- 0.2%
DKK 50,000 Kingdom of Denmark.................. 7.000 12/15/04 9,486
DKK 90,000 Kingdom of Denmark.................. 9.000 11/15/98 17,639
-----------
27,125
-----------
ECUADOR -- 2.5%
$ 850,000 Republic of Ecuador, Par Bonds*..... 3.000 02/28/25 308,125
-----------
GERMANY -- 3.6%
DEM 300,000 Government of Germany, Series 91.... 8.375 05/21/01 239,185
DEM 120,000 Government of Germany, Series 95.... 7.375 01/03/05 91,018
DEM 160,000 Government of Germany, Series 106... 6.000 02/20/98 116,096
-----------
446,299
-----------
ITALY -- 0.7%
ITL 45,000,000 Government of Italy Treasury........ 9.500 01/01/05 26,521
ITL 105,000,000 Government of Italy Treasury........ 9.500 12/01/97 65,352
-----------
91,873
-----------
JAPAN -- 0.8%
JPY 10,000,000 Government of Japan, Series 29...... 4.200 09/21/15 103,413
-----------
MEXICO -- 2.6%
$ 500,000 United Mexican States, Par Bonds,
Series A, including 500,000
attached warrants................. 6.250 12/31/19 328,750
-----------
NETHERLANDS -- 0.5%
NLG 45,000 Netherlands Government.............. 7.000 06/15/05 29,472
NLG 60,000 Netherlands Government.............. 6.250 07/15/98 39,136
-----------
68,608
-----------
</TABLE>
See accompanying notes to financial statements.
PAGE 21
<PAGE> 242
SALOMON BROTHERS INVESTMENT SERIES
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
December 31, 1995
SALOMON BROTHERS STRATEGIC BOND FUND (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL INTEREST MATURITY VALUE (NOTE
AMOUNT DESCRIPTION RATE DATE 1A)
- ------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
POLAND -- 4.6%
$ 500,000 Republic of Poland, PDI Bonds*...... 3.750% 10/27/14 $ 325,625
$ 500,000 Republic of Poland, Series RSTA*.... 2.750 10/27/24 248,750
-----------
574,375
-----------
SPAIN -- 0.3%
ESP 590,000 Government of Spain................. 10.000 02/28/05 4,922
ESP 3,210,000 Government of Spain................. 11.450 08/30/98 27,734
-----------
32,656
-----------
UNITED KINGDOM -- 0.9%
GBP 75,000 United Kingdom Treasury............. 7.000 11/06/01 116,581
-----------
TOTAL SOVEREIGN BONDS
(cost $2,784,100)................. 3,255,742
-----------
LOAN PARTICIPATION -- 2.7%
$ 500,000 Kingdom of Morocco, Tranche A*(c)
(Chase Manhattan Bank, N.A. and
Morgan Guaranty Trust Company)
(cost $317,724)................... 6.594 01/01/09 336,250
-----------
U.S. GOVERNMENT & AGENCY -- 14.6%
$ 638,310 Federal Home Loan Mortgage
Corporation....................... 6.000 09/01/10 631,512
$ 57,397 Federal Home Loan Mortgage
Corporation....................... 6.000 10/01/10 56,785
$ 1,100,000 Federal National Mortgage
Association(d).................... 6.500 ** 1,085,906
$ 60,000 U.S. Treasury Note.................. 6.125 05/31/97 60,731
-----------
1,834,934
-----------
TOTAL U.S. GOVERNMENT & AGENCY
(cost $1,794,702)................. 1,834,934
-----------
TOTAL INVESTMENTS -- 92.3%
(cost $11,035,096)................ 11,601,579
-----------
REPURCHASE AGREEMENTS -- 16.6%
$ 1,042,000 Repurchase Agreement dated 12/29/95,
with J.P. Morgan, collateralized
by $799,000 U.S. Treasury Bonds,
8.500%, due 02/15/20, valued at
$1,063,669; proceeds:
$1,042,666........................ 5.750 01/02/96 1,042,000
</TABLE>
See accompanying notes to financial statements.
PAGE 22
<PAGE> 243
SALOMON BROTHERS INVESTMENT SERIES
SALOMON BROTHERS STRATEGIC BOND FUND (concluded)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL INTEREST MATURITY VALUE (NOTE
AMOUNT DESCRIPTION RATE DATE 1A)
- ------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 1,042,000 Repurchase Agreement dated 12/29/95,
with Merrill Lynch, collateralized
by $1,050,000 U.S. Treasury Notes,
5.625%, due 10/31/97, valued at
$1,067,063; proceeds:
$1,042,648........................ 5.600% 01/02/96 $ 1,042,000
-----------
TOTAL REPURCHASE AGREEMENTS
(cost $2,084,000)................. 2,084,000
-----------
Liabilities in excess of other
assets -- (8.9%).................. (1,119,166)
-----------
NET ASSETS -- 100.0%................ $12,566,413
============
</TABLE>
FORWARD FOREIGN CURRENCY CONTRACTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNREALIZED
MATURITY CONTRACTS TO CONTRACTS APPRECIATION
DATES DELIVER/RECEIVE IN EXCHANGE FOR AT VALUE (DEPRECIATION)
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PURCHASES
01/22/96 $ 272,728 DEM 389,518 $271,712 $(1,016)
01/22/96 to 01/24/96 218,035 FRF 1,072,831 218,954 919
01/22/96 106,995 GBP 69,840 108,293 1,298
01/22/96 61,174 ITL 98,716,411 61,911 737
SALES
01/22/96 BEF 952,364 $ 31,452 32,406 (954)
01/22/96 GBP 142,788 222,561 221,404 1,157
01/22/96 CAD 59,932 43,785 43,929 (144)
01/22/96 DKK 145,898 25,492 26,266 (774)
01/22/96 FRF 1,052,926 210,037 214,885 (4,848)
01/22/96 DEM 1,045,092 724,418 729,013 (4,595)
01/22/96 ITL 243,985,473 149,511 153,019 (3,508)
01/22/96 JPY 11,118,743 110,415 107,999 2,416
01/22/96 NLG 110,912 67,897 69,148 (1,251)
01/22/96 ESP 3,840,396 30,008 31,501 (1,493)
-----------
$(12,056)
===========
</TABLE>
* Interest rate shown reflects current rate on instrument with variable rate
or step coupon rate.
** TBA -- To be announced.
(a) Zero or step coupon bond. Interest rate shown reflects yield to maturity on
date of purchase.
(b) Payment-in-kind security for which part of the interest earned is paid by
the issuance of additional bonds.
(c) Participation interest was acquired through the financial institutions
indicated parenthetically.
(d) Mortgage Dollar Roll. See Note 1.
Abbreviations used in this statement:
PDI -- Past Due Interest
BEF -- Belgian Franc
CAD -- Canadian Dollar
DEM -- German Deutschemark
DKK -- Danish Krone
ESP -- Spanish Peseta
FRF -- French Franc
GBP -- British Pound Sterling
ITL -- Italian Lira
JPY -- Japanese Yen
NLG -- Netherlands Guilder
See accompanying notes to financial statements.
PAGE 23
<PAGE> 244
SALOMON BROTHERS INVESTMENT SERIES
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
December 31, 1995
SALOMON BROTHERS TOTAL RETURN FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES DESCRIPTION (NOTE 1A)
- ----------------------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS -- 43.2%
BASIC INDUSTRIES -- 2.3%
1,600 Dow Chemical........................................................... $ 112,600
3,000 Dupont (E.I.) de Nemours............................................... 209,625
----------
322,225
----------
CAPITAL GOODS -- 4.1%
2,800 Boeing................................................................. 219,450
6,000 Deere.................................................................. 211,500
2,200 Textron................................................................ 148,500
----------
579,450
----------
CONSUMER CYCLICALS -- 5.9%
6,000 Ball................................................................... 165,000
4,000 Eastman Kodak.......................................................... 268,000
6,000 Ford Motor............................................................. 174,000
5,100 May Department Stores.................................................. 215,475
----------
822,475
----------
CONSUMER NON-CYCLICALS -- 1.7%
1,500 Philip Morris Companies................................................ 135,750
2,000 Tambrands.............................................................. 95,500
----------
231,250
----------
ENERGY -- 10.7%
3,500 Amoco.................................................................. 251,559
3,000 Exxon.................................................................. 240,375
2,000 Mobil.................................................................. 224,000
1,000 Royal Dutch Petroleum, 5 Guilder....................................... 141,125
3,000 Texaco................................................................. 235,500
7,000 Ultramar............................................................... 180,250
5,000 Williams Companies..................................................... 219,375
----------
1,492,184
----------
FINANCIAL SERVICES -- 5.0%
2,500 American General....................................................... 87,188
3,300 Citicorp............................................................... 221,925
7,000 Prudential Reinsurance Holdings........................................ 163,625
4,200 UNUM................................................................... 231,000
----------
703,738
----------
HEALTH CARE -- 2.9%
1,200 American Home Products................................................. 116,400
5,200 SmithKline Beecham -- ADR.............................................. 288,600
----------
405,000
----------
REAL ESTATE INVESTMENT TRUSTS -- 2.3%
7,000 Beacon Properties...................................................... 161,000
6,200 Patriot American Hospitality........................................... 159,650
----------
320,650
----------
</TABLE>
See accompanying notes to financial statements.
PAGE 24
<PAGE> 245
SALOMON BROTHERS INVESTMENT SERIES
SALOMON BROTHERS TOTAL RETURN FUND (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES DESCRIPTION (NOTE 1A)
- ----------------------------------------------------------------------------------------------
<C> <S> <C>
TELECOMMUNICATIONS & UTILITIES -- 6.4%
5,000 American Electric Power................................................ $ 202,500
3,000 Ameritech.............................................................. 177,000
4,600 BellSouth.............................................................. 200,100
3,000 Boston Edison.......................................................... 88,500
5,000 GTE.................................................................... 220,000
----------
888,100
----------
TRANSPORTATION -- 1.9%
18,000 Canadian National Railway.............................................. 270,000
----------
TOTAL COMMON STOCKS
(cost $5,687,214).................................................... 6,035,072
----------
CONVERTIBLE PREFERRED STOCKS -- 4.6%
CAPITAL GOODS -- 1.1%
3,000 Browning-Ferris 7.25%, 6/30/98......................................... 94,125
4,000 Coopers Industries 6.00%, 01/01/99..................................... 55,000
----------
149,125
----------
CONSUMER CYCLICALS -- 0.2%
2,500 MascoTech, $1.20, 07/01/97............................................. 31,250
----------
CONSUMER NON-CYCLICALS -- 0.3%
1,500 James River 9.00%, 07/01/98............................................ 35,063
----------
ENERGY -- 1.9%
1,000 Ashland, $3.125, 12/31/49.............................................. 58,875
1,000 Diamond Shamrock 5.00%, 12/31/49....................................... 55,375
1,000 Tejas Gas 5.25%, 12/31/49.............................................. 47,500
2,000 Unocal 7.00%, 12/31/49................................................. 107,250
----------
269,000
----------
MEDIA -- 0.4%
2,500 Times Mirror, Class A.................................................. 64,531
----------
TECHNOLOGY -- 0.7%
2,000 Elsag Bailey 5.50%, 12/31/49........................................... 100,250
----------
TOTAL CONVERTIBLE PREFERRED STOCKS (cost $651,064)..................... 649,219
----------
</TABLE>
See accompanying notes to financial statements.
PAGE 25
<PAGE> 246
SALOMON BROTHERS INVESTMENT SERIES
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
December 31, 1995
SALOMON BROTHERS TOTAL RETURN FUND (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL INTEREST MATURITY VALUE (NOTE
AMOUNT DESCRIPTION RATE DATE 1A)
- --------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CORPORATE BONDS -- 19.3%
BASIC INDUSTRIES -- 3.6%
$ 100,000 Acetex..................................... 9.750% 10/01/03 $ 104,500
100,000 Crown Paper................................ 11.000 09/01/05 87,500
200,000 International Semi-Technology (Zero coupon
until 08/15/00, 11.50% thereafter)(a).... 13.420 08/15/03 107,250
100,000 RBX........................................ 11.250 10/15/05 99,000
100,000 Silgan Holdings............................ 11.750 06/15/02 107,000
-----------
505,250
-----------
CONSUMER CYCLICALS -- 2.2%
100,000 Cole National.............................. 11.250 10/01/01 100,250
100,000 Grand Casinos.............................. 10.125 12/01/03 104,875
100,000 Herff Jones................................ 11.000 08/15/05 106,750
-----------
311,875
-----------
CONSUMER NON-CYCLICALS -- 5.7%
100,000 American Safety Razor...................... 9.875 08/01/05 101,750
100,000 Bally's Grand.............................. 10.375 12/15/03 102,000
100,000 Berry Plastics............................. 12.250 04/15/04 107,500
100,000 Carr-Gottstein Foods....................... 12.000 11/15/05 101,000
100,000 Jordan Industries.......................... 10.375 08/01/03 89,000
100,000 Pathmark Stores............................ 9.625 05/01/03 97,250
100,000 Samsonite.................................. 11.125 07/15/05 96,000
100,000 Selmer..................................... 11.000 05/15/05 98,500
-----------
793,000
-----------
ENERGY -- 0.7%
100,000 Public Service Electric & Gas.............. 6.500 05/01/04 100,598
-----------
FINANCIAL SERVICES -- 3.8%
50,000 Commercial Credit.......................... 6.875 05/01/02 52,281
100,000 Ford Motor Credit.......................... 8.200 02/15/02 110,758
150,000 Household Finance.......................... 6.750 06/01/00 155,096
100,000 Standard Credit Card Master Trust.......... 6.750 06/07/00 102,718
100,000 USL Capital................................ 8.125 02/15/00 107,878
-----------
528,731
-----------
MEDIA -- 3.3%
200,000 Diamond Cable (Zero coupon until 12/15/00,
11.750% thereafter)(a)................... 11.750 12/15/05 117,500
200,000 Marcus Cable (Zero coupon until 12/15/00,
14.25% thereafter)(a).................... 12.921 12/15/05 136,000
100,000 Rogers Cablesystems........................ 10.000 12/01/07 107,750
150,000 United International Holdings(a)........... 13.187 11/15/99 93,000
-----------
454,250
-----------
TOTAL CORPORATE BONDS
(cost $2,642,343)........................ 2,693,704
-----------
</TABLE>
See accompanying notes to financial statements.
PAGE 26
<PAGE> 247
SALOMON BROTHERS INVESTMENT SERIES
SALOMON BROTHERS TOTAL RETURN FUND (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL INTEREST MATURITY VALUE (NOTE
AMOUNT DESCRIPTION RATE DATE 1A)
- --------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CONVERTIBLE CORPORATE BONDS -- 7.0%
BASIC INDUSTRIES -- 3.5%
$ 50,000 Albany International....................... 5.250% 03/15/02 $ 44,500
50,000 Allegheny Ludlum........................... 5.875 03/15/02 51,500
150,000 Exide...................................... 2.900 12/15/05 108,750
75,000 Magna International........................ 5.000 10/15/02 76,500
150,000 Roche Holdings(a).......................... 6.218 04/20/10 66,375
100,000 RPM(a)..................................... 5.110 09/30/12 42,875
100,000 Unifi...................................... 6.000 03/15/02 100,500
-----------
491,000
-----------
CONSUMER CYCLICALS -- 1.9%
125,000 Federated Department Stores................ 5.000 10/01/03 124,688
50,000 MascoTech.................................. 4.500 12/15/03 39,000
125,000 Proffitt's................................. 4.750 11/01/03 106,250
-----------
269,938
-----------
ENERGY -- 0.4%
50,000 Pennzoil................................... 4.750 10/01/03 50,625
-----------
FINANCIAL SERVICES -- 1.2%
100,000 Liberty Property Trust..................... 8.000 07/01/01 102,750
50,000 Trenwick Group............................. 6.000 12/15/99 57,750
-----------
160,500
-----------
TOTAL CONVERTIBLE CORPORATE BONDS
(cost $962,876).......................... 972,063
-----------
U.S. GOVERNMENT & AGENCY -- 15.3%
48,636 Federal National Mortgage Association...... 6.500 10/01/10 48,894
119,850 Federal National Mortgage Association...... 7.500 08/01/23 122,860
97,811 Federal National Mortgage Association...... 7.000 09/01/25 98,637
98,000 Federal National Mortgage Association...... 6.500 12/01/25 96,959
350,000 U.S. Treasury Note......................... 7.750 01/31/00 380,188
450,000 U.S. Treasury Note......................... 5.750 10/31/00 456,467
650,000 U.S. Treasury Note......................... 7.875 11/15/04 752,375
150,000 U.S. Treasury Bond......................... 7.625 02/15/25 183,422
-----------
TOTAL U.S. GOVERNMENT & AGENCY
(cost $2,096,216)........................ 2,139,802
-----------
TOTAL INVESTMENTS -- 89.4%
(cost $12,039,713)....................... 12,489,860
-----------
</TABLE>
See accompanying notes to financial statements.
PAGE 27
<PAGE> 248
SALOMON BROTHERS INVESTMENT SERIES
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
December 31, 1995
SALOMON BROTHERS TOTAL RETURN FUND (concluded)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL INTEREST MATURITY VALUE (NOTE
AMOUNT DESCRIPTION RATE DATE 1A)
- -------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
REPURCHASE AGREEMENTS -- 20.1%
$1,405,000 Repurchase Agreement dated 12/29/95, with
J.P. Morgan, collateralized by
$1,077,000 U.S. Treasury Bonds, 8.500%,
due 02/15/20, valued at $1,433,756;
proceeds: $1,405,898.................... 5.750% 01/02/96 $ 1,405,000
1,405,000 Repurchase Agreement dated 12/29/95, with
Merrill Lynch, collateralized by
$1,415,000 U.S. Treasury Notes, 5.625%,
due 10/31/97, valued at $1,437,994;
proceeds: $1,405,874.................... 5.600 01/02/96 1,405,000
-----------
TOTAL REPURCHASE AGREEMENTS
(cost $2,810,000)....................... 2,810,000
-----------
Liabilities in excess of other
assets -- (9.5%)........................ (1,325,621)
-----------
NET ASSETS -- 100.0%...................... $13,974,239
============
</TABLE>
(a) Zero or step coupon bond. Interest rate shown reflects yield to maturity on
date of purchase.
Abbreviations used in this statement:
ADR American Depository Receipt.
See accompanying notes to financial statements.
PAGE 28
<PAGE> 249
SALOMON BROTHERS INVESTMENT SERIES
SALOMON BROTHERS INVESTORS FUND INC
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE (NOTE
SHARES DESCRIPTION 1A)
- ----------------------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS -- 88.3%
BASIC INDUSTRIES -- 7.9%
104,000 Dupont (E.I.) de Nemours........................................ $ 7,267,000
117,400 Hanna (M.A.).................................................... 3,287,200
125,000 Hercules........................................................ 7,046,875
141,500 OM Group........................................................ 4,687,188
345,000 Praxair......................................................... 11,600,625
------------
33,888,888
------------
CAPITAL GOODS -- 12.6%
150,000 AlliedSignal.................................................... 7,125,000
220,000 Browning-Ferris Industries...................................... 6,490,000
35,000 Champion Enterprises............................................ 1,080,625
280,500 Deere........................................................... 9,887,625
107,500 General Electric................................................ 7,740,000
242,000 Raytheon........................................................ 11,434,500
300,500 Tyco International.............................................. 10,705,313
------------
54,463,063
------------
CONSUMER CYCLICALS -- 11.4%
150,000 Ball............................................................ 4,125,000
10,000 Centex.......................................................... 347,500
37,000 Chrysler........................................................ 2,048,875
100,000 Eastman Kodak................................................... 6,700,000
235,000 Federated Department Stores*.................................... 6,462,500
150,000 Ford Motor...................................................... 4,350,000
320,000 Host Marriott*.................................................. 4,240,000
25,000 Lennar.......................................................... 628,125
137,500 MascoTech....................................................... 1,495,313
212,500 Sears, Roebuck.................................................. 8,287,500
157,300 Sherwin-Williams................................................ 6,409,975
229,000 U.S. Industries*................................................ 4,207,875
------------
49,302,663
------------
CONSUMER NON-CYCLICALS -- 11.7%
195,000 ConAgra......................................................... 8,043,750
60,000 Estee Lauder Companies, Class A................................. 2,092,500
147,300 Hormel Foods.................................................... 3,627,263
60,000 Kimberly-Clark.................................................. 4,965,000
206,200 Kroger*......................................................... 7,732,500
99,000 Penn Traffic*................................................... 1,485,000
85,000 Philip Morris Companies......................................... 7,692,500
488,800 Stop & Shop Companies*.......................................... 11,303,500
100,000 Sysco........................................................... 3,250,000
------------
50,192,013
------------
</TABLE>
See accompanying notes to financial statements.
PAGE 29
<PAGE> 250
SALOMON BROTHERS INVESTMENT SERIES
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
December 31, 1995
SALOMON BROTHERS INVESTORS FUND INC (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE (NOTE
SHARES DESCRIPTION 1A)
- ----------------------------------------------------------------------------------------------
<C> <S> <C>
ENERGY -- 14.0%
113,500 Amoco........................................................... $ 8,157,813
85,000 Chevron......................................................... 4,462,500
105,000 Mobil........................................................... 11,760,000
93,000 Royal Dutch Petroleum, 5 Guilder................................ 13,124,625
73,000 Texaco.......................................................... 5,730,500
130,117 TOTAL -- ADR.................................................... 4,423,978
51,600 Union Pacific Resources Group................................... 1,309,350
75,000 Union Texas Petroleum Holdings.................................. 1,453,125
230,000 Williams Companies.............................................. 10,091,250
------------
60,513,141
------------
FINANCIAL SERVICES -- 13.5%
147,500 American Express................................................ 6,102,813
47,000 Amerin*......................................................... 1,257,250
207,200 Bank of New York................................................ 10,101,000
37,500 BayBanks........................................................ 3,684,375
73,500 Federal Home Loan Mortgage Corporation.......................... 6,137,250
27,500 Federal National Mortgage Association........................... 3,413,438
60,000 MGIC Investment................................................. 3,255,000
163,500 Prudential Reinsurance Holdings................................. 3,821,808
103,400 St. Paul Companies.............................................. 5,751,625
120,000 SunAmerica...................................................... 5,700,000
138,843 Travelers Group................................................. 8,729,763
------------
57,954,322
------------
HEALTH CARE -- 6.7%
230,000 Columbia/HCA Healthcare......................................... 11,672,500
225,000 SmithKline Beecham -- ADR....................................... 12,487,500
100,000 U.S. HealthCare................................................. 4,650,000
------------
28,810,000
------------
REAL ESTATE INVESTMENT TRUSTS -- 1.8%
75,000 Beacon Properties............................................... 1,725,000
40,000 Crescent Real Estate Equities................................... 1,365,000
75,000 Highwoods Properties............................................ 2,118,750
96,500 Patriot American Hospitality.................................... 2,484,875
------------
7,693,625
------------
TECHNOLOGY -- 3.7%
30,500 DST Systems*.................................................... 869,250
179,500 First Data...................................................... 12,004,063
30,000 National Data................................................... 742,500
60,000 Plantronics*.................................................... 2,167,500
------------
15,783,313
------------
TELECOMMUNICATIONS & UTILITIES -- 1.2%
190,000 AirTouch Communications*........................................ 5,367,500
------------
</TABLE>
See accompanying notes to financial statements.
PAGE 30
<PAGE> 251
SALOMON BROTHERS INVESTMENT SERIES
SALOMON BROTHERS INVESTORS FUND INC (concluded)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE (NOTE
SHARES DESCRIPTION 1A)
- ----------------------------------------------------------------------------------------------
<C> <S> <C>
TRANSPORTATION -- 3.8%
188,000 Canadian National Railway....................................... $ 2,820,000
52,000 Norfolk Southern................................................ 4,127,500
200,000 Pittston Services Group......................................... 6,275,000
45,000 Union Pacific................................................... 2,970,000
------------
16,192,500
------------
TOTAL COMMON STOCKS (cost $281,370,713)......................... 380,161,028
------------
CONVERTIBLE PREFERRED STOCKS -- 1.8%
CONSUMER CYCLICALS -- 0.2%
75,000 MascoTech, $1.20, 07/01/97...................................... 937,500
------------
FINANCIAL SERVICES -- 0.2%
20,000 Merrill Lynch 6.50%............................................. 1,037,500
------------
TECHNOLOGY -- 1.4%
62,500 Ceridian 5.50%.................................................. 5,781,250
------------
TOTAL CONVERTIBLE PREFERRED STOCKS (cost $5,317,287)............ 7,756,250
------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
- -----------
<C> <S> <C>
CONVERTIBLE BONDS -- 1.2%
BASIC INDUSTRIES -- 0.2%
$ 1,000,000 Unifi, 6.00%, due 03/15/02...................................... 983,750
------------
CONSUMER CYCLICALS -- 1.0%
2,000,000 Federated Department Stores, 5.00%, due 10/01/03................ 2,022,500
2,000,000 Time Warner, 8.75%, due 01/10/15................................ 2,072,500
------------
4,095,000
------------
TOTAL CONVERTIBLE BONDS (cost $5,091,250)....................... 5,078,750
------------
U.S. TREASURY OBLIGATION -- 1.0%
4,295,000 U.S. Treasury Bill, 6.81%, 01/11/96 (cost $4,286,875)........... 4,288,257
------------
TOTAL INVESTMENTS -- 92.3% (cost $296,066,125).................. 397,284,285
------------
REPURCHASE AGREEMENTS -- 8.5%
18,268,000 Repurchase Agreement, 5.750% due 01/02/96, dated 12/29/95, J.P.
Morgan, collateralized by $14,687,000 U.S. Treasury Bonds,
8.125%, due 05/15/21 valued at $18,634,131; proceeds:
$18,279,671................................................... 18,268,000
18,267,000 Repurchase Agreement, 5.600% due 01/02/96, dated 12/29/95,
Merrill Lynch, collateralized by $18,335,000 U.S. Treasury
Bonds, 5.625%, due 10/31/97, valued at $18,632,944; proceeds:
$18,278,366................................................... 18,267,000
------------
TOTAL REPURCHASE AGREEMENTS (cost $36,535,000).................. 36,535,000
------------
Liabilities in excess of other assets -- (0.8%)................. (3,405,679)
------------
NET ASSETS -- 100.0%............................................ $430,413,606
=============
</TABLE>
* Non-income producing security.
Abbreviations used in this statement:
ADR American Depository Receipt.
See accompanying notes to financial statements.
PAGE 31
<PAGE> 252
SALOMON BROTHERS INVESTMENT SERIES
- --------------------------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES
December 31, 1995
<TABLE>
<CAPTION>
CASH NEW YORK
MANAGEMENT MUNICIPAL
FUND BOND FUND
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Investments, at value (Note A).................................. $ 9,699,491 $3,536,175
Repurchase agreements, at value and cost........................ 1,036,551 --
Cash............................................................ 5,048 35,613
Receivable for securities sold.................................. -- --
Receivable for fund shares sold................................. 19,469 130,016
Interest and dividends receivable............................... 37,309 56,833
Receivable from investment advisor.............................. 75,716 63,088
Deferred organization expense................................... -- 27,895
Other assets.................................................... 10,582 --
----------- ----------
Total assets.................................................... 10,884,166 3,849,620
----------- ----------
LIABILITIES:
Payable for:
Securities purchased.......................................... -- --
Fund shares redeemed.......................................... -- --
Dividends and distributions declared.......................... 16,946 4,509
Affiliate transactions:
Management fees............................................. -- --
Service and distribution fees............................... -- 736
Net unrealized depreciation of forward foreign currency
contracts..................................................... -- --
Accrued expenses and other liabilities.......................... 6,416 10,424
----------- ----------
Total Liabilities............................................... 23,362 15,669
----------- ----------
NET ASSETS...................................................... $10,860,804 $3,833,951
============ ===========
NET ASSETS CONSIST OF:
Paid-in capital................................................. $10,862,918 $4,303,977
Undistributed net investment income or (distributions in excess
of net investment income)..................................... -- 3,359
Accumulated net realized gain (loss) on investments, options and
foreign currency transactions or (distributions in excess of
net realized gains)........................................... (2,114) (623,945)
Net unrealized appreciation on investments, foreign currency
transactions and other assets................................. -- 150,560
----------- ----------
NET ASSETS...................................................... $10,860,804 $3,833,951
=========== ==========
Class A......................................................... $ 1,755,547 $ 545,852
=========== ==========
Class B......................................................... $ 2,238,486 $ 528,143
=========== ==========
Class C......................................................... $ 182,541 $ 265,612
=========== ==========
Class O......................................................... $ 6,684,230 $2,494,344
=========== ==========
SHARES OUTSTANDING:
Class A......................................................... 1,755,547 53,980
=========== ==========
Class B......................................................... 2,238,486 52,234
=========== ==========
Class C......................................................... 182,541 26,267
=========== ==========
Class O......................................................... 6,686,344 246,653
=========== ==========
NET ASSET VALUE:
CLASS A SHARES
Net asset value and redemption price per share.................. $ 1.00 $ 10.11
=========== ==========
Maximum offering price per share (based on maximum sales charge
of 4.75%, except Cash Management Fund)........................ $ 1.00 $ 10.61
=========== ==========
CLASS B SHARES
Net asset value and offering price per share *.................. $ 1.00 $ 10.11
=========== ==========
CLASS C SHARES
Net asset value and offering price per share *.................. $ 1.00 $ 10.11
=========== ==========
CLASS O SHARES
Net asset value, offering price and redemption price per
share......................................................... $ 1.00 $ 10.11
=========== ==========
Note A: Cost of investments..................................... $ 9,699,491 $3,385,615
=========== ==========
</TABLE>
* Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
See accompanying notes to financial statements.
PAGE 32
<PAGE> 253
SALOMON BROTHERS INVESTMENT SERIES
- ------------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES
December 31, 1995
<TABLE>
<CAPTION>
NATIONAL U.S.
INTERMEDIATE GOVERNMENT HIGH YIELD STRATEGIC TOTAL INVESTORS
MUNICIPAL FUND INCOME FUND BOND FUND BOND FUND RETURN FUND FUND
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$10,499,595 $10,176,161 $28,137,782 $11,601,579 $12,489,860 $397,284,285
-- 2,064,000 2,374,000 2,084,000 2,810,000 36,535,000
136,414 162 552 461 784 467
72,129 -- -- -- -- 4,984,053
-- -- 464,168 19,033 117,005 3,207
181,612 137,503 577,083 219,734 105,572 713,554
35,803 39,324 -- 11,822 4,346 --
101,185 104,594 126,477 126,910 89,854 --
10,608 10,608 15,358 10,608 7,182 31
--------------- ------------ ----------- ----------- ------------ -------------
11,037,346 12,532,352 31,695,420 14,074,147 15,624,603 439,520,597
--------------- ------------ ----------- ----------- ------------ -------------
-- 1,680,094 1,266,635 1,084,417 1,562,019 304,968
-- -- 858 -- 901 22,011
71,326 157,141 335,268 385,850 77,289 8,243,742
-- -- 29,150 -- -- 477,789
712 730 10,793 1,891 5,055 947
-- -- -- 12,056 -- --
18,268 19,448 26,982 23,520 5,100 57,534
--------------- ------------ ----------- ----------- ------------ -------------
90,306 1,857,413 1,669,686 1,507,734 1,650,364 9,106,991
--------------- ------------ ----------- ----------- ------------ -------------
$10,947,040 $10,674,939 $30,025,734 $12,566,413 $13,974,239 $430,413,606
=============== ============= =========== =========== ============= ============
$10,509,907 $10,354,517 $29,486,368 $12,033,429 $13,514,968 $314,330,433
3,929 -- 28,464 (29,376) -- --
9,324 (4,982) 62,774 12,072 9,124 14,865,013
423,880 325,404 448,128 550,288 450,147 101,218,160
--------------- ------------ ----------- ----------- ------------ -------------
$10,947,040 $10,674,939 $30,025,734 $12,566,413 $13,974,239 $430,413,606
=============== ============= =========== =========== ============= ============
$ 569,222 $ 277,961 $10,789,155 $ 512,897 $ 3,658,044 $ 441,420
=============== ============= =========== =========== ============= ============
$ 431,688 $ 572,178 $10,108,061 $ 1,879,195 $ 5,378,037 $ 715,646
=============== ============= =========== =========== ============= ============
$ 270,683 $ 273,265 $ 1,274,433 $ 411,135 $ 444,641 $ 306,499
=============== ============= =========== =========== ============= ============
$ 9,675,447 $ 9,551,535 $ 7,854,085 $ 9,763,186 $ 4,493,517 $428,950,041
=============== ============= =========== =========== ============= ============
54,591 26,945 1,024,197 48,705 346,685 26,563
=============== ============= =========== =========== ============= ============
41,423 55,470 960,116 178,426 510,399 43,089
=============== ============= =========== =========== ============= ============
25,972 26,488 121,069 39,045 42,109 18,455
=============== ============= =========== =========== ============= ============
928,011 925,812 75,520 927,028 425,125 25,828,464
=============== ============= =========== =========== ============= ============
$ 10.43 $ 10.32 $ 10.53 $ 10.53 $ 10.55 $ 16.62
=============== ============= =========== =========== ============= ============
$ 10.95 $ 10.83 $ 11.06 $ 11.06 $ 11.08 $ 17.45
=============== ============= =========== =========== ============= ============
$ 10.42 $ 10.32 $ 10.53 $ 10.53 $ 10.54 $ 16.61
=============== ============= =========== =========== ============= ============
$ 10.42 $ 10.32 $ 10.53 $ 10.53 $ 10.56 $ 16.61
=============== ============= =========== =========== ============= ============
$ 10.43 $ 10.32 $ 10.54 $ 10.53 $ 10.57 $ 16.61
=============== ============= =========== =========== ============= ============
$10,075,715 $ 9,850,757 $27,676,814 $11,035,096 $12,039,713 $296,066,125
=============== ============= =========== =========== ============= ============
</TABLE>
See accompanying notes to financial statements.
PAGE 33
<PAGE> 254
SALOMON BROTHERS INVESTMENT SERIES
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
For the Year Ended December 31, 1995
<TABLE>
<CAPTION>
CASH NEW YORK
MANAGEMENT MUNICIPAL
FUND BOND FUND
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
INCOME (Note A):
Interest.................................................... $ 765,757 $ 227,209
Dividends................................................... -- --
----------- ----------
765,757 227,209
EXPENSES:
Management fee.............................................. 25,505 19,069
Registration and filing fees................................ 40,284 7,001
Custody and administration fees............................. 30,009 9,059
Legal....................................................... 26,692 24,399
Printing and postage........................................ 15,750 14,702
Shareholder services........................................ 10,700 3,101
Amortization of organization expenses....................... 9,071 14,001
Audit and tax return preparation fees....................... 9,000 7,201
Directors' fees and expenses................................ 1,618 1,551
Other....................................................... 2,740 2,900
----------- ----------
171,369 102,984
Management fee waived and expenses absorbed by investment
advisor................................................... (101,221) (82,157)
Credits earned from custodian on cash balances.............. (9) (1,758)
----------- ----------
70,139 19,069
Distribution and service fees:
Class A Shares.............................................. -- 577
Class B Shares.............................................. -- 3,044
Class C Shares.............................................. -- 2,153
----------- ----------
Net expenses................................................ 70,139 24,843
----------- ----------
Net investment income....................................... 695,618 202,366
----------- ----------
REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments and options................................... -- (65,526)
Foreign currency transactions............................. -- --
----------- ----------
Net realized gain (loss)................................ -- (65,526)
----------- ----------
Net change in unrealized appreciation (depreciation) on:
Investments and options................................... -- 481,771
Foreign currency transactions and other assets............ -- --
----------- ----------
Net unrealized appreciation during the period........... -- 481,771
----------- ----------
NET REALIZED AND UNREALIZED GAIN............................ -- 416,245
----------- ----------
NET INCREASE IN NET ASSETS FROM OPERATIONS.................. $ 695,618 $ 618,611
============= ============
Note A: Net of foreign withholding tax of:.................. -- --
</TABLE>
* Fund's commencement of investment operations was February 22, 1995.
** Fund's commencement of investment operations was September 11, 1995.
See accompanying notes to financial statements.
PAGE 34
<PAGE> 255
SALOMON BROTHERS INVESTMENT SERIES
<TABLE>
<CAPTION>
NATIONAL U.S.
INTERMEDIATE GOVERNMENT HIGH YIELD STRATEGIC TOTAL INVESTORS
MUNICIPAL FUND* INCOME FUND* BOND FUND* BOND FUND* RETURN FUND** FUND
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 481,522 $576,679 $1,684,232 $1,016,101 $ 116,200 $ 2,303,702
-- -- -- -- 39,659 6,950,103
-------- -------------- ------------ ------------ --------------- ------------
481,522 576,679 1,684,232 1,016,101 155,859 9,253,805
44,953 53,073 108,535 71,026 15,069 1,614,897
6,000 6,000 6,000 6,000 -- 67,860
15,181 21,781 29,162 27,129 4,315 68,894
8,000 8,000 10,000 10,000 1,000 159,055
5,000 4,000 7,000 5,000 1,000 250,950
21,200 21,281 23,800 21,500 1,000 344,650
20,904 21,606 26,114 26,205 5,868 --
5,000 5,000 7,500 5,000 3,000 74,855
2,250 2,250 2,275 2,250 1,375 69,450
2,500 2,500 3,000 2,700 500 60,000
-------- -------------- ------------ ------------ --------------- ------------
130,988 145,491 223,386 176,810 33,127 2,710,611
(80,756) (92,397) (79,385) (82,848) (19,415) --
(5,279) (21) (735) (208) (13) (529)
-------- -------------- ------------ ------------ --------------- ------------
44,953 53,073 143,266 93,754 13,699 2,710,082
948 561 10,394 794 1,287 725
2,914 3,304 22,829 6,487 7,696 3,443
2,193 2,231 4,457 2,672 1,086 2,402
-------- -------------- ------------ ------------ --------------- ------------
51,008 59,169 180,946 103,707 23,768 2,716,652
-------- -------------- ------------ ------------ --------------- ------------
430,514 517,510 1,503,286 912,394 132,091 6,537,153
-------- -------------- ------------ ------------ --------------- ------------
39,589 110,378 472,003 217,956 24,049 49,873,105
-- -- -- 60,525 -- 63
-------- -------------- ------------ ------------ --------------- ------------
39,589 110,378 472,003 278,481 24,049 49,873,168
-------- -------------- ------------ ------------ --------------- ------------
423,880 325,404 460,968 566,483 450,147 62,151,251
-- -- (12,840) (16,195) -- --
-------- -------------- ------------ ------------ --------------- ------------
423,880 325,404 448,128 550,288 450,147 62,151,251
-------- -------------- ------------ ------------ --------------- ------------
463,469 435,782 920,131 828,769 474,196 112,024,419
-------- -------------- ------------ ------------ --------------- ------------
$ 893,983 $953,292 $2,423,417 $1,741,163 $ 606,287 $118,561,572
================== ================ ============= ============= ================ ============
-- -- -- $ 589 $ 282 $ 91,274
============= ================ ============
</TABLE>
See accompanying notes to financial statements.
PAGE 35
<PAGE> 256
SALOMON BROTHERS INVESTMENT SERIES
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
For the Year Ended December 31, 1995
<TABLE>
<CAPTION>
CASH NEW YORK
MANAGEMENT MUNICIPAL
FUND BOND FUND
- --------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Net investment income...................................... $ 695,618 $ 202,366
Net realized gain (loss) on investments, options, and
foreign currency transactions............................ -- (65,526)
Net change in unrealized appreciation (depreciation) on
investments, options, foreign currency transactions and
other assets............................................. -- 481,771
------------ -----------
Net increase in net assets from operations................. 695,618 618,611
------------ -----------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from net investment income:
Class A.................................................. (40,161) (11,538)
Class B.................................................. (26,516) (12,739)
Class C.................................................. (2,693) (9,206)
Class O.................................................. (626,248) (165,524)
------------ -----------
(695,618) (199,007)
------------ -----------
Distributions from net realized gains:
Class A.................................................. -- --
Class B.................................................. -- --
Class C.................................................. -- --
Class O.................................................. -- --
------------ -----------
-- --
------------ -----------
Distributions in excess of net realized gains:
Class A.................................................. -- --
Class B.................................................. -- --
Class C.................................................. -- --
Class O.................................................. -- --
------------ -----------
-- --
------------ -----------
NET FUND CAPITAL SHARE TRANSACTIONS:
Class A.................................................. 1,755,547 528,982
Class B.................................................. 2,238,486 504,427
Class C.................................................. 182,541 250,059
Class O.................................................. (12,442,586) (1,202,551)
------------ -----------
Net increase (decrease) in net assets derived from
share transactions................................... (8,266,012) 80,917
------------ -----------
NET INCREASE (DECREASE) IN NET ASSETS........................ (8,266,012) 500,521
NET ASSETS:
Beginning of period........................................ 19,126,816 3,333,430
------------ -----------
End of period (a).......................................... $10,860,804 $3,833,951
============= ============
(a) Including undistributed net investment income or
distributions in excess of net investment income of: -- $ 3,359
============
</TABLE>
* Fund's commencement of investment operations was February 22, 1995.
** Fund's commencement of investment operations was September 11, 1995.
See accompanying notes to financial statements.
PAGE 36
<PAGE> 257
SALOMON BROTHERS INVESTMENT SERIES
<TABLE>
<CAPTION>
NATIONAL U.S.
INTERMEDIATE GOVERNMENT HIGH YIELD STRATEGIC TOTAL INVESTORS
MUNICIPAL FUND* INCOME FUND* BOND FUND* BOND FUND* RETURN FUND** FUND
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 430,514 $ 517,510 $ 1,503,286 $ 912,394 $ 132,091 $ 6,537,153
39,589 110,378 472,003 278,481 24,049 49,873,168
423,880 325,404 448,128 550,288 450,147 62,151,251
---------------- ------------- ----------- ----------- -------------- ------------
893,983 953,292 2,423,417 1,741,163 606,287 118,561,572
---------------- ------------- ----------- ----------- -------------- ------------
(17,376) (12,734) (428,959) (30,591) (35,724) (4,087)
(11,207) (16,038) (212,975) (59,198) (47,121) (2,179)
(8,442) (10,967) (42,228) (23,725) (3,465) (1,577)
(389,560) (477,771) (790,660) (804,713) (45,781) (6,529,373)
---------------- ------------- ----------- ---------- -------------- ------------
(426,585) (517,510) (1,474,822) (918,227) (132,091) (6,537,216)
---------------- ------------- ----------- ----------- -------------- ------------
(1,569) (2,801) (146,101) (11,724) (3,900) (37,569)
(1,193) (4,374) (137,393) (42,853) (5,711) (61,264)
(749) (2,795) (17,451) (9,338) (469) (26,879)
(26,754) (100,408) (108,284) (226,037) (4,845) (36,419,464)
---------------- ------------- ----------- ----------- -------------- ------------
(30,265) (110,378) (409,229) (289,952) (14,925) (36,545,176)
---------------- ------------- ----------- ----------- -------------- ------------
-- (216) -- -- -- --
-- (1,765) -- -- -- --
-- (174) -- -- -- --
-- (2,827) -- -- -- --
---------------- ------------- ----------- ----------- -------------- ------------
-- (4,982) -- -- -- --
---------------- ------------- ----------- ----------- -------------- ------------
551,191 269,838 10,746,292 498,371 3,580,176 396,175
417,842 561,475 10,103,804 1,866,229 5,255,708 675,659
260,067 265,054 1,264,713 397,920 424,084 264,858
9,280,727 9,258,070 7,371,479 9,270,829 4,250,000 5,383,498
---------------- ------------- ----------- ----------- -------------- ------------
10,509,827 10,354,437 29,486,288 12,033,349 13,509,968 6,720,190
---------------- ------------- ----------- ----------- -------------- ------------
10,946,960 10,674,859 30,025,654 12,566,333 13,969,239 82,199,370
80 80 80 80 5,000 348,214,236
---------------- ------------- ----------- ----------- -------------- ------------
$ 10,947,040 $10,674,939 $30,025,734 $12,566,413 $13,974,239 $430,413,606
================= =============== ============= ============= ================ ============
$ 3,929 -- $ 28,464 $ (29,376) -- --
================= ============= =============
</TABLE>
See accompanying notes to financial statements.
PAGE 37
<PAGE> 258
SALOMON BROTHERS INVESTMENT SERIES
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
For the Year Ended December 31, 1994
<TABLE>
<CAPTION>
CASH NEW YORK
MANAGEMENT MUNICIPAL
FUND BOND FUND
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Net investment income.................................... $ 551,304 $ 416,648
Net realized gain (loss) on investments, options, and
foreign currency transactions.......................... (415) (552,459)
Net change in unrealized appreciation on
investments and options................................ -- (636,046)
----------- -----------
Net increase (decrease) in net assets from operations.... 550,889 (771,857)
----------- -----------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from net investment income:
Class A................................................ -- --
Class B................................................ -- --
Class C................................................ -- --
Class O................................................ (551,304) (416,648)
----------- -----------
(551,304) (416,648)
----------- -----------
Distributions from net realized gains:
Class A................................................ -- --
Class B................................................ -- --
Class C................................................ -- --
Class O................................................ -- --
----------- -----------
-- --
----------- -----------
NET FUND CAPITAL SHARE TRANSACTIONS:
Class A................................................ -- --
Class B................................................ -- --
Class C................................................ -- --
Class O................................................ 4,077,861 (3,842,334)
----------- -----------
Net increase (decrease) in net assets
derived from share transactions.................... 4,077,861 (3,842,334)
----------- -----------
NET INCREASE (DECREASE) IN NET ASSETS...................... 4,077,446 (5,030,839)
NET ASSETS:
Beginning of year........................................ 15,049,370 8,364,269
----------- -----------
End of year.............................................. $19,126,816 $ 3,333,430
============= ============
</TABLE>
* Fund commenced investment operations in 1995.
See accompanying notes to financial statements.
PAGE 38
<PAGE> 259
SALOMON BROTHERS INVESTMENT SERIES
- --------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
For the Year Ended December 31, 1994
<TABLE>
<CAPTION>
NATIONAL U.S.
INTERMEDIATE GOVERNMENT HIGH YIELD STRATEGIC TOTAL INVESTORS
MUNICIPAL FUND* INCOME FUND* BOND FUND* BOND FUND* RETURN FUND* FUND
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
-- -- -- -- -- $ 6,507,464
-- -- -- -- -- 26,937,166
-- -- -- -- -- (38,268,999)
----------------- --------------- ------------ ------------ ------------- ------------
-- -- -- -- -- (4,824,369)
----------------- --------------- ------------ ------------ ------------- ------------
-- -- -- -- -- --
-- -- -- -- -- --
-- -- -- -- -- --
-- -- -- -- -- (6,555,567)
----------------- --------------- ------------ ------------ ------------- ------------
-- -- -- -- -- (6,555,567)
----------------- --------------- ------------ ------------ ------------- ------------
-- -- -- -- -- --
-- -- -- -- -- --
-- -- -- -- -- --
-- -- -- -- -- (36,204,568)
----------------- --------------- ------------ ------------ ------------- ------------
-- -- -- -- -- (36,204,568)
----------------- --------------- ------------ ------------ ------------- ------------
-- -- -- -- -- --
-- -- -- -- -- --
-- -- -- -- -- --
-- -- -- -- -- 9,651,539
----------------- --------------- ------------ ------------ ------------- ------------
-- -- -- -- -- 9,651,539
----------------- --------------- ------------ ------------ ------------- ------------
-- -- -- -- -- (37,932,965)
-- -- -- -- -- 386,147,201
----------------- --------------- ------------ ------------ ------------- ------------
-- -- -- -- -- $348,214,236
================= ================ ============ ============ ============== ============
</TABLE>
See accompanying notes to financial statements.
PAGE 39
<PAGE> 260
SALOMON BROTHERS INVESTMENT SERIES
- --------------------------------------------------------------------------------
STATEMENT OF CASH FLOWS
For the period ended December 31, 1995*
U.S. GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INCREASE (DECREASE) IN CASH
CASH FLOWS FROM OPERATING ACTIVITIES:
Purchases of short-term portfolio investments, net............................... $ (2,064,000)
Purchases of long-term portfolio investments..................................... (25,786,224)
Proceeds from disposition of long-term portfolio investments and principal
paydowns....................................................................... 17,724,056
------------
(10,126,168)
Net investment income............................................................ 517,510
Net amortization of premium/discount on investments.............................. 1,883
Amortization of organization expenses............................................ 21,606
Net change is receivables/payables related to operations......................... (293,456)
------------
Net cash flows used by operating activities.................................... (9,878,625)
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from shares sold........................................................ 10,348,090
Payments on shares redeemed...................................................... (9,286)
Cash dividends paid.............................................................. (460,097)
------------
Net cash flows provided by financing activities................................ 9,878,707
------------
Net increase in cash............................................................... 82
Cash at beginning of period........................................................ 80
------------
Cash at end of period.............................................................. $ 162
============
</TABLE>
* Fund's commencement of investment operations was February 22, 1995.
Note: Other non-cash activity includes mortgage dollar roll transactions. See
Note 1.
See accompanying notes to financial statements.
PAGE 40
<PAGE> 261
SALOMON BROTHERS INVESTMENT SERIES
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
The Salomon Brothers Investment Series (the "Investment Series") consists of
certain portfolios of the Salomon Brothers Series Funds Inc (the "Series
Funds"), as indicated below, and the Salomon Brothers Investors Fund Inc (the
"Investors Fund"). The Series Funds were incorporated in Maryland on April 17,
1990 as an open-end management investment company, and currently operates as a
series company comprised of nine portfolios: Salomon Brothers Cash Management
Fund (the "Cash Management Fund"), Salomon Brothers New York Municipal Money
Market Fund, (the "New York Municipal Money Fund"), Salomon Brothers U.S.
Treasury Securities Money Market Fund (the "U.S. Treasury Fund"), Salomon
Brothers New York Municipal Bond Fund (the "New York Municipal Bond Fund"),
Salomon Brothers National Intermediate Municipal Fund (the "National
Intermediate Municipal Fund"), Salomon Brothers U.S. Government Income Fund (the
"U.S. Government Income Fund"), Salomon Brothers High Yield Bond Fund (the "High
Yield Bond Fund"), Salomon Brothers Strategic Bond Fund (the "Strategic Bond
Fund"), and Salomon Brothers Total Return Fund (the "Total Return Fund").
Separate financial statements are prepared for the New York Municipal Money Fund
and U.S. Treasury Fund which are not part of the Investment Series. All of the
other portfolios of the Series Funds are included in the Investment Series,
which also includes the Investors Fund, a diversified open-end management
investment company incorporated in Maryland on April 2, 1958. The Investment
Series operates under a multiple class pricing structure, with each portfolio of
the Investment Series (individually, a "Fund") offering Class A, Class B, Class
C, and Class O shares, each with their own expense structure. Each fund has a
specific investment objective: the Cash Management Fund's objective is to seek
as high a level of current income as is consistent with liquidity and the
stability of principal; the New York Municipal Bond Fund's objective is to
achieve a high level of current income which is exempt from regular federal
income taxes and New York State and New York City personal income taxes,
consistent with the preservation of capital; the National Intermediate Municipal
Fund's objective is to achieve a high level of current income which is exempt
from regular federal income taxes; the U.S. Government Income Fund's objective
is to obtain a high level of current income; the High Yield Bond Fund's
objective is to maximize current income; the Strategic Bond Fund's objective is
to seek a high level of current income; the Total Return Fund's objective is to
obtain above-average income (compared to a portfolio entirely invested in equity
securities); the Investors Fund's objective is to seek long-term growth of
capital.
Certain costs incurred in connection with each Fund's organization, which were
payable to Salomon Brothers Asset Management Inc ("SBAM") have been deferred and
are being amortized by the Funds over a 60 month period from the date each Fund
commenced
PAGE 41
<PAGE> 262
SALOMON BROTHERS INVESTMENT SERIES
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
investment operations. A summary of those expenditures that remain as of
December 31, 1995 for each Fund is as follows:
<TABLE>
<CAPTION>
EXPIRATION OF
FUND AMORTIZATION AMOUNT
<S> <C> <C>
- -----------------------------------------------------------------------------------
New York Municipal Bond Fund...................... February 1998 $27,895
National Intermediate Municipal Fund.............. February 2000 $101,185
U.S. Government Income Fund....................... February 2000 $104,594
High Yield Bond Fund.............................. February 2000 $126,477
Strategic Bond Fund............................... February 2000 $126,910
Total Return Fund................................. September 2000 $89,854
</TABLE>
The following is a summary of significant accounting policies followed by the
Investment Series in the preparation of its financial statements. The policies
are in conformity with generally accepted accounting principles ("GAAP"). The
preparation of financial statements in accordance with GAAP requires management
to make estimates of certain reported amounts in the financial statements.
Actual amounts could differ from those estimates.
(A) INVESTMENT VALUATION. Portfolio securities listed or traded on
national securities exchanges, or reported on the NASDAQ national market
system, are valued at the last sale price, or if there have been no sales
on that day, at the mean of the current bid and asked price which
represents the current value of the security. Over-the-counter securities
are valued at the mean of the current bid and asked price. Debt securities
are valued by using either market quotations or independent pricing
services which use prices provided by market-makers or estimates of market
values obtained from yield data relating to instruments or securities with
similar characteristics. Publicly traded sovereign bonds are typically
traded internationally on the over-the-counter market and are valued at the
mean of the last current bid and asked price as of the close of business of
that market. Short-term securities with less than 60 days remaining to
maturity when acquired by a Fund will be valued at amortized cost which
approximates market value. If a Fund, other than the Cash Management Fund,
acquires such securities with more than 60 days remaining to maturity, they
will be valued at current market value (using the bid price), until the
60th day prior to maturity, and will then be valued on an amortized cost
basis.
Portfolio securities for the Cash Management Fund are valued using the
amortized cost method, which involves initially valuing an investment at
its cost and thereafter assuming a constant amortization to maturity of any
premium or discount. This method results in a value approximating market
value.
Foreign securities quoted in a foreign currency are translated into
U.S. dollars using exchange rates at 2:30 p.m. Eastern time or at such
other rates as SBAM may determine to be appropriate in computing net asset
value.
PAGE 42
<PAGE> 263
SALOMON BROTHERS INVESTMENT SERIES
Securities for which reliable quotations or prices from pricing
services are not readily available (as may be the case for securities of
limited marketability) and all other assets will be valued at their
respective fair value as determined in good faith by, or under procedures
established by, the Board of Directors.
(B) FUTURES CONTRACTS. The New York Municipal Bond Fund, National
Intermediate Municipal Fund, High Yield Bond Fund, Strategic Bond Fund,
Total Return Fund and Investors Fund may enter into futures contracts for
hedging purposes, which involves paying or receiving variation margin,
which will be recorded as unrealized gain or loss until the contract is
closed. When the contract is closed, a realized gain or loss will be
recognized. Outstanding contracts involve elements of market risk in excess
of amounts reported in the financial statements.
(C) OPTION CONTRACTS. When a Fund writes or purchases a call or a put
option, an amount equal to the premium received or paid by the Fund is
recorded as a liability or asset, the value of which is marked-to-market
daily to reflect the current market value of the option. When the option
expires, the Fund realizes a gain or loss equal to the amount of the
premium received or paid. When the Fund exercises an option or enters into
a closing transaction by purchasing or selling an offsetting option, it
realizes a gain or loss without regard to any unrealized gain or loss on
the underlying security. When a written call option is exercised, the Fund
realizes a gain or loss from the sale of the underlying security and the
proceeds from such sale are increased by the premium originally received.
When a written put option is exercised, the amount of the premium received
reduces the cost of the security that the Fund purchased upon exercise of
the option.
(D) MORTGAGE ROLLS. The U.S. Government Income Fund and the Strategic
Bond Fund may enter into mortgage "dollar rolls" in which a Fund sells
mortgage-backed securities for delivery in the current month and
simultaneously contracts to repurchase substantially similar (same type,
coupon and maturity) securities on a specified future date. The Fund is
compensated by a fee paid by the counterparty. Dollar rolls are accounted
for as financing arrangements; the fee is accrued into interest income
ratably over the term of the dollar roll and any gain or loss on the roll
is deferred until disposition of the rolled security. The average daily
balance of dollar rolls outstanding during the period ended December 31,
1995 was approximately $2,150,000 and $1,052,000 for the U.S. Government
Income Fund and the Strategic Bond Fund, respectively.
(E) REPURCHASE AGREEMENTS. When entering into repurchase agreements,
it is each Fund's policy that the Fund take possession, through its
custodian, of the underlying collateral and monitor the collateral's value
at the time the agreement is entered into and on a daily basis during the
term of the repurchase agreement to ensure that it always equals or exceeds
the repurchase price. In the event of default or bankruptcy by the other
party to the agreement, realization and/or retention of the collateral may
be subject to legal proceedings.
(F) FOREIGN CURRENCY TRANSLATION. The accounting records of each Fund
are maintained in U.S. dollars. Investment securities and other assets and
liabilities of the High Yield Bond Fund, Strategic Bond Fund, Total Return
Fund and Investors
PAGE 43
<PAGE> 264
SALOMON BROTHERS INVESTMENT SERIES
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
Fund denominated in a foreign currency are translated into U.S. dollars at
the prevailing rates of exchange each day. Purchases and sales of
securities, income receipts and expense payments are translated into U.S.
dollars at the prevailing exchange rate on the respective dates of the
transactions. Net realized gains and losses on foreign currency
transactions represent net gains and losses from sales and maturities of
forward currency contracts, disposition of foreign currencies, currency
gains and losses realized between the trade and settlement dates on
securities transactions and the difference between the amount of net
investment income accrued and the U.S. dollar amount actually received. The
effect of changes in foreign currency exchange rates on investments in
securities are not segregated in the Statements of Operations from the
effects of changes in market prices of those securities, but are included
with the net realized and unrealized gain or loss on investments.
(G) FORWARD FOREIGN CURRENCY CONTRACTS. The High Yield Bond Fund,
Strategic Bond Fund, Total Return Fund and Investors Fund may enter into
forward foreign currency contracts in connection with planned purchases or
sales of securities or to hedge the value of portfolio securities. A
forward foreign currency contract is an agreement between two parties to
buy and sell a currency at a set price on a future date. The contract is
marked-to-market daily and the change in value is recorded by the Fund as
an unrealized gain or loss. When a forward foreign currency contract is
extinguished, through either delivery or offset by entering into another
forward foreign currency contract, the Fund records a realized gain or loss
equal to the difference between the value of the contract at the time it
was opened and the value of the contract at the time it was extinguished or
offset.
(H) LOAN PARTICIPATIONS. The High Yield Bond Fund, Strategic Bond Fund
and Total Return Fund may invest in fixed and floating rate loans arranged
through private negotiations between a foreign sovereign entity and one or
more financial institutions ("lender"). The market values of the High Yield
Bond Fund and the Strategic Bond Fund's loan participations at December 31,
1995 were $336,250 each.
In connection with purchasing participations, the Fund generally will
have no right to enforce compliance by the borrower, and the Fund may not
benefit directly from any collateral supporting the loan in which it has
purchased the participation. As a result, the Fund will assume the credit
risk of both the borrower and the lender that is selling the participation.
In the event of the insolvency of the lender selling the participation, the
Fund may be treated as a general creditor of the lender and may not benefit
from any set-off between the lender and the borrower.
(I) FEDERAL INCOME TAXES. Each Fund intends to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies, including the distribution requirements of the Tax
Reform Act of 1986, and to distribute all of its income, including any net
realized gains, to shareholders. Therefore, no Federal income tax or excise
tax provision is required.
(J) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends from net
investment income for each of the Funds (except the Investors Fund) are
declared each business day to shareholders of record that day, and are paid
on the last business
PAGE 44
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SALOMON BROTHERS INVESTMENT SERIES
day of the month. Dividends from net investment income for the Investors
Fund are declared on a quarterly basis. Distributions of net realized gains
to shareholders of each Fund, if any, are declared at least annually.
Dividends and distributions to shareholders of each Fund are recorded on
the ex-dividend date and are determined in accordance with income tax
regulations which may differ from generally accepted accounting principles
due primarily to differences in the treatment of foreign currency
gains/losses and deferral of wash sales and post-October losses incurred by
each Fund. Permanent book/tax differences are reclassified within the
capital accounts based on their federal income tax basis treatment;
temporary differences do not require reclassifications. Dividends and
distributions which exceed net investment income and net realized gains for
financial reporting purposes but not for tax purposes are reported as
distributions in excess of net investment income and distributions in
excess of net realized capital gains.
(K) CLASS ACCOUNTING. Investment income, common expenses and gain
(loss) on investments are allocated to the various classes of a Fund on the
basis of daily net assets of each class. Distribution and shareholder
servicing fees relating to a specific class are charged directly to that
class. No class has preferential dividend rights; differences in per share
dividend rates are generally due to differences in separate class expenses.
(L) EXPENSES. Direct expenses are charged to the Fund that incurred
them, and general expenses of the Investment Series are allocated to the
Funds based on each Fund's relative net assets.
(M) OTHER. Investment transactions are recorded as of the trade date.
Dividend income is recorded on the ex-dividend date. Interest income,
including the accretion of discounts or amortization of premiums, is
recognized when earned. Gains or losses on sales of securities are
calculated for financial accounting and Federal income tax purposes on the
identified cost basis.
(N) CASH FLOW INFORMATION. Statement of Financial Accounting Standards
Number 102 generally exempts entities such as the Funds from reporting a
Statement of Cash Flows. However, the amount and nature of certain
activities entered into by the U.S. Government Income Fund and Strategic
Bond Fund may be considered financing arrangements, which may require the
presentation of a Statement of Cash Flows. General investing and operating
activities of the Funds are reported in the Statement of Changes in Net
Assets and additional information on cash receipts and cash payments are
presented in the Statement of Cash Flows. Accounting practices that do not
affect reporting activities on a cash basis include carrying investments at
value and amortizing discounts or premiums on debt obligations.
2. MANAGEMENT FEE AND OTHER AGREEMENTS
Each Fund retains SBAM, an indirect wholly owned subsidiary of Salomon Inc, to
act as investment manager, subject to the supervision by the Board of Directors
of each Fund. SBAM furnishes each Fund in the Investment Series with office
space and certain
PAGE 45
<PAGE> 266
SALOMON BROTHERS INVESTMENT SERIES
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
services and facilities required for conducting the business of the Investment
Series and pays the compensation of its officers. The management fee for these
services for each Fund (except the Investors Fund) is payable monthly and is
based on the following annual percentages of each Funds' average daily net
assets: .20% for the Cash Management Fund, .50% for the New York Municipal Bond
Fund and the National Intermediate Municipal Fund, .60% for the U.S. Government
Income Fund, .75% for the High Yield Bond Fund and Strategic Bond Fund, and .55%
for the Total Return Fund. SBAM Limited provides certain advisory services to
SBAM for the benefit of the Strategic Bond Fund. SBAM Limited is compensated by
SBAM at no additional expense to the Strategic Bond Fund.
The Investors Fund pays SBAM a base fee subject to an increase or decrease
depending on the extent, if any, to which the investment performance of the
Investors Fund exceeds or is exceeded by the investment record of the Standard &
Poor's 500 Index of Composite Stocks ("S&P 500 Index"). The base fee is paid
quarterly based on the following annual rates:
<TABLE>
<CAPTION>
ANNUAL
FEE
AVERAGE DAILY NET ASSETS RATE
<S> <C>
- -----------------------------------------------------------------------------------
First $350 million......................................................... .500%
Next $150 million.......................................................... .400%
Next $250 million.......................................................... .375%
Next $250 million.......................................................... .350%
Over $1 billion............................................................ .300%
</TABLE>
The performance adjustment is paid quarterly based on a rolling one year period.
A performance adjustment will only be made after the investment performance of
the Investors Fund exceeds or is exceeded by the investment record of the S&P
500 Index by at least one percentage point. For each percentage point by which
the investment performance of the Investors Fund exceeds or is exceeded by the
investment record of the S&P 500 Index, the base fee will be adjusted upward or
downward by .01% (annualized). The maximum annual adjustment is .10% which would
occur if the Investors Fund's performance exceeds or is exceeded by the S&P 500
Index by ten or more percentage points. The first performance adjustment
reducing the management fee by $267,836 was made on September 30, 1995,
representing a seven percent higher performance by the S&P 500 Index for the
period from October 1, 1994 through September 30, 1995. An additional reduction
in the base management fee of $31,182 was recorded for the quarter ended
December 31, 1995, representing a three percent higher performance by the S&P
500 Index.
For the year ended December 31, 1995, SBAM waived management fees of $25,505,
$19,069, $44,953, $53,073, $79,385, $71,026 and $15,069 for the Cash Management
Fund, New York Municipal Bond Fund, National Intermediate Municipal Fund, U.S.
Government Income Fund, High Yield Bond Fund, Strategic Bond Fund and Total
Return Fund, respectively, and voluntarily absorbed expenses of $75,716,
$63,088, $35,803, $39,324, $11,822 and $4,346 for the Cash Management Fund, New
York Municipal Bond
PAGE 46
<PAGE> 267
SALOMON BROTHERS INVESTMENT SERIES
Fund, National Intermediate Municipal Fund, U.S. Government Income Fund,
Strategic Bond Fund and Total Return Fund, respectively.
If in any fiscal year total expenses of any Fund, excluding taxes, interest,
brokerage and extraordinary expenses, but including the management fee, exceed
the most stringent expense limitations imposed by state securities regulations
applicable to the Fund, SBAM will pay or reimburse the Fund for the excess.
Currently, the most restrictive of these limitations on an annual basis is 2.5%
of the first $30 million of average daily net assets, 2.0% of the next $70
million of average daily net assets and 1.5% of average daily net assets in
excess of $100 million. No such expense reimbursement was required for the year
ending December 31, 1995.
Investors Bank & Trust Company serves as custodian and administrator for each
Fund, which includes performing certain administrative services in connection
with the operation of each Fund. During the year ended December 31, 1995,
credits earned on outstanding cash balances were used to reduce custodian fees
by $9, $1,758, $5,279, $21, $735, $208, $13 and $529 for the Cash Management
Fund, New York Municipal Bond Fund, National Intermediate Municipal Fund, U.S.
Government Income Fund, High Yield Bond Fund, Strategic Bond Fund, Total Return
Fund and Investors Fund, respectively.
Each Fund has an agreement with Salomon Brothers Inc ("Salomon Brothers"), an
affiliate of the Investment Adviser, to distribute its shares pursuant to a
multiple pricing system. Each class (except for Class O) of each Fund (except
for the Cash Management Fund) is authorized pursuant to a services and
distribution plan applicable to that class of shares (the "Class A Plan," the
"Class B Plan," and the "Class C Plan," collectively, the "Plans") adopted
pursuant to Rule 12b-1 under the Investment Company Act of 1940, as amended (the
"1940 Act"), to pay Salomon Brothers an annual service fee with respect to Class
A, Class B, and Class C shares of the applicable Funds at the rate of .25% of
the value of the average daily net assets of the respective class. Salomon
Brothers is also paid an annual distribution fee with respect to Class B and
Class C shares of each Fund (except for the Cash Management Fund) at the rate of
.75% of the value of the average daily net assets of the respective class. Class
O shares are not subject to a services and distribution plan fee.
Brokerage commissions of $210 and $95,179 were paid by the Total Return Fund and
Investors Fund, respectively, to Salomon Brothers, the Funds' distributor and an
indirect wholly-owned subsidiary of Salomon Inc, for transactions executed on
behalf of the Funds for the period ended December 31, 1995.
Salomon Brothers received $1,990 as its portion of the front-end sales charge on
sales of Class A shares of the Funds. In addition, contingent deferred sales
charges of $2,290 were paid to Salomon Brothers in connection with redemptions
of certain Class B and Class C shares of the Funds during the year ended
December 31, 1995.
PAGE 47
<PAGE> 268
SALOMON BROTHERS INVESTMENT SERIES
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
3. CAPITAL STOCK
At December 31, 1995, the Series Funds had 10,000,000,000 shares of authorized
capital stock, par value $.001 per share, of which the Cash Management Fund, New
York Municipal Bond Fund, National Intermediate Municipal Fund, U.S. Government
Income Fund, High Yield Bond Fund and Strategic Bond Fund each had 1,111,111,112
shares authorized, and the Total Return Fund had 1,111,111,104 shares
authorized. The Investors Fund had 50,000,000 shares of authorized capital
stock, par value $1.00 per share. Transactions in Fund shares for the periods
indicated were as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B
------------------------------------------------------------------------------
PERIOD ENDED YEAR ENDED PERIOD ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1994 DECEMBER 31, 1995 DECEMBER 31, 1994
------------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CASH MANAGEMENT FUND
Sold.................. 8,291,614 $ 8,291,614 -- -- 3,213,151 $ 3,213,151 -- --
Issued as
reinvestment........ 4,672 4,672 -- -- 24,262 24,262 -- --
Redeemed.............. (6,540,739) (6,540,739) -- -- (998,927) (998,927) -- --
---------- ----------- ---------- ----------- ---------- ----------- ---------- -----------
Net increase
(decrease).......... 1,755,547 $ 1,755,547 -- -- 2,238,486 $ 2,238,486 -- --
=========== ============ =========== ============ =========== ============ =========== ============
NEW YORK MUNICIPAL
BOND FUND
Sold.................. 53,966 $ 528,846 -- -- 52,010 $ 502,220 -- --
Issued as
reinvestment........ 16 157 -- -- 226 2,229 -- --
Redeemed.............. (2) (21) -- -- (2) (22) -- --
---------- ----------- ---------- ----------- ---------- ----------- ---------- -----------
Net increase
(decrease).......... 53,980 $ 528,982 -- -- 52,234 $ 504,427 -- --
=========== ============ =========== ============ =========== ============ =========== ============
NATIONAL INTERMEDIATE
MUNICIPAL FUND
Sold.................. 54,100 $ 546,146 -- -- 41,260 $ 416,180 -- --
Issued as
reinvestment........ 710 7,331 -- -- 163 1,682 -- --
Redeemed.............. (221) (2,286) -- -- (2) (20) -- --
---------- ----------- ---------- ----------- ---------- ----------- ---------- -----------
Net increase.......... 54,589 $ 551,191 -- -- 41,421 $ 417,842 -- --
=========== ============ =========== ============ =========== ============ =========== ============
U.S. GOVERNMENT INCOME
FUND
Sold.................. 26,869 $ 269,137 -- -- 54,833 $ 554,953 -- --
Issued as
reinvestment........ 76 721 -- -- 637 6,542 -- --
Redeemed.............. (2) (20) -- -- (2) (20) -- --
---------- ----------- ---------- ----------- ---------- ----------- ---------- -----------
Net increase.......... 26,943 $ 269,838 -- -- 55,468 $ 561,475 -- --
=========== ============ =========== ============ =========== ============ =========== ============
HIGH YIELD BOND FUND
Sold.................. 1,019,841 $10,701,496 -- -- 946,768 $ 9,961,848 -- --
Issued as
reinvestment........ 40,936 430,949 -- -- 15,920 168,888 -- --
Redeemed.............. (36,582) (386,153) -- -- (2,574) (26,932) -- --
---------- ----------- ---------- ----------- ---------- ----------- ---------- -----------
Net increase.......... 1,024,195 $10,746,292 -- -- 960,114 $10,103,804 -- --
=========== ============ =========== ============ =========== ============ =========== ============
STRATEGIC BOND FUND
Sold.................. 53,771 $ 551,616 -- -- 174,744 $ 1,827,448 -- --
Issued as
reinvestment........ 1,158 12,171 -- -- 3,737 39,371 -- --
Redeemed.............. (6,226) (65,416) -- -- (57) (590) -- --
---------- ----------- ---------- ----------- ---------- ----------- ---------- -----------
Net increase.......... 48,703 $ 498,371 -- -- 178,424 $ 1,866,229 -- --
=========== ============ =========== ============ =========== ============ =========== ============
TOTAL RETURN FUND
Sold.................. 343,940 $ 3,552,510 -- -- 518,625 $ 5,342,405 -- --
Issued as
reinvestment........ 2,713 28,624 -- -- 3,801 40,062 -- --
Redeemed.............. (93) (958) -- -- (12,152) (126,759) -- --
---------- ----------- ---------- ----------- ---------- ----------- ---------- -----------
Net increase.......... 346,560 $ 3,580,176 -- -- 510,274 $ 5,255,708 -- --
=========== ============ =========== ============ =========== ============ =========== ============
INVESTORS FUND
Sold.................. 27,922 $ 420,791 -- -- 41,769 $ 654,082 -- --
Issued as
reinvestment........ 760 12,451 -- -- 1,335 21,837 -- --
Redeemed.............. (2,119) (37,067) -- -- (15) (260) -- --
---------- ----------- ---------- ----------- ---------- ----------- ---------- -----------
Net increase.......... 26,563 $ 396,175 -- -- 43,089 $ 675,659 -- --
=========== ============ =========== ============ =========== ============ =========== ============
</TABLE>
PAGE 48
<PAGE> 269
SALOMON BROTHERS INVESTMENT SERIES
<TABLE>
<CAPTION>
CLASS C CLASS O
----------------------------------------------------------------------------------
PERIOD ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1994 DECEMBER 31, 1995 DECEMBER 31, 1994
------------------------------------------------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
180,044 $ 180,044 -- -- 47,254,877 $ 47,254,877 75,796,036 $ 75,796,036
2,497 2,497 -- -- 431,706 431,706 401,895 401,895
-- -- -- -- (60,129,169) (60,129,169) (72,120,070) (72,120,070)
---------- ----------- ---------- ----------- ----------- ------------ ----------- ------------
182,541 $ 182,541 -- -- (12,442,586) $(12,442,586) 4,077,861 $ 4,077,861
=========== ============ =========== ============ ============ ============= ============ =============
26,263 $ 250,020 -- -- 14,323 $ 137,924 194,976 $ 1,960,677
6 60 -- -- 17,711 169,082 40,650 390,961
(2) (21) -- -- (156,388) (1,509,557) (665,997) (6,193,972)
---------- ----------- ---------- ----------- ----------- ------------ ----------- ------------
26,267 $ 250,059 -- -- (124,354) $ (1,202,551) (430,371) $ (3,842,334)
=========== ============ =========== ============ ============ ============= ============ =============
25,963 $ 260,000 -- -- 927,748 $ 9,278,117 -- --
9 87 -- -- 263 2,630 -- --
(2) (20) -- -- (2) (20) -- --
---------- ----------- ---------- ----------- ----------- ------------ ----------- ------------
25,970 $ 260,067 -- -- 928,009 $ 9,280,727 -- --
=========== ============ =========== ============ ============ ============= ============ =============
27,164 $ 272,000 -- -- 925,200 $ 9,252,000 -- --
20 206 -- -- 816 8,164 -- --
(698) (7,152) -- -- (206) (2,094) -- --
---------- ----------- ---------- ----------- ----------- ------------ ----------- ------------
26,486 $ 265,054 -- -- 925,810 $ 9,258,070 -- --
=========== ============ =========== ============ ============ ============= ============ =============
124,291 $ 1,298,229 -- -- 926,518 $ 9,265,788 -- --
1,229 12,925 -- -- 791 7,911 -- --
(4,453) (46,441) -- -- (181,791) (1,902,220) -- --
---------- ----------- ---------- ----------- ----------- ------------ ----------- ------------
121,067 $ 1,264,713 -- -- 745,518 $ 7,371,479 -- --
=========== ============ =========== ============ ============ ============= ============ =============
38,420 $ 391,367 -- -- 926,274 $ 9,263,323 -- --
625 6,573 -- -- 754 7,526 -- --
(2) (20) -- -- (2) (20) -- --
---------- ----------- ---------- ----------- ----------- ------------ ----------- ------------
39,043 $ 397,920 -- -- 927,026 $ 9,270,829 -- --
=========== ============ =========== ============ ============ ============= ============ =============
41,886 $ 423,053 -- -- 425,000 $ 4,250,000 -- --
99 1,041 -- -- -- -- -- --
(1) (10) -- -- -- -- -- --
---------- ----------- ---------- ----------- ----------- ------------ ----------- ------------
41,984 $ 424,084 -- -- 425,000 $ 4,250,000 -- --
=========== ============ =========== ============ ============ ============= ============ =============
18,595 $ 267,020 -- -- 245,958 $ 3,783,857 1,535,504 $ 22,813,829
60 980 -- -- 2,017,845 32,672,713 2,324,823 32,449,031
(200) (3,142) -- -- (1,987,122) (31,073,072) (3,057,955) (45,611,321)
---------- ----------- ---------- ----------- ----------- ------------ ----------- ------------
18,455 $ 264,858 -- -- 276,681 $ 5,383,498 802,372 $ 9,651,539
=========== ============ =========== ============ ============ ============= ============ =============
</TABLE>
PAGE 49
<PAGE> 270
SALOMON BROTHERS INVESTMENT SERIES
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
At December 31, 1995, Salomon Brothers owned approximately the following
percentages of total shares outstanding of the following Funds:
<TABLE>
<S> <C>
New York Municipal Bond Fund................................................. 21%
National Intermediate Municipal Fund......................................... 95%
U.S. Government Income Fund.................................................. 97%
High Yield Bond Fund......................................................... 29%
Strategic Bond Fund.......................................................... 84%
Total Return Fund............................................................ 38%
</TABLE>
4. PORTFOLIO ACTIVITY
Cost of purchases and proceeds from sales of securities, excluding short-term
obligations, for the period ended December 31, 1995, were as follows:
<TABLE>
<CAPTION>
PURCHASES SALES
- -----------------------------------------------------------------------------------------
<S> <C> <C>
New York Municipal Bond Fund........................ $ 787,738 $ 1,438,362
============= =============
National Intermediate Municipal Fund................ $ 12,789,131 $ 2,738,946
============= =============
U.S. Government Income Fund
U.S. Government Securities........................ $ 27,466,318 $ 17,724,056
============= =============
High Yield Bond Fund................................ $ 44,314,086 $ 17,461,424
============= =============
Strategic Bond Fund
U.S. Government Securities........................ $ 8,520,260 $ 6,824,704
Other Investments................................. 17,916,013 9,025,947
------------ ------------
$ 26,436,273 $ 15,850,651
============= =============
Total Return Fund
U.S. Government Securities........................ $ 2,461,806 $ 364,527
Other Investments................................. 10,798,038 884,107
------------ ------------
$ 13,259,844 $ 1,248,634
============= =============
Investors Fund
U.S. Government Securities........................ -- $ 3,962,031
Other Investments................................. $317,547,885 364,164,543
------------ ------------
$317,547,885 $368,126,574
============= =============
</TABLE>
PAGE 50
<PAGE> 271
SALOMON BROTHERS INVESTMENT SERIES
Transactions in options written for the Investors Fund during the year ended
December 31, 1995 were as follows:
<TABLE>
<CAPTION>
NUMBER
OF PREMIUMS
CONTRACTS RECEIVED
<S> <C> <C>
- --------------------------------------------------------------
Options outstanding at December 31, 1994...................... (1,825) (428,151)
Options written............................................... (1,115) (289,198)
Options terminated in closing purchase transactions........... 2,765 681,423
Options expired............................................... -- --
Options exercised............................................. 175 35,926
------ --------
Options outstanding at December 31, 1995...................... -- --
====== =========
</TABLE>
During the year ended December 31, 1995, net realized loss from written option
transactions for the Investors Fund amounted to $268,953 and net realized loss
from purchased option transactions amounted to $113,136, for a net realized loss
on all option transactions for the Investors Fund of $382,089.
During the period ended December 31, 1995, net realized gain from forward
foreign currency contracts for the Strategic Bond Fund amounted to $67,840, and
net realized gains on mortgage dollar rolls amounted to $57,813 and $17,359 for
the U.S. Government Income Fund and the Strategic Bond Fund, respectively.
During the year ended December 31, 1995, permanent book/tax differences of
$(23,543) and $63 for the Strategic Bond Fund and Investors Fund, respectively,
arising primarily from foreign currency gains (losses) have been reclassified
from accumulated gain (loss) on investments to undistributed net investment
income. Net investment income, net realized losses and net assets were not
affected by this reclassification.
5. PORTFOLIO INVESTMENT RISKS
CREDIT AND MARKET RISK. Funds that invest in high yield and emerging market
instruments are subject to certain credit and market risks. The yields of high
yield and emerging market debt obligations reflect, among other things,
perceived credit risk. The Funds' investment in securities rated below
investment grade typically involve risks not associated with higher rated
securities including, among others, greater risk of timely and ultimate payment
of interest and principal, greater market price volatility and less liquid
secondary market trading. The consequences of political, social, economic or
diplomatic changes may have disruptive effects on the market prices of
investments held by the Funds. The Funds' investment in non-dollar denominated
securities may also result in foreign currency losses caused by devaluations and
exchange rate fluctuations.
The Cash Management Fund invests in money market instruments maturing in
thirteen months or less whose credit ratings are within the highest ratings
category of two nationally recognized statistical rating organizations
("NRSROs") or if rated by only one
PAGE 51
<PAGE> 272
SALOMON BROTHERS INVESTMENT SERIES
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
NRSRO, the highest rating of that NRSRO, or, if not rated, are believed by the
investment manager to be of comparable quality. The New York Municipal Bond Fund
pursues its investment objectives by investing at least 80% of its net assets in
obligations the interest on which is exempt from regular federal income taxes
and at least 65% of its net assets in obligations the interest on which is
exempt from personal income taxes of the State and City of New York. Because the
New York Municipal Bond Fund invests primarily in obligations of the State and
City of New York, it is more susceptible to factors adversely affecting issuers
of such obligations than a fund that is more diversified.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK. Certain Funds enter into
forward foreign currency contracts ("forward contracts") to facilitate
settlement of foreign currency denominated portfolio transactions or to manage
foreign currency exposure associated with foreign currency denominated
securities. Forward contracts involve elements of market risk in excess of the
amounts reflected in the Statements of Assets and Liabilities. The Funds bear
the risk of an unfavorable change in the foreign exchange rate underlying the
forward contract. Risks may also arise upon entering into these contracts from
the potential inability of the counterparties to meet the terms of their
contracts.
Funds that enter into mortgage dollar rolls are subject to the risk that the
market value of the securities the Fund is obligated to repurchase under the
agreement may decline below the repurchase price. In the event the buyer of
securities under a mortgage dollar roll files for bankruptcy or becomes
insolvent, the Fund's use of proceeds of the dollar roll may be restricted
pending a determination by the other party, or its trustee or receiver, whether
to enforce the Fund's obligation to repurchase the securities.
Consistent with their objective to seek high current income, the High Yield Bond
Fund and the Strategic Bond Fund may invest in instruments whose values and
interest rates may be linked to foreign currencies, interest rates, indices or
some other financial indicator. The value at maturity or interest rates for
these instruments will increase or decrease according to the change in the
indicator to which it is indexed. These securities are generally more volatile
in nature and the risk of loss of principal is greater.
A risk in writing a covered call option is that the Fund may forego the
opportunity of profit if the market price of the underlying security increases
and the option is exercised. A risk in writing a put option is that the Fund may
incur a loss if the market price of the underlying security decreases and the
option is exercised. In addition, there is the risk that the Fund may not be
able to enter a closing transaction because of an illiquid secondary market.
PAGE 52
<PAGE> 273
SALOMON BROTHERS INVESTMENT SERIES
6. TAX INFORMATION
At December 31, 1995, the Cash Management Fund and New York Municipal Bond Fund
had net capital loss carry-forwards available to offset future capital gains as
follows:
<TABLE>
<CAPTION>
CASH NEW YORK
YEAR OF MANAGEMENT MUNICIPAL
EXPIRATION FUND BOND FUND
<S> <C> <C>
- -------------------------------------------------------------
1999......................................................... $ 894 --
2000......................................................... 396 --
2001......................................................... 409 --
2002......................................................... 415 $305,822
2003......................................................... -- 318,123
---------- ---------
$2,114 $623,945
============= ==========
</TABLE>
At December 31, 1995, as permitted under federal income tax regulations, the
Strategic Bond Fund has elected to defer $14,806 of Post-October net capital
losses and $41,069 of Post-October net foreign currency losses to the next
taxable year.
At December 31, 1995, the cost for Federal income tax purposes and gross
unrealized appreciation and depreciation in value of investments and repurchase
agreements held in each Fund were as follows:
<TABLE>
<CAPTION>
GROSS GROSS NET
AGGREGATE UNREALIZED UNREALIZED UNREALIZED
COST APPRECIATION (DEPRECIATION) APPRECIATION
<S> <C> <C> <C> <C>
- ----------------------------
New York Municipal Bond..... $ 3,385,615 $ 150,560 -- $ 150,560
National Intermediate
Municipal................. 10,075,715 427,222 $ (3,342) 423,880
U.S. Government Income...... 11,920,393 319,768 -- 319,768
High Yield Bond............. 30,050,814 964,094 (503,126) 460,968
Strategic Bond.............. 13,120,041 813,804 (248,266) 565,538
Total Return................ 14,849,713 508,518 (58,371) 450,147
Investors................... 332,596,925 104,734,626 (3,512,266) 101,222,360
</TABLE>
PAGE 53
<PAGE> 274
SALOMON BROTHERS INVESTMENT SERIES
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
Selected data per share of capital stock outstanding throughout each period:
CASH MANAGEMENT FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
-------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------
1995
<S> <C> <C> <C>
- ---------------------------------------------------
Net asset value, beginning of period............... $ 1.000 $ 1.000 $ 1.000
------- ------- -------
Net investment income.............................. 0.044 0.043 0.043
Dividends from net investment income............... (0.044) (0.043) (0.043)
------- ------- -------
Net asset value, end of period..................... $ 1.000 $ 1.000 $ 1.000
======= ======= =======
Net assets, end of period (thousands).............. $ 1,756 $ 2,238 $ 183
Total return*...................................... +4.5% +4.4% +4.4%
Ratios to average net assets:
Expenses........................................... 0.55% 0.55% 0.55%
Net investment income.............................. 5.42% 5.38% 5.40%
Before waiver of management fee, expenses absorbed
by SBAM and credits earned on custodian cash
balances, net investment income per share and
expense ratios would have been:
Net investment income per share.................... $ 0.037 $ 0.037 $ 0.036
Expense ratio...................................... 1.35% 1.34% 1.34%
</TABLE>
NEW YORK MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
-------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------
1995
<S> <C> <C> <C>
- ---------------------------------------------------
Net asset value, beginning of period............... $ 8.96 $ 8.96 $ 8.96
------- ------- -------
Net investment income.............................. 0.42 0.36 0.36
Net gain (loss) on securities and futures
(both realized and unrealized)................... 1.14 1.14 1.14
------- ------- -------
Total from investment operations................... 1.56 1.50 1.50
------- ------- -------
Dividends from net investment income............... (0.41) (0.35) (0.35)
Distributions from net realized gain on securities
and futures...................................... -- -- --
------- ------- -------
Total dividends and distributions.................. (0.41) (0.35) (0.35)
------- ------- -------
Net asset value, end of period..................... $ 10.11 $ 10.11 $ 10.11
======= ======= =======
Net assets, end of period (thousands).............. $ 546 $ 528 $ 266
Total return*...................................... +17.7% +17.0% +17.0%
Ratios to average net assets:
Expenses........................................... 0.75% 1.50% 1.50%
Net investment income.............................. 5.12% 4.30% 4.38%
Portfolio turnover rate............................ 22% 22% 22%
Before waiver of management fee, expenses absorbed
by SBAM and credits earned on custodian cash
balances, net investment income per share and
expense ratios would have been:
Net investment income per share.................... $ 0.24 $ 0.17 $ 0.18
Expense ratio...................................... 2.96% 3.70% 3.71%
</TABLE>
(a) February 1, 1993, commencement of investment operations, through December
31, 1993.
* 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 payable date, and a sale at net asset value on the last day of each
period reported. Initial sales charge or contingent deferred sales charge is
not reflected in the calculation of total return. Total return calculated for
a period of less than one year is not annualized.
** Annualized.
See accompanying notes to financial statements.
PAGE 54
<PAGE> 275
SALOMON BROTHERS INVESTMENT SERIES
- ------------------------------------
FINANCIAL HIGHLIGHTS
Selected data per share of capital stock outstanding throughout each period:
CASH MANAGEMENT FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS O
-------------------------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C>
$ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
------- ------- ------- ------- -------
0.055 0.038 0.027 0.033 0.055
(0.055) (0.038) (0.027) (0.033) (0.055)
------- ------- ------- ------- -------
$ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
======= ======= ======= ======= =======
$ 6,684 $19,127 $15,049 $11,613 $22,982
+5.6% +3.9% +2.7% +3.4% +5.7%
0.55% 0.61% 0.65% 0.65% 0.65%
5.46% 3.79% 2.68% 3.41% 5.43%
$ 0.047 $ 0.036 $ 0.025 $ 0.030 $ 0.053
1.34% 0.81% 0.85% 0.85% 0.85%
</TABLE>
NEW YORK MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS O
------------------------------
PERIOD
YEAR ENDED ENDED
DECEMBER 31, DECEMBER
------------------ 31,
1995 1994 1993(a)
------------------------------
<S> <C> <C>
$ 8.98 $ 10.44 $ 10.00
------ ------- -------
0.53 0.55 0.46
1.12 (1.46) 0.46
------ ------- -------
1.65 (0.91) 0.92
------ ------- -------
(0.52) (0.55) (0.46)
-- -- (0.02)
------ ------- -------
(0.52) (0.55) (0.48)
------ ------- -------
$10.11 $ 8.98 $ 10.44
====== ======= =======
$2,494 $ 3,333 $ 8,364
+18.8% -8.8% +9.4%
0.50% 0.50% 0.50%**
5.50% 5.72% 4.99%**
22% 63% 24%
$ 0.32 $ 0.49 $ 0.40
2.71% 1.17% 1.24%**
</TABLE>
See accompanying notes to financial statements.
PAGE 55
<PAGE> 276
SALOMON BROTHERS INVESTMENT SERIES
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
Selected data per share of capital stock outstanding throughout each period:
NATIONAL INTERMEDIATE MUNICIPAL FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS O
-------------------------------------------
PERIOD ENDED DECEMBER 31, 1995(a)
- ---------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period............... $10.00 $10.00 $10.00 $10.00
------- ------- ------- -------
Net investment income.............................. 0.40 0.34 0.34 0.42
Net gain on investments (both realized and
unrealized)...................................... 0.46 0.45 0.45 0.46
------- ------- ------- -------
Total from investment operations................... 0.86 0.79 0.79 0.88
------- ------- ------- -------
Dividends from net investment income............... (0.40) (0.34) (0.34) (0.42)
Distributions from net realized gain on
investments...................................... (0.03) (0.03) (0.03) (0.03)
------- ------- ------- -------
Total dividends and distributions.................. (0.43) (0.37) (0.37) (0.45)
------- ------- ------- -------
Net asset value, end of period..................... $10.43 $10.42 $10.42 $10.43
======= ======= ======= =======
Net assets, end of period (thousands).............. $ 569 $ 432 $ 271 $9,675
Total return*...................................... +8.7 % +8.0 % +8.0 % +9.0 %
Ratios to average net assets:
Expenses........................................... 0.75%** 1.50%** 1.50%** 0.50%**
Net investment income.............................. 4.63%** 3.85%** 3.85%** 4.86%**
Portfolio turnover rate............................ 29% 29% 29% 29%
Before waiver of management fee, expenses absorbed
by SBAM and credits earned on custodian cash
balances, net investment income per share and
expense ratios would have been:
Net investment income per share.................... $ 0.32 $ 0.25 $ 0.25 $ 0.34
Expense ratio...................................... 1.71%** 2.45%** 2.46%** 1.46%**
</TABLE>
U.S. GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS O
-------------------------------------------
PERIOD ENDED DECEMBER 31, 1995(a)
- ---------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period............... $10.00 $10.00 $10.00 $10.00
------- ------- ------- -------
Net investment income.............................. 0.49 0.43 0.43 0.52
Net gain on investments
(both realized and unrealized)................... 0.43 0.43 0.43 0.42
------- ------- ------- -------
Total from investment operations................... 0.92 0.86 0.86 0.94
------- ------- ------- -------
Dividends from net investment income............... (0.49) (0.43) (0.43) (0.52)
Distributions from net realized gain on
investments...................................... (0.10) (0.10) (0.10) (0.10)
Distributions in excess of net realized gain on
investments...................................... (0.01) (0.01) (0.01) --
------- ------- ------- -------
Total dividends and distributions.................. (0.60) (0.54) (0.54) (0.62)
------- ------- ------- -------
Net asset value, end of period..................... $10.32 $10.32 $10.32 $10.32
======= ======= ======= =======
Net assets, end of period (thousands).............. $ 278 $ 572 $ 273 $9,552
Total return*...................................... +9.5 % +8.8 % +8.8 % +9.7 %
Ratios to average net assets:
Expenses........................................... 0.85%** 1.60%** 1.60%** 0.60%**
Net investment income.............................. 5.67%** 4.85%** 4.92%** 5.92%**
Portfolio turnover rate............................ 230% 230% 230% 230%
Before waiver of management fee, expenses absorbed
by SBAM and credits earned on custodian cash
balances, net investment income per share and
expense ratios would have been:
Net investment income per share.................... $ 0.40 $ 0.34 $ 0.34 $ 0.42
Expense ratio...................................... 1.90%** 2.64%** 2.64%** 1.64%**
</TABLE>
(a) February 22, 1995, commencement of investment operations, through December
31, 1995.
* 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 payable date, and a sale at net asset value on the last day of each
period reported. Initial sales charge or contingent deferred sales charge is
not reflected in the calculation of total return. Total return calculated for
a period of less than one year is not annualized.
** Annualized.
See accompanying notes to financial statements.
PAGE 56
<PAGE> 277
SALOMON BROTHERS INVESTMENT SERIES
- ------------------------------------
FINANCIAL HIGHLIGHTS
Selected data per share of capital stock outstanding throughout each period:
HIGH YIELD BOND FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS O
-------------------------------------------
PERIOD ENDED DECEMBER 31, 1995(a)
- ---------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period............... $10.00 $10.00 $10.00 $10.00
------- ------- ------- -------
Net investment income.............................. 0.92 0.85 0.85 0.95
Net gain on investments
(both realized and unrealized)................... 0.67 0.68 0.68 0.67
------- ------- ------- -------
Total from investment operations................... 1.59 1.53 1.53 1.62
------- ------- ------- -------
Dividends from net investment income............... (0.91) (0.85) (0.85) (0.93)
Distributions from net realized gain on
investments...................................... (0.15) (0.15) (0.15) (0.15)
------- ------- ------- -------
Total dividends and distributions.................. (1.06) (1.00) (1.00) (1.08)
------- ------- ------- -------
Net asset value, end of period..................... $10.53 $10.53 $10.53 $10.54
======= ======= ======= =======
Net assets, end of period (thousands).............. $10,789 $10,108 $1,274 $7,854
Total return*...................................... +16.6 % +15.7 % +15.8 % +16.8 %
Ratios to average net assets:
Expenses........................................... 1.24%** 1.96%** 1.98%** 1.00%**
Net investment income.............................. 10.58%** 9.53%** 9.61%** 10.59%**
Portfolio turnover rate............................ 109% 109% 109% 109%
Before waiver of management fee by SBAM and credits
earned on custodian cash balances, net investment
income per share and expense ratios would have
been:
Net investment income per share.................... $ 0.87 $ 0.80 $ 0.80 $ 0.90
Expense ratio...................................... 1.80%** 2.51%** 2.54%** 1.55%**
</TABLE>
STRATEGIC BOND FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS O
-------------------------------------------
PERIOD ENDED DECEMBER 31, 1995(a)
- ---------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period............... $10.00 $10.00 $10.00 $10.00
------- ------- ------- -------
Net investment income.............................. 0.84 0.76 0.77 0.87
Net gain on investments
(both realized and unrealized)................... 0.78 0.79 0.78 0.77
------- ------- ------- -------
Total from investment operations................... 1.62 1.55 1.55 1.64
------- ------- ------- -------
Dividends from net investment income............... (0.85) (0.78) (0.78) (0.87)
Distributions from net realized gain on
investments...................................... (0.24) (0.24) (0.24) (0.24)
------- ------- ------- -------
Total dividends and distributions.................. (1.09) (1.02) (1.02) (1.11)
------- ------- ------- -------
Net asset value, end of period..................... $10.53 $10.53 $10.53 $10.53
======= ======= ======= =======
Net assets, end of period (thousands).............. $ 513 $1,879 $ 411 $9,763
Total return*...................................... +16.8 % +16.1 % +16.1 % +17.0 %
Ratios to average net assets:
Expenses........................................... 1.23%** 1.97%** 1.99%** 0.99%**
Net investment income.............................. 9.51%** 8.75%** 8.77%** 9.74%**
Portfolio turnover rate............................ 161% 161% 161% 161%
Before waiver of management fee, expenses absorbed
by SBAM and credits earned on custodian cash
balances, net investment income per share and
expense ratios would have been:
Net investment income per share.................... $ 0.76 $ 0.69 $ 0.70 $ 0.79
Expense ratio...................................... 2.11%** 2.85%** 2.87%** 1.87%**
</TABLE>
(a) February 22, 1995, commencement of investment operations, through December
31, 1995.
* 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 payable date, and a sale at net asset value on the last day of each
period reported. Initial sales charge or contingent deferred sales charge is
not reflected in the calculation of total return. Total return calculated for
a period of less than one year is not annualized.
** Annualized.
See accompanying notes to financial statements.
PAGE 57
<PAGE> 278
SALOMON BROTHERS INVESTMENT SERIES
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
Selected data per share of capital stock outstanding throughout each period:
TOTAL RETURN FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS O
-------------------------------------------
PERIOD ENDED DECEMBER 31, 1995(a)+
- ---------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period............... $10.00 $10.00 $10.00 $10.00
------- ------- ------- -------
Net investment income.............................. 0.15 0.13 0.14 0.17
Net gain on investments
(both realized and unrealized)................... 0.52 0.51 0.51 0.52
------- ------- ------- -------
Total from investment operations................... 0.67 0.64 0.65 0.69
------- ------- ------- -------
Dividends from net investment income............... (0.11) (0.09) (0.08) (0.11)
Distributions from net realized gain on
investments...................................... (0.01) (0.01) (0.01) (0.01)
------- ------- ------- -------
Total dividends and distributions.................. (0.12) (0.10) (0.09) (0.12)
------- ------- ------- -------
Net asset value, end of period..................... $10.55 $10.54 $10.56 $10.57
======= ======= ======= =======
Net assets, end of period (thousands).............. $3,658 $5,378 $ 445 $4,494
Total return*...................................... +6.7 % +6.4 % +6.5 % +6.9 %
Ratios to average net assets:
Expenses........................................... 0.74%** 1.49%** 1.51%** 0.51%**
Net investment income.............................. 4.82%** 4.06%** 4.26%** 5.30%**
Portfolio turnover rate............................ 16% 16% 16% 16%
Before waiver of management fee, expenses absorbed
by SBAM and credits earned on custodian cash
balances, net investment income per share and
expense ratios would have been:
Net investment income per share.................... $ 0.13 $ 0.11 $ 0.11 $ 0.15
Expense ratio...................................... 1.45%** 2.19%** 2.22%** 1.22%**
</TABLE>
INVESTORS FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
-------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------
1995
- ---------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period............... $ 13.61 $ 13.61 $ 13.61
------- ------- -------
Net investment income.............................. 0.19 0.10 0.09
Net gain (loss) on investments (both realized and
unrealized)...................................... 4.55 4.54 4.55
------- ------- -------
Total from investment operations................... 4.74 4.64 4.64
------- ------- -------
Dividends from net investment income............... (0.23) (0.14) (0.14)
Distributions from net realized gain on
investments...................................... (1.50) (1.50) (1.50)
------- ------- -------
Total dividends and distributions.................. (1.73) (1.64) (1.64)
------- ------- -------
Net asset value, end of period..................... $ 16.62 $ 16.61 $ 16.61
======= ======= =======
Net assets, end of period (thousands).............. $ 441 $ 716 $ 306
Total return*...................................... +35.3% +34.5% +34.5%
Ratios to average net assets:
Expenses........................................... 0.94% 1.71% 1.68%
Net investment income.............................. 1.41% 0.63% 0.66%
Portfolio turnover rate............................ 86% 86% 86%
</TABLE>
(a) September 11, 1995, commencement of investment operations, through December
31, 1995.
+ Per share information calculated using the average shares outstanding
method, which more accurately represent amounts.
* 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. Initial sales charge or contingent deferred sales
charge is not reflected in the calculation of total return. Total return
calculated for a period of less than one year is not annualized.
** Annualized.
See accompanying notes to financial statements.
PAGE 58
<PAGE> 279
SALOMON BROTHERS INVESTMENT SERIES
- ----------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS O
------------------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C>
$ 13.63 $ 15.60 $ 16.10 $ 17.10 $ 14.54
-------- -------- -------- -------- --------
0.27 0.27 0.32 0.41 0.44
4.48 (0.48) 2.03 0.79 3.68
-------- -------- -------- -------- --------
4.75 (0.21) 2.35 1.20 4.12
-------- -------- -------- -------- --------
(0.27) (0.27) (0.33) (0.41) (0.46)
(1.50) (1.49) (2.52) (1.79) (1.10)
-------- -------- -------- -------- --------
(1.77) (1.76) (2.85) (2.20) (1.56)
-------- -------- -------- -------- --------
$ 16.61 $ 13.63 $ 15.60 $ 16.10 $ 17.10
-------- -------- -------- -------- --------
$428,950 $348,214 $386,147 $370,350 $378,615
+35.4% -1.3% +15.1% +7.4% +29.3%
0.69% 0.69% 0.68% 0.68% 0.70%
1.67% 1.75% 1.90% 2.47% 2.67%
86% 66% 79% 48% 44%
</TABLE>
See accompanying notes to financial statements.
PAGE 59
<PAGE> 280
SALOMON BROTHERS INVESTMENT SERIES
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Boards of Directors and Shareholders of
Salomon Brothers Cash Management Fund
Salomon Brothers New York Municipal Bond Fund
Salomon Brothers National Intermediate Municipal Fund
Salomon Brothers U.S. Government Income Fund
Salomon Brothers High Yield Bond Fund
Salomon Brothers Strategic Bond Fund
Salomon Brothers Total Return Fund
Salomon Brothers Investors Fund Inc
In our opinion, the accompanying statements of assets and liabilities, including
the portfolios of investments, and the related statements of operations, of cash
flows (for Salomon Brothers U.S. Government Income Fund) and of changes in net
assets and the financial highlights present fairly, in all material respects,
the financial position of the Salomon Brothers Cash Management Fund, Salomon
Brothers New York Municipal Bond Fund, Salomon Brothers National Intermediate
Municipal Fund, Salomon Brothers U.S. Government Income Fund, Salomon Brothers
High Yield Bond Fund, Salomon Brothers Strategic Bond Fund, Salomon Brothers
Total Return Fund (seven of the portfolios constituting Salomon Brothers Series
Funds Inc) and Salomon Brothers Investors Fund Inc (hereafter referred to as the
"Funds") at December 31, 1995, the results of each of their operations, the cash
flows (for Salomon Brothers U.S. Government Income Fund), the changes in each of
their net assets and the financial highlights for the periods indicated, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Funds' management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 1995 by
correspondence with the custodian and brokers and the application of alternative
auditing procedures where confirmations from brokers were not received, provide
a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
New York, New York
February 16, 1996
PAGE 60
<PAGE> 281
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED MARCH 29, 1996
SALOMON BROTHERS INSTITUTIONAL INVESTMENT SERIES
7 WORLD TRADE CENTER, NEW YORK, NEW YORK 10048
800-725-6666
Salomon Brothers Institutional Investment Series consists of Salomon Brothers
Institutional Money Market Fund (the "Money Market Fund"), Salomon Brothers
Institutional High Yield Bond Fund (the "High Yield Bond Fund"), Salomon
Brothers Institutional Emerging Markets Debt Fund (the "Emerging Markets Debt
Fund") and Salomon Brothers Institutional Asia Growth Fund (the "Asia Growth
Fund") (each, a "Fund" and collectively, the "Funds"). Each of the Funds,
except the Money Market Fund, is a no-load investment portfolio of Salomon
Brothers Institutional Series Funds Inc ("Institutional Series Funds"). The
Money Market Fund is a no-load investment portfolio of Salomon Brothers Series
Funds Inc ("Series Funds").
The MONEY MARKET FUND seeks as high a level of current income as is consistent
with liquidity and the stability of principal. The Fund seeks to achieve its
objective by investing in high-quality, short-term U.S. dollar denominated
money market instruments, and seeks to maintain a stable net asset value of
$1.00 per share. THERE IS NO ASSURANCE THAT A STABLE NET ASSET VALUE OF $1.00
PER SHARE WILL BE MAINTAINED. INVESTMENTS IN THE FUND ARE NOT GUARANTEED OR
INSURED BY THE U.S. GOVERNMENT.
The HIGH YIELD BOND FUND seeks to maximize total return. The Fund seeks to
achieve its objective by investing primarily in a portfolio of high yield
fixed-income securities that offer a yield above that generally available on
debt securities in the four highest rating categories of the recognized rating
services.
The EMERGING MARKETS DEBT FUND seeks to maximize total return. The Fund seeks
to achieve its objective by investing at least 80% of its total assets in debt
securities of government, government related and corporate issuers located in
emerging market countries, and of entities organized to restructure outstanding
debt of such issuers.
The ASIA GROWTH FUND seeks long-term capital appreciation. The Fund seeks to
achieve its objective by investing at least 65% of its total assets in equity
and equity-related securities of Asian Companies (as defined in this
Prospectus).
<PAGE> 282
THERE CAN BE NO ASSURANCE THAT ANY FUND WILL ACHIEVE ITS INVESTMENT OBJECTIVE
AND EACH OF THE FUNDS MAY EMPLOY CERTAIN INVESTMENT PRACTICES WHICH INVOLVE
SPECIAL RISK CONSIDERATIONS. CERTAIN FUNDS MAY INVEST IN HIGH YIELD SECURITIES,
COMMONLY REFERRED TO AS JUNK BONDS, WHICH PRESENT A HIGH DEGREE OF RISK.
HIGH-YIELDING, LOWER-QUALITY SECURITIES INVOLVE COMPARATIVELY GREATER RISKS,
INCLUDING PRICE VOLATILITY AND THE RISK OF DEFAULT IN THE TIMELY PAYMENT OF
INTEREST AND PRINCIPAL, THAN HIGHER-QUALITY SECURITIES. SEE "ADDITIONAL
INVESTMENT ACTIVITIES AND RISK FACTORS."
THIS PROSPECTUS SETS FORTH CONCISELY THE INFORMATION A PROSPECTIVE INVESTOR
SHOULD KNOW BEFORE INVESTING IN A FUND. THIS PROSPECTUS SHOULD BE READ AND
RETAINED FOR READY FUTURE REFERENCE TO INFORMATION ABOUT A FUND. A STATEMENT OF
ADDITIONAL INFORMATION DATED __________, 1996, CONTAINING ADDITIONAL
INFORMATION ABOUT EACH FUND HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION (THE "SEC") AND IS HEREBY INCORPORATED BY REFERENCE INTO THIS
PROSPECTUS. IT IS AVAILABLE WITHOUT CHARGE AND CAN BE OBTAINED BY WRITING OR
CALLING THE FUNDS AT THE ADDRESS AND TELEPHONE NUMBER PRINTED ABOVE.
- --------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
SALOMON BROTHERS ASSET MANAGEMENT INC - INVESTMENT MANAGER
SALOMON BROTHERS INC - DISTRIBUTOR
PROSPECTUS
________ __, 1996
<PAGE> 283
3
TABLE OF CONTENTS
<TABLE>
<S> <C>
FEE TABLE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
HIGHLIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
FINANCIAL HIGHLIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . 9
BENEFITS OF INVESTING IN THE FUNDS . . . . . . . . . . . . . . . . . . 11
PERFORMANCE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . 11
INVESTMENT OBJECTIVE AND POLICIES . . . . . . . . . . . . . . . . . . . 12
ADDITIONAL INVESTMENT ACTIVITIES AND RISK FACTORS . . . . . . . . . . . 27
INVESTMENT LIMITATIONS . . . . . . . . . . . . . . . . . . . . . . . . 39
PURCHASE AND REDEMPTION OF SHARES . . . . . . . . . . . . . . . . . . . 41
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
DIVIDENDS, DISTRIBUTIONS AND TAXES . . . . . . . . . . . . . . . . . . 51
ACCOUNT SERVICES . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
CAPITAL STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
APPENDIX A: DESCRIPTION OF RATINGS . . . . . . . . . . . . . . . . . . A-1
APPENDIX B: GENERAL CHARACTERISTICS
AND RISKS OF DERIVATIVES . . . . . . . . . . . . . . . . . . . . . . . B-1
</TABLE>
<PAGE> 284
4
FEE TABLE
Information in the table below is given as a percentage of average daily net
assets. Shares of each Fund are sold without imposition of any sales charge,
deferred sales charge or any other transaction fee.
<TABLE>
<CAPTION>
MONEY HIGH EMERGING ASIA
ANNUAL FUND OPERATING MARKET YIELD MARKETS GROWTH
EXPENSES FUND** BOND FUND*** DEBT FUND **** FUND*****
-------- ----- ----------- ------------- --------
<S> <C> <C> <C> <C>
Management Fee (after waiver*) . . . . . . . . . . . . .18% .50% .70% .75%
Other Expenses (after reimbursement) . . . . . . . . .00% + .05% + .05% + .25% +
------ ------- ------- -------
Total Fund Operating Expenses (after
waiver and reimbursement) . . . . . . . . . . . . . .18% .55% .75% 1.00%
==== ==== ==== =======
</TABLE>
EXAMPLE
- -------------------------
You would pay the following expenses on a $1,000 investment, assuming (i) a 5%
annual return, (ii) total annual operating expenses as shown in the fee table
set out above and (iii) redemption at the end of each time period:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Money Market Fund++ $2 $6 $10 $23
High Yield Bond Fund $ $ N/A N/A
Emerging Markets Debt Fund $ $ N/A N/A
Asia Growth Fund $ $ N/A N/A
</TABLE>
- ---------------------
* Only the Money Market Fund reflects any waiver of Management Fees.
** The information in the fee table set forth above has been restated to
reflect a new management fee as described below, and the voluntary agreement by
Salomon Brothers Asset Management Inc ("SBAM"), the Fund's investment manager,
to reduce or otherwise limit the expenses of the Money Market Fund (exclusive of
taxes, interest and extraordinary expenses such as litigation and
indemnification expenses), on an annualized basis, to .18% of the Fund's average
daily net assets for a period of at least one year from the date of this
Prospectus, and no more than .25% thereafter. For the year ended December 31,
1995, Other Expenses and Total Fund Operating Expenses (before partial waiver)
were, .60% and .70%, respectively. On November 16, 1995, the Board approved,
subject to shareholder approval, an increase in the management fee from .10% of
the Money Market Fund's average daily net assets to .20%. The shareholders
approved the amendment on March 26, 1996, to become effective as of the date of
this Prospectus.
*** SBAM has voluntarily agreed to reduce or otherwise limit the expenses of
the High Yield Bond Fund (exclusive of taxes, interest and extraordinary
expenses such as litigation and indemnification expenses), on an annualized
basis, to .55% of the Fund's average daily net assets. Without this agreement,
Other Expenses and Total Fund Operating Expenses are expected to be .56% and
1.06%, respectively.
<PAGE> 285
5
**** SBAM has voluntarily agreed to reduce or otherwise limit the expenses
of the Emerging Markets Debt Fund (exclusive of taxes, interest and
extraordinary expenses such as litigation and indemnification expenses), on an
annualized basis, to .75% of the Fund's average daily net assets. Without this
agreement, Other Expenses and Total Fund Operating Expenses are expected to be
.56%, and 1.26%, respectively.
***** SBAM has voluntarily agreed to reduce or otherwise limit the expenses
of the Asia Growth Fund (exclusive of taxes, interest and extraordinary expenses
such as litigation and indemnification expenses), on an annualized basis, to
1.00% of the Fund's average daily net assets. Without this agreement, Other
Expenses and Total Fund Operating Expenses are expected be .75%, .56%, and
1.31%, respectively.
+ As of the date of this Prospectus, the Fund had not yet commenced
investment operations. The amounts set forth for Other Expenses in the table
above and the preceding footnotes are, therefore, based on estimates for the
current fiscal year.
++ Assuming the expense cap of .18% discussed above is in effect
throughout the time period shown.
The purpose of the foregoing table is to assist an investor in understanding
the various costs and expenses that an investor in a Fund will incur either
directly or indirectly as a shareholder in a Fund. "Other Expenses" include
administrative fees, custodial fees, legal and accounting fees, printing costs
and registration fees. Expenses associated with distributing each Fund's shares
are borne by the Fund's distributor out of its own resources and are not borne
directly or indirectly by shareholders. THE EXAMPLE ABOVE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES FOR ANY
OF THE FUNDS MAY BE HIGHER OR LOWER THAN THE AMOUNTS SHOWN IN THE FEE TABLES.
Moreover, while the example assumes a 5% annual return, each Fund's performance
will vary and may result in a return greater or less than 5%. For more complete
descriptions of the various costs and expenses, see "Management" in this
Prospectus and the Statement of Additional Information.
HIGHLIGHTS
THE FUNDS
Each of the Funds, except the Money Market Fund, is a newly organized, no-load
investment portfolio of Salomon Brothers Institutional Series Funds Inc, an
open-end investment company incorporated in Maryland on January 19, 1996. The
High Yield Bond Fund is a diversified portfolio and the Emerging Markets Debt
Fund and the Asia Growth Fund are non-diversified portfolios of the
Institutional Series Funds. The Money Market Fund is a no-load, diversified
investment portfolio of Salomon Brothers Series Funds Inc, an open-end
investment company incorporated in Maryland on April 17, 1990.
<PAGE> 286
6
The MONEY MARKET FUND seeks as high a level of current income as is consistent
with liquidity and the stability of principal. The Fund seeks to achieve its
objective by investing in high-quality, short-term U.S. dollar denominated
money market instruments, and seeks to maintain a stable net asset value of
$1.00 per share. THERE IS NO ASSURANCE THAT A STABLE NET ASSET VALUE OF $1.00
PER SHARE WILL BE MAINTAINED. INVESTMENTS IN THE FUND ARE NOT GUARANTEED OR
INSURED BY THE U.S. GOVERNMENT.
The HIGH YIELD BOND FUND seeks to maximize total return. The Fund seeks to
achieve its objective by investing primarily in a portfolio of high yield
fixed-income securities that offer a yield above that generally available on
debt securities in the four highest rating categories of the recognized rating
services.
The EMERGING MARKETS DEBT FUND seeks to maximize total return. The Fund seeks
to achieve its objective by investing at least 80% of its total assets in debt
securities of government, government related and corporate issuers located in
emerging market countries, and of entities organized to restructure outstanding
debt of such issuers.
The ASIA GROWTH FUND seeks long-term capital appreciation. The Fund seeks to
achieve its objective by investing at least 65% of its total assets in equity
and equity-related securities of Asian Companies (as defined under "Investment
Objective and Policies").
There is no assurance that any particular Fund will achieve its investment
objective.
- - PURCHASE AND REDEMPTION OF SHARES
The minimum initial investment in the Money Market Fund is $250,000 and the
minimum initial investment in the other Funds is $1,000,000. The minimum
investment may be waived at the discretion of a Fund. There is no subsequent
investment minimum in any Fund. Settlement of purchases and redemptions is
effected by wire transfer of Federal funds or upon conversion to Federal funds
of a purchase payment effected by check or draft. See "Purchase and Redemption
of Shares."
- - MANAGEMENT SERVICES
Each Fund retains Salomon Brothers Asset Management Inc ("SBAM"), an indirect,
wholly-owned subsidiary of Salomon Inc, as its investment manager under an
investment management contract. SBAM has retained its affiliate, Salomon
Brothers Asset Management Asia Pacific Limited ("SBAM AP"), to serve as
sub-adviser to the Asia Growth Fund, subject to the supervision of SBAM. See
"Management."
- - DISTRIBUTOR
Salomon Brothers Inc ("Salomon Brothers") serves as each Fund's distributor.
Salomon Brothers is an indirect, wholly-owned subsidiary of Salomon Inc.
Salomon Brothers is one of the largest securities dealers in the world and a
registered broker-dealer.
- - RISK FACTORS
Prospective investors should consider certain risks associated with an
investment in each Fund.
The medium and low rated and comparable unrated securities in which the High
Yield Bond Fund will invest (commonly referred to as "junk bonds") involve
significantly greater risks than higher rated securities, including price
volatility and risk of default in payment of interest and principal. The
Emerging Markets Debt Fund's investments in securities of emerging market
countries involves certain considerations not typically associated with
investing in securities of U.S. issuers, including restrictions on foreign
investment and on repatriation of capital, currency fluctuations, price
volatility and lesser liquidity or lack of a secondary trading market, and
political and economic risks, including the risk of nationalization or
expropriation of assets. The Asia Growth Fund is subject to these same risks
and, concentration of the Fund's assets in one or a few of the Asian countries
and Asian currencies will subject the Fund, to a greater extent than if the
Fund's assets were less geographically concentrated, to the risks of adverse
changes in the securities and foreign exchange markets of such countries and
social, political or economic events which may occur in such countries.
Additionally, certain Funds may use various investment practices that involve
special considerations, including investing in illiquid securities, zero coupon
and deferred payment securities, loan participations and assignments and
warrants and engaging in repurchase and reverse repurchase agreements and
derivative transactions. See "Investment Objective and Policies"
and "Additional Investment Activities and Risk Factors."
<PAGE> 287
8
<PAGE> 288
9
FINANCIAL HIGHLIGHTS
The following information is provided with respect to the Money Market Fund
only. Financial highlights are not presented for the High Yield Bond Fund, the
Emerging Markets Debt Fund and the Asia Growth Fund since they have not yet
commenced investment operations. The following data per share of capital stock
outstanding throughout each period and ratios should be read in conjunction
with the financial statements included in the Fund's Statement of Additional
Information. The financial statements and financial highlights of the Money
Market Fund for each of the years in the period ended December 31, 1995, and
the period from December 7, 1990 (commencement of operations) through December
31, 1990 have been audited by Price Waterhouse LLP, whose unqualified report
thereon is included in the Statement of Additional Information. The Statement
of Additional Information may be obtained by shareholders by writing or calling
at the address or telephone number printed on the front cover. The Money Market
Fund changed its name from Salomon Brothers U.S. Treasury Securities Money
Market Fund to its current name on March 26, 1996. On that same date,
shareholders of the Money Market Fund approved a change in the Fund's
investment objective and policies and certain investment restrictions to those
described herein. Prior to such change, the Money Market Fund invested, under
normal market conditions, at least 65% of its assets in United States Treasury
bonds, notes and bills.
<PAGE> 289
10
<TABLE>
<CAPTION>
Year Ended December 31, Period Ended
---------------------------------------------------------------- December 31,
1995 1994 1993 1992 1991 1990**
------ ------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year . . . . $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
Net investment income . . . . . . . . . . . 0.049* .036 .028 .034 .054* .005*
Dividends from net investment income . . . (0.049) (.036) .028 (.034) (.054) (.005)
Net asset value, end of year . . . . . . . $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
Net assets end of year (thousands) . . . . $11,425 $27,667 $34,120 $50,554 $35,414 $4,596
Total investment return . . . . . . . . . . +5.0% +3.6% 2.9% 3.4% +5.5% +0.5%
Ratios to average net assets:
Expenses . . . . . . . . . . . . . 0.65%* .45% .35% .44% .54%* .74%*+
Net investment income . . . . . . . 4.89% 3.53% 2.83% 3.42% 5.23% 6.45%+
</TABLE>
- --------------
* Net investment income per share would have been $.049, $.052 and $.004 and
the expense ratios to average net assets would have been .70%, .64% and
1.72%, respectively, for the periods ended December 31, 1995, December 31,
1991 and December 31, 1990 before applicable waiver of management fee,
expenses absorbed by SBAM and credits earned on custodian cash balances.
** December 7, 1990, commencement of operations, through December 31, 1990.
+ Annualized.
<PAGE> 290
11
BENEFITS OF INVESTING IN THE FUNDS
Mutual funds, such as the Funds, are flexible investment tools that are
increasingly popular - for a variety of reasons. The Funds offer investors the
following important benefits:
- - FUNDS DESIGNED FOR INSTITUTIONS
The Funds are designed primarily for institutions as an economical and
convenient means for the investment of funds for their own account or which
they may manage for others. These institutions include corporations, banks,
trust companies, investment bankers and brokers, insurance companies,
investment counsellors, pension funds, employee benefit plans, law firms,
trusts, estates and educational, religious and charitable organizations. See
"Purchase and Redemption of Shares."
- - PROFESSIONAL MANAGEMENT
By pooling the funds of many investors, each Fund enables shareholders to
obtain the benefits of full-time professional management that is beyond the
means of most investors. As an active market participant on a day-to-day basis,
the Funds' investment manager or sub-adviser reviews the fundamental
characteristics of far more securities than a typical individual investor can
and may employ portfolio management techniques that frequently are not used by
individual or many institutional investors. Additionally, the larger
denominations of securities in which a Fund invests may result in better
overall prices for the investments than could be obtained independently by
individual investors.
- - DIVERSIFICATION
By pooling funds of exposure to individual issuers, industries and/or
geographical regions many investors, each Fund provides investors with a
degree of diversification of exposure to individual issuers, industries and/or
geographical regions, that would not be possible through the management of
smaller separate accounts.
- - TRANSACTION SAVINGS
By investing in a Fund, a shareholder is able to acquire ownership in a
portfolio of securities without paying the higher transaction costs associated
with a series of small securities purchases.
- - CONVENIENCE
Fund shareholders are relieved of the administrative and record keeping burdens
of securities settlements and interest payments and coordination of maturities
normally associated with direct ownership of securities.
- - DAILY LIQUIDITY
The Funds' convenient purchase and redemption procedures provide shareholders
with daily access to their money and reduce the delays frequently involved in
the direct purchase and sale of securities. See "Purchase and Redemption of
Shares."
- - EXCHANGE PRIVILEGE
Shareholders of a Fund may exchange all or part of their shares for shares of
any of the other Funds. The value of the shares exchanged must meet the
investment minimum of the Fund into which the investor is exchanging. See
"Purchase and Redemption of Shares--Exchange Privilege."
PERFORMANCE INFORMATION
From time to time, a Fund may advertise its "yield," "effective yield,"
"distribution rate" and/or standardized and nonstandardized "average annual
total return" over various periods of time. Total return figures show the
average annual percentage change in value of an investment in a Fund from the
beginning date of the measuring period to the end of the measuring period.
These figures reflect changes in the price of the shares and assume that any
income dividends and/or capital gains distributions made by a Fund during the
period were reinvested in the Fund.
Standardized total return is calculated in accordance with the SEC's formula.
Nonstandardized total return differs from the standardized total return only in
that it may relate to a nonstandard period or is presented in the aggregate
rather than as an annual average.
Total return figures will be given for the most current one-, five- and
ten-year periods, or the life of a Fund to the extent it has not been in
existence for any such periods, and may be given for other periods as well,
such as on a year-by-year basis. When considering average total return figures
for periods longer than one year, it is important to note that the total return
for any one year in the period might have been greater or less than the average
for the entire period. "Aggregate total return" figures may be used for various
periods, representing the cumulative change in value of an investment in Fund
shares for the specific period (again reflecting changes in share prices and
assuming reinvestment of dividends and distributions). Aggregate total return
may be shown by means of schedules, charts or graphs and may indicate subtotals
of the various components of total return (i.e., change in the value of initial
investment, income dividends and capital gains distributions).
Yield is calculated in accordance with the SEC's formula. Yield differs from
total return in that it does not consider changes in net asset value.
From time to time, the Money Market Fund may make available information as to
its "yield" and "effective yield." Both yield figures are based on historical
earnings and are not intended to indicate future performance. The "yield" of
the Money Market Fund refers to income generated by an investment in the Fund
over a seven-day period, which period will be stated in the advertisement. This
income is then "annualized." That is, the amount of income generated by the
investment during that week is assumed to be generated each week over a 52-week
period and is shown as a percentage of the investment. The "effective yield" is
calculated similarly but, when annualized, the income earned by an investment
in the Fund is assumed to be reinvested. The effective yield will be slightly
higher than the yield because of the compounding effect of this assumed
reinvestment.
Distribution rate differs from yield in that it is calculated by dividing the
annualization of the most recent month's distribution by the maximum offering
price at the end of the month.
Furthermore, in reports or other communications to shareholders or in
advertising materials, performance of Fund shares may be compared with that of
other mutual funds or classes of shares of other mutual funds, as listed in the
rankings prepared by Lipper Analytical Services, Inc. or similar independent
services that monitor the performance of mutual funds, financial
<PAGE> 291
12
indices such as the S&P 500 Index or other industry or financial publications
such as Bank Rate Monitor, Barron's, Business Week, CDA Investment
Technologies, Inc., Changing Times, Forbes, Fortune, ICB/Donoghue's Money Fund
Report, Institutional Investor, Investors Daily, Money, Morningstar Mutual Fund
Values, The New York Times, USA Today and The Wall Street Journal. The yield of
the Money Market Fund may also be compared to yields set forth in the weekly
statistical release H.15(519) or the monthly statistical release designated
G.13(415) published by the Board of Governors of the Federal Reserve System.
The annual report to shareholders of the Money Market Fund for the fiscal year
ended December 31, 1995 containing additional performance information is
available without charge and can be obtained by writing or calling the address
or telephone number printed on the front cover of this Prospectus. See
"Performance Data" in the Statement of Additional Information.
INVESTMENT OBJECTIVE AND POLICIES
MONEY MARKET FUND
The investment objective of the Money Market Fund is to seek as high a level of
current income as is consistent with liquidity and the stability of principal.
The Fund invests in high-quality, short-term U.S. dollar-denominated money
market instruments which are deemed to mature in thirteen months or less, and
is managed so that the average portfolio maturity of all portfolio instruments
(on a dollar-weighted basis) will not exceed 90 days. The Fund is diversified
within the meaning of the Investment Company Act of 1940, as amended (the "1940
Act"), and will seek to maintain a stable net asset value of $1.00 per share.
The instruments in which the Money Market Fund may invest include, but are not
limited to:
- - Securities issued or guaranteed by the U.S. government or by agencies or
instrumentalities thereof;
- - Obligations issued or guaranteed by U.S. and foreign banks ("Bank
Obligations");
- - Commercial paper;
- - Corporate debt obligations, including variable rate obligations;
- - Short-term credit facilities;
- - Asset-backed securities; and
<PAGE> 292
13
- - Other money market instruments.
The Money Market Fund will limit its portfolio investments to securities that
are determined by SBAM to present minimal credit risks pursuant to guidelines
established by the Fund's Board of Directors and which are "Eligible
Securities" at the time of acquisition by the Fund. The term "Eligible
Securities" includes securities rated by the "Requisite NRSROs" in one of the
two highest short-term rating categories, securities of issuers that have
received such ratings with respect to other short-term debt securities and
comparable unrated securities. "Requisite NRSROs" means (a) any two nationally
recognized statistical rating organizations ("NRSROs") that have issued a
rating with respect to a security or class of debt obligations of an issuer, or
(b) one NRSRO, if only one NRSRO has issued such a rating at the time that the
Fund acquires the security. The Fund may not invest more than 5% of its total
assets in Eligible Securities that have not received the highest rating from
the Requisite NRSROs and comparable unrated securities ("Second Tier
Securities") and may not invest more than the greater of 1% of its total assets
or $1 million in the Second Tier Securities of any one issuer.
The Money Market Fund may also enter into repurchase agreements with respect to
the obligations identified above. While the maturity of the underlying
securities in a repurchase agreement transaction may be more than thirteen
months, the term of the repurchase agreement will always be less than thirteen
months. For a description of repurchase agreements and their associated risks,
see "Additional Investment Activities and Risk Factors--Repurchase Agreements."
Securities issued or guaranteed by the U.S. government or by its agencies or
instrumentalities include obligations of several kinds. Such securities in
general include a wide variety of U.S. Treasury obligations consisting of
bills, notes and bonds, which principally differ only in their interest rates,
maturities and times of issuance. Securities issued or guaranteed by U.S.
government agencies and instrumentalities are debt securities issued by
agencies or instrumentalities established or sponsored by the U.S. government
and may be backed only by the credit of the issuing agency or instrumentality.
The Fund will invest in such obligations only where SBAM is satisfied that the
credit risk with respect to the issuer is minimal.
Bank Obligations that may be purchased by the Money Market Fund include
certificates of deposit, commercial paper, bankers' acceptances and fixed time
deposits. Fixed time deposits are obligations of branches of U.S. banks or
foreign banks which are payable at a stated maturity date and bear a fixed rate
of interest. Although fixed time deposits do not have a market, there are no
contractual restrictions on the right to transfer a beneficial interest in the
deposit to a third party. For a discussion of the risks associated with
investing in bank obligations, see "Additional Information on Portfolio
Instruments and Investment Policies--Bank Obligations" in the Statement of
Additional Information.
The Money Market Fund's investments in corporate debt securities consist of
non-convertible corporate debt securities such as bonds and debentures that
have thirteen months or less remaining to maturity.
<PAGE> 293
14
The Fund may invest in U.S. dollar-denominated securities of non-U.S. issuers,
including obligations of non-U.S. banks or non-U.S. branches of U.S. banks and
commercial paper and other corporate debt securities of non-U.S. issuers, where
SBAM deems the instrument to present minimal credit risks. Investments in
non-U.S. banks and non-U.S. issuers present certain risks. See "Additional
Investment Activities--Foreign Securities."
The Money Market Fund may invest in floating and variable rate obligations with
stated maturities in excess of thirteen months upon compliance with certain
conditions contained in Rule 2a-7 promulgated under the 1940 Act, in which case
such obligations will be treated, in accordance with Rule 2a-7, as having
maturities not exceeding thirteen months. Floating or variable rate obligations
bear interest at rates that are not fixed, but vary with changes in specified
market rates or indices, such as the prime rate, and at specified intervals.
Certain of the floating or variable rate obligations that may be purchased by
the Fund may carry a demand feature that would permit the holder to tender them
back to the issuer at par value prior to maturity. Such obligations include
variable rate master demand notes, which are unsecured instruments issued
pursuant to an agreement between the issuer and the holder that permit the
indebtedness thereunder to vary and provide for periodic adjustments in the
interest rate. The Fund will limit its purchases of floating and variable rate
obligations to those of the same quality as it otherwise is allowed to
purchase. SBAM will monitor on an ongoing basis the ability of an issuer of a
demand instrument to pay principal and interest on demand.
The Money Market Fund may also invest in variable amount master demand notes. A
variable amount master demand note differs from ordinary commercial paper in
that it is issued pursuant to a written agreement between the issuer and the
holder, its amount may from time to time be increased by the holder (subject to
an agreed maximum) or decreased by the holder or the issuer, it is payable on
demand, the rate of interest payable on it varies with an agreed formula and it
is not typically rated by a rating agency.
The Money Market Fund may enter into, or acquire participations in, short-term
borrowing arrangements with corporations, consisting of either a short-term
revolving credit facility or a master note agreement payable upon demand. Under
these arrangements, the borrower may reborrow funds during the term of the
facility. The Fund treats any commitments to provide such advances as a standby
commitment to purchase the borrower's notes.
The Money Market Fund may also purchase asset-backed securities. Asset-backed
securities represent defined interests in an underlying pool of assets. Such
securities may be issued as pass-through certificates, which represent
undivided fractional interests in the underlying pool of assets. Alternatively,
asset-backed securities may be issued as interests, generally in the form of
debt securities, in a special purpose entity organized solely for the purpose
of owning the underlying assets and issuing such securities. In the latter
case, such securities are secured by and payable from a stream of payments
generated by the underlying assets. The assets underlying asset-backed
securities are often a pool of assets similar to one another, such as motor
vehicle receivables or credit card receivables. Alternatively, the underlying
assets may be particular types of securities, various contractual rights to
receive payments and/or other types of assets. Asset-backed securities
frequently carry credit protection in the form of extra collateral,
subordinated certificates, cash reserve accounts, letters of credit or other
<PAGE> 294
15
enhancements. Any asset-backed securities held by the Fund must comply with its
portfolio maturity and credit quality requirements. See "Additional
Information on Portfolio Instruments and Investment Policies" in the Statement
of Additional Information.
The Money Market Fund may also invest in high-quality, short-term municipal
obligations that carry yields that are competitive with those of other types of
money market instruments in which the Fund may invest. Dividends paid by the
Fund derived from interest on municipal obligations that may be purchased by it
will be taxable to shareholders for federal income tax purposes because the
Fund will not qualify as an entity that can pass through the tax-exempt
character of such interest.
The Money Market Fund may purchase securities on a firm commitment basis,
including when-issued securities and the Fund may invest in other investment
funds. See "Additional Investment Activities and Risk Factors" for a
description of such securities and their associated risks. The Fund is not
currently authorized to use any of the various investment strategies referred
to under "Additional Investment Activities and Risk Factors--Derivatives."
The foregoing investment policies and activities, other than the Money Market
Fund's investment objective, are not fundamental and may be changed by the
Board of Directors of Series Funds without the approval of shareholders.
HIGH YIELD BOND FUND
The High Yield Bond Fund's investment objective is to maximize total return.
The Fund seeks to achieve its objective by investing primarily in a portfolio
of high yield fixed-income securities that offer a yield above that generally
available on debt securities in the four highest rating categories of the
recognized rating services and which generally entail increased credit and
market risks. To mitigate these risks, the Fund will diversify its holdings by
issuer, industry and credit quality. The Fund is diversified within the meaning
of the 1940 Act.
The High Yield Bond Fund intends to invest, under normal market conditions, at
least 80% of its total assets in non-investment grade fixed-income securities,
(e.g., bonds, debentures, notes, equipment lease certificates, equipment trust
certificates, conditional sales contracts, commercial paper and other
obligations and preferred stock). The lower-rated bonds in which the Fund will
invest are commonly referred to as "junk bonds."
The debt obligations in which the Fund will invest generally will be rated, at
the time of investment, "Ba" or "B" or lower by Moody's Investors Service
("Moody's") or "BB" or "B" or lower by Standard & Poor's Rating Services Group
("S&P"), or determined by SBAM to be of comparable quality. Debt securities
rated by both Moody's and S&P need only satisfy the foregoing ratings standards
with respect to either the Moody's or the S&P rating. The Fund is not required
to dispose of a debt security if its credit rating or credit quality declines.
Medium and low-rated and comparable unrated 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
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16
in the payment of interest and principal, than higher rated securities. Certain
of the debt securities purchased by the Fund may be rated as low as "C" by
Moody's or "D" by S&P or may be considered comparable to securities having such
ratings. An investment in the High Yield Bond Fund should not be considered as
a complete investment program for all investors. For further discussion of high
yield securities and the special risks associated therewith, see "Additional
Investment Activities and Risk Factors--High Yield Securities."
The High Yield Bond Fund may invest up to 10% of its total assets in securities
of foreign issuers and up to 5% of its total assets in foreign governmental
issuers in any one country. The foreign securities in which the High Yield Bond
Fund may invest, all or a portion of which may be non-U.S. dollar denominated,
include: (a) debt obligations issued or guaranteed by foreign national,
provincial, state, municipal or other governments with taxing authority or by
their agencies or instrumentalities, including Brady Bonds; (b) debt
obligations of supranational entities; (c) debt obligations of the U.S.
government issued in non-dollar securities; (d) debt obligations and other
fixed-income securities of foreign corporate issuers; and (e) U.S. corporate
issuers. There is no minimum rating criteria for the Fund's investments in such
securities. A description of Brady Bonds is set forth in the discussion of the
investment objective and policies of the Emerging Markets Debt Fund. The risks
associated with these investments are described under the captions "Additional
Investment Activities and Risk Factors--Foreign Securities" and "--High Yield
Securities." Moreover, investments in foreign securities may have adverse tax
implications as described under "Dividends, Distributions and Taxes."
In light of the risks associated with high yield corporate debt securities,
SBAM will take various factors into consideration in evaluating the
creditworthiness of an issuer. These will typically include the issuer's
financial resources, its sensitivity to economic conditions and trends, the
operating history of the issuer, and the experience and track record of the
issuer's management. SBAM will also review the ratings, if any, assigned to
the security by any recognized rating agencies, although SBAM's judgment as to
the quality of a debt security may differ from that suggested by the rating
published by a rating service. In addition to the foregoing credit analysis,
SBAM will evaluate the relative value of an investment compared with its
perceived credit risk. In selecting securities for the Fund, SBAM intends to
consider the correlation among securities represented in the Fund's portfolio
in an attempt to reduce the risk of exposure to market, industry and issuer
volatility. The High Yield Bond Fund's ability to achieve its investment
objective may be more dependent on SBAM's credit analysis than would be the
case if it invested in higher quality debt securities. A description of the
ratings used by Moody's and S&P is set forth in Appendix A to this Prospectus.
SBAM will be free to invest in high yield debt securities of any maturity and
may adjust the average maturity of the Fund's portfolio from time to time,
depending on SBAM's assessment of the relative yields available on securities
of different maturities and its expectations of future changes in interest
rates. Long-term debt securities generally provide a higher yield than
short-term debt securities, and therefore SBAM expects that, based upon current
market conditions, the Fund's high yield debt securities will initially have an
average maturity of 10 to 15 years.
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17
The High Yield Bond Fund may invest in zero coupon securities, pay-in-kind
bonds and deferred payment securities, each which involve special risk
considerations. See "Additional Investment Activities and Risk Factors--Zero
Coupon Securities, Pay-in-Kind Bonds and Deferred Payment Securities."
The High Yield Fund may also invest in fixed and floating rate loans ("Loans")
arranged through private negotiations between a corporate borrower or a foreign
sovereign entity and one or more financial institutions ("Lenders"). The Fund
may invest in such Loans in the form of participations in Loans ("Loan
Participations") and assignments of all or a portion of Loans from third
parties ("Assignments"). See "Additional Investment Activities and Risk
Factors--Loan Participations and Assignments."
The High Yield Fund may invest up to 10% of its total assets in either (1)
equipment lease certificates, equipment trust certificates and conditional
sales contracts or (2) limited partnership interests. The Fund may invest up to
10% of its total assets in common stock, convertible securities, warrants or
other equity securities (other than preferred stock for which there is no
limit) when consistent with the Fund's objective. The Fund will generally hold
such equity investments as a result of purchases of unit offerings of
fixed-income securities which include such securities or in connection with an
actual or proposed conversion or exchange of fixed-income securities, but may
also purchase equity securities not associated with fixed-income securities
when, in the opinion of SBAM, such purchase is appropriate.
In order to maintain liquidity, the Fund may hold and/or invest up to 20% of
its total assets in cash and/or U.S. dollar denominated debt securities
including: (1) short-term (less than 12 months to maturity) and medium-term
(not greater than five years to maturity) obligations issued or guaranteed by
(a) the U.S. government or the government of a developed country, their
agencies or instrumentalities or (b) international organizations designated or
supported by multiple foreign governmental entities to promote economic
reconstruction or development ("supranational entities"); (2) finance company
obligations, corporate commercial paper and other short-term commercial
obligations, in each case rated or issued by companies with similar securities
outstanding that are rated "Prime-1" or "A" or better by Moody's or "A-1" or
"A" or better by S&P or, if unrated, of comparable quality as determined by
SBAM; (3) obligations (including certificates of deposit, time deposits, demand
deposits and bankers' acceptances) of banks; and (4) repurchase agreements (as
discussed below under "Additional Investment Activities and Risk
Factors--Repurchase Agreements") with respect to securities in which the Fund
may invest. If at some future date, in the opinion of SBAM, adverse conditions
prevail in the securities markets which makes the High Yield Bond Fund's
investment strategy inconsistent with the best interests of the Fund's
shareholders, then for defensive purposes, the Fund may temporarily invest its
assets without limit in such instruments.
The High Yield Bond Fund may enter into repurchase agreements and reverse
repurchase agreements, may purchase securities on a firm commitment basis,
including when-issued securities and may lend portfolio securities. The Fund
may also invest in investment funds. For a description of these investment
practices and the risks associated therewith, see "Additional Investment
Activities and Risk Factors."
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18
The High Yield Bond Fund may purchase securities for which there is a limited
trading market or which are subject to restrictions on resale to the public.
The Fund will not invest more than 15% of the value of its total assets in
illiquid securities, such as "restricted securities" which are illiquid, and
securities that are not readily marketable. See "Additional Investment
Activities and Risk Factors--Restricted Securities and Securities With Limited
Trading Markets." As more fully described in the Statement of Additional
Information, the Fund may purchase certain restricted securities ("Rule 144A
securities") for which there is a secondary market of qualified institutional
buyers as contemplated by Rule 144A under the Securities Act of 1933, as
amended (the "1933 Act"). The Fund's holdings of Rule 144A securities which
are liquid securities will not be subject to the 15% limitation on investments
in illiquid securities.
The High Yield Bond Fund is currently authorized to use all of the various
investment strategies referred to under "Additional Investment Activities and
Risk Factors--Derivatives." It is not presently anticipated that any of these
strategies will be used to a significant degree by the Fund. The Fund's ability
to pursue certain of these strategies may be limited by applicable regulations
of the SEC, the Commodity Futures Trading Commission (the "CFTC") and the
federal income tax requirements applicable to regulated investment companies.
Appendix B to this Prospectus and the Statement of Additional Information
contain descriptions of these strategies and of certain risks associated
therewith.
The foregoing investment policies and activities, other than the High Yield
Bond Fund's investment objective, are not fundamental and may be changed by the
Board of Directors of Institutional Series Funds without the approval of
shareholders.
EMERGING MARKETS DEBT FUND
The investment objective of the Emerging Markets Debt Fund is to maximize total
return. The Fund seeks to achieve its objective by investing at least 80% of
its total assets in debt securities of government, government related and
corporate issuers in emerging market countries and of entities organized to
restructure outstanding debt of such issuers. As used in this Prospectus, an
"emerging market country" is any country considered to be an emerging market
country by the World Bank at the time of investment. These countries generally
include every nation in the world except the United States, Canada, Japan,
Australia, New Zealand and most countries located in Western Europe. The Fund
is non-diversified within the meaning of the 1940 Act. See "Additional
Investment Activities and Risk Factors--Non-Diversification."
Initially, the Emerging Markets Debt Fund expects that its investments in
emerging market country debt securities will be made primarily in some or all
of the following emerging market countries:
<TABLE>
<S> <C> <C>
Algeria India Philippines
Argentina Indonesia Poland
Brazil Ivory Coast PortugaL
</TABLE>
<PAGE> 298
19
<TABLE>
<S> <C> <C>
Bulgaria Jamaica Russia
Chile Jordan Slovakia
China Lebanon Slovenia
Colombia Malaysia South Africa
Costa Rica Mexico Thailand
Czech Republic Morocco Trinidad & Tobago
Dominican Republic Nicaragua Tunisia
Ecuador Nigeria Turkey
Egypt Pakistan Uruguay
Greece Panama Venezuela
Hungary Paraguay Vietnam
Peru Zaire
</TABLE>
In selecting emerging market country debt securities for investment, SBAM will
apply a market risk analysis contemplating assessment of factors such as
liquidity, volatility, tax implications, interest rate sensitivity,
counterparty risks and technical market considerations. Currently, investing in
many emerging market country securities is not feasible or may involve
unacceptable political risks. As opportunities to invest in debt securities in
other countries develop, the Fund expects to expand and further diversify the
emerging market countries in which it invests. While the Fund generally is not
restricted in the portion of its assets which may be invested in a single
country or region, it is anticipated that, under normal conditions, the Fund's
assets will be invested in issuers in at least three countries.
Emerging market country debt securities in which the Emerging Markets Debt Fund
may invest are U.S. dollar-denominated and non-U.S. dollar-denominated debt
securities, including bonds, notes, bills, debentures, convertible securities,
warrants, bank debt obligations, short-term paper, mortgage and other
asset-backed securities, preferred stock, Loan Participations and Assignments
and interests issued by entities organized and operated for the purpose of
restructuring the investment characteristics of instruments issued by emerging
market country issuers. The Fund is subject to no restrictions on the
maturities of the emerging market country debt securities in which it will
invest and such maturities may range from overnight to thirty years. There is
no limit on the percentage of the Fund's assets that may be invested in
non-U.S. dollar denominated securities and a substantial portion of the Fund's
assets may be invested in non-U.S. dollar denominated securities. The amount of
assets invested in non-U.S. dollar denominated securities will vary depending
upon market conditions. The Fund may invest in Brady Bonds, which are debt
securities issued under the framework of the Brady Plan, an initiative
announced by former U.S. Treasury Secretary Nicholas F. Brady in 1989 as a
mechanism for debtor nations to restructure their outstanding external
indebtedness. For a description of Brady Bonds, see "Additional Investment
Activities and Risk Factors--High Yield Securities" herein and "Additional
Information on Portfolio Instruments and Investment Policies--Brady Bonds" in
the Statement of Additional Information. For a description of Loan
Participations and Assignments, see "Additional Investment Activities and Risk
Factors--Loan Participations and Assignments."
Investments in securities of foreign issuers may involve risks arising from
differences between U.S. and foreign securities markets, including less volume,
much greater price volatility in
<PAGE> 299
20
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. See "Additional
Investment Activities and Risk Factors--Foreign Securities."
The Fund's investments in government, government-related and restructured debt
securities will consist of (i) debt securities or obligations issued or
guaranteed by governments, governmental agencies or instrumentalities and
political subdivisions located in emerging market countries (including
participations in loans between governments and financial institutions), (ii)
debt securities or obligations issued by government owned, controlled or
sponsored entities located in emerging market countries (including
participations in loans between governments and financial institutions), and
(iii) interests in issuers organized and operated for the purpose of
restructuring the investment characteristics of instruments issued by any of
the entities described above. Such type of restructuring involves the deposit
with or purchase by an entity of specific instruments and the issuance by that
entity of one or more classes of securities backed by, or representing
interests in, the underlying instruments. Certain issuers of such structured
securities may be deemed to be "investment companies" as defined in the 1940
Act. As a result, the Fund's investment in such securities may be limited by
certain investment restrictions contained in the 1940 Act. See "Additional
Information on Portfolio Instruments and Investment Policies--Structured
Investments" in the Statement of Additional Information. In addition to the
risks of investing in emerging market country debt securities, the Fund's
investment in government, government-related and restructured debt instruments
are subject to special risks, including the inability or unwillingness to repay
principal and interest, requests to reschedule or restructure outstanding debt,
and requests to extend additional loan amounts. The Fund may have limited
recourse in the event of default on such debt instruments. See "Additional
Investments Activities and Risk Factors--Foreign Securities" and "--High Yield
Securities".
The Emerging Market Debt Fund's investments in debt securities of corporate
issuers in emerging market countries may include debt securities or obligations
issued by (i) banks located in emerging market countries or by branches of
emerging market country banks located outside the home country or (ii)
companies organized under the laws of an emerging market country.
The securities in which the Fund will invest will not be required to meet a
minimum rating standard and may not be rated for creditworthiness by any
internationally recognized credit rating organization. In fact, the Fund's
investments are expected to be in the lower and lowest rating categories of
internationally recognized credit rating organizations or of comparable
quality. Such securities involve significantly greater risks, including price
volatility and risk of default of payment of interest and principal than higher
rated securities. An investment in the Emerging Markets Debt Fund should not be
considered as a complete investment program for all investors. See "Additional
Investment Activities and Risk Factors--Foreign Securities" and "--High Yield
Securities." Moreover, substantial investments in foreign securities may have
adverse tax implications as described under "Dividends, Distributions and
Taxes."
<PAGE> 300
21
In light of the risks associated with high yield corporate and sovereign debt
securities, SBAM will take various factors into consideration in evaluating the
creditworthiness of an issuer. For corporate debt securities, these will
typically include the issuer's financial resources, its sensitivity to economic
conditions and trends, the operating history of the issuer, and the experience
and track record of the issuer's management. For sovereign debt instruments,
these will typically include the economic and political conditions within the
issuer's country, the issuer's overall and external debt levels and debt
service ratios, the issuer's access to capital markets and other sources of
funding, and the issuer's debt service payment history. SBAM will also review
the ratings, if any, assigned to the security by any recognized rating
organizations, although SBAM's judgment as to the quality of a debt security
may differ from that suggested by the rating published by a rating service. In
addition to the foregoing credit analysis, SBAM will evaluate the relative
value of an investment compared with its perceived credit risk. In selecting
securities for the Emerging Markets Debt Fund, SBAM intends to consider the
correlation among securities represented in the Fund's portfolio in an attempt
to reduce the risk of exposure to market, industry and issuer volatility. The
Fund's ability to achieve its investment objective may be more dependent on
SBAM's credit analysis than would be the case if it invested in higher quality
debt securities. A description of the ratings used by Moody's and S&P is set
forth in Appendix A to this Prospectus.
The Emerging Markets Debt Fund may invest in zero coupon securities,
pay-in-kind bonds and deferred payment securities. The characteristics and
risks of these investments are described under "Additional Investment
Activities and Risk Factors--Zero Coupon Securities, Pay-in-Kind Bonds and
Deferred Payment Securities."
The Emerging Markets Debt Fund may invest up to 10% of its total assets in
common stock, convertible securities, warrants or other equity securities when
consistent with the Fund's objective. The Fund will generally hold such equity
investments as a result of purchases of unit offerings of fixed-income
securities which include such securities or in connection with an actual or
proposed conversion or exchange of fixed-income securities, but may also
purchase equity securities not associated with fixed-income securities when, in
the opinion of SBAM, such purchase is appropriate.
In order to maintain liquidity, the Emerging Markets Debt Fund may hold and/or
invest up to 20% of its total assets in cash and/or U.S. dollar denominated
debt securities including: (1) short-term (less than 12 months to maturity) and
medium-term (not greater than five years to maturity) obligations issued or
guaranteed by (a) the U.S. government or the government of a developed country,
their agencies or instrumentalities or (b) international organizations
designated or supported by multiple foreign governmental entities to promote
economic reconstruction or development ("supranational entities"); (2) finance
company obligations, corporate commercial paper and other short-term commercial
obligations, in each case rated or issued by companies with similar securities
outstanding that are rated "Prime-1" or "A" or better by Moody's or "A-1" or
"A" or better by S&P or, if unrated, of comparable quality as determined by the
SBAM; (3) obligations (including certificates of deposit, time deposits, demand
deposits and bankers' acceptances) of banks; and (4) repurchase agreements (as
discussed below under "Additional Investment Activities and Risk Factors--
Repurchase Agreements") with respect to securities in which the Fund may
invest. If at some future date,
<PAGE> 301
22
in the opinion of SBAM, adverse conditions prevail in the securities markets
which makes the Fund's investment strategy inconsistent with the best interests
of the Fund's shareholders, then for defensive purposes, the Fund may
temporarily invest its assets without limit in such instruments.
The Emerging Markets Debt Fund may enter into repurchase agreements and reverse
repurchase agreements, may purchase securities on a firm commitment basis,
including when-issued securities and may lend portfolio securities. The Fund
may also invest in investment funds. For a description of these investment
practices and the risks associated therewith, see "Additional Investment
Activities and Risk Factors."
The Emerging Markets Debt Fund may purchase securities for which there is a
limited trading market or which are subject to restrictions on resale to the
public. The Fund will not invest more than 15% of the value of its total assets
in illiquid securities, such as "restricted securities" which are illiquid, and
securities that are not readily marketable. See "Additional Investment
Activities and Risk Factors--Restricted Securities and Securities with Limited
Trading Markets." The Fund's holdings of Rule 144A securities which are liquid
securities will not be subject to the 15% limitation on investments in illiquid
securities.
The Emerging Markets Debt Fund is currently authorized to use all of the
various investment strategies referred to under "Additional Investment
Activities and Risk Factors--Derivatives." With the exception of currency
transactions, however, it is not presently anticipated that any of these
strategies will be used to a significant degree by the Fund. The Fund's ability
to pursue certain of these strategies, including the ability to hedge against
currency exchange rate risks with respect to its holdings of non-U.S. dollar
denominated securities, may be limited by applicable regulations of the SEC,
the CFTC and the federal income tax requirements applicable to regulated
investment companies. Appendix B to this Prospectus and the Statement of
Additional Information contain descriptions of these strategies and of certain
risks associated therewith.
The foregoing investment policies and activities, other than the Emerging
Markets Debt Fund's investment objective, are not fundamental and may be
changed by the Board of Directors of Institutional Series Funds without the
approval of shareholders.
ASIA GROWTH FUND
The Asia Growth Fund's objective is to achieve long-term capital appreciation.
The Fund seeks to achieve its objective by investing at least 65% of its total
assets in equity and equity- related securities of Asian Companies. Asian
Companies include companies that (i) are organized under the laws of
Bangladesh, China, Hong Kong, India, Indonesia, Korea, Malaysia, Pakistan, the
Philippines, Singapore, Sri Lanka, Taiwan, Thailand or any other country in the
Asian region (other than Japan, Australia and New Zealand) that currently or in
the future permits foreign investment (collectively, "Asian Countries") or (ii)
regardless of where organized and as determined by SBAM AP, (a) derive at least
50% of their revenues from goods produced or sold, investments made, or
services performed in or with one or
<PAGE> 302
23
more of the Asian Countries, (b) maintain at least 50% of their assets in one
or more of the Asian Countries, or (c) have securities which are traded
principally on a stock exchange in an Asian Country. The Fund is
non-diversified within the meaning of the 1940 Act. See "Additional Investment
Activities and Risk Factors--Non-Diversification."
Equity securities in which the Asia Growth Fund may invest include common and
preferred stocks (including convertible preferred stock), bonds, notes and
debentures convertible into common and preferred stock, stock purchase warrants
and rights, equity interests in trusts, partnerships, joint ventures or similar
enterprises, and American, Global or other types of Depositary Receipts.
Equity-linked debt securities are debt instruments whose prices are indexed to
the prices of equity securities or securities indices. In other words, the
value at maturity or coupon rate of these equity-linked debt instruments is
determined by reference to a specific instrument or statistic. The performance
of equity-linked debt instruments depends to a great extent on the performance
of the security or index to which they are indexed, and may also be influenced
by interest rate changes in the United States and abroad. At the same time,
these instruments are subject to the credit risks associated with the issuer of
the security, and their values may decline substantially if the issuer's
creditworthiness deteriorates. Indexed instruments may be more volatile than
the underlying instruments.
There are no prescribed limits on geographic asset distributions among Asian
Countries and from time to time, SBAM AP expects to invest a significant
portion of the Asia Growth Fund's assets in Hong Kong, Malaysia, Singapore and
Thailand. Investments in each of these countries may from time to time exceed
25% of the Fund's total assets. In addition, more than 25% of the Fund's total
assets may be denominated or quoted in the currencies of any one or more of
such countries. In this connection, SBAM AP anticipates that up to 35% of the
Fund's initial investments will be in Hong Kong. Although SBAM AP expects that
most of the equity securities purchased by the Fund will be traded on a stock
exchange or in an over-the-counter market, most of the Asian securities markets
have substantially less volume than U.S. or other established markets and some
of the stock exchanges in the Asian Countries are in the early stages of their
development. Concentration of the Fund's assets in one or a few of the Asian
countries and Asian currencies will subject the Fund, to a greater extent than
if the Fund's assets were less geographically concentrated, to the risks of
adverse changes in the securities and foreign exchange markets of such
countries and social, political or economic events which may occur in those
countries. For a more detailed discussion of the special risks which the Fund
is subject to by virtue of its investment in foreign securities, see
"Additional Investment Activities and Risk Factors--Foreign Securities." An
investment in the Asia Growth Fund should not be considered as a complete
investment program for all investors.
In pursuing the Asia Growth Fund's investment objective, SBAM AP will combine a
traditional fundamental approach towards evaluating industry sectors and
individual securities of Asian Companies with a risk management driven approach
seeking to keep the Fund's volatility of return in line with or lower than that
currently experienced in the Asian markets.
SBAM AP expects to focus on certain industry groups across Asian Countries in
an attempt to identify and capture the relative value of such groups on a
pan-regional basis. SBAM AP
<PAGE> 303
24
will research individual companies in an effort to identify the investment
opportunities within these industry groups which will provide long-term capital
appreciation. In addition, SBAM AP intends to meet the management of individual
companies on a periodic basis. As part of the Asia Growth Fund's risk
management objective, SBAM AP will also concentrate on macroeconomic issues and
other variables influencing the direction of monetary policies followed by
Asian Central Banks.
The investment process to be implemented by SBAM AP will consist of the three
following principal (and potentially overlapping) types of approaches.
Pan-Regional Industry Group Decisions. SBAM AP will seek to identify the
pan-regional industrial sectors which are likely to exhibit attractive returns
over the long-term. In selecting such industrial sectors, SBAM AP will focus on
industry cycles and competitiveness as well as the industrial characteristics
of the Asian economies. In addition, SBAM AP will review government
regulations, industrial policies, access to technology and industrial research
reports provided by industrial companies or associations and securities dealers
in Asian Countries. SBAM AP will focus on those industries which represent
meaningful weightings in the total market capitalization of the Asian Countries
including, but not limited to, telecommunications, consumer durables and
nondurables, food and beverage, electronics, hotels, power engineering and
generation, basic industries, public utilities, property and financial sectors.
SBAM AP believes that an investment process that places emphasis on industry
groups is appropriate given the current state of economic and financial
integration being achieved by the Asian Countries and the relatively
significant concentration of market capitalization in Asian Countries toward
certain industrial sectors.
Fundamental Analysis: Individual Security Decisions. In order to identify the
most attractive investment opportunities within industry groups, SBAM AP will
employ extensive research to select investments in Asian Countries that offer
long-term growth potential for investors. While the Asia Growth Fund generally
seeks to invest in securities of larger companies within the particular Asian
market, it may also invest in the securities of medium and smaller companies
that, in the opinion of SBAM AP, have potential for growth. In particular, SBAM
AP will employ the following three-step process to evaluate particular
investment opportunities for the Fund.
Screening Process. SBAM AP will implement a systematic screening process in an
effort to identify individual securities it believes likely to exhibit
attractive returns over the long term. SBAM AP will screen companies according
to factors such as the perceived quality of their management and business,
overall sustainable competitiveness, historical earnings, dividend records over
at least a full business cycle, liquidity, trading volumes and historical and
expected volatility.
Financial Analysis Process. The financial analysis of selected companies will
focus on evaluating the fundamental value of the enterprise. SBAM AP will use a
value-driven process which will emphasize quantitative analysis based on return
on equity ("ROE") and its components, such as operating margins, financial
leverage, asset turnover and interest and tax burdens. In addition, the
company's cash flow generating capabilities and return on assets will
<PAGE> 304
25
be considered. SBAM AP believes that ROE and cash flow dynamics are appropriate
variables when analyzing companies which operate in high growth markets, such
as Asia, as the ability of such companies to capture this growth by using the
right allocation of resources and asset financing is of utmost importance.
Valuation Process and Volatility Analysis. The valuation process will focus on
Price Earnings Ratio ("PER") calculations and comparisons with historical
relative PER bands and local market conditions. SBAM AP will use measures such
as PER/growth, and will evaluate whether the security enjoys accelerating
earnings growth momentum due to management changes or the introduction of new
products and/or services. In addition, where appropriate, SBAM AP will conduct
specific dividend discount model and discount cash flow analyses for specific
securities with predictable cash flows or dividend streams. Through the use of
this analysis, SBAM AP will attempt to identify companies with strong potential
for appreciation relative to their downside exposure. Lastly, SBAM AP will
conduct a volatility analysis on selected securities in an effort to forecast
the expected risk of such securities and compare the results of such risk
analysis with these securities' expected returns. Investments may be made in
companies that do not have extensive operating experience provided that SBAM AP
believes such companies nevertheless have significant growth potential.
Risk Management and Macroeconomic/Top-Down Analysis. SBAM AP will also consider
macroeconomic variables, such as liquidity and capital flows, foreign equity
and industrial investments and the direction of monetary policies in the Asian
Countries in an effort to capture individual market movements as well as attain
an optimal asset allocation mix and to identify the appropriate risk management
parameters for the Asia Growth Fund. The macroeconomic data SBAM AP will
monitor and analyze includes, but is not limited to, gross domestic product
growth, balance of payments and current account balances, budget deficits or
surpluses, inflation and interest rates. SBAM AP intends to meet with central
bankers, regional economists and strategists on a regular basis to assess the
present and future direction of monetary policies and their likely impact on
the markets of the Asian Countries.
As part of the Fund's risk management approach and in an attempt to better
assess and control the Fund's overall risk level on an ongoing basis, SBAM AP
will employ a quantitative analysis at each stage of the investment process
which will consist of analyzing and forecasting volatilities of the Asian
markets and securities. SBAM AP will use a number of volatility-control
strategies, including derivative instruments (as discussed below), in an effort
to attain an optimal asset allocation mix, for hedging purposes in an attempt
to control the Fund's overall risk level and to obtain exposure to markets in
the Asian Countries which have restrictions on foreign investment.
The Asia Growth Fund from time to time may invest up to 10% of its total assets
in non-convertible debt securities, which may include securities rated below
investment grade by S&P and Moody's with no minimum rating required or
comparable unrated securities. There is no limit on the amount of the Fund's
assets that can be invested in convertible securities rated below investment
grade. For additional information on these high yield debt securities, which
may involve a high degree of risk, see "Additional Investment Activities and
Risk Factors--High Yield Securities."
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In order to maintain liquidity, the Asia Growth Fund may hold and/or invest up
to 35% of its total assets in debt securities denominated in U.S. dollars or in
another freely convertible currency including: (1) short-term (less than 12
months to maturity) and medium-term (not greater than five years to maturity)
obligations issued or guaranteed by (a) the U.S. government or the government
of an Asian Country, their agencies or instrumentalities or (b) international
organizations designated or supported by multiple foreign governmental entities
to promote economic reconstruction or development ("supranational entities");
(2) finance company obligations, corporate commercial paper and other
short-term commercial obligations, in each case rated, or issued by companies
with similar securities outstanding that are rated, "Prime-1" or "A" or better
by Moody's or "A-1" or "A" or better by S&P or, if unrated, of comparable
quality as determined by SBAM AP; (3) obligations (including certificates of
deposit, time deposits, demand deposits and bankers' acceptances) of banks; and
(4) repurchase agreements (as described below under "Additional Investment
Activities and Risk Factors--Repurchase Agreements") with respect to securities
in which the Fund may invest. If at some future date, in the opinion of SBAM
AP, adverse conditions prevail in the securities markets which makes the Asia
Growth Fund's investment strategy inconsistent with the best interests of the
Fund's shareholders, then for defensive purposes, the Fund may temporarily
invest its assets without limit in such instruments.
The Asia Growth Fund may enter into repurchase agreements and reverse
repurchase agreements, may purchase securities on a firm commitment basis,
including when-issued securities and may lend portfolio securities. The Fund
may also invest in investment funds. For a description of these investment
practices and the risks associated therewith, see "Additional Investment
Activities and Risk Factors."
The Asia Growth Fund may purchase securities for which there is a limited
trading market or which are subject to restrictions on resale to the public.
The Fund will not invest more than 15% of the value of its total assets in
illiquid securities, such as "restricted securities" which are illiquid, and
securities that are not readily marketable. For further discussion of illiquid
securities and their associated risks, see "Additional Investment Activities
and Risk Factors--Restricted Securities and Securities With Limited Trading
Markets." As more fully described in the Statement of Additional Information,
the Fund may purchase Rule 144A securities. The Fund's holdings of Rule 144A
securities which are liquid securities will not be subject to the 15%
limitation on investments in illiquid securities.
The Asia Growth Fund is currently authorized and intends to use the various
investment strategies referred to under "Additional Investment Activities and
Risk Factors--Derivatives." The Fund's ability to pursue certain of these
strategies may be limited by applicable regulations of the SEC, the CFTC and
the federal income tax requirements applicable to regulated investment
companies. Appendix B to this Prospectus and the Statement of Additional
Information contain descriptions of these strategies and of certain risks
associated therewith.
The foregoing investment policies and activities, other than the Asia Growth
Fund's investment objective, are not fundamental and may be changed by the
Board of Directors of Institutional Series Funds without the approval of
shareholders.
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The investment objective of each Fund is deemed to be a fundamental policy and
may not be changed without the affirmative vote of the holders of a majority of
its outstanding shares as defined in the 1940 Act. There is no assurance that a
Fund will achieve its investment objective.
ADDITIONAL INVESTMENT ACTIVITIES AND RISK FACTORS
REPURCHASE AGREEMENTS. Each Fund may enter into repurchase agreements for cash
management purposes. A repurchase agreement is a transaction in which the
seller of a security commits itself at the time of sale to repurchase that
security from the buyer at a mutually agreed upon time and price. Each Fund
will enter into repurchase agreements only with dealers, banks or recognized
financial institutions which, in the opinion of the investment manager based on
guidelines established by the applicable Fund's Board of Directors, are deemed
creditworthy. The investment manager will monitor the value of the securities
underlying the repurchase agreement at the time the transaction is entered into
and at all times during the term of the repurchase agreement to ensure that the
value of the securities always equals or exceeds the repurchase price. In the
event of default by the seller under the repurchase agreement, a Fund could
experience losses and experience time delays in connection with the disposition
of the underlying security. To the extent that, in the meantime, the value of
the securities that a Fund has purchased has decreased, the Fund could
experience a loss. Repurchase agreements with maturities of more than seven
days will be treated as illiquid securities by a Fund.
REVERSE REPURCHASE AGREEMENTS. Certain of the Funds may enter into "reverse"
repurchase agreements to avoid selling securities during unfavorable market
conditions to meet redemptions. Pursuant to a reverse repurchase agreement, a
Fund will sell portfolio securities and agree to repurchase them from the buyer
at a particular date and price. Whenever a Fund enters into a reverse
repurchase agreement, it will establish a segregated account in which it will
maintain liquid assets in an amount at least equal to the repurchase price
marked to market daily (including accrued interest), and will subsequently
monitor the account to ensure that such equivalent value is maintained. A Fund
pays interest on amounts obtained pursuant to reverse repurchase agreements.
Reverse repurchase agreements are considered to be borrowings by a Fund.
LOANS OF PORTFOLIO SECURITIES. Certain of the Funds may lend portfolio
securities to generate income. In the event of the bankruptcy of the other
party to a securities loan, a Fund could experience delays in recovering the
securities it lent. To the extent that, in the meantime, the value of the
securities a Fund lent has increased, the Fund could experience a loss. The
value of securities loaned will be marked to market daily. Any securities that
a Fund may receive as collateral will not become a part of its portfolio at the
time of the loan and, in the event of a default by the borrower, the Fund will,
if permitted by law, dispose of such collateral except that the Fund may retain
any such part thereof that is a security in which the Fund is permitted to
invest. The Fund may invest the cash collateral and earn additional income or
receive an agreed-upon fee from a borrower that has delivered cash equivalent
collateral. Cash collateral received by a Fund may be invested in securities in
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which the Fund is permitted to invest. Portfolio securities purchased with cash
collateral are subject to possible depreciation. Voting rights may pass with
the lending of portfolio securities. Loans of securities by a Fund will be
subject to termination at the Fund's or the borrower's option. A Fund may pay
administrative and custodial fees in connection with a securities loan and may
pay a negotiated portion of the interest or fee earned with respect to the
collateral to the borrower or a placing broker.
FIRM COMMITMENTS AND WHEN-ISSUED SECURITIES. A Fund may purchase securities on
a firm commitment basis, including when-issued securities. Securities purchased
on a firm commitment basis are purchased for delivery beyond the normal
settlement date at a stated price and yield. No income accrues to the purchaser
of a security on a firm commitment basis prior to delivery. Such securities are
recorded as an asset and are subject to changes in value based upon changes in
the general level of interest rates. Purchasing a security on a firm commitment
basis can involve a risk that the market price at the time of delivery may be
lower than the agreed upon purchase price, in which case there could be an
unrealized loss at the time of delivery. A Fund will only make commitments to
purchase securities on a firm commitment basis with the intention of actually
acquiring the securities, but may sell them before the settlement date if it is
deemed advisable. A Fund will establish a segregated account in which it will
maintain liquid assets in an amount at least equal in value to the Fund's
commitments to purchase securities on a firm commitment basis. If the value of
these assets declines, the Fund will place additional liquid assets in the
account on a daily basis so that the value of the assets in the account is
equal to the amount of such commitments.
ZERO COUPON SECURITIES, PAY-IN-KIND BONDS AND DEFERRED PAYMENT SECURITIES. The
High Yield Bond Fund and the Emerging Markets Debt Fund may invest in zero
coupon securities, pay-in-kind bonds and deferred payment securities.
Zero coupon securities are debt securities that pay no cash income but are sold
at substantial discounts from their value at maturity. When a zero coupon
security is held to maturity, its entire return, which consists of the
amortization of discount, comes from the difference between its purchase price
and its maturity value. This difference is known at the time of purchase, so
that investors holding zero coupon securities until maturity know at the time
of their investment what the expected return on their investment will be.
Certain zero coupon securities also are sold at substantial discounts from
their maturity value and provide for the commencement of regular interest
payments at a deferred date. Zero coupon securities may have conversion
features. A Fund also may purchase pay-in-kind bonds. Pay-in-kind bonds pay all
or a portion of their interest in the form of debt or equity securities.
Deferred payment securities are securities that remain zero coupon securities
until a predetermined date, at which time the stated coupon rate becomes
effective and interest becomes payable at regular intervals.
Zero coupon securities, pay-in-kind bonds and deferred payment securities tend
to be subject to greater price fluctuations in response to changes in interest
rates than are ordinary interest-paying debt securities with similar
maturities. The value of zero coupon securities appreciates more during periods
of declining interest rates and depreciates more during
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periods of rising interest rates than ordinary interest-paying debt securities
with similar maturities. Zero coupon securities, pay-in-kind bonds and
deferred payment securities may be issued by a wide variety of corporate and
governmental issuers. Although these instruments are generally not traded on a
national securities exchange, they are widely traded by brokers and dealers
and, to such extent, will not be considered illiquid for the purposes of a
Fund's 15% limitation on investments in illiquid securities discussed below.
Current federal income tax law requires the holder of a zero coupon security,
certain pay-in-kind bonds, deferred payment securities and certain other
securities acquired at a discount (such as Brady Bonds) to accrue income with
respect to these securities prior to the receipt of cash payments. Accordingly,
to avoid liability for federal income and excise taxes, a Fund may be required
to distribute income accrued with respect to these securities and may have to
dispose of portfolio securities under disadvantageous circumstances in order to
generate cash to satisfy these distribution requirements.
LOAN PARTICIPATIONS AND ASSIGNMENTS. The High Yield Bond Fund and the Emerging
Markets Debt Fund may invest in Loan Participations and Assignments. The Funds
consider these investments to be investments in debt securities for purposes of
this Prospectus. Loan Participations typically will result in a Fund having a
contractual relationship only with the Lender, not with the borrower. A Fund
will have the right to receive payments of principal, interest and any fees to
which it is entitled only from the Lender selling the Participation and only
upon receipt by the Lender of the payments from the borrower. In connection
with purchasing Loan Participations, a Fund generally will have no right to
enforce compliance by the borrower with the terms of the loan agreement
relating to the Loan, nor any rights of set-off against the borrower, and the
Fund may not benefit directly from any collateral supporting the Loan in which
it has purchased the Participation. As a result, a Fund will assume the credit
risk of both the borrower and the Lender that is selling the Participation. In
the event of the insolvency of the Lender selling a Participation, a Fund may
be treated as a general creditor of the Lender and may not benefit from any
set-off between the Lender and the borrower. A Fund will acquire Loan
Participations only if the Lender interpositioned between the Fund and the
borrower is determined by SBAM to be creditworthy. When a Fund purchases
Assignments from Lenders, the Fund will acquire direct rights against the
borrower on the Loan, except that under certain circumstances such rights may
be more limited than those held by the assigning Lender.
A Fund may have difficulty disposing of Assignments and Loan Participations.
Because the market for such instruments is not highly liquid, the Funds
anticipate that such instruments could be sold only to a limited number of
institutional investors. The lack of a highly liquid secondary market may have
an adverse impact on the value of such instruments and will have an adverse
impact on a Fund's ability to dispose of particular Assignments or Loan
Participations in response to a specific economic event, such as deterioration
in the creditworthiness of the borrower.
The Board of Directors of Institutional Series Funds has adopted policies and
procedures for the High Yield Bond Fund and the Emerging Markets Debt Fund for
the purpose of determining whether Assignments and Loan Participations are
liquid or illiquid for purposes
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of a Fund's limitation on investment in illiquid securities. Pursuant to those
policies and procedures, the Board of Directors has delegated to the investment
manager the determination as to whether a particular Loan Participation or
Assignment is liquid or illiquid, requiring that consideration be given to,
among other things, the frequency of quotes, the number of dealers willing to
sell and the number of potential purchasers, the nature of the Loan
Participation or Assignment and the time needed to dispose of it, and the
contractual provisions of the relevant documentation. The Board of Directors
periodically reviews purchases and sales of Assignments and Loan Participations.
In valuing a Loan Participation or Assignment held by a Fund for which a
secondary trading market exists, the Fund will rely upon prices or quotations
provided by banks, dealers or pricing services. To the extent a secondary
trading market does not exist, a Fund's Loan Participations and Assignments will
be valued in accordance with procedures adopted by the Board of Directors,
taking into consideration, among other factors, (i) the creditworthiness of the
borrower under the Loan and the Lender, (ii) the current interest rate, period
until next rate reset and maturity of the Loan, (iii) recent prices in the
market for similar Loans and (iv) recent prices in the market for instruments of
similar quality, rate, period until next interest rate reset and maturity. See
"Net Asset Value."
To the extent that liquid Assignments and Loan Participations that a Fund holds
become illiquid, due to the lack of sufficient buyers or market or other
conditions, the percentage of a Fund's assets invested in illiquid assets would
increase. The investment manager, under the supervision of the Board of
Directors, will monitor Fund investments in Assignments and Loan Participations
and will consider appropriate measures to enable a Fund to maintain sufficient
liquidity for operating purposes and to meet redemption requests.
RESTRICTED SECURITIES AND SECURITIES WITH LIMITED TRADING MARKETS. Each Fund
may purchase securities for which there is a limited trading market or which
are subject to restrictions on resale to the public. Investments in securities
which are "restricted" may involve added expenses to a Fund should the Fund be
required to bear registration costs with respect to such securities and could
involve delays in disposing of such securities which might have an adverse
effect upon the price and timing of sales of such securities and the liquidity
of the Fund with respect to redemptions. Restricted securities and securities
for which there is a limited trading market may be significantly more difficult
to value due to the unavailability of reliable market quotations for such
securities, and investment in such securities may have an adverse impact on net
asset value. Rule 144A is a recent development and there is no assurance that a
liquid market in Rule 144A securities will develop or be maintained. To the
extent that the number of qualified institutional buyers is reduced, a
previously liquid Rule 144A security may be determined to be illiquid, thus
increasing the percentage of illiquid assets in a Fund's portfolio. The Board
of Directors of Institutional Series Funds will be responsible for monitoring
the liquidity of Rule 144A securities and the selection by the investment
manager of such securities.
[/R]
WARRANTS. Certain of the Funds may invest in warrants, which are securities
permitting, but not obligating, their holder to subscribe for other securities.
Warrants do not carry the right to dividends or voting rights with respect to
their underlying securities, and they do not represent any rights in assets of
the issuer. An investment in warrants may be considered speculative. In
addition, the value of a warrant does not necessarily change with the value of
the underlying securities and a warrant ceases to have value if it is not
exercised prior to its expiration date.
FOREIGN SECURITIES. Investors should recognize that investing in the securities
of foreign issuers generally, and particularly in emerging market issuers,
involves special considerations which are not typically associated with
investing in securities of U.S. issuers. Investments in securities of foreign
issuers may involve risks arising from differences between U.S. and
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31
foreign securities markets, including less volume, much greater price
volatility in and relative illiquidity of foreign securities markets, different
trading and settlement practices and less governmental supervision and
regulation, from changes in currency exchange rates, from high and volatile
rates of inflation, from economic, social and political conditions and, as with
domestic multinational corporations, from fluctuating interest rates.
Investment in certain emerging market securities is restricted or controlled to
varying degrees which may at times limit or preclude investment in certain
emerging market securities and increase the costs and expenses of a Fund.
Certain emerging market countries require governmental approval prior to
investments by foreign persons, limit the amount of investment by foreign
persons in a particular issuer, limit the investment by foreign persons only to
a specific class of securities of an issuer that may have less advantageous
rights than other classes, restrict investment opportunities in issuers in
industries deemed important to national interests and/or impose additional
taxes on foreign investors.
Certain emerging market countries may require governmental approval for the
repatriation of investment income, capital or the proceeds of sales of
securities by foreign investors which could adversely affect a Fund. In
addition, if a deterioration occurs in an emerging market country's balance of
payments, it could impose temporary restrictions on foreign capital
remittances. Investing in local markets in emerging market countries may
require a Fund to adopt special procedures, seek local government approvals or
take other actions, each of which may involve additional costs to the Fund.
Other investment risks include the possible imposition of foreign taxes on
certain amounts of a Fund's income which may reduce the net return on foreign
investments as compared to income received from a U.S. issuer, the possible
seizure or nationalization of foreign assets and the possible establishment of
exchange controls, expropriation, confiscatory taxation, other foreign
governmental laws or restrictions which might affect adversely payments due on
securities held by a Fund, the lack of extensive operating experience of
eligible foreign subcustodians and legal limitations on the ability of a Fund
to recover assets held in custody by a foreign subcustodian in the event of the
subcustodian's bankruptcy. Moreover, brokerage commissions and other
transactions costs on foreign securities exchanges are generally higher than in
the United States.
In addition, there may be less publicly-available information about a foreign
issuer than about a U.S. issuer, and foreign issuers may not be subject to the
same accounting, auditing and financial record-keeping standards and
requirements as U.S. issuers. In particular, the assets and profits appearing
on the financial statements of an emerging market country issuer may not
reflect its financial position or results of operations in the way they would
be reflected had the financial statements been prepared in accordance with U.S.
generally accepted accounting principles. In addition, for an issuer that keeps
accounting records in local currency, inflation accounting rules may require,
for both tax and accounting purposes, that certain assets and liabilities be
restated on the issuer's balance sheet in 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
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32
and securities markets. Finally, in the event of a default of any such foreign
obligations, it may be more difficult for a Fund to obtain or enforce a
judgment against the issuers of such obligations. See "--High Yield
Securities."
For a further discussion of certain risks involved in investing foreign
securities, particularly of emerging market issuers, see "Additional
Information on Portfolio Instruments and Investment Policies--Foreign
Securities" in the Statement of Additional Information.
FIXED-INCOME SECURITIES. Except to the extent that values are affected
independently by other factors such as developments relating to a specific
issuer, when interest rates decline, the value of a fixed-income portfolio can
generally be expected to rise. Conversely, when interest rates rise, the value
of a fixed-income portfolio can generally be expected to decline. Prices of
longer term securities generally increase or decrease more sharply than those
of shorter term securities in response to interest rate changes, particularly
if such securities were purchased at a discount. Because the High Yield Bond
Fund and the Emerging Markets Debt Fund will invest primarily in fixed-income
securities, the net asset value of these Funds' shares can be expected to
change as general levels of interest rates fluctuate. It should be noted that
the market values of securities rated below investment grade and comparable
unrated securities tend to react less to fluctuations in interest rate levels
than do those of higher-rated securities.
In addition, many fixed-income securities contain call or buy-back features
that permit their issuers to call or repurchase the securities from their
holders. Such securities may present risks based on payment expectations.
Although a Fund would typically receive a premium if an issuer were to redeem a
security, if an issuer exercises such a "call option" and redeems the security
during a time of declining interest rates, a Fund may realize a capital loss on
its investment if the security was purchased at a premium and a Fund may have
to replace the called security with a lower yielding security, resulting in a
decreased rate of return to the Fund.
HIGH YIELD SECURITIES. The High Yield Bond Fund and the Emerging Markets Debt
Fund may invest without limitation in high yield securities. The Asia Growth
Fund may invest without limitation in convertible non-U.S. high yield
securities and up to 10% of its total assets in non-convertible non-U.S. high
yield securities. Under rating agency guidelines, medium- and lower-rated
securities and comparable unrated securities will likely have some quality and
protective characteristics that are outweighed by large uncertainties or major
risk exposures to adverse conditions. Medium and lower rated securities are
considered to have extremely poor prospects of ever attaining any real
investment standing, to have a current identifiable vulnerability to default or
are in default, to be unlikely to have the capacity to pay interest and repay
principal when due in the event of adverse business, financial or economic
conditions, and/or to be in default or not current in the payment of interest
or principal. Such securities are considered speculative with respect to the
issuer's capacity to pay interest and repay principal in accordance with the
terms of the obligations. Accordingly, it is possible that these types of
factors could, in certain instances, reduce the value of securities held by a
Fund with a commensurate effect on the value of the Fund's shares.
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Changes by recognized rating services in their ratings of any fixed-income
security and in the ability of an issuer to make payments of interest and
principal may also affect the value of these investments. A description of the
ratings used by Moody's and S&P is set forth in Appendix A to this Prospectus.
The ratings of Moody's and S&P generally represent the opinions of those
organizations as to the quality of the securities that they rate. Such ratings,
however, are relative and subjective, are not absolute standards of quality,
are subject to change and do not evaluate the market risk or liquidity of the
securities. Ratings of a non-U.S. debt instrument, to the extent that those
ratings are undertaken, are related to evaluations of the country in which the
issuer of the instrument is located. Ratings generally take into account the
currency in which a non-U.S. debt instrument is denominated. Instruments
issued by a foreign government in other than the local currency, for example,
typically have a lower rating than local currency instruments due to the
existence of an additional risk that the government will be unable to obtain
the required foreign currency to service its foreign currency-denominated debt.
In general, the ratings of debt securities or obligations issued by a non-U.S.
public or private entity will not be higher than the rating of the currency or
the foreign currency debt of the central government of the country in which the
issuer is located, regardless of the intrinsic creditworthiness of the issuer.
The secondary markets for high yield securities are not as liquid as the
secondary markets for higher rated securities. The secondary markets for high
yield securities are concentrated in relatively few market makers and
participants in the market are mostly institutional investors, including
insurance companies, banks, other financial institutions and mutual funds.
These factors may have an adverse effect on the ability of a Fund holding such
securities to dispose of particular portfolio investments at fair value, may
adversely affect the Fund's net asset value per share and may limit the ability
of such a Fund to obtain accurate market quotations for purposes of valuing
securities and calculating net asset value. If a Fund is not able to obtain
precise or accurate market quotations for a particular security, it will become
more difficult for the Board of Directors to value such Fund's portfolio
securities, and the Directors may have to use a greater degree of judgment in
making such valuations. The secondary markets for high yield securities may
contract due to adverse economic conditions or for other reasons relating to or
independent of any specific adverse changes in the condition of a particular
issuer and, as a result, certain liquid securities in a Fund's portfolio may
become illiquid and the proportion of the Fund's assets invested in illiquid
securities may significantly increase.
Prices for high yield securities may be affected by legislative and regulatory
developments. These laws could adversely affect a Fund's net asset value and
investment practices, the secondary market for high yield securities, the
financial condition of issuers of these securities and the value of outstanding
high yield securities. For example, federal legislation requiring the
divestiture by federally insured savings and loan associations of their
investments in high yield bonds and limiting the deductibility of interest by
certain corporate issuers of high yield bonds adversely affected the market in
recent years.
HIGH YIELD CORPORATE SECURITIES. While the market values of securities rated
below investment grade and comparable unrated securities tend to react less to
fluctuations in interest rate levels than do those of higher-rated securities,
the market values of certain of
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34
these securities also tend to be more sensitive to individual corporate
developments and changes in economic conditions than higher-rated securities.
In addition, such securities present a higher degree of credit risk. Issuers of
these securities are often highly leveraged and may not have more traditional
methods of financing available to them, so that their ability to service their
debt obligations during an economic downturn or during sustained periods of
rising interest rates may be impaired. The risk of loss due to default by such
issuers is significantly greater than with investment grade securities because
such securities generally are unsecured and frequently are subordinated to the
prior payment of senior indebtedness. A Fund also may incur additional expenses
to the extent that it is required to seek recovery upon a default in the
payment of principal or interest on its portfolio holdings.
The development of a market for high yield corporate securities generally, and
non-U.S. securities in particular, is relatively new and may undergo
significant changes in the future.
High yield corporate securities in which the applicable Funds may invest will
generally be unsecured. Most of the debt securities will bear interest at fixed
rates but a Fund may also invest in securities with variable rates of interest
or which involve equity features, such as contingent interest or participations
based on revenues, sales or profits (i.e., interest or other payments, often in
addition to a fixed rate of return, that are based on the borrower's attainment
of specified levels of revenues, sales or profits and thus enable the holder of
the security to share in the potential success of the venture).
HIGH YIELD FOREIGN SOVEREIGN DEBT SECURITIES. Investing in fixed and floating
rate high yield foreign sovereign debt securities will expose a Fund to the
direct or indirect consequences of political, social or economic changes in the
countries that issue the securities. See "--Foreign Securities" above. The
ability and willingness of sovereign obligors in developing and emerging market
countries or the governmental authorities that control repayment of their
external debt to pay principal and interest on such debt when due may depend on
general economic and political conditions within the relevant country.
Countries such as those in which a Fund may invest have historically
experienced, and may continue to experience, high rates of inflation, high
interest rates, exchange rate trade difficulties and extreme poverty and
unemployment. Many of these countries are also characterized by political
uncertainty or instability. Additional factors which may influence the ability
or willingness to service debt include, but are not limited to, a country's
cash flow situation, the availability of sufficient foreign exchange on the
date a payment is due, the relative size of its debt service burden to the
economy as a whole, and its government's policy towards the International
Monetary Fund, the World Bank and other international agencies.
The ability of a foreign sovereign obligor to make timely payments on its
external debt obligations will also be strongly influenced by the obligor's
balance of payments, including export performance, its access to international
credits and investments, fluctuations in interest rates and the extent of its
foreign reserves. A country whose exports are concentrated in a few commodities
or whose economy depends on certain strategic imports could be vulnerable to
fluctuations in international prices of these commodities or imports. To the
extent that a country receives payment for its exports in currencies other than
dollars, its ability to make debt payments denominated in dollars could be
adversely affected. If a foreign sovereign
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obligor cannot generate sufficient earnings from foreign trade to service its
external debt, it may need to depend on continuing loans and aid from foreign
governments, commercial banks and multilateral organizations, and inflows of
foreign investment. The commitment on the part of these foreign governments,
multilateral organizations and others to make such disbursements may be
conditioned on the government's implementation of economic reforms and/or
economic performance and the timely service of its obligations. Failure to
implement such reforms, achieve such levels of economic performance or repay
principal or interest when due may result in the cancellation of such third
parties' commitments to lend funds, which may further impair the obligor's
ability or willingness to timely service its debts. The cost of servicing
external debt will also generally be adversely affected by rising international
interest rates, because many external debt obligations bear interest at rates
which are adjusted based upon international interest rates. The ability to
service external debt will also depend on the level of the relevant
government's international currency reserves and its access to foreign
exchange. Currency devaluations may affect the ability of a sovereign obligor
to obtain sufficient foreign exchange to service its external debt.
As a result of the foregoing or other factors, a governmental obligor may
default on its obligations. If such an event occurs, a Fund may have limited
legal recourse against the issuer and/or guarantor. Remedies must, in some
cases, be pursued in the courts of the defaulting party itself, and the ability
of the holder of foreign sovereign debt securities to obtain recourse may be
subject to the political climate in the relevant country. In addition, no
assurance can be given that the holders of commercial bank debt will not
contest payments to the holders of other foreign sovereign debt obligations in
the event of default under their commercial bank loan agreements.
Certain debt obligations, customarily referred to as "Brady Bonds," are created
through the exchange of existing commercial bank loans to foreign entities for
new obligations in connection with debt restructuring under a plan introduced
by former U.S. Secretary of the Treasury, Nicholas F. Brady (the "Brady Plan").
Brady Bonds have been issued only recently, and, accordingly, do not have a
long payment history. They may be fully or partially collateralized or
uncollateralized and issued in various currencies (although most are U.S.
dollar denominated) and they are actively traded in the over-the-counter
secondary market. U.S. dollar denominated, collateralized Brady Bonds, which
may be fixed rate par bonds or floating rate discount bonds, are generally
collateralized in full as to principal due at maturity by U.S. Treasury zero
coupon obligations which have the same maturity as the Brady Bonds. Certain
interest payments on these Brady Bonds may be collateralized by cash or
securities in an amount that, in the case of fixed rate bonds, is typically
equal to between 12 and 18 months of rolling interest payments or, in the case
of floating rate bonds, initially is typically equal to between 12 and 18
months rolling interest payments based on the applicable interest rate at that
time and is adjusted at regular intervals thereafter with the balance of
interest accruals in each case being uncollateralized. Payment of interest and
(except in the case of principal collateralized Brady Bonds) principal on Brady
Bonds with no or limited collateral depends on the willingness and ability of
the foreign government to make payment. In the event of a default on
collateralized Brady Bonds for which obligations are accelerated, the
collateral for the payment of principal will not be distributed to investors,
nor will such obligations be sold and the proceeds distributed. The collateral
will be held by the collateral
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agent to the scheduled maturity of the defaulted Brady Bonds, which will
continue to be outstanding, at which time the face amount of the collateral
will equal the principal payments which would have then been due on the Brady
Bonds in the normal course. Based upon current market conditions, a Fund would
not intend to purchase Brady Bonds which, at the time of investment, are in
default as to payments. However, in light of the residual risk of the Brady
Bonds and, among other factors, the history of default with respect to
commercial bank loans by public and private entities of countries issuing Brady
Bonds, investments in Brady Bonds are to be viewed as speculative. A
substantial portion of the Brady Bonds and other sovereign debt securities in
which the High Yield Bond Fund and Emerging Markets Debt Fund invest are likely
to be acquired at a discount, which involves certain considerations discussed
below under "Dividends, Distributions and Taxes."
Sovereign obligors in developing and emerging market countries are among the
world's largest debtors to commercial banks, other governments, international
financial organizations and other financial institutions. These obligors have
in the past experienced substantial difficulties in servicing their external
debt obligations, which led to defaults on certain obligations and the
restructuring of certain indebtedness. Restructuring arrangements have
included, among other things, reducing and rescheduling interest and principal
payments by negotiating new or amended credit agreements or converting
outstanding principal and unpaid interest to Brady Bonds, and obtaining new
credit to finance interest payments. Holders of certain foreign sovereign debt
securities may be requested to participate in the restructuring of such
obligations and to extend further loans to their issuers. There can be no
assurance that the Brady Bonds and other foreign sovereign debt securities in
which the Funds may invest will not be subject to similar restructuring
arrangements or to requests for new credit which may adversely affect a Fund's
holdings. Furthermore, certain participants in the secondary market for such
debt may be directly involved in negotiating the terms of these arrangements
and may therefore have access to information not available to other market
participants.
For a further discussion of certain risks involved in investing in foreign
securities, particularly of emerging market issuers, see "Additional
Information on Portfolio Instruments and Investment Policies--Foreign
Securities" in the Statement of Additional Information.
INVESTMENT FUNDS. Certain of the Funds may invest in unaffiliated investment
funds which invest principally in securities in which that Fund is authorized
to invest. Under the 1940 Act, the Fund may invest a maximum of 10% of its
total assets in the securities of other investment companies. In addition,
under the 1940 Act, not more than 5% of the Fund's total assets may be invested
in the securities of any one investment company. The Money Market Fund will
only invest in other money market funds which are subject to the requirements
of Rule 2a-7 under the 1940 Act and which are considered to present minimal
credit risks. To the extent a Fund invests in other investment funds, the
Fund's shareholders will incur certain duplicative fees and expenses, including
investment advisory fees. A Fund's investment in certain investment funds will
result in special U.S. Federal income tax consequences described below under
"Dividends, Distributions and Taxes."
BORROWING. Each of the Funds may borrow in certain limited circumstances. See
"Investment Limitations." Borrowing creates an opportunity for increased
return, but, at the
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same time, creates special risks. For example, borrowing may exaggerate changes
in the net asset value of a Fund's shares and in the return on the Fund's
portfolio. Although the principal of any borrowing will be fixed, a Fund's
assets may change in value during the time the borrowing is outstanding. A Fund
may be required to liquidate portfolio securities at a time when it would be
disadvantageous to do so in order to make payments with respect to any
borrowing, which could affect SBAM's or SBAM AP's strategy and the ability of
the Fund to comply with certain provisions of the Internal Revenue Code of
1986, as amended (the "Code") in order to provide "pass through" tax treatment
to shareholders. Furthermore, if a Fund were to engage in borrowing, an
increase in interest rates could reduce the value of the Fund's shares by
increasing the Fund's interest expense.
NON-DIVERSIFICATION. The Emerging Markets Debt Fund and the Asia Growth Fund
are classified as non-diversified investment companies under the 1940 Act,
which means that each Fund is not limited by the 1940 Act in the proportion of
its assets that may be invested in the obligations of a single issuer. Each
Fund, however, intends to comply with the diversification requirements imposed
by the Code for qualification as a regulated investment company. To the extent
a Fund invests a greater proportion of its assets in the securities of a
smaller number of issuers, the Fund may be more susceptible to any single
economic, political or regulatory occurrence than a more diversified fund and
may be subject to greater risk of loss with respect to its portfolio
securities. See "Dividends, Distributions and Taxes" and "Investment
Limitations."
DERIVATIVES. Certain of the Funds may be authorized to use various investment
strategies described below to hedge market risks (such as broad or specific
market movements, interest rates and currency exchange rates), to manage the
effective maturity or duration of debt instruments held by a Fund, or to seek to
increase a Fund's income or gain. The description in this Prospectus of each
Fund indicates which, if any, of these types of transactions may be used by that
Fund. Although these strategies are regularly used by some investment companies
and other institutional investors, it is not presently anticipated that any of
these strategies will be used to a significant degree by any Fund unless
otherwise specifically indicated in the description of the particular Fund
contained in this Prospectus. Over time, however, techniques and instruments may
change as new instruments and strategies are developed or regulatory changes
occur.
Subject to the constraints described above, a Fund may (if and to the extent so
authorized) purchase and sell interest rate, currency or stock or bond index
futures contracts and enter into currency forward contracts and currency swaps;
purchase and sell (or write) exchange listed and over-the-counter put and call
options on securities, Loan Participations and Assignments, currencies, futures
contracts, indices and other financial instruments, and a Fund may enter into
interest rate transactions, equity swaps and related transactions and other
similar transactions which may be developed to the extent the investment
manager determines that they are consistent with the applicable Fund's
investment objective and policies and applicable regulatory requirements
(collectively, these transactions are referred to in this Prospectus as
"Derivatives"). A Fund's interest rate transactions may take the form of swaps,
caps, floors and collars, and a Fund's currency transactions may take the form
of currency
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forward contracts, currency futures contracts, currency swaps and options on
currencies or currency futures contracts.
Derivatives may be used to attempt to protect against possible changes in the
market value of securities held or to be purchased for a Fund's portfolio
resulting from securities markets or currency exchange rate fluctuations, to
protect a Fund's unrealized gains in the value of its securities, to facilitate
the sale of those securities for investment purposes, to manage the effective
maturity or duration of a Fund's portfolio or to establish a position in the
derivatives markets as a temporary substitute for purchasing or selling
particular securities or to seek to enhance a Fund's income or gain. A Fund may
use any or all types of Derivatives which it is authorized to use at any time;
no particular strategy will dictate the use of one type of transaction rather
than another, as use of any authorized Derivative will be a function of
numerous variables, including market conditions. The ability of a Fund to
utilize Derivatives successfully will depend on, in addition to the factors
described above, the investment manager's ability to predict pertinent market
movements, which cannot be assured. These skills are different from those
needed to select a Fund's portfolio securities. None of the Funds is a
"commodity pool" (i.e., a pooled investment vehicle which trades in commodity
futures contracts and options thereon and the operator of which is registered
with the CFTC), and Derivatives involving futures contracts and options on
futures contracts will be purchased, sold or entered into only for bona fide
hedging purposes, provided that a Fund may enter into such transactions for
purposes other than bona fide hedging if, immediately thereafter, the sum of
the amount of its initial margin and premiums on open contracts and options
would not exceed 5% of the liquidation value of the Fund's portfolio, after
taking into account unrealized profits and losses on existing contracts
provided, further, that, in the case of an option that is in-the-money, the
in-the-money amount may be excluded in calculating the 5% limitation. The use
of certain Derivatives in certain circumstances will require that a Fund
segregate cash, liquid high grade debt obligations or other assets to the
extent a Fund's obligations are not otherwise "covered" through ownership of
the underlying security, financial instrument or currency. Derivatives involve
special risks, including possible default by the other party to the
transaction, illiquidity and, to the extent the investment manager's view as to
certain market movements is incorrect, the risk that the use of Derivatives
could result in significantly greater losses than if it had not been used. Use
of put and call options could result in losses to a Fund, force the purchase or
sale of portfolio securities at inopportune times or for prices higher or lower
than current market values, or cause a Fund to hold a security it might
otherwise sell. The use of currency transactions could result in a Fund
incurring losses as a result of the imposition of exchange controls, suspension
of settlements, or the inability to deliver or receive a specified currency in
addition to exchange rate fluctuations. The use of options and futures
transactions entails certain special risks. In particular, the variable degree
of correlation between price movements of futures contracts and price movements
in the related portfolio position of a Fund could create the possibility that
losses on the Derivative will be greater than gains in the value of the Fund's
position. In addition, futures and options markets could be illiquid in some
circumstances and certain over-the-counter options could have no markets. A
Fund might not be able to close out certain positions without incurring
substantial losses. To the extent a Fund utilizes futures and options
transactions for hedging, such transactions should tend to minimize the risk of
loss due to a decline in the value of the hedged position and, at the same
time, limit any potential
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gain to the Fund that might result from an increase in value of the position.
Finally, the daily variation margin requirements for futures contracts create a
greater ongoing potential financial risk than would purchases of options, in
which case the exposure is limited to the cost of the initial premium and
transaction costs. Losses resulting from the use of Derivatives will reduce a
Fund's net asset value, and possibly income, and the losses may be
significantly greater than if Derivatives had not been used. Additional
information regarding the risks and special considerations associated with
Derivatives appears in Appendix B to this Prospectus and the Statement of
Additional Information.
The degree of a Fund's use of Derivatives may be limited by certain provisions
of the Code. See "Dividends, Distributions and Taxes."
PORTFOLIO TURNOVER. Purchases and sales of portfolio securities may be made as
considered advisable by the investment manager in the best interests of the
shareholders. Each Fund intends to limit portfolio trading to the extent
practicable and consistent with its investment objectives. Each Fund's
portfolio turnover rate may vary from year to year, as well as within a year.
The High Yield Bond Fund and the Emerging Markets Debt Fund each anticipates
that its annual portfolio turnover rate generally will not exceed 150% and the
Asia Growth Fund anticipates that its annual portfolio turnover rate generally
will not exceed 100%. However, the expected portfolio rates may be exceeded if
conditions warrant. Short-term gains realized from portfolio transactions are
taxable to shareholders as ordinary income. In addition, higher portfolio
turnover rates can result in corresponding increases in portfolio transaction
costs for a Fund.
With respect to the Money Market Fund, SBAM seeks to enhance the Fund's yield
by taking advantage of yield disparities or other factors that occur in the
money market. For example, market conditions frequently result in similar
securities trading at different prices. The Money Market Fund may dispose of
any portfolio security prior to its maturity if such disposition and
reinvestment of the proceeds are expected to enhance yield consistent with
SBAM's judgment as to a desirable portfolio maturity structure or if such
disposition is believed to be advisable due to other circumstances or
considerations. Subsequent to its purchase, a portfolio security may be
assigned a lower rating or cease to be rated. Such an event would not require
the disposition of the instrument, but SBAM will consider such an event in
determining whether the Fund should continue to hold the security. The policy
of the Money Market Fund regarding dispositions of portfolio securities and its
policy of investing in securities deemed to have maturities of thirteen months
or less will result in high portfolio turnover. A higher rate of portfolio
turnover results in increased transaction costs to the Fund in the form of
dealer spreads. See "Portfolio Transactions" in the Statement of Additional
Information.
INVESTMENT LIMITATIONS
The following investment restrictions and certain of those described in the
Statement of Additional Information are fundamental policies applicable to the
individual Funds which may be changed only when permitted by law and approved
by the holders of a majority of each Fund's outstanding voting securities, as
defined in the 1940 Act. Except for the investment
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restrictions set forth below and in the Statement of Additional Information and
each Fund's investment objective, the other policies and percentage limitations
referred to in this Prospectus and in the Statement of Additional Information
are not fundamental policies of the Funds and may be changed by the applicable
Fund's Board of Directors without shareholder approval.
If a percentage restriction on investment or use of assets set forth below is
adhered to at the time a transaction is effected, later changes in percentages
resulting from changing values will not be considered a violation.
MONEY MARKET FUND
The Money Market Fund may not:
(1) invest more than 5% of the current value of its total assets in
the securities of any one issuer, other than obligations issued or
guaranteed by the U.S. government, its agencies or instrumentalities;
however, up to 25% of the value of the total assets of the Fund may be
invested without regard to this limitation;
(2) purchase any securities which would cause more than 25% of the
value of its total assets at the time of such purchase to be invested
in securities of one or more issuers conducting their principal
business activities in the same industry, provided that there is no
limitation with respect to investment in obligations issued or
guaranteed by the U.S. government, its agencies or instrumentalities,
with respect to bank obligations or with respect to repurchase
agreements collateralized by any of such obligations;
(3) borrow money except as a temporary measure from banks for
extraordinary or emergency purposes, and in no event in excess of 15%
of the value of its total assets, except that for the purpose of this
restriction, short-term credits necessary for settlement of securities
transactions are not considered borrowings (the Fund will not purchase
any securities at any time while such borrowings exceed 5% of the
value of its total assets); or
(4) pledge, hypothecate, mortgage or otherwise encumber its assets in
excess of 20% of the value of its total assets, and then only to
secure borrowings permitted by (3) above.
With respect to investment limitation (1), the Fund intends (as a matter of
non-fundamental policy) to limit investments in the securities of any single
issuer (other than securities issued or guaranteed by the U.S. government, its
agencies or instrumentalities) to not more than 5% of the Fund's total assets
at the time of purchase, provided that the Fund may invest up to 25% of its
total assets in the securities of a single issuer for a period of up to three
Business Days.
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HIGH YIELD BOND FUND, EMERGING MARKETS DEBT FUND AND ASIA GROWTH FUND
The High Yield Bond Fund, Emerging Markets Debt Fund and Asia Growth Fund may
not:
(1) With respect to the High Yield Bond Fund only, invest more
than 5% of the current value of its total assets in the securities of
any one issuer, other than obligations issued or guaranteed by the
U.S. government, its agencies or instrumentalities; however, up to 25%
of the value of the total assets of the Fund may be invested without
regard to this limitation, so long as no more than 25% of its total
assets are invested in the securities of any one issuer;
(2) borrow money, except for temporary or emergency purposes
and then not in excess of 5% of the value of the total assets of the
applicable Fund at the time the borrowing is made, except that for the
purpose of this restriction, short-term credits necessary for
settlement of securities transactions are not considered borrowings
(no Fund will purchase additional securities at any time its
borrowings exceed 5% of total assets); or
(3) invest more than 25% of the total assets of each Fund in
the securities of issuers having their principal activities in any
particular industry, except for obligations issued or guaranteed by
the U.S. government, its agencies or instrumentalities or by any
state, territory or any possession of the United States or any of
their authorities, agencies, instrumentalities or political
subdivisions, or with respect to repurchase agreements collateralized
by any of such obligations (for purposes of this restriction,
supranational issuers will be considered to comprise an industry as
will each foreign government that issues securities purchased by a
Fund).
For purposes of investment limitations (1) and (3) above, both the
borrower under a Loan and the Lender selling a Participation will be
considered an "issuer." See "Additional Investment Activities and
Risk Factors -- Loan Participants and Assignments."
PURCHASE AND REDEMPTION OF SHARES
NET ASSET VALUE
For the purpose of pricing purchase and redemption orders, the net asset value
per share of each Fund is calculated separately and is determined for each Fund
(other than the Money Market Fund) once daily as of the close of regularly
scheduled trading on the New York Stock Exchange ("NYSE") (normally 4:00 p.m.
(New York time)). The net asset value per share of the Money Market Fund is
determined twice daily, once at 12:00 noon (New York time) and again at 4:00
p.m. (New York time). With respect to each Fund, such calculation is determined
on each day that the NYSE is open for trading, i.e., Monday through Friday,
except for New Year's Day, President's Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day, and the
preceding Friday or subsequent Monday when one of those holidays falls on a
Saturday or Sunday, respectively.
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Net asset value per share of each Fund is calculated by dividing the value of
the Fund's securities and other assets, less liabilities, by the number of
shares outstanding. In calculating net asset value, all portfolio securities
will be valued at market value when there is a reliable market quotation
available for the securities and otherwise pursuant to procedures adopted by
the applicable Fund's Board of Directors. Securities that are primarily traded
on foreign exchanges generally are valued at the preceding closing values of
such securities on their respective exchanges, except that when an occurrence
subsequent to the time a value was so established is likely to have changed
such value, then the fair value of those securities will be determined by
consideration of other factors by or under the direction of the applicable
Fund's Board of Directors. Securities may be valued by independent pricing
services which use prices provided by market-makers or estimates of market
values obtained from yield data relating to instruments or securities with
similar characteristics. In valuing a Fund's assets, any assets or liabilities
initially expressed in terms of a foreign currency are converted to U.S. dollar
equivalents at the then current exchange rate. Corporate actions by issuers of
foreign securities held by the Fund, such as payment of dividends or
distributions, are reflected in the net asset value on the ex-dividend date
therefor, except that such actions will be so reflected on the date the Fund is
actually advised of the corporate action if subsequent to the ex-dividend date.
Further information regarding the Funds' valuation policies is contained in the
Statement of Additional Information.
The Money Market Fund uses the amortized cost method to value its portfolio
securities and seeks to maintain a stable net asset value of $1.00 per share.
Each of the other Funds values short-term investments that mature in 60 days or
less at amortized cost. If a Fund acquires securities with more than sixty days
remaining to maturity, they will be valued at current market value until the
60th day prior to maturity, and will then be valued on an amortized cost basis
based upon the value on such date unless the Board determines during such
60-day period that this amortized cost basis does not represent fair value. The
amortized cost method involves valuing a security at its cost and amortizing
any discount or premium over the period until maturity, regardless of the
impact of fluctuating interest rates on the market value of the security. See
the Statement of Additional Information for a more complete description of the
amortized cost method.
PURCHASE PROCEDURES
There is no sales charge imposed by the Funds on purchases of shares of the
Funds. The minimum initial investment in the Money Market Fund is $250,000 and
the minimum investment in the other Funds is $1,000,000. Subsequent purchases
may be in any amount. Each Fund reserves the right to waive the minimum initial
investment amount and to reject any purchase order in whole or in part.
Shares of each Fund may be made on any Business Day at the net asset value per
share next determined after receipt of a purchase order. Shares certificates
will not be issued.
Share purchase orders are effective on the date the Fund receives a completed
Account Application Form (and other required documents) and federal funds
become available to a
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Fund in such Fund's account with Investors Bank & Trust Company ("Investors
Bank"), the Funds' transfer agent and dividend-disbursing agent. Federal funds
will not necessarily become available to a Fund and consequently share purchase
orders may not be deemed received on the same date a check is received from the
shareholder.
Purchases of shares of Funds can be made by wire transfer, check or money order
through Investors Bank. The shareholder's bank may impose a charge to execute a
wire transfer. The wiring instructions are:
Investors Bank & Trust Company
ABA #011-001-438
Account Name: Salomon Brothers Institutional Series Funds
Attn: (Name of Fund)
Salomon DDA #: 456789123
Name of Account:
Account #:
Amount of Wire:
Share purchase orders made with a check or money order should be mailed to the
following address:
Investors Bank & Trust Company
P.O. Box 1537
Boston, Massachusetts 02205-1537
Attention: Transfer Agent
For a share purchase order for any Fund other than the Money Market Fund to
become effective on a particular Business Day, prior to 4:00 p.m. (New York
time) (i) in the case of a wire transfer payment, a purchaser must call
(800) 347-6028 to inform Investors Bank 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 Investors Bank, and, in either case, federal funds
must be received by a Fund. If federal funds are received by a Fund that same
day, the order will be effective on that day. If a Fund receives notification
of a wire transfer or a complete share purchase order after 4:00 p.m., or if
federal funds are not received by Investors Bank, such purchase order shall be
executed as of the date that federal funds are actually received. Purchase
orders for shares of the Money Market Fund placed by 12:00 noon (New York time)
on any Business Day will be executed and begin to earn dividends that same day
if payment is received in or converted into federal funds by 12:00 noon (New
York time) that day. Purchase orders received after 12:00 noon (New York time)
or for which payment is received in or converted into federal funds after 12:00
noon (New York time) will be executed and begin to earn dividends on the
following Business Day.
REDEMPTION PROCEDURES
Each Fund will redeem all full and fractional shares of the Fund upon request
of shareholders. The redemption price is the net asset value per share next
determined after receipt by
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Investors Bank of proper notice of redemption as described below. Shareholders
liquidating their holdings will receive upon redemption all dividends
reinvested through the date of redemption. If notice of redemption is received
on any Business Day, the redemption will be effective on the date of receipt.
Payment will ordinarily be made by wire on the next Business Day, but, in any
case, within no more than seven Business Days from the date of receipt. If the
notice is received on a day that is not a Business Day or after the close of
regularly scheduled trading on the NYSE, the redemption notice will be deemed
received as of the next Business Day. The value of shares at the time of
redemption may be more or less than the shareholder's cost depending on the
market value of the securities held by the Fund at such time.
A shareholder may elect to receive payment upon redemption of their shares in
the form of a wire or check. There is no charge imposed by a Fund to redeem
shares of the Fund; however, in the case of a redemption by wire, a
shareholder's bank may impose its own wire transfer fee for receipt of the
wire. Redemptions may be executed in any amount requested by the shareholder up
to the total amount such shareholder has invested in that Fund.
REDEMPTION BY MAIL
A shareholder wishing to redeem shares may do so by mailing proper notice of
redemption directly to Investors Bank. Proper notice of redemption may be
accomplished by written letter requesting redemption. The notice requires the
signature of all persons in whose names the shares are registered, signed
exactly as the shares are registered. In certain instances, Investors Bank may
require additional documents such as, but not limited to, trust instruments,
death certificates, appointments as executor or administrator or certificates
of corporate authority. For shareholders redeeming directly with Investors
Bank, payment will be mailed to the address of record within seven days of
receipt of a proper notice of redemption. Each Fund reserves the right to
reject any order for redemption.
REDEMPTION BY WIRE
To redeem shares by wire, a shareholder or any authorized agent (so designated
on the Account Application Form) must provide Investors Bank with the dollar or
share amount to be redeemed, the account to which the redemption proceeds
should be wired (which account shall have been previously designated by the
shareholder on its Account Application Form), the name of the shareholder and
the shareholder's account number.
A shareholder may change its authorized agent, the address of record or the
account designated to receive redemption proceeds at any time by writing to
Investors Bank with a signature guaranteed by a national bank which is a member
of the Federal Reserve System (not a savings bank) or by a member firm of any
national or regional securities exchange. Notarized signatures are not
sufficient. Further documentation may be required when deemed appropriate by
Investors Bank.
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TELEPHONE REDEMPTION
A shareholder may request redemption by calling Investors Bank at (800)
347-6028. Telephone redemption is made available to shareholders of each Fund
on the Account Application Form. Shareholders should realize that by making
redemption requests by telephone, they may be giving up a measure of security
that they may have if they were to redeem their shares in writing. Each Fund
reserves the right to refuse a telephone request for redemption if it is
believed advisable to do so. Procedures for redeeming shares by telephone may
be modified or terminated at any time by the Funds. Neither the Funds nor
Investors Bank will be liable for following redemption instructions received by
telephone, which are reasonably believed to be genuine, and the shareholder
will bear the risk of loss in the event of unauthorized or fraudulent telephone
instructions. Each Fund will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. Each Fund may be liable for
any losses due to unauthorized or fraudulent instructions in the absence of
following these procedures. Each Fund may require personal identification
codes. Checks will be made payable to the registered shareholders and sent to
the address of record on file with Investors Bank. Payments by wire will only
be made to the registered holders through pre-existing bank account
instructions. No bank instruction changes will be accepted via telephone.
SMALL ACCOUNTS
Under each Fund's present policy, it reserves the right to redeem upon not less
than 30 days' notice, the shares in an account which has a value of $10,000 or
less, if the reduction in value is the result of shareholder redemptions or
transfers and not as a result of a decline in the net asset value. However, any
shareholder affected by the exercise of this right will be allowed to make
additional investments prior to the date fixed for redemption to avoid
liquidation of the account.
EXCHANGE PRIVILEGE
Shareholders of any Fund may exchange all or part of their shares for shares of
any other Fund at the applicable relative net asset value per share. The value
of the shares exchanged must meet the investment minimum of the Fund into which
the investor is exchanging. Shares of a Fund are eligible for exchange 30 days
after purchase.
Each Fund reserves the right to refuse a telephone request for exchange if it
is believed advisable to do so. Procedures for exchanging shares by telephone
may be modified or terminated at any time by a Fund. None of the Funds,
Investors Bank and 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, Investors Bank
and Salomon Brothers may employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. The Funds, Investors Bank
and Salomon
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Brothers may be liable for any losses due to unauthorized or fraudulent
instructions in the absence of following these procedures. When requesting an
exchange by telephone, shareholders should have available the correct account
registration and account numbers or tax identification number.
The exchange of shares of one Fund for shares of another Fund is treated for
federal income tax purposes as a sale of the shares given in exchange by the
shareholder, and an exchanging shareholder may, therefore, realize a taxable
gain or loss in connection with an exchange. See "Dividends, Distributions and
Taxes."
The exchange privilege is available to shareholders residing in any state in
which the shares of the Fund being acquired may be legally sold. Investors Bank
and Salomon Brothers reserve the right to reject any exchange request. The
exchange privilege may be modified or terminated at any time after notice to
shareholders.
DISTRIBUTOR
Salomon Brothers is the Funds' distributor. Salomon Brothers, located at 7
World Trade Center, New York, New York 10048, is a wholly-owned subsidiary of
Salomon Brothers Holding Company Inc, which is in turn wholly-owned by Salomon
Inc. It is also one of the largest securities dealers in the world and a
registered broker-dealer. Salomon Brothers makes markets in securities and
provides a broad range of underwriting, research, and financial advisory
services to governments, international corporations, and institutional
investors. Salomon Brothers from time to time may receive fees from SBAM in
connection with processing and other services that it provides for certain
shareholder accounts.
MANAGEMENT
DIRECTORS AND OFFICERS
The business and affairs of each Fund are managed under the direction of its
Board of Directors. The Board of Directors approves all significant agreements
between a Fund and the persons or companies that furnish services to the Fund,
including agreements with its distributor, investment manager, administrator,
custodian and transfer agent. The day-to-day operations of the Fund are
delegated to the Fund's investment manager and administrator. The Statement of
Additional Information contains general background information regarding the
Directors and officers of each Fund.
INVESTMENT MANAGER
Each Fund retains SBAM as its investment manager under an investment management
contract. SBAM was incorporated in 1987 and together with affiliates in London,
Frankfurt
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47
and Hong Kong, SBAM provides a broad range of fixed-income and equity
investment advisory services to various individuals and institutional clients
located throughout the world, and serves as investment adviser to various
investment companies. As of January 31, 1996, SBAM had approximately $14
billion of assets under management of which approximately $1.15 million is
invested in high yield securities and approximately $459 million of which is
invested in emerging market debt securities. SBAM has access to Salomon Inc's
more than 250 economists, mortgage, bond, sovereign, and equity analysts. The
business address of SBAM is 7 World Trade Center, New York, New York 10048.
Pursuant to a Subadvisory Agreement, SBAM has retained Salomon Brothers Asset
Management Asia Pacific Limited to act as sub-adviser to the Asia Growth Fund,
subject to the supervision of SBAM. Like SBAM, SBAM AP is an indirect,
wholly-owned subsidiary of Salomon Inc. SBAM AP, which was formed in 1995, is a
member of the Hong Kong Securities and Futures Commission and is registered as
an investment adviser in the United States pursuant to the Investment Advisers
Act of 1940, as amended. The business address of SBAM AP is Three Exchange
Square, Hong Kong.
Peter J. Wilby is primarily responsible for the day-to-day management of the
High Yield Bond Fund and the Emerging Markets Debt Fund. Mr. Wilby, who joined
SBAM in 1989, is a Managing Director, responsible for SBAM's investment company
and institutional portfolios which invest in high yield non-U.S. and U.S.
corporate debt securities, high yield foreign sovereign debt securities and
emerging market debt securities. Mr. Wilby is the portfolio manager for Salomon
Brothers High Yield Bond Fund, a portfolio of Series Funds, Global Partners
Income Fund Inc., The Emerging Markets Income Fund Inc., The Emerging Markets
Income Fund II Inc., The Emerging Markets Floating Rate Fund Inc., Salomon
Brothers Worldwide Income Fund Inc, Salomon Brothers High Income Fund Inc, the
high yield and sovereign bond portions of the Salomon Brothers Strategic Bond
Fund, a portfolio of Series Funds and the foreign sovereign debt component of
Salomon Brothers 2008 Worldwide Dollar Government Term Trust Inc.
Giampaolo G. Guarnieri will be primarily responsible for the day-to-day
management of the Asia Growth Fund. Mr. Guarnieri has been employed by SBAM AP
as a Vice President and Senior Portfolio Manager since April 1995. Prior to
joining SBAM AP, Mr. Guarnieri spent five years at Credit Agricole Asset
Management (South East Asia) Limited in Hong Kong, a wholly-owned subsidiary of
the Credit Agricole Group as a senior portfolio manager since 1992 and as head
of direct investment activities prior to that. Mr. Guarnieri is also portfolio
manager of Salomon Brothers Asia Growth Fund, a portfolio of Series Funds.
Subject to policy established by the Board of Directors, which has overall
responsibility for the business and affairs of each Fund, SBAM manages the
investment and reinvestment of each Fund's assets pursuant to the applicable
management contract. SBAM also furnishes office space, personnel and certain
facilities required for the performance by SBAM of certain additional services
provided by it to each Fund under the applicable management contract, including
SEC compliance, supervision of Fund operations and certain administrative and
clerical services, and pays the compensation of the Funds' officers, employees
and directors
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48
affiliated with SBAM. Except for the expenses paid by SBAM that are described
herein, each Fund bears all costs of its operations.
As compensation for its services, the Money Market Fund pays SBAM a monthly
fee at an annual rate of .20% of the Fund's average daily net assets. On
November 16, 1995, the Board approved, subject to shareholder approval, an
increase in the management fee from .10% of the Money Market Fund's average
daily net assets to .20%. The shareholders approved the amendment on March 26,
1996, to become effective as of the date of this Prospectus. SBAM has
voluntarily agreed to reduce or otherwise limit expenses of the money market
Fund (exclusive of taxes, interest and extraordinary expenses such as
litigation and indemnification expenses), on an annualized basis, to .18% of
the Fund's average daily net assets for a period of at least one year from the
date of this Prospectus, and no more than .25% thereafter.
As compensation for its services, the High Yield Bond Fund pays SBAM a monthly
fee at an annual rate of .50% of the Fund's average daily net assets; the
Emerging Markets Debt Fund pays SBAM a monthly fee at an annual rate of .70% of
the Fund's average daily net assets; and the Asia Growth Fund pays SBAM a
monthly fee at an annual rate of .75% of the Fund's average daily net assets.
SBAM will pay SBAM AP, as full compensation for its services under the
Subadvisory Agreement, a portion of its investment management fee. SBAM has
voluntarily agreed to reduce or otherwise limit expenses of the High Yield Bond
Fund, the Emerging Markets Debt Fund and the Asia Growth Fund (exclusive of
taxes, interest and extraordinary expenses such as litigation and
indemnification expenses), on an annualized basis to .55%, .75% and 1.00%,
respectively, of the applicable Fund's average daily net assets.
The services of SBAM and SBAM AP are not deemed to be exclusive, and nothing in
the relevant agreements will prevent either of them or their affiliates from
providing similar services to other investment companies and other clients
(whether or not their investment objectives and policies are similar to those
of any of the Funds) or from engaging in other activities.
Consistent with the Rules of Fair Practice of the National Association of
Securities Dealers Inc. and subject to seeking the most favorable price and
execution available, SBAM and SBAM AP may consider sales of shares of the Funds
as a factor in the selection of brokers to execute portfolio transactions for
the Funds. The Funds may use Salomon Brothers to execute portfolio transactions
when SBAM or SBAM AP believe that the broker's charge for the transaction does
not exceed the usual and customary levels charged by other brokers in
connection with comparable transactions involving similar securities. See the
Statement of Additional Information for a more complete description of the
Funds' policies with respect to portfolio transactions.
PERFORMANCE OF ACCOUNTS
Set forth in the chart below is performance data provided by SBAM AP relating,
for the period from January 1, 1992 to February 28, 1995, to a non-U.S.
collective investment vehicle
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49
(the "Offshore Fund I") managed by the portfolio manager of the Asia Growth
Fund while he was employed by a different investment adviser unaffiliated with
SBAM and, for the period from September 1, 1995 to December 31, 1995, to a
non-U.S. collective investment vehicle managed by the portfolio manager after
commencement of employment with an affiliate of SBAM (the "Offshore Fund II").
Both Offshore Fund I and Offshore Fund II have substantially similar, though not
identical, investment objectives, policies and strategies as those of the Fund.
With respect to Offshore Fund I, the period shown reflects the period for which
the portfolio manager was primarily responsible for the day-to-day management
of the portfolio of Offshore Fund I. During the period shown for Offshore Fund
I, the size of the fund ranged from approximately $45 million to $95 million
and during the period shown for Offshore Fund II, the size of the fund ranged
from approximately $8 millon to $10 million.
The Morgan Stanley Capital International Combined Asia Ex-Japan Index is a
widely recognized market index of Asian country equity issues. The index is
composed of a sample of companies from the following ten countries: Hong Kong,
India, Indonesia, Korea, Malaysia, Pakistan, Philippines, Singapore, Sri Lanka
and Thailand. Constituent stocks are selected for the index on the basis of
industry representation, liquidity and sufficient float. The index is unmanaged
and accordingly, does not reflect the effect of operating expenses, including
advisory fees, transaction costs and other expenses but does reflect
reinvestment of dividends.
The performance data shown below should be read in conjunction with the notes
that follow.
<TABLE>
<CAPTION>
Average
Annual
Total
1/1/95- Return
1/1/92- 1/1/93- 1/1/94- 2/28/95 Total Return 1/1/92-
12/31/92 12/31/93 12/31/94 (annualized) 1/1/92-2/28/95 2/28/95
-------- -------- -------- ------------ -------------- --------
<S> <C> <C> <C> <C> <C> <C>
Offshore Fund I........................ 29.50% 95.05% (13.55)% (5.47)% 106.42% 25.72%
Morgan Stanley Capital International... 18.45 98.80 (18.38) (3.01) 86.42 21.74
Combined Asia Ex-Japan Index
<CAPTION>
9/1/95- [DATES]
12/31/95
(annualized)
------------
<S> <C>
Offshore Fund II.......................
Morgan Stanley Capital International...
Combined Asia Ex-Japan Index
</TABLE>
General. The performance results shown above are based on total returns
reflecting realized and unrealized gains and losses and income, including that
derived from cash positions. Returns are calculated monthly for Offshore Fund I
and Offshore Fund II and are compounded monthly. The investment results are
time-weighted based on market values determined as of the last business day of
each month. The performance results are net of transaction costs and advisory
and other fees incurred and reflect reinvestment of dividends and capital gains
distributions, if any.
The performance results shown above are not performance results for the Asia
Growth Fund, which has no history of operations. The results shown above should
not be deemed to be indicative of future results for the Asia Growth Fund owing
to differences in brokerage commissions and dealer spreads, expenses, including
investment advisory fees, the size of positions taken in relation to fund size,
timing of purchases and sales and market conditions at the time of a
transaction, timing of cash flows and availability of cash for new investments.
Although substantially similar, the investment objectives, policies and
strategies for Offshore Fund I and Offshore Fund II above differ in certain
respects from those of the Asia Growth Fund. Such accounts were managed without
regard to certain tax requirements applicable to U.S. registered investment
companies that limit the proportions of short-term
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50
gains that such companies may realize to maintain their tax status. See
"Dividends, Distributions and Taxes." Accordingly, the performance results
shown above and that of the Asia Growth Fund are expected to differ.
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. INVESTORS SHOULD ALSO BE
AWARE THAT THE USE OF METHODS OF DETERMINING PERFORMANCE DIFFERENT THAN THAT
USED BY SBAM AP WOULD RESULT IN DIFFERENT PERFORMANCE DATA. NO ADJUSTMENT HAS
BEEN MADE FOR ANY INCOME TAXES WHICH ARE PAYABLE ON INCOME DIVIDENDS OR CAPITAL
GAINS DISTRIBUTIONS. THE EFFECT OF TAXES ON ANY INVESTOR WILL DEPEND ON SUCH
INVESTOR'S TAX STATUS. SEE "DIVIDENDS, DISTRIBUTIONS AND TAXES."
ADMINISTRATOR
Each Fund employs Investors Bank, 89 South Street, Boston, Massachusetts 02111,
under an administration agreement to provide certain administrative services
to each Fund. Investors Bank is not involved in the investment decisions made
with respect to the Funds. The services provided by Investors Bank under the
administration agreements include certain accounting, clerical and bookkeeping
services, Blue Sky compliance, corporate secretarial services and assistance in
the preparation and filing of tax returns and reports to shareholders and the
SEC. For its services as administrator, transfer agent and custodian the High
Yield Bond Fund, Emerging Markets Debt Fund and Asia Growth Fund, each Fund
pays Investors Bank a fee at an annual rate of .10% of each Fund's average
daily net assets up to $500 million in net assets and .05% of each Fund's
average daily net assets in excess of $500 million. For its services as
administrator to the Money Market Fund, Investors Bank receives a fee at an
annual rate of .08% of the Fund's average daily net assets.
Investors Bank acts as transfer agent for the High Yield Bond Fund, Emerging
Markets Debt Fund and Asia Growth Fund pursuant to a transfer agency, dividend
disbursing agency and shareholder servicing agency agreement. First Data
Investors Services Group, Inc. ("FDISG"), a subsidiary of First Data
Corporation, which is located at One Exchange Place, Boston, Massachusetts
02109, serves as transfer agent for the Money Market Fund. Each of Investors
Bank and FDISG are responsible for the issuance, transfer and redemption of
shares and the opening and maintenance of shareholder accounts.
EXPENSES
Each Fund's expenses include taxes, interest, fees and salaries of the
directors and officers who are not directors, officers or employees of the
Fund's service contractors, SEC fees, state securities qualification fees,
costs of preparing and printing prospectuses for regulatory purposes and for
distribution to existing shareholders, advisory and administration fees,
charges of the custodian, transfer agent and dividend disbursing agent, certain
insurance premiums, outside auditing and legal expenses, costs of shareholder
reports and shareholder meetings and any extraordinary expenses. Each Fund also
pays for brokerage fees and commissions (if any) in connection with the
purchase and sale of portfolio securities.
<PAGE> 330
51
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Money Market Fund intends to declare as a dividend substantially all of its
net investment income at the close of each Business Day to the Fund's
shareholders of record at 12:00 noon (New York time) on that day, and will pay
such dividends monthly. The High Yield Bond Fund, the Emerging Markets Debt
Fund and the Asia Growth Fund will declare dividends from net investment income
annually and pay them annually.
Net investment income is a Fund's investment company taxable income, as that
term is defined in the Code, determined without regard to the deduction for
dividends paid and excluding any net realized capital gains. For the purpose of
calculating dividends, net investment income shall consist of interest earned,
which includes, where applicable, any discount accredited or premium amortized
to the date of maturity, minus estimated expenses.
Shares of a Fund (other than the Money Market Fund, as described below) are
entitled to dividends declared beginning on the day after the purchase order is
received in good order. Purchase orders for shares of the Money Market Fund for
which payment is received in or converted into federal funds by 12:00 noon (New
York time) on any Business Day will become effective that day and begin to earn
dividends on that day. Purchase orders for shares of the Money Market Fund for
which payment is received in or converted into federal funds after 12:00 noon
(New York time) on any Business Day will become effective that day and begin to
earn dividends on the following Business Day. With respect to the Money Market
Fund, shares redeemed by 12:00 noon (New York time) will accrue dividends
through the day prior to redemption, shares redeemed after 12:00 noon (New York
time) will accrue dividends on the day of redemption. The High Yield Bond Fund,
the Emerging Markets Debt Fund and the Asia Growth Fund will accrue dividends
on settled shares through the day of redemption. Net investment income for a
Saturday, Sunday or holiday will be declared as a dividend on the previous
Business Day.
Net realized short-term capital gains of each Fund, if any, will be distributed
whenever the Directors determine that such distributions would be in the best
interest of shareholders, but in any event at least once a year. Each Fund
distributes annually any net realized long-term capital gains from the sale of
securities (after deducting any net realized losses that may be carried forward
from prior years). The Money Market Fund does not expect to realize any
long-term capital gains.
If, for any full fiscal year, a Fund's total distributions exceed net
investment income and net realized capital gains, the excess distributions
generally will be treated as a tax-free return of capital (up to the amount of
the shareholder's tax basis in his or her shares). The amount treated as a
tax-free return of capital will reduce a shareholder's adjusted basis in his or
her shares. Pursuant to the requirements of the 1940 Act and other applicable
laws, a notice will accompany any distribution paid from sources other than net
investment income. In the event a Fund distributes amounts in excess of its net
investment income and net realized capital
<PAGE> 331
52
gains, such distributions may have the effect of decreasing the Fund's total
assets, which may increase the Fund's expense ratio.
Dividend and/or capital gain distributions will be reinvested automatically in
additional shares of a Fund at net asset value and such shares will be
automatically credited to a shareholder's account, unless a shareholder elects
to receive either dividends or capital gains distributions in cash. If such
distributions are to be sent to an address other than the address on record or
the account designated to receive redemption proceeds a signature guarantee is
required. See "Redemptions Procedures" above for instructions concerning
signature guarantees. Such signature must be signed exactly as registered with
Investors Bank. Shareholders may change the distribution option at any time by
notification to Investors Bank prior to the record date of any such dividend or
distribution.
If a shareholder elects to receive dividends and/or distributions in cash and
the check cannot be delivered to a shareholder due to an invalid address or
otherwise remains uncashed by the shareholder for a period of six months, each
Fund reserves the right to reinvest the dividend and/or distribution in a
shareholder's account at the then-current net asset value and to convert the
shareholder's election to automatic reinvestment in shares of that Fund.
TAXES
FEDERAL INCOME TAX MATTERS. Each Fund intends to qualify and elect to be
treated as a regulated investment company under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"). If it so qualifies, a Fund will
not be subject to U.S. federal income taxes on its net investment income (i.e.,
its investment company taxable income, as that term is defined in the Code,
determined without regard to the deduction for dividends paid) and net capital
gain (i.e., the excess of a Fund's net long-term capital gain over its net
realized short-term capital loss), if any, that it distributes to its
shareholders in each taxable year, provided that it distributes to its
shareholders at least 90% of its net investment income for such taxable year.
If in any year a Fund fails to qualify as a regulated investment company, the
Fund would incur regular corporate federal income tax on its taxable income for
that year and be subject to certain additional distribution requirements upon
requalification.
Each Fund will be subject to federal corporate income tax (currently at a
maximum rate of 35%) on any undistributed income other than tax-exempt income
from municipal obligations and to alternative minimum tax (currently at a
maximum rate of 28%) on alternative minimum taxable income, which includes
interest income on certain "private activity" obligations that is otherwise
exempt from tax.
Each Fund is subject to a nondeductible 4% excise tax calculated as a
percentage of certain undistributed amounts of ordinary income and net realized
capital gains. To the extent possible, each Fund intends to make sufficient
distributions to avoid the application of both the corporate income and excise
taxes.
<PAGE> 332
53
All dividends and distributions to shareholders of a Fund of investment company
taxable income will be taxable to shareholders whether paid in cash or
reinvested in additional shares. For federal income tax purposes, distributions
of net investment income which includes the excess of the Fund's net realized
short-term capital gains realized over net long-term capital losses, are
taxable to shareholders as ordinary income.
Distributions of "net capital gains" designated by a Fund as "capital gain
dividends" will be taxable as long-term capital gains, whether paid in cash or
additional shares, regardless of how long the shares have been held by such
shareholders, and such distributions will not be eligible for the dividends
received deduction. A portion of a Fund's dividends may qualify for the
dividends received deduction available to corporations. In general, the maximum
federal income tax rate imposed on individuals with respect to capital gain
dividends will be limited to 28%, whereas the maximum federal income tax rate
imposed on individuals with respect to ordinary income (and short-term capital
gains, which currently are taxed at the same rates as ordinary income) will be
39.6%. With respect to corporate taxpayers, long-term capital gains currently
are taxed at the same federal income tax rates as ordinary income and
short-term capital gains. Investors should consider the tax implications of
buying shares shortly before the record date of a distribution because
distributions of net capital gain will be taxable even though the net asset
value of shares of a Fund is reduced by the distribution.
Funds investing in foreign securities or currencies may be required to pay
withholding or other taxes to foreign governments on dividends and interest.
The investment yield of a Fund investing in foreign securities or currencies
will be reduced by these foreign taxes. Shareholders will bear the cost of any
foreign taxes but may not be able to claim a foreign tax credit or deduction
for these foreign taxes. In addition, a Fund investing in securities of passive
foreign investment companies may be subject to U.S. federal income taxes (and
interest on such taxes) as a result of such investments. The investment yield
of a Fund making such investments will be reduced by these taxes and interest.
Shareholders will bear the cost of these taxes and interest, but will not be
able to claim a deduction for these amounts.
The redemption, sale or exchange of shares of one Fund for shares of another is
a taxable event and may result in a gain or loss. Gain or loss, if any,
recognized on the sale or other disposition of shares of a Fund will be taxed
as capital gain or loss if the shares are capital assets in the shareholder's
hands. Generally, a shareholder's gain or loss will be a long-term gain or loss
if the shares have been held for more than one year. If a shareholder sells or
otherwise disposes of shares of a Fund before holding them for more than six
months, any loss on the sale or other disposition of such shares shall be
treated as a long-term capital loss to the extent of any capital gain dividends
received by the shareholder with respect to such shares. A loss realized on a
sale or exchange of shares may be disallowed if other shares are acquired
within a 61-day period beginning 30 days before and ending 30 days after the
date that the shares are disposed of.
Generally, shareholders will be taxable on dividends or distributions in the
year of receipt. However, if a Fund declares a dividend or distribution in
October, November or December to shareholders of record on a specified date in
such a month which is actually paid during the
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54
following January, it will be deemed to have been received by the shareholders
and paid by the Fund no later than December 31 of the year in which the
dividend or distribution is declared.
A Fund may make investments that produce income that is not matched by a
corresponding cash distribution to the Fund, such as investments in Pay-In-Kind
bonds or in obligations such as certain Brady Bonds or zero coupon securities
having original issue discount (i.e., an amount equal to the excess of the
stated redemption price of the security at maturity over its issue price), or
market discount (i.e., an amount equal to the excess of the stated redemption
price of the security over the basis of such bond immediately after it was
acquired) if the Fund elects to accrue market discount on a current basis. In
addition, income may continue to accrue for federal income tax purposes with
respect to a non-performing investment. Any such income would be treated as
income earned by a Fund and therefore would be subject to the distribution
requirements of the Code. Because such income may not be matched by a
corresponding cash distribution to a Fund, such Fund may be required to borrow
money or dispose of other securities to be able to make distributions to its
investors. The extent to which a Fund may liquidate securities at a gain may be
limited by the requirement that less than 30% of its annual gross income be
derived from the sale or other disposition of securities and certain other
investments held for less than three months (the "short-short test"). In
addition, if an election is not made to currently accrue market discount with
respect to a market discount bond, all or a portion of any deduction or any
interest expense incurred to purchase or hold such bond may be deferred until
such bond is sold or otherwise disposed.
Each Fund may be required to withhold federal income tax at a rate of 31%
("backup withholding") from dividends (other than exempt-interest dividends)
and redemption proceeds paid to noncorporate shareholders. This tax may be
withheld from dividends if (i) the payee fails to furnish the Fund with the
payee's correct taxpayer identification number (e.g., an individual's social
security number), (ii) the Internal Revenue Service ("IRS") notifies the Fund
that the payee has failed to report properly certain interest and dividend
income to the IRS and to respond to notices to that effect, or (iii) when
required to do so, the payee fails to certify that he or she is not subject to
backup withholding. Redemption proceeds may be subject to withholding under the
circumstances described in (i) above. Backup withholding is not an additional
tax and any amounts withheld may be credited against the shareholder's federal
income tax liability.
HONG KONG TAX MATTERS. The Asia Growth Fund would be subject to Hong Kong
profits tax, which is currently charged at the rate of 16.5% for corporations
and 15% for individuals, if, by virtue of the fact that SBAM AP is located in
Hong Kong, (a) the Fund or its agents were deemed to carry on a trade,
profession or business in Hong Kong and (b) profits from that trade, profession
or business were to arise in or be derived from Hong Kong. Hong Kong profits
tax will not be payable in respect of profits from the sale of shares and other
securities transacted outside Hong Kong, interest arising or derived from
outside Hong Kong and profits in the nature of capital gains. The sale of
securities will not be treated as the sale of capital assets if the profit or
loss from such sale is regarded as attributable to a trade or business carried
on in Hong Kong. The Asia Growth Fund does not currently believe that it will
be subject to Hong Kong profits tax.
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55
Dividends which the Fund pays to its shareholders are not taxable in Hong Kong
(whether through withholding or otherwise) under current legislation and
practice. No Hong Kong stamp duty will be payable in respect of transactions in
shares of the Asia Growth Fund provided that the register of shareholders is
maintained outside of Hong Kong.
Depending on the residence of the shareholder for tax purposes, distributions
may also be subject to state and local taxes or withholding taxes. Statements
detailing the tax status of each shareholders' dividends and distributions will
be mailed annually.
The foregoing is intended to be general information to shareholders and
potential investors in a Fund and does not constitute tax advice. Shareholders
and potential investors should consult their own tax advisers regarding
federal, state, local and foreign tax consequences of ownership of shares in a
Fund.
ACCOUNT SERVICES
Shareholders of each Fund will be kept informed through semi-annual reports
showing diversification of investments and other financial data for such Fund.
Annual reports for all Funds will include audited financial statements.
Shareholders of each Fund will receive a Statement of Account following each
share transaction, except for shareholders of the Money Market Fund, who will
receive a Statement of Account at least monthly showing transactions in the
account, the total number of shares owned, and any dividends or distributions
paid. Shareholders can write or call a Fund at the address and telephone number
on the front cover of this Prospectus with any questions relating to their
investment in shares of such Fund.
CAPITAL STOCK
The Institutional Series Funds was incorporated in Maryland on January 19,
1996. The authorized capital stock of the Institutional Series Funds consists
of 10,000,000,000 shares of common stock having a par value of $.001 per share.
Pursuant to the Institutional Series Funds' Articles of Incorporation, the
Board of Directors has authorized the issuance of three series of shares, each
representing shares in one of three separate funds. The High Yield Bond Fund,
the Emerging Markets Debt Fund and the Asia Growth Fund are the currently
existing portfolios of the Institutional Series Funds. The assets of each Fund
are segregated and separately managed. The Institutional Series Funds' Board of
Directors may, in the future, authorize the issuance of additional classes of
capital stock representing shares of additional investment portfolios.
The Money Market Fund, a portfolio of the Series Funds, changed its name from
Salomon Brothers U.S. Treasury Securities Money Market Fund to its current name
on March 26, 1996. The Series Funds was incorporated in Maryland on April 17,
1990. On March 26, 1996, shareholders of the Money Market Fund approved a
change in the Fund's investment objective and policies and certain investment
restrictions to those described herein. The authorized capital stock of the
Series Funds consists of 10,000,000,000 shares of common
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56
stock having a par value of $.001 per share. Pursuant to the Series Funds'
Articles of Incorporation and Articles Supplementary, the Board of Directors
has authorized the issuance of ten series of shares, each representing shares
in one of ten separate funds. In addition to the Money Market Fund, the
portfolios of the Series Funds include Salomon Brothers National Intermediate
Municipal Fund, Salomon Brothers U.S. Government Income Fund, Salomon Brothers
High Yield Bond Fund, Salomon Brothers Strategic Bond Fund, Salomon Brothers
Total Return Fund, Salomon Brothers Asia Growth Fund, Salomon Brothers Cash
Management Fund, Salomon Brothers New York Municipal Bond Fund and Salomon
Brothers New York Municipal Money Market Fund. The assets of each fund are
segregated and separately managed. The Series Funds' Board of Directors may, in
the future, authorize the issuance of additional classes of capital stock
representing shares of additional investment portfolios. As of the date of this
Prospectus, Salomon Brothers Holding Company Inc, the parent company of SBAM,
owns a significant percentage of the outstanding shares of the High Yield Bond
Fund, the Emerging Markets Debt Fund and the Asia Growth Fund, and consequently
is a controlling person of such Funds.
Although each Fund is offering only its own shares, it is possible that a Fund
could become liable for a misstatement in this Prospectus about another Fund.
The Directors of the Institutional Series Funds and the Series Funds have
considered this factor in approving the use of a combined Prospectus.
All shares of each Fund have equal voting rights and will be voted in the
aggregate, and not by series or class, except where voting by series or class
is required by law or where the matter involved affects only one series or
class. Each shareholder is entitled to cast, at all meetings of shareholders,
such number of votes as is equal to the number of full and fractional shares
held by such shareholder. All shares of each Fund will, when issued, be fully
paid and nonassessable. None of the funds will issue any senior securities.
Under the corporate law of Maryland, the state of incorporation of the
Institutional Series Funds and the Series Funds, and the By-Laws of both the
Institutional Series Funds and the Series Funds, neither the Institutional
Series Funds nor the Series Funds is required and does not currently intend to
hold annual meetings of shareholders for the election of directors except as
required under the 1940 Act. A more complete statement of the voting rights of
shareholders is contained in the Statement of Additional Information.
<PAGE> 336
APPENDIX A:
DESCRIPTION OF RATINGS
A DESCRIPTION OF THE RATING POLICIES OF MOODY'S, S&P AND FITCH WITH RESPECT TO
BONDS AND COMMERCIAL PAPER APPEARS BELOW.
MOODY'S INVESTORS SERVICE'S CORPORATE BOND RATINGS
Aaa-Bonds which are rated "Aaa" are judged to be of the best quality and carry
the service fees smallest degree of investment risk. Interest payments are
protected by a large or by an exceptionally stable margin, and principal is
secure. While the various protective elements are likely to change, such
changes as can be visualized are most unlikely to impair the fundamentally
strong position of such issues.
Aa-Bonds which are rated "Aa" are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long-term risks appear
somewhat larger than in Aaa securities.
A-Bonds which are rated "A" possess many favorable investment qualities and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa-Bonds which are rated "Baa" are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba-Bonds which are rated "Ba" are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position,
characterizes bonds in this class.
B-Bonds which are rated "B" generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of maintenance and
other terms of the contract over any long period of time may be small.
Caa-Bonds which are rated "Caa" are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca-Bonds which are rated "Ca" represent obligations which are speculative to a
high degree. Such issues are often in default or have other marked
shortcomings. C-Bonds which are rated
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"C" are the lowest rated class of bonds and issues so rated can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Moody's applies numerical modifiers "1" "2" and "3" to certain of its ratings
classifications. The modifier "1" indicates that the security ranks in the
higher end of its generic rating category; the modifier "2" indicates a
mid-range ranking; and the modifier "3" indicates that the issue ranks in the
lower end of its generic rating category.
STANDARD & POOR'S RATING GROUP CORPORATE BOND RATINGS
AAA-This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to repay principal and
pay interest.
AA-Bonds rated "AA" also qualify as high-quality debt obligations. Capacity to
repay principal and interest is very strong, and differs from "AAA" issues only
in small degree.
A-Bonds rated "A" have a strong capacity to repay principal and pay interest,
although they are somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions than debt in higher-rated categories.
BBB-Bonds rated "BBB" are 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.
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MOODY'S INVESTORS SERVICE'S COMMERCIAL PAPER RATINGS
PRIME-1-Issuers (or related supporting institutions) rated "Prime-1" have a
superior ability for repayment of senior short-term debt obligations. "Prime-1"
repayment ability will often be evidenced by many of the following
characteristics: leading market positions in well-established industries, high
rates of return on funds employed, conservative capitalization structures with
moderate reliance on debt and ample asset protection, broad margins in earnings
coverage of fixed financial charges and high internal cash generation, and
well-established access to a range of financial markets and assured sources of
alternate liquidity.
PRIME-2-Issuers (or related supporting institutions) rated "Prime-2" have a
strong ability for repayment of senior short-term obligations. This will
normally be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratio, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternative liquidity is
maintained.
PRIME-3-Issuers (or related supporting institutions) rated "Prime-3" have an
acceptable ability for repayment of senior short-term obligations. The effect
of industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and the requirement for relatively high financial
leverage. Adequate alternate liquidity is maintained.
NOT PRIME-Issuers rated "Not Prime" do not fall within any of the Prime rating
categories.
STANDARD & POOR'S RATINGS GROUP COMMERCIAL PAPER RATINGS
A-S&P commercial paper rating is a current assessment of the likelihood of
timely repayment of debt having an original maturity of no more than 365 days.
Ratings are graded into several categories, ranging from "A-1" for the highest
quality obligations to "D" for the lowest. The four categories are as follows:
A-1-This highest category indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus (+) sign designation.
A-2-Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1."
A-3-Issues carrying this designation have adequate capacity for timely payment.
They are, however, somewhat more vulnerable to the adverse effects of changes
in circumstances than obligations carrying the higher designations.
B-Issues rated "B" are regarded as having only speculative capacity for timely
payment.
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C-This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D-Debt Rated "D" is in payment default. The "D" rating category is used when
interest payments or principal payments are not made on the date due, even if
the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period.
MOODY'S INVESTORS SERVICE'S MUNICIPAL BOND RATINGS
Aaa-Bonds which are rated Aaa are judged to be of the best quality and carry
the smallest degree of investment risk. Interest payments are protected by a
large or by an exceptionally stable margin, and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of
such issues.
Aa-Bonds which are rated Aa are judged to be of high-quality by all standards.
Together with the Aaa group they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
pursuant which make the long term risks appear somewhat larger than in Aaa
securities.
A-Bonds which are rated A possess many favorable investment qualities and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa-Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Moody's applies numerical modifiers "1", "2" and "3" to certain of its rating
classifications. The modifier "1" indicates that the security ranks in the
higher end of its generic rating category; the modifier "2" indicates a
mid-range ranking; and the modifier "3" indicates that the issue ranks in the
lower end of its generic rating category.
STANDARD & POOR'S MUNICIPAL BOND RATING
AAA-is the highest rating assigned by S&P to a debt obligation and indicates an
extremely strong capacity to pay principal and interest.
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AA-Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong, and in the majority of instances
they differ from AAA issues only in small degrees.
A-Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB-Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds
in this category than for bonds in the A category.
The ratings set forth above may be modified by the addition of a plus or minus
to show relative standing within the major rating categories.
MOODY'S INVESTORS SERVICE'S RATINGS OF STATE AND MUNICIPAL NOTES
MIG-1/VMIG-1-Notes rated MIG-1/VMIG-1 are of the best quality. There is present
strong protection by established cash flows, superior liquidity support or
broad-based access to the market for refinancing.
MIG-2/VMIG-2-Notes which are rated MIG-2/VMIG-2 are of high-quality. Margins of
protection are ample though not so large as in the preceding group.
STANDARD & POOR'S RATINGS OF STATE AND MUNICIPAL NOTES
SP-1-Notes which are rated SP-1 have a very strong or strong capacity to pay
principal and interest. Those issues determined to possess overwhelming safety
characteristics will be given a plus (+) designation.
SP-2-Notes which are rated SP-2 have a satisfactory capacity to pay principal
and interest.
FITCH MUNICIPAL BOND RATING
AAA-Bonds rated AAA by Fitch are considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
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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+.
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.
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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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APPENDIX B:
GENERAL CHARACTERISTICS
AND RISKS OF DERIVATIVES
A detailed discussion of Derivatives (as defined below) that may be used by the
investment manager on behalf of certain Funds follows below. The description in
this Prospectus of each Fund indicates which, if any, of these types of
transactions may be used by that Fund. A Fund will not be obligated, however,
to use any Derivatives and makes no representation as to the availability of
these techniques at this time or at any time in the future. "Derivatives," as
used in this Appendix B, refers to interest rate, currency or stock or bond
index futures contracts, currency forward contracts and currency swaps, the
purchase and sale (or writing) of exchange listed and over-the-counter ("OTC")
put and call options on debt and equity securities, currencies, interest rate,
currency or stock index futures and fixed-income and stock indices and other
financial instruments, entering into various interest rate transactions such as
swaps, caps, floors, collars, entering into equity swaps, caps, floors or
trading in other similar types of instruments.
A Fund's ability to pursue certain of these strategies may be limited by the
Commodity Exchange Act, as amended, applicable regulations of the Commodity
Futures Trading Commission ("CFTC") thereunder and the federal income tax
requirements applicable to regulated investment companies which are not
operated as commodity pools.
GENERAL CHARACTERISTICS OF OPTIONS
Put options and call options typically have structural characteristics and
operational mechanics regardless of the underlying instrument on which they are
purchased or sold. Thus, the following general discussion relates to each of
the particular types of options discussed in greater detail below. In addition,
many Derivatives involving options require segregation of Fund assets in
special accounts, as described below under "Use of Segregated and Other Special
Accounts."
A put option gives the purchaser of the option, upon payment of a premium, the
right to sell, and the writer of the obligation to buy, the underlying
security, index, currency or other instrument at the exercise price. A Fund's
purchase of a put option on a security, for example, might be designed to
protect its holdings in the underlying instrument (or, in some cases, a similar
instrument) against a substantial decline in the market value of such
instrument by giving the Fund the right to sell the instrument at the option
exercised price. A call option, upon payment of a premium, gives the purchaser
of the option the right to buy, and the seller the obligation to sell, the
underlying instrument at the exercise price. A Fund's purchase of a call option
on a security, financial futures contract, index, currency or other instrument
might be intended to protect the Fund against an increase in the price of the
underlying instrument that it intends to purchase in the future by fixing the
price at which it may purchase the instrument. An "American" style put or call
option may be exercised at any time during the option period, whereas a
"European" style put or call option may be exercised only upon expiration or
during a fixed period prior to expiration. Exchange listed options are
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issued by a regulated intermediary such as the Options Clearing Corporation
("OCC"), which guarantees the performance of the obligations of the parties to
the options. The discussion below uses the OCC as an example, but is also
applicable to other similar financial intermediaries.
OCC-issued and exchange-listed options, with certain exceptions, generally
settle by physical delivery of the underlying security or (currency, although
in the future, cash settlement may become available. Index options are cash
settled for the net amount, if any, by which the option is "in-the-money" (that
is, the amount by which the value of the underlying instrument exceeds, in the
case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
A Fund's ability to close out its position as a purchaser or seller of an
OCC-issued or exchange-listed put or call option is dependent, in part, upon
the liquidity of the particular option market. Among the possible reasons for
the absence of a liquid option market on an exchange are: (1) insufficient
trading interest in certain options, (2) restrictions on transactions imposed
by an exchange, (3) trading halts, suspensions or other restrictions imposed
with respect to particular classes or series of options or underlying
securities, including reaching daily price limits, (4) interruption of the
normal operations of the OCC or an exchange, (5) inadequacy of the facilities
of an exchange or the OCC to handle current trading volume or (6) a decision by
one or more exchanges to discontinue the trading of options (or a particular
class or series of options), in which event the relevant market for that option
on that exchange would cease to exist, although any such outstanding options on
that exchange would continue to be exercisable in accordance with their terms.
The hours of trading for listed options may coincide with the hours during
which the underlying financial instruments are traded. To the extent that the
option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that would not be reflected in the corresponding option
markets.
Over-the-counter ("OTC") options are purchased from or sold to securities
dealers, financial institutions or other parties (collectively referred to as
"Counterparties" and individually referred to as a "Counterparty") through a
direct bilateral agreement with the Counterparty. In contrast to
exchange-listed options, which generally have standardized terms and
performance mechanics, all the terms of an OTC option, including such terms as
method of settlement, term, exercise price, premium guaranties and security,
are determined by negotiation of the parties. It is anticipated that any
Portfolio authorized to use OTC options will generally only enter into OTC
options that have cash settlement provisions, although it will not be required
to do so.
Unless the parties provide for it, no central clearing or guaranty function is
involved in an OTC option. As a result, if a Counterparty fails to make or take
delivery of the security,
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currency or other instrument underlying an OTC option it has entered into with
the Fund or fails to make a cash settlement payment due in accordance with the
terms of that option, the Fund will lose any premium it paid for the option as
well as any anticipated benefit of the transaction. Thus, the investment
manager must assess the creditworthiness of each such Counterparty or any
guarantor or credit enhancement of the Counterparty's credit to determine the
likelihood that the terms of the OTC option will be met. A Fund will enter into
OTC option transactions only with U.S. government securities dealers recognized
by the Federal Reserve Bank of New York as "primary dealers," or
broker-dealers, domestic or foreign banks, or other financial institutions that
the investment manager deems to be creditworthy. In the absence of a change in
the current position of the staff of the SEC, OTC options purchased by a Fund
and the amount of a Fund's obligation pursuant to an OTC option sold by the
Fund (the cost of the sell-back plus the in-the-money amount, if any) or the
value of the assets held to cover such options will be deemed illiquid.
If a Fund sells a call option, the premium that it receives may serve as a
partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments held by the Fund or will
increase the Fund's income. Similarly, the sale of put options can also
provide gains for a Fund.
A Fund may purchase and sell call options on securities that are traded on U.S.
and foreign securities exchanges and in the OTC markets, and on securities
indices, currencies and futures contracts. All calls sold by a Fund must be
"covered" (that is, the Fund must own the securities or futures contract
subject to the call), or must otherwise meet the asset segregation requirements
described below for so long as the call is outstanding. Even though the Fund
will receive the option premium to help protect it or against loss, a call sold
by a Fund will expose the Fund during the term of the option to possible loss
of opportunity to realize appreciation in the market price of the underlying
security or instrument and may require the Fund to hold a security or
instrument that it might otherwise have sold.
A Fund reserves the right to purchase or sell options on instruments and
indices, (whether or not it holds the securities in its portfolio) and on
securities indices, currencies and futures contracts. In selling put options, a
Fund faces the risk that it may be required to buy the underlying security at a
disadvantageous price above the market price.
A Fund may purchase and sell put options on securities (whether or not it holds
the securities in its portfolio) and on securities indices, currencies and
futures contracts. In selling put options, a Fund faces the risk that it may be
required to buy the underlying security at a disadvantageous price above the
market price.
GENERAL CHARACTERISTICS OF FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
A Fund may trade financial futures contracts or purchase or sell put and call
options on those contracts as a hedge against anticipated interest rate
currency or market changes, and for risk management purposes or a Fund may seek
to increase its income or gain. Futures contracts
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are generally bought and sold on the commodities exchange on which they are
listed with payment of initial and variation margin as described below. The
sale of a futures contract creates a firm obligation by the Fund, as seller, to
deliver to the buyer the specific type of financial instrument called for in
the contract at a specific future time for a specified price (or, with respect
to certain instruments, the net cash amount). Options on futures contracts are
similar to options on securities except that an option on a futures contract
gives the purchaser the right, in return for the premium paid, to assume a
position in a futures contract and obligates the seller to deliver that
position.
A Fund's use of financial futures contracts and options thereon will in all
cases be consistent with applicable regulatory requirements and in particular
the rules and regulations of the CFTC. Maintaining a futures contract or
selling an option on a futures contract will typically require the Fund to
deposit with a financial intermediary, as security for its obligations, an
amount of cash or other specified asset ("initial margin") that initially is
from 1% to 10% of the face amount of the contract (but may be higher in some
circumstances). Additional cash or assets ("variation margin") may be required
to be deposited thereafter daily as the mark-to market value of the futures
contract fluctuates. The purchase of an option on a financial futures contract
involves payment of a premium for the option without any further obligation on
the part of the Fund. If the Fund exercises an option on a futures contract it
will be obligated to post initial margin (and potentially variation margin) for
the resulting futures position just as it would for any futures position.
Futures contracts and options thereon are generally settled by entering into an
offsetting transaction, but no assurance can be given that a position can be
offset prior to settlement or that delivery will occur.
A Fund will not enter into a futures contract or option thereon if, immediately
thereafter, the sum of the amount of its initial margin and premiums required
to maintain permissible non-bona fide hedging positions in futures contracts
and options thereon would exceed 5% of the liquidation value of the Fund's
portfolio, after taking into account unrealized profits and losses on existing
contracts; however in the case of an option that is in-the-money at the time of
the purchase, the in-the-money amount may be excluded in calculating the 5%
limitation. The value of all futures contracts sold by the Fund (adjusted for
the historical volatility relationship between the Fund and the contracts) will
not exceed the total market value of the Fund's securities. The segregation
requirements with respect to futures contracts and options thereon are
described below under "Use of Segregated and Other Special Accounts."
OPTIONS ON SECURITIES INDICES AND OTHER FINANCIAL INDICES
A Fund may purchase and sell call and put options on securities indices and
other financial indices. In doing so, the Fund can achieve many of the same
objectives it would achieve through the sale or purchase of options on
individual securities or other instruments. Options on securities indices and
other financial indices are similar to options on a security or other
instrument except that, rather than settling by physical delivery of the
underlying instrument, options on indices settle by cash settlement; that is,
an option on an index gives the holder the right to receive, upon exercise of
the option, an amount of cash if the closing level of the index upon which the
option is based exceeds, in the case of a call, or is less than, in the case
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of a put, the exercise price of the option (except if in the case of an OTC
option, physical delivery is specified). This amount of cash is equal to the
excess of the closing price of the index over the exercise price of the option,
which also may be multiplied by a formula value. The seller of the option is
obligated, in return for the premium received, to make delivery of this amount.
The gain or loss on an option on an index depends on price movements in the
instruments comprising the market, market segment, industry or other composite
on which the underlying index is based, rather than price movements in
individual securities, as is the case with respect to options on securities.
CURRENCY TRANSACTIONS
A Fund may engage in currency transactions with Counterparties to hedge the
value of portfolio securities denominated in particular currencies against
fluctuations in relative value or to generate income or gain. Currency
transactions include currency forward contracts, exchange-listed currency
futures contracts and options thereon, exchange-listed and OTC options on
currencies, and currency swaps. A forward currency contract involves a
privately negotiated obligation to purchase or sell (with delivery generally
required) a specific currency at a future date, which may be any fixed number
of days from the date of the contract agreed upon by the parties, at a price
set at the time of the contract. A currency swap is an agreement to exchange
cash flows based on the notional difference among two or more currencies and
operates similarly to an interest rate swap, which is described below under
"Swaps, Caps, Floors and Collars." A Fund may enter into currency transactions
only with Counterparties that the investment manager deems to be creditworthy.
Transaction hedging is entering into a currency transaction with respect to
specific assets or liabilities of the Fund, which will generally arise in
connection with the purchase or sale of the Fund's portfolio securities or the
receipt of income from them. Position hedging is entering into a currency
transaction with respect to portfolio securities positions denominated or
generally quoted in that currency. A Fund will not enter into a transaction to
hedge currency exposure to an extent greater, after netting all transactions
intended wholly or partially to offset other transactions, than the aggregate
market value (at the time of entering into the transaction) of the securities
held by the Fund that are denominated or generally quoted in or currently
convertible into the currency, other than with respect to proxy hedging as
described below.
A Fund may cross-hedge currencies by entering into transactions to purchase or
sell one or more currencies that are expected to increase or decline in value
relative to other currencies to which the Fund has or in which the Fund expects
to have exposure. To reduce the effect of currency fluctuations on the value of
existing or anticipated holdings of its securities, a Fund may also engage in
proxy hedging. Proxy hedging is often used when the currency to which the
Fund's holdings is exposed is difficult to hedge generally or difficult to
hedge against the dollar. Proxy hedging entails entering into a forward
contract to sell a currency, the changes in the value of which are generally
considered to be linked to a currency or currencies in which some or all of the
Fund's securities are or are expected to be denominated, and to buy
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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."
COMBINED TRANSACTIONS
A Fund may enter into multiple transactions, including multiple options
transactions, multiple futures transactions, multiple currency transactions
(including forward currency contracts), multiple interest rate transactions and
any combination of futures, options, currency and interest rate transactions,
instead of a single Derivative, as part of a single or combined strategy when,
in the judgment of the investment manager, it is in the best interests of the
Fund to do so. A combined transaction will usually contain elements of risk
that are present in each of its component transactions. Although combined
transactions will normally be entered into by a Fund based on the investment
manager's judgment that the combined strategies will reduce risk or otherwise
more effectively achieve the desired portfolio management goal, it is possible
that the combination will instead increase the risks or hinder achievement of
the Fund management objective.
SWAPS, CAPS, FLOORS AND COLLARS
A Fund may enter into interest rate, currency and equity swap, the purchase or
sale of related caps, floors and collars and other similar arrangements. A Fund
will enter into these transactions primarily to seek to preserve a return or
spread on a particular investment or portion of its portfolio, to protect
against currency fluctuations, as a duration management technique, to protect
against any increase in the price of securities the Fund anticipates purchasing
or selling at a later date or to generate income or gain. Interest rate swaps
involve the exchange by the Fund with another party of their respective
commitments to pay or receive interest (for example, an exchange of floating
rate payments for fixed rate payments with respect to a notional amount of
principal). An equity swap is an agreement to exchange cash flows on a national
principal amount based on changes in the values of the reference index. A
currency swap is an agreement to exchange cash flows on a notional amount based
on changes in the values of the currency exchange rates. The purchase of a cap
entitles the purchaser to receive payments on a notional principal amount from
the party selling the cap to the extent that a specified interest rate,
currency exchange rate or index exceeds a predetermined rate or amount. The
purchase of a floor entitles the purchaser to receive payments on a notional
principal amount from the party selling the floor to the extent that a
specified interest rate currency exchange rate or index falls below a
predetermined rate or amount. A collar is a combination of a cap and a floor
that preserves a certain return with a predetermined range of rates or values.
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A Fund will usually enter into swaps on a net basis, that is, the two payment
streams are netted out in a cash settlement on the payment date or dates
specified in the instrument with the Fund receiving or paying, as the case may
be, only the net amount of the two payments.
Inasmuch as these swaps, caps, floors, collars and other similar types of
instruments are entered into for good faith hedging or other non-speculative
purposes, they do not constitute senior securities under the 1940 Act, and,
thus, will not be treated as being subject to the Fund's applicable borrowing
restrictions. A Fund will not enter into any swap, cap, floor, collar or other
similar type of transaction unless the investment manager deems the
Counterparty to be creditworthy. If a Counterparty defaults, the Fund may have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of
banks and investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. As a result, the swap market has
become relatively liquid. Caps, floors and collars are more recent innovations
for which standardized documentation has not yet been fully developed and, for
that reason, they are less liquid than swaps.
The liquidity of swap agreements will be determined by the investment manager
based on various factors, including (1) the frequency of trades and quotations,
(2) the number of dealers and prospective purchasers in the marketplace, (3)
dealer undertakings to make a market, (4) the nature of the security (including
any demand or tender features), and (5) the nature of the marketplace for
trades (including the ability to assign or offset the Fund's rights and
obligations relating to the investment). Such determination will govern whether
a swap will be deemed within the 10% restriction on investment in securities
that are not readily marketable.
A Fund will maintain cash and appropriate liquid assets (i.e., high grade debt
securities) in a segregated custodial account to cover its current obligations
under swap agreements. If a Fund enters into a swap agreement on a net basis,
it will segregate assets with a daily value at least equal to the excess, if
any, of the Fund's accrued obligations under the swap agreement over the
accrued amount the Fund is entitled to receive under the agreement. If a Fund
enters into a swap agreement on other than a net basis, it will segregate
assets with a value equal to the full amount of the Fund's accrued obligations
under the agreement. See "Use of Segregated and Other Special Accounts" below.
RISK FACTORS
Derivatives have special risks associated with them, including possible default
by the Counterparty to the transaction, illiquidity and, to the extent the
investment manager's view as to certain market movements is incorrect, the risk
that the use of the Derivatives could result in losses greater than if they had
not been used. Use of put and call options could result in losses to a Fund,
force the sale or purchase of portfolio securities at inopportune times or for
prices higher than (in the case of put options) or lower than (in the case of
call options) current market values, or cause a Fund to hold a security it
might otherwise sell.
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The use of futures and options transactions entails certain special risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related securities position of a
Fund could create the possibility that losses on the hedging instrument are
greater than gain in the value of the Fund's position. In addition, futures and
options markets could be illiquid in some circumstances and certain
over-the-counter options could have no markets. As a result, in certain markets,
a Fund might not be able to close out a transaction without incurring
substantial losses. Although a Fund's use of futures and options transactions
for hedging should tend to minimize the risk of loss due to a decline in the
value of the hedged position, at the same time it will tend to limit any
potential gain to the Fund that might result from an increase in value of the
position. There is also the risk of loss by a Fund of margin deposits in the
event of bankruptcy of a broker with whom the Fund has an open position in a
futures contract or option thereon. Finally, the daily variation margin
requirements for futures contracts create a greater ongoing potential financial
risk than would purchases of options, in which case the exposure is limited to
the cost of the initial premium. However, because option premiums paid by a Fund
are small in relation to the market value of the investments underlying the
options, buying options can result in large amounts of leverage. The leverage
offered by trading in options could cause a Fund's net asset value to be subject
to more frequent and wider fluctuation than would be the case if the Fund did
not invest in options.
As is the case with futures and options strategies, the effective use of swaps
and related transactions by a Fund may depend, among other things, on a Fund's
ability to terminate the transactions at times when the investment manager
deems it desirable to do so. To the extent a Fund does not, or cannot,
terminate such a transaction in a timely manner, a Fund may suffer a loss in
excess of any amounts that it may have received, or expected to receive, as a
result of the investment manager entering into the transaction.
Currency hedging involves some of the same risks and considerations as other
transactions with similar instruments. Currency transactions can result in
losses to a Fund if the currency being hedged fluctuates in value to a degree
or in a direction that is not anticipated. Further, the risk exists that 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.
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Losses resulting from the use of Derivatives will reduce a Fund's net asset
value, and possibly income, and the losses can be greater than if Derivatives
had not been used.
RISK OF DERIVATIVES OUTSIDE THE UNITED STATES
When conducted outside the United States, Derivatives may not be regulated as
rigorously as in the United States, may not involve a clearing mechanism and
related guarantees, and will be subject to the risk of governmental actions
affecting trading in, or the prices of, foreign securities, currencies and
other instruments. In addition, the price of any foreign futures or foreign
options contract and, therefore, the potential profit and loss thereon, may be
affected by any variance in the foreign exchange rate between the time an order
is placed and the time it is liquidated, offset or exercised. The value of
positions taken as part of non-U.S. Derivatives also could be adversely
affected by: (1) other complex foreign political, legal and economic factors,
(2) lesser availability of dates on which to make trading decisions than in the
United States, (3) delays in the Fund's ability to act upon economic events
occurring in foreign markets during nonbusiness hours in the United States, (4)
the imposition of different exercise and settlement terms and procedures and
margin requirements than in the United States and (5) lower trading volume and
liquidity.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS
Use of many Derivatives by a Fund will require, among other things, that the
Fund segregate cash, liquid high grade debt obligations or other assets with
its custodian, or a designated sub-custodian, to the extent the Fund's
obligations are not otherwise "covered" through ownership of the underlying
security, financial instrument or currency. In general, either the full amount
of any obligation by a Fund to pay or deliver securities or assets must be
covered at all times by the securities, instruments or currency required to be
delivered, or, subject to any regulatory restrictions, an amount of cash or
liquid high grade debt obligations at least equal to the current amount of the
obligation must be segregated with the custodian or sub-custodian. The
segregated assets cannot be sold or transferred unless equivalent assets are
substituted in their place or it is no longer necessary to segregate them. A
call option on securities written by a Fund, for example, will require the Fund
to hold the securities subject to the call (or securities convertible into the
needed securities without additional consideration) or to segregate liquid high
grade debt obligations sufficient to purchase and deliver the securities if the
call is exercised. A call option sold by a Fund on an index will require the
Fund to own portfolio securities that correlate with the index or to segregate
liquid high grade debt obligations equal to the excess of the index value over
the exercise price on a current basis. A put option on securities written by a
Fund will require the Fund to segregate liquid high grade debt obligations
equal to the exercise price. Except when a Fund enters into a forward contract
in connection with the purchase or sale of a 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
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currency equal to the Fund's obligations or to segregate liquid high grade debt
obligations equal to the amount of the Fund's obligations.
OTC options entered into by a Fund, including those on securities, currency,
financial instruments or indices, and OCC-issued and exchange-listed index
options will generally provide for cash settlement, although the Fund will not
be required to do so. As a result, when a Fund sells these instruments it will
segregate an amount of assets equal to its obligations under the Options. OCC-
issued and exchange-listed options sold by a Fund other than those described
above generally settle with physical delivery, and the Fund will segregate an
amount of assets equal to the full value of the option. OTC options settling
with physical delivery or with an election of either physical delivery or cash
settlement will be treated the same as other options settling with physical
delivery.
In the case of a futures contract or an option on a futures contract, a Fund
must deposit initial margin and, in some instances, daily variation margin in
addition to segregating assets sufficient to meet its obligations to purchase
or provide securities or currencies, or to pay the amount owed at the
expiration of an index-based futures contract. These assets may consist of
cash, cash equivalents, liquid debt or equity securities or other acceptable
assets. A Fund will accrue the net amount of the excess, if any, of its
obligations relating to swaps over its entitlements with respect to each swap
on a daily basis and will segregate with its custodian, or designated
sub-custodian, an amount of cash or liquid high grade debt obligations having
an aggregate value equal to at least the accrued excess. Caps, floors and
collars require segregation of assets with a value equal to the Fund's net
obligation, if any.
Derivatives may be covered by means other than those described above when
consistent with applicable regulatory policies. A Fund may also enter into
offsetting transactions so that its combined position, coupled with any
segregated assets, equals its net outstanding obligation in related
Derivatives. A Fund could purchase a put option, for example, if the strike
price of that option is the same or higher than the strike price of a put
option sold by the Fund. Moreover, instead of segregating assets if it holds a
futures contract or forward contract, a Fund could purchase a put option on the
same futures contract or forward contract with a strike price as high or higher
than the price of the contract held. Other Derivatives may also be offset in
combinations. If the offsetting transaction terminates at the time of or after
the primary transaction, no segregation is required, but if it terminates prior
to that time, assets equal to any remaining obligation would need to be
segregated.
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SALOMON BROTHERS INSTITUTIONAL INVESTMENT SERIES
PROSPECTUS
, 1996
No dealer, salesman or other person has been authorized to give any information
or to make any representations, other than those contained in this Prospectus
and, if given or made, such other information or representations must not be
relied upon as having been authorized by a Fund, the distributor or the
investment manager. This Prospectus does not constitute an offering in any
state in which such offering may not lawfully be made.
<PAGE> 354
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This statement of additional information shall not constitute an
offer to sell or the solicitation of an offer to buy nor shall there be any
sale of these securities in any State in which such offer, solicitation or sale
would be unlawful prior to registration or qualification under the securities
laws of any such State.
SUBJECT TO COMPLETION
PRELIMINARY STATEMENT OF ADDITIONAL INFORMATION
DATED MARCH 29, 1996
SALOMON BROTHERS INSTITUTIONAL INVESTMENT SERIES
7 WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
(800) SALOMON
(800) 725-6666
STATEMENT OF ADDITIONAL INFORMATION
Salomon Brothers Institutional Investment Series consists of Salomon
Brothers Institutional Money Market Fund (the "Money Market Fund"), Salomon
Brothers Institutional High Yield Bond Fund (the "High Yield Bond Fund"),
Salomon Brothers Institutional Emerging Markets Debt Fund (the "Emerging
Markets Debt Fund") and Salomon Brothers Institutional Asia Growth Fund (the
"Asia Growth Fund") (each, a "Fund" and collectively, the "Funds"). Each of the
Funds, except the Money Market Fund, is a no-load investment portfolio of
Salomon Brothers Institutional Series Funds Inc, an open-end investment company
incorporated in Maryland on January 19, 1996 ("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").
This Statement of Additional Information is not a Prospectus and is only
authorized for distribution when preceded or accompanied by the Prospectus
dated __________ __, 1996 (the "Prospectus"). This Statement of Additional
Information contains additional information to that set forth in the Prospectus
and should be read in conjunction with the Prospectus, additional copies of
which may be obtained without charge by writing or calling the Funds at the
address and telephone number printed above.
___________ __, 1996
<PAGE> 355
2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ADDITIONAL INFORMATION ON PORTFOLIO INSTRUMENTS AND INVESTMENT POLICIES . . . . . . . . . . . . . . . . . . . . . . . . . 3
INVESTMENT LIMITATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
PORTFOLIO TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
NET ASSET VALUE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
ADDITIONAL INFORMATION CONCERNING TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
PERFORMANCE DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
CAPITAL STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
CUSTODIAN AND TRANSFER AGENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
VALIDITY OF SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
INDEPENDENT ACCOUNTANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
COUNSEL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
</TABLE>
<PAGE> 356
3
ADDITIONAL INFORMATION ON PORTFOLIO INSTRUMENTS AND INVESTMENT POLICIES
The Prospectus indicates the extent to which each of the Funds may
purchase the instruments or engage in the investment activities described
below. The discussion below supplements the information set forth in the
Prospectus under "Investment Objective and Policies" and "Additional Investment
Activities and Risk Factors". References herein to the investment manager
means, with respect to the Money Market Fund, the High Yield Bond Fund and the
Emerging Markets Debt Fund, Salomon Brothers Asset Management Inc ("SBAM") and
with respect to the Asia Growth Fund, Salomon Brothers Asset Management Asia
Pacific Limited ("SBAM AP").
FOREIGN SECURITIES
As discussed in the Prospectus, investing in the securities of foreign
issuers generally, and particularly in emerging market issuers, involves
special considerations which are not typically associated with investing in
securities of U.S. issuers. The following discussion supplements the discussion
contained in the Prospectus under "Additional Investment Activities and Risk
Factors--Foreign Securities" and "--High Yield Securities--High Yield Foreign
Sovereign Debt Securities." See also "--Brady Bonds" below.
Certain of the risks associated with international investments and
investing in smaller capital markets are heightened for investments in emerging
market countries. For example, some of the currencies of emerging market
countries have experienced devaluations relative to the U.S. dollar, and major
adjustments have been made periodically in certain of such currencies. Certain
of such countries face serious exchange constraints. In addition, governments
of many emerging market countries have exercised and continue to exercise
substantial influence over many aspects of the private sector. In certain
cases, the government owns or controls many companies, including the largest in
the country. Accordingly, government actions in the future could have a
significant effect on economic conditions in developing countries which could
affect private sector companies and a Fund, as well as the value of securities
in the Fund.
Certain markets are in only the earliest stages of development. There
is also a high concentration of market capitalization and trading volume in a
small number of issuers representing a limited number of industries, as well as
a high concentration of investors and financial intermediaries. Many of such
markets also may be affected by developments with respect to more established
markets in the region. Brokers in emerging market countries typically are fewer
in number and less capitalized than brokers in the United States. These
factors, combined with the U.S. regulatory requirements for open-end 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.
<PAGE> 357
4
With respect to investments in certain emerging market countries,
archaic legal systems may have an adverse impact on a Fund. For example, while
the potential liability of a shareholder in a U.S. corporation with respect to
acts of the corporation is generally limited to the amount of the shareholder's
investment, the notion of limited liability is less clear in certain emerging
market countries. Similarly, the rights of investors in emerging market
companies may be more limited than those of shareholders of U.S. corporations.
In some countries, banks or other financial institutions may
constitute a substantial number of the leading companies or companies with the
most actively traded securities. The Investment Company Act of 1940 (the "1940
Act") limits a Fund's ability to invest in any equity security of an issuer
which, in its most recent fiscal year, derived more than 15% of its revenues
from "securities related activities", as defined by the rules thereunder. These
provisions may also restrict a Fund's investments in certain foreign banks and
other financial institutions.
The manner in which foreign investors may invest in companies in
certain emerging market countries, as well as limitations on such investments,
also may have an adverse impact on the operations of a Fund. For example, the
Fund may be required in certain of such countries to invest initially through a
local broker or other entity and then have the shares purchased re-registered
in the name of the Fund. Re-registration may in some instances not be able to
occur on a timely basis, resulting in a delay during which the Fund may be
denied certain of its rights as an investor.
Foreign markets have different clearance and settlement procedures,
and in certain markets there have been times when settlements have failed to
keep pace with the volume of securities transactions, making it difficult to
conduct such transactions. Further, satisfactory custodial services for
investment securities may not be available in some countries having smaller,
emerging capital markets, which may result in a Fund incurring additional costs
and delays in transporting and custodying such securities outside such
countries. Delays in settlement or other problems could result in periods when
assets of a Fund are uninvested and no return is earned thereon. The inability
of a Fund to make intended security purchases due to settlement problems or the
risk of intermediary counterparty failures could cause a Fund to miss
attractive investment opportunities. The inability to dispose of a portfolio
security due to settlement problems could result either in losses to a Fund due
to subsequent declines in the value of such portfolio security or, if the Fund
has entered into a contract to sell the security, could result in possible
liability to the purchaser.
Rules adopted under the 1940 Act permit a Fund to maintain its foreign
securities and cash in the custody of certain eligible non-U.S. banks and
securities depositories. Certain banks in foreign countries may not be eligible
sub-custodians for a Fund, in which event the Fund may be precluded from
purchasing securities in certain foreign countries in which it otherwise would
invest or which may result in the Fund's incurring additional costs and delays
in providing transportation and custody services for such securities outside of
such countries. A Fund may encounter difficulties in effecting on a timely
basis portfolio transactions with respect to any securities of issuers held
outside their countries. Other banks that are eligible foreign sub-custodians
may be recently organized or otherwise lack extensive operating experience. In
addition, in certain countries there may be legal restrictions or limitations
on the ability of a Fund to recover assets held in custody by foreign
sub-custodians in the event of the bankruptcy of the sub-custodian.
<PAGE> 358
5
BANK OBLIGATIONS
Banks are subject to extensive governmental regulations which may
limit both the amounts and types of loans and other financial commitments which
may be made and interest rates and fees which may be charged. The profitability
of this industry is largely dependent upon the availability and cost of capital
funds for the purpose of financing lending operations under prevailing money
market conditions. Also, general economic conditions play an important part in
the operations of this industry and exposure to credit losses arising from
possible financial difficulties of borrowers might affect a bank's ability to
meet its obligations.
Investors should also be aware that securities issued or guaranteed by
foreign banks, foreign branches of U.S. banks, and foreign government and
private issuers may involve investment risks in addition to those relating to
domestic obligations. See "Additional Investment Activities and Risk
Factors--Foreign Securities" in the Prospectus and "--Foreign Securities"
above.
As stated in the Prospectus, bank obligations that may be purchased by
a Fund include certificates of deposit, banker's acceptances and fixed time
deposits. A certificate of deposit is a short-term negotiable certificate
issued by a commercial bank against funds deposited in the bank and is either
interest-bearing or purchased on a discount basis. A bankers' acceptance is a
short-term draft drawn on a commercial bank by a borrower, usually in
connection with an international commercial transaction. The borrower is liable
for payment as is the bank, which unconditionally guarantees to pay the draft
at its face amount on the maturity date. Fixed time deposits are obligations of
branches of U.S. banks or foreign banks which are payable at a stated maturity
date and bear a fixed rate of interest. Although fixed time deposits do not
have a market, there are no contractual restrictions on the right to transfer a
beneficial interest in the deposit to a third party.
Bank obligations may be general obligations of the parent bank or may
be limited to the issuing branch by the terms of the specific obligations or by
government regulation.
FLOATING AND VARIABLE RATE INSTRUMENTS
As stated in the Prospectus, certain of the floating or variable rate
obligations that may be purchased by a Fund may carry a demand feature that
would permit the holder to tender them back to the issuer of the instrument or
to a third party at par value prior to maturity. Some of the demand instruments
purchased by the Funds are not traded in a secondary market and derive their
liquidity solely from the ability of the holder to demand repayment from the
issuer or third party providing credit support. If a demand instrument is not
traded in a secondary market, each Fund will nonetheless treat the instrument
as "readily marketable" for the purposes of its investment restriction limiting
investments in illiquid securities unless the demand feature has a notice
period of more than seven days; if the notice period is greater than seven
days, the demand instrument will be characterized as "not readily marketable"
for such purpose.
A Fund's right to obtain payment at par on a demand instrument could
be affected by events occurring between the date such Fund elects to demand
payment and the date payment is due that may affect the ability of the issuer
of the instrument or a third party providing credit support to make payment
when due, except when such demand instruments permit same day settlement. To
facilitate settlement, these same day demand instruments may be held in book
entry form at a bank other than a Fund's custodian subject to a sub-custodian
agreement approved by the Fund between that bank and the Fund's custodian.
<PAGE> 359
6
ASSET-BACKED SECURITIES
Asset-backed securities are generally issued as pass through
certificates, which represent undivided fractional ownership interests in the
underlying pool of assets, or as debt instruments, which are generally issued
as the debt of a special purpose entity organized solely for the purpose of
owning such assets and issuing such debt. Asset-backed securities are often
backed by a pool of assets representing the obligations of a number of
different parties. Asset-backed securities frequently carry credit protection
in the form of extra collateral, subordinated certificates, cash reserve
accounts, letters of credit or other enhancements. For example, payments of
principal and interest may be guaranteed up to certain amounts and for a
certain time period by a letter of credit or other enhancement issued by a
financial institution unaffiliated with the entities issuing the securities.
Assets which, to date, have been used to back asset-backed securities include
motor vehicle installment sales contracts or installment loans secured by motor
vehicles, and receivables from revolving credit (credit card) agreements.
Asset-backed securities present certain risks which are, generally,
related to limited interests, if any, in related collateral. Credit card
receivables are generally unsecured and the debtors are entitled to the
protection of a number of state and federal consumer credit laws, many of which
give such debtors the right to set off certain amounts owed on the credit
cards, thereby reducing the balance due. Most issuers of automobile receivables
permit the servicers to retain possession of the underlying obligations. If the
servicer were to sell these obligations to another party, there is a risk that
the purchaser would acquire an interest superior to that of the holders of the
related automobile receivables. In addition, because of the large number of
vehicles involved in a typical issuance and technical requirements under state
laws, the trustee for the holders of the automobile receivables may not have a
proper security interest in all of the obligations backing such receivables.
Therefore, there is the possibility that recoveries on repossessed collateral
may not, in some cases, be available to support payments on these securities.
Other types of asset-backed securities will be subject to the risks associated
with the underlying assets. If a letter of credit or other form of credit
enhancement is exhausted or otherwise unavailable, holders of asset-backed
securities may also experience delays in payments or losses if the full amounts
due on underlying assets are not realized. Because asset-backed securities are
relatively new, the market experience in these securities is limited and the
market's ability to sustain liquidity through all phases of the market cycle
has not been tested.
LOANS OF PORTFOLIO SECURITIES
Certain Funds may lend portfolio securities to brokers or dealers or
other financial institutions. The procedure for the lending of securities will
include the following features and conditions. The borrower of the securities
will deposit cash with the Fund in an amount equal to a minimum of 100% of the
market value of the securities lent. The Fund will invest the collateral in
short-term debt securities and earn the interest thereon. A negotiated portion
of the income so earned may be paid to the borrower or the broker who arranged
the loan. If the deposit drops below the required minimum at any time, the
borrower may be called upon to post additional cash. If the additional cash is
not paid, the loan will be immediately due and the Fund may use the collateral
or its own cash to replace the securities by purchase in the open market
charging any loss to the borrower. These will be "demand" loans and may be
terminated by the Fund at any time. A Fund will receive any dividends and
interest paid on the securities lent and the loans will be structured to assure
that the Fund will be able to exercise its voting rights on the securities.
Such loans will be authorized only to the extent that the receipt of income
from such activity would not cause any adverse tax consequences to a Fund's
<PAGE> 360
7
shareholders and only in accordance with applicable rules and regulations. The
borrowers may not be affiliated, directly or indirectly, with a Fund.
RULE 144A SECURITIES
As indicated in the Prospectus, certain Funds may purchase certain
restricted securities ("Rule 144A securities") for which there is a secondary
market of qualified institutional buyers, as contemplated by Rule 144A under
the Securities Act of 1933, as amended (the "1933 Act"). Rule 144A provides an
exemption from the registration requirements of the 1933 Act for the resale of
certain restricted securities to qualified institutional buyers.
One effect of Rule 144A is that certain restricted securities may now
be liquid, though there is no assurance that a liquid market for Rule 144A
securities will develop or be maintained. In promulgating Rule 144A the
Securities and Exchange Commission (the "SEC") stated that the ultimate
responsibility for liquidity determinations is that of an investment company's
board of directors. However, the SEC stated that the board may delegate the
day-to-day function of determining liquidity to the fund's investment adviser,
provided that the board retains sufficient oversight. The Board of Directors of
Institutional Series Funds and Series Funds have adopted policies and
procedures for the purpose of determining whether securities that are eligible
for resale under Rule 144A are liquid or illiquid for purposes of a Fund's
limitation on investment in illiquid securities. Pursuant to those policies and
procedures, each 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 Board of Directors periodically reviews Fund
purchases and sales of Rule 144A securities.
To the extent that liquid Rule 144A securities that a Fund holds
become illiquid, due to the lack of sufficient qualified institutional buyers
or market or other conditions, the percentage of a Fund's assets invested in
illiquid assets would increase. The investment manager under the supervision
of the Board of Directors, will monitor Fund investments in Rule 144A
securities and will consider appropriate measures to enable a Fund to maintain
sufficient liquidity for operating purposes and to meet redemption requests.
BRADY BONDS
Brady Bonds are debt securities, generally denominated in U.S.
dollars, issued under the framework of the Brady Plan. The Brady Plan is an
initiative announced by former U.S. Treasury Secretary Nicholas F. Brady in
1989 as a mechanism for debtor nations to restructure their outstanding
external commercial bank indebtedness. In restructuring its external debt under
the Brady Plan framework, a debtor nation negotiates with its existing bank
lenders as well as multilateral institutions such as the International Bank for
Reconstruction and Development (the "World Bank") and the International
Monetary Fund (the "IMF"). The Brady Plan framework, as it has developed,
contemplates the exchange of external commercial bank debt for newly issued
bonds (Brady Bonds). Brady Bonds may also be issued in respect of new money
being advanced by existing lenders in connection with the debt restructuring.
The World Bank and/or the IMF support the restructuring by providing funds
pursuant to loan agreements or other arrangements which enable the debtor
nation to collateralize the new Brady Bonds or to repurchase outstanding bank
debt at a discount. Under these
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arrangements with the World Bank and/or the IMF, debtor nations have been
required to agree to the implementation of certain domestic monetary and fiscal
reforms. Such reforms have included the liberalization of trade and foreign
investment, the privatization of state-owned enterprises and the setting of
targets for public spending and borrowing. These policies and programs seek to
promote the debtor country's economic growth and development. Investors should
also recognize that the Brady Plan only sets forth general guiding principles
for economic reform and debt reduction, emphasizing that solutions must be
negotiated on a case-by-case basis between debtor nations and their creditors.
SBAM believes that economic reforms undertaken by countries in connection with
the issuance of Brady Bonds make the debt of countries which have issued or
have announced plans to issue Brady Bonds an attractive opportunity for
investment. However, there can be no assurance that SBAM's expectations with
respect to Brady Bonds will be realized.
Investors should recognize that Brady Bonds have been issued only
recently, and accordingly do not have a long payment history. Brady Bonds which
have been issued to date are rated in the categories "BB" or "B" by 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
"Additional Information Concerning Taxes."
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STRUCTURED INVESTMENTS
Included among the issuers of emerging market country debt securities
in which the Emerging Markets Debt Fund may invest are entities organized and
operated solely for the purpose of restructuring the investment characteristics
of various securities. These entities are typically organized by investment
banking firms which receive fees in connection with establishing each entity
and arranging for the placement of its securities. This type of restructuring
involves the deposit with or purchase by an entity, such as a corporation or
trust, of specified instruments (such as Brady Bonds) and the issuance by that
entity of one or more classes of securities ("Structured Investments") backed
by, or representing interests in, the underlying instruments. The cash flow on
the underlying instruments may be apportioned among the newly issued Structured
Investments to create securities with different investment characteristics such
as varying maturities, payment priorities or interest rate provisions; the
extent of the payments made with respect to Structured Investments is dependent
on the extent of the cash flow on the underlying instruments. Because
Structured Investments of the type in which the Emerging Markets Debt Fund
anticipates investing typically involve no credit enhancement, their credit
risk will generally be equivalent to that of the underlying instruments.
The Emerging Markets Debt Fund is permitted to invest in a class of
Structured Investments that is either subordinated or unsubordinated to the
right of payment of another class. Subordinated Structured Investments
typically have higher yields and present greater risks than unsubordinated
Structured Investments. Although the Fund's purchase of subordinated Structured
Investments would have a similar economic effect to that of borrowing against
the underlying securities, the purchase will not be deemed to be borrowing for
purposes of the limitations placed on the extent of the Fund's assets that may
be used for borrowing. See "Additional Investment Activities and Risk
Factors--Borrowing" in the Prospectus.
Certain issuers of Structured Investments may be deemed to be
"investment companies" as defined in the 1940 Act. As a result, the Fund's
investment in these Structured Investments may be limited by the restrictions
contained in the 1940 Act described in the Prospectus under "Additional
Investment Activities and Risk Factors--Investment Funds." Structured
Investments are typically sold in private placement transactions, and there
currently is no active trading market for Structured Investments.
DERIVATIVES
The description in the Prospectus of each Fund indicates which, if
any, of these types of transactions may be used by that Fund.
FORWARD CURRENCY EXCHANGE CONTRACTS. As indicated in the Prospectus,
in order to hedge against currency exchange rate risks or to increase income,
certain Funds may enter into forward currency exchange contracts with
securities dealers, financial institutions or other parties, through direct
bilateral agreements with such counterparties. A Fund will enter into forward
currency exchange contracts only with counterparties which the investment
manager deems creditworthy. In connection with a Fund's forward currency
transactions, the Fund will set aside in a segregated account with its
custodian, cash, cash equivalents or high quality debt securities in an amount
equal to the amount of the contract, to be used to pay for the commitment. The
segregated account will be marked-to-market on a daily basis. In addition to
the circumstances set forth in the Prospectus, a Fund may enter into forward
currency exchange contracts when the investment manager believes that the
currency of a particular country may suffer a substantial decline against the
U.S. dollar. In those
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circumstances, a Fund may enter into a forward contract to sell, for a fixed
amount of U.S. dollars, the amount of that currency approximating the value of
some or all of the Fund's portfolio securities denominated in such currency.
Forward contracts may limit potential gain from a positive change in the
relationship between the U.S. dollar and foreign currencies.
FUTURES CONTRACTS. As indicated in the Prospectus, certain Funds may
trade futures contracts (1) on domestic and foreign exchanges on currencies,
interest rates and bond indices and (2) on domestic and, to the extent
permitted by the Commodity Futures Trading Commission ("CFTC"), foreign
exchanges on stock indices. None of the Funds is a commodity pool, and a Fund
will use futures contracts and options thereon solely (i) for bona fide hedging
purposes and (ii) for other purposes in amounts permitted by the rules and
regulations promulgated by the CFTC. A Fund may not enter into any futures
contract or related option other than for bona fide hedging purposes if,
immediately thereafter, the sum of the amount of aggregate initial margin
deposits on the Fund's existing futures contracts and premiums paid for options
on futures contracts would exceed 5% of the liquidation value of the Fund's
portfolio, after taking into account unrealized profits and losses on existing
contracts. In addition, the value of a Fund's long futures and options
positions (futures contracts on stock or bond indices, interest rates or
foreign currencies and call options on such futures contracts) will not exceed
the sum of (a) cash, cash equivalents or high quality debt securities
segregated for this purpose, (b) cash proceeds on existing investments due
within thirty days and (c) accrued profits on the particular futures or options
positions. Furthermore, with respect to the sale of futures contracts by a
Fund, the value of such contracts may not exceed the total market value of such
Fund's portfolio securities.
Interest Rate Futures Contracts. A Fund may enter into interest rate
futures contracts in order to protect it from fluctuations in interest rates
without necessarily buying or selling fixed income securities. An interest rate
futures contract is an agreement to take or make delivery of either (i) an
amount of cash equal to the difference between the value of a particular index
of debt securities at the beginning and at the end of the contract period or
(ii) a specified amount of a particular debt security at a future date at a
price set at time of the contract. For example, if a Fund owns bonds, and
interest rates are expected to increase, the Fund might sell futures contracts
on debt securities having characteristics similar to those held in the
portfolio. Such a sale would have much the same effect as selling an
equivalent value of the bonds owned by the Fund. If interest rates did
increase, the value of the debt securities in the portfolio would decline, but
the value of the futures contracts to the Fund would increase at approximately
the same rate, thereby keeping the net asset value of the Fund from declining
as much as it otherwise would have. A Fund could accomplish similar results by
selling bonds with longer maturities and investing in bonds with shorter
maturities when interest rates are expected to increase. However, since the
futures market may be more liquid than the cash market, the use of futures
contracts as a risk management technique allows a Fund to maintain a defensive
position without having to sell its portfolio securities.
Similarly, when the investment manager expects that interest rates may
decline, a Fund may purchase interest rate futures contracts in an attempt to
hedge against having to make subsequently anticipated purchases of bonds at the
higher prices subsequently expected to prevail. Since the fluctuations in the
value of appropriately selected futures contracts should be similar to that of
the bonds that will be purchased, a Fund could take advantage of the
anticipated rise in the cost of the bonds without actually buying them until
the market had stabilized. At that time, a Fund could make the intended
purchase of the bonds in the cash market and the futures contracts could be
liquidated.
At the time of delivery of securities pursuant to an interest rate
futures contract, adjustments are made to recognize differences in value
arising from the delivery of securities with a different interest
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rate from that specified in the contract. In some (but not many) cases,
securities called for by a futures contract may have a shorter term than the
term of the futures contract and, consequently, may not in fact have been
issued when the futures contract was entered.
OPTIONS. As indicated in the Prospectus, in order to hedge against
adverse market shifts or to increase income, certain Funds may purchase put and
call options or write "covered" put and call options on futures contracts on
stock indices, interest rates and currencies. In addition, in order to hedge
against adverse market shifts or to increase its income, a Fund may purchase
put and call options and write "covered" put and call options on stocks, Loan
Participations and Assignments (as defined in the Prospectus), stock indices
and currencies. A Fund may utilize options on currencies in order to hedge
against currency exchange rate risks. A call option is "covered" if, so long as
the Fund is obligated as the writer of the option, it will own (i) the
underlying investment subject to the option; (ii) securities convertible or
exchangeable without the payment of any consideration into the securities
subject to the option or (iii) a call option on the relevant security or
currency with an exercise price no higher than the exercise price on the call
option written. A put option is "covered" if, to support its obligation to
purchase the underlying investment if a put option that a Fund writes is
exercised, the Fund will either (a) deposit with its custodian in a segregated
account cash, U.S. government securities or other high grade liquid debt
obligations having a value at least equal to the exercise price of the
underlying investment or (b) continue to own an equivalent number of puts of
the same "series" (that is, puts on the same underlying investment having the
same exercise prices and expiration dates as those written by the Fund), or an
equivalent number of puts of the same "class" (that is, puts on the same
underlying investment) with exercise prices greater than those that it has
written (or, if the exercise prices of the puts it holds are less than the
exercise prices of those it has written, it will deposit the difference with
its custodian in a segregated account). Parties to options transactions must
make certain payments and/or set aside certain amounts of assets in connection
with each transaction, as described in the Prospectus.
In all cases except for certain options on interest rate futures
contracts, by writing a call, a Fund will limit its opportunity to profit from
an increase in the market value of the underlying investment above the exercise
price of the option for as long as the Fund's obligation as writer of the
option continues. By writing a put, a Fund will limit its opportunity to profit
from a decrease in the market value of the underlying investment below the
exercise price of the option for as long as the Fund's obligation as writer of
the option continues. Upon the exercise of a put option written by a Fund, the
Fund may suffer an economic loss equal to the difference between the price at
which the Fund is required to purchase the underlying investment and its market
value at the time of the option exercise, less the premium received for writing
the option. Upon the exercise of a call option written by a Fund, the Fund may
suffer an economic loss equal to an amount not less than the excess of the
investment's market value at the time of the option exercise over the Fund's
acquisition cost of the investment, less the sum of the premium received for
writing the option and the positive difference, if any, between the call price
paid to the Fund and the Fund's acquisition cost of the investment.
In all cases except for certain options on interest rate futures
contracts, in purchasing a put option, a Fund will seek to benefit from a
decline in the market price of the underlying investment, while in purchasing a
call option, a Fund will seek to benefit from an increase in the market price
of the underlying investment. If an option purchased is not sold or exercised
when it has remaining value, or if the market price of the underlying
investment remains equal to or greater than the exercise price, in the case of
a put, or remains equal to or below the exercise price, in the case of a call,
during the life of the option, the Fund will lose its investment in the option.
For the purchase of an option to be profitable, the market price of the
underlying investment must decline sufficiently below the exercise
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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.
A Fund's ability to close out its position as a purchaser or seller of
an exchange-listed put or call option is dependent upon the existence of a
liquid secondary market on option exchanges. Among the possible reasons for the
absence of a liquid secondary market on an exchange are: (i) insufficient
trading interest in certain options; (ii) restrictions on transactions imposed
by an exchange; (iii) trading halts, suspensions or other restrictions imposed
with respect to particular classes or series of options or underlying
securities; (iv) interruption of the normal operations on an exchange; (v)
inadequacy of the facilities of an exchange or the Options Clearing Corporation
("OCC") to handle current trading volume; or (vi) a decision by one or more
exchanges to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that exchange (or in
that class or series of options) would cease to exist, although outstanding
options on that exchange that had been listed by the OCC as a result of trades
on that exchange would generally continue to be exercisable in accordance with
their terms.
Over-the-counter options are purchased from or sold to securities
dealers, financial institutions or other parties, through direct bilateral
agreement with such counterparties. A Fund will purchase and sell
over-the-counter options only from and to counterparties which the investment
manager deems to be creditworthy.
The hours of trading for options on securities may not conform to the
hours during which the underlying securities are traded. To the extent that the
option markets close before the markets for the
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underlying securities, significant price and rate movements can take place in
the underlying markets that cannot be reflected in the options markets.
(a) Options on Stocks and Stock Indices. A Fund may purchase put and
call options and write covered put and call options on stocks and stock indices
listed on domestic and foreign securities exchanges in order to hedge against
movements in the equity markets or to increase income to the Fund. In addition,
the Fund may purchase options on stocks that are traded over-the-counter.
Options on stock indices are similar to options on specific securities.
However, because options on stock indices do not involve the delivery of an
underlying security, the option represents the holder's right to obtain from
the writer cash in an amount equal to a fixed multiple of the amount by which
the exercise price exceeds (in the case of a put) or is less than (in the case
of a call) the closing value of the underlying stock index on the exercise
date. Currently, options traded include the Standard & Poor's 100 Index of
Composite Stocks, Standard & Poor's 500 Index of Composite Stocks (the "S&P 500
Index"), the New York Stock Exchange ("NYSE") Composite Index, the American
Stock Exchange ("AMEX") Market Value Index, the National Over-the-Counter Index
and other standard broadly based stock market indices. Options are also traded
in certain industry or market segment indices such as the Oil Index, the
Computer Technology Index and the Transportation Index. Stock index options are
subject to position and exercise limits and other regulations imposed by the
exchange on which they are traded.
If the investment manager expects general stock market prices to rise,
a Fund might purchase a call option on a stock index or a futures contract on
that index as a hedge against an increase in prices of particular equity
securities it wants ultimately to buy. If in fact the stock index does rise,
the price of the particular equity securities intended to be purchased may also
increase, but that increase would be offset in part by the increase in the
value of the Fund's index option or futures contract resulting from the
increase in the index. If, on the other hand, the investment manager expects
general stock market prices to decline, it might purchase a put option or sell
a futures contract on the index. If that index does in fact decline, the value
of some or all of the equity securities in a Fund's portfolio may also be
expected to decline, but that decrease would be offset in part by the increase
in the value of the Fund's position in such put option or futures contract.
(b) Options on Currencies. A Fund may invest in options on currencies
traded on domestic and foreign securities exchanges in order to hedge against
currency exchange rate risks or to increase income, as described above in
"Forward Currency Exchange Contracts."
(c) Options on Futures Contracts. A Fund may purchase put and call
options and write covered put and call options on futures contracts on stock
indices, interest rates and currencies traded on domestic and, to the extent
permitted by the CFTC, foreign exchanges, in order to hedge all or a portion of
its investments or to increase income and may enter into closing transactions
in order to terminate existing positions. There is no guarantee that such
closing transactions can be effected. An option on a stock index futures
contract, interest rate futures contract or currency futures contract, as
contrasted with the direct investment in such a contract, gives the purchaser
the right, in return for the premium paid, to assume a position in the
underlying contract at a specified exercise price at any time on or before the
expiration date of the option. Upon exercise of an option, the delivery of the
futures position by the writer of the option to the holder of the option will
be accompanied by delivery of the accumulated balance in the writer's futures
margin account. The potential loss related to the purchase of an option on a
futures contract is limited to the premium paid for the option (plus
transaction costs). While the price of the option is fixed at the point of
sale, the value of the option does change daily and the change would be
reflected in the net asset value of the Fund.
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INTEREST RATE AND EQUITY SWAPS AND RELATED TRANSACTIONS. Certain Funds
may enter into interest rate and equity swaps and may purchase or sell (i.e.,
write) interest rate and equity caps, floors and collars. A Fund expects to
enter into these transactions in order to hedge against either a decline in the
value of the securities included in the Fund's portfolio, or against an
increase in the price of the securities which it plans to purchase, or in order
to preserve or maintain a return or spread on a particular investment or
portion of its portfolio or to achieve a particular return on cash balances, or
in order to increase income. Interest rate and equity swaps involve the
exchange by a Fund with another party of their respective commitments to make
or receive payments based on a notional principal amount. The purchase of an
interest rate or equity cap entitles the purchaser, to the extent that a
specified index exceeds a predetermined level, to receive payments on a
contractually-based principal amount from the party selling the interest rate
or equity cap. The purchase of an interest rate or equity floor entitles the
purchaser, to the extent that a specified index falls below a predetermined
rate, to receive payments on a contractually-based principal amount from the
party selling the interest rate or equity floor. A collar is a combination of a
cap and a floor which preserve a certain return within a predetermined range of
values.
A Fund may enter into interest rate and equity swaps, caps, floors and
collars on either an asset-based or liability-based basis, depending on whether
it is hedging its assets or its liabilities, and will usually enter into
interest rate and equity swaps on a net basis (i.e., the two payment streams
are netted out), with the Fund receiving or paying, as the case may be, only
the net amount of the two payments. The net amount of the excess, if any, of a
Fund's obligations over its entitlements with respect to each interest rate or
equity swap will be accrued on a daily basis, and an amount of cash and/or
liquid high grade debt securities having an aggregate net asset value at least
equal to the accrued excess will be maintained in a segregated account by the
Fund's custodian. If a Fund enters into an interest rate or equity swap on
other than a net basis, the Fund will maintain a segregated account in the full
amount accrued on a daily basis of the Fund's obligations with respect to the
swap. A Fund will only enter into interest rate and equity swap, cap, floor or
collar transactions with counterparties the investment manager deems to be
creditworthy. The investment manager will monitor the creditworthiness of
counterparties to its interest rate and equity swap, cap, floor and collar
transactions on an ongoing basis. If there is a default by the other party to
such a transaction, a Fund will have contractual remedies pursuant to the
agreements related to the transaction. The swap market has grown substantially
in recent years with a large number of banks and investment banking firms
acting both as principals and agents utilizing standardized swap documentation.
The investment manager has determined that, as a result, the swap market has
become relatively liquid. Caps, floors and collars are more recent innovations
for which standardized documentation has not yet been developed and,
accordingly, they are less liquid than swaps. To the extent a Fund sells caps,
floors, and collars it will maintain in a segregated account cash and/or liquid
high grade debt securities having an aggregate net asset value at least equal
to the full amount, accrued on a daily basis, of the Fund's obligations with
respect to the caps, floors or collars. The use of interest rate and equity
swaps is a highly specialized activity which involves investment techniques and
risks different from those associated with ordinary portfolio securities
transactions. If the investment manager is incorrect in its forecasts of market
values, interest rates and other applicable factors, the investment performance
of a Fund would diminish compared with what it would have been if these
investment techniques were not utilized. Moreover, even if the investment
manager is correct in its forecasts, there is a risk that the swap position may
correlate imperfectly with the price of the asset or liability being hedged.
There is no limit on the amount of interest rate and equity swap
transactions that may be entered into by a Fund. These transactions do not
involve the delivery of securities or other underlying assets or principal.
Accordingly, the risk of loss with respect to interest rate and equity swaps is
limited to the net amount of payments that a Fund is contractually obligated to
make, if any. The effective use of
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swaps and related transactions by a Fund may depend, among other things on the
Fund's ability to terminate the transactions at times when the investment
manager deems it desirable to do so. Because swaps and related transactions are
bilateral contractual arrangements between a Fund and counterparties to the
transactions, the Fund's ability to terminate such an arrangement may be
considerably more limited than in the case of an exchange traded instrument. To
the extent a Fund does not, or cannot, terminate such a transaction in a timely
manner, the Fund may suffer a loss in excess of any amounts that it may have
received, or expected to receive, as a result of entering into the transaction.
If the other party to a swap defaults, a Fund's risk of loss is the net amount
of payments that the Fund contractually is entitled to receive, if any. A Fund
may purchase and sell caps, floors and collars without limitation, subject to
the segregated account requirement described above.
OTHER INVESTMENT COMPANIES
As indicated under "Investment Restrictions" below, a Fund may from
time to time invest in securities of other investment companies. The return on
such investments will be reduced by the operating expenses, including
investment advisory and administration fees, of such investment funds, and will
be further reduced by Fund expenses, including management fees; that is, there
will be a layering of certain fees and expenses.
INVESTMENT LIMITATIONS
Except for (i) the investment limitations set forth below which are
indicated as fundamental policies, (ii) the investment restrictions set forth
in the Prospectus and (iii) each Fund's investment objective as described in
the Prospectus, the other policies and percentage limitations referred to in
this Statement of Additional Information and the Prospectus are not fundamental
policies of the Funds and may be changed by the applicable Board of Directors
without shareholder approval. The investment restrictions which are fundamental
policies may be changed only when permitted by law, if applicable, and approved
by the holders of a majority of a Fund's outstanding voting securities, which,
as defined by the 1940 Act, means the lesser of (i) 67% of the shares
represented at a meeting at which more than 50% of the outstanding shares are
represented or (ii) more than 50% of the outstanding shares.
If a percentage restriction on investment or use of assets set forth
below is adhered to at the time a transaction is effected, later changes in
percentages resulting from changing values will not be considered a violation.
MONEY MARKET FUND. The Money Market Fund may not:
(1) invest more than 10% of the value of its net assets in
securities which are illiquid;
<PAGE> 369
16
(2) purchase shares of other investment companies (except as part
of a merger, consolidation or reorganization or purchase of
assets approved by the Fund's shareholders), provided that the
Fund may purchase shares of any registered open-end investment
company that determines its net asset value per share based on
the amortized cost or penny-rounding method, if immediately
after any such purchase the Fund does not (a) own more than 3%
of the outstanding voting stock of any one investment company,
(b) invest more than 5% of the value of its total assets in
any one investment company, or (c) invest more than 10% of the
value of its total assets in the aggregate in securities of
investment companies;
(3) purchase securities on margin (except for delayed delivery or
when-issued transactions or such short-term credits as are
necessary for the clearance of transactions);
(4) sell securities short;
(5) purchase or sell commodities or commodity contracts, including
futures contracts;
(6) invest for the purpose of exercising control over management
of any company;
(7) make loans, except that the Fund may (a) purchase and hold
debt instruments in accordance with its investment objective
and policies and (b) enter into repurchase agreements with
respect to portfolio securities;
(8) underwrite the securities of other issuers, except to the
extent that the purchase of investments directly from the
issuer thereof and later disposition of such securities in
accordance with the Fund's investment program may be deemed to
be an underwriting;
(9) purchase real estate or real estate limited partnership
interests (other than securities issued by companies that
invest in real estate or interests therein);
(10) invest directly in interests in oil, gas or other mineral
exploration development programs or mineral leases; or
(11) purchase warrants.
Each of the above restrictions are fundamental policies of the Money
Market Fund. For the purpose of applying the above percentage restrictions and
the percentage investment limitations set forth in the Prospectus to
receivables-backed obligations, both the special purpose entity issuing the
receivables-backed obligations and the issuer of the underlying receivables
will be considered an issuer.
<PAGE> 370
17
HIGH YIELD BOND FUND, EMERGING MARKETS FUND AND ASIA GROWTH FUND. Each of the
High Yield Bond Fund, Emerging Markets Fund and Asia Growth Fund may not:
(1) underwrite securities of other issuers, except to the extent that
the purchase of investments directly from the issuer thereof or from an
underwriter for an issuer and the later disposition of such securities in
accordance with a Fund's investment program may be deemed to be an
underwriting;
(2) purchase or sell real estate, although a Fund may purchase and
sell securities of companies which deal in real estate, may purchase and sell
marketable securities which are secured by interests in real estate and may
invest in mortgages and mortgage-backed securities;
(3) purchase or sell commodities or commodity contracts except that a
Fund may engage in derivative transactions to the extent permitted by its
investment policies as such policies are set forth from time to time in the
Prospectus and this Statement of Additional Information;
(4) make loans, except that (a) a Fund may purchase and hold debt
securities in accordance with its investment objective and policies, (b) a Fund
may enter into repurchase agreements with respect to portfolio securities,
subject to applicable limitations of its investment policies, (c) a Fund may
lend portfolio securities with a value not in excess of one-third of the value
of its total assets, provided that collateral arrangements with respect to
options, forward currency and futures transactions will not be deemed to
involve loans of securities, and (d) delays in the settlement of securities
transactions will not be considered loans;
(5) purchase the securities of other investment companies except as
permitted under the 1940 Act or in connection with a merger, consolidation,
acquisition or reorganization;
(6) purchase securities on margin (except for delayed delivery or
when-issued transactions or such short-term credits as are necessary for the
clearance of transactions, and except for initial and variation margin payments
in connection with purchases or sales of futures contracts);
(7) sell securities short; provided that short positions in a futures
contract or forward contract are permitted;
(8) purchase or retain any securities of an issuer if one or more
persons affiliated with a Fund owns beneficially more than 1/2 of 1% of the
outstanding securities of such issuer and such affiliated persons so owning 1/2
of 1% together own beneficially more than 5% of such securities;
<PAGE> 371
18
(9) invest in oil, gas and other mineral leases, provided, however,
that this shall not prohibit a Fund from purchasing publicly traded securities
of companies engaging in whole or in part in such activities;
(10) with respect to the High Yield Bond Fund only, purchase the
securities of any issuer if by reason thereof the value of its investment in
all securities of that issuer will exceed 5% of the value of its total assets;
(11) purchase securities of issuers which it is restricted from
selling to the public without registration under the 1933 Act if by reason
thereof the value of its aggregate investment in such classes of securities
will exceed 10% of its total assets, provided, however, that this limitation
shall not apply to Rule 144A securities;
(12) invest more than 5% of its total assets in securities of
unseasoned issuers (other than securities issued or guaranteed by U.S. federal
or state or foreign governments or agencies, instrumentalities or political
subdivisions thereof) which, including their predecessors, have been in
operation for less than three years;
(13) purchase puts, calls, straddles, spreads and any combination
thereof if by reason thereof the value of its aggregate investment in such
classes of securities will exceed 5% of its total assets; or
(14) invest in warrants (other than warrants acquired by a Fund as
part of a unit or attached to securities at the time of purchase) if, as a
result, the investments (valued at the lower of cost or market) would exceed 5%
of the value of the Fund's net assets or if, as a result, more than 2% of the
Fund's net assets would be invested in warrants that are not listed on AMEX or
NYSE.
Investment restrictions (1) through (5) described above are
fundamental policies of each of the High Yield Bond Fund, Emerging Markets Fund
and Asia Growth Fund. Restrictions (6) through (14) are non-fundamental
policies of such Fund.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Certificates representing shares of the Funds will not be issued to
shareholders. Investors Bank and Trust Company ("Investors Bank"), the Fund's
transfer agent, will maintain an account for each shareholder upon which the
registration and transfer of shares are recorded, and any transfers shall be
reflected by bookkeeping entry, without physical delivery. Detailed
confirmations of each purchase or redemption are sent to each shareholder.
Monthly statements of account are sent which include shares purchased as a
result of a reinvestment of Fund distributions.
Investors Bank will require that a shareholder provide requests in
writing, accompanied by a valid signature guarantee form, when changing certain
information in an account (i.e., wiring instructions, telephone privileges,
etc.).
<PAGE> 372
19
If the Board of Directors of each of Institutional Series Funds and
Series Funds shall determine that it is in the best interests of the remaining
shareholders of a Fund, the Fund may pay the redemption price in whole, or in
part, by a distribution in kind from the portfolio of the Fund, in lieu of
cash, taking such securities at their value employed for determining such
redemption price, and selecting the securities in such manner as such Board of
Directors may deem fair and equitable. However, each Fund has made an election
pursuant to Rule 18f-1 under the 1940 Act requiring that all redemptions be
effected in cash to each redeeming shareholder, during periods of 90 days, up
to the lesser of $250,000 or 1% of the net assets of such Fund. A shareholder
who receives a distribution in kind may incur a brokerage commission upon a
later disposition of such securities and may receive less than the redemption
value of such securities or property upon sale, particularly where such
securities are sold prior to maturity. Redemption in kind is not as liquid as
a cash redemption.
Under the 1940 Act, a Fund may suspend the right of redemption or
postpone the date of payment upon redemption for any period during which the
NYSE is closed, other than customary weekend and holiday closings, or during
which trading on the NYSE is restricted, or during which (as determined by the
SEC by rule or regulation) an emergency exists as a result of which disposal or
valuation of portfolio securities is not reasonably practicable, or for such
other periods as the SEC may permit. A Fund may also suspend or postpone the
recordation of the transfer of its shares upon the occurrence of any of the
foregoing conditions.
EXCHANGE PRIVILEGE. Shareholders may exchange all or part of their
shares for shares of other Funds in the Salomon Brothers Institutional
Investment Series, as indicated in the Prospectus. The value of the shares
exchanged must meet the investment minimum of the Fund into which the investor
is exchanging.
The exchange privilege enables shareholders of a Fund to acquire
shares in a Fund with a different investment objective when they believe that a
shift between Funds is an appropriate investment decision. This privilege is
available to shareholders residing in any state in which the Fund shares being
acquired may legally be sold.
Exercise of the exchange privilege is treated as a sale and repurchase
for federal income tax purposes and, depending on the circumstances, a short-
or long-term capital gain or loss may be realized. The price of the shares of
the Fund into which shares are exchanged will be the new cost basis for tax
purposes.
Upon receipt of proper instructions and all necessary supporting
documents, shares submitted for exchange are redeemed at the then-current net
asset value and the proceeds immediately invested in shares of the Fund being
acquired at a price equal to the then current net asset value of such shares.
All accounts involved in a telephone or telegram exchange must have
the same registration. If a new account is to be established, the dollar amount
to be exchanged must be at least as much as the minimum initial investment of
the Fund whose shares are being
<PAGE> 373
20
purchased. Any new account established by exchange will automatically be
registered in the same way as the account from which shares are exchanged and
will carry the same dividend option.
The exchange privilege is not designed for investors trying to catch
short-term savings in market prices by making frequent exchanges. A Fund
reserves the right to impose a limit on the number of exchanges a shareholder
may make. Call or write the applicable Fund for further details.
PORTFOLIO TRANSACTIONS
Subject to policy established by the applicable Fund's Board of
Directors, the investment manager is primarily responsible for each Fund's
portfolio decisions and the placing of the Fund's portfolio transactions.
Fixed-income, certain short-term securities and certain equities
normally will be purchased or sold from or to issuers directly or to dealers
serving as market makers for the securities at a net price, which may include
dealer spreads and underwriting commissions. Equity securities may also be
purchased or sold through brokers who will be paid a commission.
The general policy of each Fund in selecting brokers and dealers is to
obtain the best results taking into account factors such as the general
execution and operational facilities of the broker or dealer, the type and size
of the transaction involved, the creditworthiness of the broker or dealer, the
stability of the broker or dealer, execution and settlement capabilities, time
required to negotiate and execute the trade, research services and the
investment manager's arrangements related thereto (as described below), overall
performance, the dealer's risk in positioning the securities involved, and the
broker's commissions and dealer's spread or mark-up. While the investment
manager generally seeks the best price in placing its orders, a Fund may not
necessarily be paying the lowest price available.
Notwithstanding the above, in compliance with Section 28(e) of the
Securities Exchange Act of 1934, the investment manager may select brokers who
charge a commission in excess of that charged by other brokers, if the
investment manager determines in good faith that the commission to be charged
is reasonable in relation to the brokerage and research services provided to
the investment manager by such brokers. Research services generally consist of
research or statistical reports or oral advice from brokers and dealers
regarding particular companies, industries or general economic conditions. The
investment manager may also have arrangements with brokers pursuant to which
such brokers provide research services to the investment manager in exchange
for a certain volume of brokerage 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.
<PAGE> 374
21
Research services furnished to the investment manager by brokers who
effect securities transactions for a Fund may be used by the investment manager
in servicing other investment companies and accounts which it manages.
Similarly, research services furnished to the investment manager by brokers who
effect securities transactions for other investment companies and accounts
which the investment manager manages may be used by the investment manager in
servicing a Fund. Not all of these research services are used by the investment
manager in managing any particular account, including the Funds.
Affiliated persons of a Fund, or affiliated persons of such persons,
may from time to time be selected to execute portfolio transactions for such
Fund. Subject to the considerations discussed above and in accordance with
procedures adopted by the applicable Fund'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.
Each Fund's Board of Directors has determined that Salomon Brothers
may execute portfolio transactions for such Fund so long as the Fund is charged
commission rates consistent with those charged by other brokers in comparable
transactions with clients that are comparable to the Fund.
Under the 1940 Act, persons affiliated with a Fund are prohibited from
dealing with it as a principal in the purchase and sale of securities unless an
exemptive order allowing such transactions is obtained from the SEC. However, a
Fund may purchase securities from underwriting syndicates of which the
investment manager or any of their affiliates (including Salomon Brothers Inc)
is a member under certain conditions, in accordance with the provisions of Rule
10f-3 under the 1940 Act.
MANAGEMENT
DIRECTORS AND OFFICERS
The principal occupations of the directors and executive officers of
the Institutional Series Funds and the Series Funds for the past five years are
listed below. The board composition of Institutional Series Funds and Series
Funds is identical. Certain of the directors and officers are also directors and
officers of one or more other investment companies for which SBAM acts as
investment manager.
Except as indicated below, the address of Mr. Hyland and each
executive officer is Salomon Brothers Asset Management Inc, 7 World Trade
Center, New York, New York 10048.
<PAGE> 375
22
DIRECTORS OF SERIES FUNDS
<TABLE>
<CAPTION>
POSITION(S) Principal
HELD WITH Occupation(s)
NAME AND ADDRESS Series Funds Past 5 Years
---------------- ------------ ------------
<S> <C> <C>
Charles F. Barber Director Consultant; formerly Chairman
66 Glenwood Drive (Audit Committee of the Board, ASARCO
Greenwich, CT 06830 Member) Incorporated
Age 79
Carol L. Colman Director President, Colman Consulting
Colman Consulting (Audit Committee Co., Inc.; formerly Managing
Co., Inc. Member) Partner of Inferential Focus
P.O. Box 212
North Salem, NY 10560
Age 50
Daniel P. Cronin Director Vice President and General
Pfizer, Inc (Audit Committee Counsel,
253 East 42nd Street Member) Pfizer International Inc
New York, NY 10017 since 1987;
Age 50 Senior Assistant General
Counsel,
Pfizer, Inc since 1989
Michael S. Hyland* Director and President, SBAM and Managing
Age 50 President Director, Salomon Brothers
since 1989; formerly Managing
Director,
First Boston Asset Management
and Managing Director, The
First Boston Corporation
</TABLE>
<PAGE> 376
23
[Directors of Institutional Series Funds to be named]
* Interested Person as defined in the 1940 Act.
<PAGE> 377
24
EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
PRINCIPAL
POSITION(S) OCCUPATION(S)
NAME AND ADDRESS HELD PAST 5 YEARS
---------------- ----------- -------------
<S> <C> <C>
Giampaolo G. Guarnieri Executive Vice Vice President and Portfolio Manager,
Salomon Brothers Asset President SBAM AP since April 1995; formerly
Management Asia Senior Portfolio Investment Manager,
Pacific Limited Credit Agricole Asset Management
Three Exchange Square, (South East Asia) Limited since 1992
Hong Kong and head of direct investment
Age 32 activities from 1990-1992
Steven Guterman (Series Executive Vice Managing Director, SBAM and Salomon
Funds only) President Brothers Inc since January 1996;
Age 42 formerly Vice President, SBAM and
Salomon Brothers Inc.
Peter J. Wilby Executive Vice Managing Director, SBAM and Salomon
Age 37 President Brothers Inc since January 1996;
formerly Vice President, SBAM and
Salomon Brothers Inc.
Richard E. Dahlberg Executive Vice Managing Director, SBAM and Salomon
(Series Funds only) President Brothers Inc since January 1996;
Age 58 formerly Vice President SBAM since
June 1995; prior to that employed by
Massachusetts Financial Services
Company.
Lawrence H. Kaplan Executive Vice Vice President and Chief Counsel, SBAM
Age 39 President and General and Vice President, Salomon Brothers
Counsel Inc since May 1995; formerly Senior
Vice President, Director and General
Counsel, Kidder Peabody Asset
Management, Inc. and Senior Vice
President, Kidder, Peabody & Co.
Incorporated since November 1990
Eliza Lau Vice President Vice President, SBAM since 1995;
Age 33 previously research analyst, Salomon
Brothers Inc.
James E. Craige Vice President Vice President, SBAM and Salomon
(Institutional Series Brothers Inc since 1992; prior to that
Funds only) employed as an associate, Shearson
Age 28 Lehman Advisors.
Thomas K. Flanagan Vice President Director, SBAM and Salomon Brothers
(Institutional Series Inc since 1996; formerly Vice
Funds only) President, SBAM and Salomon Brothers
Age 43 Inc since 1991; prior to that employed
as a Director, Merrill Lynch & Co.
Nancy Noyes (Series Vice President Director, SBAM and Salomon Brothers
Funds officer only) Inc since January 1996; formerly Vice
Age 37 President, SBAM and Salomon Brothers
Inc.
Alan M. Mandel Treasurer Vice President, SBAM since January
Age 38 1995; formerly Chief Financial
Officer, Hyperion Capital Management
since 1991; prior to which he was Vice
President, Mitchell Hutchins Asset
Management ("MHAM".)
</TABLE>
<PAGE> 378
25
<TABLE>
<S> <C> <C>
Tana E. Tselepis Secretary Compliance Officer, SBAM since 1993
Age 60 and Senior Administrator since 1989;
Vice President, Salomon Brothers since
1991; formerly Vice President and
Senior Administrator at First Boston
Asset Management Corporation, 1985-
1989.
Reji Paul Assistant Treasurer Investment Accounting Manager, SBAM
Age 33 since 1995; formerly Assistant Vice
President, MHAM since 1994; prior to
which he was Supervisor at MHAM.
Janet Tolchin Assistant Treasurer Investment Accounting Manager, SBAM
(Series Funds officer only)
Age 37
Amy Yeung Assistant Treasurer Investment Accounting Manager, SBAM
(Institutional Series Only) since April 1995; formerly Manager of
Age 31 McGladrey & Pullen, LLP (accounting
firm).
Jennifer G. Muzzey Assistant Secretary Employee of SBAM since June 1994;
Age 36 formerly Vice President of SunAmerica
Asset Management Corporation.
</TABLE>
COMPENSATION TABLE
The following table provides information concerning the compensation
paid during the fiscal year ended December 31, 1995 to each director of the
Series Funds. It is estimated that each Director of Institutional Series Funds,
except Mr. Hyland will receive $5,000 for the 1996 fiscal year as compensation
for serving as director. Neither the Institutional Series Funds nor the Series
Funds provide any pension or retirement benefits to directors. In addition,
no remuneration was paid during the fiscal year ended December 31, 1995 by the
Series Funds or will be paid during the 1996 fiscal year by the Institutional
Series Funds to officers of the Series Funds or to Mr. Hyland, who as an
employee of SBAM may be defined as an "interested person" under the 1940 Act.
SERIES FUNDS
<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION TOTAL COMPENSATION
NAME OF PERSON, FROM THE FROM OTHER FUNDS
POSITION SERIES FUNDS ADVISED BY SBAM(A) TOTAL COMPENSATION
-------- ------------ ------------------ ------------------
<S> <C> <C> <C>
Charles F. Barber
Director $4,326 $110,149(12) $114,475
Daniel P. Cronin
Director $3,544 $26,399(3) $29,943
Carol L. Colman
Director $4,416 $28,250(3) $32,666
</TABLE>
- -----------------
(A) The numbers in parenthesis indicate the applicable number of
investment company directorships held by that director.
<PAGE> 379
26
PRINCIPAL HOLDERS OF SECURITIES
As of the date of this Statement of Additional Information, Salomon
Brothers Asset Management Inc, 7 World Trade Center, New York, NY 10048, owns
all of the outstanding shares of the High Yield Bond Fund, the Emerging Markets
Debt Fund and the Asia Growth Fund and, accordingly, is a control person of
each of these Funds.
<TABLE>
<CAPTION>
LARGEST SHAREHOLDERS % OF SHARES
<S> <C> <C>
1 SALOMON BROTHERS INC A/C NYS6734 24.34%
7 WORLD TRADE CENTER, 40TH FLOOR
NEW YORK, NY 10048
2 STATE STREET BANK & TRUST CO FBO 18.82%
SALOMON BROTHERS NY MUNICIPAL DEPT
7 WORLD TRADE CENTER, 38TH FLOOR
NEW YORK, NY 10048
3 SALOMON BROTHERS A/C VO263 7.60%
7 WORLD TRADE CENTER, 40TH FLOOR
NEW YORK, NY 10048
4 MARTIN L LEIBOWITZ 7.24%
ONE FIFTH AVENUE
APT. #13K
NEW YORK, NY 10005
</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 meetings.
As of December 31, 1995, directors and officers of the Series Funds as a
group beneficially owned less than 1% of the outstanding shares of any series
of the Series Fund.
INVESTMENT MANAGER
Each Fund retains SBAM to act as its investment manager. SBAM, an indirect
wholly-owned subsidiary of Salomon Inc, serves as the investment manager to
numerous individuals and institutions and other investment companies.
The management contract between SBAM and each respective Fund provides
that SBAM shall manage the operations of such Fund, subject to policy
established by the Board of Directors. Pursuant to the applicable management
contract, SBAM manages each Fund's investment portfolio, directs purchases and
sales of portfolio securities and reports thereon to the Fund's officers and
directors regularly. SBAM also provides the office space, facilities, equipment
and personnel necessary to perform the following services for each Fund: SEC
compliance, including record keeping, reporting requirements and registration
statements and proxies; supervision of Fund operations, including custodian,
accountants and counsel and other parties performing services or operational
functions for each Fund, certain administrative and clerical services,
including certain accounting services, facilitation of redemption requests,
exchange privileges, and account adjustments, development of new shareholder
services and maintenance of certain books and records; and certain services to
each Fund's shareholders, including assuring that investments and redemptions
are completed efficiently,
<PAGE> 380
27
responding to shareholder inquiries and maintaining a flow of information to
shareholders. In addition, SBAM pays the compensation of each Fund's officers,
employees and directors affiliated with SBAM. Each Fund bears all other costs
of its operations, including the compensation of its directors not affiliated
with SBAM.
Pursuant to a sub-advisory agreement (the "Subadvisory Agreement"), SBAM
has retained Salomon Brothers Asia Pacific Limited ("SBAM AP") as sub-adviser to
the Asia Growth Fund. Subject to the supervision of SBAM, SBAM AP will have
responsibility for the day-to-day management of the Fund's portfolio. Pursuant
to a sub-administration agreement (the "Subadministration Agreement"), SBAM has
retained Salomon Brothers Asset Management Limited ("SBAM Limited") to provide
certain administrative services to SBAM relating to the Asia Growth Fund. Like
SBAM, SBAM AP and SBAM Limited are indirect, wholly-owned subsidiaries of
Salomon Inc. SBAM AP is a member of the Hong Kong Securities and Futures
Commission, SBAM Limited is a member of the Investment Management Regulatory
Organization in the United Kingdom and both SBAM AP and SBAM Limited are
registered as investment advisers in the United States pursuant to the
Investment Advisers Act of 1940, as amended.
As compensation for its services, the Money Market Fund pays SBAM a monthly
fee at an annual rate of .20% of the Fund's average daily net assets. On
November 16, 1995, the Board of Directors of the Series Funds approved an
amendment to the management contract of the Money Market Fund, subject to
shareholder approval, to increase the management fee from .10% of average daily
net assets to .20%. The shareholders approved the amendment on March 26, 1996,
to become effective as of the date of this Prospectus. As of the date of this
Statement of Additional Information, SBAM has voluntarily agreed to reduce or
otherwise limit the expenses of the Fund (exclusive of taxes, interest and
extraordinary expenses such as litigation and indemnification expenses), on an
annualized basis, to .25% of the Fund's average daily net assets and for a
period of at least one year from the date of the Prospectus such expenses shall
not exceed .18% of the Fund's average daily net assets. See "Fee Table" in the
Prospectus. For the fiscal years ended December 31, 1993, December 31, 1994 and
December 31, 1995, the Money Market Fund paid SBAM $39,189, $29,658 and $7,609
(which reflects a waiver of $7,609) respectively, for its services.
As compensation for its services, the High Yield Bond Fund pays SBAM a
monthly fee at an annual rate of .50% of the Fund's average daily net assets;
the Emerging Markets Debt Fund pays SBAM a monthly fee at an annual rate of .70%
of the Fund's average daily net assets and the Asia Growth Fund pays SBAM a
monthly fee at an annual rate of .75% of the Fund's average daily net assets.
Effective as of the date of the Prospectus, SBAM has voluntarily agreed to
reduce or otherwise limit the expenses of the High Yield Bond Fund, Emerging
Markets Debt Fund and Asia Growth Fund (exclusive of taxes, interest and
extraordinary expenses such as litigation and indemnification expenses) on an
annualized basis, to .55%, .75% and 1.00%, respectively, of the applicable
Fund's average daily net assets. See "Fee Table" in the Prospectus. For its
services under the Subsidiary Agreement, SBAM AP is compensated by SBAM at no
additional expense to the Asia Growth Fund. For its services under the
Subadministration Agreement, SBAM Limited is compensated by SBAM at no
additional cost to the Asia Growth Fund at an annual rate of [.10%] of the Asia
Growth Fund's daily net assets.
The management contract for the Money Market Fund was approved by the
Series Funds Board of Directors on November 29, 1990, by the Fund's sole
shareholder, SBAM, on December 7, 1990 and ratified by shareholders on
September 20, 1991. The management contract for each of the High Yield Bond
Fund, the Emerging Markets Debt Fund and the Asia Growth Fund was approved by
the Institutional Series Fund Board of Directors on March 19, 1996 and by the
sole shareholder of each Fund, SBAM, on March 22, 1996. 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
<PAGE> 381
28
of Directors or a majority of the outstanding voting securities. Each
management contract may be terminated by either party on 60 days' written
notice, and will terminate immediately in the event of its assignment.
Under the terms of the management contract between each Fund and SBAM,
neither SBAM nor its affiliates shall be liable for losses or damages incurred
by the Fund (including, with respect to the Asia Growth Fund, the imposition of
certain Hong Kong tax liabilities on the Fund), unless such losses or damages
are attributable to the wilful misfeasance, bad faith or gross negligence on
the part of either SBAM or its affiliates or from reckless disregard by it of
its obligations and duties under the Management Contract ("disabling conduct").
In addition, each of the High Yield Bond Fund, Emerging Markets Debt Fund and
Asia Growth Fund will indemnify SBAM and its affiliates and hold each of them
harmless against any losses or damages (including, with respect to the Asia
Growth Fund, the imposition of certain Hong Kong tax liabilities on the Fund),
not resulting from disabling conduct.
Investment decisions for a particular Fund are made independently from
those for other funds and accounts advised or managed by SBAM or SBAM AP. Such
other funds and accounts may also invest in the same securities as a Fund. If
those funds or accounts are prepared to invest in, or desire to dispose of, the
same security at the same time as a Fund, however, transactions in such
securities will be made, insofar as feasible, for the respective funds and
accounts in a manner deemed equitable to all. In some cases, this procedure may
adversely affect the size of the position obtained for or disposed of by a Fund
or the price paid or received by a Fund. In addition, because of different
investment objectives, a particular security may be purchased for one or more
funds or accounts when one or more funds or accounts are selling the same
security.
If in any fiscal year expenses borne by a Fund (excluding interest, taxes,
brokerage commissions and other portfolio transaction expenses and any
extraordinary expenses, but including the management fee) exceed expense
limitations imposed by applicable state securities regulations, SBAM, in its
capacity as investment manager, will reimburse that Fund for any such excess to
the extent required by such regulations up to the amount of the fees payable to
it. California is the only state which currently imposes such an expense
limitation. The limitation is 2.5% of the first $30 million of the average net
assets, 2.0% of the next $70 million of the average net-assets and 1.5% of the
remaining average net assets. Such reimbursement, if any, will be estimated and
paid on a monthly basis. There was no reimbursement to the Money Market Fund
for the years ended December 31, 1995, 1994 or 1993.
Rule 17j-1 under the 1940 Act requires all registered investment companies
and their investment advisers and principal underwriters to adopt written codes
of ethics and institute procedures designed to prevent "access persons" (as
defined in Rule 17j- 1) from engaging in any fraudulent, deceptive or
manipulative trading practices. The Board of Directors for the Series Funds and
the Institutional Series Funds has adopted a code of ethics (the "Fund Code")
that incorporates personal trading policies and procedures applicable to access
persons of each Fund, which includes officers, directors and other specified
persons who may make, participate in or otherwise obtain information concerning
the purchase or sale of securities by the Fund. In addition, the Fund Code
attaches and incorporates personal trading policies and procedures applicable
to access persons of SBAM, as the investment adviser to each Fund, and, in the
case Asia Growth Fund, access persons of SBAM AP, as the Fund's sub-adviser,
which policies serve as SBAM's and SBAM AP's code of ethics, respectively (the
"Adviser Code"). The Fund and Adviser Codes have been designed to address
potential conflicts of interest that can arise in connection with the personal
trading activities of investment company and investment advisory personnel.
Pursuant to the Fund and Adviser Codes, access persons are generally
permitted to engage in personal securities transactions, provided that a
transaction does not involve securities that are being purchased or sold, are
being considered for purchase or sale, or are being recommended for purchase or
sale by or for a Fund. In
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29
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 employ Investors Bank under
their applicable administration agreement to provide certain administrative
services to the respective Funds. For its services to the Money Market Fund,
Investors Bank receives a fee from the Fund, at an annual rate of .08% of
the Fund's average daily net assets. For its services as administrator,
custodian and transfer agent to the High Yield Bond Fund, Emerging Markets Debt
Fund and Asia Growth Fund, each Fund pays Investors Bank a fee of each Fund's
average daily net assets at an annual rate of .10% up to $500 million in net
assets and .05% of each Funds average daily net assets in excess of $500
million. The services provided by Investors Bank under the applicable
administration agreement include certain accounting, clerical and bookkeeping
services; Blue Sky compliance; corporate secretarial services and assistance in
the preparation and filing of tax returns and reports to shareholders and the
SEC. Investors Bank is located at 89 South Street, Boston, Massachusetts 02111.
The Series Funds paid the Boston Company Advisors, Inc., the Money Market
Fund's previous administrator ("Boston Company"), a fee calculated daily and
payable monthly, at annual rate of .08% of that Fund's average daily net
assets. For the fiscal years ended December 31, 1993 and 1994, Boston Company
received fees totaling $32,105 and $21,964. Investors Bank received fees
totaling $1,762 and $12,208 for the fiscal years ended December 31, 1994
and 1995 from the Money Market Fund.
DISTRIBUTOR
Salomon Brothers, located at 7 World Trade Center, New York, New York
10048, serves as each Fund's distributor. Salomon Brothers is an indirect
wholly-owned subsidiary of Salomon Inc.
EXPENSES
Each Fund's expenses include taxes, interest, fees and salaries of such
Fund directors and officers who are not directors, officers or employees of the
Fund's service contractors, SEC fees, state securities qualification fees,
costs of preparing and printing prospectuses for regulatory purposes and for
distribution to existing shareholders, advisory and administration fees,
charges of the custodian and of the transfer and dividend disbursing agent,
certain insurance premiums, outside auditing and legal expenses, costs of
shareholder reports and shareholder meetings and any extraordinary expenses.
Each Fund also pays for brokerage fees and commissions (if any) in connection
with the purchase and sale of portfolio securities.
NET ASSET VALUE
The Prospectus discusses the time at which the net asset value of a Fund
is determined for purposes of sales and redemptions. The following is a
description of the procedures used by each Fund in valuing its assets.
In calculating net asset value, portfolio securities listed or traded on
national securities exchanges, or reported by the NASDAQ National Market
reporting system, are valued at the last sale price, or, if there have
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30
been no sales on that day, at the mean of the current bid and ask price which
represents the current value of the security. Over- the-counter securities are
valued at the mean of the current bid and ask price.
Securities that are primarily traded on foreign exchanges generally are
valued at the preceding closing values of such securities on their respective
exchanges, except that when an occurrence subsequent to the time a value was so
established is likely to have changed such value, then the fair value of those
securities will be determined by consideration of other factors by or under the
direction of the applicable Fund's Board of Directors or its delegates. In
valuing assets, prices denominated in foreign currencies are converted to U.S.
dollar equivalents at the current exchange rate. Securities may be valued by
independent pricing services which use prices provided by market-makers or
estimates of market values obtained from yield data relating to instruments or
securities with similar characteristics. Short-term obligations with maturities
of 60 days or less are valued at amortized cost, which constitutes fair value
as determined by the Board of Directors. Amortized cost involves valuing an
instrument at its original cost to a Fund and thereafter assuming a constant
amortization to maturity of any discount or premium, regardless of the impact
of fluctuating interest rates on the market value of the instrument. All other
securities and other assets of a Fund will be valued at fair value as
determined in good faith pursuant to procedures adopted by the Board of
Directors of the applicable Fund.
As stated in the Prospectus, the Money Market Fund seeks to maintain a net
asset value of $1.00 per share with respect to the Fund and, in this
connection, values the Fund's instruments on the basis of amortized cost
pursuant to Rule 2a-7 under the 1940 Act. While this method provides certainty
in valuation, it may result in periods during which value, as determined by
amortized cost, is higher or lower than the price the Fund would receive if it
sold the instrument. During such periods the yield to investors in the Fund may
differ somewhat from that obtained in a similar company which uses market
values for all its portfolio securities. For example, if the use of amortized
cost resulted in a lower (higher) aggregate portfolio value on a particular
day, a prospective investor in the Fund would be able to obtain a somewhat
higher (lower) yield than would result from investment in such a similar
company, and existing investors would receive less (more) investment income.
The purpose of using the amortized cost method of calculation is to attempt to
maintain a stable net asset value per share of $1.00.
The Board of Directors of Series Funds has established procedures
applicable to the Money Market Fund, reasonably designed, taking into account
current market conditions and the Money Market Fund's investment objective, to
stabilize the net asset value per share as computed for the purposes of sales
and redemptions at $1.00. These procedures include periodic review, as the
Board of Directors deem appropriate and at such intervals as are reasonable in
light of current market conditions, of the relationship between the amortized
cost value per share and net asset value per share based upon available
indications of market value.
In the event of a deviation of 1/2 of 1% between the Money Market Fund's
net asset value based upon available market quotations or market equivalents
and $1.00 per share based on amortized cost, the Board of Directors will
promptly consider what action, if any, should be taken. The Board of Directors
will also take such action as they deem appropriate to eliminate or to reduce
to the extent reasonably practicable any material dilution or other unfair
result which might arise from differences between the two. Such action may
include redemption in kind, selling instruments prior to maturity to realize
capital gains or losses or to shorten the average maturity, withholding
dividends, or utilizing a net asset value per share as determined by using
available market quotations.
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31
ADDITIONAL INFORMATION CONCERNING TAXES
TAXATION OF A FUND
The following discussion is a brief summary of certain additional tax
considerations affecting a Fund and its shareholders. No attempt is made to
present a detailed explanation of all federal, state, local and foreign tax
concerns, and the discussions set forth here and in the Prospectus do not
constitute tax advice. Investors are urged to consult their own tax advisers
with specific questions relating to federal, state, local or foreign taxes.
Each Fund intends to qualify and elect to be treated as a regulated
investment company ("RIC") under Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code").
Qualification as a RIC requires, among other things, that a Fund: (a)
derive at least 90% of its gross income in each taxable year from dividends,
interest, payments with respect to securities loans and gains from the sale or
other disposition of stock or securities, or other income (including gains from
options, futures or forward contracts) derived with respect to its business of
investing in such stock, securities or currencies; (b) derive less than 30% of
its gross income in each taxable year from the sale or other disposition of any
of the following held for less than three months: stock, securities, and
certain options, futures or forward contracts; and (c) diversify its holdings
so that, at the end of each quarter of each taxable year, (i) at least 50% of
the market value of a Fund's assets is represented by cash, cash items, United
States government securities, securities of other regulated investment
companies and other securities with such other securities limited, in respect
of any one issuer, to an amount not greater than 5% of the value of a Fund's
assets and 10% of the outstanding voting securities of such issuer, and (ii)
not more than 25% of the value of its assets is invested in the securities of
any one issuer (other than United States government securities or the
securities of other regulated investment companies).
As a RIC, a Fund will not be subject to Federal income tax on its net
investment income (i.e., its investment company taxable income, as that term is
defined in the Code, determined without regard to the deduction for dividends
paid) and "net capital gains" (the excess of the Funds net long-term capital
gains over net short-term capital losses), if any, that it distributes in each
taxable year to its shareholders, provided that the Fund distributes at least
90% of its net investment income for such taxable year. However, a Fund would
be subject to corporate income tax (currently at a maximum rate of 35%) on any
undistributed net investment income and net capital gains. Each Fund expects to
designate amounts retained as undistributed net capital gains in a notice to
its shareholders who (i) will be required to include in income for United
States federal income tax purposes, as long-term capital gains, their
proportionate shares of the undistributed amount, (ii) will be entitled to
credit their proportionate shares of the 35% tax paid by a Fund on the
undistributed amount, against their federal income tax liabilities and to claim
refunds to the extent such credits exceed their liabilities and (iii) will be
entitled to increase their tax basis, for federal income tax purposes, in their
shares by an amount equal to 65% of the amount of undistributed net capital
gains included in the shareholder's income.
A Fund will be subject to a nondeductible 4% excise tax to the extent that
it does not distribute by the end of each calendar year: (a) at least 98% of
its ordinary income for such calendar year; (b) at least 98% of the excess of
its capital gains over its capital losses for the one year period ending, as a
general rule, on October 31 of each year; and (c) 100% of the undistributed
income and gains from the preceding calendar year (if any) pursuant to the
calculations in (a) and (b). For this purpose any income or gain retained by a
Fund that is subject to corporate tax will be considered to have been
distributed by year-end.
A Fund's investment in options, swaps and related transactions, futures
contracts and forward contracts, options on futures contracts and stock indices
and certain other securities, including transactions involving actual or deemed
short sales or foreign exchange gains or losses are subject to many complex and
special tax rules. For example, over-the-counter options on debt securities and
equity options, including options on stock and on narrow-based stock indexes,
will be subject to tax under Section 1234 of the Code, generally producing
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32
a long-term or short-term capital gain or loss upon exercise, lapse or closing
out of the option or sale of the underlying stock or security. By contrast, a
Fund's treatment of certain other options, futures and forward contracts
entered into by a Fund is generally governed by Section 1256 of the Code. These
"Section 1256" positions generally include listed options on debt securities,
options on broad-based stock indexes, options on securities indexes, options on
futures contracts, regulated futures contracts and certain foreign currency
contracts and options thereon.
Absent a tax election to the contrary, each such Section 1256 position
held by a Fund will be marked-to-market (i.e., treated as if it were sold for
fair market value) on the last business day of a Fund's fiscal year, and all
gain or loss associated with fiscal year transactions and mark-to-market
positions at fiscal year end (except certain currency gain or loss covered by
Section 988 of the Code) will generally be treated as 60% long-term capital
gain or loss and 40% short-term capital gain or loss. The effect of Section
1256 mark-to-market rules may be to accelerate income or to convert what
otherwise would have been long-term capital gains into short-term capital gains
or short-term capital losses into long-term capital losses within a Fund. The
acceleration of income on Section 1256 positions may require a Fund to accrue
taxable income without the corresponding receipt of cash. In order to generate
cash to satisfy the distribution requirements of the Code, a Fund may be
required to dispose of portfolio securities that they otherwise would have
continued to hold or to use cash flows from other sources such as the sale of
Fund shares. In these ways, any or all of these rules may affect the amount,
character and timing of income earned and in turn distributed to shareholders
by a Fund.
When a Fund holds options or contracts which substantially diminish their
risk of loss with respect to other positions (as might occur in some hedging
transactions), this combination of positions could be treated as a "straddle"
for tax purposes, resulting in possible deferral of losses, adjustments in the
holding periods of Fund securities and conversion of short-term capital losses
into long-term capital losses. Certain tax elections exist for mixed straddles
i.e., straddles comprised of at least one Section 1256 position and at least
one non-Section 1256 position which may reduce or eliminate the operation of
these straddle rules.
As a RIC, a Fund is also subject to the requirement that less than 30% of
its annual gross income be derived from the sale or other disposition of
securities and certain other investment held for less than three months (the
"short-short test"). This requirement may limit a Fund's ability to engage in
options, spreads, straddles, hedging transactions, forward or futures contracts
or options on any of these positions because these transactions are often
consummated in less than three months, may require the sale of portfolio
securities held less than three months and may, as in the case of short sales
of portfolio securities reduce the holding periods of certain securities within
a Fund, resulting in additional short-short income for such Fund.
A Fund will monitor its transactions in such options and contracts and may
make certain other tax elections in order to mitigate the effect of the above
rules and to prevent disqualification of the Fund as a RIC under Subchapter M
of the Code.
A Fund may make investments that produce income that is not matched by a
corresponding cash distribution to the Fund, such as investments pay-in-kind
bonds or in obligations such as certain Brady Bonds or zero-coupon securities
having original issue discount (i.e., an amount equal to the excess of the
stated redemption price of the security at maturity over its issue price), or
market discount (i.e., an amount equal to the excess of the stated redemption
price of the security over the basis of such bond immediately after it was
acquired) if the Fund elects to accrue market discount on a current basis. In
addition, income may continue to accrue for federal income tax purposes with
respect to a non-performing investment. Any such income would be treated as
income earned by a Fund and therefore would be subject to the distribution
requirements of the Code. Because such income may not be matched by a
corresponding cash distribution to a Fund, the Fund may be required to borrow
money or dispose of other securities to be able to make distributions to its
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33
investors. The extent to which a Fund may liquidate securities at a gain may be
limited by the short-short test discussed above. In addition, if an election is
not made to currently accrue market discount with respect to a market discount
bond, all or a portion of any deduction for any interest expense incurred to
purchase or hold such bond may be deferred until such bond is sold or otherwise
disposed.
If a Fund purchases shares in certain foreign investment entities, called
"passive foreign investment companies" ("PFICs"), the Fund may be subject to
U.S. federal income tax on a portion of any "excess distribution" or gain from
the disposition of shares even if the income is distributed as a taxable
dividend by the Fund to its shareholders. Additional charges in the nature of
interest may be imposed on either a Fund or its shareholders with respect to
deferred taxes arising from the distributions or gains. If a Fund were to
invest in a PFIC and (if the Fund received the necessary information available
from the PFIC, which may be difficult to obtain) elected to treat the PFIC as a
"qualified electing fund" under the Code (a "QEF"), in lieu of the foregoing
requirements, the Fund might be required to include in income each year a
portion of the ordinary earnings and net capital gains of the PFIC, even if not
distributed to the Fund, and the amounts would be subject to the 90% and excise
tax distribution requirements described above. Because of the expansive
definition of a PFIC, it is possible that a Fund may invest a portion of its
assets in PFICs.
In the case of PFIC stock owned by a RIC, H.R. 2491, as passed by Congress
and vetoed by President Clinton, contained a provision that would have
permitted a RIC to elect to annually mark-to-market stock in the PFIC and
thereby avoid the need for a RIC to make a QEF election. It is unclear whether
similar legislation will be included as part of the 1996 budget compromise.
Moreover, on April 1, 1992 the Internal Revenue Service proposed regulations
providing a mark-to-market election for RICs that would have effects similar to
the proposed legislation. These regulations would be effective for taxable
years ending after promulgation of the regulations as final regulations.
A Fund may be subject to certain taxes, including without limitation,
taxes imposed by foreign countries with respect to its income and capital
gains. If a Fund qualifies as a RIC, certain distribution requirements are
satisfied and more than 50% of the value of the Fund's total assets at the
close of any taxable year consists of stock or securities of foreign
corporations, which for this purpose may include obligations of foreign
governmental issuers, the Fund may elect, for United States federal income tax
purposes, to treat any foreign country's income or withholding taxes paid by
the Fund that can be treated as income taxes under the United States income tax
principles, as paid by its shareholders.
The Asia Growth Fund and the Emerging Markets Debt Fund expect to qualify
for and make this election. For any year that either Fund makes such an
election, each shareholder in such Fund will be required to include in its
income an amount equal to his or her allocable share of such income taxes paid
by such Fund to a foreign country's government and shareholders will be
entitled, subject to certain limitations, to credit their portions of these
amounts against their United States federal income tax due, if any, or to
deduct their portions from their United States taxable income, if any. No
deductions for foreign taxes paid by such Funds may be claimed, however, by
non-corporate shareholders (including certain foreign shareholders described
below) who do not itemize deductions. Shareholders that are exempt from tax
under Section 501(a) of the Code, such as pension plans, generally will derive
no benefit from this election. However, such shareholders should not be
disadvantaged either because the amount of additional income they are deemed to
receive equal to their allocable share of such foreign countries' income taxes
paid by such Funds generally will not be subject to United States federal
income tax.
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34
TAXATION OF UNITED STATES SHAREHOLDERS
The Prospectus describes each Fund's policy with respect to distribution
of net investment income and any net capital and long-term capital gains.
Shareholders should consider the tax implications of buying shares just prior
to a distribution. Although the price of shares purchased at that time may
reflect the amount of the forthcoming distribution, those purchasing just prior
to a distribution will receive a distribution which will nevertheless be
taxable to them.
Shareholders receiving a distribution in the form of additional shares
will be treated for federal income tax purposes as receiving a distribution in
an amount equal to the fair market value, determined as of the distribution
date, of the shares received and will have a cost basis in each share received
equal to the fair market value of a share of a Fund on the distribution date.
Shareholders will be notified annually as to the federal tax status of
distributions, and shareholders receiving distributions in the form of shares
will receive a report as to the fair market value of the shares received.
Gain or loss on the sale or other disposition of Fund shares will result
in capital gain or loss to shareholders. Generally, a shareholder's capital
gain or loss will be long-term gain or loss if the shares have been held for
more than one year. In general, the maximum federal income tax rate imposed on
individuals with respect to net realized long-term capital gains will be
limited to 28%, whereas the maximum federal income tax rate imposed on
individuals with respect to net realized short-term capital gains (which are
taxed at ordinary income rates) will be 39.6%. With respect to corporate
taxpayers, long-term capital gains are taxed at the same federal income tax
rates as short-term capital gains, the maximum being 35%. If a shareholder
redeems or exchanges shares of a Fund before he or she has held them for more
than six months, any short-term capital loss on such redemption or exchange
will be treated as a long-term capital loss to the extent of any capital gain
dividends received by the shareholder (or credited to the shareholder as an
undistributed capital gain) with respect to such shares. Under H.R. 2491, as
passed by Congress and vetoed by President Clinton, individual taxpayers would
have been permitted a 50 percent deduction for any capital gains that they
recognized, and corporations would have been taxed at a 28 percent rate on
capital gains, in lieu of the regular corporate rate. The provisions generally
were to have retroactive effect to January 1, 1995. It is unclear whether
similar legislation will be included as part of the 1996 budget compromise and,
if so, what the effective date will be.
It is expected that a portion of the dividends of net investment income
received by corporate shareholders from a Fund (other than the Money Market
Fund) will qualify for the federal dividends received deduction generally
available to corporations. The dividends received deduction for corporate
shareholders may be reduced if the securities with respect to which dividends
are received by a Fund are (1) considered to be "debt-financed" (generally,
acquired with borrowed funds), (2) held by a Fund for less than 46 days (91
days in the case of certain preferred stock) or (3) subject to certain forms of
hedges or short sales. The amount of any dividend distribution eligible for the
corporate dividends received deduction will be designated by a Fund in a
written notice within 60 days of the close of the taxable year.
PERFORMANCE DATA
As indicated in the Prospectus, from time to time, a Fund may quote its
"yield," "effective yield," "average annual total return" and/or "aggregate
total return" in advertisements or in reports and other communications to
shareholders and compare its performance figures to those of other funds or
accounts with similar objectives and to relevant indices. Such performance
information will be calculated as described below.
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35
AVERAGE ANNUAL TOTAL RETURN
A Fund's "average annual total return" figures, as described and shown in
the Prospectus, are computed according to a formula prescribed by the SEC. The
formula can be expressed as follows:
P(1+T)N = ERV
WHERE: P = A HYPOTHETICAL INITIAL PAYMENT OF $1,000
T = AVERAGE ANNUAL TOTAL RETURN
N = NUMBER OF YEARS
ERV = Ending Redeemable Value of a hypothetical $1,000 payment made at the
beginning of a 1, 5, or 10 year period at the end of such period (or fractional
portion thereof), assuming reinvestment of all dividends and distributions.
The performance data represents past performance; investment returns and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
AGGREGATE TOTAL RETURN
The "aggregate total return" figures for a Fund, as described in the
Prospectus, represent the cumulative change in the value of an investment in
Fund shares of such class for the specified period and are computed by the
following formula:
AGGREGATE TOTAL RETURN ERV -
P
_______
P
WHERE: P = A HYPOTHETICAL INITIAL PAYMENT OF $10,000.
ERV = Ending Redeemable Value of a hypothetical $10,000 investment made at
the beginning of a 1-, 5-, or 10-year period at the end of such period (or
fractional portion thereof), assuming reinvestment of all dividends and
distributions.
YIELD
With respect to the Money Market Fund, yield quotations are expressed in
annualized terms and may be quoted on a compounded basis.
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36
The current yield for the Money Market Fund is computed by (a) determining
the net change in the value of a hypothetical pre-existing account in the Fund
having a balance of one share at the beginning of a seven calendar day period
for which yield is to be quoted; (b) dividing the net change by the value of
the account at the beginning of the period to obtain the base period return;
and (c) annualizing the results (i.e., multiplying the base period return by
365/7). The net change in the value of the account reflects the value of
additional shares, but does not include realized gains and losses or unrealized
appreciation and depreciation. In addition, the Money Market Fund may calculate
a compound effective annualized yield by adding 1 to the base period return
(calculated as described above), raising the sum to a power equal to 365/7 and
subtracting 1.
For the seven-day period ended December 31, 1995, the annualized yield and
effective yield of the Money Market Fund were 4.42% and 4.52%, respectively.
In periods of declining interest rates the Money Market Fund's yield will
tend to be somewhat higher than prevailing market rates on short-term
obligations, and in periods of rising interest rates the Fund's yield will tend
to be somewhat lower. Also, when interest rates are falling, the inflow of net
new money to the Money Market Fund from the continuous sale of shares will
likely be invested in portfolio instruments producing lower yields than the
balance of the Fund's portfolio, thereby reducing the Fund's current yield. In
periods of rising interest rates, the opposite can be expected to occur.
Any quotation of performance stated in terms of yield will be given no
greater prominence than the information prescribed under SEC rules. In
addition, all advertisements containing performance data of any kind will
include a legend disclosing that such performance data represents past
performance and that the investment return and principal value of an investment
will fluctuate so that an investor's shares, when redeemed, may be worth more
or less than their original cost.
Advertisements and communications may compare a Fund's performance with
that of other mutual funds, as reported by Lipper Analytical Services, Inc. or
similar independent services or financial publications. From time to time,
advertisements and other Fund materials and communications may cite statistics
to reflect a Fund's performance over time utilizing comparisons to indices.
A Fund's performance will vary from time to time depending upon market
conditions, the composition of its portfolio and operating expenses.
Consequently, any given performance quotation should not be considered
representative of the performance of Fund shares for any specified period in
the future. Because performance will vary, it may not provide a basis for
comparing an investment in Fund shares with certain bank deposits or other
investments that pay a fixed return for a stated period of time. Investors
comparing a Fund's performance with that of other mutual funds should give
consideration to the nature, quality and maturity of the respective investment
companies' portfolio securities and market conditions. An investor's principal
is not guaranteed by any Fund.
CAPITAL STOCK
As used in the Prospectus and this Statement of Additional Information,
the term "majority", when referring to the approvals to be obtained from
shareholders in connection with matters affecting a particular Fund or any
other single portfolio (e.g., approval of investment management contracts),
means the vote of the lesser of (i) 67% of the shares of the portfolio
represented at a meeting if the holders of more than 50% of the outstanding
shares of the portfolio are present in person or by proxy or (ii) more than 50%
of the outstanding shares of the portfolio. Shareholders are entitled to one
vote for each full share held and fractional votes for fractional shares held.
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37
Each share of a Fund is entitled to such dividends and distributions out
of the income earned on the assets belonging to that Fund as are declared in
the discretion of the Fund's Board of Directors.
In the event of the liquidation or dissolution of the Institutional Series
Funds or Series Funds, as the case may be, shares of a Fund are entitled to
receive the assets attributable to it that are available for distribution, and
a proportionate distribution, based upon the relative net assets of a Fund, of
any general assets not attributable to a Fund that are available for
distribution. Shareholders are not entitled to any preemptive rights. All
shares, when issued, will be fully paid, non-assessable, fully transferable and
redeemable at the option of the holder.
CUSTODIAN AND TRANSFER AGENT
Investors Bank serves as custodian for each Fund. As each Fund's custodian,
Investors Bank, among other things, maintains a custody account or accounts in
the name of the Fund; receives and delivers all assets for the Fund upon
purchase and upon sale or maturity; collects and receives all income and other
payments and distributions on account of the assets of the Fund; and makes
disbursements on behalf of the Fund. The custodian does not determine the
investment policies of a Fund, nor decides which securities a Fund will buy or
sell. For its services as custodian, Investors Bank 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.
Investors Bank also serves as transfer agent for each Fund, other than the Money
Market Fund. First Data Investor Services Group, Inc. ("FDISG"), a subsidiary of
First Data Corporation, which is located at One Exchange Place, Boston,
Massachusetts 02109, serves as transfer agent for the Money Market Fund.
Investors Bank and FDISG registers and processes transfer of a Fund's stock,
process purchase and redemption orders, acts as dividend disbursing agent for
the Fund and maintains records and handles correspondence with respect to
shareholder accounts. For these services, Investors Bank and FDISG receive a
monthly fee. See "Administrator."
VALIDITY OF SHARES
The validity of the shares will be passed upon for the Company by Piper
and Marbury L.L.P., Baltimore, Maryland.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP ("Price Waterhouse") provides audit services, tax
return preparation and assistance and consultation in connection with review of
SEC filings. The financial statements and financial highlights included or
incorporated by reference in the Prospectus and included in this Statement of
Additional Information have been included in reliance upon the report of Price
Waterhouse, independent accountants, given on the authority of that firm as
experts in auditing and accounting. Price Waterhouse's address is 1177 Avenue
of the Americas, New York, New York 10036.
COUNSEL
Simpson Thacher & Bartlett (a partnership which includes professional
corporations) serves as counsel to each Fund, and is located at 425 Lexington
Avenue, New York, New York 10017-3954.
<PAGE> 391
38
OTHER INFORMATION
The Prospectus and this Statement of Additional Information do not contain
all the information included in the Registration Statement filed with the
Securities and Exchange Commission under the 1933 Act with respect to the
securities offered by the Prospectus. Certain portions of the Registration
Statement have been omitted from the Prospectus and this Statement of
Additional Information pursuant to the rules and regulations of the Securities
and Exchange Commission. The Registration Statement including the exhibits
filed therewith may be examined at the office of the Securities and Exchange
Commission in Washington, D.C.
Statements contained in the Prospectus or in this Statement of Additional
Information as to the contents of any contract or other document referred to
are not necessarily complete, and, in each instance, reference is made to the
copy of such contract or other document filed as an exhibit to the Registration
Statement of which the Prospectus and this Statement of Additional Information
form a part, each such statement being qualified in all respects by such
reference.
<PAGE> 392
39
SALOMON BROTHERS INSTITUTIONAL SERIES FUNDS INC (Note 1)
STATEMENTS OF ASSETS AND LIABILITIES
MARCH 21, 1996
<TABLE>
<CAPTION>
Emerging
High Yield Markets Asia Growth
Bond Fund Debt Fund Fund
---------- --------- -----------
<S> <C> <C> <C>
Assets:
Cash $33,330 $33,330 $ 33,340
Deferred organization expenses (Note 2) 57,668 57,668 72,859
-------- -------- --------
Total assets 90,998 90,998 108,009
-------- -------- --------
Liabilities:
Organization expenses payable 57,668 57,668 72,669
Commitments and contingencies (Notes 2 and 3) - - -
-------- -------- --------
Total Liabilities 57,668 57,668 72,669
-------- -------- --------
Net assets $33,330 $33,330 $ 33,340
======== ======== ========
Shares outstanding 3,333 3,333 3,334
======== ======== ========
Net asset value, offering price
and redemption price per share $ 10.00 $ 10.00 $ 10.00
======== ======== ========
</TABLE>
See accompanying notes to Statements of Assets and Liabilities
<PAGE> 393
NOTES TO STATEMENTS OF ASSETS AND LIABILITIES
NOTE 1
Salomon Brothers Institutional Series Funds Inc (the "Company") was
incorporated as a Maryland corporation on January 19, 1996 as an
open-end management investment company and currently operates as a series
company comprised of three portfolios. The Salomon Brothers Institutional High
Yield Bond Fund (the "High Yield Bond Fund"), Salomon Brothers Institutional
Emerging Markets Debt Fund (the "Emerging Markets Debt Fund") and Salomon
Brothers Institutional Asia Growth Fund (the "Asia Growth Fund") (each, a
"Fund" and collectively, the "Funds") were formed on March 21, 1996 and have
had no operations to date other than matters relating to their organization and
registration under the Investment Company Act of 1940, as amended, and the sale
and issuance to Salomon Brothers Asset Management Inc (the "Investment
Adviser") of 3,333 shares of common stock of the High Yield Bond Fund and and
Emerging Markets Debt Fund, and 3,334 shares of common stock of the Asia Growth
Fund for an aggregate purchase price of $100,000. The Company has authorized
capital stock of 10,000,000,000 shares having a par value of $0.001 per share.
NOTE 2
Organization expenses relating to the Funds incurred and to be incurred by
the Investment Adviser will be reimbursed by the Funds. Such expenses,
estimated at $57,668 for each of the High Yield Bond Fund and Emerging Markets
Debt Fund, and $72,669 for the Asia Growth Fund, will be deferred and amortized
on a straight-line basis for a five year period beginning with the commencement
of operations of the Funds.
NOTE 3
Each of the Funds will enter into a management agreement with the
Investment Adviser pursuant to which the Investment Adviser will provide
investment advisory services to the Funds and will be responsible for the
management of each Fund's portfolio in accordance with each Fund's investment
policies and for making decisions to buy, sell, or hold particular securities.
Investors Bank & Trust Company will serve as each Fund's Administrator (the
"Administrator") pursuant to an administration agreement entered into between
the Company and the Administrator.
Each Fund will pay the Investment Adviser a monthly fee for its advisory
services based on the following annual percentages of each Fund's average daily
net assets: .50% for the High Yield Bond Fund, .70% for the Emerging Markets
Debt Fund, and .75% for the Asia Growth Fund. Each Fund will pay the
Administrator a monthly fee for its custody, fund accounting, administration
and transfer agency services at an annual rate of .10% of each Fund's average
daily net assets up to $500 million in net assets and .05% of each Fund's
average daily net assets in excess of $500 million in net assets.
<PAGE> 394
Certain officers and/or directors of the Company are officers and/or
directors of the Investment Adviser.
<PAGE> 395
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholder and Board of Directors
of Salomon Brothers Institutional Series Funds Inc
In our opinion, the accompanying statements of assets and liabilities present
fairly, in all material respects, the financial position of Salomon Brothers
Institutional High Yield Bond Fund, Salomon Brothers Institutional Emerging
Markets Debt Fund and Salomon Brothers Institutional Asia Growth Fund
(constituting Salomon Brothers Institutional Series Funds Inc, hereafter
referred to as the "Fund") at March 21, 1996, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our
audit of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluting the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
March 21, 1996
<PAGE> 396
SALOMON BROTHERS MONEY MARKET FUNDS
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
December 31, 1995
SALOMON BROTHERS NEW YORK MUNICIPAL MONEY MARKET FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YIELD TO
MATURITY
PRINCIPAL ON DATE OF MATURITY VALUE
AMOUNT DESCRIPTION PURCHASE* DATE (NOTE 1A)
- ------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS AND NOTES -- 98.8%
NEW YORK -- 92.8%
$ 1,050,000 Albany County, New York
Industrial Development Agency PUT....................... 4.150% 12/01/96 $ 1,050,000
800,000 Albany County, New York
Industrial Development Agency VR........................ 5.250 01/04/96 800,000
1,139,000 Albany, New York
Housing Authority VR.................................... 3.900 01/03/96 1,139,000
2,410,000 Albany, New York
Industrial Development Agency PUT....................... 4.250 07/01/96 2,410,000
2,600,000 Amherst, New York
Industrial Development Agency VR........................ 5.300 01/04/96 2,600,000
400,000 Amherst, New York
Industrial Development Agency VR........................ 5.250 01/04/96 400,000
950,000 Auburn, New York
Industrial Development Agency VR........................ 5.450 01/03/96 950,000
875,000 Babylon, New York
Industrial Development Agency VR........................ 5.350 01/04/96 875,000
2,025,000 Broome County, New York
Industrial Development Agency VR........................ 5.250 01/04/96 2,025,000
650,000 Broome County, New York
Industrial Development Agency VR........................ 4.800 01/03/96 650,000
2,250,000 Chautaqua County, New York
Industrial Development Agency VR........................ 5.450 01/03/96 2,250,000
3,000,000 Chemung County, New York
Industrial Development Agency VR........................ 5.250 01/04/96 3,000,000
730,000 Colonie, New York
Housing Development Corporation VR...................... 3.900 01/03/96 730,000
3,525,000 Colonie, New York
Industrial Development Agency PUT....................... 4.150 12/01/96 3,525,000
585,000 Colonie, New York
Industrial Development Agency VR........................ 5.250 01/04/96 585,000
5,000,000 Connetquot Central School District, New York GO TAN....... 3.900 06/27/96 5,011,220
1,275,000 Dutchess County, New York
Industrial Development Agency VR........................ 5.250 01/04/96 1,275,000
1,210,000 Erie County, New York
Industrial Development Agency VR........................ 5.250 01/04/96 1,210,000
500,000 Erie County, New York
Industrial Development Agency VR........................ 5.250 01/04/96 500,000
400,000 Erie County, New York
Industrial Development Agency VR........................ 5.250 01/04/96 400,000
</TABLE>
See accompanying notes to financial statements.
PAGE 3
<PAGE> 397
SALOMON BROTHERS MONEY MARKET FUNDS
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
December 31, 1995
SALOMON BROTHERS NEW YORK MUNICIPAL MONEY MARKET FUND (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YIELD TO
MATURITY
PRINCIPAL ON DATE OF MATURITY VALUE
AMOUNT DESCRIPTION PURCHASE* DATE (NOTE 1A)
- ------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 388,400 Erie County, New York
Industrial Development Agency VR........................ 5.250% 01/04/96 $ 388,400
1,140,000 Fulton County, New York
Industrial Development Agency PUT....................... 4.150 12/01/96 1,140,000
1,860,000 Fulton County, New York
Industrial Development Agency VR........................ 5.150 01/04/96 1,860,000
3,000,000 Islip, New York
Industrial Development Agency VR........................ 5.225 01/04/96 3,000,000
500,000 Lewis County, New York
Development Agency VR .................................. 4.900 01/03/96 500,000
1,820,000 Monroe County, New York
Industrial Development Agency PUT....................... 4.000 06/01/96 1,820,000
700,000 Monroe County, New York
Industrial Development Agency PUT....................... 4.400 06/15/96 700,000
6,500,000 Monroe County, New York
Industrial Development Agency VR........................ 5.450 01/03/96 6,500,000
4,375,000 Monroe County, New York
Industrial Development Agency VR........................ 5.250 01/04/96 4,375,000
4,300,000 Monroe County, New York
Industrial Development Agency VR........................ 5.000 01/04/96 4,300,000
3,325,000 Monroe County, New York
Industrial Development Agency VR........................ 5.300 01/04/96 3,325,000
2,370,000 Monroe County, New York
Industrial Development Agency VR........................ 5.350 01/04/96 2,370,000
2,200,000 Monroe County, New York
Industrial Development Agency VR........................ 4.150 01/02/96 2,200,000
1,740,000 Monroe County, New York
Industrial Development Agency VR........................ 5.350 01/04/96 1,740,000
1,700,000 Monroe County, New York
Industrial Development Agency VR........................ 5.500 01/03/96 1,700,000
1,580,000 Monroe County, New York
Industrial Development Agency VR........................ 5.350 01/04/96 1,580,000
945,000 Monroe County, New York
Industrial Development Agency VR........................ 5.350 01/04/96 945,000
225,000 Monroe County, New York
Industrial Development Agency VR........................ 5.250 01/04/96 225,000
</TABLE>
See accompanying notes to financial statements.
PAGE 4
<PAGE> 398
SALOMON BROTHERS MONEY MARKET FUNDS
SALOMON BROTHERS NEW YORK MUNICIPAL MONEY MARKET FUND (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YIELD TO
MATURITY
PRINCIPAL ON DATE OF MATURITY VALUE
AMOUNT DESCRIPTION PURCHASE* DATE (NOTE 1A)
- ------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 4,475,000 Mount Pleasant, New York
Industrial Development Agency VR........................ 5.200% 01/02/96 $ 4,475,000
3,000,000 Nassau County, New York GO BAN............................ 3.450 08/15/96 3,014,478
2,000,000 Nassau County, New York GO TAN............................ 3.700 04/15/96 2,004,309
1,090,000 Nassau County, New York
Industrial Development Agency VR........................ 5.250 01/04/96 1,090,000
800,000 New York City, New York
Housing Development Corporation VR...................... 5.250 01/03/96 800,000
16,330,000 New York City, New York
Housing Development Corporation VR...................... 5.750 01/04/96 16,330,000
2,000,000 New York City, New York
Housing Development Corporation VR...................... 5.800 01/04/96 2,000,000
1,000,000 New York City, New York
Housing Development Corporation VR...................... 5.750 01/04/96 1,000,000
9,500,000 New York City, New York
Industrial Development Agency VR........................ 6.250 01/02/96 9,500,000
6,000,000 New York City, New York
Industrial Development Agency VR........................ 5.500 01/04/96 6,000,000
2,100,000 New York City, New York
Industrial Development Agency VR........................ 6.100 01/02/96 2,100,000
1,650,000 New York City, New York
Industrial Development Agency VR........................ 5.350 01/04/96 1,650,000
1,300,000 New York City, New York
Industrial Development Agency VR........................ 5.250 01/04/96 1,300,000
780,000 New York City, New York
Industrial Development Agency VR........................ 5.350 01/04/96 780,000
600,000 New York City, New York
Industrial Development Agency VR........................ 5.350 01/04/96 600,000
505,000 New York City, New York
Industrial Development Agency VR........................ 5.250 01/04/96 505,000
400,000 New York City, New York
Industrial Development Agency VR........................ 5.800 01/04/96 400,000
115,000 New York City, New York
Industrial Development Agency VR........................ 5.250 01/04/96 115,000
1,200,000 New York City, New York
Trust for Cultural Resources VR......................... 5.550 01/03/96 1,200,000
</TABLE>
See accompanying notes to financial statements.
PAGE 5
<PAGE> 399
SALOMON BROTHERS MONEY MARKET FUNDS
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
December 31, 1995
SALOMON BROTHERS NEW YORK MUNICIPAL MONEY MARKET FUND (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YIELD TO
MATURITY
PRINCIPAL ON DATE OF MATURITY VALUE
AMOUNT DESCRIPTION PURCHASE* DATE (NOTE 1A)
- ------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 5,000,000 New York City, New York GO VR............................. 6.100% 01/02/96 $ 5,000,000
8,000,000 New York City, New York GO VR............................. 6.250 01/02/96 8,000,000
6,900,000 New York City, New York GO VR............................. 5.500 01/03/96 6,900,000
3,800,000 New York City, New York GO VR............................. 6.250 01/02/96 3,800,000
1,100,000 New York City, New York GO VR............................. 5.350 01/03/96 1,100,000
1,050,000 New York State, Dormitory Authority FGIC.................. 3.800 07/01/96 1,063,100
13,674,000 New York State, Dormitory Authority TECP.................. 4.900 01/03/96 13,674,000
500,000 New York State,
Energy Research & Development VR........................ 3.550 01/02/96 500,000
3,390,000 New York State,
Job Development Authority VR............................ 4.400 01/02/96 3,390,000
1,620,000 New York State,
Job Development Authority VR............................ 4.400 01/02/96 1,620,000
925,000 New York State,
Job Development Authority VR............................ 4.300 01/02/96 925,000
420,000 New York State,
Job Development Authority VR............................ 4.300 01/02/96 420,000
125,000 New York State,
Job Development Authority VR............................ 4.300 01/02/96 125,000
100,000 New York State,
Job Development Authority VR............................ 4.300 01/02/96 100,000
1,000,000 New York State,
Urban Development Corporation BIG P/R................... 3.500 01/01/96 1,020,000
1,350,000 New York State,
Urban Development Corporation P/R....................... 3.500 01/01/96 1,377,000
1,000,000 New York State,
Urban Development Corporation P/R....................... 5.750 01/01/96 1,020,000
600,000 New York State,
Urban Development Corporation P/R....................... 5.750 01/01/96 612,000
1,600,000 Newburgh, New York
Industrial Development Agency VR........................ 4.800 01/03/96 1,600,000
1,180,000 Niagara County, New York
Industrial Development Agency VR........................ 5.350 01/04/96 1,180,000
2,050,000 Oneida County, New York
Industrial Development Agency VR........................ 5.350 01/04/96 2,050,000
</TABLE>
See accompanying notes to financial statements.
PAGE 6
<PAGE> 400
SALOMON BROTHERS MONEY MARKET FUNDS
SALOMON BROTHERS NEW YORK MUNICIPAL MONEY MARKET FUND (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YIELD TO
MATURITY
PRINCIPAL ON DATE OF MATURITY VALUE
AMOUNT DESCRIPTION PURCHASE* DATE (NOTE 1A)
- ------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
$ 379,000 Oneida County, New York
Industrial Development Agency VR........................ 5.100% 01/04/96 $ 379,000
3,900,000 Onondaga County, New York
Industrial Development Agency VR........................ 5.400 01/03/96 3,900,000
1,300,000 Onondaga County, New York
Industrial Development Agency VR........................ 5.400 01/03/96 1,300,000
3,500,000 Ontario County, New York
Industrial Development Agency VR........................ 6.650 01/02/96 3,500,000
1,650,000 Rockland County, New York
Industrial Development Agency VR........................ 5.350 01/04/96 1,650,000
345,000 Schoharie County, New York
Industrial Development Agency VR........................ 5.100 01/04/96 345,000
75,000 St. Lawrence County, New York
Industrial Development Agency VR........................ 5.450 01/04/96 75,000
1,675,000 Suffolk County, New York GO AMBAC......................... 3.750 10/15/96 1,684,606
1,500,000 Syracuse, New York
Industrial Development Agency PUT....................... 4.400 06/15/96 1,500,000
3,550,000 Syracuse, New York
Industrial Development Agency VR........................ 5.500 01/03/96 3,550,000
2,000,000 Triborough Bridge & Tunnel Authority
New York P/R............................................ 4.000 01/01/96 2,040,000
6,660,000 Wyoming County, New York
Industrial Development Agency VR........................ 5.350 01/04/96 6,660,000
640,000 Wyoming County, New York
Industrial Development Agency VR........................ 5.250 01/04/96 640,000
1,440,000 Yates County, New York
Industrial Development Agency VR........................ 5.150 01/04/96 1,440,000
1,080,000 Yonkers, New York
Industrial Development Agency VR........................ 5.250 01/04/96 1,080,000
------------
210,137,113
</TABLE>
See accompanying notes to financial statements.
PAGE 7
<PAGE> 401
SALOMON BROTHERS MONEY MARKET FUNDS
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
December 31, 1995
SALOMON BROTHERS NEW YORK MUNICIPAL MONEY MARKET FUND (concluded)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YIELD TO
MATURITY
PRINCIPAL ON DATE OF MATURITY VALUE
AMOUNT DESCRIPTION PURCHASE* DATE (NOTE 1A)
- ------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
PUERTO RICO -- 6.0%
$13,600,000 Puerto Rico Industrial, Tourist, Educational,
Medical & Environmental Control Facilities VR........... 5.400% 01/03/96 $ 13,600,000
------------
TOTAL INVESTMENTS -- 98.8% (COST $223,737,113)............ 223,737,113
Other assets in excess of liabilities -- 1.2%............. 2,811,482
------------
NET ASSETS -- 100.0%...................................... $226,548,595
============
</TABLE>
*Yield to maturity on date of purchase, except in the case of Variable Rate
Demand Notes (VR) and Put Bonds, whose yields are determined on date of the
last interest rate change. For Variable Rate Demand Notes and Put Bonds,
maturity date shown is the date of next interest rate change.
Abbreviations used in this statement:
<TABLE>
<S> <C> <C>
AMBAC -- Insured as to principal and interest by the American Municipal Bond Assurance Corporation.
BAN -- Bond Anticipation Note
BIG -- Insured as to principal and interest by the Bond Investors Guaranty Insurance Company.
FGIC -- Insured as to principal and interest by the Financial Guaranty Insurance Company.
GO -- General Obligation
P/R -- Pre-refunded in U.S. Treasury Securities.
PUT -- Optional or mandatory put. Maturity date shown is the put date as well as the date of the
next interest rate change.
TAN -- Tax Anticipation Note
TECP -- Tax Exempt Commercial Paper
</TABLE>
See accompanying notes to financial statements.
PAGE 8
<PAGE> 402
SALOMON BROTHERS MONEY MARKET FUNDS
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1995
SALOMON BROTHERS NEW YORK MUNICIPAL MONEY MARKET FUND
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments, at value (cost $223,737,113).................................................... $223,737,113
Cash......................................................................................... 22,069
Receivable for Fund shares sold.............................................................. 1,934,480
Interest receivable.......................................................................... 1,210,552
------------
Total assets......................................................................... 226,904,214
------------
LIABILITIES
Payable for Fund shares redeemed............................................................. 266,863
Dividend payable............................................................................. 15,997
Management fee payable....................................................................... 35,265
Accrued expenses............................................................................. 37,494
------------
Total liabilities.................................................................... 355,619
------------
NET ASSETS (equivalent to $1.00 per share on 226,776,791 shares of $.001 par value
capital stock outstanding)................................................................. $226,548,595
============
</TABLE>
- -------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
Year Ended December 31, 1995
SALOMON BROTHERS NEW YORK MUNICIPAL MONEY MARKET FUND
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INCOME
Interest.................................................................................... $9,231,307
EXPENSES
Management fee................................................................. $ 449,809
Custody and administration fees................................................ 258,054
Shareholder services........................................................... 113,900
Audit and tax return preparation fees.......................................... 77,282
Legal.......................................................................... 40,000
Printing....................................................................... 27,718
Amortization of organization expenses.......................................... 9,071
Directors' fees and expenses................................................... 1,617
Other.......................................................................... 30,000
----------
1,007,451
Management fee waived by investment advisor.................................... (31,455)
Credits earned from custodian on cash balances................................. (6,021) 969,975
---------- ----------
Net investment income....................................................................... 8,261,332
NET REALIZED GAIN ON SECURITIES SOLD............................................................ 27,905
----------
NET INCREASE IN NET ASSETS FROM OPERATIONS...................................................... $8,289,237
==========
</TABLE>
See accompanying notes to financial statements.
PAGE 9
<PAGE> 403
SALOMON BROTHERS MONEY MARKET FUNDS
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
SALOMON BROTHERS NEW YORK MUNICIPAL MONEY MARKET FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1995 1994
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS
Net investment income.............................................. $ 8,261,332 $ 6,160,954
Net realized gain (loss) on securities sold........................ 27,905 (65,622)
------------- -------------
Net increase in net assets from operations......................... 8,289,237 6,095,332
------------- -------------
DIVIDENDS FROM NET INVESTMENT INCOME................................... (8,261,332) (6,160,954)
------------- -------------
CAPITAL SHARE TRANSACTIONS
Proceeds from sales of shares...................................... 298,776,320 424,692,601
Net asset value of shares issued in reinvestment of dividends...... 7,924,931 5,955,238
Payment for redemption of shares................................... (349,968,556) (423,206,832)
------------- -------------
Net increase (decrease) in net assets derived from share
transactions..................................................... (43,267,305) 7,441,007
------------- -------------
Net increase (decrease) in net assets.............................. (43,239,400) 7,375,385
NET ASSETS
Beginning of year.................................................. 269,787,995 262,412,610
------------- -------------
End of year........................................................ $ 226,548,595 $ 269,787,995
============= =============
</TABLE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED DATA PER SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR:
SALOMON BROTHERS NEW YORK MUNICIPAL MONEY MARKET FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1995 1994 1993 1992 1991
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year.................... $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
-------- -------- -------- -------- --------
Net investment income................................. 0.037* 0.027 0.023 0.031 0.047
Dividends from net investment income.................. (0.037) (0.027) (0.023) (0.031) (0.047)
-------- -------- -------- -------- --------
Net asset value, end of year.......................... $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
======== ======== ======== ======== ========
Net assets end of year (thousands).................... $226,549 $269,788 $262,413 $263,685 $154,782
Total investment return............................... +3.7% +2.7% +2.3% +3.1% +4.8%
Ratios to average net assets:
Expenses.......................................... 0.43%* 0.41% 0.41% 0.42% 0.60%
Net investment income............................. 3.67% 2.63% 2.31% 3.07% 4.63%
</TABLE>
* Net investment income per share would have been $.037 and the expense ratio
to average net assets would have been .45% before waiver of management fee
and credits earned on custodian cash balances.
See accompanying notes to financial statements.
PAGE 10
<PAGE> 404
SALOMON BROTHERS MONEY MARKET FUNDS
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS
December 31, 1995
SALOMON BROTHERS U.S. TREASURY SECURITIES MONEY MARKET FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YIELD TO
MATURITY ON
PRINCIPAL DATE OF MATURITY VALUE
AMOUNT DESCRIPTION PURCHASE DATE (NOTE 1A)
- ------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
U.S. TREASURY BILLS -- 99.9%
$ 898,000 U.S. Treasury Bill......................................... 5.350% 01/11/96 $ 896,665
870,000 U.S. Treasury Bill......................................... 5.270 01/18/96 867,835
190,000 U.S. Treasury Bill......................................... 4.800 02/08/96 189,037
9,190,000 U.S. Treasury Bill......................................... 4.880 02/08/96 9,142,662
315,000 U.S. Treasury Bill......................................... 5.270 02/08/96 313,248
-----------
TOTAL INVESTMENTS -- 99.9% (COST $11,409,447)........................................ 11,409,447
Other assets in excess of liabilities -- 0.1%........................................ 16,021
-----------
NET ASSETS -- 100.0%................................................................. $11,425,468
===========
</TABLE>
See accompanying notes to financial statements.
PAGE 11
<PAGE> 405
SALOMON BROTHERS MONEY MARKET FUNDS
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1995
SALOMON BROTHERS U.S. TREASURY SECURITIES MONEY MARKET FUND
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments, at value (cost $11,409,447)...................................................... $11,409,447
Cash.......................................................................................... 7,304
Receivable from investment advisor............................................................ 5,394
Receivable for Fund shares sold............................................................... 28,974
-----------
Total assets.......................................................................... 11,451,119
-----------
LIABILITIES
Payable for Fund shares redeemed.............................................................. 8,000
Dividend payable.............................................................................. 10,635
Accrued expenses.............................................................................. 7,016
-----------
Total liabilities..................................................................... 25,651
-----------
NET ASSETS (equivalent to $1.00 per share on 11,425,379 shares of $.001 par value
capital stock outstanding).................................................................. $11,425,468
===========
</TABLE>
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
Year Ended December 31, 1995
SALOMON BROTHERS U.S. TREASURY SECURITIES MONEY MARKET FUND
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INCOME
Interest..................................................................................... $843,023
EXPENSES
Management fee.................................................................... $ 15,217
Custody and administration fees................................................... 26,631
Registration and filing fees...................................................... 13,359
Amortization of organization expenses............................................. 11,241
Shareholder services.............................................................. 11,079
Audit and tax return preparation fees............................................. 9,200
Legal............................................................................. 7,144
Printing.......................................................................... 6,000
Directors' fees and expenses...................................................... 1,618
Other............................................................................. 4,551
--------
106,040
Management fee waived by investment advisor....................................... (7,096)
Credits earned from custodian on cash balances.................................... (31) 98,913
-------- --------
Net investment income........................................................................ 744,110
NET REALIZED GAIN ON SECURITIES SOLD............................................................. 6,443
--------
NET INCREASE IN NET ASSETS FROM OPERATIONS....................................................... $750,553
========
</TABLE>
See accompanying notes to financial statements.
PAGE 12
<PAGE> 406
SALOMON BROTHERS MONEY MARKET FUNDS
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
SALOMON BROTHERS U.S. TREASURY SECURITIES MONEY MARKET FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1994
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS
Net investment income............................................... $ 744,110 $ 1,045,249
Net realized gain (loss) on securities sold......................... 6,443 (2,037)
------------ -------------
Net increase in net assets from operations.......................... 750,553 1,043,212
------------ -------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income................................ (744,110) (1,045,249)
Distributions from net realized gains............................... (959) --
------------ -------------
(745,069) (1,045,249)
CAPITAL SHARE TRANSACTIONS
Proceeds from sales of shares....................................... 79,773,668 127,781,043
Net asset value of shares issued in reinvestment of dividends....... 555,617 881,270
Payment for redemption of shares.................................... (96,624,438) (135,113,944)
------------ -------------
Net decrease in net assets derived from share transactions.......... (16,295,153) (6,451,631)
------------ -------------
Contribution from investment advisor (Note 2)....................... 48,447 --
------------ -------------
Net decrease in net assets.......................................... (16,241,222) (6,453,668)
NET ASSETS
Beginning of year................................................... 27,666,690 34,120,358
------------ -------------
End of year (including undistributed net investment income of $265
for 1995)......................................................... $ 11,425,468 $ 27,666,690
============ =============
</TABLE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
SELECTED DATA PER SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR:
SALOMON BROTHERS U.S. TREASURY SECURITIES MONEY MARKET FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1995 1994 1993 1992 1991
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year........................ $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
------- ------- ------- ------- -------
Net investment income..................................... 0.049* 0.036 0.028 0.034 0.054*
Dividends from net investment income...................... (0.049) (0.036) (0.028) (0.034) (0.054)
------- ------- ------- ------- -------
Net asset value, end of year.............................. $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
======= ======= ======= ======= =======
Net assets end of year (thousands)........................ $11,425 $27,667 $34,120 $50,554 $35,414
Total investment return................................... +5.0% +3.6% +2.9% +3.4% +5.5%
Ratios to average net assets:
Expenses.............................................. 0.65%* 0.45% 0.35% 0.44% 0.54%*
Net investment income................................. 4.89% 3.53% 2.83% 3.42% 5.23%
</TABLE>
* Net investment income per share would have been $.049 and $.052 and the
expense ratios to average net assets would have been .70% and .64%,
respectively, for the years ended December 31, 1995 and 1991 before
applicable waiver of management fee, expenses absorbed by SBAM and credits
earned on custodian cash balances.
See accompanying notes to financial statements.
PAGE 13
<PAGE> 407
SALOMON BROTHERS MONEY MARKET FUNDS
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Salomon Brothers Series Funds Inc (the "Company") was incorporated in Maryland
on April 17, 1990 as an open-end management investment company, and currently
operates as a series company comprised of nine portfolios: Salomon Brothers Cash
Management Fund (the "Cash Management Fund"), Salomon Brothers New York
Municipal Money Market Fund, (the "New York Municipal Money Fund"), Salomon
Brothers U.S. Treasury Securities Money Market Fund (the "U.S. Treasury Fund"),
Salomon Brothers New York Municipal Bond Fund (the "New York Municipal Bond
Fund"), Salomon Brothers National Intermediate Municipal Fund (the "National
Intermediate Municipal Fund"), Salomon Brothers U.S. Government Income Fund (the
"U.S. Government Income Fund"), Salomon Brothers High Yield Bond Fund (the "High
Yield Bond Fund"), Salomon Brothers Strategic Bond Fund (the "Strategic Bond
Fund"), and Salomon Brothers Total Return Fund (the "Total Return Fund"). The
New York Municipal Money Fund and the U.S. Treasury Fund (individually, a
"Fund", collectively, the "Funds") are included in this report. The New York
Municipal Money Fund's objective is to seek as high a level of current income
exempt from federal, New York State and New York City personal income taxes as
is consistent with liquidity and the stability of principal. The U.S. Treasury
Fund's objective is to seek a high level of current income by investing only in
short-term United States government and government agency securities. The Cash
Management Fund, New York Municipal Bond Fund, National Intermediate Municipal
Fund, U.S. Government Income Fund, High Yield Bond Fund, Strategic Bond Fund,
and Total Return Fund are reported in a separate report and are not included
herein.
Following is a summary of significant accounting policies followed by each Fund
in the preparation of its financial statements. The policies are in conformity
with generally accepted accounting principles ("GAAP"). The preparation of
financial statements in accordance with GAAP requires management to make
estimates of certain reported amounts in the financial statements. Actual
amounts could differ from those estimates.
(A) SECURITIES VALUATION. Portfolio securities are valued using the
amortized cost method, which involves initially valuing an investment at
its cost and thereafter assuming a constant amortization to maturity of any
premium or discount. This method results in a value approximating market
value and does not include unrealized gains or losses.
(B) FEDERAL INCOME TAXES. Each Fund has complied and intends to
continue to comply with the requirements of the Internal Revenue Code
applicable to regulated investment companies, including the distribution
requirements of the Tax Reform Act of 1986, and to distribute all of its
income, including any net realized gains, to shareholders. Therefore, no
Federal income tax or excise tax provision is required.
PAGE 14
<PAGE> 408
SALOMON BROTHERS MONEY MARKET FUNDS
- --------------------------------------------------------------------------------
(C) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends on the
shares of each Fund are declared each business day to shareholders of
record that day, and paid on the last business day of the month.
Distributions of net realized gains to shareholders, if any, are declared
annually and recorded on the ex-dividend date. Dividends and distributions
are determined in accordance with income tax regulations, which may differ
from GAAP.
(D) EXPENSES. Direct expenses are charged to the Fund that incurred
them, and general expenses of the Company are allocated to the Funds based
on relative average net assets for the period the expense was incurred.
(E) OTHER. Investment transactions are recorded as of the trade date.
Interest income, including the accretion of discounts or the amortization
of premiums, is recognized when earned. Gains or losses on sales of
securities are calculated on the identified cost basis.
2. MANAGEMENT FEE AND OTHER AGREEMENTS
The Company retains Salomon Brothers Asset Management Inc ("SBAM"), an indirect
wholly owned subsidiary of Salomon Inc, to act as investment manager of each
Fund, subject to the supervision by the Board of Directors of the Company. SBAM
furnishes the Company with office space and certain services and facilities
required for conducting the business of the Company and pays the compensation of
its officers. The management fee for these services is payable monthly and is
based on the following annual percentages of the Funds' average daily net
assets: .20% for the New York Municipal Money Fund and .10% for the U.S.
Treasury Fund. For the year ended December 31, 1995, SBAM voluntarily waived
management fees of $31,455 and $7,096 for the New York Municipal Money Fund and
U.S. Treasury Fund, respectively.
If in any fiscal year total expenses of any Fund, excluding taxes, interest,
brokerage and extraordinary expenses, but including the management fee, exceed
the most stringent expense limitations imposed by state securities regulations
applicable to the Fund, SBAM will pay or reimburse the Fund for the excess.
Currently, the most restrictive of these limitations on an annual basis is 2.5%
of the first $30 million of average daily net assets, 2.0% of the next $70
million of average daily net assets and 1.5% of average daily net assets in
excess of $100 million. No such expense reimbursement was required for the year
ended December 31, 1995.
PAGE 15
<PAGE> 409
SALOMON BROTHERS MONEY MARKET FUNDS
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
The U.S. Treasury Fund incurred realized losses on the sale of certain
securities in current and previous years. In order to maintain a $1 net asset
value per share, SBAM contributed $48,447 to offset cumulative net realized
losses. For tax purposes, this contribution was applied against the realized
losses for the year ended December 31, 1995. Accordingly, such amount has been
reclassified from paid-in-capital to accumulated net realized loss on
investments in the composition of net assets detailed in Note 3.
Investors Bank & Trust Company serves as custodian and administrator for each
Fund, which includes performing custodial and certain administrative services in
connection with the operation of each Fund. During the year ended December 31,
1995, custodian fees were reduced by $6,021 and $31 for the New York Municipal
Money Fund and U.S. Treasury Fund, respectively, relating to credits earned on
cash balances held by the custodian.
Each Fund has an agreement with Salomon Brothers Inc to distribute its shares.
3. CAPITAL STOCK
At December 31, 1995, the Company had 10,000,000,000 shares of authorized
capital stock, par value $.001 per share, of which the New York Municipal Money
Fund and the U.S. Treasury Fund each had 1,111,111,112 shares authorized.
Net assets, after re-classification of book/tax differences, consist of:
<TABLE>
<CAPTION>
NEW YORK U.S.
MUNICIPAL TREASURY
MONEY FUND FUND
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Par value....................................................................... $ 226,777 $ 11,425
Paid-in capital in excess of par................................................ 226,549,157 11,413,954
Undistributed net investment income............................................. -- 265
Accumulated net realized loss on investments.................................... (227,339) (176)
------------ -----------
Net assets...................................................................... $226,548,595 $11,425,468
============ ===========
</TABLE>
PAGE 16
<PAGE> 410
SALOMON BROTHERS MONEY MARKET FUNDS
- --------------------------------------------------------------------------------
4. PORTFOLIO ACTIVITY
The New York Municipal Money Fund invests in money market instruments maturing
in thirteen months or less whose credit ratings are within the highest ratings
category of two nationally recognized statistical rating organizations
("NRSROs") or if rated by only one NRSRO, the highest rating of that NRSRO, or,
if not rated, are believed by the investment manager to be of comparable
quality. The U.S. Treasury Fund invests in U.S. Treasury Securities maturing in
thirteen months or less. The New York Municipal Money Fund pursues its
investment objectives by investing at least 65% of its net assets in obligations
that are exempt from regular Federal income tax and from personal income taxes
of the State and City of New York. Because the New York Municipal Money Fund
invests primarily in obligations of the State and City of New York, it is more
susceptible to factors adversely affecting issuers of such obligations than a
fund that is more diversified.
During the year ended December 31, 1995, the New York Municipal Money Fund and
U.S. Treasury Fund utilized $27,604 and $6,411, respectively, of capital loss
carry-forwards to offset net realized capital gains. At December 31, 1995, the
Funds had net capital loss carry-forwards available to offset future capital
gains as follows:
<TABLE>
<CAPTION>
NEW YORK U.S.
MUNICIPAL TREASURY
YEAR OF EXPIRATION MONEY FUND FUND
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1999.............................................................................. $ 67,240 --
2000.............................................................................. 94,778 --
2002.............................................................................. 65,321 $ 176
--------- -----
$ 227,339 $ 176
========= =====
</TABLE>
PAGE 17
<PAGE> 411
SALOMON BROTHERS MONEY MARKET FUNDS
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Salomon Brothers New York Municipal Money Market Fund and
Salomon Brothers U.S. Treasury Securities Money Market Fund
In our opinion, the accompanying statements of assets and liabilities, including
the portfolios of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Salomon Brothers New York Municipal
Money Market Fund and Salomon Brothers U.S. Treasury Securities Money Market
Fund (two of the portfolios constituting Salomon Brothers Series Funds Inc,
hereafter referred to as the "Funds") at December 31, 1995, the results of each
of their operations for the year then ended, the changes in each of their net
assets for each of the two years in the period then ended and the financial
highlights for each of the periods indicated, in conformity with generally
accepted accounting principles. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Funds' management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 1995 by
correspondence with the custodian, provide a reasonable basis for the opinion
expressed above.
PRICE WATERHOUSE LLP
New York, New York
February 16, 1996
PAGE 18
<PAGE> 412
SALOMON BROTHERS SERIES FUNDS INC
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements included in Part A:
For the Salomon Brothers U.S. Treasury Securities Money Market Fund,
Salomon Brothers Cash Management Fund, the Salomon Brothers New York Municipal
Bond Fund, the Salomon Brothers National Intermediate Municipal Fund, the
Salomon Brothers U.S. Government Income Fund, the Salomon Brothers High Yield
Bond Fund, the Salomon Brothers Strategic Bond Fund, and the Salomon Brothers
Investors Fund Inc:
Selected Per Share Data and Ratios for the specified periods for each
Fund are presented under the heading "Financial Highlights" in the Prospectus
Financial Statements included in Part B:
1. For Salomon Brothers New York Municipal Money Market Fund and Salomon
Brothers U.S. Treasury Securities Money Market Fund:
(i) Portfolio of Investments at December 31, 1995
(ii) Statement of Assets and Liabilities at December 31,
1995
(iii) Statement of Operations for the year ended December
31, 1995
(iv) Statement of Changes in Net Assets for the years
ended December 31, 1995 and 1994
(v) Financial Highlights for the years ended December 31,
1995, 1994, 1993, 1992 and 1991
(vi) Notes to Financial Statements
(vii) Report of Independent Accountants
2. For Salomon Brothers Cash Management Fund, Salomon Brothers New York
Municipal Bond Fund, Salomon Brothers National Intermediate Municipal
Fund, Salomon Brothers U.S. Government Income Fund, Salomon Brothers
High Yield Bond Fund, Salomon Brothers Strategic Bond Fund, Salomon
Brothers Total Return Fund and Salomon Brothers Investors Fund Inc
C-1
<PAGE> 413
(i) Portfolio of Investments at December 31, 1995
(ii) Statement of Assets and Liabilities at December 31,
1995
(iii) Statement of Operations for the year ended December
31, 1995
(iv) Statement of Changes in Net Assets for the years
ended December 31, 1995 and, with respect to the Cash
Management Fund, Salomon Brothers New York Municipal
Bond Fund and Investors Fund only, 1994
(v) Statement of Cash Flows for the U.S. Government
Income Fund for the period from February 22, 1995
(commencement of operations) through December 31,
1995
(vi) Notes to Financial Statements
(vi) Financial Highlights:
For Class A, B and C of Cash Management Fund and New York Municipal
Bond Fund, for the year ended December 31, 1995
For Class O of Cash Management Fund, for the years ended December 31,
1995, 1994, 1993, 1992 and 1991
For Class O of New York Municipal Bond Fund, for the years ended
December 31, 1995 and 1994 and the period from February 1, 1993 (commencement
of investment operations) through December 31, 1993
For Class A, B, C and O of National Intermediate Fund, U.S. Government
Income Fund, High Yield Bond Fund and Strategic Bond Fund, for the period from
February 22, 1995 (commencement of investment operations) through December 31,
1995
For Class A, B, C and O of Total Return Fund, for the period from
September 11, 1995 (commencement of investment operations) through December 31,
1995.
For Class A, B, C of Investors Fund, for the year ended December 31,
1995
For Class O of Investors Fund, for the years ended December 31, 1995,
1994, 1993, 1992 and 1991
(vii) Report of Independent Accountants
C-2
<PAGE> 414
(b) Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
1(a) -- Articles of Incorporation of Registrant (filed as Exhibit 1 to
the Registration Statement on Form N-1A (File Nos. 33-34423
and 811-06087) and incorporated herein by reference).
1(b) -- Articles Supplementary (filed as Exhibit 1(b) to Post-Effective
Amendment No. 6 to the Registration Statement on Form N-1A
and incorporated herein by reference).
1(c) -- Articles Supplementary (filed as Exhibit 1(c) to Post-Effective
Amendment No. 6 to the Registration Statement on Form N-1A
and incorporated herein by reference).
1(d) -- Form of Registrant's Articles of Amendment (filed as Exhibit 1(d)
to Post-Effective Amendment No. 12 to the Registration Statement
on Form N-1A and incorporated herein by reference).
1(e) -- Form of Articles Supplementary (filed as Exhibit 1(e) to Post-Effective
Amendment No. 12 to the Registration Statement on Form N-1A and
incorporated herein by reference).
1(f) -- Form of Articles Supplementary (filed as Exhibit 1(f) to Post-Effective
Amendment No. 15 to the Registration Statement on Form N-1A and incorporated
herein by reference).
1(g) -- Form of Articles Supplementary (filed as Exhibit 1(g) to Post-Effective
Amendment No. 17 to the Registration Statement and incorporated by
reference herein).
2(a) -- Registrant's By-Laws (filed as Exhibit 2 to the Registration Statement on
Form N-1A (File Nos. 33-34423 and 811-06087) and incorporated herein by reference).
3 -- None.
4(a) -- Form of Stock Certificate for shares of Class A Stock (filed as Exhibit 4(a)
to Post-Effective Amendment No. 2 to the Registration Statement on Form N-1A
(File Nos. 33-34423 and 811-06087) and incorporated herein by reference).
4(b) -- Form of Stock Certificate for shares of Class B Stock (filed as Exhibit 4(b)
to Post-Effective Amendment No. 2 to the Registration Statement on Form N-1A (File Nos.
</TABLE>
C-3
<PAGE> 415
<TABLE>
<S> <C>
33-34423 and 811-06087) and incorporated herein by reference).
4(c) -- Form of Stock Certificate for shares of Class C Stock (filed as Exhibit 4(c)
to Post-Effective Amendment No. 2 to the Registration Statement on Form N-1A
(File Nos. 33-34423 and 811-06087) incorporated herein by reference).
4(d) -- Form of Stock Certificate for shares of Class O Stock (filed as Exhibit 4(d)
to Post-Effective Amendment No. 6 to the Registration Statement on Form N-1A
and incorporated herein by reference).
4(e) -- Forms of Specimen Stock Certificates: for Cash Management Fund - A, New York
Municipal Bond Fund - A, National Intermediate Municipal Fund - A, U.S. Government
Income Fund - A, High Yield Bond Fund - A, Strategic Bond Fund - A, Cash Management
Fund - B, New York Municipal Bond Fund - B, National Intermediate Municipal Fund - B,
U.S. Government Income Fund - B, High Yield Bond Fund - B, Strategic Bond Fund - B,
Cash Management Fund - C, New York Municipal Bond Fund - C, National Intermediate
Municipal Fund - C, U.S. Government Income Fund - C, High Yield Bond Fund - C and
Strategic Bond Fund - C, Cash Management Fund - O, New York Municipal Bond Fund - O,
National Intermediate Municipal Fund - O, U.S. Government Income Fund - O, High Yield
Bond Fund - O, Strategic Bond Fund - O (filed as Exhibit 4(e) to Post-Effective Amendment
No. 12 to the Registration Statement on Form N-1A and incorporated herein by reference).
4(f) -- Forms of Specimen Stock Certificates for Total Return Fund - A, Total Return Fund - B,
Total Return Fund - C and Total Return Fund - O (filed as Exhibit 4(f) to Post-Effective
Amendment No. 15 to the Registration Statement on Form N-1A and incorporated herein
by reference).
4(g) -- Forms of Specimen Stock Certificates for Asia Growth Fund - A, Asia Growth Fund - B,
Asia Growth Fund - C and Asia Growth Fund - O.
5(a) -- Management Contract between Registrant and Salomon Brothers Asset Management Inc dated
September 27, 1990 relating to the Salomon Brothers Cash Management Fund and the Salomon
Brothers New York Municipal Money Market Fund (filed as Exhibit 5(a) to Post-Effective
Amendment No. 7 to the Registration Statement on Form N-1A and incorporated herein by
reference).
5(b) -- Management Contract between Registrant and Salomon Brothers Asset Management Inc dated
December 7, 1990
</TABLE>
C-4
<PAGE> 416
<TABLE>
<S> <C>
relating to the Salomon Brothers U.S. Treasury Securities Money Market Fund (filed as
Exhibit 5 to Post-Effective Amendment No. 5 to the Registration Statement on Form N-1A
and incorporated herein by reference).
5(c) -- Management Contract between Registrant and Salomon Brothers Asset Management Inc dated
December 8, 1992 relating to the Salomon Brothers New York Municipal Bond Fund (filed
as Exhibit 5(c) to Post-Effective Amendment No. 7 to the Registration Statement on
Form N-1A and incorporated herein by reference).
5(d) -- Form of Management Contract between Registrant and Salomon Brothers Asset Management
Inc relating to the Salomon Brothers National Intermediate Municipal Fund (filed as
Exhibit 5(d) to Post-Effective Amendment No. 12 to the Registration Statement on
Form N-1A and incorporated herein by reference).
5(e) -- Form of Management Contract between Registrant and Salomon Brothers Asset Management
Inc relating to the Salomon Brothers U.S. Government Income Fund (filed as Exhibit 5(e)
to Post-Effective Amendment No. 12 to the Registration Statement on Form N-1A and
incorporated herein by reference).
5(f) -- Form of Management Contract between Registrant and Salomon Brothers Asset Management
Inc relating to the Salomon Brothers High Yield Bond Fund (filed as Exhibit 5(f) to
Post-Effective Amendment No. 12 to the Registration Statement on Form N-1A and
incorporated herein by reference).
5(g) -- Form of Management Contract between Registrant and Salomon Brothers Asset Management
Inc relating to the Salomon Brothers Strategic Bond Fund (filed as Exhibit 5(g) to
Post-Effective Amendment No. 12 to the Registration Statement on Form N-1A and
incorporated herein by reference).
5(h) -- Form of Subadvisory Consulting Agreement between Salomon Brothers Asset Management
Inc and Salomon Brothers Asset Management Limited relating to the Strategic Bond Fund
(filed as Exhibit 5(h) to Post-Effective Amendment No. 12 to the Registration Statement
on Form N-1A and incorporated herein by reference).
5(i) -- Form of Management Contract between Registrant and Salomon Brothers Asset Management
Inc relating to the Salomon Brothers Total Return Fund (filed as Exhibit 5(i) to
Post-Effective Amendment No. 15 to the
</TABLE>
C-5
<PAGE> 417
<TABLE>
<S> <C>
Registration Statement on Form N-1A and incorporated herein by reference).
5(j) -- Form of Management Contract between Registrant and Salomon Brothers Asset Management
Inc relating to the Salomon Brothers Asia Growth Fund.
5(k) -- Form of Sub-advisory Contract between Salomon Brothers Asset Management Inc and
Salomon Brothers Asset Management Asia Pacific Limited relating to the Salomon
Brothers Asia Growth Fund.
6(a) -- Distribution Agreement between Registrant and Salomon Brothers Inc dated September 27,
1990 (filed as Exhibit 6 to Post-Effective Amendment No. 5 to the Registration
Statement on Form N-1A and incorporated herein by reference).
6(b) -- Distribution Agreement between Registrant and Salomon Brothers Inc dated December 7,
1990 relating to the Salomon Brothers U.S. Treasury Money Market Fund (filed as
Exhibit 6 to Post-Effective Amendment No. 5 on Form N-1A and incorporated herein
by reference).
6(c) -- Distribution Agreement between Registrant and Salomon Brothers Inc dated December 8,
1992 relating to the New York Municipal Bond Fund (filed as Exhibit 6(c) to Post-Effective
Amendment No. 7 to the Registration Statement on Form N-1A and incorporated herein by
reference).
6(d) -- Distribution Agreement between Registrant and AMT Capital Services, Inc. dated June 18,
1993 relating to the Salomon Brothers New York Municipal Money Market Fund and the
Salomon Brothers New York Municipal Bond Fund (filed as Exhibit 6(d) to Post-Effective
Amendment No. 8 to the Registration Statement on Form N-1A and incorporated herein by
reference).
6(e) -- Form of Distribution Agreement between Registrant and Salomon Brothers Inc relating to
Salomon Brothers National Intermediate Municipal Fund, Salomon Brothers U.S. Government
Income Fund, Salomon Brothers High Yield Bond Fund and Salomon Brothers Strategic Bond
Fund (filed as Exhibit 6(e) to Post-Effective Amendment No. 12 to the Registration Statement
on Form N-1A and incorporated herein by reference).
6(f) -- Form of Distribution Agreement between Registrant and Salomon Brothers Inc relating to
Salomon Brothers Total Return Fund (filed as Exhibit 6(f) to Post-Effective Amendment
No. 15 to the Registration Statement on Form N-1A and incorporated herein by reference).
</TABLE>
C-6
<PAGE> 418
<TABLE>
<S> <C>
6(g) -- Form of Distribution Agreement between Registrant and Salomon Brothers Inc relating to
Salomon Brothers Asia Growth Fund.
7 -- None.
8(a) -- Custody Agreement between Registrant and Boston Safe Deposit and Trust Company (filed
as Exhibit 8 to Post-Effective Amendment No. 4 to the Registration Statement on Form N-1A
(File Nos. 33-34423 and 811-06087) and incorporated herein by reference).
8(b) -- Form of Custodian Agreement between Registrant and Investors Bank & Trust Company (filed
as Exhibit 8(b) to Post-Effective Amendment No. 12 to the Registration Statement on
Form N-1A and incorporated herein by reference).
9(a) -- Transfer Agency Agreement between Registrant and The Shareholder Services Group, Inc.
(filed as Exhibit 9(a) to Post-Effective Amendment No. 5 to the Registration Statement
on Form N-1A and incorporated herein by reference).
9(b) -- Administration Agreement between Registrant and The Boston Company Advisors, Inc. (filed
as Exhibit 9(a) to Post-Effective Amendment No. 4 to the Registration Statement on Form N-1A
(File Nos. 33-34423 and 811-06087) and incorporated herein by reference).
9(c) -- Form of Administration Agreement between Registrant and Investors Bank & Trust Company (filed
as Exhibit 9(c) to Post-Effective Amendment No. 12 to the Registration Statement on Form N-1A
and incorporated herein by reference).
9(d) -- Form of Amendment to Transfer Agency Agreement between Registrant and The Shareholders Services
Group, Inc (filed as Exhibit 9(d) to Post-Effective Amendment No. 12 to the Registration
Statement on Form N-1A and incorporated herein by reference).
9(e) -- Form of Transfer Agency Agreement among the Registrant, Salomon Brothers Institutional Series
Funds Inc and Investors Bank & Trust Company.
9(f) -- Form of Subadministration Agreement between Salomon Brothers Asset Management Inc and Salomon
Brothers Asset Management Limited.
10 -- Opinion and Consent of Counsel of Piper & Marbury, LLP as to the Legality of Securities Being
Registered.
11 -- Consents of Independent Accountants.
12 -- None.
</TABLE>
C-7
<PAGE> 419
<TABLE>
<S> <C>
13(a) -- Share Purchase Agreement (filed as Exhibit 13 to Post-Effective Amendment No. 5 to the
Registration Statement on Form N-1A (File Nos. 33-34423 and 811-06087) and incorporated
herein by reference).
13(b) -- Form of Share Purchase Agreement relating to Salomon Brothers New York Municipal Bond
Fund, Salomon Brothers National Intermediate Municipal Fund, Salomon Brothers U.S.
Government Income Fund, Salomon Brothers High Yield Bond Fund and the Strategic Bond Fund
(filed as Exhibit 13(b) to Post-Effective Amendment No. 12 to the Registration Statement
on Form N-1A and incorporated herein by reference).
13(c) -- Form of Share Purchase Agreement Relating to Salomon Brothers Total Return Fund (filed as
Exhibit 13(c) to Post-Effective Amendment No. 15 to the Registration Statement on Form N-1A
and incorporated herein by reference).
13(d) -- Form of Share Purchase Agreement Relating to Salomon Brothers Asia Growth Fund.
14 -- None.
15(a) -- Form of Services and Distribution Plan for Salomon Brothers Series Funds Inc (filed as
Exhibit 15(a) to Post-Effective Amendment No. 12 to the Registration Statement on
Form N-1A and incorporated herein by reference).
16(a) -- Performance Data (filed as Exhibit 16 to Post-Effective Amendment No. 4 to the Registration
Statement on Form N-1A (File Nos. 33-34423 and 811-06087) and incorporated herein by reference).
16(b) -- Schedule of Performance Data for Class A, Class B, Class C and Class O Shares for Salomon
Brothers New York Municipal Bond Fund (filed as Exhibit 16(b) to Post-Effective Amendment
No. 12 to the Registration Statement on Form N-1A and incorporated herein by reference).
17(a) -- Financial Data Schedule for Salomon Brothers Cash Management Fund, Salomon Brothers New York
Municipal Bond Fund, Salomon Brothers National Intermediate Municipal Fund, Salomon Brothers
U.S. Government Income Fund, Salomon Brothers High Yield Bond Fund, Salomon Brothers Strategic
Bond Fund and Salomon Brothers Investors Fund Inc.
</TABLE>
C-8
<PAGE> 420
<TABLE>
<S> <C>
17(b) -- Financial Data Schedule for Salomon Brothers New York Municipal Money Market Fund and Salomon
Brothers U.S. Treasury Securities Money Market Fund.
18 -- Form of Application and Signature Card for Salomon Brothers Investment Series (filed as
Exhibit 18 to Post-Effective Amendment No. 13 to the Registration Statement on Form N-1A
and incorporated herein by reference).
18(a) -- Powers of Attorney (filed as an Exhibit to Post-Effective Amendment No. 1 to the Registration
Statement on Form N-1A (File Nos. 33-34423 and 811-06087) and incorporated herein by reference).
18(b) -- Powers of Attorney of Carol L. Colman and Daniel P. Cronin (filed as an Exhibit to
Post-Effective Amendment No. 11 to the Registration Statement on Form N-1A (File Nos. 33-34423
and 811-06087) and incorporated herein by reference).
18(c) -- Powers of Attorney of Carol L. Colman, Daniel P. Cronin and Charles F. Barber (filed as
Exhibit 18(c) to Post-Effective Amendment No. 13 to the Registration Statement on Form N-1A
(File Nos. 33-34423 and 811-06087) and incorporated herein by reference)
18(d) -- Form of Multiclass Plan Pursuant to Rule 18f-3 Under the Investment Company Act of 1940 for
the Salomon Brothers Series Funds Inc (filed as Exhibit 18(d) to Post-Effective Amendment
No. 13 to the Registration Statement on Form N-1A (File Nos. 33-34423 and 811-06087) and
incorporated herein by reference).
</TABLE>
- -----------------
Item 25. Persons Controlled by or under Common Control with Registrant.
Salomon Brothers Holding Company Inc ("SBH"), owns a substantial
amount of the outstanding shares of the National Intermediate Municipal Fund,
U.S. Government Income Fund, High Yield Bond Fund, Strategic Bond Fund and
Total Return Fund and consequently is a controlling person of such Funds. SBH
owns the outstanding shares of SBAM, Salomon Brothers Inc and certain of their
affiliates.
C-9
<PAGE> 421
Item 26. Number of Holders of Securities.
<TABLE>
<CAPTION>
Number of Record
Holders at
Title of Class March 16, 1996
----------------
<S> <C>
Shares of Salomon Brothers Cash
Management Fund, par value
$.001 per share
Class A 34
Class B 7
Class C 11
Class O 121
Shares of Salomon Brothers New 804
York Municipal Money Market
Fund, par value $.001 per share
Shares of Salomon Brothers U.S. 106
Treasury Securities Money Market
Fund, par value $.001 per share
Shares of Salomon Brothers New
York Municipal Bond Fund, par
value $.001 per share
Class A 5
Class B 7
Class C 1
Class O 68
Shares of Salomon Brothers
Investors Fund, par value $1.00
per share
Class A 38
Class B 29
Class C 8
Class O 16,232
Shares of Salomon Brothers
National Intermediate Municipal
Fund, par value $.001 per share
Class A 1,075
Class B 6
Class C 2
Class O 2
</TABLE>
C-10
<PAGE> 422
<TABLE>
<S> <C>
Shares of Salomon Brothers U.S.
Government Income Fund, par
value $.001 per share
Class A 1,081
Class B 11
Class C 2
Class O 1
Shares of Salomon Brothers
High Yield Bond Fund, par
value $.001 per share
Class A 1,515
Class B 670
Class C 76
Class O 4
Shares of Salomon Brothers
Strategic Bond Fund, par
value $.001 per share
Class A 1,115
Class B 188
Class C 20
Class O 3
Shares of Salomon Brothers
Total Return Fund, par
value $.001 per share
Class A 1,516
Class B 694
Class C 31
Class O 3
Shares of Salomon Brothers 0
Asia Growth Fund, par
value $.001 per share
Class A 0
Class B 0
Class C 0
Class O 0
</TABLE>
Item 27. Indemnification.
Reference is made to Article VII of Registrant's Articles of
Incorporation, Article IV of Registrant's By-Laws and Section 4 of the
Distribution Agreements between the Registrant and Salomon Brothers Inc.
C-11
<PAGE> 423
Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended (the "Securities Act"), may be permitted to
directors, officers and controlling persons of the Registrant pursuant to the
foregoing provisions, or otherwise, the Registrant understands that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
Item 28. Business and Other Connections
of Investment Adviser.
The list required by this Item 28 of officers and directors of SBAM,
Salomon Brothers Asset Management Limited ("SBAM Limited") and Salomon Brothers
Asia Pacific Limited ("SBAM AP"), together with information as to any other
business, profession, vocation or employment of a substantial nature engaged in
by such officers and directors during the past two years, is incorporated by
reference to Schedules A and D of their respective FORM ADV filed by SBAM, SBAM
Limited and SBAM AP, respectively, pursuant to the Advisers Act (SEC File Nos.
801-32046, 801-43335 and 51393, respectively).
Item 29. Principal Underwriter.
(a) Salomon Brothers Inc ("Salomon Brothers") currently acts as
distributor for, in addition to the Registrant, Salomon Brothers Capital Fund
Inc, Salomon Brothers Investors Fund Inc and Salomon Brothers Opportunity Fund
Inc.
(b) The information required by this Item 29 with respect to each
director, officer or partner of Salomon Brothers is incorporated by reference
to Schedule A of Form BD filed by Salomon Brothers pursuant to the Securities
Exchange Act of 1934 (SEC File No. 8-26920).
(c) Not applicable.
Item 30. Location of Accounts and Records.
(1) Salomon Brothers Asset Management Inc
7 World Trade Center
New York, New York 10048
C-12
<PAGE> 424
(2) Investors Bank & Trust Company
89 South Street
Boston, Massachusetts 02111
(3) The Shareholder Services Group, Inc.
One Exchange Place
Boston, Massachusetts 02109
Item 31. Management Services.
Not applicable.
Item 32. Undertakings.
(a) Not applicable.
(b) The Registrant undertakes to file a post-effective amendment
containing financial statements as of a reasonably current date, which need not
be certified, within four to six months from the date of commencement of
investment operations for the Asia Growth Fund.
(c) Registrant undertakes to furnish to each person to whom a
prospectus is delivered a copy of Registrant's latest annual report to
shareholders, upon request and without charge.
(d) Registrant hereby undertakes to call a meeting of shareholders
for the purpose of voting upon the question of removal of one or more of
Registrant's directors when requested in writing to do so by the holders of at
least 10% of Registrant's outstanding shares of common stock and, in connection
with such meeting, to assist in communications with other shareholders in this
regard, as provided under Section 16(c) of the Investment Company Act of 1940,
as amended.
C-13
<PAGE> 425
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this Amendment
to this Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of New York, and State of New York, on
the 28th day of March, 1996.
SALOMON BROTHERS SERIES FUNDS INC
(Registrant)
By /s/ Michael S. Hyland
------------------------------
Michael S. Hyland
President
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to the Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Michael S. Hyland
- -------------------------
Michael S. Hyland Director and President 3/28/96
(principal executive
officer)
* Director 3/28/96
- -------------------
Charles F. Barber
* Director 3/28/96
- -------------------
Carol L. Colman
* Director 3/28/96
- -------------------
Daniel P. Cronin
/s/ Alan M. Mandel Treasurer 3/28/96
- ------------------- (principal financial
Alan M. Mandel and accounting officer)
</TABLE>
C-14
<PAGE> 426
<TABLE>
<S> <C>
*By:/s/Alan M. Mandel 3/28/96
-----------------------
Alan M. Mandel as
Attorney-in-Fact
</TABLE>
C-15
<PAGE> 427
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
1(a) -- Articles of Incorporation of Registrant (filed as Exhibit 1 to
the Registration Statement on Form N-1A (File Nos. 33-34423
and 811-06087) and incorporated herein by reference).
1(b) -- Articles Supplementary (filed as Exhibit 1(b) to Post-Effective
Amendment No. 6 to the Registration Statement on Form N-1A
and incorporated herein by reference).
1(c) -- Articles Supplementary (filed as Exhibit 1(c) to Post-Effective
Amendment No. 6 to the Registration Statement on Form N-1A
and incorporated herein by reference).
1(d) -- Form of Registrant's Articles of Amendment (filed as Exhibit 1(d)
to Post-Effective Amendment No. 12 to the Registration Statement
on Form N-1A and incorporated herein by reference).
1(e) -- Form of Articles Supplementary (filed as Exhibit 1(e) to Post-Effective
Amendment No. 12 to the Registration Statement on Form N-1A and
incorporated herein by reference).
1(f) -- Form of Articles Supplementary (filed as Exhibit 1(f) to Post-Effective
Amendment No. 15 to the Registration Statement on Form N-1A and incorporated
herein by reference).
1(g) -- Form of Articles Supplementary (filed as Exhibit 1(g) to Post-Effective
Amendment No. 17 to the Registration Statement and incorporated by
reference herein).
2(a) -- Registrant's By-Laws (filed as Exhibit 2 to the Registration Statement on
Form N-1A (File Nos. 33-34423 and 811-06087) and incorporated herein by reference).
3 -- None.
4(a) -- Form of Stock Certificate for shares of Class A Stock (filed as Exhibit 4(a)
to Post-Effective Amendment No. 2 to the Registration Statement on Form N-1A
(File Nos. 33-34423 and 811-06087) and incorporated herein by reference).
4(b) -- Form of Stock Certificate for shares of Class B Stock (filed as Exhibit 4(b)
to Post-Effective Amendment No. 2 to the Registration Statement on Form N-1A (File Nos.
</TABLE>
<PAGE> 428
<TABLE>
<S> <C>
33-34423 and 811-06087) and incorporated herein by reference).
4(c) -- Form of Stock Certificate for shares of Class C Stock (filed as Exhibit 4(c)
to Post-Effective Amendment No. 2 to the Registration Statement on Form N-1A
(File Nos. 33-34423 and 811-06087) incorporated herein by reference).
4(d) -- Form of Stock Certificate for shares of Class O Stock (filed as Exhibit 4(d)
to Post-Effective Amendment No. 6 to the Registration Statement on Form N-1A
and incorporated herein by reference).
4(e) -- Forms of Specimen Stock Certificates: for Cash Management Fund - A, New York
Municipal Bond Fund - A, National Intermediate Municipal Fund - A, U.S. Government
Income Fund - A, High Yield Bond Fund - A, Strategic Bond Fund - A, Cash Management
Fund - B, New York Municipal Bond Fund - B, National Intermediate Municipal Fund - B,
U.S. Government Income Fund - B, High Yield Bond Fund - B, Strategic Bond Fund - B,
Cash Management Fund - C, New York Municipal Bond Fund - C, National Intermediate
Municipal Fund - C, U.S. Government Income Fund - C, High Yield Bond Fund - C and
Strategic Bond Fund - C, Cash Management Fund - O, New York Municipal Bond Fund - O,
National Intermediate Municipal Fund - O, U.S. Government Income Fund - O, High Yield
Bond Fund - O, Strategic Bond Fund - O (filed as Exhibit 4(e) to Post-Effective Amendment
No. 12 to the Registration Statement on Form N-1A and incorporated herein by reference).
4(f) -- Forms of Specimen Stock Certificates for Total Return Fund - A, Total Return Fund - B,
Total Return Fund - C and Total Return Fund - O (filed as Exhibit 4(f) to Post-Effective
Amendment No. 15 to the Registration Statement on Form N-1A and incorporated herein
by reference).
4(g) -- Forms of Specimen Stock Certificates for Asia Growth Fund - A, Asia Growth Fund - B,
Asia Growth Fund - C and Asia Growth Fund - O.
5(a) -- Management Contract between Registrant and Salomon Brothers Asset Management Inc dated
September 27, 1990 relating to the Salomon Brothers Cash Management Fund and the Salomon
Brothers New York Municipal Money Market Fund (filed as Exhibit 5(a) to Post-Effective
Amendment No. 7 to the Registration Statement on Form N-1A and incorporated herein by
reference).
5(b) -- Management Contract between Registrant and Salomon Brothers Asset Management Inc dated
December 7, 1990
</TABLE>
<PAGE> 429
<TABLE>
<S> <C>
relating to the Salomon Brothers U.S. Treasury Securities Money Market Fund (filed as
Exhibit 5 to Post-Effective Amendment No. 5 to the Registration Statement on Form N-1A
and incorporated herein by reference).
5(c) -- Management Contract between Registrant and Salomon Brothers Asset Management Inc dated
December 8, 1992 relating to the Salomon Brothers New York Municipal Bond Fund (filed
as Exhibit 5(c) to Post-Effective Amendment No. 7 to the Registration Statement on
Form N-1A and incorporated herein by reference).
5(d) -- Form of Management Contract between Registrant and Salomon Brothers Asset Management
Inc relating to the Salomon Brothers National Intermediate Municipal Fund (filed as
Exhibit 5(d) to Post-Effective Amendment No. 12 to the Registration Statement on
Form N-1A and incorporated herein by reference).
5(e) -- Form of Management Contract between Registrant and Salomon Brothers Asset Management
Inc relating to the Salomon Brothers U.S. Government Income Fund (filed as Exhibit 5(e)
to Post-Effective Amendment No. 12 to the Registration Statement on Form N-1A and
incorporated herein by reference).
5(f) -- Form of Management Contract between Registrant and Salomon Brothers Asset Management
Inc relating to the Salomon Brothers High Yield Bond Fund (filed as Exhibit 5(f) to
Post-Effective Amendment No. 12 to the Registration Statement on Form N-1A and
incorporated herein by reference).
5(g) -- Form of Management Contract between Registrant and Salomon Brothers Asset Management
Inc relating to the Salomon Brothers Strategic Bond Fund (filed as Exhibit 5(g) to
Post-Effective Amendment No. 12 to the Registration Statement on Form N-1A and
incorporated herein by reference).
5(h) -- Form of Subadvisory Consulting Agreement between Salomon Brothers Asset Management
Inc and Salomon Brothers Asset Management Limited relating to the Strategic Bond Fund
(filed as Exhibit 5(h) to Post-Effective Amendment No. 12 to the Registration Statement
on Form N-1A and incorporated herein by reference).
5(i) -- Form of Management Contract between Registrant and Salomon Brothers Asset Management
Inc relating to the Salomon Brothers Total Return Fund (filed as Exhibit 5(i) to
Post-Effective Amendment No. 15 to the
</TABLE>
<PAGE> 430
<TABLE>
<S> <C>
Registration Statement on Form N-1A and incorporated herein by reference).
5(j) -- Form of Management Contract between Registrant and Salomon Brothers Asset Management
Inc relating to the Salomon Brothers Asia Growth Fund.
5(k) -- Form of Sub-advisory Contract between Salomon Brothers Asset Management Inc and
Salomon Brothers Asset Management Asia Pacific Limited relating to the Salomon
Brothers Asia Growth Fund.
6(a) -- Distribution Agreement between Registrant and Salomon Brothers Inc dated September 27,
1990 (filed as Exhibit 6 to Post-Effective Amendment No. 5 to the Registration
Statement on Form N-1A and incorporated herein by reference).
6(b) -- Distribution Agreement between Registrant and Salomon Brothers Inc dated December 7,
1990 relating to the Salomon Brothers U.S. Treasury Money Market Fund (filed as
Exhibit 6 to Post-Effective Amendment No. 5 on Form N-1A and incorporated herein
by reference).
6(c) -- Distribution Agreement between Registrant and Salomon Brothers Inc dated December 8,
1992 relating to the New York Municipal Bond Fund (filed as Exhibit 6(c) to Post-Effective
Amendment No. 7 to the Registration Statement on Form N-1A and incorporated herein by
reference).
6(d) -- Distribution Agreement between Registrant and AMT Capital Services, Inc. dated June 18,
1993 relating to the Salomon Brothers New York Municipal Money Market Fund and the
Salomon Brothers New York Municipal Bond Fund (filed as Exhibit 6(d) to Post-Effective
Amendment No. 8 to the Registration Statement on Form N-1A and incorporated herein by
reference).
6(e) -- Form of Distribution Agreement between Registrant and Salomon Brothers Inc relating to
Salomon Brothers National Intermediate Municipal Fund, Salomon Brothers U.S. Government
Income Fund, Salomon Brothers High Yield Bond Fund and Salomon Brothers Strategic Bond
Fund (filed as Exhibit 6(e) to Post-Effective Amendment No. 12 to the Registration Statement
on Form N-1A and incorporated herein by reference).
6(f) -- Form of Distribution Agreement between Registrant and Salomon Brothers Inc relating to
Salomon Brothers Total Return Fund (filed as Exhibit 6(f) to Post-Effective Amendment
No. 15 to the Registration Statement on Form N-1A and incorporated herein by reference).
</TABLE>
<PAGE> 431
<TABLE>
<S> <C>
6(g) -- Form of Distribution Agreement between Registrant and Salomon Brothers Inc relating to
Salomon Brothers Asia Growth Fund.
7 -- None.
8(a) -- Custody Agreement between Registrant and Boston Safe Deposit and Trust Company (filed
as Exhibit 8 to Post-Effective Amendment No. 4 to the Registration Statement on Form N-1A
(File Nos. 33-34423 and 811-06087) and incorporated herein by reference).
8(b) -- Form of Custodian Agreement between Registrant and Investors Bank & Trust Company (filed
as Exhibit 8(b) to Post-Effective Amendment No. 12 to the Registration Statement on
Form N-1A and incorporated herein by reference).
9(a) -- Transfer Agency Agreement between Registrant and The Shareholder Services Group, Inc.
(filed as Exhibit 9(a) to Post-Effective Amendment No. 5 to the Registration Statement
on Form N-1A and incorporated herein by reference).
9(b) -- Administration Agreement between Registrant and The Boston Company Advisors, Inc. (filed
as Exhibit 9(a) to Post-Effective Amendment No. 4 to the Registration Statement on Form N-1A
(File Nos. 33-34423 and 811-06087) and incorporated herein by reference).
9(c) -- Form of Administration Agreement between Registrant and Investors Bank & Trust Company (filed
as Exhibit 9(c) to Post-Effective Amendment No. 12 to the Registration Statement on Form N-1A
and incorporated herein by reference).
9(d) -- Form of Amendment to Transfer Agency Agreement between Registrant and The Shareholders Services
Group, Inc (filed as Exhibit 9(d) to Post-Effective Amendment No. 12 to the Registration
Statement on Form N-1A and incorporated herein by reference).
9(e) -- Form of Transfer Agency Agreement among the Registrant, Salomon Brothers Institutional Series
Funds Inc and Investors Bank & Trust Company.
9(f) -- Form of Subadministration Agreement between Salomon Brothers Asset Management Inc and Salomon
Brothers Asset Management Limited.
10 -- Opinion and Consent of Counsel of Piper & Marbury, LLP as to the Legality of Securities Being
Registered.
11 -- Consents of Independent Accountants.
12 -- None.
</TABLE>
<PAGE> 432
<TABLE>
<S> <C>
13(a) -- Share Purchase Agreement (filed as Exhibit 13 to Post-Effective Amendment No. 5 to the
Registration Statement on Form N-1A (File Nos. 33-34423 and 811-06087) and incorporated
herein by reference).
13(b) -- Form of Share Purchase Agreement relating to Salomon Brothers New York Municipal Bond
Fund, Salomon Brothers National Intermediate Municipal Fund, Salomon Brothers U.S.
Government Income Fund, Salomon Brothers High Yield Bond Fund and the Strategic Bond Fund
(filed as Exhibit 13(b) to Post-Effective Amendment No. 12 to the Registration Statement
on Form N-1A and incorporated herein by reference).
13(c) -- Form of Share Purchase Agreement Relating to Salomon Brothers Total Return Fund (filed as
Exhibit 13(c) to Post-Effective Amendment No. 15 to the Registration Statement on Form N-1A
and incorporated herein by reference).
13(d) -- Form of Share Purchase Agreement Relating to Salomon Brothers Asia Growth Fund.
14 -- None.
15(a) -- Form of Services and Distribution Plan for Salomon Brothers Series Funds Inc (filed as
Exhibit 15(a) to Post-Effective Amendment No. 12 to the Registration Statement on
Form N-1A and incorporated herein by reference).
16(a) -- Performance Data (filed as Exhibit 16 to Post-Effective Amendment No. 4 to the Registration
Statement on Form N-1A (File Nos. 33-34423 and 811-06087) and incorporated herein by reference).
16(b) -- Schedule of Performance Data for Class A, Class B, Class C and Class O Shares for Salomon
Brothers New York Municipal Bond Fund (filed as Exhibit 16(b) to Post-Effective Amendment
No. 12 to the Registration Statement on Form N-1A and incorporated herein by reference).
17(a) -- Financial Data Schedule for Salomon Brothers Cash Management Fund, Salomon Brothers New York
Municipal Bond Fund, Salomon Brothers National Intermediate Municipal Fund, Salomon Brothers
U.S. Government Income Fund, Salomon Brothers High Yield Bond Fund, Salomon Brothers Strategic
Bond Fund and Salomon Brothers Investors Fund Inc.
</TABLE>
<PAGE> 433
<TABLE>
<S> <C>
17(b) -- Financial Data Schedule for Salomon Brothers New York Municipal Money Market Fund and Salomon
Brothers U.S. Treasury Securities Money Market Fund.
18 -- Form of Application and Signature Card for Salomon Brothers Investment Series (filed as
Exhibit 18 to Post-Effective Amendment No. 13 to the Registration Statement on Form N-1A
and incorporated herein by reference).
18(a) -- Powers of Attorney (filed as an Exhibit to Post-Effective Amendment No. 1 to the Registration
Statement on Form N-1A (File Nos. 33-34423 and 811-06087) and incorporated herein by reference).
18(b) -- Powers of Attorney of Carol L. Colman and Daniel P. Cronin (filed as an Exhibit to
Post-Effective Amendment No. 11 to the Registration Statement on Form N-1A (File Nos. 33-34423
and 811-06087) and incorporated herein by reference).
18(c) -- Powers of Attorney of Carol L. Colman, Daniel P. Cronin and Charles F. Barber (filed as
Exhibit 18(c) to Post-Effective Amendment No. 13 to the Registration Statement on Form N-1A
(File Nos. 33-34423 and 811-06087) and incorporated herein by reference)
18(d) -- Form of Multiclass Plan Pursuant to Rule 18f-3 Under the Investment Company Act of 1940 for
the Salomon Brothers Series Funds Inc (filed as Exhibit 18(d) to Post-Effective Amendment
No. 13 to the Registration Statement on Form N-1A (File Nos. 33-34423 and 811-06087) and
incorporated herein by reference).
</TABLE>
- -----------------
<PAGE> 1
Exhibit 4(g)
SALOMON BROTHERS SERIES FUNDS, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF MARYLAND
SB 0000 ***00***
CAPITAL STOCK CAPITAL STOCK
ACCOUNT KD.
109-0000000000 CUSIP 79549D640
THIS IS TO CERTIFY THAT:
JOHN DOE
is the owner of *** ZERO SHARES ***
FULLY PAID AND NON-ASSESSABLE SHARES OF THE PAR VALUE OF $0.001 PER SHARE EACH
OF THE CAPITAL STOCK OF
SAL BROS ASIA GROWTH FUND
CLASS A (hereinafter called the Corporation) transferable on the books of the
Corporation by the holder hereof in person or by duly authorized attorney upon
surrender of this Certificate properly endorsed. This Certificate and the shares
represented hereby are issued and shall be held subject to all the provisions of
the Articles of Incorporation, as amended and supplemented and the Bylaws, as
amended (copies of which are on file with the Transfer Agent), to all of which
the holder by acceptance hereof assents. This Certificate is not valid unless
countersigned by the Transfer Agent and registered by the Registrar.
Witness the facsimile seal of the Corporation and the Facsimile
signatures of its duty authorized officers.
Dated: MARCH 5, 1996
SALOMON BROTHERS SERIES FUNDS INC
CORPORATE
SEAL
1990
MARYLAND
*
COUNTERSIGNED and REGISTERED:
THE SHAREHOLDER SERVICES GROUP, INC.
a subsidiary of First Data
Corporation, Transfer Agent
(Boston, Massachusetts)
[sig] [sig] BY
CHAIRMAN OF THE BOARD SECRETARY AUTHORIZED SIGNATURE
<PAGE> 2
SALOMON BROTHERS SERIES FUNDS, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF MARYLAND
SB 0000 ***00***
CAPITAL STOCK CAPITAL STOCK
ACCOUNT KD.
209-0000000000 CUSIP 79549D632
THIS IS TO CERTIFY THAT:
JOHN DOE
is the owner of *** ZERO SHARES ***
FULLY PAID AND NON-ASSESSABLE SHARES OF THE PAR VALUE OF $0.001 PER SHARE EACH
OF THE CAPITAL STOCK OF
SAL BROS ASIA GROWTH FUND
CLASS B (hereinafter called the Corporation) transferable on the books of the
Corporation by the holder hereof in person or by duly authorized attorney upon
surrender of this Certificate properly endorsed. This Certificate and the shares
represented hereby are issued and shall be held subject to all the provisions of
the Articles of Incorporation, as amended and supplemented and the Bylaws, as
amended (copies of which are on file with the Transfer Agent), to all of which
the holder by acceptance hereof assents. This Certificate is not valid unless
countersigned by the Transfer Agent and registered by the Registrar.
Witness the facsimile seal of the Corporation and the Facsimile
signatures of its duty authorized officers.
Dated: MARCH 5, 1996
SALOMON BROTHERS SERIES FUNDS INC
CORPORATE
SEAL
1990
MARYLAND
*
COUNTERSIGNED and REGISTERED:
THE SHAREHOLDER SERVICES GROUP, INC.
a subsidiary of First Data
Corporation, Transfer Agent
(Boston, Massachusetts)
[sig] [sig] BY
CHAIRMAN OF THE BOARD SECRETARY AUTHORIZED SIGNATURE
<PAGE> 3
SALOMON BROTHERS SERIES FUNDS, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF MARYLAND
SB 0000 ***00***
CAPITAL STOCK CAPITAL STOCK
ACCOUNT KD.
309-0000000000 CUSIP 79549D624
THIS IS TO CERTIFY THAT:
JOHN DOE
is the owner of *** ZERO SHARES ***
FULLY PAID AND NON-ASSESSABLE SHARES OF THE PAR VALUE OF $0.001 PER SHARE EACH
OF THE CAPITAL STOCK OF
SAL BROS ASIA GROWTH FUND
CLASS C (hereinafter called the Corporation) transferable on the books of the
Corporation by the holder hereof in person or by duly authorized attorney upon
surrender of this Certificate properly endorsed. This Certificate and the shares
represented hereby are issued and shall be held subject to all the provisions of
the Articles of Incorporation, as amended and supplemented and the Bylaws, as
amended (copies of which are on file with the Transfer Agent), to all of which
the holder by acceptance hereof assents. This Certificate is not valid unless
countersigned by the Transfer Agent and registered by the Registrar.
Witness the facsimile seal of the Corporation and the Facsimile
signatures of its duty authorized officers.
Dated: MARCH 5, 1996
SALOMON BROTHERS SERIES FUNDS INC
CORPORATE
SEAL
1990
MARYLAND
*
COUNTERSIGNED and REGISTERED:
THE SHAREHOLDER SERVICES GROUP, INC.
a subsidiary of First Data
Corporation, Transfer Agent
(Boston, Massachusetts)
[sig] [sig] BY
CHAIRMAN OF THE BOARD SECRETARY AUTHORIZED SIGNATURE
<PAGE> 4
SALOMON BROTHERS SERIES FUNDS, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF MARYLAND
SB 0000 ***00***
CAPITAL STOCK CAPITAL STOCK
ACCOUNT KD.
009-0000000000 CUSIP 79549D616
THIS IS TO CERTIFY THAT:
JOHN DOE
is the owner of *** ZERO SHARES ***
FULLY PAID AND NON-ASSESSABLE SHARES OF THE PAR VALUE OF $0.001 PER SHARE EACH
OF THE CAPITAL STOCK OF
SAL BROS ASIA GROWTH FUND
CLASS O (hereinafter called the Corporation) transferable on the books of the
Corporation by the holder hereof in person or by duly authorized attorney upon
surrender of this Certificate properly endorsed. This Certificate and the shares
represented hereby are issued and shall be held subject to all the provisions of
the Articles of Incorporation, as amended and supplemented and the Bylaws, as
amended (copies of which are on file with the Transfer Agent), to all of which
the holder by acceptance hereof assents. This Certificate is not valid unless
countersigned by the Transfer Agent and registered by the Registrar.
Witness the facsimile seal of the Corporation and the Facsimile
signatures of its duty authorized officers.
Dated: MARCH 5, 1996
SALOMON BROTHERS SERIES FUNDS INC
CORPORATE
SEAL
1990
MARYLAND
*
COUNTERSIGNED and REGISTERED:
THE SHAREHOLDER SERVICES GROUP, INC.
a subsidiary of First Data
Corporation, Transfer Agent
(Boston, Massachusetts)
[sig] [sig] BY
CHAIRMAN OF THE BOARD SECRETARY AUTHORIZED SIGNATURE
<PAGE> 1
Exhibit 5(j)
MANAGEMENT CONTRACT
SALOMON BROTHERS SERIES FUNDS INC
7 World Trade Center
New York, New York 10048
April __, 1996
Salomon Brothers Asset Management Inc
7 World Trade Center
New York, New York 10048
Dear Sirs:
This will confirm the agreement between the
undersigned (the "Company") and you (the "Investment Manager") as follows:
1. The Company is an open-end investment company
which currently has ten investment portfolios -- Salomon Brothers Cash
Management Fund, Salomon Brothers New York Municipal Money Market Fund, Salomon
Brothers U.S. Treasury Securities Money Market Fund, Salomon Brothers New York
Municipal Bond Fund, Salomon Brothers National Intermediate Municipal Fund,
Salomon Brothers U.S. Government Income Fund, Salomon Brothers High Yield Bond
Fund, Salomon Brothers Strategic Bond Fund, Salomon Brothers Total Return Fund
and Salomon Brothers Asia Growth Fund. The Company proposes to engage in the
business of investing and reinvesting the assets of Salomon Brothers Asia
Growth Fund (the "Fund") in the manner and in accordance with the investment
objective and limitations specified in the Company's Articles of Incorporation,
as amended (the "Articles") and the currently effective prospectus, including
the documents incorporated by reference therein (the "Prospectus"), relating to
the Company and the Fund, included in the Company's Registration Statement, as
amended from time to time (the "Registration Statement"), filed by the Company
under the Investment Company Act of 1940, as amended (the "1940 Act"), and the
Securities Act of 1933, as amended. Copies of the documents referred to in the
preceding sentence have been furnished to the Investment Manager. Any
amendments to these documents shall be furnished to the Investment Manager.
2. The Company employs the Investment Manager to
(a) make investment strategy decisions for the Fund, (b) manage the investing
and reinvesting of the Fund's assets as specified in paragraph 1, (c) place
purchase and sale orders on behalf of the Fund and (d) provide continuous
supervision of the Fund's investment portfolio. At the Investment Manager's
own expense and subject to its supervision, the Investment Manager may delegate
the performance of all or a part of its services under this agreement to
others.
<PAGE> 2
2
3. (a) The Investment Manager shall, at its
expense, (i) provide the Fund with office space, office facilities and
personnel reasonably necessary for performance of the services to be provided
by the Investment Manager pursuant to this Agreement, (ii) provide the Fund
with persons satisfactory to the Company's Board of Directors to serve as
officers and employees of the Fund and (iii) provide the office space,
facilities, equipment and personnel necessary to perform the following services
for the Fund: (A) review purchases and sales of portfolio instruments and
review the Fund's portfolio to assess compliance with the Fund's stated
investment objective and limitations and compliance with the 1940 Act and other
applicable laws and regulations, (B) record keeping and reporting to the extent
such records and reports are not maintained or furnished by the Fund's transfer
agent, custodian, administrative and accounting services agent, or other agents
employed by the Fund, (C) supervision of Fund operations, including
coordination of functions of transfer agent, custodian, administrative and
accounting services agent, accountants, counsel and other parties performing
services or operational functions for the Fund; and (D) certain administrative
and clerical services not otherwise provided by the Fund's transfer agent,
custodian, administrative and accounting services agent, or other agents
employed by the Fund.
(b) Except as provided in subparagraph (a), the
Company shall be responsible for all of the Fund's expenses and liabilities,
including organizational expenses; taxes; interest; fees (including fees paid
to its directors who are not affiliated with the Investment Manager or any of
its affiliates); fees payable to the Securities and Exchange Commission; state
securities qualification fees; costs of preparing and printing prospectuses for
regulatory purposes and for distribution to existing shareholders; advisory and
administration fees; charges of the custodian, transfer agent, administrative
and accounting services agent and any other agent employed by the Fund;
insurance premiums; auditing and legal expenses; costs of shareholders' reports
and shareholders' meetings; charges and expenses of any entity used for pricing
the Fund's portfolio securities and calculating the net asset value of the
Fund's shares; any extraordinary expenses; brokerage fees and commissions, if
any, in connection with the purchase or sale of portfolio securities; and
payments to the Fund's distributor for activities intended to result in the
sale of Fund shares.
4. As manager of the Fund's assets, the
Investment Manager shall make investments for the Fund's account in accordance
with the investment objective and limitations set forth in the Articles, the
Prospectus, the 1940 Act, the provisions of the Internal Revenue Code of 1986,
as amended, relating to regulated investment companies, applicable banking laws
and regulations, and policy decisions adopted by the Company's Board of
Directors from time to time. The Investment Manager shall advise the Company's
officers and Board of Directors, at such times as the Company's Board of
Directors may
<PAGE> 3
3
specify, of investments made for the Fund's account and shall, when requested
by the Company's officers or Board of Directors, supply the reasons for making
such investments.
5. The Investment Manager is authorized on
behalf of the Company, from time to time when deemed to be in the best
interests of the Company and to the extent permitted by applicable law, to
purchase and/or sell securities in which the Investment Manager or any of its
affiliates underwrites, deals in and/or makes a market and/or may perform or
seek to perform investment banking services for issuers of such securities.
The Investment Manager is further authorized, to the extent permitted by
applicable law, to select brokers for the execution of trades for the Company,
which broker may be an affiliate of the Investment Manager, provided that the
best competitive execution price is obtained at the time of the trade
execution.
6. In consideration of the Investment Manager's
undertaking to render the services described in this agreement, the Company
agrees that the Investment Manager shall not be liable under this agreement for
any error of judgment or mistake of law or for any loss suffered by the Company
(including any Hong Kong taxes or related expenses imposed on the Fund in
relation to matters contemplated by this agreement) in connection with the
performance of this agreement, provided that nothing in this agreement shall be
deemed to protect or purport to protect the Investment Manager against any
liability to the Company or its stockholders to which the Investment Manager
would otherwise be subject by reason of willful misfeasance, bad faith or gross
negligence in the performance of its duties under this agreement or by reason
of its reckless disregard of its obligations and duties hereunder ("disabling
conduct"). The Fund will indemnify the Investment Manager against, and hold it
harmless from, any and all losses, claims, damages, liabilities or expenses
(including any Hong Kong taxes or related expenses imposed on the Fund in
relation to the matters contemplated by this agreement), including reasonable
counsel fees and expenses and any amounts paid in satisfaction of judgments, in
compromise or as fines or penalties, not resulting from disabling conduct by
the Investment Manager. Indemnification shall be made only following: (i) a
final decision on the merits by a court or other body before whom the
proceeding was brought that the Investment Manager was not liable by reason of
disabling conduct, or (ii) in the absence of such a decision, a reasonable
determination, based upon a review of the facts, that the Investment Manager
was not liable by reason of disabling conduct by (a) the vote of a majority of
a quorum of directors of the Company who are neither "interested persons" of
the Company nor parties to the proceeding ("disinterested non-party
directors"), or (b) an independent legal counsel in a written opinion. The
Investment Manager shall be entitled to advances from the Fund for payment of
the reasonable expenses incurred by it in connection with the matter as to
which it is seeking indemnification in the manner and to the fullest extent
permissible under law. The Investment Manager
<PAGE> 4
4
shall provide to the Fund a written affirmation of its good faith belief that
the standard of conduct necessary for indemnification by the Fund has been met
and a written undertaking to repay any such advance if it should ultimately be
determined that the standard of conduct has not been met. In addition, at
least one of the following additional conditions shall be met: (a) the
Investment Manager shall provide security in form and amount acceptable to the
Fund for its undertaking; (b) the Fund is insured against losses arising by
reason of the advance; or (c) a majority of a quorum of disinterested non-party
directors, or independent legal counsel, in a written opinion, shall have
determined, based on a review of facts readily available to the Fund at the
time the advance is proposed to be made, that there is reason to believe that
the Investment Manager will ultimately be found to be entitled to
indemnification. For purposes of this paragraph 6 only, the term "Investment
Manager" shall be deemed to include affiliates of the Investment Manager to
whom the Investment Manager has delegated the exercise of all or any of its
powers, discretion and duties under this agreement.
7. In consideration of the services to be
rendered by the Investment Manager under this agreement, the Company shall pay
the Investment Manager a monthly fee on the first business day of each month at
an annual rate of [0.__%] of the average daily value (as determined on the days
and at the time set forth in the Prospectus for determining net asset value per
share) of the Fund's net assets during the preceding month. If the fee payable
to the Investment Manager pursuant to this paragraph 7 begins to accrue before
the end of any month or if this agreement terminates before the end of any
month, the fee for the period from such date to the end of such month or from
the beginning of such month to the date of termination, as the case may be,
shall be prorated according to the proportion which such period bears to the
full month in which such effectiveness or termination occurs. For purposes of
calculating each such monthly fee, the value of the Fund's net assets shall be
computed in the manner specified in the Prospectus and the Articles for the
computation of the value of the Fund's net assets in connection with the
determination of the net asset value of shares of the Fund's capital stock.
8. If the aggregate expenses incurred by, or
allocated to, the Fund in any fiscal year shall exceed the expense limitations
applicable to the Fund imposed by state securities laws or regulations
thereunder, as such limitations may be raised or lowered from time to time, the
Investment Manager shall reimburse the Fund for such excess. The Investment
Manager's reimbursement obligation will be limited to the amount of fees it
received under this agreement during the period in which such expense
limitations were exceeded, unless otherwise required by applicable laws or
regulations. With respect to portions of a fiscal year in which this contract
shall be in effect, the foregoing limitations shall be prorated according to
the proportion which that portion of the fiscal year bears to the
<PAGE> 5
5
full fiscal year. Any payments required to be made by this paragraph 8 shall
be made once a year promptly after the end of the Company's fiscal year.
9. This agreement shall continue in effect until
two years from the date hereof and thereafter for successive annual periods,
provided that such continuance is specifically approved at least annually (a)
by the vote of a majority of the Fund's outstanding voting securities (as
defined in the 1940 Act) or by the Company's Board of Directors and (b) by the
vote, cast in person at a meeting called for the purpose, of a majority of the
Company's directors who are not parties to this agreement or "interested
persons" (as defined in the 1940 Act) of any such party. This agreement may be
terminated at any time, without the payment of any penalty, by a vote of a
majority of the Fund's outstanding voting securities (as defined in the 1940
Act) or by a vote of a majority of the Company's entire Board of Directors on
60 days' written notice to the Investment Manager or by the Investment Manager
on 60 days' written notice to the Company. This agreement shall terminate
automatically in the event of its assignment (as defined in the 1940 Act). The
respective agreements, covenants, indemnities and other statements set forth in
Section 6 hereof shall remain in full force and effect regardless of any
termination or cancellation of this agreement. All property of the Fund shall
be returned to the Fund as soon as reasonably practicable after the termination
of this agreement.
10. Upon expiration or earlier termination of
this agreement, the Company shall, if reference to "Salomon Brothers" is made
in the corporate name of the Company or in the name of the Fund and if the
Investment Manager requests in writing, as promptly as practicable change its
corporate name and the name of the Fund so as to eliminate all reference to
"Salomon Brothers", and thereafter the Company and the Fund shall cease
transacting business in any corporate name using the words "Salomon Brothers"
or any other reference to the Investment Manager or "Salomon Brothers". The
foregoing rights of the Investment Manager and obligations of the Company shall
not deprive the Investment Manager, or any affiliate thereof which has "Salomon
Brothers" in its name, of, but shall be in addition to, any other rights or
remedies to which the Investment Manager and any such affiliate may be entitled
in law or equity by reason of any breach of this agreement by the Company, and
the failure or omission of the Investment Manager to request a change of the
Company's or the Fund's name or a cessation of the use of the name of "Salomon
Brothers" as described in this paragraph 10 shall not under any circumstances
be deemed a waiver of the right to require such change or cessation at any time
thereafter for the same or any subsequent breach.
11. Except to the extent necessary to perform the
Investment Manager's obligations under this agreement, nothing herein shall be
deemed to limit or restrict the right of the Investment Manager, or any
affiliate of the Investment Manager,
<PAGE> 6
6
or any employee of the Investment Manager, to engage in any other business or
to devote time and attention to the management or other aspects of any other
business, whether of a similar or dissimilar nature, or to render services of
any kind to any other corporation, firm, individual or association.
12. This agreement shall be governed by the laws of the
State of New York.
If the foregoing correctly sets forth the agreement
between the Company and the Investment Manager, please so indicate by signing
and returning to the Company the enclosed copy hereof.
Very truly yours,
SALOMON BROTHERS SERIES FUNDS
INC
By:
----------------------------
Name: Michael S. Hyland
Title: President
ACCEPTED:
SALOMON BROTHERS ASSET
MANAGEMENT INC
By:
-----------------------
Name: Michael S. Hyland
Title: President
<PAGE> 1
Exhibit 5(k)
SUBADVISORY AGREEMENT
Agreement, dated as of April , 1996 between Salomon
Brothers Asset Management Inc, a Delaware Corporation (the "Investment
Manager") and Salomon Brothers Asset Management Asia Pacific Limited (the
"Subadviser"), a company incorporated in Hong Kong and registered with the Hong
Kong Securities and Futures Commission as a investment adviser (registration
number _________), relating to the Salomon Brothers Asia Growth Fund (the
"Fund"), an investment portfolio of Salomon Brothers Series Funds Inc, an
open-end investment company (the "Company").
1. The Company proposes to engage in the
business of investing and reinvesting the assets of the Fund in the manner and
in accordance with the investment objective and limitations specified in the
Company's Articles of Incorporation, as amended (the "Articles") and the
currently effective prospectus, including the documents incorporated by
reference therein (the "Prospectus"), relating to the Company and the Fund,
included in the Company's Registration Statement, as amended from time to time
(the "Registration Statement"), filed by the Company under the Investment
Company Act of 1940, as amended (the "1940 Act"), and the Securities Act of
1933, as amended. Copies of the documents referred to in the preceding
sentence have been furnished by the Investment Manager to the Subadviser. Any
amendments to these documents shall be furnished by the Investment Manager to
the Subadviser.
2. Pursuant to Section 2 of the Investment
Management Agreement dated the date hereof between the Company and the
Investment Manager relating to the Fund (the "Investment Management
Agreement"), the Investment Manager hereby delegates the performance of certain
of its services to the Subadviser to the extent and on the terms set forth in
this agreement. The Subadviser accepts such delegation and agrees to render
the services herein set forth for the compensation herein provided.
3. The Subadviser shall (a) make investment strategy
decisions for the Fund, (b) manage the investing and reinvesting of the Fund's
assets as specified in paragraph 1, (c) place purchase and sale orders on
behalf of the Fund and (d) provide continuous supervision of the Fund's
investment portfolio. The Subadviser shall, at its expense, (i) provide office
space, office facilities and personnel reasonably necessary for performance of
the services to be provided by the Subadviser pursuant to this agreement, and
(ii) provide persons satisfactory to the Company's Board of Directors to serve
as officers and employees of the Fund.
4. As manager of the Fund's assets, the
Subadviser shall make investments for the Fund's account in accordance with the
investment objective and limitations set forth in the Articles, the Prospectus,
the 1940 Act, the provisions of the
<PAGE> 2
2
Internal Revenue Code of 1986, as amended, relating to regulated investment
companies, applicable banking laws and regulations, and policy decisions
adopted by the Company's Board of Directors from time to time. The Subadviser
shall advise the Investment Manager, the Company's officers and Board of
Directors, at such times as the Company's Board of Directors may specify, of
investments made for the Fund's account and shall, when requested by the
Subadviser and/or the Company's officers or Board of Directors, supply the
reasons for making such investments.
5. The Subadviser is authorized on behalf of the
Company, from time to time when deemed to be in the best interests of the
Company and to the extent permitted by applicable law, to purchase and/or sell
securities in which the Subadviser, Investment Manager or any of their
affiliates underwrites, deals in and/or makes a market and/or may perform or
seek to perform investment banking services for issuers of such securities.
The Subadviser is further authorized, to the extent permitted by applicable
law, to select brokers for the execution of trades for the Company, which
broker may be an affiliate of the Subadviser and the Investment Manager,
provided that the best competitive execution price is obtained at the time of
the trade execution.
6. In consideration of the Subadviser's
undertaking to render the services described in this agreement, the Investment
Manager agrees that the Subadviser shall not be liable under this agreement for
any error of judgment or mistake of law or for any loss suffered by the Company
(including any Hong Kong taxes or related expenses imposed on the Fund in
relation to matters contemplated by this agreement) in connection with the
performance of this agreement, provided that nothing in this agreement shall be
deemed to protect or purport to protect the Subadviser against any liability to
the Company or its stockholders to which the Subadviser would otherwise be
subject by reason of willful misfeasance, bad faith or gross negligence in the
performance of its duties under this agreement or by reason of its reckless
disregard of its obligations and duties hereunder ("disabling conduct"). To
the extent the Investment Manager obtains indemnification from the Fund, the
Investment Manager will indemnify the Subadviser against, and hold it harmless
from, any and all losses, claims, damages, liabilities or expenses (including
any Hong Kong taxes or related expenses imposed on the Fund in relation to the
matters contemplated by this agreement), including reasonable counsel fees and
expenses and any amounts paid in satisfaction of judgments, in compromise or as
fines or penalties, not resulting from disabling conduct by the Subadviser.
Indemnification shall be made only following: (i) a final decision on the
merits by a court or other body before whom the proceeding was brought that the
Subadviser was not liable by reason of disabling conduct, or (ii) in the
absence of such a decision, a reasonable determination, based upon a review of
the facts, that the Subadviser was not liable by reason of disabling conduct by
(a) the vote of a majority of a quorum of
<PAGE> 3
3
directors of the Company who are neither "interested persons" of the Company
nor parties to the proceeding ("disinterested non-party directors"), or (b) an
independent legal counsel in a written opinion. To the extent the Investment
Manager receives the same from the Fund, the Subadviser shall be entitled to
advances from the Investment Manager for payment of the reasonable expenses
incurred by it in connection with the matter as to which it is seeking
indemnification in the manner and to the fullest extent permissible under law.
The Subadviser shall provide to the Investment Manager, who in turn will
provide to the Fund, a written affirmation of the Subadviser's good faith
belief that the standard of conduct necessary for indemnification has been met
and a written undertaking to repay any such advance if it should ultimately be
determined that the standard of conduct has not been met. In addition, at
least one of the following additional conditions shall be met: (a) the
Subadviser shall provide security in form and amount acceptable to the
Investment Manager for its undertaking; (b) the Fund is insured against losses
arising by reason of the advance; or (c) a majority of a quorum of
disinterested non-party directors, or independent legal counsel, in a written
opinion, shall have determined, based on a review of facts readily available to
the Fund at the time the advance is proposed to be made, that there is reason
to believe that the Subadviser will ultimately be found to be entitled to
indemnification.
7. In consideration of the services to be
rendered by the Subadviser under this agreement, the Investment Manager shall
pay the Investment Adviser, in respect of each quarter of its service, a lump
sum fee in such amount as shall be agreed between the parties hereto from time
to time. Such agreement may be recorded in an agreement substantially in the
form of Attachment A hereto. The quarterly fee referred to in the preceding
sentence shall be paid by the Investment Manager to the Subadviser in arrears.
Any amount payable to the Subadviser under this agreement shall be computed in
U.S. dollars. The fee due for any quarter during which this agreement remains
in effect for less than a full quarter will be determined on a pro rata basis.
8. This agreement shall continue in effect until
two years from the date hereof and thereafter for successive annual periods,
provided that such continuance is specifically approved at least annually (a)
by the vote of a majority of the Fund's outstanding voting securities (as
defined in the 1940 Act) or by the Company's Board of Directors and (b) by the
vote, cast in person at a meeting called for the purpose, of a majority of the
Company's directors who are not parties to this agreement or "interested
persons" (as defined in the 1940 Act) of any such party. This agreement may be
terminated at any time, without the payment of any penalty, (i) by a vote of a
majority of the Fund's outstanding voting securities (as defined in the 1940
Act), (ii) by a vote of a majority of the Company's entire Board of Directors
on 60 days' written notice to the Investment Manager
<PAGE> 4
4
and the Subadviser or (iii) by either the Subadviser or the Investment Manager
on 60 days' written notice to the other party and the Company. This agreement
shall terminate automatically in the event of its assignment (as defined in the
1940 Act). Termination of this agreement shall not relieve either the
Investment Manager nor the Subadviser from any liability or obligation in
respect of any matters, undertakings or conditions which shall not have been
done, observed or performed prior to such termination. The respective
agreements, covenants, indemnities and other statements set forth in Section 6
hereof shall remain in full force and effect regardless of any termination or
cancellation of this agreement. All property of the Fund shall be returned to
the Fund as soon as reasonably practicable after the termination of this
agreement.
10. Upon expiration or earlier termination of
this agreement, the Company shall, if reference to "Salomon Brothers" is made
in the corporate name of the Company or in the name of the Fund and if the
Investment Manager requests in writing, as promptly as practicable change its
corporate name and the name of the Fund so as to eliminate all reference to
"Salomon Brothers", and thereafter the Company and the Fund shall cease
transacting business in any corporate name using the words "Salomon Brothers"
or any other reference to the Investment Manager or "Salomon Brothers". The
foregoing rights of the Investment Manager and obligations of the Company shall
not deprive the Investment Manager, or any affiliate thereof which has "Salomon
Brothers" in its name, of, but shall be in addition to, any other rights or
remedies to which the Investment Manager and any such affiliate may be entitled
in law or equity by reason of any breach of this agreement by the Company, and
the failure or omission of the Investment Manager to request a change of the
Company's or the Fund's name or a cessation of the use of the name of "Salomon
Brothers" as described in this paragraph 10 shall not under any circumstances
be deemed a waiver of the right to require such change or cessation at any time
thereafter for the same or any subsequent breach.
11. Except to the extent necessary to perform the
Investment Manager's obligations under this agreement, nothing herein shall be
deemed to limit or restrict the right of the Investment Manager, or any
affiliate of the Investment Manager, or any employee of the Investment Manager,
to engage in any other business or to devote time and attention to the
management or other aspects of any other business, whether of a similar or
dissimilar nature, or to render services of any kind to any other corporation,
firm, individual or association.
12. Each of the parties hereto undertakes to notify
the other of any material change in any information supplied in, or pursuant
to, this agreement within a reasonable time after such change. The Subadviser
undertakes (i) to notify the Investment Manager of any change in its directors
within a reasonable time after such change and (ii) to provide, on demand,
<PAGE> 5
5
such financial and other information relating to itself or its business as the
Investment Manager may from time to time reasonably require. The Investment
Manager acknowledges that the Subadviser may be required by law or the rules of
any governmental or other regulatory authority to disclose information relating
to the Fund.
13. This agreement shall be governed by the laws of the
State of New York.
<PAGE> 6
6
IN WITNESS WHEREOF, the parties hereto have caused
this agreement to be executed by their officers designated below as of the date
hereinabove written.
SALOMON BROTHERS ASSET MANAGEMENT
ASIA PACIFIC LIMITED
By:
----------------------------
Name:
Title:
SALOMON BROTHERS ASSET
MANAGEMENT INC
By:
-----------------------
Name: Michael S. Hyland
Title: President
<PAGE> 7
7
Attachment A
From: Salomon Brothers Asset Management Asia Pacific Limited
To: Salomon Brothers Asset Management Inc
Date: _________________________
This confirms that the amount of the quarterly fee under paragraph 7 of our
agreement effective March , 1996 for the period set forth below shall be as
follows:
Period: from ___________ to ____________
Amount of Quarterly Fee: ___________________
Please initial next to your name above and return to indicate your
confirmation.
<PAGE> 1
Exhibit 6(g)
DISTRIBUTION AGREEMENT
April 1996
Salomon Brothers Asset Management Inc
7 World Trade Center
New York, New York 10048
Dear Sirs:
This is to confirm that, in consideration of the
agreements hereinafter contained, Salomon Brothers Series Funds Inc (the
"Company"), an open-end, professionally managed investment company organized as
a corporation under the laws of the State of Maryland, has agreed that Salomon
Brothers Inc ("Salomon Brothers") shall be, for the period of this Agreement,
the distributor of shares of Salomon Brothers Asia Growth Fund (the "Fund"), an
investment portfolio of the Company (the "Shares").
1. Services as Distributor
1.1 Salomon Brothers will act as agent for the
distribution of the Shares covered by the registration statement, prospectus
and statement of additional information then in effect under the Securities Act
of 1933, as amended (the "1933 Act"), and the Investment Company Act of 1940,
as amended (the "1940 Act").
1.2 Salomon Brothers agrees to use its best
efforts to solicit orders for the sale of the Shares at the public offering
price, as determined in accordance with the registration statement, and will
undertake such advertising and promotion as it believes is reasonable in
connection with such solicitation.
1.3 All activities by Salomon Brothers as
distributor of the Shares shall comply with all applicable laws, rules and
regulations, including, without limitation, all rules and regulations made or
adopted by the Securities and Exchange Commission (the "SEC") or by any
securities association registered under the Securities Exchange Act of 1934, as
amended.
1.4 Salomon Brothers will transmit any orders
received by it for purchase or redemption of shares of the Fund to First Data
Investor Services Group, Inc. ("First Data", formerly, The Shareholder Services
Group, Inc.), the Fund's transfer agent and dividend disbursing agent, or any
successor to First Data of which the Fund has notified Salomon Brothers in
writing.
<PAGE> 2
2
1.5 Salomon Brothers acknowledges that, whenever
in the judgment of the Fund's officers such action is warranted for any reason,
including, without limitation, market, economic or political conditions, those
officers may decline to accept any orders for, or make any sales of, the Shares
until such time as those officers deem it advisable to accept such orders and
to make such sales.
1.6 Salomon Brothers will act only on its own
behalf as principal should it choose to enter into selling agreements in the
form of Exhibit A attached hereto with selected dealers or others.
1.7 As compensation for its services hereunder,
Salomon Brothers shall be entitled to such compensation as is described in the
Fund's current registration statement.
2. Duties of the Fund
2.1 The Fund agrees at its own expense to execute
any and all documents, to furnish any and all information and to take any other
actions that may be reasonably necessary in connection with the qualification
of the Shares for sale in those states that Salomon Brothers may designate.
2.2 The Fund shall furnish from time to time, for
use in connection with the sale of the Shares, such information reports with
respect to the Fund and its Shares as Salomon Brothers may reasonably request,
all of which shall be signed by one or more of the Fund's duly authorized
officers; and the Fund warrants that the statements contained in any such
reports, when so signed by one or more of the Fund's officers, shall be true
and correct. The Fund shall also furnish Salomon Brothers upon request with:
(a) annual audits of the Fund's books and accounts made by independent public
accountants regularly retained by the Fund, (b) semiannual unaudited financial
statements pertaining to the Fund, (c) quarterly earnings statements prepared
by the Fund, (d) a monthly itemized list of the securities in the portfolio of
the Fund, (e) monthly balance sheets as soon as practicable after the end of
each month and (f) from time to time such additional information regarding the
Fund's financial condition as Salomon Brothers may reasonably request.
3. Representations and Warranties
The Fund represents to Salomon Brothers that all
registration statements, prospectuses and statements of additional information
filed by the Fund with the SEC under the 1933 Act and the 1940 Act with respect
to the shares of the Fund have been carefully prepared in conformity with the
requirements of the 1933 Act, the 1940 Act and the rules and regulations of the
SEC thereunder. As used in this Agreement the terms "registration statement",
"prospectus" and "statement of additional information" shall mean any
registration statement,
<PAGE> 3
3
prospectus and statement of additional information filed by the Fund with the
SEC and any amendments and supplements thereto which at any time shall have
been filed with the SEC. The Fund represents and warrants to Salomon Brothers
that any registration statement, prospectus and statement of additional
information, when such registration statement becomes effective, will include
all statements required to be contained therein in conformity with the 1933
Act, the 1940 Act and the rules and regulations of the SEC; that all statements
of fact contained in any registration statement, prospectus or statement of
additional information will be true and correct when such registration
statement becomes effective; and that neither any registration statement nor
any prospectus or statement of additional information when such registration
statement becomes effective will include an untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements therein not misleading to a purchaser of the Fund's shares.
Salomon Brothers may, but shall not be obligated to, propose from time to time
such amendment or amendments to any registration statement and such supplement
or supplements to any prospectus or statement of additional information as, in
the light of future developments, may, in the opinion of Salomon Brothers'
counsel, be necessary or advisable. If the Fund shall not propose such
amendment or amendments and/or supplement or supplements within fifteen days
after receipt by the Fund of a written request from Salomon Brothers to do so,
Salomon Brothers may, at its option, terminate this Agreement. The Fund shall
not file any amendment to any registration statement or supplement to any
prospectus or statement of additional information without giving Salomon
Brothers reasonable notice thereof in advance; provided, however, that nothing
contained in this Agreement shall in any way limit the Fund's right to file at
any time such amendments to any registration statement and/or supplements to
any prospectus or statement of additional information, of whatever character,
as the Fund may deem advisable, such right being in all respects absolute and
unconditional.
4. Indemnification
4.1 The Fund authorizes Salomon Brothers and any
dealers with whom Salomon Brothers has entered into dealer agreements to use
any prospectus or statement of additional information furnished by the Fund
from time to time, in connection with the sale of the Fund's shares. The Fund
agrees to indemnify, defend and hold Salomon Brothers, its several officers and
directors, and any person who controls Salomon Brothers within the meaning of
Section 15 of the 1933 Act, free and harmless from and against any and all
claims, demands, liabilities and expenses (including the cost of investigating
or defending such claims, demands or liabilities and any counsel fees incurred
in connection therewith) which Salomon Brothers, its officers and directors, or
any such controlling person, may incur under the 1933 Act, the 1940 Act or
common law or
<PAGE> 4
4
otherwise, arising out of or based upon any untrue statement or alleged untrue
statement of a material fact contained in any registration statement, any
prospectus or any statement of additional information, or arising out of or
based upon any omission or alleged omission to state a material fact required
to be stated in any registration statement, any prospectus or any statement of
additional information, or necessary to make the statements in any of them not
misleading; provided, however, that the Fund's agreement to indemnify Salomon
Brothers, its officers or directors, and any such controlling person shall not
be deemed to cover any claims, demands, liabilities or expenses arising out of
or based upon any statements or representations made by Salomon Brothers or its
representatives or agents other than such statements and representations as are
contained in any registration statement, prospectus or statement of additional
information and in such financial and other statements as are furnished to
Salomon Brothers pursuant to paragraph 2.2 hereof; and further provided that
the Fund's agreement to indemnify Salomon Brothers and the Fund's
representations and warranties hereinbefore set forth in paragraph 3 shall not
be deemed to cover any liability to the Fund or its shareholders to which
Salomon Brothers would otherwise be subject by reason of willful misfeasance,
bad faith or gross negligence in the performance of its duties, or by reason of
Salomon Brothers' reckless disregard of its obligations and duties under this
Agreement. The Fund's agreement to indemnify Salomon Brothers, its officers
and directors, and any such controlling person, as aforesaid, is expressly
conditioned upon the Fund's being notified of any action brought against
Salomon Brothers, its officers or directors, or any such controlling person,
such notification to be given by letter or by telegram addressed to the Fund at
its principal office in New York, New York and sent to the Fund by the person
against whom such action is brought, within ten days after the summons or other
first legal process shall have been served. The failure so to notify the Fund
of any such action shall not relieve the Fund from any liability that the Fund
may have to the person against whom such action is brought by reason of any
such untrue or alleged untrue statement or omission or alleged omission
otherwise than on account of the Fund's indemnity agreement contained in this
paragraph 4.1. The Fund's indemnification agreement contained in this paragraph
4.1 and the Fund's representations and warranties in this Agreement shall
remain operative and in full force and effect regardless of any investigation
made by or on behalf of Salomon Brothers, its officers and directors, or any
controlling person, and shall survive the delivery of any of the Fund's shares.
This agreement of indemnity will inure exclusively to Salomon Brothers'
benefit, to the benefit of its several officers and directors, and their
respective estates, and to the benefit of the controlling persons and their
successors. The Fund agrees to notify Salomon Brothers promptly of the
commencement of any litigation or proceedings against the Fund or any of its
officers or directors in connection with the issuance and sale of any of the
Fund's shares.
<PAGE> 5
5
4.2 Salomon Brothers agrees to indemnify, defend
and hold the Fund, its several officers and directors, and any person who
controls the Fund within the meaning of Section 15 of the 1933 Act, free and
harmless from and against any and all claims, demands, liabilities and expenses
(including the costs of investigating or defending such claims, demands or
liabilities and any counsel fees incurred in connection therewith) that the
Fund, its officers or directors or any such controlling person may incur under
the 1933 Act, the 1940 Act or common law or otherwise, but only to the extent
that such liability or expense incurred by the Fund, its officers or directors
or such controlling person resulting from such claims or demands shall arise
out of or be based upon (a) any unauthorized sales literature, advertisements,
information, statements or representations or (b) any untrue or alleged untrue
statement of a material fact contained in information, furnished in writing by
Salomon Brothers to the Fund and used in the answers to any of these items of
the registration statement or in the corresponding statements made in the
prospectus or statement of additional information, or shall arise out of or be
based upon any omission or alleged omission to state a material fact in
connection with such information furnished in writing by Salomon Brothers to
the Fund and required to be stated in such answers or necessary to make such
information not misleading. Salomon Brothers' agreement to indemnify the Fund,
its officers and directors, and any such controlling person, as aforesaid, is
expressly conditioned upon Salomon Brothers' being notified of any action
brought against the Fund, its officers or directors, or any such controlling
person, such notification to be given by letter or telegram addressed to
Salomon Brothers at its principal office in New York, New York and sent to
Salomon Brothers by the person against whom such action is brought, within ten
days after the summons or other first legal process shall have been served.
The failure so to notify Salomon Brothers of any such action shall not relieve
Salomon Brothers from any liability that Salomon Brothers may have to the Fund,
its officers or directors, or to such controlling person by reason of any such
untrue or alleged untrue statement or omission or alleged omission otherwise
than on account of Salomon Brothers' indemnity agreement contained in this
paragraph 4.2. Salomon Brothers agrees to notify the Fund promptly of the
commencement of any litigation or proceedings against Salomon Brothers or any
of its officers or directors in connection with the issuance and sale of any of
the Fund's shares.
4.3 In case any action shall be brought against
any indemnified party under paragraph 4.1 or 4.2, and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party shall be
entitled to participate in, and, to the extent that it shall wish to do so, to
assume the defense thereof with counsel satisfactory to such indemnified party.
If the indemnifying party opts to assume the defense of such action, the
indemnifying party will not be liable to the indemnified party for any legal or
other expenses subsequently incurred by
<PAGE> 6
6
the indemnified party in connection with the defense thereof other than (a)
reasonable costs of investigation or the furnishing of documents or witnesses
and (b) all reasonable fees and expenses of separate counsel to such
indemnified party if (i) the indemnifying party and the indemnified party shall
have agreed to the retention of such counsel or (ii) the indemnified party
shall have concluded reasonably that representation of the indemnifying party
and the indemnified party by the same counsel would be inappropriate due to
actual or potential differing interests between them in the conduct of the
defense of such action.
5. Effectiveness of Registration
None of the Shares shall be offered by either Salomon
Brothers or the Fund under any of the provisions of this Agreement and no
orders for the purchase or sale of the Shares hereunder shall be accepted by
the Fund if and so long as the effectiveness of the registration statement then
in effect or any necessary amendments thereto shall be suspended under any of
the provisions of the 1933 Act or if and so long as a current prospectus as
required by Section 5(b)(2) of the 1933 Act is not on file with the SEC;
provided, however, that nothing contained in this paragraph 5 shall in any way
restrict or have an application to or bearing upon the Fund's obligation to
repurchase its Shares from any shareholder in accordance with the provisions of
the Fund's prospectus, statement of additional information or articles of
incorporation.
6. Notice to Salomon Brothers
The Fund agrees to advise Salomon Brothers
immediately in writing:
(a) of any request by the SEC for amendments to
the registration statement, prospectuses or statements of additional
information then in effect or for additional information;
(b) in the event of the issuance by the SEC of
any stop order suspending the effectiveness of the registration statement,
prospectus or statement of additional information then in effect or the
initiation of any proceeding for that purpose;
(c) of the happening of any event that makes
untrue any statement of a material fact made in the registration statement,
prospectus or statement of additional information then in effect or that
requires the making of a change in such registration statement, prospectus or
statement of additional information in order to make the statements therein not
misleading; and
(d) of all actions of the SEC with respect to
any amendment to any registration statement, prospectus or statement
<PAGE> 7
7
of additional information which may from time to time be filed with the SEC.
7. Term of Agreement
This Agreement shall continue for two years from the
date hereof and thereafter shall continue automatically for successive annual
periods, provided such continuance is specifically approved at least annually
by (i) the Company's Board of Directors with respect to the Fund, or (ii) by a
vote of a majority (as defined in the 1940 Act) of the Fund's outstanding
voting securities, provided that in either event the continuance is also
approved by the majority of the Directors of the Company who are not interested
persons (as defined in the 1940 Act) of any party to this Agreement, by vote
cast in person at a meeting called for the purpose of voting on such approval.
This Agreement is terminable, without penalty, on 60 days' notice by the
Company's Board of Directors, by vote of the holders of a majority of the
Fund's shares, or on 90 days' notice by Salomon Brothers. This Agreement will
also terminate automatically in the event of its assignment (as defined in the
1940 Act).
8. Miscellaneous
The Fund recognizes that directors, officers and
employees of Salomon Brothers may from time to time serve as directors,
trustees, officers and employees of corporations and business trusts (including
other investment companies) and that such other corporations and trusts may
include the name "Salomon" or "Salomon Brothers" as part of their names, and
that Salomon Brothers or its affiliates may enter into distribution or other
agreements with such other corporations and trusts. If Salomon Brothers, or an
affiliate, ceases to act as the distributor of the Fund's shares, the Fund
agrees that, at Salomon Brothers' request, the Fund's license to use the words
"Salomon Brothers" will terminate and that the Fund will take all necessary
action to change the name of the Fund to a name not including the words
"Salomon" or "Salomon Brothers."
<PAGE> 8
8
Please confirm that the foregoing is in accordance
with your understanding by indicating your acceptance thereof at the place
below indicated, whereupon it shall become a binding agreement between us.
Very truly yours,
SALOMON BROTHERS SERIES FUNDS INC
By:
------------------------------
Michael S. Hyland
President
Accepted:
SALOMON BROTHERS INC
By:
---------------------------
Michael S. Hyland
Managing Director
<PAGE> 9
EXHIBIT A
DEALER CONTRACT
SALOMON BROTHERS INC
7 World Trade Center
New York, New York 10048
[Name of Broker-Dealer]
- -----------------------
- -----------------------
- -----------------------
Ladies and Gentlemen:
We, Salomon Brothers Inc ("Salomon"), have agreements
with certain investment companies for which Salomon Brothers Asset Management
Inc serves as investment adviser (each a "Company") pursuant to which we act as
the distributor for the sale of shares of each Company's capital stock, par
value $.001 per share ("shares"), and as such have the right to distribute
shares for resale. Each Company is an open-end investment company registered
under the Investment Company Act of 1940, as amended (the "1940 Act") and the
shares being offered to the public are registered under the Securities Act of
1933, as amended (the "1933 Act"). You have received copies of the
Distribution Contract (the "Distribution Contract") between ourselves and each
Company and reference is made herein to certain provisions of the Distribution
Contract. Each Company or, in the case of a series investment company, each
investment portfolio of such Company, together with any other investment
company or investment portfolio thereof which may in the future be included in
the Salomon Brothers Institutional Investment Series is referred to in this
agreement as a "Fund" and collectively as the "Funds." The term "Prospectus",
as used herein, refers to the prospectus and related statement of additional
information (the "Statement of Additional Information") incorporated therein by
reference (as amended or supplemented) on file with the Securities and Exchange
Commission which is part of the most recent effective Registration Statement of
the Fund under the 1933 Act. As principal, we offer to sell to you, as a
dealer, shares of each Fund upon the following terms and conditions:
1. In all sales to the public you shall act as
dealer for your own account, and in no transaction shall you have any authority
to act as agent for the Funds, for us or for any other dealer.
2. Orders received from you will be accepted through
us only at the public offering price per share (i.e. the net asset value per
share applicable to each order), and all orders for redemption of any Fund
shares shall be executed at the net asset value per share, as set forth in the
Prospectus. The procedure relating to the handling of orders shall be subject
to paragraph 4 hereof and instructions which we or the Funds shall
<PAGE> 10
2
forward from time to time to you. All orders are subject to acceptance or
rejection by Salomon or each Fund in the sole discretion of either. The
minimum initial purchase and the minimum subsequent purchase shall be as set
forth in the Prospectus of each Fund.
3. You shall not place orders for any shares unless
you have already received purchase orders for those shares at the applicable
public offering price and subject to the terms hereof and of the Distribution
Contracts. You agree that you will not offer or sell any shares except under
circumstances that will result in compliance with the applicable Federal and
state securities laws, the applicable rules and regulations thereunder and the
rules and regulations of applicable regulatory agencies or authorities and that
in connection with sales and offers to sell shares you will furnish to each
person to whom any such sale or offer is made, at or prior to the time of such
sale or offer, a copy of the Prospectus and, upon request, the Statement of
Additional Information, and will not furnish to any person any information
relating to shares which is inconsistent in any respect with the information
contained in the Prospectus or Statement of Additional Information (as then
amended or supplemented). You shall not furnish or cause to be furnished to
any person or display or publish any information or materials relating to the
shares (including, without limitation, promotional materials and sales
literature, advertisements, press releases, announcements, statements, posters,
signs or other similar material), except such information and materials as may
be furnished to you by us or by the Funds, and such other information and
materials as may be approved in writing by us.
4. As a dealer, you are hereby authorized (i) to
place orders directly with the Funds for shares to be resold by us to you
subject to the applicable terms and conditions governing the placement of
orders by us set forth in the Prospectus and the Distribution Contract and (ii)
to tender shares directly to each Fund or its agent for redemption subject to
the applicable terms and conditions governing the redemption of shares
applicable to us set forth in the Prospectus and the Distribution Contract.
5. You shall not withhold placing orders received
from your customers so as to profit yourself as a result of such withholding,
e.g., by a change in the "net asset value" from that used in determining the
offering price to your customers.
6. In determining the amount of any sales concession
payable to you hereunder, we reserve the right to exclude any sales which we
reasonably determine are not made in accordance with the terms of the
Prospectus and the provisions of this Agreement. Unless at the time of
transmitting an order we advise you or the transfer agent to the contrary, the
shares ordered will be deemed to be the total holdings of the specified
investor.
<PAGE> 11
3
7. (a) You agree that payment for orders
from you for the purchase of shares will be made in accordance with the terms
of the Prospectus. On or before the business day following the settlement date
of each purchase order for shares, you shall transfer same day funds to an
account designated by us with the transfer agent an amount equal to the public
offering price on the date of purchase of the shares being purchased less your
sales concession, if any, with respect to such purchase order determined in
accordance with the Prospectus. If payment for any purchase order is not
received in accordance with the terms of the Prospectus, we reserve the right,
without notice, to cancel the sale and to hold you responsible for any loss
sustained as a result thereof.
(b) Upon payment for shares in accordance with
paragraph 7(a) above, the transfer agent will issue and transmit to you a
confirmation statement evidencing the purchase of such shares. Any transaction
in uncertificated shares, including purchases, transfers, redemptions and
repurchases, shall be effected and evidenced by book-entry on the records of
the transfer agent.
8. No person is authorized to make any
representations concerning shares except those contained in the current
Prospectus and Statement of Additional Information and in printed information
subsequently issued by us or the Funds as information supplemental to the
Prospectus and the Statement of Additional Information. In purchasing shares
through us you shall rely solely on the representations contained in the
Prospectus, the Statement of Additional Information and the supplemental
information above mentioned.
9. You agree to deliver to each purchaser making
a purchase of shares from you a copy of the Prospectus at or prior to the time
of offering or sale, and, upon request, the Statement of Additional
Information. You may instruct the transfer agent to register shares purchased
in your name and account as nominee for your customers. You agree thereafter
to deliver to any purchaser whose shares you are holding as record holder
copies of the annual and interim reports and proxy solicitation materials and
any other information and materials relating to the Funds and prepared by or on
behalf of us, the Funds or the investment adviser, custodian, transfer agent or
dividend disbursing agent for distribution to such customer. The Funds shall
be responsible for the costs associated with forwarding such reports, materials
and other information and shall reimburse you in full for such costs. You
further agree to make reasonable efforts to endeavor to obtain proxies from
such purchasers whose shares you are holding as record holder. You further
agree to obtain from each customer to whom you sell shares any taxpayer
identification number certification required under Section 3406 of the Internal
Revenue Code of 1986, as amended (the "Code"), and the regulations promulgated
thereunder, and to provide us or our designee with timely written notice of any
failure to obtain
<PAGE> 12
4
such taxpayer identification number certification in order to enable the
implementation of any required backup withholding in accordance with Section
3406 of the Code and the regulations thereunder. Additional copies of the
Prospectus, Statement of Additional Information, annual or interim reports,
proxy solicitation materials and any such other information and materials
relating to the Funds will be supplied to you in reasonable quantities upon
request.
10. Exchanges (i.e., the investment of the proceeds
from the liquidation of shares of one fund in the shares of another fund, each
of which is managed by the Funds' investment adviser) shall, where available,
be made in accordance with the terms of each Prospectus.
11. We reserve the right in our discretion, without
notice, to suspend sales or withdraw the offering of shares entirely. Each
party hereto has the right to cancel this agreement upon notice to the other
party.
12. We shall have full authority to take such action
as we may deem advisable in respect of all matters pertaining to the continuous
offering of shares. We shall be under no liability to you except for lack of
good faith and for obligations expressly assumed by us herein. Nothing
contained in this paragraph 12 is intended to operate as, and the provisions of
this paragraph 12 shall not in any way whatsoever constitute a waiver by you of
compliance with, any provisions of the 1933 Act or of the rules and regulations
of the Securities and Exchange Commission issued thereunder.
13. You agree that: (a) you shall not effect any
transactions (including, without limitation, any purchases and redemptions) in
any shares registered in the name of, or beneficially owned by, any customer
unless such customer has granted you full right, power and authority to effect
such transactions on his behalf, (b) we shall have full authority to act upon
your express instructions to sell, repurchase or exchange shares through us on
behalf of your customers under the terms and conditions provided in the
Prospectus and (c) we, the Funds, the transfer agent and our and their
respective officers, directors or trustees, agents, employees and affiliates
shall not be liable for, and shall be fully indemnified and held harmless by
you from and against, any and all claims, demands, liabilities and expenses
(including, without limitation, reasonable attorneys' fees) which may be
incurred by us or any of the foregoing persons entitled to indemnification from
you hereunder arising out of or in connection with (i) the execution of any
transactions in shares registered in the name of, or beneficially owned by, any
customer in reliance upon any oral or written instructions believed to be
genuine and to have been given by or on behalf of you, (ii) any statements or
representations that you or your employees make concerning the Funds that are
inconsistent with the applicable Fund's Prospectus and (iii) any sale of
<PAGE> 13
5
shares of a Fund where the Fund or its shares were not properly registered or
qualified for sale in any state, any U.S. territory or the District of
Columbia, when we have indicated to you that the Fund or its shares were not
properly registered or qualified. The indemnification agreement contained in
this Paragraph 13 shall survive the termination of this Agreement.
14. You represent that: (a) you are a member in good
standing of the National Association of Securities Dealers, Inc. (the "NASD"),
or, if a foreign dealer who is not eligible for membership in the NASD, that
(i) you will not make any sales of shares in, or to nationals of, the United
States of America, its territories or its possessions, and (ii) in making any
sales of shares you will comply with the NASD's Rules of Fair Practice and (b)
you are a member in good standing of the Securities Investor Protection
Corporation ("SIPC"). You agree that you will provide us with timely written
notice of any change in your NASD or SIPC status.
15. We shall inform you as to the states or other
jurisdictions in which each Fund has advised us that shares have been qualified
for sale under, or are exempt from the requirements of, the respective
securities laws of such states, but we assume no responsibility or obligation
as to your qualification to sell shares in any jurisdiction.
16. All communications to us should be sent, postage
prepaid, to 7 World Trade Center, New York, New York 10048. Attention:
___________. Any notice to you shall be duly given if mailed, telegraphed or
telecopied to you at the address specified by you below. Communications
regarding placement of orders for shares should be sent, postage prepaid, to
First Data Invsetor Services Group, Inc., P.O. Box 9109, Boston, Massachusetts
02205-9109.
<PAGE> 14
6
17. This Agreement shall be binding upon both
parties hereto when signed by us and accepted by you in the space provided
below.
20. This Agreement and the terms and conditions
set forth herein shall be governed by, and construed in accordance with, the
laws of the State of New York.
SALOMON BROTHERS INC
By:
-------------------------
(Authorized Signature)
Please return one signed copy of this Contract to:
Salomon Brothers Inc
7 World Trade Center
New York, New York 10048
Attention:
Accepted:
Firm Name: ________________________________________________
By: _______________________________________________________
Address: __________________________________________________
____________________________________________________________
Accepted By (signature): __________________________________
Name (print): __________________ Title: __________________
Date: ______________________________________________________
<PAGE> 1
Exhibit 9(e)
TRANSFER AGENCY AND SERVICE AGREEMENT
among
SALOMON BROTHERS INSTITUTIONAL SERIES FUNDS INC
SALOMON BROTHERS SERIES FUNDS INC
and
INVESTORS BANK & TRUST COMPANY
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
o ARTICLE 1. Terms of Appointment; Duties of the Bank . . . . . . . . . . . . . . . . 1
o ARTICLE 2. Sale of Company Shares . . . . . . . . . . . . . . . . . . . . . . . . . 4
o ARTICLE 3. Returned Checks . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
o ARTICLE 4. Redemptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
o ARTICLE 5. Transfers and Exchanges . . . . . . . . . . . . . . . . . . . . . . . . 5
o ARTICLE 6. Right to Seek Assurances . . . . . . . . . . . . . . . . . . . . . . . . 5
o ARTICLE 7. Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
o ARTICLE 8. Other Duties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
o ARTICLE 9. Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
o ARTICLE 10. Books and Records . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
o ARTICLE 11. Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
o ARTICLE 12. Representations and Warranties of the Bank . . . . . . . . . . . . . . . 8
o ARTICLE 13. Representations and Warranties of the Company . . . . . . . . . . . . . 8
o ARTICLE 14. Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
o ARTICLE 15. Covenants of the Company and the Bank . . . . . . . . . . . . . . . . . 10
o ARTICLE 16. Term of Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
o ARTICLE 17. Additional Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
o ARTICLE 18. Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
o ARTICLE 19. Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
o ARTICLE 20. Massachusetts Law to Apply . . . . . . . . . . . . . . . . . . . . . . . . 13
o ARTICLE 21. Merger of Agreement and Severability . . . . . . . . . . . . . . . . . . . 13
o ARTICLE 22. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
o ARTICLE 23. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
</TABLE>
<PAGE> 4
TRANSFER AGENCY AND SERVICE AGREEMENT
AGREEMENT effective as of the ____ day of ____, 1996 among
Salomon Brothers Institutional Series Funds, Inc., a corporation organized
under the laws of the State of Maryland ("Institutional Series Funds"),
Salomon Brothers Series Funds Inc, a corporation organized under the laws of
Maryland ("Series Funds") (each, a "Company") and INVESTORS BANK & TRUST
COMPANY, a Massachusetts trust company (the "Bank").
WITNESSETH:
WHEREAS, the Bank is duly registered as a transfer agent as provided
in Section 17A(c) of the Securities Exchange Act of 1934, as amended, (the
"1934 Act");
WHEREAS, each Company is authorized to issue shares in separate series,
with each such series representing interests in a separate portfolio of
securities and other assets;
WHEREAS, each Company desires to appoint the Bank as its transfer
agent, dividend disbursing agent and agent in connection with certain other
activities, and the Bank desires to accept such appointment; with respect to the
series listed on Appendix A corresponding to each Company (such series, together
with all other series subsequently established by either Company and made
subject to this Agreement in acccordance with Article 17, being herein referred
to as the "Fund(s)")
NOW, THEREFORE, in consideration of the mutual covenants herein set
forth, the Company and the Bank agree as follows:
ARTICLE 1. Terms of Appointment: Duties of the Bank
1.01 Subject to the terms and conditions set forth in this
Agreement, each Company on behalf of their respective Funds, hereby employs and
appoints the Bank to act as, and the Bank agrees to act as, transfer agent for
each of the Fund(s)' authorized and issued shares of beneficial interest
("Shares"), dividend disbursing agent and agent in connection with any
accumulation, open-account or similar plans provided to the shareholders of the
Company ("Shareholders") and set out in the currently effective prospectus and
statement of additional information, as each may be amended from time to time,
(the "Prospectus") of the Company, including without limitation any periodic
investment plan or periodic withdrawal program.
1.02 The Bank agrees that it will perform the following services:
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(a) In connection with procedures established from time to time by
agreement between the Company and the Bank, the Bank shall:(i) Receive for
acceptance, orders for the purchase of Shares, and promptly deliver payment and
appropriate documentation therefor to the custodian of the Company appointed by
the Board of Directors of the Company (the "Custodian");
(ii) Pursuant to purchase orders, issue the appropriate
number of Shares and hold such Shares in the appropriate Shareholder account;
(iii) Receive for acceptance, redemption requests and
redemption directions and deliver the appropriate documentation therefor to the
Custodian;
(iv) At the appropriate time as and when it receives
monies paid to it by the Custodian with respect to any redemption, pay over or
cause to be paid over in the appropriate manner such monies as instructed by
the redeeming Shareholders;
(v) Effect transfers of Shares by the registered owners
thereof upon receipt of appropriate instructions;
(vi) Prepare and transmit payments for dividends and
distributions declared by the Company on behalf of a Fund; and
(vii) Create and maintain all necessary records including
those specified in Article 10 hereof, in accordance with all applicable laws,
rules and regulations, including but not limited to records required by Section
31(a) of the Investment Company Act of 1940, as amended (the "1940 Act"), and
those records pertaining to the various functions performed by it hereunder.
All records shall be available for inspection and use by the Company. Where
applicable, such records shall be maintained by the Bank for the periods and in
the places required by Rule 3la-2 under the 1940 Act.
(viii) Make available during regular business hours all
records and other data created and maintained pursuant to this Agreement for
reasonable audit and inspection by the Company, or any person retained by the
Company. Upon reasonable notice by the Company, the Bank shall make available
during regular business hours its facilities and premises employed in
connection with its performance of this Agreement for reasonable visitation by
the Company, or any person retained by the Company.
(ix) At the expense of and at the request of the Company,
the Bank shall maintain an adequate supply of blank share certificates for each
Fund providing for the issuance of certificates to meet the Bank's requirements
therefor. Such share certificates shall be property signed by facsimile. The
Company agrees that, notwithstanding the death, resignation, or removal of any
officer of the Company whose signature appears on such certificates, the Bank
may continue to countersign certificates which bear such signatures until
otherwise directed by the Company. Share certificates may be issued and
accounted for entirely by the Bank and do not require any third party registrar
or other endorsing party.
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(x) Issue replacement share certificates in lieu of
certificates which have been lost, stolen, mutilated or destroyed, without any
further action by the Board of Directors or any officer of the Company, upon
receipt by the Bank of properly executed affidavits and lost certificate bonds,
in form satisfactory to the Bank with the Company and the Bank as obligees
under the bond. At the discretion of the Bank, and at its sole risk, the Bank
may issue replacement certificates without requiring the affidavits and lost
certificate bonds described above and the Bank agrees to indemnify the Company
against any and all losses or claims which may arise by reason of the issuance
of such new certificates in the place of the ones allegedly lost, stolen or
destroyed.
(xi) Record the issuance of Shares of the Company and
maintain, pursuant to Rule 17Ad-10(e) under the 1934 Act, a record of the total
number of Shares of the Company which are authorized, based upon data provided
to it by the Company, and issued and outstanding. The Bank shall also provide
the Company on a regular basis with the total number of Shares which are
authorized and issued and outstanding and shall have no obligation, when
recording the issuance of Shares, to monitor the issuance of such Shares or to
take cognizance of any laws relating to the issue or sale of such Shares, which
functions shall be the sole responsibility of the Company.
(b) In addition to and not in lieu of the services set forth in
the above paragraph (a) or in any Schedule hereto, the Bank shall: (i) perform
all of the customary services of a transfer agent, dividend disbursing agent
and, as relevant, agent in connection with accumulation, open-account or
similar plans (including without limitation any periodic investment plan or
periodic withdrawal program); including but not limited to maintaining all
Shareholder accounts, preparing Shareholder meeting lists, mailing proxies,
receiving and tabulating proxies, mailing Shareholder reports and prospectuses
to current Shareholders, withholding taxes on all accounts, including
nonresident alien accounts, preparing and filing U.S. Treasury Department Forms
1099 and other appropriate forms required with respect to dividends and
distributions by federal authorities for all, Shareholders, preparing and
mailing confirmation form and statements of account to Shareholders for all
purchases and redemptions of Shares and other confirmable transactions in
Shareholder accounts, responding to Shareholder telephone calls and Shareholder
correspondence, preparing and mailing activity statements for Shareholders, and
providing Shareholder account information; and (ii) provide a system which will
enable the Company to monitor the total number of shares sold in each State.
The Company shall (i) identify to the Bank in writing those transactions and
assets to be treated as exempt from blue sky reporting for each State and (ii)
verify the establishment of transactions for each State on the system prior to
activation and thereafter monitor the daily activity for each State. The
responsibility of the Bank for a Fund's blue sky state registration status is
solely limited to the initial establishment of transactions subject to blue sky
compliance by such Fund(s) and the reporting of such transactions to the
Fund(s) as provided above.
(c) Additionally, the Bank shall utilize a system to identify all
share transactions which involve purchase and redemption orders that are
processed at a time other than the time of
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<PAGE> 7
the computation of net asset value per share next computed after receipt of
such orders, and shall compute the net effect upon the Fund(s) of such
transactions so identified on a daily and cumulative basis.
ARTICLE 2. Sale of Company Shares
2.01 Whenever the Company shall sell or cause to be sold any Shares
of a Fund, the Company shall deliver or cause to be delivered to the Bank a
document duly specifying: (i) the name of the Fund whose Shares were sold; (ii)
the number of Shares sold, trade date, and price; (iii) the amount of money to
be delivered to the Custodian for the sale of such Shares and specifically
allocated to such Fund; and (iv) in the case of a new account, a new account
application or sufficient information to establish an account.
2.02 The Bank will, upon receipt by it of a check or other payment
identified by it as an investment in Shares of one of the Funds and drawn or
endorsed to the Bank as agent for, or identified as being for the account of,
one of the Funds, promptly deposit such check or other payment to the
appropriate account postings necessary to reflect the investment. The Bank
will notify the Company, or its designee, and the Custodian of all purchases
and related account adjustments.
2.03 Under procedures as established by mutual agreement between
the Company and the Bank, the Bank shall issue to the purchaser or his
authorized agent such Shares, computed to the nearest three decimal points, as
he is entitled to receive, based on the appropriate net asset value of the
Funds' Shares, determined in accordance with the prospectus and applicable
Federal law or regulation. In issuing Shares to a purchaser or his authorized
agent, the Bank shall be entitled to rely upon the latest directions, if any,
previously received by the Bank from the purchaser or his authorized agent
concerning the delivery of such Shares,
2.04 The Bank shall not be required to issue any Shares of the
Company where it has received a written instruction from the Company or written
notification from any appropriate Federal or State authority that the sale of
the Shares of the Fund(s) in question has been suspended or discontinued, and
the Bank shall be entitled to rely upon such written instructions or written
notification.
2.05 Upon the issuance of any Shares of any Fund(s) in accordance
with foregoing provisions of this Section, the Bank shall not be responsible
for the payment of any original issue or other taxes, if any, required to be
paid by the Company in connection with such issuance.
2.06 The Bank may establish such additional rules and regulations
governing the transfer or registration of Shares as it may deem advisable and
consistent with such rules and regulations generally adopted by transfer
agents, or with the written consent of the Company, any other rules and
regulations.
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<PAGE> 8
ARTICLE 3. Returned Checks
3.01 In the event that any check or other order for the transfer of
money is returned unpaid for any reason, the Bank will take such steps as the
Bank may, in its discretion, deem appropriate to protect the Company from
financial loss or as the Company or its designee may instruct. Provided that
the standard procedures, as agreed upon from time to time, between the Company
and the Bank, regarding purchases and redemptions of Shares, are adhered to by
the Bank, the Bank shall not be liable for any loss suffered by a Fund as a
result of returned or unpaid purchase or redemption transactions. Legal or
other expenses incurred to collect amounts owed to a Fund as a consequence of
returned or unpaid purchase or redemption transactions shall be an expense of
that Fund.
ARTICLE 4. Redemptions
4.01 Shares of any Fund may be redeemed in accordance with the
procedures set forth in the Prospectus of the Company and the Bank will duly
process all redemption requests.
ARTICLE 5. Transfers and Exchanges
5.01 The Bank is authorized to review and process transfers of
Shares of each Fund, exchanges between Funds on the records of the Funds
maintained by the Bank, and exchanges between the Company and any other entity
as may be permitted by the Prospectus of the Company. If Shares to be
transferred are represented by outstanding certificates, the Bank will, upon
surrender to it of the certificates in proper form for transfer, and upon
cancellation thereof, countersign and issue new certificates for a like number
of Shares and deliver the same. If the Shares to be transferred are not
represented by outstanding certificates, the Bank will, upon an order therefor
by or on behalf of the registered holder thereof in proper form, credit the
same to the transferee on its books. If Shares are to be exchanged for Shares
of another Fund, the Bank will process such exchange in the same manner as a
redemption and sale of Shares, except that it may in its discretion waive
requirements for information and documentation.
ARTICLE 6. Right to Seek Assurances
6.01 The Bank reserves the right to refuse to transfer or redeem
Shares until it is satisfied that the requested transfer or redemption is
legally authorized, and it shall incur no liability for the refusal, in good
faith, to make transfers or redemptions which the Bank, in its judgment, deems
improper or unauthorized, or until it is satisfied that there is no basis for
any claims adverse to such transfer or redemption. The Bank may, in effecting
transfers, rely upon the provisions of the Uniform Act for the Simplification
of Fiduciary Security Transfers or the Uniform Commercial Code, as the same may
be amended from time to time, which protect it in not requiring certain
documents in connection with the transfer or redemption of Shares of any
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<PAGE> 9
Fund, and Institutional Series Funds, only with respect to a Fund listed on
Appendix A as a series of that Company, and Series Funds, only with respect to
a Fund listed on Appendix A as a series of that Company, shall indemnify the
Bank for any act done or omitted by it in good faith reliance upon such laws;
provided that such indemnification shall only be available to the extent of the
applicable Fund's assets and shall not be paid from the assets of any other
Fund.
ARTICLE 7. Distributions
7.01 The Company will promptly notify the Bank of the declaration
of any dividend or distribution. The Company shall furnish to the Bank a
resolution of the Board of Directors of the Company certified by the Secretary
(a "Certificate"): (i) authorizing the declaration of dividends on a specified
periodic basis and authorizing the Bank to rely on oral instructions or a
Certificate specifying the date of the declaration of such dividend or
distribution, the date of payment thereof, the record date as of which
Shareholders entitled to payment shall be determined and the amount payable per
share to Shareholders of record as of the date and the total amount payable to
the Bank on the payment date; or (ii) setting forth the date of the declaration
of any dividend or distribution by a Fund, the date of payment thereof, the
record date as of which Shareholders entitled to payment shall be determined,
and the amount payable per share to the Shareholders of record as of that date
and the total amount payable to the Bank on the payment date.
7.02 The Bank, on behalf of the Company, shall instruct the
Custodian to place in a dividend disbursing account funds equal to the cash
amount of any dividend or distribution to be paid out. The Bank will
calculate, prepare and mail checks to (at the address as it appears on the
records of the Bank), or (where appropriate) credit such dividend or
distribution to the account of, Fund Shareholders, and maintain and safeguard
all underlying records.
7.03 The Bank will replace lost checks at its discretion and in
conformity with regular business practices.
7.04 The Bank will maintain all records necessary to reflect the
crediting of dividends which am reinvested in Shares of the Company, including
without limitation daily dividends.
7.05 The Bank shall not be liable for any improper payments made in
accordance with a resolution of the Board of Directors of the Company.
7.06 If the Bank shall not receive from the Custodian sufficient
cash to make payment to all Shareholders of the Company as of the record date,
the Bank shall, upon notifying the Company, withhold payment to all
Shareholders of record as of the record date until such sufficient cash is
provided to the Bank.
ARTICLE 8. Other Duties
8.01 In addition to the duties expressly provided for herein, the
Bank shall perform such other duties and functions and shall be paid such
amounts therefor as may from time to time be agreed to in writing.
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<PAGE> 10
ARTICLE 9. Taxes
9.01 It is understood that the Bank shall file such appropriate
information returns concerning the payment of dividends and capital gain
distributions and tax withholding with the proper Federal, State and local
authorities as are required by law to be filed by the Company and shall
withhold such sums as are required to be withheld by applicable law.
ARTICLE 10. Books and Records
10.01 The Bank shall maintain confidential records showing for each
Shareholder's account the following: (i) names, addresses and tax
identification numbers; (ii) numbers of Shares held; (iii) historical
information (as available from prior transfer agents) regarding the account of
each Shareholder, including dividends paid and date and price of all
transactions on a Shareholder's account; (iv) any stop or restraining order
placed against a Shareholder's account; (v) information with respect to
withholdings; (vi) any capital gain or dividend reinvestment order, plan
application, dividend address and correspondence relating to the current
maintenance of a Shareholder's account; (vii) certificate numbers and
denominations for any Shareholders holding certificates; (viii) any information
required in order for the Bank to perform the calculations contemplated or
required by this Agreement; and (ix) such other information and data as may be
required by applicable law.
10.02 Any records required to be maintained by Rule 31a-1 under the
1940 Act will be preserved for the periods prescribed in Rule 31a-2 under the
1940 Act. Such records my be inspected by the Company at reasonable times. The
Bank may, at its option at any time, and shall forthwith upon the Company's
demand, turn over to the Company and cease to retain in the Bank's files,
records and documents created and maintained by the Bank in performance of its
service or for its protection. At the end of the six-year retention period,
such periods and documents will either be turned over to the Company, or
destroyed in accordance with the Company's authorization.
10.03 Procedures applicable to the services to be performed
hereunder may be established from time to time by agreement between the Fund(s)
and the Bank. The Bank shall have the right to utilize any shareholder
accounting and recordkeeping systems which, in its opinion, qualifies to
perform any services to be performed hereunder. The Bank shall keep records
relating to the services performed hereunder, in the form and manner as it may
deem advisable.
ARTICLE 11. Fees and Expenses,
11.01 For performance by the Bank pursuant to this Agreement, the
Fund(s) agree to pay the Bank an annual maintenance fee for each Shareholder
account as set out in the initial fee schedule attached hereto. Such fees and
out-of-pocket expenses and advances identified under Section 11.02 below may be
changed from time to time subject to mutual written agreement between the
Fund(s) and the Bank.
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<PAGE> 11
11.02 In addition to the fee paid under Section 11.01 above, the
Fund(s) agree to reimburse the Bank for out-of-pocket expenses or advances
incurred by the Bank for the items set out in the fee schedule attached hereto.
In addition, any other expenses incurred by the Bank at the request or with the
consent of the Fund(s) including, without limitation, any equipment or supplies
specifically ordered by the Company or required to be purchased by the Company,
will be reimbursed by the Fund(s).
11.03 The Fund(s) agree to pay all fees and reimbursable expenses
within thirty days following the mailing of the respective billing notice.
Postage for mailing of dividends, proxies, Fund reports and other mailings to
all shareholder accounts shall be advanced to the Bank by the Fund(s) at least
seven (7) days prior to the mailing date of such material.
ARTICLE 12. Representations and Warranties of the Bank
The Bank represents and warrants to the Company that:
12.01 It is a trust company duly organized and existing and in good
standing under the laws of the Commonwealth of Massachusetts.
12.02 It is empowered under applicable laws and by its charter and
by-laws to enter into and perform this Agreement.
12.03 All requisite corporate proceedings have been taken to
authorize it to enter into and perform this Agreement.
12.04 It has and will continue to have access to the necessary
facilities, equipment and personnel to perform its duties and obligations under
this Agreement.
12.05 The various procedures and systems which it has implemented
with regard to safeguarding from loss or damage attributable to fire, theft or
any other cause, each Company's blank checks, records and other data and the
Bank's records, data, equipment facilities and other property used in the
performance of its obligations hereunder are adequate and that it will make
such changes herein from time to time as are required for the secure
performance of its obligations hereunder.
ARTICLE 13. Representations and Warranties of the Company
The Company represents and warrants to the Bank that:
13.01 It is a corporation duly organized and existing and in good
standing under the laws of the State of its incorporation as set forth in the
preamble hereto.
13.02 It is empowered under applicable laws and by its charter
documents and by-laws to enter into and perform this Agreement.
13.03 All proceedings required by said charter documents and by-laws
have been taken to authorize it to enter into and perform this Agreement.
13.04 It is an open-end investment company registered under the 1940
Act.
13.05 A registration statement on Form N-lA (including a prospectus
and statement of additional information) under the Securities Act of 1933 and
the 1940 Act is currently
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effective and will remain effective, and appropriate state securities law
filings have been made and will continue to be made, with respect to all Shares
of the Company being offered for sale.
13.06 When Shares are hereafter issued in accordance with the terms
of the Prospectus, such Shares shall be validly issued, fully paid and
nonassessable by the Fund(s).
ARTICLE 14. Indemnification
14.01 Except as set forth in subparagraph (e) hereof, the Bank shall
not be responsible for, and Instituitional Series Funds, only with respect to a
Fund listed on Appendix A as a series of that Company and only from the assets
of the applicable Fund, and Series Funds, only with respect to a Fund listed on
Appendix A as a series of that Company and only from the assets of the
applicable Fund, shall indemnify and hold the Bank harmless from and against,
any and all losses, damages, costs, charges, counsel fees, payments, expenses
and liability arising out of or attributable to:
(a) All actions taken or omitted to be taken by the Bank or its
agent or subcontractors in good faith in reliance on or use by the Bank or its
agents or subcontractors of information, records and documents which (i) are
received by the Bank or its agents or subcontractors and furnished to it by or
on behalf of a Fund and (ii) have been prepared and/or maintained by the
Fund or any other person or firm on behalf of a Fund, and (iii) were
received by the Bank or its agents or subcontractors from a prior transfer
agent.
(b) Any action or failure or omission to act by a Fund as a
result of such Fund's lack of good faith, negligence or willful misconduct.
(d) The reliance on, or the carrying out by the Bank or its agents
or subcontractors of any instructions or requests, whether written or oral, of
a Fund.
(c) The offer or sale of Shares by a Fund in violation of any
requirement under the federal securities laws or regulations or the securities
laws or regulations of any State that such Shares be registered in such State
or in violation of any stop order or other determination or ruling by any
federal agency or any State with respect to the offer or sale of such Shares in
such state.
(e) In addition to any other limitation provided herein, or by
law, indemnification under this Agreement shall not apply to actions or
omissions of the Bank or its directors, officers, employees, agents or
subcontractors in cases of its or their own gross negligence, willful
misconduct bad faith, reckless disregard of its duties or their own duties
hereunder, knowing violation of law or fraud.
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14.02 The Bank shall indemnify and hold the Fund(s) harmless from
and against any and all losses, damages, costs, charges, counsel fees,
payments, expenses and liability arising out of or attributed to any action or
failure or omission to act by the Bank as a result of the Bank's lack of good
faith, negligence, willful misconduct, knowing violation of law or fraud.
14.03 At any time the Bank may apply to any officer of the
applicable Company for instructions with respect to any matter arising in
connection with the services to be performed by the Bank under this
Agreement for a Fund, and the Bank and its agents or subcontractors shall not
be liable and shall be indemnified by the applicable Company for any action
taken or omitted by it in good faith reliance upon such instructions except for
a knowing violation of law. The Bank, its agents and subcontractors shall be
protected and indemnified by Institutional Series Funds, only with respect to a
Fund listed on Appendix A as a series of that Company and only from the assets
of the applicable Fund, and Series Funds, only with respect to a Fund listed on
Appendix A as a series of that Company and only from the assets of the
applicable Fund, in acting upon any paper or document furnished on behalf of a
Fund, reasonably believed to be genuine and to have been signed by the proper
person or persons, or upon any instruction, information, data, records or
documents provided by a Fund, the Bank or its agents or subcontractors by
machine readable input, telex, CRT data entry or other similar means authorized
by the applicable Company, on behalf of that Fund, and shall not be held to
have notice of any change of authority of any person, until receipt of written
notice thereof from the applicable Company, on behalf of that Fund. The Bank,
its agents and subcontractors shall also be protected and indemnified by the
applicable Company only to the extent of the assets of the applicable Fund in
recognizing stock certificates of that Fund which are reasonably believed to
bear the proper manual or facsimile signatures of an officer of that Company,
and one proper countersignature of any former transfer agent or registrar, or
of a co-transfer agent or co-registrar.
14.04 In the event any party is unable to perform its obligations
under the terms of this Agreement because of acts of God, strikes, interruption
of electrical power or other utilities, equipment or transmission failure or
damage reasonably beyond its control, or other causes reasonably beyond its
control, such party shall not be liable to the others for any damages resulting
from such failure to perform or otherwise from such causes.
14.05 No party to any Agreement shall be liable to the other
parties for consequential damages under any provision of this Agreement or for
any act or failure to act hereunder as contemplated by this Agreement.
14.06 In order that the indemnification provisions contained in this
Article 14 shall apply, upon the assertion of a claim for which a party may be
required to indemnify an other, the party seeking the indemnification shall
promptly notify the indemnifying party of such assertion, and shall keep the
other party advised with respect to all developments concerning such claim. The
party who may be required to indemnify shall have the option to participate
with the party seeking indemnification in the defense of such claim. The party
seeking indemnification shall in no case confess any claim or make any
compromise in any case in which the other party may be required to indemnify it
except with the other party's prior written consent, which consent shall not be
unreasonably withheld.
ARTICLE 15. Covenants of the Company and the Bank
15.01 The Company shall promptly furnish to the Bank the following:
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(a) A certified copy of the resolution of the Directors of the
Company authorizing the appointment of the Bank and the execution and delivery
of this Agreement.
(b) A copy of the charter documents and by-laws of the Company and
all amendments thereto.
(c) Copies of each vote of the Directors designating authorized
persons to give instructions to the Bank, and a Certificate providing specimen
signatures for such authorized persons.
(d) Certificates as to any change in any officer or Director of
the Company.
(e) If applicable a specimen of the certificate of Shares in each
Fund of the Company in the form approved by the Directors, with a Certificate
as to such approval.
(f) Specimens of all new certificates for Shares, accompanied by
the Directors' resolutions approving such forms.
(g) All account application forms and other documents relating to
shareholder accounts or relating to any plan, program or service offered by the
Company.
(h) A list of all Shareholders of the Fund(s) with the name,
address and tax identification number of each Shareholder, and the number of
Shares of the Fund(s) held by each, certificate numbers and denominations (if
any certificates have been issued), lists of any account against which stops
have been placed, together with the reasons for said stops, and the number of
Shares redeemed by the Fund(s).
(i) An opinion of counsel for the Company with respect to the
validity of the Shares and the status of such Shares under the Securities Act
of 1933.
(j) Copies of the Fund(s) registration statement on Form N-1A as
amended and declared effective by the Securities and Exchange Commission and
all post-effective amendments thereto.
(k) Such other certificates, documents or opinions as may mutually
be deemed necessary or appropriate for the Bank in the proper performance of
its duties.
15.02 The Bank hereby agrees to establish and maintain facilities
and procedures reasonably acceptable to the Company for safekeeping of stock
certificates, check forms and facsimile signature imprinting devices, if any;
and for the preparation or use, and for keeping account of, such certificates,
forms and devices.
15.03 The Bank shall keep records relating to the services to be
performed under, in the form and manner as it may deem advisable. To the
extent required by Section 31 of the
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1940 Act and the Rules thereunder, the Bank agrees that all such records
prepared or maintained by the Bank relating to the services to be performed by
the Bank hereunder are the confidential property of the Company and will be
preserved, maintained and made available in accordance with such Section and
Rules, and will be surrendered to the Company on and in accordance with its
request.
15.04 The Bank and the Company agree that all books, records,
information and data pertaining to the business of the other party which are
exchanged or received pursuant to the negotiation or the carrying out of this
Agreement shall remain confidential, and shall not be voluntarily disclosed to
any other person, except as may be required by law.
15.05 In case of any requests or demands for the inspection of the
Shareholder records of the Company, the Bank will endeavor to notify the
Company and to secure instructions from an authorized officer of the Company as
to such instruction. The Bank reserves the right, however, to exhibit the
Shareholder records to any person whenever it is advised by its counsel that it
may be held liable for the failure to exhibit the Shareholder records to such
person.
ARTICLE 16. Term of Agreement
16.01 This Agreement shall become effective on the date hereof (the
"Effective Date") and shall continue in effect for twelve months from the
Effective Date ( the "Initial Term") and from year to year thereafter with
respect to each Fund, provided that subsequent to the Initial Term, this
Agreement may be terminated by Institutional Series Funds, on behalf of a Fund
listed on Appendix A as a series of that Company, Series Funds, on behalf of a
Fund listed on Appendix A as a series of that Company, or the Bank, with
respect to a Fund, at any time without payment of any penalty upon ninety (90)
days written notice to the other. In the event such notice is given by a
Company, it shall be accompanied by a resolution of the Board of Directors,
certified by the Secretary, electing to terminate this Agreement.
16.02 Should either Company exercise its right to terminate with
respect to a Fund, all out-of-pocket expenses associated with the movement of
records and material will be borne by the Company. Nevertheless, the Bank will
consult with the applicable Company regarding the movement of records and
materials. Additionally, the Bank reserves the right to charge the applicable
Fund for any other reasonable expenses associated with such termination.
ARTICLE 17. Additional Funds
17.01 In the event that the Company establishes one or more series
of Shares in addition to the initial series with respect to which it desires to
have the Bank render services as transfer agent under the term hereof, it shall
so notify the Bank in writing, and if the Bank agrees in writing to provide
such services, such series of Shares shall become a Fund hereunder.
ARTICLE 18. Assignment
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18.01 Except as provided in Section 18.03 below, neither this
Agreement nor any rights or obligations hereunder may be assigned by either
party without the written consent of the other party.
18.02 This Agreement shall inure to the benefit of and be binding
upon the parties and their respective permitted successors and assigns.
18.03 The Bank, may without further consent on the part of the
Company, subcontract for the performance of any of the services to be provided
hereunder to third parties, including any affiliate of the Bank, provided that
the Bank shall remain liable hereunder for any acts or omissions of any
subcontractor as if performed by the Bank.
ARTICLE 19. Amendment
19.01 This Agreement may be amended or modified by a written
agreement executed by both parties.
ARTICLE 20. Massachusetts Law to Apply
20.01 This Agreement shall be construed and the provisions thereof
interpreted under and in accordance with the laws of the Commonwealth of
Massachusetts.
ARTICLE 21. Merger of Agreement and Severability
21.01 This Agreement constitutes the entire agreement between the
parties hereto and supersedes any prior agreement with respect to the subject
hereof whether oral or written.
21.02 In the event any provision of this Agreement shall be held
unenforceable or invalid for any reason, the remainder of the Agreement shall
remain in full force and effect.
21.03 This Agreement may be executed in any number of counterparts,
each of which shall be deemed to be an original; but such counterparts shall
together, constitute only one instrument.
ARTICLE 22. Notices
22.01 Any notice or other instrument in writing authorized or
required by this Agreement to be given to either party hereto will be
sufficiently given if addressed to such party and mailed or delivered to it at
its office at the address set forth below:
For the Fund(s): Salomon Brothers Institutional Series Funds Inc
c/o Salomon Brothers
7 World Trade Center
New York, NY 10048
Attention: Alan Mandel
13
<PAGE> 17
For the Bank: Investors Bank & Trust Company
P.O. Box 1537
Boston, Massachusetts 02205-1537
Attention: Henry Joyce
ARTICLE 23. Miscellaneous
23.01 Notwithstanding anything in this Agreement to the contrary,
the respective responsibilities, obligations and duties of each Company relate
only to a Fund which is listed on Appendix A as a series of that Company and
not to any Fund which is a series of the other Company. Moreover, any amount
owing to the Bank under any provision of this Agreement with respect to a
particular Fund shall be paid by the Company only from the assets of that Fund
and not from the assets of any other Fund.
14
<PAGE> 18
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed in their names and on their behalf under their seals by and through
their duly authorized officers, as of the day and the year first above written.
Salomon Brothers
Institutional Series Funds Inc
By:
---------------------------------
Name:
Title:
ATTEST:
--------------------------
Investors Bank & Trust Company
By:
---------------------------------
Name:
Title:
ATTEST:
--------------------------
DATE:
----------------------------
<PAGE> 19
APPENDIX A
DATED APRIL 1, 1996
to
TRANSFER AGENCY AND SERVICE AGREEMENT
between
SALOMON BROTHERS INSTITUTIONAL SERIES FUNDS INC
and
INVESTORS BANK & TRUST COMPANY
Salomon Brothers Institutional High Yield Bond Fund
Salomon Brothers Institutional Emerging Markets Debt Fund
Salomon Brothers Institutional Asia Growth Fund
Salomon Brothers Institutional Money Market Fund
<PAGE> 1
Exhibit 9(f)
SUBADMINISTRATION AGREEMENT
Agreement dated as of _____, 1996, by and between Salomon
Brothers Asset Management Limited, a company incorporated under the laws of
England ("SBAM Limited") and Salomon Brothers Asset Management Inc, a Delaware
Corporation ("SBAM").
1. SBAM, pursuant to a Management Contract (the
"Management Contract") dated the date hereof between SBAM and Salomon Brothers
Institutional Series Funds Inc, an open-end investment company (the "Company"),
SBAM is the investment manager of the Salomon Brothers Asia Growth Fund (the
"Fund"), an investment portfolio of the Company;
2. Pursuant to Section 2 of the Management Contract,
SBAM shall delegate the performance of certain administrative services to SBAM
Limited as are agreed to by the parties from time to time.
3. In consideration of the services to be rendered by
SBAM Limited under this agreement, SBAM shall pay SBAM Limited [a monthly fee
on the first business day of each month] at an annual rate of [____] of the
average daily value (as determined on the days and at the time set forth in the
Fund's prospectus for determining net asset value per share) of the Fund's net
assets during the preceding month. If the fee payable to the Investment
Manager pursuant to this paragraph 3 begins to accrue before the end of any
month or if this agreement terminates before the end of any month, the fee for
the period from such date to the end of such month or from the beginning of
such month to the date of termination, as the case may be, shall be prorated
according to the proportion which such period bears to the full month in which
such effectiveness or termination occurs. For purposes of calculating each
such monthly fee, the value of the Fund's net assets shall be computed in the
manner specified in the Fund's prospectus and the Company's Articles of
Incorporation (as amended) for the computation of the value of the Fund's net
assets in connection with the determination of the net asset value of shares of
the Fund's capital stock.
4. This Agreement shall become effective as of the date first
above written and shall remain in force for two years from the date hereof, and
for such successive annual periods thereafter but only so long as each such
continuance is specifically approved at least annually by (1) a vote of the
holders of a majority of the outstanding voting securities of the Fund (as
defined in the Investment Company Act of 1940, as amended (the "1940 Act")) or
by the Company's Board of Directors and (2) a majority of the Directors of the
Company who are not parties to this Agreement or interested persons of any such
parties (other than as Directors of the Company), by vote cast in person at a
meeting duly called for the purpose of voting on such approval.
5. This Agreement may be terminated at any time without the
payment of any penalty: (1) by a vote of a majority of the entire
<PAGE> 2
2
Board of Directors of the Company on sixty (60) days' written notice to SBAM
Limited and SBAM; (2) by vote of the holders of a majority of the outstanding
voting securities of the Fund (as defined in the 1940 Act); or (3) by SBAM
Limited or SBAM on 60 days' written notice to the Company.
This Agreement shall automatically terminate in the event of
its assignment, the term "assignment" for this purpose having the meaning
defined in Section 2(a)(4) of the 1940 Act and the rules thereunder.
6. Nothing contained herein shall limit the obligations
of SBAM under the Management Contract.
7. This Agreement shall be governed in accordance with
the laws of the State of New York.
<PAGE> 3
3
IN WITNESS WHEREOF, the parties hereto have caused this
Subadministration Agreement to be executed by their officers thereunto duly
authorized.
Salomon Brothers Asset Management Inc
By:
--------------------------------
Name: Michael S. Hyland
Title: President
Salomon Brothers Asset Management
Limited
By:
--------------------------------
Name: Michael S. Hyland
Title: President
<PAGE> 1
Exhibit 10
[PIPER & MARBURY LETTERHEAD]
March 19, 1996
Salomon Brothers Series Funds Inc
7 World Trade Center
New York, New York 10048
Re: Salomon Brothers Series Funds Inc Registration Statement on Form N-1A
---------------------------------------------------------------------
Ladies and Gentlemen:
We have acted as Maryland counsel to Salomon Brothers Series Funds Inc,
a Maryland corporation (the "Company"), in connection with the Company's
Registration Statement on Form N-1A, (the "Registration Statement") filed with
the Securities and Exchange Commission under the Securities Act of 1933, as
amended, (the "Act") and the issuance of 1,000,000,008 shares of the Company's
Class J capital stock, par value of $0.001 per share (the "Shares"), pursuant
to the Registration Statement.
In this capacity, we have examined the Company's Articles of
Incorporation filed with the State Department of Assessments and Taxation of
Maryland (the "SDAT") on April 17, 1990, Articles Supplementary filed with the
SDAT on December 6, 1990, Articles Supplementary filed with the SDAT on
November 30, 1992, Articles of Amendment filed with the SDAT on December 29,
1994, Articles Supplementary filed with the SDAT on January 3, 1995, Articles
Supplementary filed with the SDAT on July 13, 1995, the Certificate of
Correction filed with the SDAT on September 5, 1995, Articles Supplementary
filed with the SDAT on January 19, 1996; by-laws; the prospectus included in
the Registration Statement; the resolutions of the Board of Directors of the
Company relating to the issuance of the Shares; a good-standing certificate
recently issued by the SDAT; a Certificate of the Secretary of the Company
dated the date hereof, upon which we have relied without independent
verification; and such other statutes, certificates, instruments and documents
relating to the Company and matters of law as we have deemed necessary to the
issuance of this opinion. In such examination, we have assumed the genuineness
of all signatures, the conformity of final
<PAGE> 2
Salomon Brothers Series Funds Inc
March 19, 1996
Page 2
documents in all material respects to the versions thereof submitted to us in
draft form, the authenticity of all documents submitted to us as originals, and
the conformity with originals of all documents submitted to us as copies.
Based upon the foregoing, and limited in all respects to applicable
Maryland law, we are of the opinion and advise you that:
1. The Company has been duly incorporated and is validly existing as a
corporation under the laws of the State of Maryland.
2. The Shares to be issued by the Company pursuant to the Registration
Statement have been duly authorized and, when issued as contemplated in the
Registration Statement, will be validly issued, fully paid and nonassessable.
Simpson Thacher & Bartlett is authorized to rely upon this opinion in
rendering any opinion to the Company which is to be filed as an Exhibit to the
Registration Statement. We hereby consent to the filing of this opinion as an
Exhibit to the Registration Statement and to the reference to our firm in the
Registration Statement and the related Prospectus.
Very truly yours,
/s/ Piper & Marbury L.L.P.
<PAGE> 1
Exhibit 11
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 18 to the registration
statement on Form N-1A (the "Registration Statement") of our reports dated
February 16, 1996, relating to the financial statements and financial
highlights of the Salomon Brothers Cash Management Fund, Salomon Brothers New
York Municipal Bond Fund, Salomon Brothers National Intermediate Municipal
Fund, Salomon Brothers U.S. Government Income Fund, Salomon Brothers High Yield
Bond Fund, Salomon Brothers Strategic Bond Fund, Salomon Brothers Total Return
Fund, Salomon Brothers New York Municipal Money Market Fund, Salomon Brothers
U.S. Treasury Securities Money Market Fund (constituting Salomon Brothers
Series Funds Inc) and Salomon Brothers Investors Fund Inc. which appear in such
Statement of Additional Information, and to the incorporation by reference of
our reports into the prospectus which constitute part of this Registration
Statement. We also consent to the reference to us under the heading
"Independent Accountants" in such Statement of Additional Information and to the
reference to us under the heading "Financial Highlights" in such Prospectus.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York, 10036
March 29, 1996
<PAGE> 1
Exhibit 13(d)
PURCHASE AGREEMENT
Salomon Brothers Series Funds Inc (the "Company"), a
Maryland corporation, and Salomon Brothers Asset Management Inc ("SBAM"), a
Delaware corporation, hereby agree as follows:
1. The Company hereby offers SBAM and SBAM hereby
purchases 125 shares of each of A Sub-Class, B Sub-Class, C Sub- Class and O
Sub-Class of the Company's Class J (Asia Growth Fund) capital stock (par value
$.001 per share) for consideration of $10.00 per share (collectively, the
"Shares"). SBAM hereby acknowledges receipt of a purchase confirmation
reflecting the purchase of the Shares, and the Company hereby acknowledges
receipt from SBAM of funds in the amount of $5,000.00 in full payment for the
Shares.
2. SBAM represents and warrants to the Company that
the Shares are being acquired for investment purposes and not with a view to
the distribution thereof.
3. SBAM agrees that if it or any direct or indirect
transferee of any of the Shares redeems any of the Shares prior to the fifth
anniversary of the date the Company begins its investment activities, SBAM will
pay to the Company an amount equal to the number resulting from multiplying the
Company's total unamortized organizational expenses by a fraction, the
numerator of which is equal to the number of Shares redeemed by SBAM or such
transferee and the denominator of which is equal to the number of Shares
outstanding as of the date of such redemption, as long as the administration
position of the staff of the Securities Exchange Commission requires such
reimbursement.
<PAGE> 2
2
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the ___th day of _____, 1996.
SALOMON BROTHERS SERIES FUNDS INC
Attest:
By:
- ----------------------- -----------------------
Tana E. Tselepis Michael S. Hyland
Secretary President
(SEAL)
SALOMON BROTHERS ASSET MANAGEMENT INC
Attest:
By:
- ----------------------- --------------------------
Tana E. Tselepis Michael S. Hyland
President
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOUND IN PART B OF THIS REGISTRATION STATEMENT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<SERIES>
<NUMBER> 010
<NAME> CASH MANAGEMENT FUND-CLASS O
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
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<OTHER-ITEMS-ASSETS> 0
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<ACCUMULATED-NET-GAINS> 0
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<GROSS-EXPENSE> 0
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<PER-SHARE-NAV-BEGIN> 1.000
<PER-SHARE-NII> 0.055
<PER-SHARE-GAIN-APPREC> 0
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<PER-SHARE-NAV-END> 1.000
<EXPENSE-RATIO> 0.55
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOUND IN PART B OF THIS REGISTRATION STATEMENT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<SERIES>
<NUMBER> 011
<NAME> CASH MANAGEMENT FUND-CLASS A
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
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<ACCUMULATED-NET-GAINS> 0
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<GROSS-EXPENSE> 0
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<PER-SHARE-NAV-BEGIN> 1.000
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<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOUND IN PART B OF THIS REGISTRATION STATEMENT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<SERIES>
<NUMBER> 012
<NAME> CASH MANAGEMENT FUND-CLASS B
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
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<ACCUMULATED-NET-GAINS> 0
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<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
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<TABLE> <S> <C>
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<LEGEND>
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</LEGEND>
<RESTATED>
<SERIES>
<NUMBER> 013
<NAME> CASH MANAGEMENT FUND-CLASS C
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
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<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
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<NET-CHANGE-FROM-OPS> 0
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<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
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<LEGEND>
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</LEGEND>
<RESTATED>
<SERIES>
<NUMBER> 020
<NAME> NEW YORK MUNICIPAL BOND FUND-CLASS O
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
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<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 0
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
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<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 8.98
<PER-SHARE-NII> 0.53
<PER-SHARE-GAIN-APPREC> 1.12
<PER-SHARE-DIVIDEND> (0.52)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.11
<EXPENSE-RATIO> 0.50
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOUND IN PART B OF THIS REGISTRATION STATEMENT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<SERIES>
<NUMBER> 021
<NAME> NEW YORK MUNICIPAL BOND FUND-CLASS A
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 0
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 8.96
<PER-SHARE-NII> 0.42
<PER-SHARE-GAIN-APPREC> 1.14
<PER-SHARE-DIVIDEND> (0.41)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.11
<EXPENSE-RATIO> 0.75
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOUND IN PART B OF THIS REGISTRATION STATEMENT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<SERIES>
<NUMBER> 022
<NAME> NEW YORK MUNICIPAL BOND FUND-CLASS B
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 0
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 8.96
<PER-SHARE-NII> 0.36
<PER-SHARE-GAIN-APPREC> 1.14
<PER-SHARE-DIVIDEND> (0.35)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.11
<EXPENSE-RATIO> 1.50
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOUND IN PART B OF THIS REGISTRATION STATEMENT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<SERIES>
<NUMBER> 023
<NAME> NEW YORK MUNICIPAL FUND-CLASS C
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 0
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 8.96
<PER-SHARE-NII> 0.36
<PER-SHARE-GAIN-APPREC> 1.14
<PER-SHARE-DIVIDEND> (0.35)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.11
<EXPENSE-RATIO> 1.50
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOUND IN PART B OF THIS REGISTRATION STATEMENT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<SERIES>
<NUMBER> 030
<NAME> NATIONAL INTERMEDIATE MUNICIPAL FUND-CLASS O
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 0
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.42
<PER-SHARE-GAIN-APPREC> 0.46
<PER-SHARE-DIVIDEND> (0.42)
<PER-SHARE-DISTRIBUTIONS> (0.03)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.43
<EXPENSE-RATIO> 0.50
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOUND IN PART B OF THIS REGISTRATION STATEMENT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<SERIES>
<NUMBER> 031
<NAME> NATIONAL INTERMEDIATE MUNICIPAL FUND-CLASS A
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 0
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.40
<PER-SHARE-GAIN-APPREC> 0.46
<PER-SHARE-DIVIDEND> (0.40)
<PER-SHARE-DISTRIBUTIONS> (0.03)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.43
<EXPENSE-RATIO> 0.75
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOUND IN PART B OF THIS REGISTRATION STATEMENT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<SERIES>
<NUMBER> 032
<NAME> NATIONAL INTERMEDIATE MUNICIPAL FUND-CLASS B
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 0
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.34
<PER-SHARE-GAIN-APPREC> 0.45
<PER-SHARE-DIVIDEND> (0.34)
<PER-SHARE-DISTRIBUTIONS> (0.03)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.42
<EXPENSE-RATIO> 1.50
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOUND IN PART B OF THIS REGISTRATION STATEMENT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<SERIES>
<NUMBER> 033
<NAME> NATIONAL INTERMEDIATE MUNICIPAL FUND-CLASS C
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 0
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.34
<PER-SHARE-GAIN-APPREC> 0.45
<PER-SHARE-DIVIDEND> (0.34)
<PER-SHARE-DISTRIBUTIONS> (0.03)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.42
<EXPENSE-RATIO> 1.50
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOUND IN PART B OF THIS REGISTRATION STATEMENT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<SERIES>
<NUMBER> 040
<NAME> U.S. GOVERNMENT INCOME FUND-CLASS O
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 0
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.52
<PER-SHARE-GAIN-APPREC> 0.42
<PER-SHARE-DIVIDEND> (0.52)
<PER-SHARE-DISTRIBUTIONS> (0.10)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.32
<EXPENSE-RATIO> 0.60
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOUND IN PART B OF THIS REGISTRATION STATEMENT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<SERIES>
<NUMBER> 041
<NAME> U.S. GOVERNMENT INCOME FUND-CLASS A
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 0
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.49
<PER-SHARE-GAIN-APPREC> 0.43
<PER-SHARE-DIVIDEND> (0.49)
<PER-SHARE-DISTRIBUTIONS> (0.10)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.32
<EXPENSE-RATIO> 0.85
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOUND IN THIS REGISTRATION STATEMENT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<SERIES>
<NUMBER> 042
<NAME> U.S. GOVERNMENT INCOME FUND-CLASS B
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 0
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.43
<PER-SHARE-GAIN-APPREC> 0.43
<PER-SHARE-DIVIDEND> (0.43)
<PER-SHARE-DISTRIBUTIONS> (0.10)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.32
<EXPENSE-RATIO> 1.60
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOUND IN PART B OF THIS REGISTRATION STATEMENT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<SERIES>
<NUMBER> 043
<NAME> U.S. GOVERNMENT INCOME FUND-CLASS C
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 0
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.43
<PER-SHARE-GAIN-APPREC> 0.43
<PER-SHARE-DIVIDEND> (0.43)
<PER-SHARE-DISTRIBUTIONS> (0.10)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.32
<EXPENSE-RATIO> 1.60
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOUND IN PART B OF THIS REGISTRATION STATEMENT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<SERIES>
<NUMBER> 050
<NAME> HIGH YIELD BOND FUND-CLASS O
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 0
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.95
<PER-SHARE-GAIN-APPREC> 0.67
<PER-SHARE-DIVIDEND> (0.93)
<PER-SHARE-DISTRIBUTIONS> (0.15)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.54
<EXPENSE-RATIO> 1.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOUND IN PART B OF THIS REGISTRATION STATEMENT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<SERIES>
<NUMBER> 051
<NAME> HIGH YIELD BOND FUND-CLASS A
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 0
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.92
<PER-SHARE-GAIN-APPREC> 0.67
<PER-SHARE-DIVIDEND> (0.91)
<PER-SHARE-DISTRIBUTIONS> (0.15)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.53
<EXPENSE-RATIO> 1.24
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOUND IN PART B OF THIS REGISTRATION STATEMENT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<SERIES>
<NUMBER> 052
<NAME> HIGH YIELD BOND FUND-CLASS B
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 0
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.85
<PER-SHARE-GAIN-APPREC> 0.68
<PER-SHARE-DIVIDEND> (0.85)
<PER-SHARE-DISTRIBUTIONS> (0.15)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.53
<EXPENSE-RATIO> 1.96
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOUND IN PART B OF THIS REGISTRATION STATEMENT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<SERIES>
<NUMBER> 053
<NAME> HIGH YIELD BOND FUND-CLASS C
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 0
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.85
<PER-SHARE-GAIN-APPREC> 0.68
<PER-SHARE-DIVIDEND> (0.85)
<PER-SHARE-DISTRIBUTIONS> (0.15)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.53
<EXPENSE-RATIO> 1.98
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOUND IN PART B OF THIS REGISTRATION STATEMENT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<SERIES>
<NUMBER> 060
<NAME> STRATEGIC BOND FUND-CLASS O
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 0
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.87
<PER-SHARE-GAIN-APPREC> 0.77
<PER-SHARE-DIVIDEND> (0.87)
<PER-SHARE-DISTRIBUTIONS> (0.24)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.53
<EXPENSE-RATIO> .99
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOUND IN PART B OF THIS REGISTRATION STATEMENT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<SERIES>
<NUMBER> 061
<NAME> STRATEGIC BOND FUND-CLASS A
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 0
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.84
<PER-SHARE-GAIN-APPREC> 0.78
<PER-SHARE-DIVIDEND> (0.85)
<PER-SHARE-DISTRIBUTIONS> (0.24)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.53
<EXPENSE-RATIO> 1.23
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOUND IN PART B OF THIS REGISTRATION STATEMENT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<SERIES>
<NUMBER> 062
<NAME> STRATEGIC BOND FUND-CLASS B
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 0
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.76
<PER-SHARE-GAIN-APPREC> 0.79
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (0.78)
<RETURNS-OF-CAPITAL> (0.24)
<PER-SHARE-NAV-END> 10.53
<EXPENSE-RATIO> 1.97
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOUND IN PART B OF THIS REGISTRATION STATEMENT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<SERIES>
<NUMBER> 063
<NAME> STRATEGIC BOND FUND-CLASS C
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 0
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.77
<PER-SHARE-GAIN-APPREC> 0.78
<PER-SHARE-DIVIDEND> (0.78)
<PER-SHARE-DISTRIBUTIONS> (0.24)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.53
<EXPENSE-RATIO> 1.99
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOUND IN PART B OF THIS REGISTRATION STATEMENT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<SERIES>
<NUMBER> 070
<NAME> INVESTORS FUND-CLASS O
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 0
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 13.63
<PER-SHARE-NII> 0.27
<PER-SHARE-GAIN-APPREC> 4.48
<PER-SHARE-DIVIDEND> (0.27)
<PER-SHARE-DISTRIBUTIONS> (1.50)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 16.61
<EXPENSE-RATIO> 0.69
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOUND IN PART B OF THIS REGISTRATION STATEMENT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<SERIES>
<NUMBER> 071
<NAME> INVESTORS FUND-CLASS A
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 0
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 13.61
<PER-SHARE-NII> 0.19
<PER-SHARE-GAIN-APPREC> 4.55
<PER-SHARE-DIVIDEND> (0.23)
<PER-SHARE-DISTRIBUTIONS> (1.50)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 16.62
<EXPENSE-RATIO> 0.94
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOUND IN PART B OF THIS REGISTRATION STATEMENT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<SERIES>
<NUMBER> 072
<NAME> INVESTORS FUND-CLASS B
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 0
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 13.61
<PER-SHARE-NII> 0.10
<PER-SHARE-GAIN-APPREC> 4.54
<PER-SHARE-DIVIDEND> (0.14)
<PER-SHARE-DISTRIBUTIONS> (1.50)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 16.61
<EXPENSE-RATIO> 1.71
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOUND IN PART B OF THIS REGISTRATION STATEMENT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<SERIES>
<NUMBER> 073
<NAME> INVESTORS FUND-CLASS C
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 0
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 13.61
<PER-SHARE-NII> 0.09
<PER-SHARE-GAIN-APPREC> 4.55
<PER-SHARE-DIVIDEND> (0.14)
<PER-SHARE-DISTRIBUTIONS> (1.50)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 16.61
<EXPENSE-RATIO> 1.68
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOUND IN PART B OF THIS REGISTRATION STATEMENT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<SERIES>
<NUMBER> 080
<NAME> TOTAL RETURN FUND-CLASS O
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 0
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.17
<PER-SHARE-GAIN-APPREC> 0.52
<PER-SHARE-DIVIDEND> (0.11)
<PER-SHARE-DISTRIBUTIONS> (0.01)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.57
<EXPENSE-RATIO> .51
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOUND IN PART B OF THIS REGISTRATION STATEMENT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<SERIES>
<NUMBER> 081
<NAME> TOTAL RETURN FUND-CLASS A
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 0
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.15
<PER-SHARE-GAIN-APPREC> 0.52
<PER-SHARE-DIVIDEND> (0.11)
<PER-SHARE-DISTRIBUTIONS> (0.01)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.55
<EXPENSE-RATIO> .74
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOUND IN PART B OF THIS REGISTRATION STATEMENT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<SERIES>
<NUMBER> 082
<NAME> TOTAL RETURN FUND-CLASS B
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 0
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.13
<PER-SHARE-GAIN-APPREC> 0.51
<PER-SHARE-DIVIDEND> (0.09)
<PER-SHARE-DISTRIBUTIONS> (0.01)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.54
<EXPENSE-RATIO> 1.49
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOUND IN PART B OF THIS REGISTRATION STATEMENT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<SERIES>
<NUMBER> 083
<NAME> TOTAL RETURN FUND-CLASS C
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 0
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.14
<PER-SHARE-GAIN-APPREC> 0.51
<PER-SHARE-DIVIDEND> (0.08)
<PER-SHARE-DISTRIBUTIONS> (0.01)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.56
<EXPENSE-RATIO> 1.51
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOUND IN PART B OF THIS REGISTRATION STATEMENT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<SERIES>
<NUMBER> 09
<NAME> TREASURY FUND
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 0
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 1.000
<PER-SHARE-NII> 0.049
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> (0.049)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.000
<EXPENSE-RATIO> 0.65
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
